Wednesday, February 25, 2009

Goldratt On Economy ...

At a time when there is concern about the state of the economy, there was a news piece i read which mentioned that things might not be as bad as they seem (cant seem to find the link, so i am not referring to it here). Add to this, there is a very interesting newspiece about an economic upturn ... and, coming from someone as notable as Eliyahu Goldratt, one would sit up and listen.

Goldratt, to my mind, is one of the few business thinkers who go mre by common sense than by business theory. And, this reflects in the article i mentioned. Something i have been saying to friends, that the consumption of a billion people is not going to change drastically. Yes, there are going to be changes, definitely, but would these changes be as drastic as they have been made out to be? I dont think so. Even if people are to change their lifestyles, and reduce consumption, this takes time, and is not something which happens overnight. And if consumption is not going to be drastically altered, surely, the fortunes of companies which are linked to this, shouldnt change drastically either.

Lets look at it logically, as Goldratt does in this newspiece ... as fears of a slowdown continue, retailers reduce orders on manufacturers, who see demand going down, and they in turn reduce orders on their suppliers, and so on, down the value chain. What happens in this process is something well-documented ... the bullwhip effect. The fluctuations increase as one moves down the value chain, and this amplification is seen as proof of slowdown. Which would explain the disproportionate change in demand for component manufacturers, as compared to change in retail demand. Now, i am not an economist, but having studied supply chains, this logic rings a bell.

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