If you rely on suppliers for parts or for material, you are part of a system with volatile forces.
Unexpected Consequences of Material Handling
The basic “laws” we operate under say that you can’t change one part of a system without affecting another part of that same system. The effects of that change, however, may not have been anticipated — depending on how you’ve defined the system.
Our economy is presently experiencing this “law.” You see it in the daily fluctuations in the stock market. A simple change in a material handling process can cause major ripples through our economy, pointing out the narrowness of our definition of a system. However, with this insight, we have an opportunity to plan for the changes that are coming as the effects continue to ripple through.
A system is usually thought of as a group of elements that interrelate to and with each other. Most of us take the view that a system is a collection of individual pieces of hardware and software somehow linked together. But a system can define a broader concept. Your company’s supply chain, for example, is a system.
If you rely on suppliers for parts or material, you’re part of a system. And your decisions affect all members of that system, as well as the larger economic system we all participate in.
Take, for example, the decision to lower the amount of inventory you carry. Only now are economic analysts seeing the greater ramifications of this decision within the overall U.S. economy. The latest observation they have is that low inventories will slow our economic recovery. This concept seems counterintuitive; after all, the common belief is that low inventories mean high productivity, which is generally considered good for the economy. Here’s the analysts’ reasoning.
Customers are delaying purchase orders so as not to carry inventory. When they do order, they are buying smaller quantities more often, sometimes wanting shipment to occur the day they place an order. This purchasing behavior is making it harder for suppliers to project sales and profits on a quarterly basis, as increasingly they don’t know until the last minute when an order will come in. Well, investors don’t like not knowing what a company expects to earn, so they’re reluctant to invest in a company that can’t predict. No investment capital, no expansion. Therefore, we will likely experience delays in our economic recovery.
It’s these behaviors that are giving us a more volatile and unpredictable economy, said a recent Wall Street Journal article. Another little gem of information in that article: 57 percent of respondents to an industrial buying survey say they will no longer rely on forecasts to make their buying decisions because of the “order today, ship today” change in business operations. (Which leads to the question: What will now happen to forecasting software?)
If fewer companies are relying on forecasts, what is that going to do to basic business decisions? For example, if you can’t predict how many parts you’ll need to make in a day, how do you appropriately staff your production and material handling processes? Will we continue to need “full-time” staff or day-labor? If you can’t predict how many parts you’ll make on a piece of equipment, then how does that affect the amount of money you’re willing to pay for that equipment? If you can’t predict its operation time, how do you manage its maintenance? And if shipments have to be same day, or even next day, what are the costs of immediate shipment versus the costs of planned? Do you gain anything by spending money on air freight versus truck delivery, and how does customer good will factor in to that?
These are just a few of the ripples heading your way.
Despite the changes this seemingly simple decision is creating, it’s unlikely that business customers will go back to ordering in large quantities.
This means that those who interpret corporate financial health will have to find a way to measure profitability despite market unpredictability. And you may be called in to help explain.
But this is just the start. Our entire business economic system will oscillate until it finds its new balance point. That’s what systems do. Thus, you can count on more changes, more ripples moving through the system. When you’re anticipating what those additional ripples will be, just be sure to maintain a broad perspective on what constitutes a system.
Leslie Langnau, senior technical editor, email@example.com