@ Supply Chain Management

The Great Recession is finally over. So says Mark Zandi in his testimony before the Joint Economic Committee: The Impact of the Recovery Act on Economic Growth.

From that report,

This downturn will go into the record books as the longest, broadest and most severe since the Great Depression (see Table 1). The recession was twice the length of the average economic contraction, and it dragged down nearly every industry and region in the country. Its final toll in terms of increased unemployment and falling real GDP will be greater than that seen during any other recession on record.

What was interesting to me is this little tidbit from the report,

Retailers and manufacturers have also worked hard to reduce bloated inventories. The plunge in inventories in the second quarter was the largest on record and came after a year of steady destocking. Inventories are now so thin that manufacturing production is picking up quickly, as otherwise stores will not have enough on their shelves and in warehouses to meet demand even at currently depressed levels.

This suggests to me the effect of outsourcing/offshoring that inventories were unnaturally high post bust and then the plunge in inventories as the pipeline and finished goods inventories were depleted. Now a few months after the bust, manufacturing production has to be ramped up based on the expectations of a recovery going forward – a classic case of the bullwhip effect, perhaps?

Also pay attention to Table 2, where in Zandi breaks out the $175.8 billion already spent (from a total $359.3 billion available). The bulk of stimulus payments (~ 100 billion) go towards “obligations” of the government meaning extending unemployment benefits, food stamps, Medicaid etc. I mean these are obligations that the government took on regardless of the economic-business cycle but is paying for by bringing forward future tax receipts. As for providing actual infrastructure building, that amounts to a paltry $14.4 billion and tax cuts $59.3 billion.

Zandi notes,

Workers who lose their jobs before the end of 2009 can temporarily receive more UI, food stamps, and help with health insurance payments. Without this extra help, laid-off workers and their families would be slashing their own spending, leading to the loss of even more jobs.

“.leading to the loss of even more jobs” – whose jobs are these? The problem with such assertions ought to be obvious: How does one verify such statements? The same logic is everywhere:

Arguments that tax cuts in the stimulus program are not supporting consumer spending are incorrect.vii Although spending has not rebounded sharply, without the stimulus, it would still be declining.

and,

But although the exact number of additional jobs that would have been lost without the fiscal stimulus will never be known, it is clear that the number is significant.

The icing on the cake,

Although the recession is over, the economy is struggling. Job losses have slowed significantly since the beginning of the year, but payrolls are still shrinking, and unemployment is still rising. The nation’s jobless rate will top 10% in coming months-higher than the Obama administration forecast when it was trying to get the stimulus passed early in the year. That fact, however, says nothing about the program’s efficacy. If anything, it suggests the $787 billion stimulus was too small.

If you read the report, you would be hard-pressed to find any stimulus spending (unless you count the paltry $14 billion spent on infrastructure) going towards actual job creation. That’s an efficiency ratio of 14/787 = 1.7% as of now. When all the infrastructure spending is accounted for, that would stand at 11.5%. As you can very well imagine, the economists are now realizing that the stimulus was too small. Or in other words, the stimulus has not succeeded because it was too small to succeed. Or if you prefer the truth, spending 12% of the total outlay on actual job creation was a disastrous policy that will show up in the unemployment figures in the not so distant future.

Hence, the trial balloon for a new round of “targeted” stimulus: Locke Was ‘Imprecise’ in Comments on Second Stimulus

“If there is to be another stimulus — and that’s being hotly discussed and very seriously considered within the administration as well as members of Congress — it needs to be very targeted, very specific and we need to be very mindful of the deficit as well.”

That quickly went nowhere as the reactions to this trial balloon quickly popped it. But that’s where we’re heading – Stimulus #3 is coming for sure.

Also, take a gander at the risks that are outlined for the economy going forward – nothing has changed there.

Are you pat down with the “V” shaped recovery or perhaps the “U” shaped recovery? Or perhaps, you’re attuned to stair stepping model of recovery that is headed to the dungeon of doom (nefarious toothless grin on my face)?

As you might gather from the dates between the last post and this one, I’ve been so long in the dungeon of doom, it is so dark there, that I’ve made only the slightest efforts to surface albeit with a severe case of decompression. I am decompressing actively now and hopefully I don’t get an acute case of the bends.

I still maintain my bearish bias but in the dark corners of the dungeon, one doesn’t really know whether one is amongst many or accompanying the few that remain. The last two months have been a veritable siege on my sensibility and not to mention stability. In retrospect, this was to be expected as I was well aware that there is no end to the machinations of an administration (any administration) hell bent on righting a sinking ship. While the previous administration might have protested that the ship was not sinking but it was that the storm was raging, this administration notes that while the storm has passed, there are so many tropical paradises nearby that you’d do well to use this straw to get from here to there. The more articulate ones have even begun to say that getting wet is the point of sailing. Meanwhile, “Full steam ahead.”

This is no critique of this administration because no administration save a brazen one could create sensibility when it has been jettisoned wholesale (or as a serving of humble pie a moi – offer sensibility where it is lacking. My sensibility, I confess, was lacking because I didn’t recognize the true extent of the power of government but I’m young and can be forgiven my insistence on comeuppance – well, that’s my “cop out” apology sort of thing). And this administration, like those before it, are brazen dispensers of promises and promissory notes – a brazenness more banal than breathtaking, partly because it is so predictable. While uncertainty is a staple, even necessary, when it comes to the machinations of countless parties, second parties and third parties in a web of agreements, only the steadfastness of that nameless bureaucrat and his ilk can save our world – for obvious reason: in that his chief means – power, is balanced by his chief virtues – ignorance and stability. The bureaucrat is ignorant because he was never a party to nameless and faceless agreements and his career is a glorious hymn beginning “Don’t rock the boat, baby.”

It must come a sigh of fresh air to a bureaucrat when a cursory sampling of the latest uproar on his table reads, “Extravagant bonuses at bailed out banks, unemployment and regulatory loopholes.” These are the bread and butter of a bureaucracy – incompetence, corruption, ad hoc rules, fly by night consultations and visitations – what bureaucrat is unfamiliar with those, thses can be dealt with, even swiftly if the overlords in the political world so desired it. What a bureaucrat cannot deal with is “Value”.

To illustrate, chain a man to a treadmill with rules and regulations – now, that is an easy thing in and of itself. The cheery bureaucrat will write himself a bonus for this task and no doubt countless pages of regulation that no one other than his cousin the lawyer would ever read. Why a man would run on a treadmill of his own accord – that is a secret that a bureaucrat cannot ever hope to fathom? So what does he do in the face of the latest tumult, order more treadmills and more importantly, more chains.

But this is not a question of sensibility (there’s that bearishness creeping right back in). When the agents of the government go on offense, even in a haphazard way as is their wont, even style, you’d better take note. My pocketbook took a lot of hits because I insisted on reason – governments, as I have been educated, insist on a different kind of reason.

So how have our fearless bureaucrats sought to return us to health? “Get on into more debt, young man,” blares every program in some form or the other. Take a look:

1. The stimulus (and all others to come) – borrow against future tax receipts but spend it today.
2. Cash for clunkers – Destroy a working (polluting?) car and go into debt for a new one with a little help from us – save the earth, save on oil but tie this chain around your neck.
3. Homebuyer’s credit – The first $8000 is on us, the next sum of an order 100 times our bait is on you – go into debt for the sake of cycling those homes through the market, er, no better time to buy a house.
4. FDIC is broke – This program which operates through the fees collected from the participating banks is floating a plan to have its members pre-pay up to three years of future dues in order to resume its mission of finding, taking control and then reopening failing and failed banks.

And the list goes on and on. Which of these spell restraint, awareness of the system or something wise? If we were reckless getting to this point, the administration responds with another form of recklessness getting out. The constant is a yearning for the halcyon days of but a few years ago (which having lived through were anything but) and the method of madness is to get into debt. Draw me a fine distinction, if you will, between 

(a) the worry free days of getting into debt during the housing bubble that has just revealed a chain of corruption, wheeling and dealing all the way from the mortgage officers right through Wall Street and into the books of government backed institutions such as Fannie Mae and Freddie Mac

(b) government enticing homebuyers with a credit and saddling them with homes the value of which they are certain would crater if they didn’t endeavor this way to get their citizenry into debt. Of course, if the home prices still declined, though at a lesser pace, we would revisit this same issue a few years later. 

In an insane world, if a bunch of guys were determinedly pouring water into a sinking ship, they would be keelhauled without delay. However, in this sane world, determined guys can pour more water into a sinking ship by pointing out that only then would the ship’s pumps be fully utilized. Furthermore, this is widely praised as distinguished public service.

So what then of the recovery, “V”, “U”, “L”, “W”. twenty two letters to go? To me, this is a “C” shaped recovery i.e. “Consumer” shaped recovery. I’m in the least concerned about the shape of the recovery. I’m more concerned about the consumer, the customer – the true end point of every supply chain. From my vantage point, talk about the shape of the recovery treats the consumer as the animal that he is (as in the repository of the animal spirit) – to be whipped onto the next treadmill of consumption and debt until he collapses.

And this is my contribution to the masters of the supply chain universe – if you can, for a minute, get away from the forecasts of recovery, and the talk of priming the supply chain pump, long lead times, weak dollar and what have you, and ask yourself – how is my customer dealing with a drawdown in credit lines, loss of equity in his home, chopped liver in his 401K.? In looking at the coverage of the consumer and businesses, we have gone from “Things are terrible” to “Things are bad”. However, now, I note an impatience to getting to “Things are great” while I’m expecting a “Things are not so bad” followed by “Things are Ok” followed by “Things are not so bad” followed by “Things are Ok”. The policy actions of this administration and the next would set the direction of that cycle in motion and there is every evidence that we’re gearing up for more spending, more debt, pressure from creditor nations and so on.

So is there any evidence of a consumer recovery? Yes, there is some but it is by no means something that presages significant improvement and the petering out of some of the extant stimulus programs should impact consumer confidence negatively going forward. As it stands now, note the rebound from the all too widespread feeling that went along the lines of “The world is ending,”:

There was a slight decline in September 2009 and as they note,

Consumer sentiment indices get way too much attention.  The simple fact is that sentiment does not correlate strongly with consumer spending and thus has little predictive value.  Consumer spending correlates more closely with income.  Sentiment tends to reflect well known factors such as unemployment rates and gas prices more than it predicts future spending patterns.

Meanwhile, Romer: Impact of stimulus will wear off (Christian Romer is a top White House economist) notes,

A top White House economist says spending from the $787 billion economic stimulus has already had its biggest impact on economic growth and will likely not contribute to significant expansion next year.

But I thought the bulk of the stimulus effect would be felt in 2010 and not in 2009 – What’s the deuce here? As this CNN story notes from January 2009: Stimulus will take a while to work.

All in all, the legitimate infrastructure spending, which in its expanded form would include Obama’s ambitious plans to invest heavily in renewable energy sources, will most likely not start coming on line until the fourth quarter of the year and its full effect is at least 12 to 18 months away. In other words, the fiscal stimulus measures that the incoming Administration will be pushing through are more a 2010 story.

And as for numbers of jobs created, A look at the effect of stimulus on States notes

Economists on both sides of the debate agree that the actual number of jobs created by the stimulus package will likely never be known. Large swaths of stimulus money went to provide tax relief, extend unemployment benefits and provide fiscal relief to beleaguered state government budgets. These programs have largely indirect effects on employment.

Only about a third of the stimulus funds – some $275 billion – are going to grants, contracts and loans that will be tracked on Recovery.gov. The 30,000 jobs reported so far cover only direct contracts, which represent $16 billion of that total.

So what can one conclude from this sorry state of affairs? What can one say about the “C” in the “C” shaped recovery? In a post a little while back, I had noted that there will be many more stimulii in the pipeline and one can already see the trial balloons being floated for them.

However, there is another “C” in the “C” shaped recovery – the Corporation. That will be next.

Note: I contributed this post to the Sourcing Innovation Blog as well.

I want to alert you to a new free webinar on Supply Chain Risk Management: Supply Chain – it’s Risky Business hosted by World Trade Group (WTG) and presented by Douglas Kent. From the brief of the webinar,

This webinar examines the responses from hundreds of global companies to our recent supply chain risk survey, unveiling their most concerning risks and the level of exposure.  In addition, the study uncovers how companies are evaluating their level of vulnerability and, most importantly, reveals the best practices being adopted to effectively mitigate supply chain risk.

 
Key learning’s:

Extend the knowledge coming from our primary risk research
Provide the participant with valuable insight into how others are conquering the common problem of managing and mitigating supply chain risk.

And a little about the presenter Douglas Kent,

Douglas Kent is the European Chair for the Supply Chain Council and President of eKnowtion. With nearly 20 years of supply chain experience, Douglas Kent brings proven expertise in creating, implementing, and operating complex supply chain projects by "unlocking value" within client companies.   Through formalised business process re-engineering techniques, Douglas drives this improvement by utilising the SCOR model as the baseline for all improvement activities ranging from the initial diagnostic, through re-engineering and change management, benchmarking and continuing education.  His approach stems from the unique combination of experiences as a successful practitioner, consultant and educator of SCOR since the model’s inception.

There are a select group of chosen companies that seem to go bankrupt again and again – they seem to have a bankruptcy addiction. They just can’t seem to help themselves – someone would think Airlines in this context. I am beginning to think that GM is going to join that select list if such buffoonery is going to be the norm.

What am I referring to?

GM board orders faster new vehicle rollout. A hundred thousand blistering barnacles – was that all there was to it? The woes of GM would be well past us if newer vehicles were to hit the streets faster.

He said the board’s involvement in product decisions seems to show that the new board intends to be more active than the previous one.

No kidding!!! I do hope that employees of GM have a role in this. Never mind.

Meanwhile, as you may very well observe that GM is preparing to fire off its silver bullet – in this case, the Chevy Volt. Observe,

The Volt, due in showrooms late next year, can go 40 miles on a single charge from a home electrical outlet. It has a small internal combustion engine on board to generate electricity for the car beyond that.

He called the Volt a "leap in technology" that no one else has, and said the country needs to move toward electric vehicles.

"I think it will be very successful," he said.

Can the Volt save the company? Maybe. But while its competitors thrive on Continuous Improvement or Kaizen, GM is betting its future on silver bullets. Wouldn’t you say?

Whitacre said the board was interested in pulling more fuel-efficient products forward.

"We’re certainly going that direction of more efficient models," he said. "We’re looking at reliability. We’re looking at efficiency. We certainly will make a major thrust in that direction, but that’s not the only direction we’re going."

The all important question assuming the spectacular success of the Chevy Volt (and that’s a big assumption), is whether the culture of the firm allows for incremental approach to improving their product or will they go back to looking for silver bullets. I’m thinking silver bullets and therefore I’m thinking yet another bankruptcy in the not so near future.

Or maybe it really is the influence of the board that shortens product development life cycles and not repeated (as in continuous) efforts to solving issues that require a company wide effort. Keep a look out for the kind of signals that emanate from GM about five to six months from now and then I think the dice will have been cast.

When the recession ends, Will your supply chain be ready? is a virtual conference being conducted by Logistics Management and Supply Chain Management Review.

In my natural bearishness, I read the title as If the recession ends, will  your supply chain be ready? Heh!! Critical words – If, when and it should be in that order. As you can readily observer, “When” is a rather optimistic frame of mind in this context and “If” is dramatically pessimistic. I have no doubts that this recession will end but I am of the opinion that it is very well possible that when it ends, we’ll begin another one which we might or will recognize in hindsight.

But in the meantime, let’s get positive.

Acceleration of Eco-Operation is a new report published (free report : the kind I like) by the Business Performance Management Forum.  I think it would be well worth your time to register and download the report if you want to keep up with the trendiness of green washing everything. I will read and review the report a little later but in reading the executive summary, two comments caught my eye:

"Building better links in high-tech supply chains.the sprawl and complexity of such networks have made it harder to manage end-to-end operations smoothly. Many technology companies are grappling with volatility and disruptions across their supply networks and eliminating waste from duplicative efforts is an ongoing challenge. As product
life cycles shrink, we see inventory build-ups in the supply chains of some companies, while others cope with rising distribution costs, ontime delivery problems, or delays in getting new products to market."
The McKinsey Quarterly

Becoming green is no longer an end in and of itself, but the byproduct of optimizing a supply chain. At the same time, transitioning to a Green Supply Chain while also maximizing efficiency is not a clear-cut process."
Industry Week – Diamond Management & Technology Consultants

There is so much confusion in the above two posts that I can’t help but roll my eyes.

In the first snippet, there is a lot of talk about eliminating waste. If you collapse the global supply chain into a simple manufacturing floor and pretend for a moment that various work centers were indeed different countries and ports, then you would see that all the effort of bygone years that went into batch size reductions, reducing setup times and inefficient steps and processes, reducing physical movement times by workers (all lean related activities) on the manufacturing floor have been turned to naught. We’re back again to big batches, carrying work items from one end of the floor to the other end and then sending it back half way across the floor because we’ve decided to outsource and increase lead times. If anything that is the one root cause of everything that is outlined in the snippet from The McKinsey Quarterly. In short, you cannot eliminate waste on the one hand by creating mounds of it with the other hand. All these management consultants have been doing this for a decade now – I hope that one of the upcoming articles in the quarterly will be titled – "We were wrong to recommend outsourcing," but I’m not holding my breath here.

In the second snippet, ask yourself this question – Would you subject one of the most critical aspect of your operations to some befuddling calculation of carbon emissions sustained in your activity, calculations that no one can even agree on whether they’re the right ones? And it’s not just calculations, but using these calculations to dictate what you would do? This is precisely the back assed way of doing things. Give me a way/technology that surmounts your latest world is ending dogma and I’ll move to it; just don’t ask me to end the world on account of your dogmatism. Archimedes once said, ‘If you give me a lever and a place to stand, I can move the world.’ Today, we’re told, "If you cut your emissions, you can save the world." But cutting emissions means that the industrial activity of the world would decline (and rapidly) across the world returning many parts of the world to the poverty they were just leaving behind barring some new technology that effectively and efficiently replaces the carbon based energy source. And to those who would say that this technology (batteries, wind, solar, geothermal etc) would do it – all I would say is that on your next transatlantic conference or vacation either use one of your "this technologies" in making the trip or use a carbon neutral sail boat or raft. I really don’t believe in nor have the time for first class or corporate jet traveling world messiahs who want me to cut down on my carbon emissions. Neither should you!

And that’s before reading this report. Those are my initial conditions. Now, let me read the report and be enlightened.

No, make that yesterday. By “you”, I mean any of us who are in the business of working to sell things – selling something either here or there. It’s an amazing circular world we live in where I’m working hard to sell you something which you either need or don’t need but which  you can only buy by working hard to return the favor.

Some of you have something to do with the supply chain and some of you don’t. So as someone close to the supply chain space, here is the absolute one thing that you should have done yesterday:

Is it better demand forecasting?

Is it investments in a better supply chain for the eventual uptick?

Is it becoming leaner and meaner?

Is it cutting your losses in earlier bright ideas?

Or something else on your long list that you had hidden away in the deep freeze.

In my opinion, the most important thing that you should be doing right now is getting to know your customer again. Again, as in Refresh.

Your customers are probably in a world of hurt right now and taking the effort to understand them and the value of plain ol’ vanilla, tried and true, is a very good idea. Now is the time to reevaluate the concept of value you provide because it is probably the only thing that you can take to the bank for whatever that’s worth.

Sometimes, I wonder if I am not a victim of my own “permabearishness” and that I’m mistaking the signs of improvement for the calm before the next storm. Perhaps it is the numbness to good news because we’ve been here before now haven’t we?

But I took notice of something: they don’t make good news like they used to. Now, that’s the poverty of it all.