Gillan Tett’s latest offering in the Financial Times discusses the woes that have befallen various major companies that find themselves exposed as a result of having extended supply chains that have Japan-based manufacturing as an important part. She correctly depicts this as a symptom of a much larger problem, of having pushed the idea of wringing out production costs too far. But perhaps due to space constraints, she fails to draw out the most important conclusion: just as with financial engineering, management incentives favored ignoring risk, and the resulting blow ups were predictable.
Tett tells us the Japan-related disruptions are merely the most visible symptom of a widespread pathology:
Last year, the Business Continuity Institute published a survey of companies which suggested that three-quarters had experienced production hiccups in their supply chain in the previous 12 months, due to unexpected surprises (ranging from weather to health issues to earthquakes). A quarter said that problems were getting worse. “In the highly competitive, global market of recent years, many businesses implemented cost-saving strategies to maintain profit margins, including just-in-time deliveries of critical resources and components,” says Nick Wildgoose, supply chain product manager at Zurich. “[But] some of those earlier savings are becoming operational weak links, especially in extended supply chains.”
It isn’t all that hard to understand that stressing efficiency at all cost comes at the expense of safety. Engineers will tell you that efforts that are pro-safety involve various forms of buffers and redundancy and are thus costly. During the early days of the crisis, commentators often discussed the implications of Richard Bookstaber’s book A Demon of Our Own Design, in which he argued that systems that lacked breaks between various processes were tightly coupled, which meant that a failure at one point in the process would propagate through the entire system, as if one transformer failing would bring down an entire electrical grid.
Anyone who has been on the periphery of manufacturing can see that all its fads can easily have pushed too many companies into failure-prone systems. Just in time inventory was a reversal of the historical propensity of manufactures to carry a lot of inventory to make life easier for managers. That practice in isolation might not be a bad thing. But over the years, many manufacturers have also concentrated on limiting the number of vendors to give them more bargaining leverage with them and squeeze them on costs. That increases dependence on suppliers while also increasing the riskiness of their operations. It has finally become fashionable to work with vendors or offshored factories in countries with low labor costs like China, Bangladesh, and Vietnam. Long transit times also increases business risk.
Now of course, like traders, top manager have every reason not to be terribly worried about long term risks. The prototype of the profitable but risky trading strategies that Nicholas Nassim Taleb likes to deride is that they work just fine on a day to day basis but blow up catastrophically periodically. And those blowups are predictable. But as long as they aren’t likely to happen every year or every other year, decision-makers have huge incentives that increase risk as long as the blow-up risk is not all that imminent (I am waiting for a quant to devise an optimal blow up metric as a covert trading strategy tool). So we should also regard the fact that business managers have acted exactly like reckless traders to be an expected outcome.
Tett also tells us that the business leaders aren’t quite sure what to do:
The good news, as Mr Wildgoose notes, is that corporate awareness of this problem is rising: many companies have started to develop mitigation strategies to diversify their supply chains.
The bad news, as the World Economic Forum recently warned, is that many of the vulnerabilities in these chains remain unaddressed and are poorly understood.
The lack of understanding doesn’t simply mean they’ll have a wee bit of study needed before they act. Bookstaber warned that tightly coupled systems were indeed difficult to contend with and that risk mitigation efforts that look logical typically make matters worse. His example was the emergency measures taken when a valve got stuck at Three Mile Island. The efforts to ameliorate the situation led to the meltdown. The only way to make a tightly coupled system less risky is to de-couple it, which will also make it less efficient on an ongoing basis. Management incentives will be to try to do everything but increase costs in a meaningful way, which means they are likely to try precisely the sort of interventions that Bookstaber warns against.
The only good news is that few manufacturers are so fundamental to the economy that we cannot afford them to take some hits from short-sighted decisions. But until a CEO bites the dust over this sort of error, we are unlikely to see a serious rethinking on this front. The fact that this sort of error is common means it will be treated as more legitimate than it ought to be.
71 comments
Comments are closed.
Good post!
It’s unfortunate that neither business management, the expert professional economists that rationalize their pathologies… nor especially the academic institutions that propagate these idiocies have ever read a biology book.
Resilience in a community is enhanced by redundancy and, yes, even slack in the complex network of relationships and supply chains (metaphorically speaking) that sustain it.
If economists’ ran biological systems they’d see a species population within it as most successful when they were utilizing the resources of the environment as rapidly and efficiently as possible.
It works for a while… but tends to result in wide population swings at best (like rats and grasshoppers).
Its not an exaggeration to say that if we don’t do something pragmatic about shifting this paradigm we are going to be paying a very heavy price for it in very real terms.
On the Birth of the Global Social Organism
Tom Crowl said: “It’s unfortunate that neither business management, the expert professional economists that rationalize their pathologies… nor especially the academic institutions that propagate these idiocies have ever read a biology book.”
Simply not true.
The sociopaths and psychopaths have their celebrity “scientists”—-their “paid liars and bumsuckers” to use the vernacular of George Orwell—-in the field of biology just like they do in the field in economics:
Much has happened in the four decades following the rejection of group selection in the 1960s. Naïve groupism is still a mistake that needs to be avoided, but between-group selection can no longer be categorically rejected. Claims for group selection must be evaluated on a case-by-case basis, along with the other major evolutionary hypotheses. Demonstrations of group selection appear regularly in the top scientific journals.
As one example reported in the July 6, 2006 issue of Nature, a group of microbiologists headed by Benjamin Kerr cultured bacteria (E. coli) and their viral predator (phage) in 96-well plates, which are commonly used for automated chemical analysis. Each well was an isolated group of predators and their prey. Within each well, natural selection favored the most rapacious viral strains, but these strains tended to drive their prey, and therefore themselves extinct. More prudent viral strains were vulnerable to replacement by the rapacious strains within each well, but as groups they persisted longer and were more likely to colonize other wells. Migration between wells was accomplished by robotically controlled pipettes. Biologically plausible migration rates enabled the prudent viral strains to persist in the total population, despite their selective disadvantage within groups.
As a second example reported in the December 8, 2006 issue of Science, economist Samuel Bowles estimated that between-group selection was strong enough to promote the genetic evolution of altruism in our own species, exactly as envisioned by Darwin. These and many other examples, summarized by Edward O. Wilson and myself in a forthcoming review article, are ignored entirely by Dawkins, who continues to recite his mantra that the selective disadvantage of altruism within groups poses an insuperable problem for between-group selection.
▬David Sloand Wilson, Beyond Demonic Memes
Why Richard Dawkins is Wrong About Religion
I haven’t read it yet—-it appears to be very technical so will take some time to read—-but the article Wilson refers to that he co-authored with Edward O. Wilson that appeared in American Scientist can be found here:
Evolution “for the Good of the Group”
Its a very good article!
The “Nesting Russian Dolls” proposed answer to the scaling issue within the Tragedy of the Commons is great! Its this idea of “levels of selection”…
In other words while an individual “good” citizen won’t be able to out-compete an individual “cheater” (and hence will be less fit and less evolutionarily successful)…
However, a group of “good” citizens WILL out-compete a group of cheaters!
WHICH IS WHY ITS SO IMPORTANT TO ENCOURAGE A CAPABLE AND PARTICIPATING CITIZENRY!
(something neither big biz nor big political parties REALLY want despite the horse excreta they spew)
It’s up to us.
”
group of “good” citizens WILL out-compete
”
~~Tom Crowl~
Got it.
When the good people of River City all aspire towards the same goal, you don’t need no stinking conspiracy. Cooperation is greater than the sum of its cooperators. Such étude is now unfolding within Libya.
Let the games begin
!
Not as technical as it seems, DS. I love the part near the end about hens: selecting the best-laying individuals created a strain of agressive murderers that would fight instead of lay, but selecting the best-laying groups created a strain of friendly high-producers.
Then the suggestion that the key to human evolutionary success was our propensity for teamwork. Egalitarian community and cooperation allowed intergroup selection and the betterment of the species. This blows a large hole in the current dogma of competition that we are force-fed from infancy.
Isn’t that why we Naked Capitalists are here — because we are long-term greedy?
@ScottS…Survival of our species and any others we have not pushed to extinction, is not well defined as greed, language dear man…its our language, which not unlike a ballistic chamber, propels our thoughts out.
Skippy…*killer* thoughts…eh…Greed is the equivalent of a vocabulary doomsday device.
Good, fair and informed critique!!!
I guess what it really shows is that experts (like statistics)… can be used to support essentially any side of any argument… professional experts in particular.
You mean a Political commissar such as this one:
http://www.youtube.com/watch?v=RWsx1X8PV_A
When the only thing corporations and banksters can do (most especially in Amerika) are either generating (1) junk paper, (2) doing private equity leveraged buyouts pump-and-dumps, and (3) offshoring jobs, and importing foreign scab workers (who then make for further homeless, and the occasional NY Times Square attempted car bomber), what more can one expect?
Many, many Americans do not feel that globalization has helped them in the long run. Their lives are NOT more prosperous, secure and satisfying than before the warp speed globalization of the last 25 years.
This is because justice and fairness should be a goal that is just as important as efficiency. Our leaders have lost sight of properly balancing these two.
Totally ridiculous and thoroughly utopian dreaming. :)
No CEO will ever “bite the dust”. At worst, they’ll float down under their golden parachute and land gently on two feet, with sycophants and entourage in tow.
Ready for golf or board meetings, or maybe a summer at the country house where they can write their book before they reload and bring their “efficiencies” to some other hapless enterprise which they’ll break like a pinata.
Biting the dust is for little people.
Sign of the times on a Manhattan subway: Riding uptown on the 6 train Sunday and sitting across from me an angry, intense looking Hispanic dude deeply engrossed in a paper back biography of Che Guevera.
the viral meme of Rubinesque financialization is indeed taking its toll. CFOs used to play a supporting role for a real underlying business. now they drive companies and drive decision-making.
thanks Harvard! thanks McKinsey! and thanks most of all to you, Goldman, for so effectively spreading the gospel!
intellectual and ethical bankruptcy precedes systemic failure.
My pleasure.
Yours truly,
John E. Cash, MBA, PhD, CFA, CPA, CDO, OCD, AA, CCC-, BYOB
Lootem & Howe Capital Partners
“E is for Easy”
Lootem – didn’t you guys merge with Cheatem and Robbem?
Does the “Managerial Revolution” end when an island-country (which is the world’s third-largest economy)half of which becomes uninhabitable, stops buying foreign bonds to salvage the remainder of their country,leaving a gash in the ledgerbook of the U.S. Treasury,the effects of which cascade around the planet,like cars piling up on a fog-covered freeway ?
Let’s hope for the best.
If I was manufacturer, I would keep my supply chain close, and my managers closer still.
But that’s me. Call me conservative, or call me paranoid, but I believe that if something can go wrong, it will go wrong; and when it inevitably does, I want to be there, in person, to oversee the solution making process, to separate the calm from the panic stricken, and most importantly, to identify the clowns ultimately responsible, so I can fire their ass.
There is a problem of scaling up or putting everything into efficient but dangerous single buckets. I was surprised of the single sourcing (actually two) of a common part design in Toyota’s unintended acceleration problem (whatever its cause). This is asking for trouble when failure ensues.
Similarly, the locating of six (and if you count the other group 10?) nuclear reactors on the same geographical spot is asking for scaled up trouble.
There should be a philosophy that pursues some inefficiency just to spread risk.
Science/technology is practiced by humans.
Knowing the diversity of the lot, one should expect an occasional folly, or two…or three…
Jeez, anyone remember the celebrations of the ‘risk society’ back in the 90s – when ‘flexibility’ and ‘management innovation’ were hailed as the harbingers of post-modern ‘freedom’? Looking pretty quaint these days, eh? Rationalising catastrophe and little more…
The push to efficiency at all costs is horrid, but I think its a symptom, not the disease.
The disease is a need to always grow profits at the maximum possible rate coupled with a short (few year or less) time horizon for decision making.
Especially in a mature industry, the only way to increase profit is to take from your competitor (often by reducing costs) OR by reducing cost directly.
And if a company WAS satisfied with not growing profits, it would get destroyed by a competitor who is not satisfied. THus you get these super efficient supply chains with no margin for error.
Nicholas Weaver,
You might find what Carroll Quigley has to say in his book The Evolution of Civilizations to be of interest:
The instrument of expansion of Canaanite society [2200 – 100 B.C.] is also a source of difficulty because it is a type of economic organization so familiar to us that it is taken as a matter of course without the emphasis which is placed, for example, on Mesopotamian temple administration or the domination of Egyptian economic life by the Pharaonic state. The Canaanite instrument of expansion seems to have been commercial capitalism. Thus it is similar to the instrument of expansion that gave our Western civilization its second age of expansion in 1440-1690.
Capitalism might be defined, if we wish to be scientific, as a form of economic organization motivated by the pursuit of profit within a price structure. Thus defined, it should be evident that there can be more than one kind of capitalism and that any kind can perform as an instrument or perform with decreasing effectiveness by becoming institutionalized. When profits are pursued by geographic interchange of goods, so that commerce for profit becomes the central mechanism of the system, we usually call it “commercial capitalism.” In such a system goods are conveyed from areas where they are more common (and therefore cheaper) to areas where they are less common (and therefore less cheap). This process leads to regional specialization and to division of labor, both in agricultural production and in handicrafts. Both of these, as well as the interlinking commercial groups, become specialized activities within a market nexus.
[….]
Commercial capitalism, as an instrument of expansion, has powerful tendencies to become institutionalized, to the injury of economic advance. Such institutionalization arises when pursuit of profit becomes dominant over the real, if remote, goals of any economic system. These real goals include high enjoyment of wealth, and can be analyzed into high production, high distribution, and high consumption of goods. As long as the pursuit of profits serves to assist these goals, any profit organization of the economic system remains an instrument, but this is likely to continue only as long as the trading system is a competitive one. As long as the competitive aspect of the organization continues, each entrepreneur seeks to obtain a larger share of the total trade for himself, and invest his savings, as in ships, wharves, or warehouses, in order to do so. Such investment increases the total volume of trade, which, in turn, increases the total volume of production on one side, and the total volume of consumption on the other side. This increase in wealth has, eventually, an adverse effect on the volume of profits, since profits (meaning surplus over the total of the costs of production and of distribution) require a scarcity system. Increase in volume, by making goods less scarce, reduces the margin by which retail selling prices exceed costs and thus, in general terms, jeopardizes profits. When this occurs, and the commercial traders are in a position to reduce their mutual competition, they seek to manage the market, by reducing volume in order to raise profits. In this way profits become dominant over wealth as an economic goal, to the jeopardy of volume and high living standards. Means have become ends—-or, as we put it, an instrument has become an institution. This process took place in our own Western civilization about the seventeenth century, and of that process we generally say that commercial capitalism (or the “commercial revolution,” in the older books) was transformed into mercantilism. In Canaanite society we speak of the rise of a “commercial oligarchy” in the later days of Phoenicia or of Carthage. When this occurred, the society ceased to expand by economic means (that is, by increasing volume of wealth, or by intensification of economic activities) and tried to expand by political means (that is, to increase profits by extensification of economic activities by bringing wider geographic areas under the institutionalized economic organization). Thus, the economic imperialism and wars typical of Stage 4 of any civilization replaced the earlier economic expansion (which also involved geographic expansion, but by exploration and colonization rather than by imperialist wars).
Quigley sets out the following seven stages in the rise and fall of civilizations:
1. Mixture
2. Gestation
3. Expansion
4. Age of Conflict
5. Universal Empire
6. Decay
7. Invasion
Thanks Downsouth for your insightful commentary.
I call it the cheetah problem – you’re the fastest meanest thing on earth (and with the least fat), but if you don’t eat for three days, you die.
If a kick from your next meal breaks your leg, you die (of hunger). If you run for too long, you die (of overheating). If you run and can’t rest afterwards, you die (of overheating). If (a lot of things goes here) you die.
Cheetah is sexy, hyena isn’t – but if I was to bet on a long-term survival of one, I’d back hyenas (in fact, a cheetah will give up its kill to a hyena, because it cannot afford any injury in a fight).
Not to mention that they have bred so specifically for those traits that they have become virtual clones of each other – leaving little room for species survival in case of widespread disease.
Risk is ever present in endless forms. The illusion that engineering financial exposure or structural design will eliminate or minimize risks is another Disney product. While many risks may not appear in our very short lifetimes most if not all are inevitable over longer durations.
Check out Naomi Klein’s TED talk, “Addicted to Risk.” It recounts BP Oil chairman Tony Hayward’s “inspirational office poster:” “What could you do if you knew you could not fail?”
I am looking at my “Demotivator” poster:
OVERCONFIDENCE
Before you attempt to beat the odds,
be sure you can survive the odds beating you.
Ah for capitalism to embrace the not so schizophrenic thought that Price Point also contains Stupidity Point!
In one way like innovation the more open the contributory network on risk the better. Unfortunately capitalism is becoming less democratic as corporations grow both larger and fewer and managers specialize in both autocratically growing and looting the enterprise aka Fred The Shred.
Whether its financial engineering, supply-chain management, or nuclear engineering, it’s about cost. Risk management can, at most, identify the weak links, single point of failures, etc., but it will always come up against cost. Why assess the risk of the once in a hundred year flood, oil spill remediation training and equipment, or a structure designed to withstand a magnitude 8.9 earthquake when neither has yet to occur? And since the risks can be socialized while the profits from such activity remain privatized – mine – why pay for something that isn’t likely to happen to me? Plain and simple: it’s SHORT-TERM THINKING predicated on a rabid individualism.
Living in the eternal present devoid of historical context, there is no past nor any future – just the PRESENT. And this malady of short-term thinking is not confined to management but endemic to American culture. That we may be in the “forefront” of such cutting edge praxis isn’t surprising given our preference for “new and shiny” versus tried and true. But as we are finding out, the consequences of securitization, oil pollution, and nuclear radioactivity are LONGTERM. In the case of the latter, thousands of years given the half-lives of many nuclear isotope/elements created in the process of nuclear fission. Plutonium, PU239 for example, has a half-life of 24,000 years! Even to presume that “we” can keep adequate records, safely manage the disposal and subsequent storage of radioactive waste for the required period of time before it becomes inert testifies to human hubris.
Perhaps it’s because the adverse effects of our technologies often extend beyond the 70-odd year life span of most of us that we are increasingly incapable of thinking longterm. Disconnected from the land, very few of us comprehend the rhythms and cycles of nature on which agricultural societies depended and transgressed only at their peril. Sun, water, earth/land have little meaning in advanced industrial society other than as “factors of production”, something with which to produce a commodity – good and/or service – something for sale. Hence, seismic forces are of little immediate consequence and beyond predictability. As such, there is no risk or the risks can be minimized – externalized. We won’t suffer the consequences…
I just wonder if Gaia has had enough. Is this living planet trying to tell us something? Anthropomorphism aside and depending on one’s time perspective – say that of a Taoist or Buddhist – to envision Mother Earth as anything but living and breathing may be the penultimate example of short term thinking.
Mickey Marzick in Akron, Ohio said: “Plutonium, PU239 for example, has a half-life of 24,000 years! Even to presume that ‘we’ can keep adequate records, safely manage the disposal and subsequent storage of radioactive waste for the required period of time before it becomes inert testifies to human hubris.”
Mickey, you might enjoy reading Michael Allen Gillespie’s Nihilism before Nietzsche. Here are some passages from the Epilogue:
Modernity was a response to the breakdown of the scholastic synthesis of reason and revelation and the assertion of a new idea of God in late medieval Christianity. This new nominalist God was a terrifying, transrational, transnatural God of will, an omnipotent God whose absolute power reduced nature to a chaos of radically individual and unconnected beings. This idea of God in combination with the Black Death and the papal schism brought the medieval world to an end and left man afloat in an infinite and incomprehensible universe with no guarantee of happiness in this world or the next.
Descartes constructed his bastion of reason to shield man from this god and to establish a certain and secure citadel from which to undertake the conquest of the natural world. He was able to accomplish this, however, only by attributing to man the same infinite will that had proven so problematic in God. In this way, will was established as the foundation of modern reason. This notion of will, which remained implicit in Descartes’ thought, became increasingly explicit in continental thought from Fitche to Nietzsche. The history of nihilism is the history of the development of this notion of will….
It was this idea of an absolute will that gave birth to the idea of nihilism, for if the I is everything, then, as Jacobi pointed out, God is nothing. Nihilism, as it was originally understood, was thus not the result of the degeneration of man and his concomitant inability to sustain a God. It was rather the consequence of the assertion of an absolute human will that renders God superfluous and thus for all intents and purposes dead….
The transformation of this notion of the absolute I into an absolute human will was the work of Fitche’s students, the early German Romantics, who depicted the striving to attain such an absolute will in their demonic heros. While both Goethe and Hegel had serious misgivings about this demonic titanism and attempted to constrain it, they were also attracted to it. Ironically, it was through their efforts to constrain this Fitchean will that it became a world-historical force, first as Left Hegelianism and then as Russian nihilism…
[….]
The history of modern though has thus been the ever more explicit revelation of the hidden foundation of modern reason in will. From another perspective, however, this is the history of the reconquest of the bastion or reason by the omnipotent God behind the mask of human will. At the end of modernity, we are thus brought face to face with this dark God that modernity was constructed to constrain. The possibility of coming to terms with modernity or passing beyond it depends upon our capacity to face this question.
Oops!
The last paragraph has two typos. Here’s the correction:
The history of modern thought has thus been the ever more explicit revelation of the hidden foundation of modern reason in will. From another perspective, however, this is the history of the reconquest of the bastion of reason by the omnipotent God behind the mask of human will. At the end of modernity, we are thus brought face to face with this dark God that modernity was constructed to constrain. The possibility of coming to terms with modernity or passing beyond it depends upon our capacity to face this question.
Ha! I didn’t think you were typing it out from memory!
It is encouraging that “Mr. Wildgoose” is familiar with Taleebs Mr. Blackswan.
As long as those CEOs can externalise the costs of their failures to others, i.e. the public in general, nothing will change.
Also further regulation will not change anything either, because as we have seen, there is nothing in the system to prevent regulatory capture. All regulators do want a job in the industry they are supposed to regulate. The outcome is clear: Regulation is not enforced. You just need to have a look at the SEC, CFTC the FED, or other regulators OFHEO, MMS etc.
You have to get the profit motive out of certain industries. Profit is what remains beyond what you actually need to make a living. Profit is greed and has no place in industries that are crucial for humankind.
So I hate efficiency because it feels and looks like a fool’s game.
I say keep something in reserve. Because you never know.
The problem is that other people adore efficiency.
Like the bankers who thought nothing of gambling with their balance sheets by deploying a 40:1 leverage ratio. Why worry? They had thought through every possibility. Their thinking allowed them to stretch to the very edge. Efficiency demanded they squeeze every ounce of profit from their equity and not allow it to sit around under deployed. That word “under” implies inefficient deployment.
Efficient people always feel fine going to extremes. They know the future sufficiently to do so. They see no reason to build in some spare capacity. They just know the answer.
Besides it is cheaper being efficient. Cheaper because every ounce of resource is at work. Nothing is left idle. There is no need for a reserve. No need for a shock absorber.
http://rwer.wordpress.com/2011/03/16/the-efficiency-myth/
The progressive gospel of efficiency in the United States became one of the triumphant denominations in a worldwide “religion of progress” that shaped the dominant secular religions of much of the twentieth century. In country after country, traditional Christian and Jewish faiths were marginalized over the course of the century; in western Europe they virtually disappeared in some countries as significant influences on public affairs. If the wars of religion four hundred years earlier had been fought among Catholics and diverse Protestant denominations within Christianity, the great wars of religion of the twentieth century were now fought among socialist, Marxist, fascist, American progressive, capitalist, and other branches of an overarching religion of progress.
If salvation was now to be a matter of ending material scarcity, leading humankind into a new era of economic abundance, it followed logically that the new chief priesthood should consist of economists…
[….]
Professional economics and other social sciences had a central role to play in all this. As Lee writes, Progressives assumed that there existed a one true “natural science of society” whose knowledge would provide the technical basis for governing. Hence, social science researchers must work “to discover the immutable laws of society.” In this way, it would be possible for “the truth and objectivity of science” to substitute for the interest-group favoritism, for “the unenlightened majority” of past American politics, thus providing a much firmer “basis of [American] democracy.” This would stimulate a new “sense of political community” in the United States, based on “the adoption of science as the common language of discourse, bringing about an end to irrationality, rivalry of power, and authoritarianism.” It reflected a view that the tasks of government administration are mainly “objective, universal, natural, altogether devoid of historical and cultural contexts, and dictated only by scientific laws.” The “social significance of science” was that it would now provide “the legitimate basis for public authority” for American government……
[T]he new progressive vision of “scientific politics took technical rationality as the criteria of political action and sought to technically control and engineer social and political processes, with scientists, experts, and professionals as legitimate bearers of such knowledge.” It resulted in a “centralization of power in the hands of political and administrative elites [that] was justified as the science of democracy,” the means by which government would transcend private concerns and act for the benefit of all the people. Technical rationality included as a central preoccupation “the demands for efficiency” in government and society as a whole. All this produced among the progressive faithful a typical conviction that a secular “salvation would come from ‘science,’ ‘primary sources,’ ‘relevance,’ ‘democracy,’ and ‘progress.’ “
Progressivism strongly encouraged the turn of the civic allegiance of Americans from the local community to the nation as a whole. If good government required the application of the best scientific knowledge, scientific institutions at the national level could be expected to achieve the highest quality of science, produced by the most gifted scientists gathered from throughout the country and the world…
In the progressive value system, there were “serious doubts about [traditional] religion, traditional morality, and the local civic manifestations,” because they posed an obstacle to the “new reliance on rational, scientific principles and institutions to create a national community.” Instead, as Schambra comments, Progressives turned to new secular faiths in place of an outmoded Christianity:
“Many of the Progressives understood the new social sciences and their seeming capacity to reorder society into a coherent and orderly whole to be a secular evolution from or substitute for religion, a realization of the Kingdom on Earth—-to recall [Herbert] Croly’s formulation, a ‘religion of human brotherhood.’…. John Bascom argued that ‘a theology which seeks the regeneration of society in ignorance of social laws is doomed to failure,’ while a government that grasped such laws was ‘a surrogate for the churches and voluntary societies.’ Progressives generally shared Bascom’s view that traditional, local civil institutions—-as he put it ‘rambling, halting voluntaryism’—-based on traditional moral principles could only obstruct and delay the creation of a new, sleek, streamlined, rational centralized order.”
▬Robert H. Nelson, Economics as Religion: from Samuelson to Chicago and Beyond
I happened to read this article a few days ago at Ars Technica and it seems to fit in with this topic.
Made in America: small businesses buck the offshoring trend
http://arstechnica.com/tech-policy/news/2011/03/in-early-2010-somewhere-high.ars
frank,
The article was a good read – many thanks. But the substitution of robots for human labor won’t do much to alleviate unemployment.
excellent piece.
As a former manufacturing engineer i can say unequivocally this writing is dead on the money.
One of the biggest problems is those in charge of the supply chain. Said purchasing departments of companies who, in the end, do not work in the best interest of the product, process or the company as a whole.
one great example with my former employer involves justification of a new machining cell which included two new machining centers. This cell would make a key large component for a product which happened to be the companies largest profit margin product, its bread and butter if you will.
The short version is this, months of meetings and proposals, only to have the purchasing department come in, in the eleventh hour with a bid from china to make this component. Now, throwing aside the questionable quality issues (this part was difficult to make), the bid came in as a negligible cost reduction vs doing it in house.
Now for the good stuff, so the questions from the internal management team after pressing for numbers used in their calculation found this – the purchasing departments negligible cost improvement was calculated with out shipping costs. YES that’s right, somewhere along the line shipping became free i guess. The justification was, because day rates are currently so high they should not be counted, at all! The purchasing managers accounting on this was straight out of the BLS playbook if you ask me.
Beyond the funny numbers behind this project, there was a larger issue the manufacturing department raised, “do you really want to entrust your most important component, for our most important product, to sit in shipping containers for 6 weeks, 2 of those weeks being late”? It was pointed out further, what are you going to do if they are out of spec? Again, remember this is our highest profit margin product, the one that can and will make or break a Q-report.
The decision was ultimately made to override the Pur. Manager and make it in house, but this type of nonsense is typical of what manufacturing and process engineers have been dealing with for the better part of a decade, or more.
Amazingly, US based manufacturers can and are competitive in many regards. The problem is, upper management is constantly moving the goal posts on us, because they are hell bent on the idea that off-shoring is cheaper. Little do people realize how much corporate politics and bending of numbers is really involved.
“they are hell bent on the idea that off-shoring is cheaper”
Staying in vogue means never having to think.
“Worldly wisdom teaches that it is better for reputation to fail conventionally then to succeed unconventionally.” – Keynes, as always, says it best
Well gs, this is a perfect Jeopardy question.
“What is make-buy?”
You went through this entire explanation of how “Purchasing” was screwing the company by coming in with a miniscule better bid. The nonsense is with you my friend who appears to lack knowledge of the fixed costs of your facility. The only time it makes sense to source outside of a facility is if, if the purchased price + the fixed cost of the facility apportioned to that price is less than the cost of making it in-house. For all intents and purposes Purchasing “may” have been right if you did not do this type of analysis.
Purchasing is not at fault for presenting alternatives, management is for not understanding the costs of manufacturing in their fricking facility. How do you know you made the right decision after all of the theatrics?
Just a “Drucker-type” manufacturing through-put-analyst.
You are as tone deaf to my thesis as the purchasing people I was talking about.
I am well aware of the fixed costs, per hour, per sq foot of manufacturing space. That is something internally, we manufacturing employees have to use in our justifications for process changes or equipment, etc.
And, If you read what I wrote, the first issue is I can not change or bend those numbers. Unlike what I illustrated, purchasing playing accounting games.
Again, the larger issue was, even if said component was xx$ cheaper, it may in fact be disrupting your manufacturing process. When you are talking JIT, LEAN, DEMAND FLOW or whatever other current process buzz words for zero inventory, what good is a cheaper part if it doesn’t get delivered on time, and does not meet quality specs?
The issue you will hear from US based manufacturing engineers and process engineers is that of double standards. Holding of internal quality standards here, and products delivered via supplier are a different set of standards (deviations tend to be standard practice at the supplier level, especially when its coming by shipping container).
If you tell me I can manufacture a part .005-.010 of an inch looser tolerance(which parts from overseas supplies inevitably end up being delivered at), I will tell you that part just got 10-15% cheaper to manufacture, and scrap rate just went to zero.
It boils down to this “Tell me what game were are playing, so I know the rules I am dealing with.” We could be much more competitive manufactures in this country if product designers and purchasing knew the full impact of their decisions.
In many instances purchasing departments don’t get a bonus, or a feather in their cap, for keeping things in house, just as loan servicers don’t get paid to do loan mods, they get paid to foreclose.
btw, this is what a Chinese progressive die looks like. This type of stuff still exists to this day.
http://www.youtube.com/watch?v=yL1AgOqnYYE
While many out there are impressed with parts of the auto and semi-conductor industry, many of china processes are still not advanced. Hence, bad quality materials being used, bad processes etc. Not all of their manufacturing is yet advanced.
Again GS:
What is “Make-Buy”
If you can not answer the question, you have no basis for your ascertions. This is the basis and everything else is secondary. Its simple and not accounting or economics. If your price is too high and someone else takes the business, you still lose and you eventually die.
If your process can not make it, than you MUST change your process (regardless of YOUR process) or you die by the wayside. You do not have a choice, either evolve or go out of business. Plain and simple.
I am manufacturing and I love the pontificating of engineers, sales, and accountants. I am where the rubber meets the road who attempts to make your dreams a reality.
I really do care what you are and you sound like many of the financial people I run into . . . too much into themselves. So spare us the sanctimonious attitude as an engineer who designs something which can not be manufactured in the plant he works in today. You are a large part of the reason manufacturing has disappeared in the US. Get a grip old timer in retirement, your time has passed, it passed you by, and you failed to make things better during your watch.
“His example was the emergency measures taken when a valve got stuck at Three Mile Island. The efforts to ameliorate the situation led to the meltdown. The only way to make a tightly coupled system less risky is to de-couple it, which will also make it less efficient on an ongoing basis.”
This is a small point, but you shouldn’t be crediting Bookstaber for this — his example, and indeed his broader argument, was taken from the work of Charles Perrow, who identified and defined this problem long before Bookstaber did. Bookstaber’s book, good as it was, was really just an extension of Perrow’s work to finance (which Perrow himself had already written about). You should be giving Perrow credit here.
It’s not just in manufacturing sector that this occurs. The IT sector has been shipping functions and jobs overseas for twenty years and the rate of transfer is still increasing. Most of these outsourced facilities are in countries with known political and infrastructure risks for example, India and Pakistan, China and the demise(?)of the CP and so on. The assumption that because these functions are electronically connected then they are safer ignores the easy with which these links can be severed. A few years back an undersea fiber optic cable in the Indian Ocean was damaged causing massive disruptions to companies in Europe and the US. That’s another high impact risk that is being down played.
I agree with this in principle, but what about the powers inherent in an oligopoly? As I was reading, what came to my mind was the actions by oil refiners and gasoline wholesalers, reducing their on-hand supply. If prices DO go up because of dislocations or short-term supply shocks, they just pass those costs on to consumers.
Couldn’t this happen in markets dominated by a few producers, particularly for products with very little demand elasticity?
And anyway, who cares if the supply chain is prone to risk? There’s always a bailout waiting in event of any “whocoodanode” eventuality.
It looks like the MOTU have decided that it’s time for the tough to get going. This was predictable:
From zerohedge
Some foreign bankers, flush with money, are fleeing fast, some on private jets. BNP Paribas, Standard Chartered and Morgan Stanley were among banks whose staff have left since Friday, according to industry sources.
Thousands of people have inundated private jet companies with requests for evacuation flights, sending prices surging.
“I got a request yesterday to fly 14 people from Tokyo to Hong Kong … they did not care about price,” said Jackie Wu, chief operations officer at Hong Kong Jet, a newly established private jet subsidiary of China’s HNA Group.
A chartered plane from Tokyo to Australia, one way, was $265,000, 20 percent higher than usual, he said.
Systems that have a long term survival give a huge premium to robustness and redundancy over efficiency any day of the century.
That is why it was kind of amusing to note the baffled reactions of the media and would-be geneticists when the human genome was finally decoded: these people couldn’t believe how much, ahem, “junk” there was in the genome.
No shit, Sherlock!
You just don’t roam this planet from the Rift Valley to Siberia, going through the Arabian desert, the Younger Drias and all these climate changes, natural catastrophes, droughts and famines without a hefty dose of genetic robustness and phenotypical adaptability.
Duh!
In addition to the problems that individual companies can run into with overly tight supply chains, doesn’t this problem create an overall social problem.
Ideology and textbooks say that if the individual companies do what is best for them, the needs of society as a whole will be met automatically, but there are a lot of needs for overall resilience and spare capacity that do not seem to be getting met.
Somewhat OT:
I don’t ordinarily read MarketWatch because it appeals to the neophyte “free-market” generation with their ingrained ideology. But I came across this:
FDIC’s Bair tackles hostile crowd of bankers
http://www.marketwatch.com/story/fdics-bair-tackles-hostile-bankers-2011-03-16
The banking industry is intent on destroying it’s host to survive rather than providing legitimate business function that would allow everyone opportunity to grow and thrive.
Not to be smug, but honestly, the way things are headed, community banks is a non issue because they will be extinct.
Point is, the way things are now, smaller community banks will be gone in 5-10 years. Further, Bruce Krasting has a great article on Credit Unions. Credit unions are headed the way of the do do bird to, now that they can turn themselves into a bank at the blink of an eye. And thus be gobbled up by a FHC/BHC.
In the immortal words of an acquaintance that sits on the board of directors of a community bank, “Anyone with less than a billion in assets will no survive.”
Not an exactly encouraging picture is it.
TBTF, TOO BIG TO SAVE, how about just to damn big.
While that may be true about community banks, credit unions are owned by members and do not operate as for-profit entities like investment banks. Their profits are returned to members, and they are far more accountable and accomodating to members. I don’t see them going away anytime soon.
gs,
I just read the article and it is interesting. Especially how a troubled CU can transform into a mutual savings bank in the morning and merge with a commercial bank by afternoon. While there will no doubt be many casualties, I still believe there will be many healthy CUs to continue doing well. I know they haven’t been happy about the punishment they’re forced to take in light of commercial bankings’ foibles, but in the end there are bound to be losses of weaker CUs in order to shore up the NCUA’s ability to insure the broader range of healthier ones. Sacrificing some CUs to the commercial banking sector is all part of remedying the banking collapse of 2008. I don’t believe they will go the way of the dodo.
In his book “Where Do Good Ideas Come From: The Natural History of Innovation.” Steven Johnson after careful study of the settings where innovation occurs offers the conclusion that the open collegiate peer reviewed network of universities has proved to be the dominant source of innovation and invention. Second best was the private company research departments. They were second because privacy was considered important to protect investment so open-ness took a hit. The moral of this story, therefore, being that protection from bottom-line efficiency snafu’s comes best from democratization of the organisation where all are encouraged to contribute their ideas, including fears, to best protect against abrupt change in their organisation’s operating environment. This is the old Peter Senge “learning organisation” concept re-injected. Autocrat’s like Fred The Shred are in consequence disasters waiting to happen and this explains why the average life expectancy of corporations is only 40 years and new innovations in terms of marketable products and services are more likely to arrive from newly formed companies ( Eric D. Beinhocker “The Origin of Wealth.”).
Ages ago I built a stochastic inventory model. Te interesting thing was that supply delivery times follow a gamma (ie skewed with a long tail) distribution. This means there are finite probabilities of serious delivery delays.
Now if, just as in the financial sector (ah lah that nonsense, the Scholes Black equations) you assume gaussian (normal) distributions in your model, then you can underestimate supply delays by literally orders of magnitude.
After that point it is only a matter of time until you roll ‘snake eyes’ and if it is for something critical then life can get real interesting. Tightly coupled systems are like walking around with a live grenade in your hand … with the pin pulled out.
skeptic:
You point to an interesting issue amongst statistics interpreters. If the data distribution is not normal, one has to use non-normal techniques to analyze the data. The outcomes in a supply chain are numerous and increase based upon the length of it.
What supply chain planner plans for a typhoon delaying their shipment out of China, the Philippines, Indonesia, Thailand, etc.?
In practical terms, the problem you have as a manager is this. For whatever reason, local suppliers are not competitive on quality and price. It is probably not simply that they are more expensive than the components bought in from elsewhere, the supplier’s whole approach is less good, less flexible, poorer quality, inability to flex supply.
So what are you to do? You can either go down with your suppliers, which is what Marks & Spencer did in the UK. They stuck with a buy British policy for a long time. The result was the clothes were poorer quality and higher priced, so people stopped buying. In the end they had to redo their sourcing.
Or you can change suppliers. At that point you discover your new suppliers because of their flexibility will allow you to carry less inventory. So you do it. The thing that drives you is avoiding inventory writeoffs. That is why you do not want to carry large quantities of it. It leaves you exposed to market fluctuations in a big way.
People don’t understand what is going on in these situations. You automate not to save labor costs but to improve quality. You reduce inventory only partly to reduce capital employed, but also and importantly to avoid inventory writeoffs. You end up sourcing not because the new supplier is cheaper, but because the whole business model lowers your costs, not just in terms of the prices paid, but lowers your internal costs.
Now, as a country you can put tariff barriers in place of various sorts. What you then have to be prepared for is an internationally uncompetitive industry. For instance, it could be autos, as it was in the UK. Any user of cars or trucks in the UK for years and years ended up paying double what their competitors in Europe were paying.
You go into a black hole of autarchy. You have effectively told your local suppliers they have no competition, they behave accordingly. Innovation stops. You end up in Eastern Europe.
And when your citizens travel, if you still let them, they see everyone else living much better. It doesn’t last anyway.
Or lerogue:
You bear the costs of a population largeky unemployed and unproductive. At what point does the percentage unemployed and on the dole drag down the economy. Does a company that lowers it costs by going overseas with production, keeping its profits offshore, and coming back to sell to the worlds largest consuming economy owe something to that infrastructure and economy?
Should we really be surprised events have culminated as they have.
When you worship the almighty profit margin over all else, results like this become inevitable.
When you turn over PUBLIC utilities to PRIVATE business, chaos is bound to ensue.
PRIVATE companies are not dedicated to the cause, they are dedicated to the profit margin. Once there is no profit margin, goodbye.
As the need for profit arises, the need for competent engineers goes down. As competent engineers are not swayed by profit motives and consider it blasphemy, actually.
“If you don’t have the time to do it right the first time, where are you going to find the time and money to do it a second time?”
So as we kick the can merrily down the road, whistling past the graveyard, promoting friends and family over accomplished performers, acting like if you don’t acknowledge it, it doesn’t exist, thinking we are the smartest people in the room, while not noticing the room is slowly, ever so slowly, filling with radioactive gas……….til
BOOM
whocuddaknowd.
foghorn longhorn
Think about what you are saying. Was it bloodsucking private enterprise that operated Chernobyl or for that matter Windscale before it? Do you know what the accident rate is in the state operated Chinese coal mining sector?
State ownership of facilities is not a recipe for safety or responsibility. Neither is private. The advantage of private however is that you can have a system of independent checks and balances. This is what produces safety.
As a for instance, a legally mandated insurance policy in effect, and an insurance sector that will not insure bad risks.
Whoever said that nuclear plants should not be able to operate without liability insurance had got it right. Having them run by government without insurance would be wrong.
“The advantage of private however is that you can have a system of independent checks and balances.”
The advantage of public, however, is that you can have a system of independent checks and balances.
Keyword in both cases : ‘can’.
One miniscule advantage to public enterprise is that real persons have a slightly better chance to discover what management is really doing, at least the formal power to compel correction.
With every country trying to take the “free” out of global trade by rigging it to their advantage surely what we actually have is a race to the bottom, or a race backwards via Price Point. So, for example, China gets all the manufacturing plant and research facilities but the bulk of its people live on pittances and those in former developed countries hold out begging bowls because demand has all but collapsed. I’m sure we can do better by using partnering to maintain innovation and sensible efficiency.
Hi Yves:
Hmmmm. This statement bothers me.
“the idea of wringing out production costs”
The costs of manufacturing were never really the issue today. Lets again understand the three components of manufacturing which you have heard me repeatedly recite. Materials, Overhead, and Labor and of the three, Labor is the least of our costs impacting the cost of manufacturing. Yet we see fir to continue whacking it as if they are make $75/hour as Delphi’s Miller suggested. Those days of inefficient manufacturing involving masses of Labor have been long gone in the US and in general manufacturing. Since the sixties Labor has been a dying issue.
Being involved in electronis today and automotive, I am not seeing the same issues Tett discusses in the article. We have checked Renasis, Freescale, IR, Kemet, NEC, NXP, Amphenol, Tyco, Atmel, etc. None of the plants are near the site and they are intact. What is an issue are the rolling blackouts and people helping relatives get out and away from the site of the melt down. How is this different than an earthquake in California or a hurricane in the Gulf? Its not different as we would have the same problem just closer. Building on faults and in areas prone to issues in weather, etc have always been an issue. The population of the US lives on 5% of its land mass (300 Lillion and Counting – Joel Garreau) and much of that area has issues. Business locates where they can be the most profitable.
Good supply chain and purchasing managers plan for a typhoon in the China sea which will cause a freighter is stop in Kong Kong to ride it out. Good supply chain people plan 5 weeks bu ocean and to get through customs knowing full well it may be 4 weeks much of the time. Good engineers and supply chain managers duel source components so they have flexibility ins spite of investors.
As far as banking, the skewing of productivity gains has been towards capital over labor since the eighties. If we wish to be manufacturing again change the paradigm and make manufacturing more profitable than capital appreciation.
I am a design engineer. I deal with failure modes, factors, of safety, robustness of design, redundancy, reliability etc. all the time.
A few of my thoughts that I believe can be seen in business management.
1. People have a REALLY hard time separating potential minor failures from major failures during planning stages. I often have to sit in meetings and really lay it on the line: If this happens, can you live with the consequences which would be these? It usually takes a while before the real decision making regarding minor versus major failure modes can be done.
2. People do not equate factors of safety with potential failure. Instead they simply assume that the engineer is being his usual conservative, expensive self. However, there is a lot of empirical data that provides estimates of reliability for different ranges of factor of safety. This has actually been codified in buidling codes with limit state design using partial factors of safety based on different probabilistic characteristics of loads and resisitance. Unfortunately, most managers just assume that bigger factor of safety simply costs more money with little benefit – after all it didn’t fail last time we did this. We see this in banking where the reserve ratio is effectively a factor of safety for a bank – they are constantly trying to pull that reserve ratio down as much as possible because it only costs them profits – they don’t see benefits in remaining solvent in a crisis because it won’t happen to them because they are too smart.
3. Which brings up a key third point, namely the recency bias. Most managers cannot conceive of the world in probabilistic terms – it must be black and whie; success or failure. So executing a risky behavior and not having it fail immediately means that it is ok. The concept that having it fail one times out of 10 being disastrous is foreign to their thought process. Engineers understand that there are often indeterminate miscellaneous things occuring at a random level that can mean the difference between success or failure of a single test. There is no guarantee that the small factor that allowed it to succeed this time will be present the next time. Managers who need everything summarized as black and white choices on a single sheet of paper get very surprised the next time when it doesn’t work out.
Hi bloggers, I’m in need of several options for fixing an old vehicle or perhaps scrapping it. Can someone direct me in the suitable direction where I might find some reliable information.