The Lean Recession

The WSJ just posted (1/20/10) a small article about the semiconductor industry. Here is a line from the article:
 
Distributors controlled 36.9 days of inventory at the end of the third quarter, down 15% from a year earlier,according to iSuppli. In dollar terms, distributors held $4.8 billion worth of semiconductor inventory at the end of the third quarter, down 22%.
 
I couldn’t help but pull out Little’s Law to calculate the sales rate this year and last year. This year’s sales rate is R = I / T = 4.8 / (36.9 / 365) = 47.5$b.

This year’s days-of-supply is down 15% from last year, so last year’s days-of-supply was 36.9 / 0.85 = 43.41.  This year’s inventory is down 22% from last year, so last year’s inventory was 4.8 / 0.78 = 6.15.  Hence, last year’s sale rate was R = 6.15 / (43.41 / 365) = 51.7$b.  We can conclude that sales are down only 1- 47.5/51.7 = 8%

The bad news is that sales are down. The good news is that firms were able to reduce their days-of-supply even though their sales rate was declining. This is remarkable.

Imagine firms were producing at a certain rate and then demand softens. A natural reaction is to think this is a temporarily blip and to keep producing. Before you know it, inventories have ballooned and your days-of-supply has skyrocketed. That is not what happened in this industry and I suspect in many others. Firms “hit the brakes” very quickly and consequently, we are not in as big of a mess as we could otherwise be.

I suspect this happened because firms had very good information/production systems – they knew what was going on throughout the supply chain and so they could determine that they needed to slow down production rapidly. Second, they had the ability to slow down production – flexible workers, flexible suppliers.

When we go back and dissect this recession, I believe we will discover that it was quite different than earlier ones. The economy indeed operates differently now.

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One Response to The Lean Recession

  1. Seth Pippin says:

    How do you think the economy will react in the future as technology becomes even more sophisticated and allows firms to react even more rapidly to changing economic environments?

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