Supply chains and recession – potential consequences

Current financial markets crisis and expected economy recession rise the question – "will it also have the impact on the supply chains"? It seems that at least three potential consequences can be thought of:

1) Tight credit forces companies to focus on better inventory management

In order to fund operations, companies need credit to finance their working capital. As the result of financial crisis, the availability of credit decreasing and it is becoming more and more expensive. Therefore, companies should look for ways to reduce their working capital – one of them is by better inventory management.

2) Manufacturing will gain increasing attention as the service markets are in the downturn

As Dan Gilmore is pointing out in his latest commentary on Supply Chain Digest, in 1978, manufacturing represented 26% of UK's GDP – and today it is just 14%. In United States, these changes in the last decades were even deeper. One of the reasons mentioned is the services prices (incl. financial services) were growing much faster than the prices of manufactured goods, thus their share in the total GDP was also increasing. As the financial services industry is in crisis, it cannot be the engine of economy growth anymore. Manufacturing needs more attention, also in terms of attracting the best graduates who currently prefer to choose financial services sector (or consultancies).

3) Global supply chain networks need to be redesigned as the offshoring becomes less profitable

In the last decade, production of high-tech goods has moved steadily from United States to Asia. However, as mentioned in the September edition of McKinsey quarterly, the benefits of off-shore production has been undermined by rising costs related with soaring oil prices, rising wages and a failing dollar. Therefore, the companies should revise their global supply chain network design models, as the previous assumptions could change significantly.