I was reading an interesting article in the Financial Review today which covered the reasoning behind the decision by Australian banks to raise their interest rates despite the RBA not having changed rates to them. In summary, it explains why the credit crunch in the USA  was restricting the supply of money to the banks, which has in turn increased the pressure for them to raise rates on loans because their cost of money has increased. This has the flow-on effect of banks now increasing the interest rates paid on deposits, which hopefully will increase the supply of cheaper money for them.

So what is the impact on business? supply chains of all of this? This obviously will vary depending on the gearing a company carries; however, the most obvious impact will be that the cost of money will increase. So any company with an overdraft or borrowings of what ever structure will be paying more. Likewise any company that is cash positive and carrying no debt will be receiving more for their money (depending on how they manage their surpluses).

It also seems inevitable that rates will continue to increase for the foreseeable future. It seems to me that the American economy is undoubtedly slowing, as is Europe’s. This is evidenced by the credit crunch and employment numbers in the USA and slow-downs in Spain and other parts of Europe. The talk is that this will also flow through to the UK. So with slow downs occurring in many developed economies, one asks why Australia is any different. Many say we are immune because our economy is being driven by China. Many believe that China is ‘decoupled’ from America and therefore their demand will continue despite what happens in the USA. I do not subscribe to this theory.

While China does seem to be generating sufficient demand internally to keep the economy growing through infrastructure projects and internal growth, the manufacturing plants in China have to be selling their goods to somebody. If the economies of USA and Europe are slowing then the demand for goods from China will slow, which will then flow on to a slowing of demand to some degree for our commodities.

For me, this all points to a continuation of tightening of rates. So what impact should this have on our supply chain strategy? Well, for quiet some time now, companies have been operating in a stable and low interest rate environment. There is almost a generation of young executives who have not experienced this type of market and those of us who have seen this before have most likely forgotten what it was really like. It seems to me that this environment reenforces the need to be agile, particularly given the level of uncertainty as to the economy’s future. So any supply chain philosophy that re-enforces agility and responsiveness requires further attention, particularly by those executives who have not considered the cost of capital in their decision making up to now.

Supply chains have become more global in outlook, particularly with outsourcing of manufacturing to China. This has added another layer of complexity to the supply chain; it has increased the time from order to delivery and increased the risk of delay, damage or loss at sea. As the price of oil continues to increase (albeit on the day of writing it dropped a little) it raises the question of a balance between the cost of oil verses the cost of labour. While labour in this country is more expensive than other countries, I can’t help but think many executives have forgotten that labour is their most agile resource.

In my view there will be a requirement to adopt those agile and responsive philosophies that encourage low and fast tuning inventories, a culture of continuous improvement and an adoption of smaller quantities more frequently so that if a downward shift in demand occurs, the company isn’t left with large quantities of obsolete inventory. The increased cost of oil re-enforces the need to have reliable sources of supply close at hand.

Adoption of these philosophies will release unnecessary capital that has been tied up in inventory and inefficient processes. This will provide two benefits to companies. Firstly, it will lower any overdraft and therefore the pressure placed by increasing interest rates, or it will provide a bigger cash surplus which can take advantage of the higher interest rates being provided by banks for cash. (I recall the day when some companies were selling product at or near cost just to generate cash that they could then place on the short term money market. Let’s hope rates don?t get so high to encourage this type of behaviour again, but it is sobering to remember them, all the same). Secondly, it will help place the focus of executives back on the actual return they are getting on their capital investments.

Does any of this requirement sound familiar to anyone??? These are all fundamental tenets of Lean Thinking. Executives have in general terms been lulled into a semi-false sense of security during the low interest rate environment. The cost of capital has been historically low and therefore there has not been a need to include the cost of capital into decisions. However now that that situation is starting to change the need to account for this cost will become more and more important and subsequently any business philosophies that encourage this behaviour become more and more important.

I will continue to encourage my clients to continually improve and adopt agile and responsive business processes.