Why the world is less ready for crises

This little story starts from an overheard conversation in a supermarket today. Warning this posts mentions toilet paper.

Customer: When will you have toilet paper back on the shelves?

Staff: Not for a week or more. We need to bring some in from overseas. You know, we adjust stock levels every 3 months normally

That brought to mind the way we do business now. It is all about just-in-time supply chains. Only stock what you need to fulfil established demand and manufacture to a forward order book.

It is a way of getting that last little bit of competitiveness in a saturated market for commodities and it has proven successful from a commercial perspective. However, the downside of such efficiency is that there is little capacity to respond to a crisis. A crisis like the threat of a viral epidemic/pandemic.

The nature of a crisis is that it is largely unpredictable. You know it will happen at some time but not when. Timing is everything for just-in-time supply chains. When you have everything locked in for 3 months ahead it can take at least half that time to change manufacturing priorities or shipping schedules – even more so for low value and high bulk items that are transported by sea.

In Australia the run on toilet paper, hand sanitiser and facial tissues is a prime example of how a crisis can disrupt a supply chain in a way that is hard to predict. Who would have thought that toilet paper would be the thing that would be in demand for a chest infection? Not the WHO. Not medical professionals. Not even social media. Yet, there was a massive buy up of toilet paper and now it is going to take a long time to get new stocks.

Meanwhile some houses will have a large pile of toilet rolls sitting around and creating a perverse demand profile for the supplier of toilet rolls. Right now there is high pent up demand and yet in the timeframe of 3-12 months the demand will be significantly less. the message to manufacturers is to hurry up and get a large stock into stores and then cut back supply by 50% or more for a year because so many people will have no need to buy it for a long time. The need for additional toilet paper due to the virus is highly unlikely to eventuate.

Hand sanitiser and tissues are a different thing. They are value added products and justify a higher price. They are less bulky and can be transported by air without too much additional cost. We will probably see these products on the shelves again quicker. Both are likely to be used more as a result of the virus so the supply chain is likely to adjust better.

This is just an example of how modern, efficient manufacturing and supply is not ready for a crisis. Put another way it is not structured well for handling risk. Let’s look at the flip side of this risk approach – fuel and oil supplies.

Most Governments mandate a minimum stockpile of oil and/or petrol, gas and inputs to electricity generation. This stockpile or reserve is needed in case of any number of “shocks” such as war, natural disasters, pandemics or similar regional or global crises. This makes sense because those commodities are clearly essentials necessary for national security. Toilet paper? probably not front of mind for strategic policy thinktanks.

The way to manage risks in a supply chain is to hold stock that lets you ride out a crisis that is mild to moderate. However, the way to make money and have your commodity manufacturing business survive in a globally competitive market is to do everything just-in-time. The two are almost mutually exclusive ways of doing business.

Are we happy?

What is happiness even…

This is a good question. Treat the questions below like a quiz. Consider your answer then have a look at what I have written. Do it in order please. Go for it. Comment.

Managing to an Inflation figure – Who does that benefit?

What is growing in price/cost? Investment products or daily consumption products?

In Australia, successive Governments since the 1970s have focused on Inflation as the main driver of monetary policy. Some of what I have been reading lately suggests that this is more about protecting established wealth than it is about protecting the general population. If this is the case then why are we stressing about inflation rather than GDP growth, which is a better indicator of how well most people are living?First, I want to refer to Capital in the 21st Century. The main tenet of this book is that Income Inequality has been traditionally high between the 10% “Upper” classes and the general population and that the level of inequality decreased between World War I and the 1970s. In that time the difference in total income between the Top 10% and the bottom 50% was smaller than the long term and this meant less inequality. One of the most important drivers for the decreased gap in income was that Inflation (not ignoring the effects of financial collapse on the Great Depression and destruction of public and private assets in the wars as major contributors or perhaps triggers) went from a fraction of a percent per annum to 10% or more. Inflation effectively eroded the value of inherited assets (property, shares and family businesses) relative to income from labour, which rose in line with inflation. The book covers the detail very well and my review covers the main points.

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Case for structural adjustment in Canberra IT business

In mid 2008, Sir Peter Gershon finalised a report into the efficiency and effectiveness of ICT in the Federal Government. That report was delivered to the Minister of Finance and responded to in late 2008. AGIMO was given a large role in the implementation of recommendations.

There is no doubt that the recommendations are good for the Government and promote operational efficiency across Agencies. The issues arise around the unintended consequences of action taken to implement the Gershon review, impacts of the global financial crisis and the required efficiency dividends from Agencies.

From 1997 through to 2007 the message from the Federal Government was clear. If the Private Sector could do the job then let them do it rather than employ Public Servants. Based on that, a large ICT focused industry developed in Canberra, accounting for at least 20% of the Private Sector employment in the ACT. Agencies were discouraged from employing permanent Public Servants. Now Gershon recommends the reverse in many ways.

The report makes no mention of the impact on the ICT services industry. As a result of the recommendation to employ contractors as Public Servants there has already been a noticeable reduction of work for people who were employed under the arrangements encouraged by the previous Government. There is a lot right about having Public Servants performing service delivery and technical roles that are ongoing and clearly defined. Issues arise around how it is implemented rather than the end result.

The amount of change to business related to this decision is in the order of $A300-500 million in the contracting businesses1. AGIMO held two consultation sessions on 30 Jan and 2 Feb with “Industry”. Prior to this the consultation had been with a select group of industry associations. The questions asked and the answers given suggest that there are a lot of unexpected consequences of the way Agencies are reacting to the Gershon Report.

There seem to be significant issues with what appears to be Policy on the run and it is quite unclear what AGIMO and the Government want from the Private Sector and therefore small companies in particular are unsure what they should be doing. On the surface, things look grim. AGIMO says that there will be significant opportunities in the medium term (after September) but it is still unclear what those opportunities are for and who will be best placed to participate.

What is good Public Policy in this area? Are we happy to risk losing a significant talent pool? Why should we look beyond the immediate impacts (that appear to be minor)?

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Capitalism is dead. Long live the king

The events of the past 6 weeks should mean that the world realises the near end to free market capitalism of Adam Smith etc (and perhaps expressed in its most ugly form by Gordon Gecko in the film Wall Street). I have pulled together a number of articles that I wrote in the past and put them into one post. Read or skim where you wish.

The argument given by “traditionalists” that the market is best able to decide should by now be finished. The market is clearly not able to do so in some circumstances. Markets measure specific things and they are not always the things that matter to people. We should stop asking if the common good or free markets are the choice. Economic Darwinism is a falsehood and therefore we should move on and just say we want the greater good. If that means regulation then so be it. We are not in the 19th century anymore and we can do better.

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When you vote you cannot avoid voting for politicians

There are two ideas going around as to where the word politician came from.

1- polis. the Greek word that refers to those who seek to influence public opinion. This is by far the most reputable idea, so I will ignore it :p

2 – Polit. To lie. I cant find any reference in any reputable book so I would like to offer this (frequently stated) explanation. It is supposed to come form Rome where “to polit” was to lie by pretending to tell people the things that they already know. This has also been called “The Big Lie” when referring to Nazi and Stalinist rhetoric.

Even if the second definition is totally made up, it is more true than not… witness the USA Presidential elections and the sad state of Australian politics for the past decade. Add to that what we have seen in Bejing, Tibet, Georgia, South Ossetia and Abkazia. They all show how “spin” is used to pretend that things are in some way comfortable to the audience being targeted while leaving the truth a long way behind.

When electing politicians, we usually get to choose from the least bad.

Shift in world power

p>Not only is Capitalism under siege but the supremacy of the USA as dominant world power is also looking like it might be at an end soon. Why do I say that when the USA is clearly the most powerful nation in military and economic terns?

the USA has been the top world power for about 70 years. They took over from Britain just before WWII and Britain took the mantle from France in the aftermath of Napoleon and had about 130 years at the top. Before Britain there was Spain, the Habsburg Empire and the Holy Roman Empire that lasted 280 years in one form or another. The Ottoman Empire was probably in the ascendancy for 3-400 years but slightly to the side of the Habsburgs. Then you go back to Greek and Roman times. 500 years for the Roman Republic and then 400 more for the Empire is a standout in longevity as well as influence. I will avoid the eastern empires here.

The common reasons that caused each of these empires to decline and be replaced with others seem to be:

  1. A decent into decadence and hubris
  2. Abuse of economic and military power causing fragmentation of alliances
  3. A culture building that said nobody else has anything good except us

In many ways you can see this in the USA now. Since the 1980s it has been the military and economic power but has steadily lost friends internationally by creating conflicts that suit its economic interests.

It has not been fatal but the signs have been there to see. Until 11 September 2001 and the subsequent wars “on terror” the USA was able to recover international respect and maintain its place as the world leader in most areas. In the last decade, the decline politically has been matched by a decline economically. This decline started in the 1970s and re-emerged in the 1990s and again in the past 3 years. Old industry and clinging onto old ways of doing things have limited opportunities. Still, the great ecomomic wealth of the USA was there to keep things going.

With the serious weakening of the USA economy and its “moral compass” in the past few years, it looks likely that the USA will rapidly decline in importance. Instead, it will be Asia, the subcontinent and possibly even Africa that will rise to make the USA relatively less important.

It will probably take another 10-20 years but it is likely that the USA will become more insular and its “adventures” internationally will be less and less supported by Europe, an emerging Russia and China. The effects of the trillion dollar bail outs on the USA economy and the Government will limit the ability to use Aid Diplomacy.

Where will it end up? We can look to France and Britain to see that after their decline (both due to wars and overreaching their capacity to manage large empires) they have become mature and solid international citizens that use their still large economic power and more limited military power judiciously and more in tune with other countries.

Wall St, we have a problem …

What is Governance? Government in so called democracies is about doing things for the people, of the people and by the people who are governed. At that level the accountabilities are with the Parliament, Senate, House of Representatives or whatever local variation exists. This is largely based on ancient Greek and Roman models with the major innovations being in the areas of how people get elected (see Democracy). Governance of Public Administration is also relatively easy to understand. If Public/Civil Servants are to serve the people they must server the Government and still do the right thing, personally and for the greater good. Failed States fail mainly for poor administrative Governance. That is what allows them to continue to do what has previously failed to succeed until failure is irretrievable. What about Corporate Governance? I mean this in the sense of Companies and large Non-Government Organisations such as major charities. This is where the waters become muddy … Berings Bank, Enron, the NAB foreign currency trading scandal, the Japanese Banking collapse and now Bear-Sterns, the Mac-Mae twins, Merrill-Lynch, AIG and Lehman Brothers. Why can this happen? Continue Reading →