Friday, December 05, 2008

Slowdown and credit flow within the manufacturing process

Credit flows within a Customer-shopkeeper-manufacturer-Supplier process. During slowdown the pattern of credit flow changes giving us lead indicators of impending slowdown. The credit flow needs to be analysed and extensively probed for clues for leading indicator for industry cycles and economic cycles. In current cycle the customer went bust hence the inventory destruction will play out longer than earlier when only manufacturer and supplier had inventories.

Usually, the credit within the customer - shopkeeper - manufacturer - supplier process resides across the chain. However, depending on bargaining power and forces best elaborated by Michael Porter, the weightage shifts.

Typically high-demand industries tend to move credit costs to opposite poles. In high-demand scenario, customer end bears a credit costs and so does supplier leaving the manufacturer with close to positive cash-flow business. This could be called the starting point of the end-game. As the inddustry slows, the credit cost moves away from customer-end to the company (in form of inventories) and then to suppliers (delayed payments). The bankrupcies move from suppliers-end towards customer-side. Customer usually does not go bankrupt as banks and FIs refuse to lend to them thereby curtailing demand. Usually, this change of credit cost pattern happens before the industry is about to go bust. Was it the case this time around as well? I hope the research departments have answers.

In current slowdown, banks and FIs didn't follow this responsibility. In fact they inflated the customer giving rise to credit expansion bubble. In our case, customer went bankrupt after buying lot of goods. So now we have inventory pile-up at customer-end, the manufactuers end and we have delayed supplier credit.

Naturally, bankrupcies are looming across the process. Retailers have been the smarter of the lot by not keeping excess inventories. Yet operating on so thin margins, their bankrupcies, when it happens, will be due to all together different cause.

Disclaimer: The post is exteremely generalised and simplified so there will be differences between industries and time-lines. Kindly accomodate.
PS: This marks the 100th post!