A distinct feature of this economic slowdown is the direct degradation of consumer’s assets which has wiped out hundreds of billions of dollars in wealth. And consumers have responded by spending conservatively and concentrating on improving their savings. This new era of low spending and unpredictable consumer behaviour has rendered many demand-forecasting models inaccurate or even obsolete. Therefore, companies across the world are facing the problem of reduced demand levels. The variation in demand levels can mean any or all the three of the following to the supply chain of the firm: A. Bullwhip Effect The customer demand information is distorted as it is transmitted up to the supply chain and the variation in customer demand causes much wider variation in supply chain and its intensity increases down the way through supply chain. This bullwhip effect causes tremendous inefficiencies: excessive inventory, poor customer service, misguided capacity plans and missed production schedules. The major challenges that firms would face under such a situation would be to be able to take quick decisions relating to purchases and inventory levels and to be able to build flexible manufacturing systems so that demand variability can be handled without great losses. B. Intense Competition With lower consumer demand, all the firms will be going after a small number of customers thereby intensifying the competition. Developing newer and more innovative strategies will be a challenge for firms to cope up with this issue. Extending collaboration beyond organizational boundaries to effectively work with partners, suppliers, customers and even competitors will be form the major part of this challenge. All this should be done without compromising on customer service.
C. Low Supplier Performance & Supplier Risk Suppliers generally get paid 45 to 60 days after delivering parts, and this may cause a wave of failures owing to severe decrease in the demand and steep production cuts. Recession presents increased credit risk and a very real risk of supplier insolvency. One of the major challenges under such situation for companies would be to identify alternative suppliers for key components. Regularly obtaining financial information of the supplier and retaining ownership and control of software, equipment, data, deliverables and work in progress and supplier owned items critical to the business are among the other challenges. For example, healthy manufacturers such as Daimler, EADS and Volkswagen that have been largely unaffected by the global credit crunch, are increasingly forced to rescue their key suppliers and explore a range of options to keep supply chains intact. Another feature of the economic downturn is liquidity crunch because of which the manufacturers are constrained not only by the capital for investment but also by the lack of working capital. Evaporation of financing channels for a firm in turn affects the supply chain by pressurizing better utilization of the existing working capital and emphasizing the need the need to shed inventory. A. Reduced working capital Challenges would then be to free up cash from operations through lean management and identifying effective cost saving measures which would help the company to cope up with recession without affecting the long term operations of the company. During the 2001–02 recessions, for example, some companies quickly cut their operational overhead. These cuts made it challenging for executives to manage day-to-day execution and service or plan for further performance improvements that would enable them to emerge from the recession successfully.
B. Need to shed Inventory: Better Forecasting Forecasting systems have typically 12-36 months data. This works well in identifying patterns during regular times but not during recession. During recession, demand for consumer products reduces dramatically....