Monday, 24 February 2014

America's polity threatened by incomes gap?

History shows that when society advances it does so best when the majority of people enjoy the fruits of economic progress. But can it be said today that the world's leading economy, America, is dangerously ignoring that lesson? Cogent evidence, alas, suggests that it is, but what are the symptoms, dangers, causes and cures? The world has a strong, vested interest, for now, in keeping and hoping that the American economy will remain strong but there is little it can do if weakness within festers like a growing canker threatening to undermine the polity.

The symptoms have been plain for decades and can be summated in the dangerously widening gap between the rich on the one hand and the middle class and poor on the other, a gap that has been accelerating particularly over the last decade. A few stark statistics may concentrate minds. The Forbes List of the 400 wealthiest Americans shows that they have more wealth than half of all Americans combined, while it has been reported that just six of the Walmart heirs have more wealth than one third of all Americans combined. Between 1978 and 2012 the top-earning 1% of Americans' share of the nation's income rose from 7.7% to 19.3%. Put another way, a family in the richest 1% has more than 288 times the wealth of the median family. About 35% of working Americans were earning $25,000 or less and 36% were in the $25,000 - $50,000 bracket.

It is not, however, just a case of the rich pulling away faster but that the poor are worse off in real terms and the middle class have gone nowhere since 1997 and seen inflation-adjusted earnings rise only about 13% since the 1980s. If the Federal minimum wage of $7.25c, set in 2009, (and much lower than many European countries' rates) were raised to $10.70 an hour it would only have compensated for inflation since 1968, so in real terms the low paid have taken a big hit. And it is not as though poor productivity is to blame, for the fact is that productivity has risen about 125% between 1968 and 2010. That means the Federal minimum wage would be $16.93c if it had kept pace with productivity growth. To add salt to the wound, adjusted for inflation Americans' real income has fallen 8% since 2000.

Immense wealth wields immensely disproportionate power, even in democracies, and stretches back to classical times. Left to grow unchecked, it can be socially divisive because like monopolies the plutocrats pulling strings behind the scenes, can and often do act against the public interest. It would be naive to believe that American politicians cannot be disproportionately influenced by the richest 1% of the population, who spend billions of dollars every year lobbying Government to steer new bills through that would be harmful to the public, or prevent other bills so as to maintain the status quo in the Rich's favour. It is, perhaps, a sad reflection on American society that only 40% of the wealthiest Americans support raising the minimum wage and that the Rich's disparate voice in public policy affairs skews the US tax code in favour of the better off.

Why the American model is failing

It must be crest-falling for Americans to look across the Atlantic to Europe to compare their economy with Europe's and what it means for social fairness. At the end of World War 2 America emerged triumphant, militarily and economically. It was the richest nation on Earth with more food and household appliances than it could possibly consume itself, while much of Europe lay in ruins and bankruptcy. Even Britain, although a victorious ally, faced a busted Treasury, significantly degraded infrastructure and interest-bearing debt to America that took about 50 years to pay off. Its only consolation for its costly sacrifice was a moral claim on the world for standing alone for over a year against sinister, vicious Nazi tyranny that threatened to plunge much of the world into unbearable oppression, but morality does not pay the bills. Yet, what do we see today?

Not only do we see the legal minimum wage in most western European countries much higher than in America but much better social security payments and free national health services that would be the envy of Americans. Gross Domestic Product (GDP) per capita is often taken as a guide to national wealth but it says nothing about how the wealth is apportioned. The fact is, many countries, including Britain, have higher earnings per capita for their middle classes than America. So is the American model failing relatively, and if so why and what are the risks?

America's hammered lower and middle classes' relative decline against their European counterparts is evidence for the failure. Inequality of incomes seems to be at least one of the biggest causes, with excessive military spending and staggering tax avoidance, helped by a badly-designed tax code, as runners up. Gross inequality of earnings is disturbing owing to its social implications, which could turn very ugly. Much of America's recent wealth creation has been the illusory kind based on casino-style economics involving much paper shuffling of newly-created financial instruments, like CDOs, to absorb credit-created wealth, rather than creation of tangible goods. The result of the lack of Federal oversight and action in the casino led to the inevitable credit implosion, which this writer warned against in January 2007, for which the innocent poor and middle classes are still paying. The vast profits so created would not be so bad if the money made was invested in job-creating enterprises. Instead, we see much of the profits invested in equities, land and existing real estate, leading to asset bubbles. Worse and more sinister still, the profits made are often secreted in offshore tax havens, where as far as the American economy is concerned it is dead money because the velocity of money circulation is reduced below what it would be.

While there may be no accurate figures on how much has been lost to tax havens, the figures are undeniably staggering, with one estimate suggesting $20 trillion. A large part of that would be accounted for by individual rich persons avoiding tax.* This is not to say that the middle and lower earnings groups are the victims solely of rich people's economic decisions, but it is a significant factor. Much of the lower and middle earnings groups have been hit by changing technology and off-shoring of manufacturing jobs to exploit much cheaper labour costs abroad. That has been a boon for developing economies while keeping down American inflation rates. It has also favourably impacted the American Government's ability to keep interest rates low owing to foreign buying, particularly from China, of US government promissory notes. The pursuit of global trade is the hand maiden of prosperity and prosperity is the surest guarantor of peace, so to that end globalisation of trade has been desirable.

Minimum wage hike will help

 To redress the potentially serious imbalance of incomes, America must act to make the economy fairer and that means tackling wages and the tax system. President Obama's latest call for a $10.10c minimum Federal wage compares with the existing $7.25c set in 2009. While that is topped up by social security payments, such help is also available in most European countries where minimum wage rates are much higher. In fact, the US minimum wage as a percentage of national average pay was only 27% in 2012, lower than any other member of the OECD, except Mexico. The case from the American right is that any rise would be a jobs killer but does experience, particularly elsewhere, support that view?

Evidence undoubtedly shows that minimum wage rises at the State level have caused little, if any, harm to employment. Denmark, for example, has a minimum pay of $20 an hour and yet has been rated as the easiest place to do business for the last three years running. One report  found that by stimulating the economic growth, a minimum wage rise could create jobs, because a worker for one company is the customer of another. Minimum wage workers struggling to make ends meet are more likely to spend in productive ways, thus accelerating the velocity of money in a more beneficial way than the rich would by salting their incomes away in overseas tax havens or simply investing in asset bubbles at home like land and real-estate, an outcome supported my various studies. Even the right-leaning British business journal, The Economist, argues that the minimum wage hike in Britain "has done little or no harm" and "not only has it pushed up pay for the bottom 5% of workers but it also seems to have boosted incomes further up the scale and thus reduced wage inequality." A substantial rise in the Federal minimum wage, therefore, would go far to minimise the risk to social cohesion that gross inequality of incomes poses.

America's economy is deeply mired in Federal Government debt which hangs like a Damoclean sword
over the economy. Arguably, a leading cause in recent years, in particular, is defence spending, which in 2012 soaked up 4.4% of its GDP, or $682 billion (rising to $750 billion in 2013) but as a percentage of total world defence spending it is 39%. This compares with a UK ratio of 2.5%, a country where the minimum wage is much higher than America's. While some US defence spending is useful in creating jobs, especially when export oriented, it seems the case for reducing this burdensome cost is a strong one. Are not these words of the Chinese sage, Sun Tzu, from 2,400 years ago prophetic? "Where the army is prices are high; when prices rise the wealth of the people is exhausted."

The third cause and cure for America's threatening incomes gap must be the issue of tax avoidance. The US tax regime cries out for major reform. A tax code that favours the wealthy over the poor cannot be justified on any grounds, except, perhaps, marginally to encourage entrepreneurial drive. But it is not just the internal tax regime in need of overhaul. International agreement on global tax avoidance is desperately needed to recoup the billions of dollars lost not only to the US Treasury but the whole world. Loopholes in the system not only allow multi-national corporations to use contrived structures legally to avoid corporation tax and sales taxes; it also allows them an unfair advantage over competitors who pay their taxes responsibly. If the vast sums of these multi-nationals were not kept offshore indefinitely then the taxes they would have to pay in the countries where the sales arise would be a welcome boost to growth and social justice. But the solution must be an international one and the time for pussyfooting is over.

*Google my blog: "Corporate tax avoidance threatens your children's future". 

Thursday, 20 February 2014

Is Britain's inventory control lamentable?

Britain's overall logistics practices and performance may lead Europe but when it comes to the key element of stock control: "We are not good at inventory control," opined Mr Zen Yaworsky, director of the British-based Supply Chain Academy.* What that must mean in terms of multi-billion pound losses to the economy one can scarcely imagine but is it a true indictment?

There is, alas, plenty of evidence to suggest that it is. Inventory, for example, has seen off many of Britain's household name retailers and seriously embarrassed many others, leaving them with bare shop shelves, sometimes following installation of a new computerised system that proved disastrous. This is hardly surprising given that 20% of businesses have no Sales and Operational Planning recognizable processes in place, with only 10% having excellent S&OP. Moreover, it does not help when estimated demand for supply chain professionals exceeds supply by six to one. To address that serious imbalance, The Supply Chain Academy, in partnership with Plymouth University, has devised a BSc degree in International Supply Chain Management.

The prerequisite for addressing the inventory control issue is to have enough of the right logistics personnel timely in place and backed by suitable IT systems. Neglect of this, it seems, played a key role in Britain's Ministry of Defence (MOD) losing track of £150 million of battlefield radios, part of the £1.3 billion project Bowman tactical communication system, which provides secure radio, intercom and Internet service. Given the multi-billion pound inventory the MOD must control, such laxity beggars belief, especially as there are serious security issues involved.

Pundits claim that the supply chain is all about inventory. While this is overly simplistic there can be no doubt that it is the most critical part of any big production businesses. Within huge warehouses, for example, the cost of holding stocks can dwarf all other costs combined, especially if much of the stock has to be written off for a variety of reasons or sold at a deep discount. Logistics, with inventory always playing a key role, can even decide the outcome of key battles and wars that change the course of history. As Field Marshal Erwin Rommel remarked: "Before the fighting proper the battle is won or lost by quartermasters." It was a pity for the then German High Command that they lacked Rommel's understanding of logistics. It is no exaggeration to say that Nazi Germany's defeat owed more to logistical problems than anything else.

Inventory control, however, is not just about the present. For it to be truly effective it must also encompass future stock control, and that means forecasting demand, which is where the exercise becomes tricky. There are plenty of stock/demand forecasting programmes on the market, some better than others, but the most effective ones, especially for the food/drinks and clothing industries, are those that react in real time to changes in forecast weather conditions or other germane factors. This is crucially important because a pending heatwave, for example, can send demand for drinks soaring four-fold in a matter of days. Just as it is important to react to pending forces with known consequences quickly so, too, it is critical to forecast more often and forecast quicker, and there is no reason why aspiring to have stock-outs for seasonal goods should be seen as a cardinal sin.

The forecasting element of inventory control becomes more complex still when the entire supply chain is geared to just-in-time (JIT) production and supply. Even if a business has forecast demand accurately, and therefore stock needs, it is of little value if supplies have been disrupted and so fail to arrive in time, leading to lost sales and, perhaps, permanently lost customers. This is precisely what happened following the Japanese tsunami of 2011, which left car and electronics plants around the world idled for want of components, causing multi-billion pound losses in production and profits. The problem was that Japan was a choke point for about 95 products key to these industries and alternative supplies could not be found quickly. JIT-oriented businesses, therefore, must ensure that they have a robust disaster recovery plan in place as part of their inventory control strategy.

Despite these tricky problems, a good stock forecasting programme can typically cut total stocks by a third without harming customer service levels, and in the process achieve paybacks within two weeks. Yet not all businesses need rely much, if at all, on forecasting programmes, and that can apply to certain kinds of grocery retailers. The reason is that the consumer does the forecasting for the supplier shop, but this will only work very well if the sales information gathered on the day is relayed to the shops' regional or national distribution centres (NDCs) by close of business each day to activate the overnight picking for shop replenishment before opening for business the next day. This was the approach the Danish food retailer, Netto, used some 20 years ago with astounding success. All of its 120 shops were EPOS-connected with one NDC so that data on products sold each day was downloaded to the NDC's computer to generate overnight picking and replacement for the next day. None of that, of course, could have been possible without the speed of data transfer that EPOS enabled. Admittedly, Netto had one or two other business model ingredients in its favour, like deliberately restricting its product range to fast movers, and quickly dropping and replacing those fast movers that became slow. The result, as this writer saw at Netto's NDC, was that 90% of all goods stored passed through it every 24 hours. Such rapid replenishment also depended on a fast sortation conveyor capable of sorting thousands of items an hour. It was a business model that came to haunt Britain's giant grocery retailers, as this writer predicted, because Netto, along with other foreign discount rivals like Aldi and Liddle, came to Britain with similar business models and are now taking market share from the leaders.


Tuesday, 18 February 2014

Can Britain afford a world power navy?

In the eyes of Britain's top military brass the legacy of imperial greatness still seems to colour their judgement about the need to maintain a first division world power punch, despite one Ministry of Defence (MOD) remark that Britain was punching above its weight. The fact is that Britain is no longer economically great, in the sense that it can put forth a 1914-style Grand Fleet to keep the world's sea lanes open and play the world's policeman. Two world wars have seen to that.

This crucial issue, affordability, seems to have been deliberately ignored by Britain's First Sea Lord, Sir George Zambellos, in his opening salvo to argue the case for more funds at the 2015 Defence Review, following the 2010 Strategic Defence and Security Review which froze for at last a decade the navy's ability to operate aircraft carriers armed with fighter jets.

It is not, however, just about affordability. It also brings into question whether costly, vulnerable aircraft carriers and nuclear-powered and armed submarines are still essential in an age when the changing nature of naval warfare and geo-politics suggests they are not.

The nuclear-armed nations, including China, now realise that trade is the handmaiden of prosperity and that prosperity is the surest guarantor of peace. The likelihood, therefore, of going to nuclear war is much less and the arms race has been a salutary lesson of how its burdensome cost can change the coarse of economic and political history -- an example, perhaps, of the law of unintended consequences. When America proposed its 'Star Wars' defence shield Russian realized it could not afford the huge expense of keeping up and so was ushered in detente, the breakup of the Soviet Union and the dissolution of the Comecon countries. Russia had ignored the first law of marketing -- give the people what the people want, not what you think is best for them. The people wanted butter, the Russian government gave them guns. China is now in that situation. The Chinese Government knows it has nothing to fear abroad, militarily speaking, but very much to fear at home from Nature's fury and popular unrest within from ethnic revolts and protests against corruption and environmental disasters, a scenario that helped bring down many a Chinese dynasty in the past.

What this says, therefore, for Britain's nuclear-armed Trident replacement plans is that such a costly programme running into £80-100 billion over its 40-year life span, is overkill, cost-wise, and that much cheaper alternatives are still enough to deter potential aggressors.

The First Sea Lord said the Royal Navy needed a "sensible and credible level of scale" but what is sensible and credible, and perhaps more importantly what is affordable? "Make the Royal Navy 'un-credible' and we cease to be a first division player," he said. His mindset, however, seems to be stuck in imperial times, when the British Empire had many colonies to defend and therefore a more plausible case for maintaining a Grand Fleet. While it is still essential to provide adequately a navy to help keep the sea lanes open, by far the most crucial role it has today, the changing nature of the socio-economic environment no longer warrants aircraft carriers, which are state-on-state warships.

Here is what some of Britain's defence chiefs said back in 2010. The then outgoing Chief of the Defence Staff, Sir Jock Stirrup, argued that pressing ahead with two carriers would skew Britain's defences because of the huge expense, which over 10 years, with running costs and aircraft, would reach about £35 billion, about the size of the black hole already in the incompetent MOD's budget, whose ideas on inventory control were clearly not its forte. Sir Jock added that "the carrier programme is worrying most of all because of its impact on the rest of the Royal Navy, which could see the number of surface ships fall. Another MOD official opined: "Almost everybody in the navy sees the calamity of this, except the people in the top half of the service." Another senior military figure added: "We should never have bought them in the first place. We've got better ways of spreading our money. We could have bought more frigates, more money for cyber, more special forces. It's £5 billion of lost opportunities."

To the point that aircraft carriers look set to follow the battleship into oblivion owing to the changing nature of naval warfare must be added the high risk/high cost ratio of carriers. These capital ships are significantly vulnerable to just a single, long-range missile from China, for example. Just as at the battle of Midway in 1942, which took only 12 bombs to sink four front line carriers, a battle that changed the course of the war in the Pacific, so today it would take only one missile to sink a £3 billion carrier, all its 'planes and the loss of over 1,000 sailors.

Britain can still be a credible nation with a credible navy but it does not have to be, and should not be, at an incredible cost. Just as naval developments change the navy's raison d'etre so, too, do economic developments impact the service and it is the latter that must be given greater heed. Britain's economic condition, while apparently improving, is still weak and its people's simmering discontent is rising. Millions of hard-working people have seen their savings and pensions enfeebled by casino-style economics fuelled by rapacious, irresponsible banks, whom Thomas Jefferson presciently described as "more dangerous than standing armies." Charity run food banks are sprouting up nationwide as social security cutbacks begin to bite. Government under-investment at home is being exposed by the recent flooding, which some sources estimate will cost over £1 billion, while it has been suggested that the Environment Agency is short of £0.5 billion a year to do essential flood defence work. The National Health Service, that most prized asset in a civilized society, is in danger of financial collapse.

These and many other pressing social issues show the great care needed to balance the Government's call on its public purse to deliver best value for money. The armed forces cannot reasonably plead for special case ring-fencing. Even less can it convince the people to buy sustainable navy notions based on outdated ideas that hark back to imperial times.

Sunday, 16 February 2014

JIT shipping costs face price hike threat

Shipping insurers will have good cause to feel weak-kneed if a Tokyo court case against Mitsubishi Heavy Industries, brought by Mitsui OSK Lines, succeeds and which by extension could force a rethink of just-in-time (JIT) shipping issues. The case concerns the loss of the MOL Comfort container ship in the Arabian sea last July on a voyage from Asia to Europe, the biggest loss in container shipping history. The reason for concern is that a successful claim would far exceed the loss of a ship and its cargo because it could open the floodgates to thousands of other claims related to the 2008-built ship which was loaded with 4,382 containers.

The MOL Comfort was built to a new design , along with six other sister ships in the Mitsui fleet, and Class NK inspection of these found "buckling type deformations" on the bottom shell plates. These ships were the first classified by the Class NK to utilise ultra high strength steel with a yield of 470 MPa (the unit of stress pressure) in the hull structures to reduce the steel weight of the ship by avoiding extreme plate thickness. The sister ships' hulls have now been reinforced to twice the level required by Class NK.

Included in the claim will not only be the cost of strengthening six sister ships made by the same shipbuilder, it will also include all the consequential losses of action having to be taken to fulfil the JIT contracts related to the lost containers. Ordinarily, the loss of even a large cargo ship would not raise eyebrows much but the MOL Comfort loss could prove a huge exception with ramifications far beyond the shipping insurance circles. For a start, Misui will be claiming compensation for the cost of strengthening its six sister ships. On a much greater scale will be the claim for all consequential losses involving action having to be taken to fulfil JIT contracts owing to the lost containers. One Japanese electronics giant, who reportedly lost six containers, had to upgrade its factory output to airfreight the entire replacement stock to Europe at considerable cost or otherwise fail to fulfil its contract. This company would not be alone in doing whatever it took to ensure its supply chain commitment was not broken owing to the MOL Comfort's loss.

Insurers could be in for another shock. Cargo insurance underwriters normally work on the value of a container's contents of around US$50,000 but many of the Comfort's containers would have been packed with high value consumer goods and these would normally be valued at selling price rather than cost price. The Japanese company which lost six containers reportedly valued the contents of each of its containers at $450,000. The cargo losses, therefore, will far exceed the $66 million hull and machinery policy, and the latest estimate for claims points to well over $500 million.

The loss of the Comfort is a warning shot across the bows, for insurers, the shipping lines and their customers. Depending on any future shipping loss claims, it could also force the trend to re-shore outsourced manufacturing to the Far East back to Europe, a trend that is already underway for a host of reasons. The insurance risks will rise, and consequently premiums, because container ships are becoming ever larger, the latest now able to carry over 18,000 TEU 20 ft boxes. There are, of course, economies of scale from growing bigger that would bring down unit shipping costs but the downside would be the crippling losses stemming from sunken leviathans filled with high-value consumer goods which could ultimately run into many billions of pounds in payouts per ship lost.

It would be wrong to finger the causes of Comfort's loss, which in all likelihood may never be known, but as in so many losses at sea there is usually a combination of factors. The weather the Comfort contended with was rough, but not so bad that it should have broken the back of a modern container ship built by a reputable shipping yard. On possible causes the smart money is on the longitudinal stresses  induced by deliberately under-declared container payloads, a practice which shippers routinely refuse to take seriously. Compounding this shame is the very common sloppy container packing practices. Without accurate container payload data and responsible container packing it is impossible for dock cranes to load ships so that they have a safe, loaded profile In this respect the IMO may have cause to regret its decision to water down amendments to SOLAS regulations which would have made container weighing at all ports mandatory. It was a great missed opportunity and, perhaps, a glaring case that when money and safety issues clash it is money that prevails.