Download SCM: The Science of Better, Faster, Cheaper

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