There was a contentious discussion about the function of economic planning during the Cold War. Was resource allocation more efficient in the USSR’s “planned” economy or the United States’ “free market” economy?
The limitations of information processing, the viability of production forecasts, and the rigidity of centralised plans were the main points of contention against planned economies.
The idea of economic planning appeared to have been consigned to history with the fall of the Soviet Union. However, the topics discussed in those discussions are still pertinent today.
According to recent studies, the top 1% of American businesses own 90% of the assets connected to American manufacturing and generate 80% of the country’s sales income. This indicates that a very small group of businesses account for the bulk of economic activity in the United States.
Planning, especially synchronising operations throughout international supply chains, is a major strategic priority for these businesses. Americans rarely consider the value of planning, even though it is essential to the economy as a whole and the supply of consumer goods in particular.
It is important to comprehend the planning implications.
Command vs free market economy
A political system in which a central governing body sets the maximum allowable output levels and the maximum pricing for goods and services is known as a command economy. Governments own the majority of industries in command economies.
A free market economy, where supply and demand determine prices and production, is the primary alternative to a command economy. A free market system is present in capitalist nations, but the command economy is part of a communist political structure.
Three countries with command economies include the former Soviet Union, North Korea, and Cuba. Up until 1978, China had a command economy. After that, it started the process of converting to a mixed economy, which combines aspects of capitalism and communism. One description of its current structure is a socialist market economy or authoritarian capitalism.
The central government of a country must possess and manage the means of production in a command economy, sometimes referred to as a planned economy.
There is either no private land ownership at all or very little. Central planners determine prices, manage output and restrict or forbid competition in the private sphere. Because the central government owns or controls every enterprise, a pure command economy lacks a private sector.
Government authorities determine national economic priorities in a command economy, along with the best times and means of generating economic growth, allocating resources, and distributing the results. This usually takes the shape of a long-term plan.
Private businesses set their output levels in a free-market economy in response to supply and demand. The government makes all the decisions in a command economy. The laissez-faire theory is rarely the only operating principle of a free-market economy. A government may promote the manufacturing of a product by enacting laws and regulations. Certain command economies have relaxed their regulations. China did not experience its economic boom until it developed a unique fusion of capitalism and socialist philosophy.
In a command economy, pricing, distribution, and allowable production levels are all determined by a single, central government body. It is a part of political systems that are communist. Free markets, where supply and demand play a major role in determining prices, are different from command economies.
Modern supply chain planning
The term “supply chain planning” describes a series of linked, iterative choices made to continuously maximise earnings by matching a company’s capacity, inventory, and other assets. It incorporates a variety of choices made over a variety of time horizons, ranging from the near-term scheduling of supplies to the longer-term optimisation of global supply networks.
Based on changing consumer demand, planners also determine how much merchandise to manufacture or purchase. They also manage the time needed to ensure that goods reach the appropriate time, location, and form, possibly the most significant aspect of their work. They carry out millions of transactions every day involving thousands of products, not just one.
Think about an average Walmart shop, which at any given moment offers over 120,000 different stock-keeping units, or SKUs, or merchandise. Over 10,000 retailers across the globe, in addition to online and at residences, must carry these products 24 hours a day, seven days a week.
Every deodorant variant has a distinct SKU. It’s also necessary to provide them in a variety that fluctuates frequently, sometimes significantly, according to customer tastes and external circumstances. Competitive pricing is necessary for products, which encourages a never-ending hunt for cheaper input prices. Planners endeavour to efficiently balance supply and demand by organising this enormous network of people, goods, and locations.
The finest-laid schemes
Long wait times and empty shelves are the most evident indicators of planning dysfunction. Billions of dollars’ worth of extra inventory are less evident. Furthermore concealed are significant waste and delays in innovation across the supply chain.
In most firms, these dysfunctions are widespread. However, the COVID-19 outbreak brought to light what many planners already knew: outdated supply chains, talent shortages, and outdated planning tools prevent businesses from meeting delivery deadlines.
Planners have been integrating their organisations’ essential business operations, from raw material purchasing to point of sale, for decades using enterprise resource planning systems, a type of business-management software. Designed in the 1990s, these systems have many inherent problems and can be stiff. They are frequently based on models from the 1960s.
Additionally, businesses frequently use hundreds or even thousands of separate systems to manage databases and workflows. Because of this, planners have to piece together insufficient data from several sources to calculate dynamic supply-and-demand requirements.
The potential of automation
Automation has great promise for resolving technical issues, particularly when it integrates learning algorithms. However, the data requirements are overwhelming.
For those of us who signed up for a set-it-and-forget-it delivery service and now have an overstocked pantry of toothpaste, you understand the risks associated with automating decisions based on a forecast. It takes very high-quality data and complex analytics to solve that issue for a global supply chain. Most businesses haven’t arrived yet.
Furthermore, it’s unclear whether the personnel required to run the systems are prepared, even if they are available. Planners are being used more and more by businesses to oversee supply chain operations.
However, today’s planning professionals require completely different knowledge, abilities, and attitudes. Planners need to be significantly more adept at leading change, handling ambiguity, and adjusting to emerging technologies.
The supply chain is currently experiencing problems with training and personnel shortages, making talent planning imperative. Though there are now many creative educational initiatives, it will take time to cultivate the necessary skills.
The supply chain game
Last but not least, the worldwide reach of today’s supply networks presents ongoing planning issues. A corporation must still transport its inventory across international borders, even if it has the personnel and processes in place to optimise inventories for future demand.
Planners must therefore not only solve a challenging demand-supply matching problem but also carry it out using trucks, trains, aeroplanes, and ships. Take even a cursory look at the headlines to understand how hard that can be. Global warfare and infrastructure failure are among the risks.
Businesses are gradually expanding their regional networks and moving their supply chains to less hazardous locations. However, it takes time to attract business partners and build new facilities. Since planners will make these choices, systems, and talent are also required.
A bold new universe
Many of the concerns that resurfaced in the Cold War economic planning debates are also present in today’s business challenges. There are distinct distinctions from centralised planning in the Soviet style. However, many businesses plan to control large portions of the American economy.
Planning errors can quickly result in commercial failure for individual organisations. Additionally, planning dysfunctions create both excess and scarcity at the level of the economy. It implies having too much stuff but not the proper stuff people require to live better lives.