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Red alert! Red alert! – Supply Chain Prediction 2013 is beginning to materialize…

Earlier this year in Feb 2013, I had made my prediction for the Supply Chain of 2013 – You can read it here in : Predictions for the Supply Chain in 2013.

In that post,

Well, I have my prediction too for the supply chain of 2013 (and 14 and 15 too). If anything I’d call it the rise of the Supply Chain Currency Wars. The first shot of this new phase of global currency wars was launched by Japan a week or two ago. While it will start slowly, over the next few years, this sort of tit-for-tat devaluation will play havoc with global supply chains especially the one’s with finely tuned cost calculations justifying the location of factories and/or distribution centers.

Devaluation of currencies over a matter of couple of quarters and in-kind retaliation is going to drive up financing risk in the supply chain. Were such a scenario to come to pass, then supply chain operators need to nail down some other variables so as not to have all the variables in a supply chain in a volatile flux.

Big Data – Nyet. Bigger and Badder visualization – Not a chance.

Increased volatility, upset cost calculations – Yes, sir – that’s for breakfast, lunch and dinner around the corner. Almost all the Emerging Market countries (such as BRIC) have entered a period of flux, not unlike what the Nutty Market countries at the periphery (Egypt, Syria etc) entered into roughly 2 years ago. This flux in the Emerging Markets – both China and India have received a lot of foreign investment in the past years.

So take one scenario : As projected growth and real growth decline, these countries will be subject to capital outflows. This is why, devaluation of the currency is the only way out for countries that constitute the manufacturing base of the world – the hope would be that devaluing their currency makes their exports cheaper and thus keeping the growth engine going. However, this is a problem for all other developed countries other than the US.

Capital outflows from emerging markets need to go somewhere. Where? You have only two choices – Bonds or Equities (well, there’s a third – Dollars). As the Fed ramped up talk about tapering the Quantitative Easing, yields have spiked for US Treasuries. Remember that if the yields spike too much, governments at all levels in the US (local, state and federal) will essentially stop functioning as they have promised to i.e. the inability to finance and roll over maturing debts at spiking rates. Equities have doddering at ever higher and higher valuations – buying into the markets at these levels is asking for trouble.

If it is bonds that these capital outflows crowd into – yields come down and everything is kicked down the road for a few more years. If it equities that these capital outflows crowd into – the markets are buoyed for a little longer with the attendant desire for the wealth effect that the Fed has been hell bent on creating.

Then the cycle reverses again intolerable equity valuations or dampened yields force capital outflows from the US back outwards in search of return.’

So what do Currency Wars mean for the supply chain? Take your pick: Disruptions, Volatility, Uncertainty, Wild swings in valuations and costing, Sourcing variations that inevitably lead to quality variations.

In one word : Variability. That’s the bane of any operation.

The Oh-no moment…

I couldn’t resist the pun. Long time readers of the blog would know very well that the insights of Taiichi Ohno hold a special place in my corpus of intelligent and wise things to have around. So it is a rather “Deming – like” sort of conundrum to have at hand an Oh No!! moment from Japan itself : Bernanke just felt a chill down his spine.

If you are not plugged in into the vast array of paralyzing news that flows around you or perchance missed this rather telling problem that has arisen in Japan of late.

In April 2013, Japan announced a QE program of $1.4 trillion, an amount equal to roughly 25% of the Japanese GDP. To put this into perspective, the US’s QE1, QE 2, QE 3, and QE 4 programs which were spaced out over four years are an amount equal to roughly 16% of US GDP.

When people refer to QE (Quantitative Easing) by the central bank, they almost always refer to it as if it were the only driving factor in the land. You have to remember that both Japan and the US has been running budgetary deficits as well. For Japan, it looks like this : Japan Government Budget (as % of GDP).

Japan Government Budget

For the US, it looks like this : US Government Budget (as a % of GDP)

United States Government Budget

But,

Japan announced a larger program relative to its economy all at once. The idea was that by throwing around a big enough amount of money, Japan’s economy would finally waken from its 20-year slumber and take off.

This effort has been an abysmal failure. Japan’s second quarter GDP grew at just 0.6% quarter over quarter, registering the single biggest growth MISS in a year (economists were expecting 0.9% which, by the way had already been revised lower).

Put in plain terms, Japan announced the single largest QE effort in history, and not only did its economic growth projections have to be lowered, but it is failing to even meet these lowered growth projections.

So, the noted result is that the GDP came in lower than the lowered forecast. For now. Oh no!!!

So what is supposed to happen?

The central bank – BOJ, Bank of Japan, being one of the bigger behemoths (financially speaking) in a country, can wish into existence more money which they then use to buy bonds. Why bonds and particularly govt. issued bonds? The point is that that’s where a lot of people have parked their monies because of the current state of the economy – accepting a nominal return in exchange for safety. By buying bonds with seemingly inexhaustible (though the only currency that is truly inexhaustible is stupidity but even a simple familiarity with the human being shows that they do get tired from time to time) i.e. magically created monies, the BOJ hopes to drive down the yield on the said bonds such that if people holding bonds currently felt that they were getting a whole lot of safety, they were going to get even less return for that safety. Ergo, those monies would be then retrieved and ploughed back into comparatively riskier assets such as stocks (i.e. the preferred funding mechanism for new ventures) which then leads to hiring instead of firing and so on.

Except that the GDP measure that is supposed to show the increase in “virtuous” activity that all this QE was supposed to engender has not worked out as well as one would have expected.

And so what is one to make of this?

Perhaps this Oh-No!! moment can lead us to what I appreciate as the central Ohno (the Taiichi kind) precept i.e. Respect for People. You see, when the BOJ (and as an agent for action, one cannot deal with a more ill-suited agent. In a firm, the BOJ would be the payroll + performance manager combined) wades onto the scene, the fundamental action is to whip people around, to coerce them into an action. You see the problem?

Let’s get something straight here – while stupidity is a truly inexhaustible resource in this world, between the ears of each and every human being is an explosive and creative engine. Unleashing this engine can only be contemplated as an extension of the inherent respect that every man, woman and child are inherently owed as their endowment.

All the machinations of central planners and allied commentators take the track of either, “Messing with/exciting the animal spirits”, or “Devaluing the efforts of people in the past i.e. through inflation” or the like.

As these Oh-No’s pile up, perhaps, it would be a wise thing to see how Ohno studied the matter in a factory on a small island far away…

Apple board worried about ‘pace of innovation,’ says Fox Business

Sometimes (nay more often than not), you’re treated to such deep and profound stupidity that it can only be located from the collective machinations of the board of directors. Apple board worried about ‘pace of innovation’. No kidding.

Gasparino, citing unnamed sources, said there is pressure on Chief Executive Tim Cook “to innovate, do something fast.”

“What have they had lately? They had the iPad. They had a few other things,” he said on a Fox Business broadcast on Friday. “But they don’t have anything innovating from what came from Steve Jobs.”

Set aside the fact that Steve Jobs had a knack for feeling the pulse of the intangible, to make visible what was only hinted at by the people at large – there’s simply no way to reproduce or latch on to what is ineffable. However that will never dissuade a bunch of board bound fools from demanding that it be done.

All around me and you,

Are those in chains.

Trapped from the last revolution

Set them free, sets them free…

So it is with the work of man – we use chains to break chains. And this is also how one differentiates the Vertical from the Horizontal.

About me

I am Chris Jacob Abraham and I live, work and blog from Newburgh, New York. I work for IBM as a Senior consultant in the Fab PowerOps group that works around the issue of detailed Fab (semiconductor fab) level scheduling on a continual basis. My erstwhile company ILOG was recently acquired by IBM and I've joined the Industry Solutions Group there.

@ SCM Clustrmap

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