@ Supply Chain Management

Acceleration of Eco-Operation is a new report published (free report : the kind I like) by the Business Performance Management Forum.  I think it would be well worth your time to register and download the report if you want to keep up with the trendiness of green washing everything. I will read and review the report a little later but in reading the executive summary, two comments caught my eye:

"Building better links in high-tech supply chains.the sprawl and complexity of such networks have made it harder to manage end-to-end operations smoothly. Many technology companies are grappling with volatility and disruptions across their supply networks and eliminating waste from duplicative efforts is an ongoing challenge. As product
life cycles shrink, we see inventory build-ups in the supply chains of some companies, while others cope with rising distribution costs, ontime delivery problems, or delays in getting new products to market."
The McKinsey Quarterly

Becoming green is no longer an end in and of itself, but the byproduct of optimizing a supply chain. At the same time, transitioning to a Green Supply Chain while also maximizing efficiency is not a clear-cut process."
Industry Week – Diamond Management & Technology Consultants

There is so much confusion in the above two posts that I can’t help but roll my eyes.

In the first snippet, there is a lot of talk about eliminating waste. If you collapse the global supply chain into a simple manufacturing floor and pretend for a moment that various work centers were indeed different countries and ports, then you would see that all the effort of bygone years that went into batch size reductions, reducing setup times and inefficient steps and processes, reducing physical movement times by workers (all lean related activities) on the manufacturing floor have been turned to naught. We’re back again to big batches, carrying work items from one end of the floor to the other end and then sending it back half way across the floor because we’ve decided to outsource and increase lead times. If anything that is the one root cause of everything that is outlined in the snippet from The McKinsey Quarterly. In short, you cannot eliminate waste on the one hand by creating mounds of it with the other hand. All these management consultants have been doing this for a decade now – I hope that one of the upcoming articles in the quarterly will be titled – "We were wrong to recommend outsourcing," but I’m not holding my breath here.

In the second snippet, ask yourself this question – Would you subject one of the most critical aspect of your operations to some befuddling calculation of carbon emissions sustained in your activity, calculations that no one can even agree on whether they’re the right ones? And it’s not just calculations, but using these calculations to dictate what you would do? This is precisely the back assed way of doing things. Give me a way/technology that surmounts your latest world is ending dogma and I’ll move to it; just don’t ask me to end the world on account of your dogmatism. Archimedes once said, ‘If you give me a lever and a place to stand, I can move the world.’ Today, we’re told, "If you cut your emissions, you can save the world." But cutting emissions means that the industrial activity of the world would decline (and rapidly) across the world returning many parts of the world to the poverty they were just leaving behind barring some new technology that effectively and efficiently replaces the carbon based energy source. And to those who would say that this technology (batteries, wind, solar, geothermal etc) would do it – all I would say is that on your next transatlantic conference or vacation either use one of your "this technologies" in making the trip or use a carbon neutral sail boat or raft. I really don’t believe in nor have the time for first class or corporate jet traveling world messiahs who want me to cut down on my carbon emissions. Neither should you!

And that’s before reading this report. Those are my initial conditions. Now, let me read the report and be enlightened.

No, make that yesterday. By “you”, I mean any of us who are in the business of working to sell things – selling something either here or there. It’s an amazing circular world we live in where I’m working hard to sell you something which you either need or don’t need but which  you can only buy by working hard to return the favor.

Some of you have something to do with the supply chain and some of you don’t. So as someone close to the supply chain space, here is the absolute one thing that you should have done yesterday:

Is it better demand forecasting?

Is it investments in a better supply chain for the eventual uptick?

Is it becoming leaner and meaner?

Is it cutting your losses in earlier bright ideas?

Or something else on your long list that you had hidden away in the deep freeze.

In my opinion, the most important thing that you should be doing right now is getting to know your customer again. Again, as in Refresh.

Your customers are probably in a world of hurt right now and taking the effort to understand them and the value of plain ol’ vanilla, tried and true, is a very good idea. Now is the time to reevaluate the concept of value you provide because it is probably the only thing that you can take to the bank for whatever that’s worth.

Sometimes, I wonder if I am not a victim of my own “permabearishness” and that I’m mistaking the signs of improvement for the calm before the next storm. Perhaps it is the numbness to good news because we’ve been here before now haven’t we?

But I took notice of something: they don’t make good news like they used to. Now, that’s the poverty of it all.

This is a story coming out of India – out of US Sec of State Hillary Clinton’s visit to India : India to Resist U.S. Pressure on Carbon Emission Caps.

India will resist pressure from the Obama administration to accept legally binding caps on its carbon emissions, the South Asian nation’s environment minister told visiting Secretary of State Hillary Clinton.

“There is simply no case for the pressure that we, who have been among the lowest emissions per capita, face to actually reduce emissions,” Jairam Ramesh said at a meeting today with Clinton in Gurgaon near New Delhi, according to a statement he issued to reporters. “And as if this pressure was not enough, we also face the threat of carbon tariffs on our exports to countries such as yours.”

Clinton is on a state visit to India meant to showcase trade and security ties and seek common ground on climate change and arms control. India has said it will reject any new treaty to limit global warming that makes it reduce emissions because that will undermine the country’s energy consumption, transportation and food security.

The climate-change bill that passed the U.S. House on June 26 calls for carbon-based tariffs if countries like China and India don’t adopt their own greenhouse gas controls by 2020. The U.S. said its push for higher environmental standards is not aimed at limiting the economic progress of nations, including India.

And,

“Legally binding” emissions targets won’t be acceptable for India, Ramesh said. “It’s going to be impossible to sell in our democratic system.”

Clinton said she is confident that the U.S. and India can devise a plan that changes the way energy is produced, consumed and conserved, helping to create additional investments and jobs. The two countries must also expand the use of renewable energy in India, especially for rural electrification.

Well, that’s one down. And the remaining player for large scale emissions out of a developing country is China – one country that has significant leverage over the US by way of financing its debt. I’d think that the only thing that one would hear out of the US Sec of State along this line in China is a short peep.

Now, harken back to the expectation set by the retail consultant in the earlier post:

"Suppliers are going to have to absorb the cost increases," retail industry consultant Burt P Flickinger III said Wednesday.

Just what is this expectation based on?

Mentioned in the above news item is a provision in the climate-change bill that calls for carbon-based tariffs on countries like China and India that don’t adopt greenhouse gas controls by 2020. Well, we’ve got till about 2020 to return to growth over here or junk the over-the-top sanctimoniousness of the climate-change bill because the last time that tariffs were raised during a sustained contraction, the resultant was not a pretty sight.

Besides, destroying the planet is an equal opportunity thing – destroying one’s economy is a national choice.

Just who is buying this bullshit is another story. I am not one to use profanity lightly but the profane doesn’t do this latest piece of ludicrousness any justice. What drove me batty is this news item from Walmart: Wal-Mart exec foresees eco-ratings for all.

Among the many firms of this world, Walmart is perhaps one of the few who can really drive such a program and we all know that.

"We see this as a universal-this is not a U.S. standard," Wal-Mart Stores Inc. President and CEO Mike Duke told a gathering of more than 1,500 suppliers, nonprofit groups and company staffers at the giant retailer’s headquarters .

"Across the world, this standard would work across all retailers, all suppliers."

Some time ago, I had blogged on this very topic in Wal-Mart Boss says he will press suppliers in race to go green.

Fortunately for us, some research from AMR places an upper bound on the marginal cost we’re willing to pay for an eco-friendly product vs. a non eco-friendly product.

C. Britt Beemer, chairman of America’s Research Group, which surveys shoppers across the country, said shoppers won’t be willing to pay any more than 10 percent more for something that is eco-friendly.

One eye-brow raised so far. That was so last year dude. Here I’m paring my grocery bill down to the last penny. 10% – fat chance?

"Suppliers are going to have to absorb the cost increases," retail industry consultant Burt P Flickinger III said Wednesday.

Two eye-brow raised now. But not batty yet.

What drove me positively batty was this piece at the very end which was supposed to be an illustration of how a focus on the development of a sustainability program would ultimately result in greater production efficiency, actually lowering costs.

However, Wal-Mart focused Thursday on the possibility that development of the sustainability program would ultimately result in greater production efficiency, actually lowering costs.

One example provided was a private-label sour cream sold only at Wal-Mart. A video told of how electricity generated by burning methane from the manure of cows at a dairy farm in upstate New York was being used to reduce energy costs at the farm.

What an excellent idea – I mean who can find fault with reusing manure. Well, anyone thinking green might for one. For example,

Rearing cattle produces more greenhouse gases than driving cars, UN report warns

Some highlights from the report,

Cattle-rearing generates more global warming greenhouse gases, as measured in CO2 equivalent, than transportation

“The environmental costs per unit of livestock production must be cut by one half, just to avoid the level of damage worsening beyond its present level,” it warns.

When emissions from land use and land use change are included, the livestock sector accounts for 9 per cent of CO2 deriving from human-related activities, but produces a much larger share of even more harmful greenhouse gases. It generates 65 per cent of human-related nitrous oxide, which has 296 times the Global Warming Potential (GWP) of CO2. Most of this comes from manure.

Apparently, among the many ways a cow contributes to global warming – belching and not flatulence is the more important one.

Now, please calculate the marginal increase/decrease in cost of the end product (sour cream) given:

1. The number of cows on the dairy farm and carbon costs of the feed

2. Belching and flatulence (in litres) per cow per day converted into greenhouse gases emissions

3. Manure recycling that reduces electricity consumption

Is the savings from (3)*number of cows/day +(1)*consumption/per cow even remotely close to that from (2) recovered per cow? Does this even compute? This kind of hand waving is precisely what gets me batty. If you’re serious about solving a problem – full credit to you. It’s the “I’m also solving the problem in however miniscule a way” that gets my goat.

And to pick an example where in, the principal player i.e. a cow innocently belches to the low stratosphere greenhouse gases, the amount of which is comparable to our own transportation emissions and publicize the miniscule change denoted by a gain in self sufficiency at the production farm as proof of some concerted shift to sustainability is just downright goofy.

I suspect the green supply chain has entered the faltering stage. And I think that I know just know the stab in the back that will consign it into its casket – that’s yet another green thing – the greenback. As long as the dollar remained the undisputed reserve currency, Walmart (and likewise many firms here) possessed the leverage to force this on offshore suppliers. The dollar is in the process of being killed by the US government itself and with it will go much of the implicit leverage.

I find it all very ironic that on the one hand the government kills the greenback (this has been quite a consistent policy over the past few administrations) and on the other hand thinks that it can legislate sustainability dogma into practice.

In an earlier post titled – What is Credit?, a common sense definition of credit was offered:

“There is a strange idea abroad, held by all monetary cranks, that credit is something a banker gives to a man. Credit, on the other hand,is something a man already has. He has it, perhaps, because he already has marketable assets of a greater cash value than the loan for which he is asking. Or he has it because his character and past record have earned it. He brings it into the bank with him. That is why the banker makes him the loan. The banker is not giving him something for nothing. He feels assured of repayment. He is merely exchanging a more liquid form of asset or credit for a less liquid form.”

Henry Hazlitt, Economics in One Lesson.

Of course, this is not what the term means if you were to look it up – you would find a transactional meaning of credit. What I mean is that, credit in practice is the money made available to you by a lender in return for deferred repayment with interest on a fixed schedule. This is the transaction character of the agreement. But embedded in this transaction is an evaluation of the debtor by the creditor as well as the creditor by the debtor.

Now, Credit has a cousin which is Leverage. Now, leverage is an artifact of physics i.e. from Lever. Archimedes said, "Give me a lever long enough and a place to stand and I will move the earth." With a lever, the same effort multiplies the result which is to say that one is exploiting this principle of physics. Fast forward to the present time, we use the notion of leverage similarly in human interactions or transactions. To lever up in this context means to be able to obtain credit to multiply the result of one’s (or a firm’s) efforts. But for a moment, go back to the physical world: you borrow a lever, use the lever and return the lever a little longer in length. Doesn’t happen in the real physical world this way but I suppose that would be a way of making a parallel. In fact, you probably paid some money to the owner of the lever which is about equivalent to adding on to the lever’s length.

Now, housing is an accessible form of leverage for the common man. Say, a new homeowner puts down 0%, 10% or even 20% of the value of the home down – that’s what they’re doing, using leverage. In other words, using 20% of their money to control 100% of the house and whatever increase in the value of the home for as long as they make their mortgage payments. But leverage is neutral with respect to the direction of the change in value of the home. If the value of the home was $100,000 and it increased by 10% in one year, then the homeowner who put down 20% of the value of the house or $20,000 increased his worth by $10,000 (not accounting for the interest payments he would have paid out over that period). That’s a 50% increase. But suppose the value of the home decreased by 10%, then, it’s a $10,000 loss which is a 50% decrease in the amount of money the homeowner had to begin with.

Leverage is great in boom times because it multiplies the positives handsomely but in bust times, it magnifies the losses as well especially if you’re unable to ride it out. Now, what possible bearing does all this have on the field of supply chain management for crying out loud.

It does but only as far as how consumption or demand was being paid for – whose been underwriting our checks for our fancy gizmos. If during the last decade, demand was being paid for out of income, then this trouble would have some impact (not a devastating one for what it’s worth) on the various supply chains of the world. But if the demand was being paid by milking the fruits of leverage (either directly by taking equity out of the home or indirectly by running up debt via credit cards) during the boom time, then the impact on the various supply chains of the world will be dramatic.

So, the appropriate question is for us in the supply chain world is: What is demand going to look like when leverage is contracting or disappearing? Or in other words, what is demand going to look like when there are no assets left to lever against? What happens when the creditworthy character of the populace upon whom everything depends is in question?

Then add this to the mix, Supply Chain Management is a middle-man activity for the most part. When, this space burst onto the scene, we cut out ten middlemen and inserted three of our own along with  a whole host of technological and automated marvels. Being asked to do more with less – a good problem to have but less to do on the whole is a bad problem any which way one cuts it.

But all is not bad – we have on our side the relentless succor of economic experts to help us out of this mess, this predicament. whatever you want to call it. Perhaps, (and I’m stretching to hope here) against every expectation, by the time the fourth stimulus bill would have been passed, things would return to as it where circa 1990. Maybe. By the time the fourth stimulus bill is passed, the populace would be very akin to treating a trillion as nothing more than a billion and congress would have no problem dealing stimulus bills in trillions aka the stimulus bill to cure all earlier stimulii.

My next post should be titled: If economists were running a manufacturing floor? Or something to that effect. My aim is simple, I want to fire the operations manager of my floundering firm and install an economics expert to tell me how to run the place.

It is time to stick your neck out and predict the future. Oh! well, it is time for me to stick my neck out and predict the future of supply chain management. And unfortunately for everyone in this space, it is going to be a dismal one. In short, I’m predicting dark and gloomy times ahead for supply chain management and allied activities. Let’s start with the different constituents:

Supply Chain Software – Bug fixing and maintenance is in your future and not code rewrites from scratch with some fancy new hookups. Unless you plan to dramatically hunt overseas for markets. I am thinking that this space is probably dead for another 3-5 years.

3PLs – A lot of consolidation will happen in this space as smaller and medium firms are pushed to the brink – the larger firms will get to binge in a bit.

4PLs – I think we can safely consign them to the dustbin of history – a bridge too far and a manager of managers is not where this space is headed.

Supply Chain Integrators and Consulting services – I think that the ones that have an overseas presence will stand to make something of the shift that is occurring. As for stateside, they will get leaner and leaner still.

Green Supply Chain – I think you’ll hear a lot of noises, needless calculations and carbon offsets in this space but any growth here is predicated on a robust global economy or rather one would need a green supply chain if there was a real growth in the supply chain to begin with. What if the scope and scale of supply chains themselves decrease? Of course governments are willing and able to tack on numerous regulations to the activity of global commerce but global commerce at what level – at the 2007 peak or the 20xx trough. Further, why would consumers be willing to accept the increased costs that producers will pass on to them in an environment in which consumption itself is being curtailed? Besides the green supply chain is a malady of the developed world and there is every indication that the growing economies of the world would discard it outright.

Supply Chain Prognosticators (such as moi) – Twiddle dum and Twiddle dee. I suppose I’ll find something else to blow hot air about.

On a more serious note, there is likely going to be a lot of work to do overseas but just not here. Don’ t take my word for it but growth is what higher and more complex abstractions of Supply Chain Management products and services manage, not flat lining or worse yet contraction. Some time ago, the refrain used to be, “Go West, young man, go west.” Well, I think we’ve come to the point where it begins to ring true yet again. And don’t let a trifle such as the pacific ocean get in the way.

On a still more serious note, such reading of the entrails demands extraordinary evidence. Actually, it doesn’t. It just demands ordinary evidence of which I have one very important data point. Better yet, it is available for free (Actually not, you just paid for it already) : U.S. Household Deleveraging and Future Consumption Growth

It’s a short piece. It’s timely and absolutely worth reading.

Some highlights,

Where we came from,

U.S. household leverage, as measured by the ratio of debt to personal disposable income, increased modestly from 55% in 1960 to 65% by the mid-1980s. Then, over the next two decades, leverage proceeded to more than double, reaching an all-time high of 133% in 2007.

Where we are at now,

Since the start of the U.S. recession in December 2007, household leverage has declined. It currently stands at about 130% of disposable income.

I’ll let that number sink in a bit. And I’ll tell you why – if you felt like the world was ending, that was in reality based on a mere 3% reduction of leverage. In other words, we received something like a pin prick. Further, there is a hammer the size of the Empire state building coming straight at you.

A parallel can be found in the Japanese experience (but treat it as illustrative and not indicative of anything)

After Japan’s bubbles burst, private nonfinancial firms undertook a massive deleveraging, reducing their collective debt-to-GDP ratio from 125% in 1991 to 95% in 2001. By reducing spending on investment, the firms changed from being net borrowers to net savers. If U.S. households were to undertake a similar deleveraging, their collective debt-to-income ratio would need to drop to around 100% by year-end 2018, returning to the level that prevailed in 2002.

I suppose the comparison to Japanese household would have been skewed because of their natural saving habits. Who knows? If a similar scenario were to occur stateside and a reduction in household leverage of about 30% were to take place or say even 15%, what effect would that have on the supply chain industry? That is my question, to you and to myself. To me, it seems that all this shaking and quivering has taken place before the real earthquake hits.

In their conclusion of the likely scenario going forward,

Assuming an effective nominal interest rate on existing household debt of 7%, a future nominal growth rate of disposable income of 5%, and that 80% of future saving is used for debt repayment, the household saving rate would need to rise from around 4% currently to 10% by the end of 2018. A rise in the saving rate of this magnitude would subtract about three-fourths of a percentage point from annual consumption growth each year, relative to a baseline scenario in which the saving rate did not change. An even larger subtraction from consumption growth would occur relative to a baseline in which the saving rate were declining, as occurred prior to 2005. In either case, the subtraction from consumption growth would act as a near-term drag on overall economic activity, slowing the pace of recovery from recession.

By the way, everything in this post can be condensed into one sentence – “Leverage is gone. And it is not coming back for a long time.” I think you will find that this statement will be a sort of touchstone for many in these times.

“Go west, young man, go west.” Go where the growth is going to be.

No, it’s stagflation. Perhaps, not. Whatever it is, it is indignation to me. Not because we find ourselves in this pickle. It’s that all the bright minds in the world cannot tell whether it is pickle or jelly. Or something else. Well, whatever it is, it has rendered very many individuals rather immobile. And that’s all one can say about it.

Personally, I find little sense in talking about Demand or Supply and therefore Supply/Demand Chain Management when everything is just downright frozen, moving neither here nor there. Of course, where you might be, you might be seeing activity galore but from where I am it is quieter than the Western front. And there is a foreboding in it even though perhaps in hindsight, one might ask oneself, what the fuss was all about? There is, I think, in ignorance and obliviousness a kind of remedy that one would be warned to do well without but in curiosity a persistent malady of wrong turns and guesstimates that exacts a terrible price on the mind. In so far as much, you find yourself tired, buffeted and tossed, let me hope that is because of the latter and not the former.

First off, the oft quoted standard definitions (from Investopedia):

Inflation:

.a sustained increase in the general level of prices for goods and services.

Deflation:

.the general level of prices is falling. This is the opposite of inflation.

Hyperinflation:

.unusually rapid inflation. In extreme cases, this can lead to the breakdown of a nation’s monetary system.

Stagflation:

.the combination of high unemployment and economic stagnation with inflation.

But what about the causes? For brevity’s sake, I’ll delve into inflation and deflation as the other two are shades of inflation.

Two mainstream theories about the cause of inflation:

Demand-Pull Inflation

This theory can be summarized as "too much money chasing too few goods". In other words, if demand is growing faster than supply, prices will increase. This usually occurs in growing economies.

Cost-Push Inflation

When companies’ costs go up, they need to increase prices to maintain their profit margins. Increased costs can include things such as wages, taxes, or increased costs of imports.

And from the Austrians,

The idea here is that,

inflation is an increase in the money supply, rising prices are merely consequences.

And further,

This interpretation of inflation implies that inflation is always a distinct action taken by the central government or its central bank, which permits or allows an increase in the money supply. In addition to state-induced monetary expansion, the Austrian School also maintains that the effects of increasing the money supply are magnified by credit expansion, as a result of the fractional-reserve banking system employed in most economic and financial systems in the world.

On the other hand, what causes deflation?

The following causes are referred to depending on the school of thought that provide  them.

From Wikipedia,

In mainstream economics, deflation may be caused by a combination of the supply and demand for goods and the supply and demand for money, specifically the supply of money going down and the supply of goods going up.

From a monetarist perspective deflation is caused primarily by a reduction in the velocity of money and/or the amount of money supply per person.

And from the Austrians,

Growth Deflation

If supplies of certain goods in the economy increase due, for example, to increased saving and investment in additional capital goods or to technological progress, as is the usual case in the historical market economy, then, all other things equal, their producers will be induced by competition to offer more units of their product for a dollar. [Assuming a fixed supply of dollars].

Cash-building Deflation

[Cash] hoarding is nothing but an increase in what is called the “cash-balance” demand for money, that is, the average amount of money that the individual desires to keep on hand over a period of time.

Bank Credit Deflation

. a decline in the supply of money that results from a collapse or contraction of fractional-reserve banks that are called upon by their depositors en masse to redeem their notes and demand deposits in cash during financial crises.

Confiscatory Deflation

This form of deflation involves an outright confiscation of people’s cash balances by the political and bureaucratic elites.

So what’s happening right now? Staking an answer to this question with some timeframes is key to deciding how to orient oneself during this period. If you chose inflation (or its cousins), then you’re banking on some sort of a recovery in the next two or three quarters. Another open question here is whether such a recovery would be accompanied by an employment recovery. If you chose deflation, then you’re thinking that the situation might meander along for another quarter or so before worsening significantly as the unemployment situation worsens. The situation is really no different for firms either – the more astute managers will have a plan for any of the economic scenarios outlined above. The problem is that these scenarios unfold over multiples of quarters as we search out the way forward with a good dose of personal biases thrown in.

As for me, I’m biased towards deflation. Deflation has its vicious cycle that plays out in the following manner:

Falling Demand -> Falling prices -> Debt defaults -> Bankruptcies -> Layoffs and Wage Reductions which leads to further fall in demand and so on. Meanwhile, the signs of a second wave of destruction are beginning to emerge and I hope to write up a post on that. Also, as  I was traveling, I had some time to think about the rationale of the stimulus and how the debate and execution of economic stimulus parallels experiences in the manufacturing world. The idea here is that government stimulus is quite like push-based manufacturing unlike pull-based manufacturing.