Apple and iPad? Cool. Caterpillar and Bullwhip? Exciting!

Thursday, January 28, 2010

01-28 406865_loaderApple certainly enhanced its “cool” factor with the introduction of iPad yesterday. But, to me, the real excitement was in The Wall Street Journal’s front page story about Caterpillar and the bullwhip effect (“’Bullwhip’ Hits Firms As Growth Snaps Back”, January 27, page A-1).  While the iPad is an important advance in consumer technology development, the bullwhip effect is a key growth spur for the entire economy. Caterpillar’s actions imply the growth burst could be nearer than many expect.

To start, I want to revisit my October 13, 2009, write-up, “Forecasts of Slow Growth May Be Incorrect,” in which I described the rapid growth effect:

There are three primary causes of this economic rebound:

  1. When the economy’s decline slows and shows signs of bottoming, confidence starts to return. Short-term defensive moves (e.g., drastic spending cuts) begin to be dropped.
  2. Postponed purchases then start to get made, causing sales to further improve.
  3. Then, with confidence returning and sales moving up, an important shift occurs. Businesses, governments and consumers move back to their more natural, desirable mode of operation: planning and acting for the future.

These three drivers can produce quite a heady growth rate more rapid than the long-term rise.

The simplistic graph below shows that an above normal growth rate occurs as an item (e.g., sales of computers) bottoms and then moves back up to normal levels.

Sine growth graph

Now, from The Wall Street Journal’s article:

… the “bullwhip effect”… is reverberating across the US economy.

This phenomenon occurs when companies cut or add inventories. Economists call it a bullwhip because even small increases in demand can cause a big snap in the need for parts and materials further down the supply chain.

The bullwhip has broad implications now as companies rush to fill orders while also restocking warehouse shelves. It touches everyone from retailers to the industrial companies…. The manner in which companies, large and small, respond to market shifts determines which ones emerge first from the slump and start growing again.

That last sentence sounds a bit passive – “The manner in which companies… respond to market shifts….” What that describes is the reawakening of the competitive spirit, a powerful growth force. That’s why Caterpillar began its effort late last year.

I highly recommend reading the entire article. It describes well the thoughts, planning and actions undertaken by Caterpillar. It also shows that some of the worries we read about (e.g., a dearth of bank lending to smaller firms) are being countered successfully by Caterpillar. And, by realizing that Caterpillar represents a microcosm of what is happening inside the US economy, we can be optimistic that widespread growth may well be at hand – sooner and larger than many expect. If so, it will likely have a positive effect on the earnings forecasts and stock prices for many companies.

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