Just in time

SAN FRANCISCO (02/20/2001) - An odd sight has appeared on the new-economy landscape. Amid the firing electrons, cocktail-napkin business plans, whiteboard reorganizations, and yes, the pink slips, there is something distinctly old economy creeping up: piles of stuff. Inventory - the very thing the new economy was supposed to eliminate - has become a major burden.

From Cisco Systems Inc. (CSCO) routers and Dell Computer Corp. computers to the Gap Inc. (GPS) 's leather pants, companies have found their just-in-time manufacturing systems have let them down. Now warehouse shelves are packed with goods that companies are desperate to unload. And the clock is ticking. The economy is teetering on the brink of recession, defined by six months of negative economic growth; the only hope of avoiding one depends on the ability of producers to clear out inventories and start producing again - and fast. In the old economy, inventory pileups took months or even years to detect, and even longer to get rid of. If the new economy cannot right itself and find innovative ways to empty the shelves, it's game over.

Not long ago, it seemed the rate of technological change was relentless. The promise of the new economy is, after all, the ability to get more stuff to more people, mo' cheaper, mo' faster, mo' better. As the economy chugged along, brave new tools could keep better track of components and materials, carefully monitor shipping and provide sophisticated gauges of customer demand.

Over the last decade, these just-in-time systems had allowed inventory-to-sales ratios to fall by more than 10 percent. "It seemed that every month we were seeing inventories set record lows," says Eugene Mintz, an economist with Wall Street firm Brown Brothers Harriman. "But sales fell so rapidly, much more rapidly than most producers expected, and suddenly those inventory levels spiked."

The result is that production has ground nearly to a halt in the new economy, which has added to the surprisingly dramatic slowdown.

In his inimitably cryptic way, U.S. Federal Reserve Chairman Alan Greenspan spoke to this before the Senate Banking Committee last week: "The same forces that have been boosting growth in structural productivity seem also to have accelerated the process of cyclical adjustment.

"New technologies for supply-chain management and flexible manufacturing imply that businesses can perceive imbalances in inventories at a very early stage - virtually in real time - and can cut production promptly in response to the developing signs of unintended inventory building," he added.

In other words, the new economy got us into this mess. But can the new economy get us out? Bet on it.

"Manufacturing inventories, historically speaking, are still quite lean," notes Mintz. "So many corporations have gone to just-in-time inventory that they've limited the scope of their problems. The 1973-74 recession was so deep because there were so many inventories to liquidate. We're nowhere near that today."

Fueling the fire of inventory liquidation, of course, are the lower interest rates that make borrowing cheaper. And much of that follows the lead of the Federal Reserve, which has already cut key rates by a full percentage point in the last six weeks.

Indeed, Greenspan seems to see his duty as having to restart this new economy. "While technology has quickened production adjustments, human nature remains unaltered," he said last Tuesday. "We respond to a heightened pace of change and its associated uncertainty in the same way we always have. We withdraw from action, postpone decisions and generally hunker down until a renewed, more comprehensible basis for acting emerges."

The Fed it seems, through its rate cuts, is boldly going where the new economy fears to go.

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