Friday, February 19, 2010

Dragonchild on the logistics logjam

Hoisted from the comments yesterday, this is worthy of its own post. Dragonchild responded to my point about companies "hoarding" jobs:


To get into the "lead time" scene in a little more detail, there's a "traffic jam" effect at work. You know how it takes only a single accident to bring a freeway to a grinding halt? It only takes a shortage of ONE part to stop a production line. This is why a lot of suppliers are able to get away with stretching their lead times for now. If any resource, component or service is in short supply and the nature of it prevents it from rebounding capacity quickly, then ALL suppliers are stuck in the same situation. So if supplier A and supplier B both buy widgets and the widgets are in critically short supply because they've been cleaned out, then even if A hired more workers, there's no competitive advantage. For increased operating costs, you just use up your existing inventory faster until you're in a "line stop" situation as you wait for more parts. This is why suppliers have been able to ignore purchasers' screams of outrage; they're all in the same boat.

NDD is correct that this can't go on forever. Purchasers are notoriously cheap bastards (they're PAID to be cheap bastards), but long lead times means more capital tied up in inventory. If a part takes 30 weeks to deliver, the OEM needs to buy up 30 weeks' worth of parts. That can be an awful lot of capital when we're still recovering from a liquidity trap. Also, you lose the flexibility to adapt to changing market conditions and can get soaked. Companies hate buying a pile of parts, only to sit on them for two years because sales slowed (even if they do well overall because another product line overperformed).

The "hoarding" of jobs is indeed happening and isn't something businesses are eager to proactively reverse in a time of uncertainty, but as for why there's pressure building up, what's killing the momentum on the ground level isn't a dam of collusion so much as a logjam in logistics. As fast and flexible as our economy is touted to be, the MBAs don't know squat about logistics. You can buy and sell companies so quickly today, but industry still moves like a freight train in slow motion.