Economic and Policy Supply Chain: The Non-Invisible Hand
Adam Smith is famous for coining the phrase the “invisible hand” to suggest the collective transparent forces of a market that work together as a whole based on the self-interest of participating members. While Smith used the phrase only a handful of times in his writing, the term has become synonymous with the famous theorist. See the following excerpt:
“Every individual … neither intends to promote the public interest, nor knows how much he is promoting it … he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”
We can leave the economic theory and philosophizing for another day. The concept itself, however, is clearly valuable: much of what occupies the daily toils of the typical procurement or supply chain manager is directly tied to the broader trade of goods, services and ideas, and ultimately, the pursuit of profit and returns based on the collective set of activities. But what’s also equally important to consider is the “non-invisible hand” and how it affects our priorities and overall goals.
The non-invisible hand is the role of economic and policy makers on the overall market, plus those tasked with enforcement. The non-invisible hand is responsible for the following:
- Creating new entities (e.g., Vodafone’s Luxembourg relocation, a procurement company only)
- Moving procurement and supply chain staff to tax advantaged regional headquarters (e.g., Singapore)
- VAT reclamation strategies as part of spend analysis
- Transfer pricing analysis and opportunities
- New types of make/buy analyses that involve site and geography selection
- Sourcing decisions based on total cost models impacted by credits and incentives (e.g., environmental) such as fleet purchases or energy consumption (plant equipment)
These items are specific tactics and strategies companies can use based on the activities of the non-invisible hand. But perhaps procurement and supply chain organizations should pay closer attention to emerging strategies to address the market (and non-market) machinations that shape overall demand and supply chain activities.
In our own research and advisory, we’ve discussed the following topics most frequently colleagues and clients, which should consume an increasing amount of time for a typical procurement executive or manager:
- Monitoring general economic indicators to develop inventory, sourcing, hedging and related supplier management (and risk management) strategies
- The role of existing legislation (e.g., conflict minerals) in procurement and supply chain activity, including broader supplier management, chain of custody and related issues
- Expected legislative activity later in 2013 and 2014
- Total cost management, capacity considerations and reshoring
- World Trade Organization (WTO) trade cases and dumping activity
- Volatility and public policy (e.g., stimulus and monetary policy)
- General health, safety and environmental issues
- Piracy and counterfeit parts
While each of these areas deserves thorough explanation, we’ll start here with a discussion of the importance of developing a monitoring and forecasting capability based on government and third-party data sources and associate policies.
The importance of monitoring general economic indicators cannot go overstated. It’s critical for procurement teams to spend more time working with finance, sales and, if available, economic leaders in their companies to model inventory based on what actual demand is doing today, and what the organization is collectively forecasting demand to do tomorrow. Investing the time to work with public information sources like the Department of Commerce, the Bureau of Labor Statistics, the Institute for Supply Management and developing forecast models is a key part of this effort.
Of course, this raises the broader question of what procurement and supply chain leaders should be focusing on when monitoring general economic indicators to act on them more effectively. We recommend the following strategies:
- Understand all of the public sources (or subscription sources) of data and information that can contribute to effective forecasting and planning on a commodity basis. While certain activity can be potentially handed off to a third party for market intelligence, it is essential to keep the ability to conduct forecasting and develop a point of view in-house.
- Build a dashboard (potentially as part of broader spend and procurement analytics deployments) that incorporates external leading indicators and data feeds with internal information (e.g., demand forecasts). Understand the intersection of the two and overall exposure and degree to which you are covered, over-covered or uncovered for order and inventory.
- Work with third-party business process outsourcing (BPO) and knowledge process outsourcing (KPO) firms continually (not one-time consultative efforts) to develop both category and more macroeconomic forecasts that map to specific buying, inventory and related tactics.
- For sourcing, consider buying more on a spot basis and avoid buying forward unnecessarily. (This is one tactic to avoid getting stuck with unnecessary inventory in the channel during the early stages of a sector or broader downturn.)
- Don’t hedge longer-term for commodities that are showing weakness. Organizations should look more aggressively at hedging strategies when prices begin to hit a bottom for commodities.
- Explore creative sourcing strategies with suppliers, potentially on a multitier basis, to understand willingness and costs associated with different (e.g., shorter) contract terms and value-added components, such as vendor managed inventory (VMI) and consignment programs.