Thursday, 20 May 2010

Good Governance Must Prevail

When people begin to doubt their nations' debts then the end game is much nearer than one supposes. If polls are to be believed, this is the disturbing, unfolding scenario that could face all industrial and trading nations. A recent Financial Times/Harris poll of over 6,000 respondents found that Europeans and Americans see a plausible chance of their countries defaulting over the next decade. The French are the gloomiest, 53% of whom believe it is likely that their government would be unable to meet their financial commitments within the next 10 years. At 46%, the Americans were not far behind. German pessimism over the future of the welfare state was acute and lent support by their Chancellor, Angela Merkel, who proclaimed: "We cannot live beyond our means forever." Jean-Claude Trichet, European Bank President, lent solemnity to the issue when he told the German magazine, Spiegel, that doubts being cast over Governments' credit worthiness "is a problem for all industrialized countries."

There is, of course, no one simple cause of the global fall from financial grace if, indeed, there was any such grace in the first place, and nor is there any one simple solution. But just as bad governance, both of the people and by the people, is the root cause of the angst, so, too, good governance could still win the day and avert catastrophe.

Politics and economics are inextricably entwined, and in any struggle between the two it is the former that will castrate the latter and so render it ineffective. Yet, ultimately it is economics that will humble nations over the full economic cycle, leaving a desolate trail of unimaginable misery, and all because there was no good governance by all.

So why is there inadequate governance? In a word, greed, at any and every level. But stupidity is also involved. This writer began to warn in print* four years ago of the dangerous build up of debt and in particular the deep exposure of Britain's banks and building societies to commercial property lending. Of America I warned that the negative domestic savings for a straight 21 months, adopted so that people could pursue their have-it-all-now culture, often based on taking out second mortgages and liar loans, meant that "much higher interest rates than three years ago (2004) now means many borrowers have reached the end of their rope." Then, on January 12, 2007, eight months before Britain's first major bank failure in over 100 years, I wrote: "The Bank of England's rate policy since being spooked by the dot com crash six years ago, aided by overly eager banks to lend irresponsibly, is a major cause of dangerously high national indebtedness. The banks and credit card companies may well pay a high price for their rapacious stupidity through record numbers of strapped consumers seeking voluntary insolvency deals."

If a mere hack journalist can foresee these developments unfolding then readers can be utterly assured that Governments and their financial regulatory bodies also saw it, but to their great indelible shame did nothing to avoid the gathering storm. In this the ratings agencies must also take some of the blame. Their deferential ratings of suspect corporate debt, which were financially motivated rather than by good governance, is a stigma and stench that will linger long. Many investors bought bonds and shares based on such deceptive ratings and are now ruing the day.

It is natural and right for people to seek a meaningful real return on their post-tax savings but governments and their central banks should not encourage people to seek riskier alternative investments owing to ludicrously low interest rates on traditional forms of saving. This is precisely what happened after 9/11 and the dot com bust when the Fed dropped its interest rate to 1%. This unleashed a spending binge, which in Britain most notably led to alternative investments in buy-to-let housing and commercial property, creating a bubble which could only burst, leaving banks and building societies nursing huge write offs and investors' dreams shattered.

Cheap, lax credit also spawned other serious problems, which ultimately led to the American sub prime housing bust, and so ushered in the world's most serious credit implosion since the 1930s. This involved the creation of new financial instruments like collateralized debt obligations (CDOs) packaged by investment banks for fat fees and sold to unsuspecting banks and other financial institutions around the world who relied on suspect ratings by debt rating agencies.

Beware Greeks bearing debts

In Europe, nowhere is the lack of universal good governance more obvious than in Greece. A country in which more than half the middle class reportedly think it their God-given right to evade taxes, Greece is the epitome of lousy governance, both of the people and by the people. Since joining the EU gravy train, Greece has lived far beyond its means, with other countries paying the bills. This has allowed civil servants to draw full pensions at 45 and others in their fifties, which can amount to more than 90% of their retiring salary.

Despite the Greek Government's robust start in moving towards good governance, there remains international scepticism over the Euro 750 billion EU bail out plan to save Greece and any of the other PIIGS nations#. But bad governance is ubiquitous and it ill befits President Sarkozy, of France, to browbeat Germany's Angela Merkel over her reluctance to have Germany remain the paymaster for profligate and corrupt nations like Greece. After all, is the Greek bail out so different from the billions of Euros paid every year to subsidise hopelessly inefficient small French farmers? Hardly. The Common Agricultural Policy is, perhaps, the supreme EU example of lousy governance in economics. Germans are rightly incensed at paying for the sins of others and have shown their displeasure over Merkel's reluctant decision to help the bail out by voting out her party's control of the upper house in recent elections. Other profligate nations should take note.

"Banking establishments are more dangerous than standing armies," declared Thomas Jefferson. Clearly, part of any good governance exercise must now include much stricter controls of banks, be they retail or investment, but not so much that is stifles acceptable enterprise. But there is another issue of global economic importance which denies peoples' aspirations for a better life -- staggering military expenditure. As Sun Tzu remarked in 400 B.C., "Where the army is, prices are high, when prices rise the wealth of the people is exhausted." Perhaps the most striking recent example to support this sage's acumen of costly military spending is the price tag for America's latest destroyers, $2 billion each, of which up to 60 may be ordered. Meanwhile, America's spending on the Iraq war and its aftermath alone has long since exceeded $1.5 trillion, and Britain's former labour government was too ashamed to reveal its costs of the Afghanistan involvement. Such huge transfer payments from taxpayers yields no significant tangible benefit -- only the feeling that it may provide protection from malcontents. Such is the price of people's suspicions of their neighbours, but as a famous general warned at the dawn of the Atomic Age: "It must be of the spirit if the flesh is to survive."
*Warehouse & Logistics News, London
#Portugal, Ireland, Italy, Greece, Spain

"If you are wise, you will dread a prosperity which only loads you with more." Ralph Waldo Emerson

Wednesday, 5 May 2010

Lousy Logistics Wastes Billions

Each year, in Britain and other countries, billions of pounds are wasted through inappropriate logistics techniques, adversarial business relationships and lack of holistic logistics solutions. What, therefore, could be realistically done to drive down those costs while delivering environmental advantages?

There are mainly two kinds of logistics costs -- storage and distribution, and both are pilloried for their adverse environmental impact. Of the two, storage must cost more if only because stocks put money to sleep. The higher the stocks the greater the opportunity cost. There are many simple ways to reduce storage costs and they need not always involve heavy new investment.

Take, for example, a warehouse footprint and how the chosen forklift types and sometimes the racking affect overall warehouse running costs. Fixed warehouse running costs include rents, rates, utilities, insurance, security and maintenance. The variables include materials handling equipment, with fuel, and labour costs.

There are basically four types of forklifts: standard counterbalance trucks, reach trucks, articulated forklifts and dedicated very narrow aisle (VNA) trucks like man up order pickers and combi trucks, and all require substantially different footprint sizes to handle the same, given pallet loads. The most wasteful of these in terms of space usage is the counterbalance truck, requiring typically minimum aisle widths of 3.6 mt and maximum lifts of 6-7 mt. The reach truck is better, needing only 2.6 mt wide aisles and able to lift to 12 mt, but these are generally unsuited to outdoor yard work. Likewise, the dedicated VNA trucks are internal machines and while able to to work in 1.5 mt wide aisles and up to 15 mt (more with crane types) they are slow, wasteful of space when aisle changing and incur significant extra costs like rail or buried wire guidance.

The articulated forklifts, produced in the British Isles by Translift Bendi, Narrow Aisle and Aisle Master, are easily the most space efficient and versatile of the trucks and such is their cost- cutting ability that in certain circumstances they can render instant truck payback. They may not always be the best choice, of course, as it depends on the nature of the business but the fact is an articulated forklift will allow 50% more pallet storage than counterbalance trucks and 33% more than reach trucks. Moreover, because of their yard-working abilities, the artics can reduce the overall number of forklifts on site and handle more pallets per hour than any other truck type. Such cost-cutting should particularly appeal in the current economic downswing.

There is help in the form of warehouse software to test layout options cheaply. It is better to choose a simulation package from an independent software house as those provided by forklift manufacturers may be skewed towards their own truck designs, and so give less than optimal results. A good example is CLASS, from Cirrus Logistics, which allowed one leading UK retailer, ASDA, to raise storage capacity by 10% at is warehouses and 40% in one case.

No matter how efficient products may be stored and internally moved, the operation could be seriously compromised by excessive stock levels, stock-outs, slow-moving and obsolete stocks. This is where a good stock forecasting program can save millions, particularly when used in real time with weather forecasts. Typically, they will allow users to reduce their total stocks by one third without adversely affecting customer service. Given that stocks in UK warehouses are always worth billions of pounds, the scope for savings is immense.

Once goods leave their warehouses, many cost-cutting initiatives beckon and their impact on the nation's economy would save billions of pounds. Congestion on UK roads alone is estimated to cost £25 billion a year. Any developments, therefore, which cut that congestion, but do not require costly new road building schemes, will be highly cost effective at both micro and macro levels. Already, UK pallet exchange operations, like those operated by Pall-Ex, Palletways and Palletline over the last 20 years, are ensuring that their members' lorries run full on both outward and return journeys, thus cutting emissions and running costs sharply.

Of far greater savings potential, however, is the use of double deck trailers. Typically, these trailers can carry 67% more goods per vehicle than single deck models, thus cutting costs and emissions by up to 40%. Yet, double deckers remain largely ignored and the adversarial relationship between third party logistics (3PLs) providers and their clients, and between 3PLs themselves, stymies true cooperation, leading to excessive empty mileage running.

The changing face of information technology (IT), however, could be the greatest cost cutter and environmental boon when applied by the consumer. Home online shopping is the only part of the UK retail industry that is growing like a weed, but a weed that needs nurturing. Each medium-sized van used by the likes of Tesco, Britain's leading food retailer, could eliminate 50 or more car journeys made by weekly shoppers. This would drastically reduce vehicle emissions, road congestion and repairs and accidents. If shoppers are encouraged to place online shopping orders earlier, food retailers and manufacturers could fine tune their supply/demand models so that less food would be wasted.

Such developments have the potential to disintermediate the current retail set ups, where manufacturers deliver to shops often via distribution centres. Large manufacturers of household consumables with a huge product range, could join with similar businesses to build giant order picking warehouses, accessed by shoppers online. This would eliminate a huge swathe of distribution/retail costs. It is difficult to see, however, given the current stranglehold on shopping by a handful of retailers, such a scenario unfolding, and might, for political/security reasons, be undesirable. This writer once pondered when visiting a huge warehouse that stored a quarter of Britain's tea stocks, what kind of cathartic experience would tea drinkers have deprived of their cuppas because the warehouse in question went up in flames. Even so, online shopping will continue to grow at a lick, posing financial problems, perhaps, for all those financial institutions heavily invested in bricks and mortar shops.