Flostock News #18
Scientific proof of the Lehman Wave and bullwhip effect
- Published in the Int. J. Production Economics
A recent article by Dr. Maximiliano Udenio in the International Journal of Production Economics shows that the severe demand dip that the industry experienced worldwide in 2009 was a bullwhip caused by active destocking of the long industrial supply chains. Active destocking is a conscious decision to reduce inventory, and was triggered by the credit squeeze in the panic immediately after the bankruptcy of Lehman Brothers in September 2008. The article shows that , in times of distress, inventory is seen as “frozen cash” and is easily sacrificed to generate a bigger cash flow. In this way the credit crisis caused an industrial crisis and a wave -- the Lehman Wave- that brutally rampaged through the industry. Main insight is that Inventory forms an integral part of global finance. A second insight is that inventory effects accumulate through the supply chain, so you cannot treat all inventories as one stock: it has a dimension, which we call Stock Depth, that is equal to the total stock coverage in the chain. And third: the cumulative effect of inventory moves in these long supply chains explains the cyclicity of the basic industries.
Why is the Lehman Wave relevant for you?
- LIBOR interest rate peaked high in September 2008.
The Lehman Wave explains the loss of billions of euros and millions of jobs, and caused ten-thousands of bankruptcies worldwide. The demand dip was deepest for companies at the beginning of long downstream supply chains and for the suppliers of capital goods, the two places where most of the closures took place. If the next financial crisis starts again at the top of a giant bubble, and the interest rates peak again, the response will be the same. Will you survive, again? The world is getting more volatile, not less. So be prepared for a next crisis! Ask Flostock for your dedicated supply chain model! Call us at +31 6 11356703.
The Lehman Wave article from 2009
- The Lehman Wave in Joinery
The same authors wrote an article (click here) about the Lehman Wave in 2009. We received exceptional cooperation from Royal DSM, who were willing to publish business data that are normally considered confidential, because they found it of imminent importance to share these views and help the industry understand the crisis. This article was published when the wave had just started and the industry was experiencing its first upward peak. The article has been quoted in many newspapers & journals, by universities & banks. McKinsey called it best practice. Journals include the Financial Times and the Dutch Financieele Dagblad, and magazines include ICIS Chemical News, EVO Logistics, Chemistry Today, www.mejudice.nl and the ECJ. Financial institutions include the ECB, Banque de France and RABO-bank. It was quoted in a books by Richard Swedberg about the collapse of Lehman Brothers. The ideas have been adopted in the teaching of MIT, Wharton and at least six European Universities. For a full list, click here. Maxi Udenio, one of the 2009 authors and first author of the new article, recently received his PhD for this work at Eindhoven University.
The Lehman Wave in Flostock Modeling
- The Lehman Wave is visible in the global GDP of 60.000.000.000.000 USD
Any economic model that covers the past 10 years and does not include the Lehman Wave will not be accurate. So all Flostock models include the Lehman Wave, in one way or another. The Lehman Wave was such a strong shock to the industry that supply chain behavior became visible that is crucial for understanding the dynamics but is normally hidden in the seemingly chaotic behavior of supply and demand. This behavior includes response times, lead times and stock keeping habits. “When the water drops, the rocks become visible”. In fact, it is doubtful whether causal dynamic modeling of the supply chains and of the economy would ever be possible without this additional information. In that sense it has been a gigantic natural experiment involving 7 billion people in a 60 trillion USD economy.
You can click here for the new Lehman Wave article at the website of Reed Elsevier. The official citation of the new article is: Udenio, M., Fransoo, J.C. and Peels, R.E.J., Destocking, the bullwhip effect, and the credit crisis: Empirical modeling of supply chain dynamics. International Journal of Production Economics (2014).
You can mail to info@Flostock.com if you want to receive a copy of the new article.
Or click here to go to the Flostock website to download it.