Are “good times” here again?
Welcome to the LQ Insights blog. First, I would like to thank Logistics Quarterly magazine and editor/publisher Fred Moody for providing this forum. It is with much pleasure and enthusiasm that we embark on this medium to offer commentary on timely topics of interest in the logistics and supply chain management domain. Topics will run the gamut from the state of the industry, current world events, ground-breaking research, regulations, and politics – as they affect the realm of logistics and supply chain management. We hope that you will find the entries thought-provoking and will contribute to the dialogue. New threads will be posted on a weekly basis – and sometimes more frequently, so keep checking back to keep abreast of the conversation, and please join in!
Without further ado, let’s get started!
**NEWSFLASH!** The U.S. Department of Commerce announced on Thursday that the U.S. economy grew at a “torrid rate” of 3.5 percent last quarter (3Q, 2009), technically ending the recession that we entered in December 2007. Along with aggressive government spending, the Cash-for-Clunkers program and housing incentives appear to have bolstered consumer spending on big-ticket items sufficiently to bring GDP back into positive territory. So, is it time to grab the party hats and break out the champagne? This is good news, for sure, but are we out of the woods? Can we even see a clearing ahead? Unfortunately, I’m not convinced that good times are here again… just yet. Let me call upon an old and trusted supply chain exercise – the Beer Game developed at MIT – to explain why I’m reluctant to say that things look brighter on the immediate horizon. The Beer Game is the hands-on simulation game where teams of four people gather to form a supply chain for beer. We have a factory that brews beer and sells that beer to a distributor, who then sells the beer to a wholesaler who sells to a retailer who sells to the consumer. Note the consumer at the end of this supply chain. The demand of this consumer is what drives the rest of the supply chain. Players in the Beer Game soon realize that small changes in demand get amplified as the orders flow from link to link upstream in the supply chain – and we end up with a huge disconnect between supply and demand that we now call the “Bullwhip Effect.”
So, how does this relate to our current economic crisis? For one, it is the consumer that drives our economy, with consumer spending accounting directly for about 70 percent of GDP, and indirectly for much of the remainder. As the consumer goes, so goes our economy. Without the beer consumer, you need no beer supply chain. Why am I not optimistic about a speedy recovery, then? Because job losses continue to grow… and, to me, unemployment is the single most important indicator of macroeconomic health. Though unemployment is increasing at a decreasing rate, it continues to increase. Only when we see growth in jobs do I believe we will see more good news than bad news and sustained improvements in the economy. That much said, I’m optimistic that by this time next year that will be the case – though many analysts think it will happen sooner.
We will have to grow in a wiser fashion than we saw in first several years of this decade, though, when life was good and credit was flowing freely. We now know that much of that credit was extended where it never belonged – in both commercial and consumer lending. It seems, however, that we have considerable pent-up demand to address. If the years of “irrational exuberance” in consumer markets (and not just on Wall Street) did anything, it fed a craving for the good life. Living within means and saving is so… yesterday. SUVs the size of a house and houses the size of, well, really big houses. Vacation homes and an iPod in every pocket. Those are tendencies that are hard to give up. And while sales in many non-essential (luxury) categories remain soft, that won’t last long and supply will soon be forced to catch up. We’ll find a way to consume again. As Dr. Ian Malcolm, the eccentric mathematician played by Jeff Goldblum in Jurassic Park, notes “Life… finds a way.”
So, what do you think? Are you seeing positive signs of life in your business?
Blog Editor, Thomas Goldsby
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Posted: November 2nd, 2009 under LQ Insights.
Tags: logistics
Comments
Comment from Will Cash
Time November 3, 2009 at 9:14 pm
Ahh, the beer game…I think my group definitely experienced the bullwhip effect when doing that excercise. I am looking forward to following the blog.
Comment from Steve Wood
Time December 15, 2009 at 12:03 pm
I agree that we are not out of the woods yet. Many companies survived this year because of long term backlog that softened the blow of lower order intake. Now, that backlog is consumed, and the effects of the lack of incoming orders will begin to be felt full force. For some, this coming year could be more challenging than last year, and hinder the recovery of those jobs that allow consumers to spend.
Comment from Ray Tribe
Time November 3, 2009 at 4:14 pm
Clients who have sustainable business offerings will need to continue to do business — that means spending on the resources that make the products available to customers. For those of us providing services, it means that the clients have a heightend passion to drive out costs more now than a year ago. Is it a fade? Is it a real need? I believe it is largely a new way of the same old approach to continuous improvement and driving costs out of the product. We will not go back to the cost structures of the early 2000′s, even in the most profitable of industry sectors.