Take a break …planning for efficiency
Yves Smith at Naked Capitalism points us to exploring how the pursuit of “efficiency”, for example in supply chains, without assessing what other risks are involved and planning ahead can result in major problems:
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.
Actually its been a long term issue, consider the story of the 3 little pigs, 2 behaved just the way cited. If one thinks further there are probably other nursery stories that have the same moral. But why worry about tommorrow if you are going to be dead then after all the Bible says to Eat Drink and Be Merry for tommorrow we die. (or in the case of the companies if the problem happens after you retire its not your problem. )
kharris,
Thanks for the expansion of the idea of weak links in the chain…
There are situations in which Taleb’s insight is a winning one. If there is systemic risk, as in the case of financial markets, and tax payers are called upon to bail out private investors, Taleb’s insight makes clear that we need better risk management – less risk, in fact.
In the case of goods production, though, which is the point of the article, I’m not sure we have evidence that Taleb’s insight is as important. As Econobrowser’s guest, Ilan Noy, notes, it’s hard to find evidence that disaster reduces output over the long haul. If it does not, then does it make sense to change our approach to the risk of disaster in making private economic decisions? Taleb’s insight has become a commonplace, and has gained weight as a result of the financial crunch, but that’s all the more reason to examine it for appropriateness before putting it to use in new situations.
There are also the risks asscociated with outsourced manufacture of interface critical components. Boeing took it hard with problem “supplies” from suppliers who either did not follow the specifications, could not meet the quality or much more likely cut corners.
So much for integrated digtal environments the specs have to be reviewed and the vendors adequately qualified, or screened.
I have seen a lot of products with outsourced supplies that were not up to the quality standards required.
All this technology should include risk related activities.
(I am waiting for a quant to devise an optimal blow up metric as a covert trading strategy tool)
moreless 7-8 years ago i knew one in chicago who – for fx – had been able to do just that, not 100% but well over 50 and full auto. His expenses though were quite high yet he demandef to remain independent.
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
as you intimate, the non-financial has -over the last 30-35 years- become increasingly financialized.
why? an attempt to offset a falling rate of profit which, with a focus on mfg, the attached somewhat exaggerates but nevertheless makes clear [1985-2006]: http://en.wikipedia.org/wiki/File:Profits_Finance_vs_Manufacturing.jpg
kharris – “The cost to ship from China to the US, as compared to shipping from Mexico to the US, changed abrubtly back in 2008, and trade patterns began to change, as well. Seen broadly, the volatility in the price of oceanic shipping is another risk to long supply chains.”
How did trade patterns begin to change? I would like to see you try back up this claim.
I am unaware of any finished or intermediate manufacturing operations that were relocated from China to Mexico, as an example. Name any electronic goods production that was shifted from China to Mexico since 2007. I know of no plug in the wall socket goods from Mexico that substitute for China’s production of such goods. Same story for most other goods sourced in China other than food products.
There is very little substitute comparison between trade in goods by the U.S. and Mexico with that of the U.S. and China.
I don’t believe that you can substantiate your claim but I look to seeing your supporting references and data.
kharris – “The cost to ship from China to the US, as compared to shipping from Mexico to the US, changed abrubtly back in 2008, and trade patterns began to change, as well. Seen broadly, the volatility in the price of oceanic shipping is another risk to long supply chains.”
How did trade patterns begin to change? I would like to see you try back up this claim.
I am unaware of any finished or intermediate manufacturing operations that were relocated from China to Mexico, as an example. Name any electronic goods production that was shifted from China to Mexico since 2007. I know of no plug in the wall socket goods from Mexico that substitute for China’s production of such goods. Same story for most other goods sourced in China other than food products.
There is very little substitute comparison between trade in goods by the U.S. and Mexico with that of the U.S. and China.
I don’t believe that you can substantiate your claim but I look forward to seeing your supporting references and data.
I also find no evidence that changes in bunker fuel costs are creating dislocation shocks to container traffic origins and destinations. The fuel surcharges absorbed part of the additional costs and the carriers covered the balance. Container traffic isn’t going to disappear from the global trade scene. Changes in fleet inventories and ship sizes along with other inefficiencies including reduced speed are all in play, but I see no evidence of plant dislocations driven by bunker fuel costs or overall container market pricing for given destinations.
You are thinking too narrowly. Relocation is not the same thing as placing orders. Only after the pattern of orders shifts is relocation of plants considered, and then there’s all that messy engineering and site selection and building and stuff. The spike in energy prices lasted for a while, but hardly long enough to result in plant relocation.
If you hadn’t been so eager to mount you little challenge, you could have figured that out for yourself. Here’s another thing you can do for yourself. Check into the claim I actually made, which had to do with trade patterns, not plant locations, and see what you can find. If you actually care about the truth of the matter, then doing your own research won’t seem a great burden.
Now, I realize that using overblown language like this:
I also find no evidence that changes in bunker fuel costs are creating dislocation shocks to container traffic origins and destinations.
makes everything you say truer, but no amount of rhetorical overkill can make up for being that wrong. The facts do not require your acceptance to be true.
kharris,
There has been no shift in trade patterns from production sources in China to production sources in Mexico. Zero. Same situation for all of Latin America. No shift in trade patterns from China or any overseas (across ocean) manufacturing production sourcing.
You said, “Only after the pattern of orders shifts is relocation of plants considered, and then there’s all that messy engineering and site selection and building and stuff.” You don’t know what you’re talking about. The pattern of filling production orders does not change unless another geographically located production source is available.
By all appearances, you know very little about manufacturing sourcing or logistics in support of such production.
I researched your claim yesterday and couldn’t support it. None of my manufacturing clients have shifted any production sourcing from China except to move some production to India, another overseas transport location. None of the global data that I have reviewed support your claim. I had two transportation economists and one manufacturing consultant contact me last night and again this morning after I emailed your blog post to them. None agree with any of your wild eyed claims. It is their opinion that you made up your claim. One economist broke out laughing and asked that you name any electronic good that is now sourced in Latin America due to bunker fuel costs. He wants to know where your Mexican television and computer laptop are built.
I study trade patterns, production sourcing, and related goods production data. I find no evidence that there is any shift in trade patterns due to the increased pricing for bunker fuel. Your claim is without merit in my opinion, and you haven’t provided any evidence whatsoever to support your statements. None.
There have been a few minor shifts in production back to original in-place sources during the past two years, but such shifts were not driven by bunker fuel pricing. This is well known in industry circles as the reasons were identified by the manufacturing principals and transportation cost changes were not raised as an issue.
It appears to me that you made a claim that you can’t support. It does not appear that you have any facts to your support your contention.
MG,
You have complained of comments not being helpful in getting information out and furthering discussion. That has been true especially in the last several weeks, so point taken. However, if you disagree or have other information say so, and present your points and ask for links perhaps. But the tone is unecessarily provocative and doesn’t appear to be asking a question…why not ask also for clarifification and links after telling kharris you disagree.
Dan,
I asked kharris to support her claim and provide supporting references and links in my first coment.
I asked, “How did trade patterns begin to change? I would like to see you try back up this claim.”
I further stated, “I don’t believe that you can substantiate your claim but I look forward to seeing your supporting references and data.”
kharris didn’t provide anything to support her claim in her response to my first comment. Instead, she says go look it up. That’s nonsense.
I spent hours reviewing numerous sources and global trading data. I found nothing to support her contentions. ZIP. I asked other professionals if they can substantiate her claim that “trade patterns began to change, as well.” None of my contacts are able to support her claim.
I closed my second comment with this: “It appears to me that you made a claim that you can’t support. It does not appear that you have any facts to your support your contention.”
She has made a claim that (1) she hasn’t explained and hasn’t supported with any references or links.
I asked her to explain how trade patterns changed. She offered no explanation whatsoever in her follow up. ZIP. And she hasn’t identified any references or supporting links.
I believe her claim is highly questionable if not false based on my research and that of associates I contacted. We have found nothing to support her contention. And kharris has not provided any information – after she was requested to do so – to support her claim.
Dan,
I asked kharris to support her claim and provide supporting references and links in my first coment.
I asked, “How did trade patterns begin to change? I would like to see you try back up this claim.”
I further stated, “I don’t believe that you can substantiate your claim but I look forward to seeing your supporting references and data.
kharris didn’t provide anything to support her claim in her response to my first comment. Instead, she says go look it up. That’s nonsense.
I spent hours reviewing numerous sources and global trading data. I found nothing to support her contentions. ZIP. I asked other professionals if they can substantiate her claim that “trade patterns began to change, as well.” None of my contacts are able to support her claim.
I closed my second comment with this: “It appears to me that you made a claim that you can’t support. It does not appear that you have any facts to your support your contention.”
She has made a claim that (1) she hasn’t explained and (2) hasn’t supported with any references or links. Zero effort by kharris.
I asked her to explain how trade patterns changed. She offered no explanation whatsoever in her follow up. ZIP. And she hasn’t identified any references or supporting links.
I believe her claim is highly questionable if not false based on my research and that of associates I contacted. We have found nothing to support her contention. And kharris has not provided any information – after she was requested to do so – to support her claim.
kharris,
I never knew kharris was a female. Over the years, it really does explain alot, not that there is anything wrong with female commenters, but when your under the assumption that your are talking to a Male for a long time…….it definitely leaves a different perception in your head on what on the other side of the tubes.