Tuesday, August 9, 2011

World Dynamics: The effects of just-in-time and outsourcing

Some years ago (2003) I decided to use my experiences and education (including and MNA and studies in Operations Research - Decisions Science and Transport Systems Analysis - Logistics) and in order to try to get an idea of the fundamental (I can them systemic) causes or factors that "drive" what is going on in our era.

After some time I came to the conclusion that it was not globalisation per se that was "responsible" for the volatile behaviour of the "system", but:

a) The just-in-time process in inventory management, combined with
b) Outsourcing

Two versions (not identical):

1) The vlog version (7 minutes, 38 seconds):



2) The text version:

a) It must now 30 or 40 years since just-in-time started being implemented by companies in order to improve their ROI by reducing the volume of inventory. Part of the reason for that was the then high interest rates and thus opportunity cost of capital. In other words, goods sitting around in inventory waiting for demand to absorb them contained value (capital) that was not being used. By minimising the volume of inventory, that cost was drastically reduced. But to do so, it required fundamental changes in the way companies, especially manufacturing ones operated, as well as their suppliers and clients (whole-sellers, retailers, transporters, etc), ie the who "value chain".

The adoption of just-in-time spread to more and more companies, even at times of lower interest rates, and started to affect all aspects not only of the economy but also society. Eg fast food is a result of the expansion of this process. 24/24, 7/7 news as well. Slowly, the world picked up pace and started to "spin" at a faster rate. At some point, the rate became relentless. We are still in that stage. Until the "engine" bursts.

More and more people, more and more decision makers have less and less time to make decisions, to analyse problems or situations. Or systemics and dynamics. In a way, that was the curse the Ancient Chinese referred to when they said "May you live in interesting times".

b) At some point, companies also decided that instead of keeping many functions internal, it made "more sense" to purchase them from the market. The idea was nor new. Let's not forget that once upon a time many companies had their own advertising department and their own corporate strategy/planning department. Once upon a time cleaning and security personnel were employees of the company not of a sub-contractor. Civil engineering had a long tradition of using sub-contractors. A theoretical backing of outsourcing was that by purchasing these "services" from the market instead of producing them internally, a company was able to expose them to competition thus improve their productivity (and cost to the company). That made things more complex and volatile, including employment. Sub-contractors lost contracts and let people off at once.

c) Then also came the M&As blitz financed by junk binds that put even more performance pressure on companies, on top of the existing pressure on CEOs and boards to show great performance every single quarter (as well as a system of remuneration via stock options). What globalisation did was, via the increasing freedom of trade of mostly manufactured goods, to offer more options not only re suppliers and clients but also sub-contractors. The volume of goods transport skyrocketed. The entry of China into the WTO system (12/2001) provided the world manufacturing industry with a huge new pool of industrial workers and eventually consumers (this is 1.4 billion of the 6.9 billion world population we are talking about!).

It should not have taken the realisation of global warming to realise that the system was overheating! All one had to do was slow done and take a look at the pace the rest of the world was passing him/her by. The average age of managers declined because experience was of less value and ability to think and act on one's feet of more value. So you pock up the phone and call info in the US or the UK and wind up taking to an operator in India or the Philippines pick up. A natural result of outsourcing combined with other systemic factors some of which are described above. Even some of stock trading have been "outsourced" from humans to computers and their algorithms.

During the same time (listen to my analysis here) the real economy was too regulated and suffocating with national and international red tape and thus running out of the ability to yield ROIs that investment houses could propose to their clients in order to get their business (ie manage their money/investments). That led to the search for new opportunities outside the real economy, the new economy. And a bubble, the dotcom one. Then to a real estate bubble or a bubble of investment tools (CDs) "based" on real estate loans (mortgages) to riskier than normally serviced clients (subprime). A "natural" development due to the pressure of the finance world to offer investors better expected and if possible, real returns. The rest is more or less known and the story is still in play. Just turn on your TV or radio or social network today.

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My analysis above tries to explain parts of how we got here.

Solutions?

Oh my! One is to liberalise all factors, instead of keeping some (eg capital) free to move globally or almost free (goods) and others (services and especially work and people in general) virtually fenced into 200+ sections. The other is to limit the mobility of capital and goods. Good luck, in any case.

And finally, as an add-on, a song inspired by the topic:

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BRs
Nick

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