U.S. Economic Conditions and Productivity:

Insights from the Supply Chain

Thomas F. Siems, Ph.D.Sr. Economist & Policy Advisor, Federal Reserve Bank of DallasISM’s 90th Annual International Supply Management Conference

San Antonio, TexasMay 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 Thingsto the Right Placesat 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

Time

Consumer Demand

Retailer's Orders to Wholesaler

Wholesaler's Orders to Manufacturer

Manufacturer's Orders to Supplier

Production

Sales growth volatility Production growth volatility

Reduced "Bullwhip Effect" for Durables

6%

8%

10%

12%

14%

16%

18%

20%

'68 '70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04

Production Growth Volatility

Sales Growth Volatility

Standard Deviation, 10-yr Moving Average

Supply Chain Managementat 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 ManagementContinues to Improve

1.25

1.50

1.75

2.00

2.25

2.50

2.75

'60 '65 '70 '75 '80 '85 '90 '95 '00

Durable Goods Inventory/Shipments Ratio

Distribution

• Involves greater distances and better coordination

Logistics Costs Continue to Fall

2

4

6

8

10

12

14

16

'81 '83 '85 '87 '89 '91 '93 '95 '97 '99 '01 '03

Costs as a percent of GDP

Total Logistics Costs

Transportation Costs

Inventory Carrying Costs

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

Forbes 100 List, 1917-1987

dead61%

survivors21%

underperformers16%

outperformers2%

Do What You Do Best...

...Trade for the Rest!

U.S. Business CycleExpansions and Contractions

Real GDP Growth

-12-9-6-303

69

121518

'48 '51 '54 '57 '60 '63 '66 '69 '72 '75 '78 '81 '84 '87 '90 '93 '96 '99 '02

1-qtr annualized growth

Mass Production Era Lean Manufacturing Era

Mass Customization

Era

Real GDP Growth Is Less Volatile

30%

17%

53%

Negative Real GDP Growth0% - 3.5% Real GDP Growth> 3.5% Real GDP Growth

15%

43%

42% 48%

8%

44%

Mass Production Era (1948-1973)

Average = 4.1% Average = 2.9% Average = 3.5%

Mass Customization Era (1996-2004)

Lean Manufacturing Era (1974-1995)

Productivity Growth

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

'70 '72 '74 '76 '78 '80 '82 '84 '86 '88 '90 '92 '94 '96 '98 '00 '02 '04

5-yr annualized growth rate

Productivity Growth Getting Stronger

27%

25%

48%

Negative Productivity Growth0% - 2.5% Productivity Growth> 2.5% Productivity Growth

21%38%

41%

31%

11%

58%

Mass Production Era (1948-1973)

Average = 2.7% Average = 1.5% Average = 3.1%

Mass Customization Era (1996-2004)

Lean Manufacturing Era (1974-1995)

96

98

100

102

104

106

108

110

112

114

-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12Quarters Before/After NBER Peak

Index, Peak Qtr = 100

Mass Customization Era

Mass Production Era

Lean Manufacturing Era

Productivity Growth Over Business Cycles

2

3

4

5

6

7

8

9

10

11

'48 '51 '54 '57 '60 '63 '66 '69 '72 '75 '78 '81 '84 '87 '90 '93 '96 '99 '02

Percent

Mass Production Era Lean Manufacturing Era

Mass Customization

Era

Unemployment Rate

Unemployment Rate Fairly Stable

39%

7%

54%

> 6.5% Unemployment5.0% - 6.5% Unemployment0% - 5.0% Unemployment

59%

0%

41%54%

0%

46%

Mass Production Era (1948-1973)

Average = 4.8% Average = 6.9% Average = 5.0%

Mass Customization Era (1996-2005)

Lean Manufacturing Era (1974-1995)

12,000

13,000

14,000

15,000

16,000

17,000

18,000

19,000

20,000

'48 '51 '54 '57 '60 '63 '66 '69 '72 '75 '78 '81 '84 '87 '90 '93 '96 '99 '020102030405060708090100110120

Jobs, Thousands

Mass Production Era Lean Manufacturing EraMass

Customization Era

Index, 1997=100

Manufacturing Payrolls(left-axis)

Industrial Production:Manufacturing Sector

(right-axis)

Manufacturing Payrolls Decline, But Output Rises

-40,000-30,000-20,000-10,000

0

10,00020,00030,00040,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

Gross Job Losses (left-axis)Gross Job Gains (left-axis)Net Change (right-axis)

Total = 357 millionTotal = 340 million

Total = 17 millionThousands, SA Thousands, SA

Turnover in the U.S. Labor Market

(Private Sector)

-3-2-10123456789

101112131415

'48 '51 '54 '57 '60 '63 '66 '69 '72 '75 '78 '81 '84 '87 '90 '93 '96 '99 '02

Annual inflation

Mass Production Era Lean Manufacturing Era Mass Customization

Era

Consumer Price Index Inflation

CPI Inflation More Stable

27%

18%

55%

> 5.0% Inflation2.5% - 5.0% Inflation<2.5% Inflation

46%

7%

47%47%

0%

53%

Mass Production Era (1948-1973)

Average = 2.7% Average = 5.8% Average = 2.0%

Mass Customization Era (1996-2005)

Lean Manufacturing Era (1974-1995)

Less Red...More GreenMass

ProductionLean

ManufacturingMass

Customization1948 - 1973 1974 - 1995 1996 - 2004

Productivity Growth

Real GDPGrowth

JoblessRate

CPI Inflation

New Information Technologies• Extend beyond typical business boundaries• Link together many business functions

Then... Now...

Phones to GPSs

Barcodes to RFIDs

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

Thomas F. Siems, Ph.D.Senior Economist and Policy Advisor

Federal Reserve Bank of Dallastom.siems@dal.frb.org

(214) 922-5129

Southwest Economy, Issue 2, March/April 2005

http://www.dallasfed.org/research/swe/2005/swe0502b.html