Economic upturn round the corner

During this season of gloom, when experts say the economy won’t look up till at least 2010, Eliyahu M Goldratt begs to differ. The Indian economy should return to its high-growth path in two months, says the renowned management expert whose ideas have helped many global majors improve efficiency and do things better. “Fears of recession are completely unfounded,” says the man described by Fortune magazine as a “guru to industry”. Goldratt says the Indian economy, particularly manufacturing, is already showing signs of an upturn. “In the next couple of months, barring a few sectors like real estate and automobiles, which depend on retail financing, it will be back on the growth path,” he adds. What’s more, says the 60-yearold Israeli business thinker, corporates that are resorting to downsizing as a response to fall in sales will find themselves at a disadvantage a few months from now. “Companies that lay off people now will most likely be slow to respond to sales picking up shortly hereafter,” he says. Goldratt, whose celebrated ‘theory of constraints’ helps manufacturers remove broken links from their value chains and improve performance, says the present gloom is just “an outcome of over-publicity in the media of the failure of banks in the US, which gripped the entire globe”. He, in fact, feels 2009 will be better than the previous year for manufacturing. “The negative growth in industrial production in India in December was because of fear of demand falling in the future and not because of lack of demand,” says the author of books like The Goal, It’s Not Luck and Critical Chain, which use fiction to propound new business ideas. Goldratt is in India on a lecture tour. Elaborating on the ‘fear factor’, Goldratt cites a Japanese electronic component manufacturer, which came to him for advice after a 50% fall in production in December. Research showed that the company had faced a 50% reduction in demand despite a growth in demand at the retail level of around 14% in Japan. As the company was a big exporter, Goldratt assessed the market condition globally. Surprisingly, his research found no evidence of a big economic crisis. Even in markets like the US, where the meltdown began, the fall in retail sales was in single-digit percentage points. “To find the cause of the steep fall in demand, we looked at the demand and supply of companies in the value chain. What we found was that the fear of a slowdown had led retailers to reduce inventories. Because of this, original equipment manufacturers (OEMs) were experiencing a substantial decrease in orders,” he says. For OEMs, this sales reduction was interpreted as a clear indication that the economic crisis was materializing. “Like the retailers, they, too, reacted by lowering inventory levels, which in turn meant that they lowered purchases from suppliers even more than the level their sales had dropped. This explains why the electronic components manufacturer suffered a dramatic 50% decrease in sales even though the consumer demand stayed about the same,” he says.
Slowdown fears often lead retailers to reduce inventories, leading to a plunge in sales even though consumer demand stays about the same. Israeli management expert Eliyahu M Goldratt says the same amplifying effect was seen when the component manufacturers, in turn, dried up their orders to their material suppliers, who experienced an alarming sales drop. Goldratt says the situation will normalize as the surplus inventories are flushed out. Since retailers typically hold three-four months of inventory, they will start increasing their orders to OEMs from February-March. As original equipment manufacturers (OEMs) hold about two months inventory, the component manufacturers will start experiencing increase in orders with a time lag of around a month. Therefore, by April, he says, the drop in orders crisis will come to an end.