I. Impact of Recession on Value Chain
Recessionary times are characterized by decreased consumption. Additionally the demandpatterns are highly erratic and volatile, for instance, output in the steel industry dropped by anunprecedented 30 percent and prices by about 50 percent from June 2008 to December 2008.
Such demand patterns, pose a challenge in market demand forecasts. This is due to the fact thatforecasting models are predominately based on historical demand patterns, with random patternseliminated to get a trend line. The forecasting challenge is particularly acute as in many upstreamindustrial settings, as supply partners along the chain anticipate decreased demand, the chain kindof decouples from downstream consumption which is the backbone of most forecasting models.In essence your product is not being consumed, whatever is being consumed is showing a highlyvolatile pattern so the focus should be more on making the delivery pattern more responsive, thatis following a pull based system. However, the chain responsiveness is dependent on the numberof links in the value chain as distortions in information, snowball along the length of a company’svalue chain. (Bull Whip Effect).Responsiveness however comes at a cost. For instance, to respond to a wider range of quantitiesdemanded one alternative could be to increase the capacity, which in turn increases cost. Valuechain efficiency is the inverse of cost of making and delivering a product to the customer. Hencethe more responsive a chain becomes the less efficient it is.
Hence in recessionary times an optimum tradeoff needs to be achieved between value chain efficiency and its responsiveness.
The following table highlights some of the characteristics of a supply chain relevant inrecessionary times:
Building a flexible supply chain for uncertain times, March 2009, The McKinsey Quarterly