The economic impact of supply chain synchronization

One of the reasons behind the continued high employment rate, ignored by the media and so-called economic experts, is supply chain synchronization—the practice of using software to match supply with demand. Because companies have deployed software (such as demand sensing programs) that aligns inventory with consumers' purchases, there are fewer spikes in production, and thus there is less demand for workers on the production line.

Supply chain synchronization does not show up in macroeconomic discussions because it's a relatively new phenomenon. In classic economic theory, swings in output are a normal part of the business cycle. As consumption falls, manufacturers find themselves stuck with large quantities of unsold product. They then curb production and lay off workers. After excess inventory has been depleted, manufacturers resume production and hire back workers so they can meet consumer demand.

But the world has changed, and it's time to call this theory into question. In the last decade, software firms have developed applications to calculate inventory holdings based on actual demand rather than on forecasts based on historical consumption patterns. Companies that deploy this type of software can better match output to demand, thus flattening the boom and bust cycle of production. (For more on this development and its potential consequences, see "Demand sensing greatly improves forecast accuracy.")

With few or no production spikes, a manufacturer does not have to hire a drove of workers to run its equipment and package its finished goods. Consider, too, that more companies are relying on automation and software to handle production and reduce the number of employees required.

Hence supply chain synchronization, matching demand to supply, keeps production more stable and holds down hiring in the manufacturing sector. And it's a trend that here's to stay as more companies deploy software to calculate forecasts based on actual consumer demand.