Tuesday, 8 April 2014
Investor sentiment is like a scared cat. It is easily spooked and does not care who gets clawed during any frights. It is just such sentiment which is keeping the British economy calm, for now, but can it last much longer? The reason for concern is Britain's alarmingly high Current Account deficits on foreign trade. Unless corrected soon, there will be serious consequences for the nation, and Britain's global supply chain logistics in particular, which should pay more attention to re-shoring outsourced manufacturing back to Britain.
Given, however, that Britain's total earnings from tangible exports (visibles) and intangibles (invisibles), like services income from banking, insurance, shipping and overseas investment income, have not exceeded import costs for decades, why should now be a cause for concern? One reason is the alarmingly high deficit last year of £108 billion on visibles, which reduced to a £27 billion deficit when invisible earnings were included. Last year's awful trade performance, however, was not an aberration. According to Britain's Office of National Statistics (ONS), the combined current and capital account has been in deficit since 1983 and the trend is getting worse. Another is that the capital inflows that have financed these deficits, such as investment in industry and real estate, plus hot money, reflect the scared cat side of the equation. What were once healthy capital inflows could very quickly become unhealthy capital outflows.
For three decades the country has relied on the financial account (direct and portfolio investments) of the Balance of Payments to keep the nation's head above water. This is potentially dangerous because these capital inflows that have come to dominate the Balance of Payments are volatile and intractable and, equally disturbing, such foreign investment in Britain has proved a mixed blessing because of the financial contrivances global corporations use to minimise their taxes and so deprive Britain of billions of pounds in lost corporation and VAT taxes. Such tax avoiders also place indigenous UK corporations, who pay their taxes in full, at an unfair trading disadvantage.
Why manufacturing matters
It has long been touted by purblind political and economic commentators that British manufacturing does not matter much any more because the services side of the economy accounts for the lion's share of Gross Domestic Product. The current deterioration in Britain's invisible exports show just how asinine that view is and the price that Britain must now pay for neglect of its goods-producing sector. The fact is, Britain's investment income for operations abroad showed a £10.3 billion deficit in the final quarter of last year and £17 billion for 2013 as a whole, up from £3.7 billion in 2012. Back in 2008 there was a surplus of £33.2 billion from this source and £22.7 billion as recently as 2011. This has happened because of losses abroad by British banks, at the root of which was British banking's lack of good governance. There has also been a drop in income on overseas investment by British firms. This partly reflects deteriorating returns from British investment in a depressed Euro zone. It was fortunate for Britain that the Euro zone countries with big trade surpluses were prepared to pour money into Britain to fund the country's current account deficit. It is, however, a risky scenario because such financial flows could be vulnerable to political and economic uncertainty.
Britain's long post war history of current account deficits, punctuated by several devaluations and sudden brake slamming on policy, is symptomatic of a serious imbalance in the economy, the cures for which are both short and long term. In the short term, Britain must wean itself off reliance on cheap money which is now stoking up another housing boom that can only end in tears unless the Bank of England acts now to signal careful rises in the base rate. That may not go down well with manufacturers thinking of new investment, which Britain badly needs, but it is far more preferable to huge interest rate spikes down the line forced by soaring inflation rates owing to a de facto devaluation caused by rising import costs and consumer binge spending, financed partly by saving less. Such a scenario partially unfolded in America back in 2007 when for a straight 21 months of negative domestic savings, 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 before (2004), left buyers at the end of their rope. Then, on January 12th, 2007, eight months before Britain's first major retail bank failure in over 100 years, I warned in Warehouse & Logistics News: "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 consumers seeking voluntary insolvency deals."*
Another short-term move must be for all British governments to eschew foreign military entanglements because these have a direct bearing on the foreign trade current account. According to one estimate, the Afghanistan war has cost Britain £38 billion so far, with many more years of costs to support the maimed forces personnel and widowed families, with almost nothing to show for it. The Iraq war would have cost much more, again with little to show for it. This is what happens when economically naive governments, egged on by even more benighted military top brass, bestride the saddles.
Moving to solutions of a medium term nature, the British Government, in concert with other governments, must take united action to reform international taxation regimes so that all global corporations pay their righteous taxes, instead of hiding their low-taxed profits in overseas tax havens, and competing unfairly with native companies.
The long-term solution will be harder to achieve but there are signs that desirable moves are already under way. One is the nascent trickle of re-shoring outsourced manufacturing back to Britain for a host of reasons, not least the soaring labour rates in countries like China, where hitherto low labour rates were the main attraction. British companies which have yet to re-shore back to Britain may also like to consider that if Britain's import costs rise owing to a falling Sterling exchange rate then they will be disadvantaged against indigenous producers. Another encouraging sign is that more investment is going into apprenticeships. If Britain is to boost manufacturing it needs a larger pool of suitably qualified labour. In this respect it would be helpful to overhaul a failing education system, which shamefully sees around four in five adults have a low level of numeracy which has been declining since 2003. This has led to the realisation that 17 million adults in England are working at a numeracy level roughly equivalent to that expected at primary school. There could hardly be a more damning indictment of Britain's current educational establishment. There should be more emphasis on occupations like engineering rather than on non productive vocations in the arts. Manufacturers, however, may need more Government incentives to invest so as to counter any adverse impact of rising interest rates that chronic Balance of Payments crises could impose.
On the social front, the Government must bear down even harder on the social security budget to eradicate fraud and waste. Money wasted in this way from undeserving, non contributors to society manifests itself in a deteriorating Balance of Payments. If nothing is done to at least balance Britain's foreign trade accounts then it is the markets that will ultimately decide the issue, and the markets can be merciless. If that happens, then the sparks will fly upwards.
* Google my headline: Good governance must prevail
Sunday, 30 March 2014
New Zealand ranks high in the decency stakes, especially for minimal corruption, transparency and the rule of law upholding human rights, but in one area it is shamefully deficient - the treatment of overseas fishing crews on foreign-flagged vessels operating in its territorial fishing grounds and partnered with some of the country's biggest fishing corporations. Ongoing for years, the scandal is so huge that a US State Department report released in 2012 scathingly labelled it "21st century slavery." It cited conditions of forced labour, including debt bondage, imposition of significant debts, physical violence, mental abuse and excessive working hours on board.
To be fair to the New Zealand government, it has proposed legislation to implement recommendations, including the requirement that all foreign fishing vessels working in the country's waters must be new Zealand flagged by 2016, but it is yet to be passed and now seems unlikely to be until after the next election because it has been pushed back to number 27 on the Parliamentary Bills list. Such foot-dragging "is outrageous," said Joe Fleetwood, secretary of the Maritime Union of New Zealand. "The New Zealand government is missing in action when it comes to protecting the rights and welfare of fishers in our region," he adds.
The accusation of tardiness is valid. It is almost 10 years since the government concluded a ministerial enquiry into the use of foreign charter vessels after national and international accusations of slave labour in New Zealand waters. The risks of further procrastination, moreover, pose significant threats to the New Zealand economy, not to mention the sullying of the country's reputation abroad. Various international condemnatory campaigns spurred and spooked big foreign fish buyers like America to pressure the land-based fishing industry to clean up its act. New Zealand's sea food exports consistently rank as the country's fourth or fifth biggest export earner, valuing the harvest at between NZ$1.5 billion to $1.2 billion a year, of which the aquaculture industry contributed about $200 million, so there is much at stake.
To ratchet up the pressure and seek justice for the exploited foreign crews, the International Transport Workers Federation (ITF) president, Paddy Crumlin, recently met with key stakeholders in Auckland about its ongoing campaign to secure NZ$ 30 million in unpaid wages for fishers in New Zealand's waters through recourse to the the courts. He said it was imperative that the fishing workers get better wages and conditions in an industry where 24,000 are killed globally every year. "We are trying to break apart the industrial model upon which commercial fishing is built, because it is akin to modern day slavery," he said.
That model may be fairly said to reflect the dark side of globalisation, not that globalisation per se has been generally bad, far from it. New Zealand's biggest fishing companies engage in joint ventures which exploit quotas under the country's fishing regime by bringing in foreign chartered vessels with overseas crews. Given that crews wages, when paid, on often poorly maintained and unsafe trawlers, are very cheap, the country's fish processors profit enormously and take the view that what goes on a few miles over the seas' horizons is of little concern to them. It is an 'out-of-sight, out-of-mind' attitude from the industry and regulators because overseas crews are not New Zealand citizens and not in a position to advocate for their own interests, and their rights are overlooked. When conditions become so bad on board and unpaid wages so delayed many foreign crews abscond in the country's ports, only to be humiliated by notices of $1,000 rewards for their capture, somewhat reminiscent of the 19th century American reward notices for capture of runaway slaves.
The problem of fishery slavery is not confined to New Zealand's waters by any means. Greed, theft and oppression of many kinds extend back to the abused crews' homelands, where usually they are hired by local, disreputable employment agencies. The problem is endemic throughout south-east Asian waters and many of the abuses suffered by fishers around New Zealand waters are reflected on board some of Britain's and Ireland's trawlers of terror* which use migrant crews, particularly from the Philippines.
The damage to New Zealand's reputation is hard to quantify, said Joe Fleetwood. "The blame must be put at the feet of the cowboy operators in the industry and successive governments who soft-pedalled the issue and only took belated action when forced to, the lesson being they can't afford to sweep these dirty issues under the carpet any more."
The New Zealand government would be foolish to delay any longer to rectify a festering sore under its nose that would shame any country trying to maintain its hitherto high regard for human rights.
*Google my blogs:
Britain's trawler fishing shame intensifies
Ireland's shameful role in migrant fishermen exposed
Friday, 21 March 2014
It might seem incredulous that Crimea's unpleasant brouhaha should pose a significant threat to Europe's logistics or that the obvious solution to the problem is not being pursued. Yet it does pose a significant threat, albeit of a knock-on kind, if allowed to get out of hand, but the solution is dependent on goodwill from all parties.
Imposing trade sanctions without prior moves to defuse the problem through political compromise with honour upheld for all invites enormous upheaval for Europe and Russia, in which everybody loses. Russia, for example, supplies up to 40% of Germany's gas needs and 1% of Britain's, while the figure for the whole of Europe is between 25% and 30%. Despite healthier European gas stocks than usual, any total cut in supplies would send European gas supply costs soaring at a time when Europe is still struggling to recover from the banking crisis. This would not only affect national output in many countries in various ways, it would also mean more consumer belt tightening. In Britain, as explained in my last blog,* cash-strapped consumers are migrating to deep, cut-price food retailers, forcing the leaders to make price cuts as they lose market share. That, in turn, will adversely impact Britain's global food supply chain through further squeezing of suppliers, as if they were not squeezed enough already. This is an example of the knock-on effect referred to earlier.
The hit Russia would take from any gas supply interruption would be massive, too. Its gas supplies to Europe are worth about US$100 million a day and around half of Russia's total budget revenues comes from oil and gas. Any gas cut off would send a potent message to European buyers that alternative, less politically endangered supplies must be sought as soon as possible, and they are already, in fact, being developed. That development could prove a body blow for Russia's skewed economy so overwhelmingly dependent on natural resource exports. That is one good reason why Russian should refrain from further military moves.
It seems that the most desirable solution to the Crimea problem would be a return to the former status quo, but with certain changes. Crimea already has a level of autonomy with its own Parliament but subject to Ukrainian law. Its people are predominantly Russian-speaking and prefer closer ties to Russia than Europe. The western half of the Ukraine, predominantly non Russian speaking, prefer closer ties with Europe, while the eastern half is more ambivalent. It was the former Ukrainian president's act to initiate closer ties with Russia instead of Europe, and apparently against the western half's majority wishes, that sparked the civil unrest and overthrow of the President and his government, technically an illegal putsch, which Western leaders should remember before casting stones about Russia's illegal invasion of the Crimea.
Russia' avowed motive for invading the Crimea was to protect the interests of the majority, Russian-speaking and leaning inhabitants. It is, of course, about more than that, but at least Russia has been accommodating enough to allow a referendum on what the majority want by way of future external relationships, however unrecognised that may be by certain Western nations. The situation is not so dissimilar from Britain hanging on to Gibraltar and the Falklands Islands because the overwhelming majority of their citizens prefer closer union with Britain rather than elsewhere.
Russia's other motives for Crimean action are probably just as much to do with access to a year-round, ice-free naval port for its Black Sea fleet and access to reportedly rich oil and gas reserves. Certain elements of the West's gutter Press also demonize President Putin as a vainglorious demagogue bent on a posthumous,
glorious legacy in Russian eyes, a free Press price any democracy must pay however odious its opinionated writers may be. What is disturbing, however, is certain members of the Russian Parliament reportedly agitating for a recapture of former Russian-annexed states like Kazakhstan, and if Putin truly wishes a glorious epitaph he would do well to scotch such military madness.
A return to Crimea's former status as part of the Ukraine should involve certain conditions to help ensure a just and lasting accommodation. First of all, there should be cast-iron guarantees that the rights of the Russian-speaking inhabitants are in no way oppressed or otherwise disadvantaged. Secondly, there should be international recognition of Russia's legitimate right to have unfettered access to its Black Sea naval port for so long as it wishes. This, after all, would not be much different from America's occupation of the military base on Guantanamo, Cuba. Thirdly, the Ukraine must play its part by cleaning out its Augean stables of intractable corruption and start to adopt good governance. The fact is, the Ukrainian economy has been in a mess well before the Crimean crisis erupted, and many of its politicians are in the unwholesome thrall of billionaire oligarchs. Some Russians are rightly incensed that certain Ukrainian politicians evince a hard-right (fascist) interest and we have the recent televised incident of just such a disgraceful example when a group of far-right politicians broke into the Ukrainian state TV company to assault the head of the station, Olexandr Pantelymanov. Under a group battering he was forced to resign because the bullying intruders took offence after a ceremony was broadcast from the Kremlin showing Putin signing a bill to make Ukraine's Crimea region part of Russia. It is shameful incidents like that which the Ukraine cannot afford if it wants to earn the respect of the outside world.
An example of the Ukrainian financial delinquency is Kiev's outstanding debt of $1.5 billion for gas supplies in 2013 and so far in this year, and it shows little evidence of paying up. A whole Ukraine, including the Crimea, should also try harder to court closer economic ties with both the West and Russia. Meanwhile, Russia bashing by the West's gutter Press and even its more respected media does not help. Europeans should never forget that they enjoy much of their freedom today thanks to Russia's heroic and appallingly high human sacrifice in World War 2 to rid the world of the 20th century's greatest political scourge -- Nazi tyranny.
*Google my blog: "Food retail price wars threaten supply chains"
Tuesday, 18 March 2014
It is ironic that smart logistics can be both a business game changer for the better and for the worse. This is particularly so in Britain's food retail sector, where looming price wars threaten to unleash hell on every part of the global supply chain, from farmers to third party logistics providers (3PLs), as if they were not abused enough already by the dominant buying power of big retailers. The catalyst is the cash-strapped consumer joining forces with the deep discounters like Aldi, Lidl and Poundland, whose remorseless rise in a few short years is rattling the leaders like Tesco, Sainsbury, Asda and Morrison, who jointly control 76% of Britain's food retail market. The chief enabler is the discounters' harnessing of smart logistics with an effective business model that has inventory control at its core. The result is that these deep discounters are seizing market share from the big four, prompting a price war reaction initiated by Tesco and Morrison. This may sound good news for consumers initially but the way in which the market leaders will pressure their suppliers to cut their costs and take on even more risks will have undeniably adverse, long-term effects for consumers.
For many years the abuse of buyer power has been widely and routinely practised against suppliers, and competition authorities have largely failed to deal with this problem in Britain. Big retailer abuse of suppliers takes many forms, including:
- Listing fees to be on a list of suppliers, thus raising suppliers' costs
- Delisting/threat of delisting. This occurs when suppliers refuse to cut prices or make other payments concessions.
- Slotting fees to gain access to shelf space
- Demanding retrospective payments like extra discounts and after-sales rebates
- Return of unsold goods to supplier, which means at the suppliers' expense because fresh food cannot be readily resold, and so the retailers' forecasting errors are passed back to the supplier
- Late payments, pushing up supplier finance costs.
- Retrospective change to agreed terms putting limitations on suppliers' ability to supply competing retailers.
All of these odious forms of payment, and more, are reported to reduce suppliers' revenues by up to 50-70%. The adverse effects of all these downward pressures on supply prices mean that there is 1) a threat to supplier viability and supply, 2) it may raise prices and reduce choice, 3) downgrading of quality by cheapening of ingredients, leading to events like the recent horse meat scandal, 4) squeezed working conditions that could amount to gross abuse of human rights and people trafficking. Invariably, throughout the food supply chain it is the large retailers who take the lion's share of the retail price of any product they sell. With pineapples, for example, it has been shown to be 41% and with bananas 29%. The farm labourers take only 4%.
Best practice inventory control is key
Mr Zen Yaworsky, director of Britain's Supply Chain Academy, says: "We are not very good at inventory control." There is plenty of evidence to support that claim as poor inventory control has seen off many British household-name retailers, while embarrassing many more through empty shop shelves. Good inventory control, therefore, is at the heart of a successful supply chain, and a lesson the foreign-owned deep discounters have taken on board. Their business model relies heavily on stocking a much smaller range of items than the retail leaders, but which are commonly and frequently in demand. Lidl, for example, would typically stock only 1,600 SKUs while Tesco stocks 40,000. But almost all of Lidl's SKUs are fast movers, and when fast items become slow they are quickly dropped. What this means for the leaders is that a large percentage of their stock is relatively slow-moving and that in turn pushes up stock-holding costs, which can dwarf all other warehouse costs combined. In short, the large retailers are disadvantaged in this respect compared with the discounters because their higher stock holding costs are reflected in their higher item costs.
Over 20 years ago this writer went to Denmark to see the food retailer Netto's national distribution centre (NDC) in action and how the company was able to offer cheaper prices. The company subsequently became the first of the foreign-owned, deep discounters to set up in Britain, shortly to be followed by Lidl and Aldi with similar business models. Netto fully exploited the latest IT systems and automated materials handling equipment, particularly very fast sortation conveyors, to fulfil its key objective of fast stock replenishment to shops. All 125 shops were EPOS-equipped so that at the end of each day all information on items sold was transmitted electronically to the NDC, to initiate the replenishment process. Overnight all the replenishment items were picked and delivered to the shops before opening times the next day, thus ensuring no stock-outs. In effect, it was the consumer that did the stock forecasting for Netto whenever they bought an item, and stock forecasting is a potent weapon the the war to control inventory costs, but a weapon that is often dulled through complexity based on assumptions.
Squeezing suppliers is wrong-headed
The result of all this smart logistics was that 90% of all the inventory in the NDC passed through it every 24 hours, thus avoiding huge costs of financing slow-moving stocks. Britain's big food retailers cannot hope to compete with the discounters' business model centred around fast stock movement unless they adopt similar business models. Pressuring their suppliers to cut prices is not the way and would only ultimately harm consumer interests. One area, however, where the leading retailers could improve their supply chain costs without resort to abusive measures is to do more than lip service to supply chain collaboration, a hot topic for many years. Those companies that have initiated supply chain collaboration agreements have seen dramatic cuts in inventories and, therefore, costs. Why, then, have many more interested parties not followed suit? Many retailers still see collaboration with the supply chain as a threat rather than an opportunity and are reluctant to reveal the kind of business critical information to their logistics partners. Perhaps the threat from the discounters will concentrate their purblind minds.
Britain's rise of the supermarkets over the last 50 years has done much to improve the shopping experience and keep prices from rising too fast. Shoppers liked the idea and convenience of being able to fulfil all their weekly shopping needs under one roof, but technology moves on, and so do shoppers' habits. Today, one need not step outside one's home to buy anything, thanks to the Internet. The old habits are breaking down and buyers in a cost-conscious age want value for money in their food, every-day consumables and clothing more than ever. One estimate suggest that within five years 40% of all Britain's bricks and mortar shops will close permanently under the merciless hammering from on-line shopping. The big food and consumable retailers need to remember and implement the first law of marketing -- give the consumer what the consumer wants and not what retailers think is best for them.
Monday, 24 February 2014
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
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
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.