3M: The Principle Effects of a Severe Downturn

Here's what 3M's George Buckley had to say about current conditions and supply chain partner reaction in the manufacturer's recent earnings call with analysts:
 
"While weak business conditions, poor consumer confidence and the psychological fear factor made it worse, we believe the principle cause of the severe downturn was the shortage of credit to lubricate the wheels of global commerce. That fact effectively locked the cycles of the world's major economies into synchronism and into shrinking mode.
 
"… There are always three principle effects that one sees at times like these. The first is that the rate of contraction in sales at wholesale is always a multiple of the rate of contraction in point of sale or retail. This happens as the channel tries to drain the excess inventory off as fast as possible, which it needs to do at a rate higher than its own for the sale shrinkage. This phenomenon is particularly acute in short-cycle, high-turn businesses, such as electronics or retail.
 
"... In a 100% efficient channel, flushing out the excess inventory would take about one inventory cycle to complete that is one turn or so. But as a practical matter, most channels would be a little less efficient than that and the full correction would take a little longer to happen.
 
"The second factor that one nearly always sees in these cases is an overshoot in inventory ... This is because the sales data, which a short-cycle company receives, is always later than the necessary corrective line rate actions it has to take.
 
"It's especially true in a company with long supply chains like ours where we have two-thirds of our sales internationally and two-thirds of our manufacturing in the United States. The consequence is an overshoot of inventory, albeit a temporary one. This is not the fundamental problem, just the nature of the beast in the short-cycle, long-supply chain company.
 
"... Receivables are another thing to watch as the channel tries to conserve cash and push out its own payable stream.
 
"... As inventory corrections are made, the third factor that appears is reduced factory absorption. Gross margins fall until the factory cost and market demand and line rates all come into balance. We expect to see some of this at work in the first and second quarters as we drive down inventory. But we should remember that when the economy recovers we'll see the other and more positive side of the factory absorption curve as pipelines fill correspondingly faster than the point of sale growth."
 
(Thanks to Seeking Alpha for the 3M earnings call transcript.)"