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business newsThe Global Interconnectedness of Inventory
By
Peter Atwater
Mar 21, 2011 9:45 am
There's an eerie similarity between the current parts crisis and the liquidity crisis of 2007.
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For commercial paper issuers, investors, and banks the event warned that the on-demand global liquidity strategy, which they had come to not just rely on, but which they had taken to an unprecedented extreme through a combination of on- and off-balance sheet short-term funding programs, was in doubt. And in an instant, access to immediate cash suddenly mattered.
In reading financial media reports since the Japan earthquake/tsunami, I was reminded of the August 2007 money market crisis. Where in 2007, it was immediate cash that was needed, today in the aftermath of the Japan crisis it is access to component parts and materials.
Just like financial services firms came to rely on on-demand liquidity and other peoples’ balance sheets (SIVs and securitization) and the benefits of interconnected global capital markets, over thee past 30 years, multinational manufacturers have turned to global just-in-time inventory management, logistics, and innovative supply chain strategies to boost margins and minimize capital.
Products would always be available whenever and wherever they were needed because an interconnected global marketplace would guarantee it.
Until it didn’t.
This weekend I noticed that corporations are now considering “just-in-case” inventory strategies and the need for dual sourcing. Suddenly redundancy matters. Over time, I expect that redundancy will mean higher on-balance sheet global inventory levels, just like “assured liquidity” in the aftermath of the 2008 banking crisis has meant higher on-balance sheet cash for financial services firms and corporations. And needless to say, the effects of redundancy will ripple through to both margins and capital.
But if the 2008 banking crisis is any indicator of what is ahead, I expect that the highly touted benefits of global “interconnectedness” may also come under threat. And with high unemployment in many developed nations, I expect that we will see politicians aggressively fight for their share of whatever redundant capabilities can be had locally. And some policymakers, under the guise of national security, may even go so far as to insist on local sourcing of key “systemically significant” products and materials.
At the risk of raising protectionist ire, I’d offer that from a socionomic perspective, the globalization that we have witnessed over the past 30 years in both manufacturing and financial services reflects an unprecedented level of not just confidence but complacency. And with the financial services industry clearly already on the other side of its globalization bubble, I am afraid that the events in Japan may mark the beginning of a similar turn for manufacturing. “Foreign” and “fear” have an unfortunate historical relationship and it will be very interesting to see whether we see protectionism rise and with it the associated vilification of others.
As I’ve offered before (see Pledging Allegiance: Multinationals in an Increasingly Nationalist World) nationalism poses an enormous challenge to the supra-sovereign business model of the world’s largest corporations. And for these firms, “just-in-case” may need to apply to far more than just inventory.
Lasting through April 15, 100% of the donations made to The Ruby Peck Foundation for Children's Education will be channeled to the children of Japan as they attempt to find their footing following this natural disaster; and to kick off this drive, we'll pledge $5000 to get it started. Please do what you can, as it will add up, and thanks.
Positions in SPY, SH, JPM.
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