On Friday, the 5th of August 2011 the world woke up to a reality that USA has lost its credit rating of triple A. This means that USA is no more the safe haven for investment it always was. The main reason for this credit rating downgrade was the politicking in Washington at the cost of overall interest of the world in general and Americans in particular. The timing for this down grading couldn’t have been worse. Europe was already in the midst of debt crisis with Greece, Portugal and Ireland on the brink and seeking bailout packages from their EU partners; and Italy also looking very vulnerable. The tremors of these economic upheavals are now felt all over the world. Global stock markets and currency markets are on a swing with trillions of dollars lost in the stock markets and investors finding safety in investing in gold. We are indeed living in a world where the economic volatility in the one hemisphere is affecting governments, large investors, banks, MNCs and people all over the world.
During the recessionary period of 2008 and 2009, there was an adverse impact of economic uncertainty on the global macro-economic indices like GDP growth, inflation, per capita income, and employment rate. The difference between the economic crisis of 2008 and the present economic crisis is that, in 2008 there was a loss of confidence in the banking system, and this time the trigger is the loss of confidence in political system in the United States and monetary policies in Europe. This political and monetary trigger has the potential to consume the world economic order and therefore has far more serious consequences than the previous crisis. It is however too early to predict the depth and the span of this present crisis. Much will depend on the political leadership and the proactive measures they take. In the meantime, for the businesses it will be worth taking the stock of the present situation and define the strategy for the near future.
It is expected that in the near to medium term there will be an uncertainty in the consumer demand for all types of products. The reason is that the consumers will be affected by slowing down of economic growth as well as rise in inflation due to increased borrowing rates from the banks. Also due to lack of investment in the public as well as private sector, there could be fewer new job opportunities and in the wake of austerity measures there is a likelihood of job losses. The cumulative result will be a decline in the consumer optimism and consequently in the purchasing power of the consumer. In the face of uncertainty there could be a wait and watch attitude for all types of spending. The consumer would tend to think twice before spending his hard earned dollar. This trend would affect both industrial, consumer durable and consumer products. The magnitude of this effect may vary across the sectors, however if the past trend is taken into account, we are once again faced with the possibility of a global recession.
In a recessionary scenario; both the manufacturers as well as retailers face decline in demand. As the demand forecasting accuracy is a challenge in this situation, a manufacturer does not know what to produce, when to produce and how much to produce. This affects his forecasts for raw materials and consumables. In the process his orders to his suppliers start drying up and his outstandings with the suppliers keep on mounting, since his receivables from the market are also piling up. This may lead to a loss of confidence between the manufacturer and his suppliers. In such case inventories of raw materials, in-process goods and finished goods keep piling across the supply chain. The same is observed at the retailer’s end also; where there is an uncertainty in consumer demand. The movement of inventories on the store shelves slows down and the inventories in warehouses and distribution centers keep increasing. In a globally integrated market, there is stock pile of inventories in different parts of the world waiting for the normalcy in the market to return.
Considering that it may take some time for the economic volatility to subside and the market to return to its normal self, global business must plan for its survival in the downturn. The first challenge to tackle is forecast accuracy. To get closer to the reality it will be a good idea to have an open sharing of information across the supply chain. Retailers can share their point-of-sale data with upstream partners to better understand the market pulse. This will help to make suitable revisions in the short term forecasts in order to achieve inventory accuracy near to the point of consumption as well as point of manufacturing. Though inventory is considered as an asset on the balance sheet, for a supply chain manager it is a liability which needs to be liquidated as early as possible. Information sharing also helps in highlighting the pockets of slow moving inventory in some parts of supply chain. It will then be possible to move such inventory to the areas where the possibility of its sale is better. During the recessionary period, many retailers offer discounts, exchange offers or gift schemes to liquidate the inventory on hand. This leads to sudden surge in demand. It is important to share the information about such promotional offers across the supply chain, failing which the manufacturer, whole sellers and distributors may perceive this surge in demand as a signal of market revival and may start manufacturing more. This can translate in to “bull whip effect”, where by a small increase in the sale at retailer’s end, will result in large piles of inventories across the upstream supply chain partners.
Secondly during the downturn there is an immediate need to control the costs. Optimization of available resources could be a part of the strategy to reduce the cost burden on the organization. During the growth period in the market, there is a tendency to expand the warehousing and storage facilities in order to quickly respond to the market demand. Recession is the time when a thought for re-configuration of distribution network needs to be given. The facilities which are not contributing to revenues can be curtailed, particularly when such a facility is rented. This will help the organizations to prune their overheads to a large extent. If the facility is owned, sharing it with others in the market can help generate additional revenues for the organization. Another area of resource optimization is transportation. For global players, this is the time to get into long term contracts with the shipping lines, trucking companies and logistics service providers. The reason is that due to fall in demand for transportation services, long term discounts can be negotiated during the recession. For smaller players, this is the time for cargo consolidation on ‘Less than Truckload’ of ‘Less than Container Load’ basis to control transportation costs. Third and the most important resource is manpower. One of the most traumatic outcomes of resource optimization during the recession is loss of jobs. Employers can consider training their employees in additional skills during the lean period in the business. Survival instinct will motivate the employees to train themselves to learn new techniques of business, adapt new technologies and shoulder new responsibilities. This will not only keep the unemployment figures low, but it will also help to sustain the demand in the domestic market.
Thirdly recession is also the ideal time for product and process innovation. It is a fact that even during the recession, there is a demand for innovative products and services and the consumers are willing to pay premium on such products. Apple has set an example of product innovation with new products coming out of its stable with a regular frequency. Delighted consumers are responding by queuing to buy Apple products at their exclusive retail outlets. Cisco is another example of innovation due to its unique ‘Customer Value Chain Management’ practices and regionalized supply network architecture. The result is their ability to respond to the market demand despite uncertainty. Proctor and Gamble, the FMCG major have established ‘control towers’ to manage the flow of products to the distributors. These control towers monitor inbound and outbound distribution flow. At PepsiCo, the innovativeness is in the form of ‘Direct Store Delivery’ capability which enables them to control the costs and delivery time. Such innovations help the business to bind the customers with their brands and retain their market share. In India, where owning a car is the aspiration of millions, but limited purchasing power a reality, Tata Motors have responded with a car with a sticker price of USD 3000. Tata Nano meets the consumer aspiration as well as their budget.
In a globalized world, economic volatility is a fact of life. The organizations that remain prepared for meeting the consumer demand under uncertainty will survive and grow irrespective of economic cycle. Small and medium enterprises have limited resources at their disposal and can argue that they cannot adopt the sophisticated techniques adopted by Multi National Corporations. They can however learn to be lean and agile within their resources and survive the market volatility.
Contributed by Dr. Rajiv Aserkar, Professor, Logistics & Supply Chain Management, S P Jain Center of Management