Category Archives: Economics

Is it Time to Stop Blaming Governments and Start Blaming Economists for All the Economic Turmoil?

How many recessions has North America had in the last two decades? How long has the Eurozone crisis been going on? Does anyone know anymore? It’s been nothing but doom and gloom for years. Doom and gloom which immediately followed periods of growth that was too rapid or optimism that was too unfounded. What the heck happened?

We can blame the governments for failing to keep the currencies in check and failing to invest in innovation and jobs, we can blame the private sector for trying to rampage out of control, or we can blame the economists who give everyone bad advice. Maybe that’s what we should be doing. According to some very recent research, by Emre Soyer and Robin Hogarth, which is being published in a special section in the July-September 2012 issue of the International Journal of Forecasting, we have “The Illusion of Predictability” [preprint] (How Regression Statistics Mislead Experts) which can be succinctly summarized by saying “economists are overconfident [and] so are you” (as summarized by Justin Fox over on the HBR blogs).

Soyer and Hogarth did a study with 257 economists who were asked to read about a regression analysis that related independent variable X to dependent variable Y and then answer questions about the probabilities of various outcomes. When the results were presented in the typical manner (as average outcomes followed by a few error terms), the economists did a really bad job of answering the questions. They paid too much attention to the averages, and too little to the uncertainties inherent in them, thereby displaying too much confidence. Moreover, they did only slightly better when they were shown the numerical results plus scatter graphs. Only the economists who were shown only the graphs actually got most of the answers [close to] right.

In other words, when the data is presented in standard form, statistically literate experts are just as likely to glom (glom glom) onto the point estimate and discount the uncertainty as innumerate journalists and make the same mistakes. (They could use Pinky and the Brain’s refresher refresher lesson on statistics.) Ouch!

We in Supply Management know that the world is often much less predictable than economists would lead us to believe — having to deal with the effects of demand spikes, supply shortages, currency fluctuations, labour strikes, and natural disasters on a(n almost) weekly basis — and that no economic model is going to capture the full extent of the reality of the situation. It’s too bad that an average economist doesn’t, because if (s)he did, then maybe the advice wold be better, and the markets would, as a result of more rational actions, be more stable and make our job a little easier. In the interim, we can do our part by making sure that we help procure any services that require an economist or economic analysis and insure that such economist or group has a tendency for presenting, and analyzing data, the right way without unnecessary exuberance, one way or the other. Because this result, captured in the preprint, is scary:


72% of the participants believe that for an individual to obtain a positive outcome with 95% probability, a small X (X < 10) would be enough, given the regression results. A majority state that any small positive amount of X would be sufficient to obtain a positive outcome with 95% probability. However, in order to obtain a positive outcome with 95% probability, a decision maker should choose approximately X=47.

Simple math says that the majority of the participants were off by a factor of 5 (or more). Ouch! Late last year the BBC ran a point of view article that said we should beware of experts when it comes to running things. Maybe they were right!

the doctor’s Top 10 Cities for Supply Management Centres of Excellence (Where Should Your Supply Management Organization Be Located? Part V)

Yesterday, I gave you the top 10 mega-regions in which to locate your Supply Management Centre of Excellence, and indicated the major cities in each region that should top your list. For those of you keeping count, I listed 46 cities. If you’re indecisive, that’s a lot of cities to choose from! So, today, I am going to give you the doctor‘s top 10 cites for your Supply Management Centre of Excellence and his rationale!

Rank City Mega-Region Rationale
10 Dallas The Dallas Triangle The telco corridor. Oil and gas USA. Just a few hours north of Silicon Hills. Finance. More Fortune 500 headquarters than any other city in the USA. The centre-point of the largest metropolitan area in the south and the fourth-largest metropolitan area in the USA. East-West and North-South focal point of the interstate highway system — get anything, anywhere, anytime. One of the largest, and busiest, airports in the world (so you won’t miss Chicago). Sports, sports, and more sports. The world famous Dallas Cowboy Cheerleaders. People named JR. A great education system. Birthplace of Amy Acker, who, before taking the Whedonverse by storm, made sure that those of us who were adults with young children didn’t get the short end of the Wishbone.
9 Frankfurt The Frankfurt-Gärtringen Corridor The stock exchange, renewable energy, great transportation and telecommunications infrastructure, and German engineering! And let’s not forget Frankfurther Rindswurst. Woot! Woot!
8 Rio de Janeiro The Rio de Janeiro to Sao Paulo corridor It’s not the CRIB, it’s the BRIC, and it starts with Brazil. It’s the emerging South American powerhouse, which is the most visited city in the southern hemisphere (and home to Carnival), on the coast, and surrounded by a great transportation infrastructure. It is the headquarters of many state-owned companies, the centre of the oil and gas industry in Brazil, and the second largest industrial producer in the country. Foxconn, who produces all of Apple’s iPads and iPhones is down the corridor in Sao Paulo, so you know that Brazil, and Rio de Janeiro, is here to stay as a major player in global trade.
7 Paris Greater Paris La ville des lumières. La ville de l’amour. La vie en rose. Audrey Tautou. La mode, l’architecture, et la philosophie. Quoi d’autre avez-vous besoin?
6 Seoul Greater Seoul A megacity with a population over 10 Million, it is the largest city proper in the OECD developed world, that is home to major multinational conglomerates and one of the world’s top ten financial and commercial centres. A very technologically advanced infrastructure and an openness to the Western Way of doing business. Architecture, fashion, and culture extrude from every crevice. And it’s home to the Wonder Girls of K-Pop. How can you go wrong?
5 Amsterdam Amsterdam – Brussels – Antwerp Central European location, an almost universal understanding of English, great international relations, strong fashion and tourism industries, architecture, and culture (even excluding its world famous Red Light District). Plus, lots and lots of conventions — no travelling required!
4 London London – Leeds – Chester More visits from The Doctor than any other place on earth (and the most likely city to be the first to participate in intergalactic trade). On a more current note, the LSE, the fashion scene and haberdashery shops, and the entertainment industry draw all shapes and sorts of creative talent. Plus, it gave us The Clash and Generation X. What more can you ask for?
3 Tokyo Greater Tokyo Domo arigato gozaimashita! You have to interact with a lot of people everyday. And not all of these people are polite. Why not go somewhere politeness reigns? Plus, it’s the home of Sanrio (hello kitty) and the J-Pop explosion. How can you go wrong? (Oh, and the financial clout, hi-tech infrastructure, and the wide range of cultural pursuits from ikebana and origami to shopping and whiskey, doesn’t hurt either.) And if that’s not enough, anime, manga, and gaming central! (If you think Gibson is inspired, just wait until you read Masamune Shirow!)
2 New York Boston – New York – Washington Corridor If you’re gonna be in Supply Management for the long haul, you gotta have Heart. And since New York is The Heart of Rock & Roll, it’s as good a place as any to start. Plus, the easy access to capital doesn’t hurt!
1 Los Angeles The California Coast Despite our desire to move to a paperless office, we still have to deal with a mountain of paper every day. Purchase Orders, Goods Receipts, Invoices, Import Forms, Export Forms, RFXs, etc. etc. So why not base your Supply Management organization in the home city of Wil Wheaton, the guy who made collating paper cool!

Commodity Prices Have Exceed the Peak of World War I

And it doesn’t look like they are going to decrease any time soon. But more importantly, recent analysis by the McKinsey Quarterly indicates that commodity prices will remain high and volatile for at least the next 20 years. As per this recent article in the McKinsey Quarterly on “a new era for commodities”, demand for energy, food, metals and water will continue to rise inexorably as three billion new middle-class consumers emerge in the next two decades.

And the changes will be significant. As per the article, the global car fleet will double by 2030. Calorie intake per person in India will increase 20%, per capita meat consumption in China could increase by 60%, and urban infrastructure demand will soar in both countries. A hundred years ago, this was not that big of an issue as improvements in exploration, extraction, and cultivation techniques kept the world ahead of ever-increasing global needs. But today, the potential climatic impact of carbon emissions associated with surging resource use limits exploration and extraction because we’re already at a level where global carbon emissions are significantly above the level required to keep increases in the global temperature below 2° Celsius — the threshold which has been identified as potentially catastrophic. Plus, current cultivation technology is pretty much at its limit as only so much food can be grown in a fixed space.

And everything is connected. The ripple effects of water shortfalls at a time when 70% of water is consumed by agriculture and 12% is consumed by energy production can be catastrophic. For example, in Uganda, water shortages led to escalating energy prices which led to the use of more wood fuels which led to deforestation and soil degradation that threatened the agricultural food supply.

As a result, for the short term, commodity prices are going to stay high and your organization had better be prepared.

Five Steps to Long-Term Growth – Huh?

Even though I was browsing the HBR Bogs, I was still a little surprised to see a post titled “Five Steps to Long Term Growth” because, to be honest, thanks to Wall Street, I didn’t think anyone knew what Long-Term Growth meant anymore. And I’m being serious here. The focus on quarterly earnings calls has gotten so intense that it’s almost obscene — the nosedive a stock takes in the market after a bad earnings call is typically so severe that one would think the world is going to end.

Not only did this intense focus on short-term profit cause the end of the famed research labs in the 1990s (like Bell Labs, Xerox Parc, Texas Instruments — and yes, I know that Bell, PARC, and TI still exist, but what we have today is not what we had then), two major market busts in the naughts (as everyone tried to IPO at unsustainable valuations), and the loss of hundreds of thousands of jobs (because people cost money and it’s more profitable to operate at skeleton crew levels and make everyone, in fear for their jobs, work unpaid overtime than actually be responsible and use the obscene amounts of profit the corporation is making to actually hire the headcount the organization should have), but it pretty much spelled the end of any thought to growth plans beyond the next year in the corporate boardroom – at least as far as I can see.

Of course, it is this lack of focus on the long term that captures everything that is wrong with the marketplace today. Once long term growth and sustainability take centre stage, short term profit becomes unimportant, Wall Street is told to go <expletive> themselves, people become as important as product, and the market changes — for the better. If you would like the market to change for the better, and become successful beyond your wildest dreams when it does, you can start by taking Vijay Govindarajan’s advice and take the following “Five Steps to Long Term Growth”.

1. Decide What You Are Playing For

Are you playing for the fat <expletive>s on Wall Street? Or are you playing for yourself and your stakeholders. If the latter, then you have to take a stand and do something about it. No one is going to do it for you.

2. Get Everyone Speaking the Same Language

Once you decide you’re playing for the long term, the next thing you have to do is something different. Growth means fostering transformational or breakthrough innovation. This will require identifying value propositions that will expand your business into new markets with new advantages.

3. Imagine Your Future

If you want sustainable growth, you must have a sense of what the future will be, what it will require, and how you will win. Then you apply your breakthrough or transformational innovation to achieving that vision.

4. Align Your Actions With Your Intentions

As Def Leppard said in a fit of Pyromania, it’s Action, Not Words. You have to remember that your people are used to hearing a lot of big talk about great new initiatives that never come to pass and without some action behind them, they will assume that your words are just another corporate fad that will be forgotten as time passes. If you say you are going to eliminate all traces of phosphate from your products, assemble teams to do it. If you say you are going to create 50 jobs with a new initiative, start hiring!

5. Do It!

Growth is hard work requiring strategy, judgment, and leadership. It involves risk. It involves you. You will have to keep doing it. Day in. Day out. Day over. Day under. Day torn asunder. And back to day in.

Risk 2011: Economic

In our last post, we discussed the top three geopolitical risks facing your Supply Management organization that were chronicled in the World Economic Forum‘s 6th annual Global Risks report. Chronicling thirty seven types of risk divided into five categories, this report did a tremendous job of covering the types of risk that an average Supply Management organization needs to prepare for. Today, SI is going to continue its coverage of the report by discussing what it believes are the top three risks from an economic perspective.

03: Asset Price Collapse

Most of an organization’s capital is tied up in two things – its people and its assets. This includes its buildings, its inventory, and the raw materials that will be used to create future inventory. If all of a sudden the value of each of these assets drops 50% over night, the organization loses 50% of the value of these assets – and will likely sustain additional losses when it has to sell its inventory at a deep discount.

02: Extreme Energy Price Volatility

Today’s organizations are ultimately dependent upon three things – people, raw materials, and the energy required to transform the raw materials into the product the organization will sell. If oil doubles in price, that could make the difference between being able to produce the goods in China and import them into the US for sale at a profit and having to import them into the US for sale at a loss (or risk losing the entire inventory).

01: Fiscal Crisis

The fiscal crisis can lead to many things – currency volatility, a credit crunch, and overall infrastructure fragility. Weakening currencies can cause costs to skyrocket. A credit crunch can severely restrict cash flow and make it almost impossible for an organization to temporarily borrow the cash it needs to secure the inventory required to produce the goods it plans to sell to create revenue and, eventually, generate profit. And infrastructure fragility, which weakens every time there is insufficient cash to invest in necessary maintenance, can result in transportation lanes, power plants, and basic utilities becoming unavailable overnight. The ramifications of a fiscal crisis can reach far and wide.