Tag Archives: Economics

Lean Inventories Do Not Excuse Failing to Deliver

Low inventory levels do not mean failing to have products available for customers. Now, if you manufacturing in huge batches and can’t respond to customer feedback then it might mean failure to predict customer demand does mean failure to deliver. But lean thinking has shown how to avoid this problem. People need to adopt lean manufacturing practices and gain the benefits of low inventory levels without the costs of failing to deliver what customers want.

Sorry Santa, We’re Out of Stock

The “it” gifts this year could swiftly vanish from store shelves, as retailers, with nightmares of Christmas 2008 markdowns dancing in their heads, have slashed inventories to some of the leanest levels in recent memory.

Retailers themselves are battle-scarred by last year’s fourth-quarter fiasco. Following the financial meltdown of September 2008 and amid the most severe economic crisis since The Great Depression, consumers retrenched.

That’s when stores hit the markdown panic button, slashing prices upwards of 75 percent. The result was the worst holiday selling season since 1970, according to The International Council of Shopping Centers.

But although leaner inventory levels should drive profit margin gains this holiday, “retailers might not have enough inventory to fully satisfy demand,” said Citigroup retail analyst Deborah Weinswig, in a research note. It is a risk they are willing to take.

“They would rather lose a sale than take the markdowns they had last year,” said Goldman Sachs analyst Adrianne Shapira.

The retailers need to design their systems with lean thinking in mind (not lean – as in cut expenses without thought). And they need to work with suppliers using lean manufacturing principles.

Related: Be Thankful for Lean ThinkingGuess What? Manufacturing in the USA is a Good IdeaTesco: Lean ProvisionZara Thrives by Ignoring Conventional WisdomOperational Excellencelean manufacturing articles

How ‘Buy American’ Can Hurt U.S. Firms

How ‘Buy American’ Can Hurt U.S. Firms

Canadian communities angered by perceived American chauvinism have started a Buy Canadian campaign to exclude U.S. bidders from municipal contracts. “If that sticks, well, there goes 25% of my business,” said Mr. Pokorsky. “To me, Ontario may as well be Indiana.”

Halton Hills, a town of 50,000 people about 25 miles west of Toronto, is one of about a dozen Canadian communities forging ahead with plans to amend their procurement policies to freeze out American companies. “We won’t be taking any products from any country that is discriminating against us,” said Mayor Rick Bonnette.

Aquarius gets a lot of its parts from abroad, particularly from Canada. Such integration became even tighter after the North American Free Trade Agreement in 1994 joined the U.S., Canada and Mexico in a free flow of goods and services.

Trojan Technologies Inc. of Ontario, North America’s dominant maker of ultraviolet disinfection equipment for treating sewage, is a key supplier to Aquarius and other companies. Because of the Buy American provisions, Trojan has had to shift production to a plant in Valencia, Calif., a move that has resulted in delays and additional costs being passed on to customers, said Trojan executive Christian Williamson.

The challenges of trying to legislate market choices such as what products to buy are difficult. It is understandable to want to direct stimulus funds to improving the economy today in the USA. Creating legislation that can cope with interactions and unintended consequences inherent in such attempts is not easy.

Related: China and the Sugar Industry Tax ConsumersNew Look American ManufacturingRussell Ackoff Webcast on Systems ThinkingWhy Congress Won’t Investigate Wall Street

Loan Default Rates Continue to Increase

chart of loan default rates 1998 to 2009Chart showing loan default rates for real estate, consumer and agricultural loans for 1998 to 2009 by the Curious Cat Investing Economics Blog, Creative Commons Attribution, data from the Federal Reserve.

Default rates on commercial (up another 151 basis points) and residential (93 basis points) real estate continued to increase dramatically in the second quarter. Credit card default rates increased but only by 20 basis points.

Real estate default rates exploded in 2008, in the aftermath of the financial market meltdown. In the 4th quarter of 2007 residential default rates were 3.02% by the 4th quarter of 2008 they were 6.34% and in the 2nd quarter of this year they were 8.84% (582 basis points above the 4th quarter of 2007). Commercial real estate default rates were at 2.74% in the 4th quarter of 2007, 5.43% in the fourth quarter of 2008 and 7.91% in the 2nd quarter of 2009 (a 517 basis point increase).

Credit card default rates were much higher than real estate default rates for the last 10 years (the 4-5% range while real estate hovered above or below 2%). Now they are over 200 and 300 basis points bellow residential and commercial default rates respectively. From 4.8% in the 3rd quarter 2008 to 5.66% in the 4th and 6.5% in the 1st quarter of 2009.

Small steps to reduce the large consumer debt have been made recently: consumer debt declined a record $21.5 billion in July. Since April of 2008 consumer debt has been reduced by $70 billion in the USA. Unfortunately we still have $2.47 trillion or
$8,233 for every person (using 300 million as the total population).
Data from the Federal Reserve

Blame the Road – Not the Person

The system is responsible for 90, 92, 94, 97% of problems – W. Edwards Deming. Fix the system, don’t blame the people. When you seek system fixes you approach situations differently than if you search for people to blame.

By the way, I am often asked about the data supporting Deming’s contention that the system was responsible for 97% of the problems. This statement was not based on a set of data but on Dr. Deming’s decades of experience. And he increased the percentage over time – as he learned more.

Roads that are designed to kill

Half blamed the runner, saying she should not have been running in the street at that hour. Half blamed the driver, for not paying close enough attention. Not a single writer blamed the road.

Your streets are designed to kill people.

Vision Zero started about 30 years ago, when traffic safety researcher Claes Tingvall got the idea that we didn’t have to accept road traffic deaths as a fact of life. Tingvall and his colleagues said that these deaths were not “accidents’’ but were predictable and preventable. And they set out to prove it.

One of the ways they began to protect people was to put barriers down the center of two-lane roads. They showed that this could be done cheaply. When Mylar – a strong polyester film – is supported by closely spaced plastic poles, it can keep cars from crossing the median. When the Swedes used this type of center barrier to separate the traffic going in opposite directions, they effectively prevented head-on collisions and the death rate on these roads fell by 70 percent to 80 percent.

Global health research shows more improvements can save lives. For example, Ghana put in rumble strips – small bumps spaced closely together – across all the roads leading into the capital city of Accra, reducing fatalities by 35 percent. Research has shown that speed bumps on roads are one of the “best buys” in all of global health.

Most people think we are doing all that can be done to keep our roads safe. They are wrong. Road traffic injuries kill more than a million people a year worldwide, including 40,000 a year in the United States.

Is a situation killing 40,000 people in the USA a year a health care issue? It sure seems to me it would be. It probably isn’t a disease management issue though (some might try to say bad roads are a disease but I wouldn’t say that). I think this is one, of many examples, that shows that we have a disease and injury management system not a health care system (in addition to illustrating systems thinking, effective root cause analysis, PDSA, innovation, respect for people…).

Related: Find the Root Cause Instead of the Person to BlameTraffic Congestion and a Non-SolutionChecklists Save LivesSaving Lives: US Health Care ImprovementThe Economic Benefits of Walkable CommunitiesSWAT Raid Signs of Systemic FailuresSystem Improvement to Respond to the Dynamics of Crowd DisastersThe Leading Causes of Death

CEOs Want Health-Care Reform

Decades ago Dr. Deming emphasized the deadly disease of excessive health care costs in the USA. Since then, year after year, the situation has become worse (reaching $2.2 trillion in spending in 2007 – 16.2% of GDP). During that time senior executives has put forth very little serious effort (in comparison to the huge cost) to fix this problem. Finally, in the last few years, more and more senior executives are actively moving to address the ever worsening crisis (including, Howard Schultz, CEO at Starbucks).

They seem to be realizing that hoping the problem will just fix itself is not a great strategy. Finally senior executives are realizing they need to have the government address the systemic failures. Those executives need to keep up their efforts because those seeking to retain the system that doesn’t work, because they personally benefit from it, have been doing a great job of preventing progress for decades. Until a critical mass of senior executives demand change from Washington the chance of improving the relative performance of the USA health system in comparison to other countries is very bleak (we have just been getting more expensive and less effective [relative to other countries] over time).

CEOs Secretly Want Health-Care Reform

Carl T. Camden, CEO of Kelly Services (KELYA). Managing insurance for his vast, geographically dispersed workforce of temporary workers is horrendously expensive, he complains: “My health-care costs total more than my profits.”

But in private, “CEOs overwhelmingly want out of this business,” says Benjamin Sasse, an Assistant Secretary of Health & Human Services under President George W. Bush who’s now an assistant professor at the University of Texas at Austin. “They just do not want to be seen as more willing to dump [benefits] than their competitors are.” Sasse says many CEOs he has talked with would even pay a new tax if it got them out of the insurance business.

Related: Many Experts Say Health-Care System Inefficient, WastefulArticles on Improving the Healthcare systemApplying Disruptive Thinking to the Healthcare CrisisOur Failed Health-care System
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Why Congress Won’t Investigate Wall Street

Why Congress Won’t Investigate Wall Street

The famous Pecora Commission of 1933 and 1934 was one of the most successful congressional investigations of all time, an instance when oversight worked exactly as it should. The subject was the massively corrupt investment practices of the 1920s. In the course of its investigation, the Senate Banking Committee, which brought on as its counsel a former New York assistant district attorney named Ferdinand Pecora, heard testimony from the lords of finance that cemented public suspicion of Wall Street. Along the way, the investigations formed the rationale for the Glass-Steagall Act, the Securities Exchange Act, and other financial regulations of the Roosevelt era.

Over the years, federal agencies have been defunded, their workers have grown dispirited, their managers, drawn in many cases from antiregulatory organizations, have seemed to care far more about industry than the public.

And while today’s chastened Democrats might be ready to reregulate the banks, they are no more willing to scrutinize the bad ideas of the Clinton years than Republicans are the bad ideas of the Bush years.

“We may now need to be reminded what Wall Street was like before Uncle Sam stationed a policeman at its corner,” Pecora wrote in 1939, “lest, in time to come, some attempt be made to abolish that post.” Well, the time did come. The attempt was made. And we could use that reminder today.

Well said. The incredibly dire current economic results should encourage some thought about choices we have made. The failures of the political leaders (putting their donors interests above the public interest) is something that should be investigated seriously. The economy declined 6.3% in the fourth quarter of last year and 6.1% in the first quarter of 2009. And we have paid several hundred billion to bail out bankers; the same bankers that had congress repeal the regulation that prevented such enormous failures in the past.

It would be nice if we at least learned our lesson, but I don’t think we are remotely close to learning our lesson. There seems to be some tilt away from the most egregious excesses of the last 25 years of financial deregulation. But only minor adjustments around the edges seem to be under consideration at this time.

Related: Failing to Understand the Capitalist Economic ModelLooting: Bankruptcy for ProfitLeverage, Complex Deals and ManiaLobbyists Keep Tax Break for Billion Dollar Private Equities Deals (2007)Congress Eases Bank Laws (1999)Why Pay Taxes or be HonestFailure to Regulate Financial Markets Leads to Predictable ConsequencesLosses Covered Up to Protect BonusesBankers Bet Billions and Lose (guess who pays? Not them)Uncertain Economic Times

USA Spent $2.2 Trillion or $7,421 Per Person on Health Care in 2007

Health spending in the United States grew 6.1 percent in 2007, to $2.2 trillion or $7,421 per person.
For comparison the total GDP per person in China is $6,100. This continues the trend of health care spending taking an every increasing portion of the economic output (the economy grew by 4.8 percent in 2007). This brings health care spending to 16.2% of GDP (which is yet another, in a string of record high percentages of GDP spent on health care). In 2003 the total health care spending was 15.3 of GDP.

With the exception of prescription drugs (which grew at 1.4% in 2007, compared to the 3.5% in 2006), spending for most other health care services grew at about the same rate or faster than in 2006. Hospital spending, which accounts for about 30 percent of total health care spending, grew 7.3 percent in 2007, compared to 6.9 percent in 2006.

Spending growth for both nursing home and home health services accelerated in 2007 (4.8% v. 4.0%). Spending growth for freestanding home health care services increased to 11.3 percent. Total health care spending by public programs, such as Medicare and Medicaid, grew 6.4% in 2007 v. 8.2% in 2006. In comparison, health care spending by private sources grew 5.8% compared to 5.4%.

Private health insurance premiums grew 6.0 percent in 2007, the same rate as in 2006. Out-of-pocket spending grew 5.3 percent in 2007, an acceleration from 3.3 percent growth in 2006. Out-of-pocket spending accounted for 12.0 percent of national health spending in 2007. This share has been steadily declining both recently and over the long-run; in 1998, it accounted for 14.7 percent of health spending and, in 1968, out-of-pocket spending accounted for 34.8 percent of all health spending.

The costs for health services and supplies for 2007 were distributed among businesses (25%), households (31%), other private sponsors (4%), and governments (40%).

Decades ago Dr. Deming included excessive health care costs as one of the seven deadly diseases of western management. We have only seen the problem get worse. Finally it seems that a significant number of people are in agreement that the system is broken. Still, admitting the system is broken is not the same as agreeing on how to fix it. The way forward to workable solutions still seems very difficult.

Full press release from the United States Department of Health and Human Services.

Related: Many Experts Say Health-Care System Inefficient, WastefulInternational Health Care System PerformanceUSA Paying More for Health CareHealth Insurance Premiums Soar AgainPBS Documentary on Improving Hospitals

Looting: Bankruptcy for Profit

Looting: The Economic Underworld of Bankruptcy for Profit by George Akerlof, University of California, Berkeley; National Bureau of Economic Research (NBER) and Paul Romer, Stanford Graduate School of Business; National Bureau of Economic Research (NBER). George Akerlof was awarded the 2001 Nobel prize for economics. This is the abstract to their 1994 paper:

During the 1980s, a number of unusual financial crises occurred. In Chile, for example, the financial sector collapsed, leaving the government with responsibility for extensive foreign debts. In the United States, large numbers of government-insured savings and loans became insolvent – and the government picked up the tab. In Dallas, Texas, real estate prices and construction continued to boom even after vacancies had skyrocketed, and the suffered a dramatic collapse. Also in the United States, the junk bond market, which fueled the takeover wave, had a similar boom and bust.

In this paper, we use simple theory and direct evidence to highlight a common thread that runs through these four episodes. The theory suggests that this common thread may be relevant to other cases in which countries took on excessive foreign debt, governments had to bail out insolvent financial institutions, real estate prices increased dramatically and then fell, or new financial markets experienced a boom and bust. We describe the evidence, however, only for the cases of financial crisis in Chile, the thrift crisis in the United States, Dallas real estate and thrifts, and junk bonds.

Our theoretical analysis shows that an economic underground can come to life if firms have an incentive to go broke for profit at society’s expense (to loot) instead of to go for broke (to gamble on success). Bankruptcy for profit will occur if poor accounting, lax regulation, or low penalties for abuse give owners an incentive to pay themselves more than their firms are worth and then default on their debt obligations.

That is exactly what has been happening. People that are not honorable and are given huge incentives to risk the future of all the other stakeholders for immense personal gain will do so.

via: New York Times Pulls Punches On Wall Street Bubble Era Pay

Related: CEOs Plundering Corporate CoffersObscene CEO PayWhy Pay Taxes or be HonestTilting at Ludicrous CEO Pay 2008Excessive Executive Pay

Big Failed Three, Meet the Successful Eight

Big Three, Meet the “Little Eight”

The 1,300-acre plant, in which Toyota has invested $5.3 billion, produces a car roughly every minute. Georgetown’s population has doubled. In fields where farmers once grew tobacco and raised cattle, McMansions, apartment complexes, and condominiums have sprouted. A 150,000-square-foot upscale retail center is rising near the Toyota plant, the better to serve its 7,000 employees.

In San Antonio, the Toyota Tundra plant lay idle for three months this fall, though Toyota hasn’t laid off anyone. Instead, according to Richard Perez, president and CEO of the Greater San Antonio Chamber of Commerce, Toyota offered the city “a whole bunch of folks who need to get busy.” (San Antonio put them to work on beautification projects.) Of course, Toyota has resources to act in a more paternalistic manner – in part because the parent companies aren’t saddled with the burdens of providing health care and retirement for workers in home markets.

This is not behaving in a paternalistic manner, this is behaving in an honorable manner with the other long term stakeholders that have a shared interest in the long term success of the company. When managers and executives do their jobs the company will succeed in good times and have a plan for bad times and will deal effectively with obvious long term issues. Health care costs, pensions costs, and bad labor-management relations have been obvious critical issues to solve for GM, Ford and Chrysler for decades. The pathetic job those 3 have done with those, and other issues (they still don’t understand how to work with suppliers, how to stop the obsessive focus on quarterly profits, how to demand honorable behavior [not looting] from senior executives…), lead to their current situation.

The poor economy leads the the situation you now see with Toyota and Honda: profits being cut, having to put in place plans to retain employees while they are not needed to produce output today, etc.. You don’t see companies needing billions to survive a few months unless they were incredibly poorly lead. And those leading them were paid many times more than those that led Toyota and Honda. They have had decades to act responsibly. They have failed. And there failure will be felt by those that enabled them to take huge pay packages that were not warranted. They should be ashamed.
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Thanksgiving: Micro-financing Entrepreneurs

photo of Frew Wube in Ethiopia

This is a post from my Curious Cat Investing and Economics Blog. For me, giving back to others is part of my personal financial plan. As I have said most people that are actually able to read this are financially much better off than billions of other people today. At least they have the potential to be if they don’t chose to live beyond their means. Here are some of the ways I give back to others.

Kiva is a wonderful organization and particularly well suited to discuss because they do a great job of using the internet to make the experience rewarding for people looking to help – as I have mentioned before: Helping Capitalism. One of my goals for this blog is to increase the number of readers participating in Kiva – see current Curious Cat Kivans. I have also created a lending team on Kiva. Kiva added a feature that allows people to connect online. When you make a loan you may link you loan to a group.

I actually give more to Trickle Up (even though I write about Kiva much more). I have been giving to them for a long time. They appeal to my same desire to help people help themselves. I believe in the power of capitalism and people to provide long term increases in standards of living. I love the idea of providing support that grows over time. I like investing and reaping the rewards myself later (with investment I make for myself). But I also like to do that with my gifts. I would like to be able to provide opportunities to many people and have many of them take advantage of that to build a better life for themselves, their families and their children.

The photo shows Frew Wube, Haimanot and Melkan (brother and two sisters), an entrepreneur that received a grant from Trickle up. Trickle Up provides grants to entrepreneur, similar to micro loans, except the entrepreneur does not have to pay back the grant. They are able to use the full funds to invest in their business and use all the income they are able to generate to increase their standard of living and re-invest in the business.
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