Background

Call it a correction or a recession, but there’s little question that during the Spring of 2001, business went into a sharp decline. The computer, telecommunication, and electronics related industries clearly reflected that fact. Markets evaporated. Profits slipped or were nonexistent. And excess inventories will took months to work down to manageable levels. What happened, and why?

To begin with, the explosion of stock prices in the late 90’s led to the assumption that business cycles were a thing of the past. This was the "new economy", and growth would continue steadily, without interruption. It would be nourished by advanced technology, and nurtured by an investment community eager to share the benefits of growth. Companies, particularly those in high technology bought this assessment as fact, and made business decisions based on its rationale.

• Using the currency of their share prices, they acquired more and more new companies, often at unrealistically inflated prices. Unfortunately, they often lacked the technical and managerial depth to integrate these companies within their original business and market mix. The result was spiraling costs and customer dissatisfaction.
• Seeking to increase market share, they financed customer purchases, thereby incurring large and increasingly costly debt. In addition to the problems of servicing that debt, these companies lost access to capital markets. This forced them to rely on bank credit at steadily higher interest rates.
• Expecting markets to snap up the latest products and applications, they allocated increasing resources to new product and market development, often at the expense of established products and customers. This was a diversion of company resources from real business opportunities to hoped-for prospects that never materialized.

Unfortunately for those who bought the fiction, the "new economy" has not eliminated the business cycle. Following the huge outlays for equipment and software made in 1999 and 2000, capital investment fell dramatically. Demand for telecommunication, networking, computer, electronic and related products failed to meet projected optimistic levels. However, with increased capacity, enhanced further by global sourcing, supply was more than adequate to meet reduced demand. As end users canceled or cut back purchases, OEM’s, contract manufacturers, component vendors and distributors all followed suit. Plants were closed. Employees laid off. Prices and margins increasingly eroded.

So much for the "new economy"!

What Happened and Why

Just as momentum propelled growth, it now propelled decline. And that decline could be easily attributed to the economy. As one observer succinctly put it: "It’s the economy, stupid!" However, to explain what happened in this downturn demands a clearer understanding of the economy’s complexity. The economy is a phenomenon reflecting the interaction and behavior of markets. These in turn reflect the actions, attitudes, and perceptions of those who influence markets. For example, there is an almost symbiotic relationship between the economy and capital markets. As one expands or contracts, so too does the other. Thus, the movement of the stock market strongly conditioned investment, acquisition, even day-to-day business decisions.

Though companies say they are not influenced by the opinions of Wall Street, their actions speak louder than their words. I’ve seen first-hand what happens at the end of a quarter when companies must report earnings. The last two weeks are a mad house. Field Sales are pressured to close sales before the end of the month, even to customers who are poor credit risks. They are pushed to book sales now, though they are forecast for later months. This, in turn, disrupts the planning process, and ensures further disruption in the coming quarters. Those disruptions are reflected in inventory shortages to cover sales never forecast, and inventory excesses when quantity or specification changes are made to forecast customer requirements.

As a consultant to dozens of companies over half a dozen business cycles, I believe that the current correction (recession) is in large part the result of weak or faulty business decisions.

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The same reasoning that bought the concept of the "new economy" also espoused the notion that advanced information technology (IT) would eliminate the cycles that plagued the "old economy". There is no question that information technology has greatly improved the efficiency of today’s business processes. For example, despite the enormous stocks of excess inventory on hand (estimated at $11 billion in the electronics industry alone), there is evidence that companies are working them down more quickly and effectively than in previous cycles. This is undoubtedly due to the employment of IT hardware and software that better manages resource allocation, supply chain processes, forecasting and inventory control. But the reality is that no matter how much IT providers hype their offerings, there are serious gaps in their implementation. There is no uniform IT platform that can integrate a company’s supply chain, so that it monitors inventories in real time, and links supply to demand seamlessly. There are IT providers who claim they can do this, but the reality is that their solutions are piecemeal, and too often conflict with internal processes and legacy systems. But by relying on provider hype and acceding to the pressure from internal IT managers, companies have expended huge capital outlays for results that are less than were promised.

So much for advanced IT!

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Over the past decade, companies have reengineered processes and downsized operations.

Much, if not most of this effort was well-conceived and effectively implemented. It eliminated superfluous management and supervisory levels; combined and consolidated overlapping functions; and simplified the flow of information across process and functional lines. This resulted in increased productivity and lower costs. So long as business was good and markets strong, this made for the best of all worlds – growing revenue, improved margins, and higher evaluations of company shares. However, when market conditions changed, downsizing became pure cost-cutting. Layers of middle management in Marketing and Sales, Production Planning and Control, Purchasing and Logistics were indiscriminately cut or eliminated. Where the supply chain, from source to customer, worked effectively while business was good, its weaknesses and gaps now became apparent. Those middle managers in Marketing and Sales who previously were the eyes and ears to the customer, were no longer there to get the "feel" of the customer’s and customer customer’s true demands. Computerized models developed forecasts, and they became the basis for planning. Where Planners and Schedulers could previously massage and tweak "requirements" to reflect real time changes in demand, production capacity, supplier lead times, delivery delays, scrap rates and yields, they were no longer around. The combination of "advanced" information technology and downsizing had eliminated Planners and their manual planning tools. And in their absence, the weaknesses and gaps in their IT replacements compounded supply chain problems.

So much for downsizing!

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Supply Chain Management is the process that integrates the physical and information flow from source of supply through end customer use. To be effective, it demands cooperation among all elements comprising the chain, as well as transparency in their interaction. Like motherhood and apple pie, most companies espouse the concept, and demonstrate their support by collaboration, partnerships, and alliances with customers and suppliers. In truth, many of these relationships have been highly successful. However, when markets turned down, many more relationships proved to be mere shams. Companies paid lip service to cooperation, but when their interests were at risk, they acted for competitive advantage. They publicly advocated transparency in their dealings, but withheld vital information, and even generated false information to "partners" in the supply chain. For example:

• When markets were booming, systems suppliers, OEM’s, and contract manufacturers double and triple-ordered scarce or long lead time components, thereby aggravating shortages, and sending false demand signals to others in the supply chain.
• OEM’s who produced those components made little effort to inform distributors of this multiple ordering pattern. As a consequence distributors are now saddled with the highest levels of excess inventory, created to satisfy an artificially inflated demand market.
• In establishing "partnerships", end users, OEM’s, and contract manufacturers demanded vendor managed inventory, consignment, and on-site warehousing, while at the same time seeking to avoid liability should inventories prove to be surplus or obsolete. Disputes over ownership of the bill of materials are widespread, and failure to share the financial costs of this downturn, now jeopardize future relations and the integrity of the very supply chain management concept.

So much for cooperation and transparency!

Positioning for the Next One

Inevitably, as night follows day, (or more aptly, given the current economic scene, as day follows night), we are destined to go through still another business cycle. Hopefully, by the 4th. quarter of this year, or the 1st.quarter of 2002, inventory excesses will be worked off. Consumer demand, spurred by tax incentives and relatively stable job markets, will revive and begin to grow. And exciting new products and applications, now on the back burner, will be introduced, reinvigorating the promises of technology. Reacting to these developments, capital markets will open up, encouraging expanded investment. New plants will be built, adding modern and more productive capacity. Mergers and acquisitions will accelerate on an increasingly global scale. And we’ll be off to the races on the upward leg of another cyclical ride. Given the duration and excesses of the last cycle, this process of revival may take longer than we’d like to see, but the point is that it’s coming. And the question to ponder now is twofold:

• What have we learned from this last cycle?
• How do we position ourselves to avoid the problems the next one will create, and exploit the opportunities it also will present?

Certainly, we should have learned two lessons. First, business cycles will recur. They are part and parcel of the economic scene, and have been so for millenia. From the biblical seven fat and lean years, to today, they have occurred in all economies, and most strikingly, in ours. Our capitalist system, with its free markets and freedom of choice, make cycles inevitable. However, they do not occur in all segments of the economy at the same time and with the same duration. But cycles are a reality, and we must be acutely sensitive to how and when they occur, both in our markets and related ones.

Secondly, the stock market and the economy are not the same thing. In theory, the market mirrors the economy, but too often it gyrates up and down with seemingly no relationship to economic facts. Our task must be to set realistic goals, and manage resources for meaningful results. Making decisions to influence share prices is an invitation to failure. It diverts attention from factors we are able to manage to one over which we have no control.

It may seem simplistic to cite these as lessons to be learned, because in retrospect, they should have been obvious for all to see. But we were so caught up in the media-driven hype of the "new economy" and how it was creating an ever-rising stock market, that these realities were forgotten or ignored. But having cited them, what can we do to position ourselves for the next cycle? Here are eight suggestions to consider:

1. Know your markets better - Too often our perceptions of the "market" are what our customers tell us. But markets are derived and intertwined. The demand for resistors or capacitors derives from the demand for PC’s, workstations, TV’s, and automotive ignition systems. These, in turn, derive from consumer, industrial, and institutional demand for those same products. Knowing your markets means knowing your customer’s and your customer’s customer’s requirements, in intimate detail. The more you know and the sooner you know it, the better prepared you’ll be to deal with change.
   
   
2. Plan more strategically - Now is an ideal time to review business strategies. This downturn has been so extreme and abrupt, that we’ve had little chance to assess its implications in full detail. Are we in the right markets? Have we targeted the right customers? Is our product and service mix what it ought to be? Many of the technical, economic, and financial assumptions that underlie existing strategies have been seriously challenged by events. So, rethink them.
   
   
3. Focus on Customer Value - Companies talk glibly about customer value, but few truly provide it. Value is the satisfaction of customer requirements at the lowest total costs of acquisition, ownership, and use. To provide value means to provide product and/or service that reduces customer cost, avoids it, or offsets it by increasing revenue or improving customer cash flow. This demands a total reorientation of business thinking from internal to external customer focus. In today’s business environment, that reorientation is critical.
   
   
4. Reexamine competencies – Reengineer - Rethinking strategies and focusing on customer value demands a reassessment of processes. Processes are the means – marketing, engineering, manufacturing, distribution - to business ends. Which processes are prime value creating and value adding ones? Which processes provide little or no customer value? Identify, refine, and allocate resources to those processes, which are value providers. Simplify, combine, or outsource those that are not
   
   
5. Clearly structure your Supply Chain - The Supply Chain comprises all functions and activities involved in the flow of physical material, information, and financing from source of supply to ultimate customer use. It’s the process that meshes customer demand with supply capabilities, seamlessly and concurrently. Managing the supply chain effectively provides the greatest competitive advantage, both on the upside and downside of the business cycle.
   
   
6. Carefully select Outsourcing and Supply Chain Partners - Strategically, these collaborators are technical, financial, and management resources. It’s true that they’re external resources, but they’re as vital to your business interests as internal ones. Seek out partners and allies whose markets, technology, and business aims are compatible with yours. Carefully define respective roles and responsibilities. Identify and quantify risks and how they will be shared. Develop and cultivate close and continuing relations.
   
   
7. Employ Information Technology wisely - There is little question that business lives and breathes on information. How that information is captures, stored, analyzed, and distributed can spell the difference between success and failure. By all means, avail yourself of the best information technology suited to your business, and within the financial means you can afford. But don’t succumb to hype. There has been much too much of that, and it’s the naïve IT buyer who has suffered the consequences. There’s a saying that the devil is in the details. And the devil with many IT offerings is that they fail to address the details of data requirements and system implementation.
   
   
8. Strategically build and develop your employee base - One of the distressing results of this downturn has been the indiscriminate cutting of staff. People have been laid off to meet the financial numbers, regardless of their contribution to the company’s performance and results. In this information age, people’s knowledge and skill are a critical factor, not only for competitive advantage, but for mere survival. People – the right people – are your biggest asset. Develop and train them to cooperate and function as a team. Clearly spell out individual and team responsibilities, holding each accountable for results. Reward employees for exceptional performance, and provide them with incentives to grow as your business grows.