A question of GAME change for Supply Chains
In the aftermath of the 2008 crises, the landscape of consumption in the largest economy of the world will undergo a permanant change. An economy which consumed the largest and lived on credit will make a life style change to savings. This will dampen the demand for products and services.
Organisations across the globe will have one time downward impact in the demand for their products and services to be digested. But the implications of that will create a large mismatch of demand and supply for significant time in future. Most of the supply (read: capacity) which got built across the globe in the recent past will suddenly turn out to be "excess" on a permanant basis. The demand destruction of this kind will create a new supply chain challenge which on one side will be price elastic demand while on the other side will have high costs to be absorbed for the supply chain assets that got created.
Many of the suply chains are global in nature for which demand exists in developed world while supply sources are in the developing world. That means countries like India, China and the likes have built their supply chain assets (read: capacities) based on consumption expected. These will now be challenged for meeting efficiency and effectivess performance parameters.
We now have a situation where;
a) the working capital requirements of the supply chain have gone up due to the asset base, while the demand has undergone a permanent downward revision.
b) The pricing power will be less as the consumer will want to spend less (as he wants to save more!) and supply will exceed the demand.
Organisations across the globe need to make a plan for GAME changing supply chains which will result into meeting the same Pre 2008 "customer" with his / her new post 2009 demands of cost, efficiency, speed and quality.
Organisations across the globe will have one time downward impact in the demand for their products and services to be digested. But the implications of that will create a large mismatch of demand and supply for significant time in future. Most of the supply (read: capacity) which got built across the globe in the recent past will suddenly turn out to be "excess" on a permanant basis. The demand destruction of this kind will create a new supply chain challenge which on one side will be price elastic demand while on the other side will have high costs to be absorbed for the supply chain assets that got created.
Many of the suply chains are global in nature for which demand exists in developed world while supply sources are in the developing world. That means countries like India, China and the likes have built their supply chain assets (read: capacities) based on consumption expected. These will now be challenged for meeting efficiency and effectivess performance parameters.
We now have a situation where;
a) the working capital requirements of the supply chain have gone up due to the asset base, while the demand has undergone a permanent downward revision.
b) The pricing power will be less as the consumer will want to spend less (as he wants to save more!) and supply will exceed the demand.
Organisations across the globe need to make a plan for GAME changing supply chains which will result into meeting the same Pre 2008 "customer" with his / her new post 2009 demands of cost, efficiency, speed and quality.
I guess there is a need for preparing the game plan for changing supply chains year after year!!
ReplyDeleteevery year one makes "incremental" changes..."fundamental" change is one time as it is in the current phase of businesses...the excessive capacity which got created due to the expected demand is going to be idle "permanantly".
ReplyDeletePK, you raise a interesting point around what will happen to supply chains (capacities) which got created in demand anticipation based on extrapolation from 2004-2007 figures, which is now undergoing serious correction in the wake of crisis and one possible outcome may be that we may take some time to catch up with those figures or as you say we may not get their in forseeable future.
ReplyDeleteMy thoughts:
1. I think its simplistic to paint with a common brush and reach the conclusion that all capacities created will be idle permanently because US is undergoing serious contraction along with Western European. I think one will need to dive deeper into specific supply chains & it could be that some may suffer while others may try different solutions and be innovative / flexible enough to actually use it to their advantage and be GAME Changers. LEt me take couple of examples:
1. Lets take automobiles, a pertinent industry when one is talking about US. Lets say that due to high US expected demand , a Japaness car manufacturer has created car plant somewhere in world, the auto components are sourced from China / India suppliers (where capacities were created). Lets assume that car sales in US are down due so this capacity is excess hitting car manufacturer and component suppliers. What could be the possible reactions ?
-> Car manufacturer may try to reduce prices and see if buyers are willing to opt for thisc car instead of another one. Price reduction will definitely mean impact on bottomline / price war.
-> Car manufacturer may look at other geographies to see if some of the produce can be sold, albeit at lower prices
-> Car manufacturer may see if the capacity can be diverted to producing different type of cars which are likely to see better uptake in US or other geography (albeit at cost)...e.g green / hybrids
-> Auto component suppliers will also try different solutions. (won't go into the details here)
2. Another example , IT services industry, close to our hearts :-)...as part of Services supply chain
Lets assume that Infy (as example) has created capacities , mainly in terms of office / human resources to cater to expected demand. Assuming that IT services demand also contracts / grows slowly in step with GDP, excess capacity will get created. Over time either Infy can let go of this capacity or use the same capacity for e.g as Lab to come up with a IT product which can have demand.
REgards your point about working capital requirements going up due to increased asset base, just by creating capacity , the working capital reqt may not go up if one decides to keep the plant idle, which may be one logical option.
Hi BPM Wiz,
ReplyDeleteAs we are with automible industry let me highlight some piece of data which indicates that GM used to sell 17 mio vehicles a year. In contrast to that they sold 9.2 mio vehicles last year. So if a capacity was created in anticipation of say 17 mio going up with whatever growth rates, the reality is excess capacity in multiple times the actual demand. And to reach the same level of demand may be long long time ahead from now.
Altering the "usage" of capacity is an alternative assuming,
a. There is demand for alternate product / service
b. There is flexibility to alter usage. e.g. If you are a gas company who laid pipeline network for distributing gas, you may find it impossible to utilize the capacity for anything else.There are countries across the globe whose economy revolves around one product or service. One can look at Venezuala or Trinidad which are predominantly gas based economies. Gas coming down from $ 20 to $ 4, and demand evaporating in thin air, has led to not only having excess capacities which have to be now idle but also tremendous loss in revenues.
One surely has to take a micro perspective of each supply chain alongwith it paramters of flexibility. But if the global economy is stated to shrink 2.9% in 2009 too, then significant GAME changing alternatives will have to be explored by the "boundaryless" Supply Chains spread across the globe!