Supply Chains affected by a country’s economic policy

Roger OakdenGlobal Logistics, Logistics Management, Supply Chains & Supply Networks

Global network

An economy

Discussions about Sales and Operations Planning (S&OP) concern the balancing of customer demand with sufficient supply. While S&OP operates at the tactical level within an organisation, a national economy also needs balancing of aggregate demand with supply capability.

How a government views the importance of demand or supply factors to a national economy can affect the operations and profitability of supply chains. As with S&OP, if too much emphasis is placed on just one side, an economy is unlikely to operate at its full potential.

The major developed economies drive the world economy, so their performance is important. For many years, they have experienced reduced economic growth rates – worse since the financial problems of 2008.

Depending on a government’s political point of view, this is either due to the declining growth rate of labour productivity or declining real wages.

Supply side challenge

Those with a view about labour productivity (what you get out for what you put in) consider that when productivity growth declines, it reduces the return on investment for businesses. This reduces the urgency to re-invest (even low interest rates have little influence), so slower productivity growth will result. Employers are therefore not willing to increase wages above the inflation rate, resulting in employees being less inclined to spend, therefore the growth in consumption falls.

To address this challenge requires improvement to the supply side of an economy; namely the labour market, labour productivity and the investment of capital. Government actions such as tax reform, ‘freeing-up’ (deregulation) the labour market, reduced government regulations and procedures (‘red tape’) will make an economy ‘more flexible, dynamic and competitive’ it is said.

Dynamic efficiency is the term used to denote the speed at which an economy can change to a new state. How long depends on delays built into a county’s economic system, including the time required to:

  • change business activities and plan new enterprises;
  • navigate regulatory and permit processes to change, expand or start a businesses;
  • acquire finance for new physical capital and
  • organise and structure revised relationships with customers, employees and suppliers

Reforms and policies that affect logistics services typically involve more than one tier of government and multiple departments or agencies within government. Due to the many stakeholders involved, improvements that may assist the overall performance of logistics services are likely to take much time.

Demand side challenge

The opposite view about the declines in the growth of labour productivity is due to the slowing demand for goods and services in an economy. Expected future demand for an enterprise’s goods and services is the driver for investment by a business. Reduced expected demand therefore means lower investment, resulting in lower productivity growth.

The reason put forward for ‘aggregate demand’ in developed countries reducing, especially since the financial crisis of 2008, is increasing job insecurity; real wages stagnating and increasing inequality in society. These can lower consumer confidence, which can increase savings, thereby reducing the number of active consumers.

To address these challenges requires government action on the demand side of an economy, such as government investment (in periods of recession), higher minimum wages, improved regulations concerning employment and working conditions and a re-balancing of power between employers and employees in collective bargaining.

Increased real wages means that businesses will invest in labour saving machinery; therefore labour productivity will improve. This is illustrated by the Lancashire UK cotton industry in the early 20th century. Labour disputes resulted in higher wages; these drove increased investments in new machinery, which saw increased productivity. This helped to build an industry with a close network of suppliers, technology development, a pool of labour and marketing capability.

The structure enabled competition with the rest of Britain, while paying wages that were about 30 percent higher and with the world, where wages were many times more than in Japan or China.

However, both views about the decline in labour productivity appear to ignore the situation that developed economies are now predominately in services, not production. While a manufacturer (and a distribution centre) has many options for replacing labour with machines, there is less opportunity in an office, child care centre or aged care home.

Productivity and people

Whatever the industry in a developed or developing economy, it is in an employers interest to have trained and adaptable staff. Whether an employer totally funds the training, or they supplement public education and training institutions, the outcome should be the same – to have a workforce that is capable and adaptable; not just hired mules to be told what to do and when.

In Australia, the experience of successful consulting assignments occurred with clients that had positive thinking about productivity and people. Memorable examples were:

  • A make to stock, production line business: pay scales were weighted heavily towards multi-skilled employees who were encouraged to upgrade their skill level. Line crewing was therefore easier and more flexible, with less supervision
  • A seasonal business: the payroll changed from weekly pay (with high overtime in the season and low hours in the off-season), to employees paid a monthly salary through the year. This was based on an agreed number of total annual work hours, with overtime paid in excess of those hours. Employees received additional training in the off-season, which also helped with staff retention
  • A 3PL business: all employees were expected to obtain a vocational qualification (and therefore a higher wage). Employees self-managed their work teams, requiring fewer supervisors and managers

For each organisation, total costs were reduced, in part due to increased flexibility built into the business – how does your organisation increase productivity?

For an economy, just as in S&OP, there needs to be a balance between supply and demand. Too much emphasis on one or the other leads to an unbalanced system – too much supply-side and the economy is ‘efficient’ but with insufficient customers and too much demand-side has the economy with lots of demand but inefficient supply.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...