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The Right Balance: Exercising Discipline, Patience & Foresight In A Difficult Economic Time

Discipline and patience may well be the catchwords for the future. The discipline to save and buy less, and the patience to keep an eye on things and wait for the next economic opportunity.

Since the Covid lockdown, the price for a furry friend has skyrocketed! (Gone to the dogs?) For many, staying at home meant a lack of co-worker interaction and loneliness. An obvious answer was to acquire a dog.

Demand increased to the point where mutts were being sold at purebred prices. Then, as restrictions were lowered and offices opened up, reality set in: someone had to take care of the dog when you went to work.

For some, the only viable solution was to drop the animal off at the nearest SPCA. Today, there’s a glut of dogs with no place to go and many are being euthanized. A not-so-pretty yet graphic example of an up-and-down cycle.

At the height of the pandemic, travel, concerts, restaurants and bars were shut down while healthy government checks were being dolled out to virtually anyone that applied. The “free cash” created an artificial bubble and a “need” for goods. Demand exploded.

Refrains such as “I’ve always wanted to learn to play guitar or piano” echoed everywhere, resulting in record sales for guitars and keyboards. Because musicians couldn’t perform in live venues, they invested in their home studios instead. Manufacturers did their best to deliver but alas, it takes time to shift production based on previous sales projections. There was no history to draw upon.

As the economy shifts back to normal, regular goods are now in short supply. So, we pay more for everything.

Push & Pull

Just as with the up and down demand for pets, the market is a push-and-pull beast (machine) that eventually finds its balance. Excessive demand causes price hikes while a glut results in heavy discounts. This is nothing new, the pandemic merely exacerbated the problem to unseen levels.

Early on when I was at Radial, we experienced supply chain problems. We were a small company that barely had enough cash to cover salaries. We held back on paying suppliers until money came in the door.

The inevitable result was that when we placed an order with a supplier, it often ended up at the bottom of a pile. We just weren’t that important. The lesson was clear: Take care of your suppliers and they will take care of you.

As the company grew, our needs increased yet cash continued to be tight. Ordering excessive inventory meant bigger monthly bills that would spiral us right back to severe cash shortages.

The solution: just-in-time delivery. This tricky balance requires building strong relationships with suppliers whereby they will hold inventory and ship it when needed. This way, when the bill is due, you’re not struggling to pay it.

Although it seems easy enough, suppliers often run out of parts. A good example is the recent chip shortage: These $2 parts are holding back the production of $75,000 cars.

In our case, bigger (more important) customers would push the manufacturer to deliver parts to them and inevitably delay deliveries to us. We addressed this problem by sourcing a second supplier that was hungry for our business. It not only created a price bargaining position, but a more consistent flow.

Easy, right? Not so much. It also meant balancing the orders between two suppliers in an attempt to keep them both happy while also placing additional pressure on quality control to ensure the products being delivered were exactly the same.

A company can also cause its own supply chain issues. We experienced this with a transformer manufactuer. When we purchased this exceptionally gifted engineering company, it soon became evident that they had serious inventory management issues.

For instance, they would run out of metal shields, which of course made it impossible to produce a transformer. What caused the problem? The company still used hand-drawn manufacturing schematics without detailed parts lists. They had manufacturing software but didn’t use it, therefore they couldn’t predict inventory needs, production labor requirements, or factor in sub-contractor delivery lead times.

Parts would often only be ordered when they ran out, which caused tremendous shipping delays.
Customers like Radial had no choice but to shift some purchases to secondary suppliers as a means to fill orders.

The company lost business, further adding pressure to their already strained finances, and inevitably it forced the owner to sell. We decided to invest in it, and with investment, systems were put in place, the company stabilized, and deliveries improved. The market isn’t always kind, but it will find a balance.

Further Pressure

So where are we today? Economic indicators point to supply chain issues being with us for some time yet. As demand rises for hard-to-get items, upward pressure on prices result. The inflation we’re now experiencing was predictable. The most effective way to slow inflation is to increase interest rates. This slows demand and forces people to tighten their belts, which eventually drives prices down.

Another factor in this global economic game is labor. We are now experiencing never-before-encountered labor shortages. Trucking companies can’t find drivers – yet if you think about it, virtually every product we buy finds its way onto a truck at some point or another. This is an enigma.

Most point to overzealous government support programs that took many out of the workforce. The government threw money at the problem and called it a stimulus program! Printing money creates artificial value.

One needs to merely look at house pricing to see how all that money in circulation actually means your dollars are not worth the paper it’s printed on. Ask yourself this: If its free or near free, does it have value?

orrowing money at 2 percent interest should set off alarm bells. We can also factor in the baby boomer retirement cycle. With less people looking for work, filling jobs becomes more and more difficult. Yet many resist immigration, an obvious source for low-cost labor that could help fill this gap.

Wage increases directly affect the cost of goods and services. McDonald’s is now paying $18 an hour – a job that previously paid minimum wage. The price of burgers will either rise or the quality will suffer. Yesterday, my house cleaner announced that with the higher price of gas, she now wants $35 an hour.

As interest rates rise and families feel more pressure on their mortgages, it will force many to seek additional part-time work to cover monthly costs. This will result in more people looking to work on weekends as cleaners, landscapers, Amazon stock people and so on. This should create a more competitive labor environment.

Eye On The Future

If one looks back at the milestones that have driven past economic boons such as the arrival of the affordable car, the microchip, the personal computer and the internet, you have to ask yourself: what will be next? The economic booster this last time round came largely from eye-watering government stimulus programs and the upside-down economic boon caused by the pandemic.

Government debt in countries all over the world is now at a breaking point. I wonder what will drive the recovery and allow us to pay back the piper? I hate to add more fuel to the fire, but higher taxes will be inevitable. Further, predictions from financial circles point to a contraction in the economy. I know, I know – it’s all head-numbing!

The good news for those in the entertainment business is the pent-up demand for concerts and live theater that we’re now experiencing. It may, however, be wise to anticipate shutdowns this winter due to new Covid variants, yet this time, we’ll likely not have the government support many enjoyed in the past.

Discipline and patience may well be the catchwords for the future. The discipline to save and buy less, and the patience to keep an eye on things and wait for the next economic opportunity.

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