Lessons from the Recession (2007-2009): Lean Inventories and the Integrated Supply Chain
According to Wikipedia; “The US entered a recession at the end of 2007, and 2008 saw many other nations follow suit.” Many economists believe that the recession that started in late 2007 in the US was a direct consequence of (a) the Housing Market Correction and (b) the Subprime Mortgage Crisis.
What followed was a very difficult operating environment for many businesses that depended on banks for credit to keep them afloat. Credit was tight and often in many instances was being revised down – not only for businesses but also for consumers.
Businesses selling high ticket items started seeing a significant decline in customers who depended on “No/Low Interest Long Term Financing Options”. Businesses were now competing based on “who could save the consumer more money”. The old adage “Shop Till You Drop” was no longer valid. Consumers started pulling back on making purchases and “bargain hunting” had become commonplace.
Consequently to match this decline in demand, businesses started to cut down on their inventories. In an integrated supply chain, where the demand at the retailer is translated back to the manufacturer in some form, the decline in sales at the retailer meant that the manufacturer would produce fewer products.
When there are subsequent periods of slow demand, it is common for the retailer and the manufacturer to reduce their on-hand finished goods and safety stock. While a single point certainly does not constitute a trend, if you face 3 months of consecutive declining demand (with limited positive outlook on the economy) it is natural for you to anticipate more slow months in the future. To balance the decline in demand, you take all the necessary steps to modify your operations, e.g. cutting safety stocks, reducing working hours and in extreme cases reducing your workforce.
In the global supply chain where finished goods and raw materials are increasingly being sourced from different continents around the world, it becomes difficult to react to any extreme swings in demand when the supply chain is lean and the lead times are long. Case in point – After subsequent months of declining demand in 2008-2009, there was an uptick in sales in March/April 2009. If you kept your inventories lean you probably used up your safety stock to cover this upswing. How did your suppliers handle the increase in order quantities that followed?
Let me share my story. A few of our suppliers were running very lean and had difficulty being able to handle additional demand from us. They had been projecting their raw material demand in-line with our slow sales keeping minimal safety stock. It was very difficult for suppliers to turn on a dime and provide us with additional inventory since a majority of the raw materials were being sourced from other continents with long lead times. The situation did improve in time but at the cost of a few lost sales.
Let me assure the readers that we were sharing as much information as possible with our suppliers. When we decided to go lean – so did our suppliers. When we decided to cut safety stocks – so did our suppliers. “Capital Conservation” was no longer just a buzz word!
How could this situation have been prevented? I am not sure if there is a right answer. Here are my thoughts:
Until my next post!
Best regards,
-AS
What followed was a very difficult operating environment for many businesses that depended on banks for credit to keep them afloat. Credit was tight and often in many instances was being revised down – not only for businesses but also for consumers.
Businesses selling high ticket items started seeing a significant decline in customers who depended on “No/Low Interest Long Term Financing Options”. Businesses were now competing based on “who could save the consumer more money”. The old adage “Shop Till You Drop” was no longer valid. Consumers started pulling back on making purchases and “bargain hunting” had become commonplace.
Consequently to match this decline in demand, businesses started to cut down on their inventories. In an integrated supply chain, where the demand at the retailer is translated back to the manufacturer in some form, the decline in sales at the retailer meant that the manufacturer would produce fewer products.
When there are subsequent periods of slow demand, it is common for the retailer and the manufacturer to reduce their on-hand finished goods and safety stock. While a single point certainly does not constitute a trend, if you face 3 months of consecutive declining demand (with limited positive outlook on the economy) it is natural for you to anticipate more slow months in the future. To balance the decline in demand, you take all the necessary steps to modify your operations, e.g. cutting safety stocks, reducing working hours and in extreme cases reducing your workforce.
In the global supply chain where finished goods and raw materials are increasingly being sourced from different continents around the world, it becomes difficult to react to any extreme swings in demand when the supply chain is lean and the lead times are long. Case in point – After subsequent months of declining demand in 2008-2009, there was an uptick in sales in March/April 2009. If you kept your inventories lean you probably used up your safety stock to cover this upswing. How did your suppliers handle the increase in order quantities that followed?
Let me share my story. A few of our suppliers were running very lean and had difficulty being able to handle additional demand from us. They had been projecting their raw material demand in-line with our slow sales keeping minimal safety stock. It was very difficult for suppliers to turn on a dime and provide us with additional inventory since a majority of the raw materials were being sourced from other continents with long lead times. The situation did improve in time but at the cost of a few lost sales.
Let me assure the readers that we were sharing as much information as possible with our suppliers. When we decided to go lean – so did our suppliers. When we decided to cut safety stocks – so did our suppliers. “Capital Conservation” was no longer just a buzz word!
How could this situation have been prevented? I am not sure if there is a right answer. Here are my thoughts:
- I think it is important to go beyond sharing just Sales Forecasts with your business partners. Your periodic “need” should include sales forecast and the safety stock requirement. Make the “total need” a part of your CPFR discussions.
- The other thing I would like to introduce is what I like to call “Risk Pooling” (not to be confused with risk pooling and reduction in demand variability). You and your suppliers form a team and you cannot succeed without each other. In challenging times, you should consider pooling your risks together to tackle the dilemma. For example, if your supplier is facing credit issues, offer monetary support if it is feasible. Remember, if they cannot procure the raw materials, you are not getting your finished goods. And if that happens, the customer that walked into your store will surely walk out. In addition, this will help you build a strong bond with your supplier, hopefully resulting in a long lasting mutually beneficial relationship.
Until my next post!
Best regards,
-AS
what are the summary of the us supply and demand of 2007-2009
ReplyDeleteAre you referring to the Trade Deficit Numbers? If yes, please visit the following link:
ReplyDeletehttp://www.census.gov/indicator/www/ustrade.html
I hope this helps.
-AS