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What Every Supply Manager Should Know About Economics



ISM's 90th Annual International Supply Management Conference

San Antonio, Texas
May 2005

Author(s):

Roberta J. Duffy

Brian G. Long, Ph.D., C.P.M.
President, Marketing and Management Institute

What can a little Lifesaver candy teach us about economics? Quite a bit, according to Brian Long, who presented a look at the economy — current and past — to supply managers at the ISM Conference.

Think of the classic supply and demand curves, where the intersection of the two illustrates the price and quantity of a product when there is equilibrium. Lifesavers, which, as you might imagine, are heavily dependent on sugar prices, was forced to relocated its manufacturing operations to Canada when the price of sugar was kept artificially high through government subsidies. This represented a "support price" surplus, basically the gap between the demand curve and the supply curve at a higher price. Understanding these dynamics, as well as demand-based shortages and how markets adjust to meet either demand or supply trends, can help supply managers see the big picture and potential impact on their firms.

While many strive to do economic forecasting, Long defines the process as " ...driving a car blindfolded while the economist is looking out the back window giving you directions." Many times there are aspects of supply management that can be misinterpreted by the economic community. Without understanding how these nuances affect "the numbers" forecasts and predictions can be off the mark.

For example:

Length of contract. Long-term contracts can slow and distort the typical supply/demand scenario. A contracted supply schedule might not reflect actual needs.

Misleading prices. An oft cited statistic is the Producer Price Index (PPI), but as many supply managers know, they seldom buy at list price.

Time factor. The lapsed time between a purchase agreement and the actual exchange of money can skew statistics.

Subsequently, if top executives only look at macro economic data and rely on it to form expectations for their supply management departments, they must realize several points, including:

  • There is an investment (in time and resources) required to effect changes and achieve long-term profitability in the supply chain.
  • Non-price issues are difficult to manage after the fact. Sometimes the leadership wants to "back in" to quality. They set a price first and then try to develop the supplier to produce quality at that price.
  • The publicized benefits of outsourcing can be exaggerated. The savings possible on outsourcing for low labor rates often yields only a small percent.

Long also said that the real debt actually increased in 2000, contrary to what we might've been led to believe. However, the good news is that the interest on the national debit fell by $43 billion from 1998 to 2004. He also said that the decline of Japan is due in part to a narrow focus of industries and a banking system in disarray.

By Roberta J. Duffy, editor of Inside Supply Management®

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