Inflation's Demise:Trading
Just-in-time (JIT) principles became standard business practice during inflationary times. In essence, repetitive purchasing and JIT delivery are tactics for hedging against price increases while minimizing inventory-carrying costs. Buyers negotiate fixed-price repetitive-supply contracts that are fulfilled and paid for over the life of the contract through periodic shipments timed to meet the actual need for goods.
Price stability makes such hedging unnecessary, and deflation makes it highly unprofitable. But buyers will be under even greater pressure to keep inventories low, since the value of inventories remains the same or depreciates in relation to cash. As a result, buyers will insist upon immediate delivery of small quantities whenever they can, at spot prices, although some suppliers will succeed in selling large quantities for immediate delivery by offering "temporary" price reductions, especially during the transitional period. For all these reasons, discrete (order-based) procurement and fulfillment systems can be expected to regain popularity lost to repetitive (schedule-based) systems during inflationary times.
At the same time, buyers and sellers can be expected to monitor competitive spot prices more vigilantly than before. The growing popularity of reverse auctions, data warehousing and data mining testify to the increasing demand for such market intelligence. Demand will increase rapidly for powerful search engines and business-to-business electronic commerce technology to solicit and extract the right information at top speed.
The importance of forecasting systems for short- to medium-term planning is likely to diminish. During inflationary times, suppliers used forecasts, customer orders and future repetitive schedule commitments to anticipate capacity as well as material shortages. Forecast accuracy is critical to the proper timing of business events when capacity shortages exist, but becomes irrelevant when unused capacity is abundant.
Inflation made it profitable for suppliers to be selective about what they sold, and to whom. When persistent capacity shortages exist, profits are maximized by discontinuing low-margin products and rewarding high-margin customers. Performance measures such as Economic Value-Add (EVA), employed in sophisticated sales, product profitability and customer profitability reporting systems, evolved to address this requirement. Suppliers are likely to abandon these tactics when confronted with excess capacity, the sooner the better, and "hunt" instead for as many new customers as they can.
Demand will grow for data warehousing, search engines, opportunity management (OMS), customer relationship management (CRM) and collaborative electronic commerce systems to help the sales force identify and qualify new customers fast. Improved sales incentive, sales engineering and product configuration tools will also be needed to find and close new customer business faster than the competition.
During inflationary periods, non-interest-bearing money owed by trade debtors should be collected as soon as possible in order to maximize its purchasing power, and non-interest-bearing money owed to trade creditors should be paid out as late as possible. In between, this money can be invested in short-term financial instruments or commodities bearing relatively high rates of return, since inflation goes hand-in-hand with higher interest rates and commodity values. Over time, many sophisticated remittance processing, money-management and hedging tools have evolved to meet this requirement.
In periods of steady or declining prices, there is no particular incentive to collect any more money from solvent trade debtors than is needed to meet current obligations. The relative benefits of sophisticated remittance processing, money-management and hedging tools are further diminished on account of the lower interest rates typically associated with price stability. But demand for improved credit management tools and up-to-date creditworthiness data is likely to increase, because of the risk that more customers will be in financial difficulties. Strong demand for sophisticated financial hedging tools can also be expected during the transition, because of arbitrage and currency instability caused by inter-regional disequilibria.
Price stability makes such hedging unnecessary, and deflation makes it highly unprofitable. But buyers will be under even greater pressure to keep inventories low, since the value of inventories remains the same or depreciates in relation to cash. As a result, buyers will insist upon immediate delivery of small quantities whenever they can, at spot prices, although some suppliers will succeed in selling large quantities for immediate delivery by offering "temporary" price reductions, especially during the transitional period. For all these reasons, discrete (order-based) procurement and fulfillment systems can be expected to regain popularity lost to repetitive (schedule-based) systems during inflationary times.
At the same time, buyers and sellers can be expected to monitor competitive spot prices more vigilantly than before. The growing popularity of reverse auctions, data warehousing and data mining testify to the increasing demand for such market intelligence. Demand will increase rapidly for powerful search engines and business-to-business electronic commerce technology to solicit and extract the right information at top speed.
The importance of forecasting systems for short- to medium-term planning is likely to diminish. During inflationary times, suppliers used forecasts, customer orders and future repetitive schedule commitments to anticipate capacity as well as material shortages. Forecast accuracy is critical to the proper timing of business events when capacity shortages exist, but becomes irrelevant when unused capacity is abundant.
Inflation made it profitable for suppliers to be selective about what they sold, and to whom. When persistent capacity shortages exist, profits are maximized by discontinuing low-margin products and rewarding high-margin customers. Performance measures such as Economic Value-Add (EVA), employed in sophisticated sales, product profitability and customer profitability reporting systems, evolved to address this requirement. Suppliers are likely to abandon these tactics when confronted with excess capacity, the sooner the better, and "hunt" instead for as many new customers as they can.
Demand will grow for data warehousing, search engines, opportunity management (OMS), customer relationship management (CRM) and collaborative electronic commerce systems to help the sales force identify and qualify new customers fast. Improved sales incentive, sales engineering and product configuration tools will also be needed to find and close new customer business faster than the competition.
During inflationary periods, non-interest-bearing money owed by trade debtors should be collected as soon as possible in order to maximize its purchasing power, and non-interest-bearing money owed to trade creditors should be paid out as late as possible. In between, this money can be invested in short-term financial instruments or commodities bearing relatively high rates of return, since inflation goes hand-in-hand with higher interest rates and commodity values. Over time, many sophisticated remittance processing, money-management and hedging tools have evolved to meet this requirement.
In periods of steady or declining prices, there is no particular incentive to collect any more money from solvent trade debtors than is needed to meet current obligations. The relative benefits of sophisticated remittance processing, money-management and hedging tools are further diminished on account of the lower interest rates typically associated with price stability. But demand for improved credit management tools and up-to-date creditworthiness data is likely to increase, because of the risk that more customers will be in financial difficulties. Strong demand for sophisticated financial hedging tools can also be expected during the transition, because of arbitrage and currency instability caused by inter-regional disequilibria.
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