Supply, as well as business, is not independent of external economic and regulatory influences.
How did it happen? How did we transition so quickly from a period of financial well-being and economic enthusiasm into a credit crunch in which businesses cannot adequately function? The marketplace has lost hundreds of billions of dollars. Where did all the money go?
In reflecting on the current financial crisis, it appears to me that four factors converged to produce a perfect storm.
Other People's Money. The traditional financial investment houses that could be characterized as Wall Street old money were inherently conservative. That conservatism was based on the fact that they were investing their own money. As partnerships, each of the senior management was personally at risk for poor decisions. This produced an operating environment where risks were low and investments were made in fail-safe ventures. This all changed in the period of the 1970s through mid ’90s when the industry changed from primarily a partnership to a public corporation where external investors were the source of funds, not the individual partners. The industry became much more accepting of risk. After all, what was at risk was other people's money.
Patronage Government. What also changed was the perception of the role of government. Historically, government’s prime objective was to promote the general welfare of all of its people. With the insanely high cost of reelection and the dependence on political contributions, governments turned increasingly as a vehicle for protecting the patronage of its contributors, and not the public. Thus, the protections of the Glass–Steagall Act were swept away to allow patrons to engage in a more highly risky but lucrative environment that combined banking and investment management. Political and social agenda trumped responsible fiscal policies—no one worried when the bill came due.
Conflicts of Interest. The proper role of the rating agencies was compromised. Where in the past the rating agencies were a highly independent and conservative critique of risk, now they became financially dependent on the very industry whose task it was to monitor. The rating agencies received their revenue from the same financial investment community they were rating. This compromised their ability to act independently. The net result was the rating agencies became willing partners in an environment that saw only potential and no risk.
The Emperor's New Clothes. No one likes to be considered a fool. The complexities of modern financial instruments are beyond the grasp of the vast majority of investors and also the vast majority of financial managers. The intellectual elite who created complex financial derivatives openly heaped scorn on those poor souls who confessed lack of understanding. Afraid to admit that they did not see the emperor's new clothes, most critics were silent. What was not understood became accepted.
These, then, were the four winds that impacted the economic climate of high pressure of enthusiasm and euphoria and the low pressure of reality and risk. The forecast is still uncertain. The trade imbalances with China have allowed China to secure a significant investment in financial instruments that are producing easy money. Any limits to continued Chinese investment will produce another major fiscal crisis.
The result is the financial crisis that still continues to plague industry. We, as supply and procurement professionals, cannot afford not to understand the impact that economic factors and regulation have on our ability to manage effectively. Government policy and business policy are intertwined and cannot be viewed separately.
New production innovation/introduction (NPI), alternative sources of supply, and technology improvements are just some of the opportunities that are now restricted by the credit crunch. How has your business been impacted by the financial crisis?