Category Archives: Economics

We Need More Corporate Ethics – Bring on the No-Maximum Mega Fines!

As noted in a recent article on Fine and Punishment, it has been a bumper summer for corporate fines and settlements. With firms in Britain and America agreeing to pay over 10 Billion in the past three months alone, there’s too much corporate wrong-doing these days. But the current fines are not enough. For example, a mere 5K for violating 10+2 is a CEO’s lunch money these days in most Global 3000’s. The only act close to defining a fine that will take a real chunk out of the corporate coffers of the guilty that the doctor knows of is the National Defense Authorization Act (NDAA) which allows 15 Million Dollar fines for first offenses and 30 Million Dollar fines for second offenses.

The reality is that a fine is only a deterrent if getting caught would mean a loss. Let’s say the fine for stock-fixing is 1 Million but an investor group could make 10 Million on the fix. Guess what’s going to happen? The stock is going to get fixed if the investor group has anything to do about it because, worst case, they only make 9 Million. The fine HAS to outweigh the reward, or corporate wrongdoing is going to continue to permeate both the financial sector, and the supply chain practices in industries where unlicensed knock-offs (especially in pharmaceuticals or electronics) can save a middle-man millions of dollars and push profits through the roof. As the Economist article stakes, given a risk-free opportunity to mis-sell a product, or form a cartel executives will grab it. To them, it’s all about the almighty dollar — and earning more than their peers to earn Wall Street’s favour and have something to boast about at the next charity dinner. (For a great Wall Street Perspective, you have to check out Randall Lane‘s The Zeroes: My Misadventures in the Decade Wall Street Went Insane [now at a bargain price for the hardcover edition on Amazon.com — you can’t go wrong]. Audiobook also available).

Unless the potential fines are crippling, wrong-doing will persist*, and so will cheapening out. And this is the biggest problem. Right now, we need sustainability in supply management, but initial investment in sustainability always costs more, so not only are executives not going to green light sustainable efforts, but if the organization has to look green or socially responsible, they are going to fund the lowest-cost “accredited” third parties that they can find to be “socially responsible”, and, in particular, likely fund those that use shady practices and cut corners everywhere possible. Because when the dollar rules, as long as you can buy the image, why create the real thing?

But if we force ethics back into the corporate world, then maybe we can force sustainability in as well. And when the only choice for gains is again long-term strategy, which is precisely where the economics of sustainability really make sense, maybe we’ll see improvement in ethics and corporate responsibility across the board. Or maybe it’s a pipe-dream. Either way, heftier fines would be a great start!


After all, remember what Randall Lane discovered when he did a Trader Monthly survey in the zeroes:
  If you received an illegal insider tip, a sure thing, and had a 50% chance of getting busted, would you use it? Only 7% would. What about only a 10% chance of getting caught? The numbers spiked to 28%. And what if you had a 0% chance of getting discovered? Suddenly, the number surged to 58%! To the majority of our readers, cheating wasn’t an ethical issue, it was simply a matter of whether they’d get caught.

Markets are Unpredictable – Is It Time For Old Fashioned Futures?

Recently, the Economist published a piece about the broken record that the markets have been following for the past five years. In particular, it has been skipping between two tracks – total chaos (as we experience one crisis after another) and a rhythmic predictability (as investors flee to the safest investment vehicles around, a sharp contrast to the early noughts when risk was everything and traders made millions on the press of a button).

According to the article, an ideal portfolio in 2007 would have been stuffed with gold, white sugar, Swiss francs and German bunds, anyone holding that mixture of assets when the crisis began would have seemed either eccentric or confused. However, over the past five years, a new kind of risk aversion has seen gold hit record values on almost 10% of trading days. So has the Swiss franc, white sugar, and government bonds.

At the same time, many other currencies and commodities have hit record lows as well as highs. Hedging, the standard trick of attempting to offset potential losses/gains that may be incurred by locking in a price too high (or low) for a desired commodity by also taking a position in another commodity that has traditionally followed a mathematically defined relation with the desired commodity, has become almost impossible as one crisis after another derails any and all attempts to find predictable trends.

However, before hedges, we had good old fashioned futures. Initially designed to allow a farmer to sell his crop for a fixed price before it was even planted, a future provided a farmer with an assurance that he would be able to sell his crop without losing the farm if markets went south. This not only benefited the farmer, but also benefited the buying company as they would be assured of a product at the time of harvest. Or, if they didn’t want it, the buying company could sell the contract to someone else.

In today’s volatile market, hedging is not the best idea. If you can’t lock a contract in at a fixed price, which should be your Supply Management organization’s number one goal, you should look to a futures exchange. While it won’t offer either party as much security as a good old fashioned contract, a futures contract may prevent either party from losing their shirt.

Any differing thoughts?

The (Board) Gamer’s Guide to Supply Management Part III: Munchkin

I’m ecstatic to continue this one-of-a-kind summer series that will help you whether you are just interested in finding out about this new and exciting career opportunity, or ready to take your Supply Management career to the next level. As I said in my last post, learning Supply Management can be infinitely more fun than watching paint dry. And when you can grasp a lot of the basic concepts by playing the right mix of strategic (and sometimes tactical) board games with your friends, it’s a blast and a half!

While this might be a good time to move on to a game like Puerto Rico, an economic city building game where you select a trade (such as captain, mayor, trader, settler, craftsman, or builder) in an effort to achieve the greatest prosperity (and highest respect) by shipping goods, building impressive cities, and managing their colonists and plantations, it’s still a little advanced for our budding gamers, so we are going to select a different game for our third post. Plus, while Ticket to Ride (Part I) helped us understand the capacity limitations of the shipping industry and The Settlers of Catan (Part II) helped us to understand the balance between supply and demand in limited commodities, they both limited our view to a competitive market where each player was acting independently at all times. (And while trading is a big part of Catan, your opponent only traded when it was in his interest to do so, and partnerships were never formed.)

In Steve Jackson’s Munchkin, we still have the situation where every player is out for herself, but where players will often unite for brief periods of time to accomplish a goal where there are mutual rewards (or bribes) to be made. Plus, as we will quickly discover, Munchkin brings a reality to gaming that neither Ticket to Ride nor Catan bring to the table. And most importantly, we have another fantastic TableTop episode where Wil Wheaton (who still claims to be In Exile) introduces the game with the help of the game’s creator, Steve Jackson (and Felicia Day and Sandeep Parikh). As long as he keeps churning them out, we are going to take advantage of the priceless gifts that Mr. Wheaton has granted us.

When it comes to Munchkin, as Wil Wheaton says,

The goal is very simple. Get from level one all the way up to level ten. To do that we’re going to kick in doors. Bam! And fight the monsters that we find behind them. Now, if a monster is too tough for us, we can ask our friends for help. Maybe they’ll make it less scary. . . . Of course if a monster looks like it’s getting to be too easy for us to defeat, those same ‘friends” will turn around and make that monster harder for us to defeat. . . . If we are able to defeat the monster and don’t have to run away, we’re going to go up a level and we get to take one of its treasures, always something that helps us. . . . Munchkin is a game where you really find out who your friends are. Generally, not the people sitting around the table with you.

In addition, Munchkin is a turn-based game where, at the start of your turn, you may play as many cards from your hand as you’d like, trade items in play with other players, or sell items for levels. Then you have to kick in the door, where you will generally find a monster (which must be fought immediately), a curse (which applies to you immediately), or another card that may be put in your hand and saved for later or played immediately. Other cards are generally monster modifiers (that make them weaker or stronger), a race (such as dwarf, elf, orc, etc. that gives you a special ability), a class (such as warrior, wizard, bard, etc. that gives you a special skill), or another special card that can be played at a later time. If you fight a monster, you either beat it (with help), or you try to run away. If you beat it, you get its treasurer. If you don’t, you suffer bad stuff, such as losing a level, losing an item, or, in some cases, you die. If it’s not a monster, you get to look for trouble (and play a monster from your hand to fight, if you have one), or loot the room (where you take a second door card and put it in your hand).

It’s representative of our job many days because we never know what interruption (probably caused by a gremlin) we are going to have to deal with, and we never know if we’re going to be able to conquer it without help. Sometimes we can solve the problem with help from within our organization, but sometimes we will need help from our competition. And this is where Munchkin gets interesting when compared to Ticket to Ride or The Settlers of Catan. Maybe when our primary distributor ‘loses’ the shipment of tantalum we need to keep our mobile phone capacitor production line operational, we can call up our competitor a few miles away and find out that they will sell us some of their excess inventory (at a mark-up) that will keep our production line going until we can get a replacement shipment. But maybe they will instead take advantage of this moment of weakness to lock up even more supply from their distributor, in the hopes that our production line will stay down for weeks and give them a chance to leapfrog us on New Product Introduction into the rapidly evolving mobile market place. We don’t know. Munchkin is one of the few games that will help us understand the intricacies of a co-opetitive market (which may not be a good thing for your supply chain, as per this post).

The trading aspect introduces us to the ways that we can barter inventory when cash is at a premium, the selling aspect (treasure for levels) introduces us to the ways we can profit off of excess inventory if we are smart about it, and the cursing aspect introduces us to the dirty tricks we might have to deal with from shady suppliers. Plus, classes demonstrate how skills acquired through education can improve your capabilities and races demonstrate how specializations in certain functions, processes, or technologies can take you up the Procurement ladder. And, just like in real life, if you don’t have enough excitement in your job, you can always look for trouble and hedge your bets (by buying on the spot market or, even worse, hedging) or, if you see a supplier or competitor in trouble, you can, in effect, loot the room.

It’s a great game. And since, as Wil says,

Sometimes you don’t care about someone’s rich personal backstory. You don’t care about a character’s precious little hopes and dreams. Sometimes you just want to kick in the door, kill the monster, and take it’s treasure without any of that pesky role playing.

So, without further ado, it’s time to kick in the door, mutilate the bodies, and backstab each other as we fight to see which one of us in the biggest munchkin.

The (Board) Gamer’s Guide to Supply Management Part II: The Settlers of Catan

I’m very excited to continue this brand new summer series that will help you whether you are just interested in finding out about this new and exciting career opportunity or ready to take your Supply Management career to the next level. Learning Supply Management doesn’t have to be as fun as watching paint dry — it can be much more fun! And when you can grasp some of the basic concepts playing a strategic board game with your friends, it’s a blast.

While Settlers of America Trails to Rails (also put out by Catan) might be a better choice to follow Ticket To Ride, that we introduced in last week’s post, The Settlers of Catan is also a great game to include in our series, and, more importantly, there is another great TableTop episode, again hosted by the one, and only, Wil Wheaton In Exile on Twitter. And since the best way to learn a new game is to see it in action until you are familiar with other board games in the same vein, we’re going to take advantage of the priceless gift that Mr. Wheaton has given us.

In TableTop Episode 2, Wil Wheaton uses Settlers of Catan, a modern day classic that has sold hundreds of millions of copies, to introduce us to the joys of trading wood for sheep. What could be better?

As with Ticket to Ride, the rules are fairly simple. As explained by Wil:

We are settlers on the legendary island of Catan. The first person to reach 10 victory points wins the game. You get victory points by collecting and managing resources. You get resources when one of the settlements you have built is adjacent to a tile that has spawned a resource. We find out which tiles spawn resources every turn by rolling dice. No one will have enough resources on their own to build the roads, settlements, and cities they need to win the game. So we will all have to barter and trade with each other. Just like in real life, there are nasty surprises waiting for you. Whenever we roll a seven, the robber gets activated. He steals from you. We hate the robber. The robber is a dick. But if you get robbed, it’s not the end of the world. There are other ways to get victory points — having the longest road, having the largest army, or you can also trade in resources to buy [these] development cards (which may also give us victory points).

Sounds easy, right? So where is the difficulty? Some resources are more likely to be spawned than others, as each of the 18 non-desert hexes have different numbers associated with them from 2 to 12 (excluding 7), and, according to probability, hexes with sixes or eights are more likely to be rolled and spawn their resources. Plus, there are five different resource types (brick, wood, wheat, sheep, and stone), and each type of building requires multiple resource types. A road requires wood and brick; a settlement (worth one victory point) requires wood, brick, wheat, and sheep; and a city (which is built on top of a settlement and worth two victory points) requires two wheat and three stone. As such, you need to strategically position your settlements to maximize the chances of getting the resources you need, but you can’t place settlements just anywhere. They can only be at hex boundaries and there must be a road of length at least two between any pair of settlements on the board. Or, if you don’t have good placement opportunities for your settlements that would allow you to maximize your chance of getting resources (by placing the settlement on a corner between three hexes with decent roll probabilities), you can try to build on a port that gives you better than average trading opportunities. (In the game, you can always trade four resources of the same type for a resource of any other type with “the bank”*, but some ports reduce this to three for one, and some ports allow you to trade specific resources two for one. This is very useful near the end of the game when your opponents are unwilling to trade with you if they see you nearing victory.)

The only other relevant rules are that if you build the longest road (of length five or more), or amass the largest army (of three or more knights, which are mixed in with the development cards), you gain two victory points and if you are lucky enough to draw a monopoly card when you purchase a development card, you can play it down and every other player has to give you all cards of the resource type you name.** And if you roll the robber, everyone (including you) with 7 or more resource cards has to lose half, but you get to move the robber to any hex and steal a (random) resource from a player with a neighbouring settlement (or city).

So what are the parallels with Supply Management? In Supply Management:

We are Supply Chain Professionals doing business in the global marketplace. The first of us to secure and deliver all of the products and services we need to meet all of the customer demands wins the game. We secure the products and services we need by managing suppliers and reserving limited production and distribution capacity. We find out which resources are limited by watching the market and taking note of tumultuous events. In today’s marketplace, no supplier will be able to meet all of our component or service needs on their own, so we will not only have to barter and trade with multiple suppliers, but also with our competitors and their suppliers in tight markets. And there will be nasty surprises waiting for us. A natural disaster may wipe out part of the raw material supply or Somali pirates may seize a precious shipment. We hate the pirates. They are dicks. But if our shipments get robbed, it’s not the end of the world. There are other ways to serve our customers. We can use the insurance money to buy from someone else, we can redesign our products to use alternate materials, or we can focus on a new or different substitute product or service to get us, and our customers, through the worst of times.

And just like in Catan, some resources will be more readily available than others. We will need different resources (from different suppliers) to assemble our complex product and service offerings, strategic reservation of production capacity and distribution capacity will give us a major competitive edge over our competition, and the more international trading capability we have at our disposal, the better trades we are going to be able to make (as some countries value wheat, lumber, or brick more than others, depending on whether they are short on building materials or food). The more trade lanes we have access to, the more markets the organization can serve; acquiring a monopoly on a certain product or service in a region, even for a limited time, gives us a significant edge in negotiations (as long as it’s not in violation of local laws), and keeping individual shipment value down can limit losses in the event of a robbery.

So what does The Settlers of Catan teach us?

  • if we are gamers new to the subject matter, it teaches us that successful Supply Management requires a lot of skill as we have to balance investments in (new) product development (settlements and cities) and logistics capacity (roads); we have to optimize local distribution (inner placement) hand-in-hand with global distribution (port placement); and we have to try and keep our competitors from locking up too much of available capacity in critical trade lanes (longest road) or production (largest army) and, most importantly, that we will have to do a lot of negotiating to succeed.
  • if we are new Supply Management professionals looking to improve our Supply Management game, it allows us to practice our negotiation skills and see how the negotiations change depending on the supply/demand imbalance for the raw materials and our relative strength in the marketplace (as your opponents will typically be very open to trading with you to mutual advantage if they are in the lead but very reserved if you are in the lead and the trade is perceived as advancing you [closer] to victory).
  • if we are seasoned Supply Management veterans, it helps us understand the strength and weaknesses of different Supply Management strategies. For example, if we focus on inland building to maximize the chances of resource spawning every turn, we are giving up any chance to guarantee low-cost trades later in the game (as we will not be building on ports). And if we focus on the ports, while we may be able to trade many resources cheap, we may never acquire enough resources to trade. If we focus on pure settlement and city building, an opponent may be able to sneak in and win the game with only two settlements (2 points) and one city (2 points) if they took a development strategy and secured the longest road (2 points), largest army (2 points), and two victory point development cards (2 points). It allows us to work on our strategic planning skills and notice that for every strength we achieve with a strategy, there is always a weakness that can be exploited by our competition with the right counter-strategy. And the better we understand the strengths and weaknesses of our strategies, the better we can adapt them and monitor them over time.

It’s a great game, and if you can’t wait to get started, I have great news if you own an iOS device. Catan for iOS is available in the App Store — although I must admit its a bit hard to play on the iPhone/iPod touch as you constantly have to zoom in and out. Now go forth and settle!

* which is a term you Monopoly (which we will not be including in this series) players are familiar with
** which has the opposite effect of the Mod card in Uno Mod for you Uno players

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!