@ Supply Chain Management

Just a short post to wish all of you a Happy New Year and the very best that life has to bring. Earlier in December, my wife and I were blessed with a girl (our third child and the second girl) – everyone is doing well.

Have a blast of a year!!!

In my earlier post, I had said that I was working on the idea/concept of a Living Wage. Some eyebrows might have popped at this – if not, this would be a good time to go a popping. After all, what is the connection between a Living Wage and the supply chain?

Take a look at this report for instance: Why is Wal-Mart blocking 35 cents an hour for Bangladeshi workers?

From that article,

Senior sewers are paid 1.7 cents for each pair of Wal-Mart jeans they sew. (Each worker must sew 10 pairs of jeans per hour, or one pair every six minutes—which is 10 percent of an hour. Ten percent of their 17-cent-an-hour wage amounts to 1.7 cents.)

That’s an hourly wage of US$ 0.17 for experienced sewers and the current demand is to raise the wage to US$0.35 (and up to US$ 0.51 by some accounts that I have researched).

The obvious question is : Is an hourly wage of US$0.17 a living wage? Is an hourly wage of US$0.35 or US$0.51 a living wage? If you think that US$0.17 is an absurdly small number, what do you make of US$0.35 or US$0.51? If you’re mortified by the idea that the designer jeans that you’re donning tonight was sewn together in misery, will you be gratified by the notion that they will be paid double that wage if you just bully the capitalist/retailer to forgo that marginal hit to his profits?

Now coming back to stateside, take a look at this site from Penn State that enables you to work out what constitutes a living wage in America, by state, by county – Living Wage Calculator. I live in Newburgh, NY and so I took a look at what constituted a living Wage for Newburgh, NY – A  living wage for Newburgh, NY.

A family with two adults and two children require a wage of $60,274 in order to “live” in Newburgh, NY which works out to a $28.98 hourly wage while the Minimum wage is $7.25 and Poverty Wage is $9.83.  Of course, this calculation does not include any governmental assistance which spans the spectrum of wages from ~ $20,000 to ~ $60,000 depending on family configuration.

The critical issue with the living wage is that is has nothing to do with living or working – it has to do with calculations in Ivory towers. There is no such thing as a living wage (just as there is no such thing as a minimum wage) – the effort to create a living wage is about replacing the antiquated notion of a minimum wage by something more substantial. What the residents and denizens of Ivory Towers and various social justice movements don’t understand is that a Living wage like the Minimum wage before it is a calculation that looks good on paper and might even absolve the bean counters and theoreticians from enjoying their privileged lives. It will do nothing to lift those Bangladeshi garment workers out of poverty and neither will it change the lives of those living stateside.

All that it will accomplish is that the annual wage of CEOs in the millions will then become in the billions, the annual wage of the consultant in the hundred thousands will be in the millions and so on. The poor will still be poor and probably poorer still because for the decade or so (and it will be much faster than that) that it would take to adjust, they will have adopted habits and lifestyles that will leave them worse off.

If you don’t believe what I say, take the hypothetical Bangladeshi worker who, through all the unrest in Bangladesh, doubles (from 17 cents to 35 cents an hour) or triples (from 17 cents to 51 cents an hour) his/her hourly wage. When that dramatic increase in wage happens, what I’d like you to do is tell me what happens to his/her life?

1. Wage – we know this already because it is a given, doubled or tripled.

2. Rent Cost – ?

3. Transportation Cost – ?

4. Food cost – ?

5. Medical cost –?

6. Taxes – ?

7. Entertainment costs – ?

8. Other costs – ?

Do you think items, 2 through 7, increase, decrease or remains the same?

I think that such misguided thinking betrays a mistaken notion of the concept of profit. I think that the most fundamental error that the calculators always make is to think that all that needs to be done is to carve out a portion of profit and return it to labor. And what always happens is that the profit margin remains unchanged or is impacted ever so slightly and everything else is adjusted accordingly.

Profit is notoriously difficult for the Ivory Tower to understand. And the reason is quite easy as well – they’ve never really worked in the real world. For some Profit is a subtraction of numbers and for others it is the recompense for overcoming fear – these two worlds will never meet.

A living wage is a confident calculation about the static nature of human enterprise and economy. And that calculation is wrong. Profit is a dynamic calculation of the nature of human enterprise and economy.

I want to bring to your attention a new blog dealing with Supply Chain Risk by Daniel Stengel at the Hamburg University of Technology. His blog is called Supply Chain Risk Management and I wish him the best in his new blogging life on this important topic.

And if you didn’t already know, the University of San Francisco has a SCM program that offers a supply chain management master certificate program via distance learning. You can read more about that here.

Well, of late, I’ve been swamped at work and life in general – we’re awaiting the birth of our third child by mid-December. Meanwhile, I’m working on a short piece concerning “Living Wage” and how that affects such giants as Walmart.

Stay tuned for that soon!!

That’s probably a rather safe thing to say as long as everyone is saying it. I would add that they might be whispering, “Well, what do you think would happen given the costs of in-sourcing?”. That’s probably not a safe thing to say, if you were a CEO.

Square with me a little, ought it not to be said? Perhaps, it bears frequent repetition as far as I’m concerned. The article titled Multinational CEOs say outsourcing has gone too far from Manufacturing and Technology News recounts:

Chief executive officers and senior manufacturing executives working for multinational corporations predict the United States will become an even less competitive location for manufacturing, according to a survey conducted by Deloitte on behalf of the U.S. Council on Competitiveness. Over the next five years, the United States is expected to slip further behind the world’s current leading manufacturing nations — China, India and Korea. The CEOs say Brazil will surpass the United States as a better destination for manufacturing by 2015.

The CEOs "see a fundamental shift — a new world order in manufacturing — that replaces the 20th century dominance" of the United States, Germany and Japan, says Craig Giffi, vice chairman of Deloitte. "It’s a virtual restart from the 21st century."

The CEOs are nervous about what this means for their children and grandchildren if the United States can’t get back into the global manufacturing game. They recognize that outsourcing of manufacturing has not worked in the way they had envisioned. "We overestimated the issues associated with outsourcing jobs to low-cost nations and the consequences of that," says Giffi. "The executives underestimated the erosion that would have in their overall capabilities in places like the United States and how that would fundamentally shift their supply chains."

and

But the United States government can’t dither in putting together policies that favor production over consumption. "This isn’t something that can be debated indefinitely," says Giffi. "Business leaders are forced into a world of making decisions 24 hours a day seven days a week on where they have to make investments in plants, equipment and new jobs." If the United States does not address its cost structure, talent gaps, trade polices and infrastructure "then we will see a continual gradual deterioration and downward spiral. . ."

Now, in the pages of this blog, I’ve gone over back and forth over the outsourcing, off-shoring and in-sourcing arguments countless times. Whether the decision to outsource or offshore manufacturing is based on flawed cost modeling, the growth of a global culture of some weird shape or form, easy credit or some other combination of other factors – what is obviously true is that it has been happening for more than a decade now.

One of more pathetic slogans that I have heard during this recession/depression is – “Buy American.” Well, I’ve been hearing this slogan even before that too. The implication of such a statement is staggering.

Allow me to explain. If the only recourse the American manufacturer has left in his arsenal to the onslaught of “cheap” foreign manufactured items is patriotism i.e. “Buy American”, it’s time to remove the last tatters of a once delicate fig leaf that has been long defending the promise of American manufacturing. If using that same flawed cost modeling, it costs ten times more to manufacturing something here in the USA than in some place far far away – there are two glaring questions – Why? and Where is the equilibration point?

The first question is :Why?

Well. that’s quite easily answered if one is prepared to be crude. Life doesn’t cost as much over there. Being paid 50 cents an hour to stitch shoe soles might inflame the passions of the very flammable over here but 50 cents an hour is a life changing event in some parts of the world. In other words, the difference in costs (using the same flawed cost modeling) is purely because of divergent cultural attitudes, wants and desires – after all, needs are the same for the human being. And this divergence has been effected in the course of less than a century. The corollary of this statement is that rights, benefits and freedoms come at an enormous price and you have to be willing to pay it.

The second question is : Where is the equilibration point?

Now, we all know that there is never going to be perfect equilibrium between the manufacturing options from overseas and those over here i.e. because of backgrounds, resource distribution etc, there are going to be quite a different set of initial conditions for any operation/endeavor. So, the natural question is whether the equilibration point is at three, five or seven times wage differential or does it lie on some other dimension itself? Is it going to be dictated on a dimension of response time or quality or some other critical cost impacting dimension? In the real world, it is a function that intersects all of these and as we muddle from one crisis to another, it will become quite apparent.

But the proof of equilibration is in the pudding. Consider for a moment, that all tax breaks for US corporations that move jobs overseas are eliminated, the currency exchange rate differential between the US$ and other foreign currencies are eliminated and so on and so forth – will there still be a significant wage differential remaining? Will the American manufacturer still have to utter the words, “Buy American!!”  as a rejoinder to those who weigh the output stateside and overseas and votes with their dollars to buy overseas? For American manufacturing to win, there has to be an exceptional value delivered even to American buyers be they consumers or intermediates. Only exceptional value can force equilibration at a higher wage differential – so the real message to the American manufacturer seems to be – where is the value that I ought to be getting for this high a wage differential? And I’m afraid that the answer just doesn’t cut it.

You see, I fear that it is not the multinational CEO that has been shipping jobs overseas as much as it is the lack of value that was being created that forced the issue. It  may not be that one fine day, a couple of CEOs figured out that it is better to ship everything, lock, stock and barrel to some god forsaken place far far away. Instead, a few CEOs looked at what they were getting for what they were paying and decided not to pay that differential any more.

I fear that in a very general sense, the American brand as far as manufacturing was concerned (and maybe in some other aspects as well) has lost its way and that’s why it becomes necessary to invoke the fig leaf of patriotism.

The words of General Patton concerning patriotism ring true –

Don’t be a fool and die for your country. Let the other sonofabitch die for his.

That’s the be all and end all of patriotism. For everything else, bring Value.

That sort of view should warm the cockles of anyone inhabiting this space but what is it based on? In this article Manhattan Associates sees uptick in supply-chain business, an interview with the CEO of Manhattan Associates is presented.

If you read the article, you would be able to immediately grasp the underlying thought process that produces this sort of view namely the theory of business cycles and the availability of new technology. Perhaps that is sufficient to warrant the intimation that there is going to be an uptick in the supply chain business but color me the skeptical – me thinks only green (i.e. dollars) indicate that.

Even though that lesson has been drilled into CEOs time and again, many aggressively cut R&D and key projects during tough times, just like they do with operating expenses.

But when important capital investments are put on the back burner, companies risk future growth in what can be a penny-wise, pound-foolish move.

Still, many did just that during the height of this recession — if one bellwether firm’s experience is indicative. Some had no choice, given the credit crunch.

“Companies didn’t know where they would get cash, so they postponed investment,” said Pete Sinisgalli, president and CEO of Manhattan Associates.

That’s business cycles right there – nothing more. As for new technology, well, it’s the same old technology – just different this time.

Instead of focusing on just one part of a company’s supply chain, such as inventory control, Manhattan Associates is now selling software that ties together the different stages. The software can maximize efficiency throughout the entire process, from planning to inventory control to distribution.

That’s in contrast to individual software packages that can produce the optimum result in one area, but neglect to factor in others. Without stitching the software together, a company could arrive at the right inventory solution, but it might be tying up too much capital.

I did find this particularly humorous though

“We’re constantly inventing new math and science to help companies operate more efficiently,” said Sinisgalli, who has headed Manhattan Associates for the past six years.

Maybe, we could do with less “new math and science” in the business world for a little while longer until we’ve recovered some business-skeptical sense, given how that just “old math and science” did just a few years ago.

I’ll take the time now to laugh : A very dignified guffaw.

I’ve just managed to recover almost everything that was hacked by some pharma front that inserted unauthorized and irrelevant ads inside my blog.

Thankfully, I didn’t have to go through too much hassle to recover the site and the bonus is that I’ve managed to upgrade the site to WordPress 2.9.2.

Meanwhile, here’s a short video from Mario Vittone of the US Coast Guard that I found interesting.

Wrong About Everything (sample) from Mario Vittone on Vimeo.

What I found interesting was his effort to classify the types of mistakes that he found in his experience and organization. There’s a long video also available on Vimeo on the same topic and it will be worth your while to obtain the only free lunch in life i.e. learning from the mistakes of others.

No sooner than I had posted yesterday: ‘Scuse me but who sprung the volatility back?, than I saw this little tidbit:

Geithner plans trip to Britain and Germany

Treasury Secretary Timothy Geithner will confer with finance officials in Britain and Germany next week about ways to restore global confidence in the financial system on a trip.

The Treasury Department announced the trip Thursday after a rough day on global financial markets. The Dow Jones industrial average fell 376 points, its biggest point drop since February 2009.

Investors are concerned that the debt problems in Greece and Portugal will spill over to other countries in Europe and threaten to derail the economic recovery in the United States and elsewhere.

Investors are not concerned that the debt problems in Greece and Portugal will spill over to other countries in Europe as much as they’re aware that the debt problems in their own countries will be shoved into the spotlight sooner or later. Right now, sooner is pulling ahead of later and that is cause for panic. None of these administrations have the spine to deal with these debts. Why? Because these debts cannot be paid without causing a global disruption of some sort or worse a collective default.

So what now? The Euro zone is going to engage in quantitative easing aka debasing the euro – the time honored way of keeping up appearances.

Only pathos grows as small men squeeze farce out of tragedy. Remember, that the powers that be have managed to keep the sun shining for nearly a year and a half, they can and will keep the moon shining for at least half as much.

It’s time to save the moon.