Managing Risks in An Uncertain Global Economy Should Market Determine the Future Direction of Business? Joseph E. Stiglitz Columbia University New York IBS GLOBAL EXECUTIVE SUMMIT Stockholm September 20-21, 2005

Global Economic Outlook  Global economic performance in 2004 was strongest in two decades –it is unlikely that global economy will grow as fast in the coming years  Asian economies, especially the East Asian miracle countries and India, are likely to be the bright stars in the global economy  High oil prices, rising interest rates, and the twin problems of trade and fiscal deficits are likely to limit U.S. growth prospects  Trade deficit grew 24% between 2003 and 2004  Fiscal deficit is almost 4% of GDP  Europe is unlikely to grow faster either –uncertainty regarding the future of European Union, labor market issues and soaring oil price will continue to stall European growth  Global economy marked by high levels of uncertainty

The Underlying Factors  The U.S. real interest will be on the rise, driven by large fiscal deficit – the increase is likely to be seen sooner with mounting federal spending on post-Katrina relief and reconstruction efforts  Given role of housing in U.S. economy in last four years, this is of particular concern  Housing directly and indirectly generated some 3.5 million jobs in last five years  Productivity slow-down - earlier periods of productivity slowdown have been associated with increase in inflation  Lack of confidence in the U.S. economy, and in U.S. policies (including burgeoning deficits) are likely to make exchange rates more volatile, further impacting growth in the U.S. and elsewhere  Deficits are likely to grow even larger

The Underlying Factors  The integration of China and India—with more than 2.5 billion people—into the global economy is going to have major consequences, both for the North and the South  Huge new markets  Lower cost production  Longer supply chains  Some resistance from established “players” to new global order (textile quotas)  Contributing to sense of uncertainty  Global uncertainty and associated risks - soaring oil price, exchange rate volatility and political uncertainties – will be the likely new realities

Meeting the Challenge  Consumption and possibly investment slowdown will require businesses to be more cost efficient and look for new avenues to offer better prices and to look for more efficient use of its resources  At both supply and demand sides, businesses will have to improve practices and processes  Increasing global uncertainty will also require businesses to have better inventory and risk management systems  An integrated approach to demand and supply management will be the key to future successes

Improving Business Efficiency  Better understanding and forecasting of demand, market trends and macroeconomic environment – knowing what drives the demand  Knowing the capacity of the suppliers and understanding all the risks in the supply chain  Risks in sourcing  Risks in production  Risks in quality  Risks in timing and delivery  Synchronizing customer demand with sourcing, orders and inventory  Managing cash flow and integrate cash-flow management with sourcing decisions and inventory management  Sharing risks with vendors/suppliers

Supply Chain Management  Supply chain management (SCM) – in the forms of e-procurement, e-sourcing or b- 2-b solutions – has been a major source for improving business efficiency in recent years  By some estimates, SCM solutions market is somewhere between US$ 5-6 billion  But, demand for SCM solutions are likely to grow rapidly in the coming years, especially when businesses are pressed for improving their cost efficiency and effectiveness

Competitive Advantage  Businesses can improve their cost and competitive advantage by  Reducing search costs  Reducing transaction costs  Streamlining processes and sourcing  Cost savings allow businesses not only to offer more competitive prices but also give additional resources for new investments  SCM solutions can significantly improve competitive advantages of businesses across industries

China and the Apparel Market  In the post MFA world, China is poised to significantly increase its share in the $495 billion apparel market  China’s gain in market share has mostly come from effective management of costs  Chinese apparel exporters have been able to reduce unit cost by more than 40% between 2000 and 2004  Although labor cost is higher in China than in Bangladesh, Kenya, Cambodia or Madagascar, China is still the least cost producer of clothing  The cost saving in China mostly came from automation of processes, especially from effective sourcing and supply chain management

Trends in Apparel Price Source: Compiled from U.S. Customs (ITC) Data

Unit Cost of Apparel: China’s Competitive Advantage Source: Compiled from U.S. Customs (ITC) Data

The Bigger Picture  According to some research, effective supply chain management (SCM) and e- sourcing can reduce procurement cost by about 15%  But Managing supply side alone will not give businesses the necessary competitive advantage  Automated supply chain management systems often ignore capacity issues or performance risks  Existing SCM solutions also do not incorporate cash flow management issues and different types of financial risks

Concluding Remarks  Business automation processes would need to be comprehensive – interface both demand and supply sides of the equation  Handling customer demand effectively and offering the flexibility of choices will provide the businesses the necessary competitive edge  Dell approach to customer demand  Effective cost management solutions would need to integrate supply chains with financial flows and payment systems  But more importantly, cost management solutions would need to take into account various sources of business and macroeconomic risks and uncertainty