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U.S. Economic Conditions and Productivity: Insights from the Supply Chain
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Transcript of U.S. Economic Conditions and Productivity: Insights from the Supply Chain
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 [email protected]
(214) 922-5129
Southwest Economy, Issue 2, March/April 2005
http://www.dallasfed.org/research/swe/2005/swe0502b.html