FEDERAL RESERVE BANK OF DALLAS Issue 2 March/April 2005 Southwest Economy . Empty Spaces: Are Texas Office Markets on the Road to Recovery? Office markets are cyclical by nature, but in Texas the booms tend to be larger and the busts seem to last longer. In the past, Texas’ office con- struction was sometimes driven by external fac- tors—such as oil prices and tax law changes— in addition to economic fundamentals. However, beginning in the 1990s, Texas real estate was driven more by supply and demand. Economic prosperity in the 1990s, partly thanks to the high-tech boom, breathed life into Texas office markets that had been stagnant since the mid-1980s bust. Demand for office space rose strongly, rents increased at double-digit rates and construction cranes dotted the Texas skyline. The national recession that began in March 2001, along with the high-tech bust and cata- strophic events of 9/11, took a toll on the Texas economy, however. The downturn hit harder and lasted longer in Texas than elsewhere in the coun- try. As firms downsized, office vacancies in Texas markets climbed quickly and rents began falling. (Continued on page 2) . Supply Chain Management: The Science of Better, Faster, Cheaper INSIDE: Over the past 20 years, real GDP growth in the United States has become Domestic Policy strikingly less volatile. Extreme movements in output occur far less often today, and there have been only two relatively mild recessions since 1982. In No Match for Trade addition, about 10 years ago productivity growth began to accelerate. The average annual productivity growth rate since 1995 is about double that ex- Stance of Central perienced from 1973 to 1995. Improved economic stability and accelerating productivity growth have American Countries important policy implications. Specifically, accelerating productivity ultimately leads to higher living standards and fewer and milder periods of declining output. This makes the economy more resilient and flexible. Together, rising (Continued on page 7) Supply Chain Management: The Science of Better, Faster, Cheaper (Continued from front page) productivity growth and a more stable Chart 2 economic environment give monetary policymakers more room to maneuver Productivity Growth Has Surged by allowing faster economic growth with (Output per hour, nonfarm business sector) less inflationary pressure. 5-year moving average (percent)* The economy’s increased stability 4 and stronger productivity growth in recent years have intrigued economists 3.5 and policymakers (Charts 1 and 2). Sev- 3 eral competing explanations—which are not mutually exclusive and are likely 2.5 complementary—have been put forth. 2 Among the leading hypotheses are that monetary policy has been better in the 1.5 Volcker and Greenspan eras;1 that there 1 have been fewer shocks—or better luck—in recent years; that globalization, .5 trade and deregulation have become 0 more commonplace around the world; ’70 ’72 ’74 ’76 ’78 ’80 ’82 ’84 ’86 ’88 ’90 ’92 ’94 ’96 ’98 ’00 ’02 ’04 and that businesses have radically im- *Four-quarter growth rate. proved their supply chain management SOURCE: Bureau of Labor Statistics. through the widespread adoption of new information technologies.2 This article focuses on one of these What Is Supply Chain how and where to store inventory; how explanations—improved supply chain Management? to distribute products in the most cost- management. I discuss important changes Supply chain management is getting effective, timely manner; and how and and emerging trends in management the right things to the right places at the when to make payments. practices and then present some of the right times for maximum profit. Many A typical supply chain is made up of evidence that has led analysts to believe important strategic decisions impact the many interrelated firms. As shown in that better supply chain management has supply chain: how to coordinate the pro- Chart 3, component and subassembly contributed to the nation’s improved duction of goods and services, including suppliers are upstream from the manu- macroeconomic performance. which suppliers to buy materials from; facturer. Further up the chain are the supplier’s suppliers, who provide raw materials. Downstream from the produc- Chart 1 ing firm are the warehousing and distri- Real U.S. GDP Growth Is More Stable bution channels, then the retail channels Quarterly percent change, annualized and finally the consumer. Thus, the sup- 18 ply chain encompasses the flow and 16 transformation of goods, services and 14 information from the raw materials stage 12 to the customer. 10 While supply chain management is 8 as old as trade itself, new information 6 and communications technologies have 4 made today’s supply chains better, faster 2 and cheaper. Information engineering 0 that combines new information tech- –2 nologies with improved production, –4 inventory, distribution and payments –6 methods has revolutionized supply chain –8 ’59 ’62 ’65 ’68 ’71 ’74 ’77 ’80 ’83 ’86 ’89 ’92 ’95 ’98 ’01 ’04 operations. SOURCE: Bureau of Economic Analysis. For example, one way to buy a computer is to get on Dell’s web site and FEDERAL RESERVE BANK OF DALLAS SOUTHWEST ECONOMY MARCH/APRIL 2005 7 quantity. Significant lean manufacturing Chart 3 ideas include six-sigma quality control, The Supply Chain just-in-time inventory and total quality management. (See the box titled “Lean Retailers Manufacturing Lingo.”) W/D Suppliers’ Suppliers suppliers Mass Customization Era. Beginning around 1995 and coinciding with the commercial application of the Internet, Retailers Warehouses manufacturers started to mass-produce and distribution Suppliers Suppliers’ centers suppliers customized products. Henry Ford’s famous Manufacturers statement “You can have any color Model T as long as it’s black” no longer applies. While Dell may be the most famous Retailers W/D Suppliers Suppliers’ suppliers mass customizer, the elimination of mid- dlemen (such as travel agents, ware- housers and salespeople) and the shar- ing of critical information in real time with key partners make this era signifi- configure and price a system exactly ones—can be shipped anywhere in the cantly different. Perhaps a more accurate as you want it. As soon as you submit world in seconds at virtually no cost. term would be the “information engineer- the online order, all of Dell’s global sup- And with digital products there are no ing” or “information management” era. pliers—those providing chips, monitors time-to-manufacture delays, inventory Firms are effectively using new and so on—are immediately notified of shortages or delivery problems. information technologies to improve ser- the sale and go to work so that you vice and delivery processes. Through receive your computer typically within Supply Chain Management Eras secure intranet systems and business-to- a week. Throughout history, new ideas and business (B2B) e-commerce platforms, Contrast this direct sales model with technologies have revolutionized supply firms focus on improving information yesterday’s supply chain. The old model chains and changed the way we work. required the customer to go to a store in Two hundred years ago, giant machines search of a product that the manufac- replaced manual labor to complete tasks turer thinks you want to buy. in large factories. Railroads, electricity Lean Manufacturing Lingo But now, in some cases, the middle- and new communications media ex- Six-sigma: This quality control idea was men between you and the manufacturer panded markets and made supply chains pioneered by Motorola as a way to improve can be eliminated. Moreover, in the better, faster and cheaper. processes that are already under control. direct sales model, the upstream suppli- Mass Production Era. In the early The outputs of such processes typically have a ers play a key real-time role in keeping 1900s, Henry Ford created the first mov- normal distribution, and the process capability production and distribution flowing ing assembly line. This reduced the time is expected to be within plus or minus three standard deviations of the mean. Each standard smoothly. required to build a Model T from 728 deviation is one sigma, so the total process Better supply chain models help not hours to 1.5 hours and ushered in the capability covers six sigma. only manufacturers of goods, but also mass production era. Over the next 60 Just-in-time: This inventory management idea some service businesses, including those years, American manufacturers became was pioneered by Toyota to ensure that inven- requiring creativity, imagination and spe- adept at mass production and stream- tory in production systems would arrive in cialized knowledge. For example, using lined supply chains with the help of good condition exactly when needed: not too a virtual reality system and ultrasound scientific management methods and early and not too late. data sent through the Internet, a medical operations research techniques. Total quality management: This idea empha- specialist in Dallas can give an opinion Lean Manufacturing Era. But in the sizes multifunctional teams to solve quality- to a patient in New York…or London… 1970s, U.S. manufacturing’s superiority related problems. Such teams are trained to or Bombay. A virtual reality system worn was challenged. Foreign firms in many understand basic statistical tools and then collect and analyze data to resolve quality around the hand and arm allows a physi- industries made higher quality products problems. cian to feel pressure sensations from at lower costs. Global competition forced computer images and make an informed U.S. manufacturers to concentrate on im- Kaizen: This is a team approach toward incremental improvement to tear down and diagnosis in real time halfway around proving quality by reducing defects in rebuild a process layout to function more the globe. their supply chains. efficiently. Today’s most efficient supply chains Starting in the early 1970s, Japanese Kanban: This inventory management tech- use the Internet and associated tech- manufacturers like Toyota changed the nique uses containers, cards and electronic nologies to move information in real rules of production from mass to lean.