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U.S. Economic Conditions and Productivity: Insights from the Supply Chain Thomas F. Siems, Ph.D. Sr. Economist & Policy Advisor, Federal Reserve Bank of Dallas ISM’s 90th Annual International Supply Management Conference San Antonio, Texas May 10, 2005 The Supply Chain Overview • What is supply chain management? • How has supply chain management evolved? • How have supply chains improved over time? • What are the macroeconomic benefits of supply chain improvements? Supply Chain Management: The science of better, faster, cheaper Getting the Right Things to the Right Places at the Right Times, for Profit. Dell Direct Model Global Services Model • Virtual reality diagnoses • Information sent anywhere in the world, instantly and at a low cost Supply Chain Evolution (1800s) • Division/specialization of labor • Interchangeable parts • Railroads, electricity, communications Mass Production Era (1900-1973) • Moving assembly lines • Scientific management methods • Operations research techniques Lean Manufacturing Era (1974-1995) • Increased global competition • Improved flexibility and quality control • Six-Sigma QC, JIT, TQM Mass Customization Era (1996-today) • Better information engineering • Internet, wireless communications, B2B e-commerce • Integrate internal systems with external partners ! I’m Next? Supply Chain Components • Production – How much to produce? Where? What suppliers? • Inventory – Where to store products? How much to store? • Distribution – How should products be moved and stored? • Payments – How (and when) should payments be made? The Changing Nature of the Firm • Why Do Firms Exist? – Ronald H. Coase (1937) • Transactions Costs – Supply Chain Management is all about reducing transactions costs • Information is Everything – The Internet Changes Everything • Better, Faster, Cheaper – Globalization and the Real-Time Economy The Real-Time Economy = Ideas + Technology + Information (Better) (Faster) (Cheaper) Information Distortions and the “Bullwhip Effect” The Bullwhip Effect in Action Order Quantity Manufacturer's Orders to Supplier Wholesaler's Orders to Manufacturer Retailer's Orders to Wholesaler Consumer Demand Time Production Sales growth volatility Production growth volatility Reduced "Bullwhip Effect" for Durables Standard Deviation, 10-yr Moving Average 20% Production Growth Volatility 18% 16% 14% 12% 10% Sales Growth Volatility 8% 6% '68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 Supply Chain Management at JC Penney • Outsourced sales forecasting and inventory management to supplier • Reduced production volatility and eliminated inventory Inventory • Inventory is insurance against supply chain uncertainties • Supply chain management substitutes information for inventory Inventory Management Continues to Improve Durable Goods Inventory/Shipments Ratio 2.75 2.50 2.25 2.00 1.75 1.50 1.25 '60 '65 '70 '75 '80 '85 '90 '95 '00 Distribution • Involves greater distances and better coordination Logistics Costs Continue to Fall Costs as a percent of GDP 16 14 Total Logistics Costs 12 10 8 Transportation Costs 6 4 Inventory Carrying Costs 2 '81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03 Payments • Eliminate paper • Automate transactions • B2B e-commerce Supply Chain Management at Progressive Insurance • The 20 minute insurance claim Supply Chain Management Summary: Better, Faster, Cheaper • Reduced production volatility • Lower inventory levels • Less expensive logistics • Streamlined payments Do What You Do Best... Forbes 100 List, 1917-1987 outperformers 2% underperformers 16% survivors 21% dead 61% ...Trade for the Rest! U.S. Business Cycle Expansions and Contractions Real GDP Growth 1-qtr annualized growth 18 15 12 Mass Production Era Lean Manufacturing Era Mass Customization Era 9 6 3 0 -3 -6 -9 -12 '48 '51 '54 '57 '60 '63 '66 '69 '72 '75 '78 '81 '84 '87 '90 '93 '96 '99 '02 Real GDP Growth Is Less Volatile Negative Real GDP Growth 0% - 3.5% Real GDP Growth > 3.5% Real GDP Growth Mass Production Era (1948-1973) Lean Manufacturing Era (1974-1995) Mass Customization Era (1996-2004) 8% 15% 17% 43% 44% 53% 30% Average = 4.1% 42% Average = 2.9% 48% Average = 3.5% Productivity Growth 5-yr annualized growth rate 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04 Productivity Growth Getting Stronger Negative Productivity Growth 0% - 2.5% Productivity Growth > 2.5% Productivity Growth Mass Production Era (1948-1973) Lean Manufacturing Era (1974-1995) Mass Customization Era (1996-2004) 11% 25% 21% 38% 48% 58% 27% Average = 2.7% 31% 41% Average = 1.5% Average = 3.1% Productivity Growth Over Business Cycles Index, Peak Qtr = 100 114 Mass Customization Era 112 110 108 Mass Production Era 106 104 Lean Manufacturing Era 102 100 98 96 -4 -3 -2 -1 0 1 2 3 4 5 6 Quarters Before/After NBER Peak 7 8 9 10 11 12 Unemployment Rate Percent 11 Mass Production Era 10 Lean Manufacturing Era Mass Customization Era 9 8 7 6 5 4 3 2 ' 48 ' 51 ' 54 ' 57 ' 60 ' 63 ' 66 ' 69 ' 72 ' 75 ' 78 ' 81 ' 84 ' 87 ' 90 ' 93 ' 96 ' 99 ' 02 Unemployment Rate Fairly Stable > 6.5% Unemployment 5.0% - 6.5% Unemployment 0% - 5.0% Unemployment Mass Production Era (1948-1973) Lean Manufacturing Era (1974-1995) Mass Customization Era (1996-2005) 0% 0% 7% 41% 54% 39% Average = 4.8% 46% 59% Average = 6.9% 54% Average = 5.0% Manufacturing Payrolls Decline, But Output Rises Index, 1997= 100 Jobs, Thousands 20,000 120 110 19,000 100 90 18,000 17,000 80 Manufacturing Payrolls (left-axis) 70 16,000 60 50 Industrial Production: Manufacturing Sector (right-axis) 15,000 40 14,000 13,000 30 Mass Production Era Lean Manufacturing Era Mass Customization Era 12,000 20 10 0 ' 48 ' 51 ' 54 ' 57 ' 60 ' 63 ' 66 ' 69 ' 72 ' 75 ' 78 ' 81 ' 84 ' 87 ' 90 ' 93 ' 96 ' 99 ' 02 Turnover in the U.S. Labor Market (Private Sector) Thousands, SA 40,000 Gross Job Losses (left-axis) Total = 340 million Gross Job Gains (left-axis) Total = 357 million Net Change (right-axis) Total = 17 million Thousands, SA 4,000 30,000 3,000 20,000 2,000 10,000 1,000 0 0 -10,000 -1,000 -20,000 -2,000 -30,000 -3,000 -40,000 -4,000 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Consumer Price Index Inflation Annual inflation 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 -1 -2 -3 Mass Production Era Lean Manufacturing Era Mass Customization Era ' 48 ' 51 ' 54 ' 57 ' 60 ' 63 ' 66 ' 69 ' 72 ' 75 ' 78 ' 81 ' 84 ' 87 ' 90 ' 93 ' 96 ' 99 ' 02 CPI Inflation More Stable > 5.0% Inflation 2.5% - 5.0% Inflation <2.5% Inflation Mass Production Era (1948-1973) Lean Manufacturing Era (1974-1995) Mass Customization Era (1996-2005) 0% 7% 18% 46% 55% 27% Average = 2.7% 47% Average = 5.8% 53% 47% Average = 2.0% Less Red...More Green Real GDP Growth Productivity Growth Jobless Rate CPI Inflation Mass Production Lean Manufacturing 1948 - 1973 1974 - 1995 Mass Customization 1996 - 2004 New Information Technologies • Extend beyond typical business boundaries • Link together many business functions Then... Phones to GPSs Barcodes to RFIDs Now... Conclusion • Supply Chain Management: The Science of Better, Faster, Cheaper • Macroeconomic Benefits – more stable economic growth – higher productivity growth • Think Globally, Act Globally – specialize and trade Supply Chain Management: The Science of Better, Faster, Cheaper Southwest Economy, Issue 2, March/April 2005 http://www.dallasfed.org/research/swe/2005/swe0502b.html Thomas F. Siems, Ph.D. Senior Economist and Policy Advisor Federal Reserve Bank of Dallas [email protected] (214) 922-5129