Reverse Supply Chain: An Evolving Business Imperative

• In US, nearly 20% of everything that is sold is returned back to the manufacturing
• Reverse logistics in the US costs companies roughly $100 billion per year
• Reverse logistics represents anywhere from 3 to 35 % of a company’s bottom line.
• Moving product back through supply chain is 4 to 5 times costlier than moving it forward
• In 2008, about 60% of Americans have avoided certain brands because of a recall

As evident from above, reverse supply chain is a significant and at the same time an ignored topic. Executives choose to focus more on  forward supply chain as its impact on bottom-line is more substantial. But now their is a need to address it while formulating business strategy, primarily for following three reasons.

- Business Efficiency: Marginal cost of improvement in forward supply chain has been rising. Reverse supply chain is being seen as a low hanging fruit to increase business efficiency. Also reverse supply chain can offer a wealth of actionable intelligence to improve the product design, process design and operations.

- Market Drivers: Reverse supply chain offers various sources of revenue from auctions, refurbishments, recycling and others. Also how a company manages its warranties, product recalls have a significant impact on its brand image.

- Non-Market Drivers: Current regulations (like Bioterrorism, WEEE and others) list chemical and hazardous waste disposal requirements. More such regulations are expected in future to effect EPR (Extended Producer Responsibility) to protect environment and human health. 

 

For benefit of readers, lets explore the breadth of what constitutes a reverse supply chain:

• Returned Products: Products may be returned from any point in outbound supply chain because of Excess, Short, Damaged, Refused reasons.
• Recalled Products: Sometime companies need to recall certain batch of products due to defects which went unnoticed during product design and manufacturing.
• EOL/EOU products: EOL(End of Life)/EOU(End of Use) products refer to products discarded after use. 
• Containers: Some companies own their containers which go as assets in accounting books. Companies end up carrying a excess buffer of these mobile assets as they don't have real-time visibility into location and inventory of empty containers.
• Cases/Pallets/Racks: These are also considered as mobile assets. They are either to be handed over to forward supply chain or disposed off.

Having clarified the breadth of reverse supply chain, we now examine the areas business strategists need to look at. Following areas are key to drive business efficiency and address market and non-market demands.

Disposition Strategies & Gating:  There are several disposition alternatives like Auction, Donate, Redistribute, Repair, Refurbish, Recycle, Incineration, Landfill or Energy generation. The first step is to recognize the choices available because most companies limit themselves to redistribute or repair or dispose. 

Next step would be making the right disposition choice and routing the returns accordingly. The gating choice is dictated by regulations and cost-benefit analysis. Reverse supply chain can become a revenue source from just a cost center with wise disposition choices.

Traceability: 

Traceability is maintained in forward supply chain, but it breaks down in returns. Proper traceability using barcodes, RFID, GPS avoids mix-up of returns with forward flowing items/components. Also it avoids returns landing up at un-intended places which may put the company under legal risks.

Mobile assets like containers, pallets, cases may not have any traceability at all. Traceability would enable efficient management of these assets and free up the capital locked up in excess buffers.

Financial Control: 

Long 'Returns to Credit' cycle can harm a company's relations with its customers, retailers, and distributors. A good approach is to internally develop a SLA of 1 week and improve the processes to achieve it.

Tax implications is another area of attention. For instance, VAT paid in managing returns largely go unclaimed as the accounts dept. does not get timely information. Also visibility into custom duties and other taxes paid for returns can guide the company in optimizing the routes and destinations of returns.

Root Cause Analysis & Feedback: 

The National Retail Federation (NRF) estimated that fraudulent returns cost upto $3.68 billion in 2010. As high as 70% of claims are in 'No Fault Found' category. By collecting and analyzing the data at time of claims helps to identify the patterns in fraudulent claims and plug the loop-holes.

For genuine claims, root cause analysis in reasons of product failure can help product and process design.

In cases of returns due to excess/short/damage, a collaborative root cause analysis with logistic providers and distributors can help to reduce such incidents.

Overall reverse supply chain has a lot of actionable intelligence which can be leveraged to improve product and process design and also reduce the quantity of those goods in reverse supply chain which should not have been there in first place.

Recall/Warranty/Repairs Support: 

Product recalls are one of the most undesirable situation a company wants to be in. Recalls carry risk to company's image and hence should be handled with care. Proper customer helpdesk support goes a long way  in pre-empting any bad mouthing from customers in public domain. 

In case of food recalls, regulations also step in and hence an extra effort is required in generating and maintaining compliance reports.

Warranties/Repairs is another sensitive area for customers where providing customers the necessary information and regular updates goes a long way in assuaging their concerns. A company's website should be the first source of information and allow creation of RMA (Return Material Authorization) followed by helpdesk.

Logistics Optimization:

Working closely with third party logistics providers and using transport optimisation techniques can make reverse supply chain efficient. Good news is some of the third party logistics providers have recognized the need and hence are differentiating themselves from other providers on reverse supply chain capabilities. 

Performance Management:

'One cannot improve what one cannot measure' holds true for reverse supply chain. A bunch of KPIs need to be defined within the Balanced Scorecard of the company to monitor the progress. Some of the KPIs can be 'Returned Goods as % of Sales', 'No Fault Found ratio', 'Reverse Supply Chain costs as % of Operating Expenses', 'Product & Process Improvement initiatives', 'VAT Recovered as % of Total Returns' etc..

An effective reverse supply chain management also offers benefits to the Logistics Provider and the Customer. It can reduce driver downtime and improve delivery response for a logistics provider. For customers, it would mean peace of mind while dealing with returns, recalls. 

 

Fixing reverse supply chain is not about reverse logistics alone. Also with evolving business conditions, it will no longer be a choice in future. Companies who address it now in holistic way will not only derive business efficiency but also competitive advantage in time to come.

Exploring the contours of Food Crisis

The purpose of this blog is to turn spotlights on impending food crisis. World has its hands full dealing with Energy and Water crisis, yet this is the right time to also turn attention to looming food crisis and take necessary steps. It would be reasonable to say that today we are at a inflection point in food crisis. From this point forward, the cost of any preventive and corrective measures is only going to increase. 

Food Crisis - How its affecting the World

Lets start with exploring the evidence which indicate as why the food crisis is real.

The above map depicts two things:

- First, the affect of food crisis comes in various forms. The most serious form being the political unrest itself as observed in recent years. It was food crisis at heart of the movement which toppled the Tunisian dictator.

- Secondly, The affects of food crisis are not confined to any single country, region or continent. Its a global phenomenon now.

Various international organisations have acknowledged the problem:

World bank has said that rising food prices has pushed 44 million people into extreme poverty in developing countries since June 2010.

FAO has declared that global food price index is at a record high compared to the last food crisis three years ago.

Roubini, NYU economist, said that rising food and energy prices are fueling inflation across the emerging markets and hence pose one of the biggest threat to global economy recovery.

Private food companies are now forced to pass on the burden to consumers. ConAgra is mulling 25% increase in price on some of its products. Kraft has opted for stealth moves like reducing the packaging size or using the cheaper ingredients. 

What is Fueling Food Crisis

Again we map it out the reasons behind food crisis.

As evident from above, unpredictable climatic conditions and increased consumption has been primarily responsible for food crisis. Other reasons being land diverted for bio-fuels etc. World has been addressing unpredictable climatic conditions by pollution control, afforestation and other means. However, it is a long drawn struggle with no quick cure. 

China, India which have become engines of world growth have to feed their population. Increased consumption is going to be a norm as world population increases and living standards improve in developing countries. 

Hence effective solution lies in improving the food supply and food security.

Need for Broad & Inclusive Measures

World Bank has suggested following steps: 

• Achieve better food chain security
• Improving weather forecasting
• Establish humanitarian food reserves in disaster prone and isolated areas
• Empowering smallholder farmers through transactions with global groups like the World Food Program 

G-20 backed a billion-dollar Global Agriculture and Food Security Fund to get food aid to needy countries.

Much of the efforts are seen at country levels where governments are responding by increasing the budgetary spending, price controls and trade controls. However, caution needs to be exercised while using price controls and trade controls.

- Price controls and public distribution should not take away the incentive to produce from farmers.

- Trade controls and any other protectionist measures can bring more harm than good at global level by restricting food trade.

True opportunity lies in increasing agriculture yield as many of developing nations have low yields, as much as one seventh of the developed countries.

Food crisis and recent food contamination incidents have renewed the focus on food safety.

• European Union has issued a directive towards legal compliance to food safety measures throughout the supply chain.
• US enacted the bio-terrorism act and recently have come with Food Safety Modernization Act. 
• Several industrial standards like GS1, ISO 22000 have evolved over time to address the issue of food safety.

The compliance pose a big challenge to food industry as whole supply chain (starting from farmer) needs to be revamped and aligned.

Food crisis has not reached severe proportions yet. And it should not be allowed to. As H. G. Wells put it 'Hunger makes a fool of a man'. France President Nicolas Sarkozy too acknowledged the seriousness when he declared that 'The world faces the risk of food riots if leaders around the world do not deal with food inflation'.

So to conclude, Food crisis warrants our attention just as other major crisis.
We have our hands full with triple crisis - Energy, Food & Water. 

Proactive Management of Supply Chain Risks: Optional to Essential

Supply Chain Risks is an important part of the whole gamut of Enterprise Risks that an organization faces. Lately their importance has grown and hence a renewed focus on the topic is warranted.


The Need
Thoughts around proactively insulating your supply chain from risks have been around for a while. Only few companies have taken it forward with a dedicated program inside their organizations. However it might be time for other organizations to actively consider it, primarily because of three reasons:

• A company is finding itself managing a complex web of relationships across geographies and supply chain tiers. Hence a company is susceptible to disturbance though the problem may not be with its immediate partners but several tiers away in supply chain.

• The business world is far more competitive than before and a small mistake can lead to greater consequences like being shut out of a market.

• The increasing unpredictability in world, be it commodity prices, climate, regulations or other events. An enterprise can never know what would hit them and where.

There are numerous examples of how dear supply chain disruptions cost. A fire at sole supplier of an electronics company eventually resulted in its exit from the particular line of business as the competitor ate away into its market share while the company recovered. Researches have indicated that a supply chain disruption can cause 10% drop in price and takes two years to recover (Source: Kevin Hendricks, Vinod Singhal). Over 3 years, a supply chain disruption can result in 11% higher costs, 7% lower sales growth and 35% reduction in shareholders’ value (Source: Corporate Executive Board).

Recent global events have supply chain executives losing sleep. As world watched Egyptian crisis unfold, executives were worrying about movement of Goods along Suez canal. Japan's tragedy has affected semi-conductor industry worldwide due to fab shutdowns and halted product shipments. However, the ones who had Japan as major portion of their fab capacity are poised to lose more and fall behind the others. In automotive industry, Toyota and Nissan has closed down factories.

(Japan's earthquake, tsunami and nuclear crisis are tragic events and whole world shares the pain and sorrow. The brief reference of Japan's tragedy in the blog is in context of a different topic as such).

The Approach
The starting point for a proactive approach is to make a business case. Any program for active risk management would involve investment. Investment is required not only in form of direct cost like data collection, analysis, administration costs but also in form of indirect costs like high inventory levels, burden of managing more supply chain partners, foregone discounts etc. The benefits are far more intangible in terms of avoided losses. A business case should endeavor to use examples from past history to quantify the benefits and then work out return on investment.

Objectives of such a program will have direct bearing on the business case as it would influence both investment and benefits. Program objectives could be in form of: 

• Recovery Time and Cost: Allowable limits on time and money which can be spend to mitigate supply chain disruption. 
• Business Impact: The target cap on any losses on topline, bottom-line, shareholders worth, brand image, company image etc. when a risk goes live.

Objectives are key to define the boundaries of the program so that the company keeps a balance and does not go either overboard or under-invests.

Design of whole program is another factor which would influence the business case. One can opt to cover the following entire spectrum or components of it:

Inbound Supply Chain: Refers to commodities, components and/or products from contract manufacturers. It also includes logistic providers.

Prioritization: Prioritization of inbound parts is key first step and not all parts handled are equal in terms of importance. Shortfall in some parts can be more damaging than others. ABC classification, proprietary components, lead times can be some of the criteria for prioritization.

Risk Assessment: Next step would be risk assessment of each part and of supplier/logistic provider. Several agencies provide required data on suppliers to assess the risks. Specialized companies help with commodities risk management. Elaborate analytical models are capable of assimilating the risk data on several parameters like financial risk, nature risk, physical risk, political risk etc. Apart from parameters, risks also needed to be analyzed on following three dimensions:

• Severity of the risk 
• Probability of occurrence
• Ease of prior detection

A single risk number is then calculated which is then used for risk prioritization, tracking and event management.

Risk Planning: If a risk is beyond a given threshold, mitigation steps can be taken till the risk drops below threshold. Also plans are devised if risk crossed threshold in future. Crisis teams are identified. Trigger points and escalation matrix are established.

Risk Tracking: This would require continuous information gathering and updating the analytical model to keep the risk number current. Personalized dashboards help executives to keep an eye on various developments, changes in risk levels, trends and sound alarm.

Risk Recovery: Unpredictable things will happen, risks will go live and execution will then matter the most. A well trained crisis team ensures timely and cost-effective execution of a risk mitigation/recovery plan.

Learning and Improve: With every passing event, knowledge would be generated which would improve the prowess of organization to handle risks. However, this is possible only if a system is in place to capture the knowledge generated and make it available at right time to right people.

In-house Supply Chain: This would cover in-house manufacturing and other operations. The steps would be similar to above. Business Continuity Planning will be a key risk planning measure.

Outbound Supply Chain: Distribution to warehouses, distribution centers, retailers/dealers, reverse supply chain form part of this.

Any successful program for managing supply chain risks needs to have a wide breadth to cover every possible source of disruption and depth of analysis to derive actionable intelligence and plan. A well-defined proactive approach to manage risks is the best insurance a business can have in these unpredictable times.

Sustainability for Profit: How to Build a Business Case for Sustainability in your Company.

Literally every company is engaged in some activities around sustainability. But barring some, others have not been able to make it an integral part of their business. For many it is confined to philanthropy. As the relevance to bottom-line is unclear, many companies treat Sustainability as sort of 'Extra-curricular'. Its something which is left to discretion of CXO. They are the ones who have championed it in their organisations. It has been a top down approach till date and rest of the management hardly pushes for any sustainability initiatives. Though they would nod in agreement that it is something which they ought to do but they just don't have the business case around it to support it. Its the perception of intangibility and soft benefits which needs to be overcome to nail down the hard benefits. Lets explore Sustainability strictly from 'Bottom-line' point of view keeping the soft-benefits aside.

(I have used real-life examples to drive home the point for an abstract concept like Sustainability)

Market Differentiation: Sustainability awareness has been growing among consumers and now they care. Given a choice, they would always prefer a product which is environment and society friendly. 

 - A Swedish hotel chain was able to differentiate in market through its commitment to environment. 

 - A US Builder received nation-wide recognition because of its Green Buildings. 

There are several examples where such market differentiation has translated into more revenues either by more volume sales or by a  price premium.

Companies can demonstrate their commitment by Eco-labels. There are 369 eco-labels developed for different geographies and industries which guide organisations to sustainability practices and give them the seal for marking their product..

Improved Product & Process Design: An environment friendly product and process design goes a long way in  improving overall performance while reducing the cost.  

 - A chemical company applied the principles of bio-chemistry to reduce the process waste and increase the yield by 30%.

- Under pressure to recycle old carpet, a company discovered that it can make better carpets at reduced cost.

- A woods product manufacturer saved money by putting the waste back into the product.

- A aerodynamic fairing in front of a truck lowers the fuel consumption.

- Using Bio-mimicry, many innovative products are on anvil which would perform much better while consuming less resources.

- A company decided to measures carbon footprint of its Supply Chain and instantly identified areas of improvement. By reducing the carbon footprint it also saved much in energy costs.

The list would go on and on. Carbon Footprinting, Recycling Waste, Collaborative Research, Partnering for Closed Loop Manufacturing are some means by which company can get started to leverage sustainability to improve the bottom line.

Reduced Legal & Image Risks: In todays connected world in which bad news travels as fast as light, spreads like a viral and in a form which can adversely impact consumer perception of a product, brand or company. 

 - Activist used the popular and viral Dove Evolution campaign to attack the company for palm trees destruction. Dove had to go in damage control mode and started sourcing from sustainable forests.

 - A footwear company suffered a big dent in its image due to sourcing from 'Sweat Shops' in China.

 - A semi-conductor company got lower insurance rate because it eliminated toxic chemicals from its process.

 - A gaming product got banned in Netherlands due to high cadmium content in their cables which led to severe revenue loss for the consumer electronics company.

  - A Swiss textile co. was smart enough to see a legislation coming and proactively switched to being chemicals from toxic chemicals.

 - WEEE, RoHS, CRC are some of the regulatory compliance which companies will have to adhere to be eligible to sell in the market.

The impact can be measured in ways of avoided legal cost, potential loss of revenues or reduced insurance cost. Though putting the numbers might be subjective here, one can always fall back on real life examples of above to drive home the impact on bottom-line. 

New Revenue Sources: A focus on sustainability can open up unexpected new sources of revenue.

 - A photocopier producer realized that it can sell off the waste ink to paint companies and packaging to home furnishing companies.

 - An Indian company on its focus on Bottom of Pyramid, invented a cheap way of refrigeration and a new ice cream offer to open up a new market for itself. 

 - Advent of mobile banking had expanded the consumer base for many companies while bringing better standard of living to secluded communities.

For companies, a new consumer base in this competitive world is far valuable than usual revenue projections. A re-look in reverse supply chain which is often considered a burden can open up new revenue opportunities.

Above are just pointers to how Bottom-line can benefit from Sustainability. Add to it, the other intangible benefits and our responsibility to progeny and posterity and we have a compelling case. 

A top down approach may not suffice. Participation from other levels of management is key to tightly integrate sustainability with business.

'Collaboration': The word which would redefine the Business World

Collaboration has been a sort of buzzword for long with companies and consultants gravitating towards it alike. Collaboration is now much more than social networking which caught the attention of business folks in first place.
Following only gives a glimpse of the limitless potential of 'Collaboration' to address business complexities of today.


Multi-tier
Internal Collaboration: Organisations are divided into silos of departments. However value chain cuts across departments (dept.). Hence came the concept of internal customer where every department tries to serve the downstream dept. best. Collaboration extends the reach of an individual depts to literally any other dept far off in value chain. A design dept. is not longer limited to marketing and engineering but can also talk to manufacturing and field service.


Supplier Collaboration: Made popular by Toyota Production System, supplier collaboration is now reaching new heights as companies move towards outsourcing and off-shoring to gain competitive advantage. Present day challenges include aligning a contact manufacturer in China with business strategy of the company, aligning proprietary equipment design to your design process, to build responsiveness and flexibility at supplier to move towards open configuration products and mass customisation.


Customer Collaboration: This is another frontier which has opened up where companies are trying to engage their customers to design better products and services. A must for 'Engineering to Order' companies and a competitive advantage for 'Make to Order' and Service oriented companies. 
Customer collaboration also helps in building brand and loyalty. Agriculture firms are leveraging new technologies to reach out to farmers and help them to improve the yield.
Customer collaboration also holds key to product innovation.


Strategic Partners Collaboration: No longer individual companies compete. Its the networks that compete with each other. For a company to grow, it needs to have a network of strategic partner ranging from Govt. agencies to NGOs, independent researchers and academia. Some examples can be:
- Collaborative Research or Co-creation: Companies can stay ahead in technology trends by engaging with independent researchers. 
- Crowd-sourcing: To tap into collective intelligence of public to identify new trends, ideas and outsource research, product testing and innovation.
- Pro-active Public Image Management: Collaborating with activists, NGOs can help to identify areas where a proactive action can pre-empt any possible public backlash.
- Competitor collaboration: Sometimes collaboration with competitors can help to usher the whole industry into new era and create new market opportunities and avoid threat of substitutes.


Multi-site
Overcoming Geographical Barriers: Companies now operate with a complex web of geographically dispersed design teams, field service team, sales personnel, customers,manufacturers, tier 1,2 and 3 suppliers. The challenge has always been to promote interaction between geographically dispersed stakeholders as good as face to face interaction.


Overcoming Systems Barriers: Many companies grow with acquisition and hence end up having diverse systems and processes within the organisation. The barriers would include different IT systems to completely different organisational procedures. Monolithic and disparate ERP systems, CAD systems within the organisation and outside the organisation with suppliers hinder organisational  alignment towards business strategy. System barriers become more prominent as organisation try to move towards mass customisation and wants visibility and control throughout the supply chain. Monolithic systems handicap executives in gathering Business Intelligence for effective decision making.




Information flow is key to enable collaboration. IT systems are now gearing up for the challenge and SOA (Service Oriented Architecture), Cloud Computing and others are gaining prominence. IT systems now allow both synchronous and asynchronous collaboration. Platforms like SharePoint which are both open and scalable are purpose made for collaboration. Concepts like Enterprise 3.0 incite companies to go further and connect seamlessly to IT systems of supplier itself onto one Service Bus.


Even with limitless potential and developing support systems, collaboration wave has not swept the industry as predicted. The lukewarm reception can be attributed to many reasons like
- How does it help me in doing my job better?
- I don't have training to do this kind of thing.
- Are these things worth investing in?
- Looks more like bling-bling to me.


The companies are not yet able to establish direct relationship with bottom-line and has been guarded in their approach. A clear business impact and direct relevance to ones job at hand is critical to acceptance and adoption. 

International Migration: How to turn it into Public Good?

We have one Earth and its limited resources can support human population and its growth only to a certain extent without hurting the progeny and posterity. But Earth is divided into about 200 nations with their own identities and aspirations. These boundaries make it difficult to reach a balance in Demographics as every nation has their own political and cultural climate which restricts international migration.

Let’s investigate without getting trapped by national boundaries as how international migration can be good for all. Demographics vary in different regions of the world. Some regions would have ageing population and some would have surplus young population. Migration of surplus young workforce to regions of ageing population helps to provide the working population to complement the ageing population and sustain the growth of the region. The young regions benefit by lower unemployment and hence lower social ills related to high unemployment like poverty, crime, violence, fanaticism etc. In long term the regions trade place. After 50-60 years, the young regions grow old and other regions come up with young population. On overall, the world has right age distribution but not regions wise. Migration gets the distribution right.

The above sounds simple enough till you add the factor of national boundaries which changes the whole game. Nations differ in extent of economic development and culture which adds several anomalies and make international migration dysfunctional.

• Developed nations with shortage of workforce have been importing high quality workforce from developing nations through visa rules and restrictions. This has helped the developed nations tremendously and robbed the developing nations of the very people who would have championed the growth of their region. Also developing nations loose the investment which has gone into their upbringing, education and training. This brain drain results in reverse foreign aid to developed nations from developing nations which is much more than a direct foreign aid from developed nations to developing nations as per some studies.
• Cultural identities too play a major role. Japan has a very ageing population. But Japan culturally is closed to outsiders ‘Gaijin’. The demographic imbalance in Japan has taken its toll on the country pushing the Debt to GDP ratio of this second largest economy to 200%. We also hear protests against migration from West as people are not able to accept immigrants who are glaringly different in appearance, customs and culture. Add regional politics to above and one gets further muddled situation. Politicians cash on popular (though unjustified) sentiments and introduce policies which are protectionist and create trade barriers.
• Occupational and lifestyles discrepancies further compound the problem. Emigration from rich agriculture resources countries to modern, attractive and consumption oriented regions tends to affects world food production.

However, the above anomalies disappear within a national boundary. Within a country, people can move from one place to another to inhabit and work without any restrictions, no matter how culturally different the place is. India is one good example as how a region with numerous cultures, ethnicities, appearances, customs allow unrestricted and good migration which does not suffer from the anomalies mentioned above. The challenge is enable similar good migration across national boundaries. Formation of European Union with relaxed movement across European countries (which in themselves are culturally diverse) is a step in right direction.

OECD recently declared that migration is key to long-term growth. Most economists agree that legal and illegal migration is beneficial to economy. However, general public opinion is negative in countries which face immigration. International agencies like UN and ILO are constantly working towards strengthening international cooperation on the topic.  The current recession literally put brakes on good international migration. However, in a increasingly growing global and flat world, its imperative to manage international migration and public opinion better to turn migration into public good. 

Social Capital: Need of the Hour for India (An Independence Day Special)

As India celebrates Independence day on 15th August and completes 63 years of freedom, its time to reflect on present day challenges and how to address them. India has gained world prominence due to its economic development. To ensure further sustainable economic development, its imperative to bolster the Social capital in addition to other capital like Money, Land etc.. The blog entry takes a dispassionate view of current social conditions and emphasis the need to address Social Capital needs of the nation. 

But the need of Social capital is not confined to India. After reading the blog, one would realise that whole world needs it more as it influences social and economic well being of people.

Numerous incidents in recent times have concerned me about deteriorating social capital of the country. Rising crime rate, corruption, communal riots, rising regionalism, casteism are symptoms of it. India is currently in an enviable position demographically, with half of its population under 25 years. I too believe in its youth power. But got a big shock when a promising youth leader used language to divide people, breed hatred and spark riots, just to firm up his regional votebank. These incidents indicate declining social capital in the country and a misguided youth can become a liability rather than strength of the country.

What is Social capital?

It's a set of informal norms in the society. The informal norms that constitute social capital lead to greater trust and cooperation in society. These informal norms are related to traditional virtues like honesty, honouring commitments, sincere discharge of duties, reciprocity etc. Maybe this is what makes Social Capital an elusive and ignored subject in public debates. A high social capital has not only social benefits but also economic benefits. Studies by World Bank have shown that social cohesion is critical for societies to prosper economically and for development to be sustainable. A perfect example would be Japan, who was shattered in Second World War, rose back due to its high social capital. For a modern stable democracy, social capital is sine qua non.

Can Government Play a Role?

Can government increase our stock of social capital? Yes, it can to some degree. The best way government can influence it is through education. Not any education but morals and values based education. The need of this education was emphasized long back by 'Father of Nation (India)', Mahatma Gandhi. But is being ignored as today's education is more geared towards science and profession. Also a government which provides property and public safety breeds trust and cooperation in society hence indirectly creating social capital. Promoting organization of people for greater cause like environment protection, poverty eradication etc also strengthens society cohesion. More specifically to India, which is home of more than 100 languages, many religions, cultures and ethnic groups, any voice of separatism should be nipped in the bud, rather than allowing it to spin into vote bank politics. Separatist sentiments are a killer of social capital in the country.

Role of Non-Governmental Bodies

Many non-governmental initiatives like 'Art of Living' also go a long way in preserving the social capital and improving it. Spirituality opens ones heart and inspires one to live a value driven life. Indian public is very emotional, when it comes to movies. In recent times many movies like Rang De Basanti, Chak De India, Peepli Live etc., not only entertained but also sent across right message to public. In real life too there are many stories which demonstrate human values and compassion. Media can play its role by covering these incidents, rather than sensationalising all negative incidents. Last but not the least, how a common man can contribute? For a start, follow the core values of his/her religion, which is based on moral values and love for humanity and is common to all religions. A common man would do just great by believing in 'One World One Family' and upholding moral values in work & public dealing.

Social Capital and Sustainability

But why should one worry about social capital at all? Yes, one can choose to ignore it as we become used to living in present conditions. But if we want to ensure a better future for our children, then we have to act now! And that is the basic tenet of Sustainability.

Some members of society employ unethical means to amass wealth, justifying it in name of creating better future for their children. Unwittingly they end up teaching unethical short-cuts to their children too. All unethical actions by members of society invariably flow and diffuse into the society, hence polluting it. Happiness of a person is also a function of his surroundings & society. Wealthy children cannot remain happy as the world around them grows meaner, corrupt, violent and polluted. No one lives in isolation, we are all connected and hence we can no longer afford to ignore the need to develop this all important but elusive Social Capital for our progeny and posterity.

Why No Alarm Bells for Japan?

The above question generated much discussion on LinkedIn in Group 'Economist of the World'. I have attached my opening post and following discussion for visitors' review. I thank Daryl, Kamal, Poonam, Jacky, Richard and Sep for sharing their thoughts in the comments.

(I sincerely regret the use of the acronym 'PIIGS' in the discussion by some.)

Why No Alarm Bells for Japan?

Ashutosh Agrawal • Hello everyone. The above question is no less than a puzzle for me.

Greece which is on brink of bankruptcy has Debt/GDP ratio of about 120%. Lot of hue and cry has been seen over it. Stock markets and Euro have all suffered. Next anticipated failures in line are Italy, Portugal and Spain which yet have Govt debt/GDP ratio less than that of Greece. A lot of serious warnings are also given for US also which has the ratio of about 90%.

But surprisingly, Japan is comfortably sitting on top of the debt pile with 200% ratio. And deflation and contracting population makes it further worse by putting downward pressure on GDP. Its the second largest economy and yet there are only rare warning flares given out. Why? What is special about Japan which gives the confidence that it is not on brink of failure?

20 days ago

14 comments

Daryl Montgomery • A good question indeed Ashutosh. The alarms bells are going off, but no one is listening.

In general, the media only reports on a crisis after it has erupted, not before, no matter how obvious it is. How much reporting did you see on the subprime crisis before capital markets started to implode? Japan is indeed a major crisis about to erupt.

Japan differs from Greece and the other PIIGS in that it can engage in 'money-printing'. Japan differs from the PIIGS and the U.S. in that it has funded its massive debt internally by drawing on the substantial savings of its people. That source is now just about depleted however. Japan will have to turn to the global capital markets to fund its government deficits in the future and compete with the U.S. a number of other countries for a decreasing pool of money. To the extent that it can't borrow enough, it will have to print money (as will the U.S.and the UK). This could lead an interesting reaction of deflation turning into severe inflation in a relatively short period of time - something that few have considered.

The obvious follow up to your question is: What will happen to other countries and the global financial system as Japan becomes increasingly stressed? If Greece, which represents only 2% of the eurozone economy can wreak havoc on the global financial system, imagine how big a problem Japan could cause.

18 days ago

Ashutosh Agrawal  • Thank you Mr. Daryl. Your answer did satisfy my curiosity. But also made me bit wary as you clearly mentioned that Japan is in trouble. I was hoping otherwise as another dip would be disastrous for sure. Even for a growing economy like India.

However I get a feeling from your comment that Japan's troubles are yet to become serious and there is still some time before the internal borrowing gets exhausted. Maybe this is the right time to intervene before the second largest economy starts accelerating downhill, dragging the whole world down with it.

Our discussion is just another warning flare. Hope someone in Japanese leadership sees it. ;)

18 days ago

Kamal Gupta • It is Japan's huge forex reserves

18 days ago

Poonam Arora • Prime Minister of Japan, Naoto Kan has already warned collapse of Japan under its huge debt mountain in its first major speech only. Population of Japan is ageing and as more and more Japanese citizens retire, they would sell their long holded govt. bonds to cover the expenses and Japan would left with no other option but borrowing from global capital market as Mr.Daryl rightly pointed out.

17 days ago

Ashutosh Agrawal • Thanks for the insights. So is it that Japan can afford to not to act for some time longer? If yes, then how long? How long before Japan turns to Global market or tries liquidating its reserves to service the debt?

Should Japan take some concrete steps now to rein in the debt or should wait? Is there any possibility that the problem will correct by itself in near future?

I am still trying to understand the reason for inaction though the danger is not immediate.

17 days ago

Kamal Gupta • Japan has to act pretty quickly. It is a rapidly greying society and not immigrant-friendly. If it does not change its immigration policies, it will anyways implode in the next forty years.

Just like Russia, and a number of European countries.

17 days ago

Jacky Mallett • Japan is a highly overpopulated volcanic mountain chain. I'm not sure what particular hazard it risks by allowing its population to naturally drop to a more comfortable level, besides the tragedy of its population having to adapt to more living space in Tokyo.

Less can be more.

16 days ago

Kamal Gupta • An ageing population means more demanding hands, less of productive hands. You start eating up the capital that you have built up, and then implode.

The population will first shrink gradually, and then the pace of shrinking will accelerate.

It is beginning to happen in Russia. It would have happened in the US if it had not opened up immigration. If you look at the demographics, at the census figures, you will find that the population of "white" Americans has shrunk, but has been more than made up by increase in population of non-white Americans and immigrants- mainly from Hispanic America, but also from China, India, Carribean countries.

Immigration is the last major barrier to trade still remaining. Natural forces will bring it crashing down, though maybe not in my lifetime.

15 days ago

Richard Di Bona • Interesting discussion – a few observations and possible angles:

As Poonam stated, Japan has had warnings attached. But for the Western (and hence effectively World Press) perhaps it’s best to concentrate on matters closer to home.

Remember that Japan has been in a slump since about 1989. One exacerbated, not relieved, but interest rates close to 0% for much of that time (and sometimes even negative interest rates). This helped give rise to the avalanche of malinvestments undertaken with public purse/ peoples savings in post office bank accounts. IMHO a stark warning to many western countries that seem to be seriously considering attempting to spend their way out of an overspending-induced crisis!

What has probably kept Japan Inc.’s head above water to date is innovation: both by small and large firms. Much manufacturing may be offshored, but most of the high margin works as kept at home. For as long as they can retain intellectual capital in Japan, as a whole Japan has something going for it. This is after all less commoditised than tourism & agriculture (both major income earners in the PIGS).

That having been said, in order to redistribute income from the intellectual capital holders to the populace as a whole (increasingly required due to demographics as Ashutosh and Kamal point out), tax rates are destined to rise and at some stage a tipping point may be reached.

But this is unlikely to be immediate. Also after 20 years of slow growth, lost generations etc Japan is not in the state of shock that PIGS are following recent boom years.

15 days ago

Ashutosh Agrawal • Thanks Kamal for clarifying the effect of a contracting population. A contracting population also mean a lower consumption/demand overall. And then the Govt. keeps spending to create demand, hence digging itself deeper into debt. Culturally, Japan does not welcome immigrants and I don't see any signs of that changing.

Thanks Richard for bringing in the angle of intellectual capital. I do agree that Japan is ahead on innovation. By which they tend to create value for the world and are not much constrained by a lower demand back home. But how long will that innovation edge last as other countries catch up in development.

It seems that factors which are keeping Japan afloat may not long last. But the danger is not immediate, I guess and I sincerely hope so!

But these things have a way to accelerate on their own. Some months back no one was even talking of a Euro-wide crisis.

15 days ago

Jacky Mallett • Economic arguments based on schadenfreude should be inherently suspect. The simple problem with most of the arguments here is that the productivity improvements of the last 20 years are being ignored. What impact can a dropping population have on production when you have robotic factories being run by a handful of people?

Japan blew its monetary system out with an equity capital feedback loop back in the 1980's. It never properly addressed the fractures in the monetary system that that created, but consequently and probably serendipitously it has dodged the Asset Backed Security bullet that is currently taking out the United States and European monetary systems.

The underlying economy is one of the most productive in the world, especially when the lack of natural resources in the Islands is factored in. Probably the biggest are under employment, with a lot of make work, the lack of physical space in the major cities, and the need to import food. All of which will alleviate themselves naturally as the population reduces to a more sustainable level.

In realms of scientific inquiry outside of Economics it is fairly well known that it is possible to saturate systems to the point where performance drops off as increasing numbers are added to the system.

15 days ago

Poonam Arora • Looking at all the aspects of the economy of Japan, it is not wrong to say that its the time when Japan needs to take some actions not only to increase its revenue and reduce expenditure/subsidies but to raise producitivity/intellectual capital and address structual problem of rapidly graying population also. I agree with Mr. Jacky that factories in japan are being run by a few productive people but overall impact of low saving because of ageing population can not be ignored here. Although Japan still has advantage of rising yen against both the dollar and the euro and being the net lender to the rest of the world but these long overdue fiscal austerity measures need to be addressed now.

13 days ago

Sep Van de Voort • Yesterday Standard & Poor's warned that it may lower Japan's debt rating after this weekend's election results. Premier Kan's ruling coalition lost its majority in the Upper House which makes its plans to deal with the public finance problems less credible. Such a down grade by S&P could potentially be the catalyst to open eyes of investors for Japan's immense problems which Ashutosh rightly pointed out in his opening comments for this tread. Not only is Japan a volcanic mountain chain, as Jacky Mallett said, they're dancing on the volcano as well :-)

13 days ago

Ashutosh Agrawal • Thanks Sep for the update with regards to S&P.

Even after the financial crisis we still look up to rating agencies to provide guidance. Hope they don't miss this time.

5 days ago

Exit, Double Dip, Govt. Debt, Recovery!

Nearly all the economic discussion these days revolve around these terms. The endless discussion on cause and affects of recession are now long gone. The centre stage has been taken by spiralling Government debts/GDP ratios, European Debt Crisis, Exit strategy from expansionary policies, avoiding Double Dip recession and sustaining recovery.

The crisis has made everyone Keynesian. The expansionary fiscal and monetary policies implemented by crisis affected countries' governments have increased their deficit and consequently Govt. Debt. In particular, US got drawn into two successive crisis without giving itself space in between to apply contractionary policies and recover from high deficit and debt. Attempts by US government to use contractionary monetary policies after recovering from early 2000s recession accelerated the housing crisis. As a result US Govt. had to go again for expansionary policies which continues till date. No wonder the US Govt. debt to GDP ratio is hovering around 90%.

Europe too is laden with high Debt. Greece which is on brink of bankruptcy has Debt/GDP ratio of about 120%. Italy, Portugal and Spain too have high debts. Unlike US, the mis-management and unbridled Govt. spending is responsible for Greece woes. The discipline in Govt. spending has been missing for a long time as populist policies and high standard of living became more important. Now when its time for austerity, the public is bound to feel the pinch and most affected will be the lower strata and pension beneficiaries. Surprisingly, Japan is comfortably sitting on top of the debt pile with 200% ratio. What makes Japan further unique is its contracting population and deflation which further aggravates the problem by arresting GDP growth. Japan is the second largest economy and its failure will cause havoc to world economy. When is Japan leadership going to wake up?

The way out of the high debt is obvious, lower the government spending and go for contractionary fiscal policy. And there lies the fear. Still the recovery is incomplete. Any premature withdrawal of expansionary fiscal policy is bound to push the economy in another recession, which is widely known and feared as 'Double Dip' recession. As Europe gears up for austerity measures and reduced government spending, US has time to time issues warnings that it might affect the economic recovery. Also unemployment figures in both US and Europe are too high to allow scaling down expansionary policies.

So what could be the Exit Strategy for the governments from expansionary policies. Some quick-fix but unpopular means would be to Print Money or Default on Debt. Former would skyrocket the inflation and common man will suffer. The later will severely dent the credit worthiness and reliability of the country for time to come. The right approach to bring in fiscal discipline would be long drawn and painful. But there is an increasing danger of governments resorting to protectionism in both consumption and jobs to speed up the process. This would invite counter actions from other countries and will further restrict growth at global level. Protectionism on consumption will adversely impact demand at global level and that on Jobs would adversely affect the supply side of the GDP equation. Its significant that countries at G20 summit resolve to refrain form protectionist mindset. Also everyone cannot Exit as same time. Some have to stay longer for sake of the world economy.

Measures taken in India are laudable with government taking unpopular decision to remove subsidies and de-regulate oil market. Also deft handling of 3G and broadband spectrum distribution has given the government much needed funds. However, there is urgent need of reforms on supply side like labour reforms and others to control spiralling inflation.

The financial crisis has proved that world is far more interconnected than we ever thought before. Mis-steps by one country or woes of another affects the whole world. A united, responsible but a painful approach is the only way forward.

Competing Networks: A Holistic Approach to Competition

Who competes today? Is it the stand alone organisation or is it the network of organisations?

The question is pertinent as success in today's 'Glocal' environment is dependent on the relations with suppliers, customers, partners and stakeholders. Companies don't compete with each other but its their collaborative networks which compete with each other. The success of Toyota is not of the Toyota Motor Corp. alone but the success of its network of suppliers, dealers, and other partners. The strength and relationships within networks gives the competitive edge in today's world. A good example of this would be the 'Standard Wars' like that of 'VHS' and 'Betamax' or that of recent 'HD DVD' and 'Blue-ray'. The winner was not the best technology but the one who had the network to sway the whole industry in its favour.

The competing networks are not entirely independent of each other and tend to have overlaps when they share some resource to common benefit. The overlap/sharing works to the advantage for both competing networks. Its very common to have automotive ancillaries who supply to various companies. Mobile companies share their patents with each other for a fee. Sometimes companies may even support each other out of necessity. Apple provides MS Office compatibility on its PCs and so does Google on its Google-Docs..

How far these networks reach out to? Does it go beyond the supply chain and technology partners? The answer would be Yes, if one closely examines the business environment of today. One would find examples of oil companies enjoying patronage of governments. An FMCG company engaging with environmental activists for CSR and public relations. The 'Buzz' network of die-hard customers and critics developed by a company to market their offerings. Affiliation of companies with regulatory bodies and personnel to influence new regulations for the industry. Also a network may include not so holy relationships like that with influential intermediaries for customer acquisition or with mafias for land acquisition or for ensuring safety and success of businesses.

After above discussion, one might agree that considering organisations as competing entities is a narrow view in today's dynamic and interconnected world. By considering itself a stand-alone competing entity, a company will not be able to leverage the competitive strength which comes from a strong network of organisations and influential bodies. In addition, a company would also have to be mindful of the network of which its a part of and take steps to strengthen its position within the network and the network itself.

Can 'Lean' Fire Back on Your Business? Potential Pitfalls in Implementation.

Recently I came across some news/discussions which stumped me and motivated me to examine the topic in detail. 'A leading tractor company couldn't fulfil its customer orders because it did not have enough inventory owing to lean manufacturing.'

But before we reach any conclusions, lets go in detail. The company reaped the benefits of Lean during the recession period as its decline in bottom-line was lower than other companies. It was when tide was turning, the company miscalculated. The demand rose faster than they had anticipated. Other firms with unsold inventory were clearing up while this company was turning its customers away. And the blame was put on Lean, which is not a person, not an organisation but just a concept.

So what is amiss in the whole episode? First we need to clarify the premises on which Lean gained prominence. As the consumers became more demanding, competition increased and so the customer choices (as the car became available in colours other than 'Black Ford Model T'), the old model of large batch size production became ineffective. Long-term forecasts became unreliable, large inventories rotted in stores and companies lost money.

Then entered 'Lean'. A customer oriented approach where you give what customer wants and produce only what he wants. Reduced cycle times and flexibility were key goals. To achieve them it became pertinent to reorganise and streamline value chain, eliminate wastes, empower employees and collaborate with suppliers. All these are good for business and in no way undermine it.

A common mistake is to equate Lean with inventory reduction. Inventory has to be looked in a strategic way. At one end its locked up capital, has high associated costs and risks of obsolescence with changing customer preferences. At other end it has strategic importance in terms of absorbing production ups & downs and buffer for variation in customer demands.

Now coming to tractors. Are they same as mobile phones where you need a new model every month to survive in market? Does the product configuration change drastically? Is the product life cycle as short as a laptop model? If the answer is 'No' then it would not hurt to keep some inventory. One might argue against it citing inventory as waste. But here its a strategic trade-off. Protecting customer base is more important and lost sales are more costly than inventory costs.

But does this strategic decision violates the basic tenets of Lean? Answer is 'No' as Lean is all about 'giving customer what he wants'. Just because 'Inventory' is mentioned as one of the 7 wastes, does not mean that it is to be eliminated at all times. Inventory has been and always be a strategic tool. Reduce it to save money. Increase it if required to protect your customer base. Especially when economy is coming out of recession and demand is bound to jump.

Carbon Footprint: A Cost Management Driver and Product Differentiator - Twin benefits

In my recent studies on Carbon Footprinting of Supply Chain, it was interesting to note that the efforts towards reducing carbon footprint also resulted in cost savings. This is contrary to the popular notion that becoming Green comes at a cost. One might be tempted to believe that it is just a co-incidence, but is not so if one analyses in depth.

Once carbon footprint of whole supply chain is measured, its clearly visible that which areas are contributing more carbon emissions. Attacking these areas result in steps which also lower associated costs:
- lower fuel costs by switching to better fuel efficient transportation
- reduced electricity costs by using more energy efficient design
- decreased transportation costs by rationalisation of logistics routes
- reduced raw material costs by use of recycled material
- saving on packaging costs by reducing packaging material
There are many more with real life cases for each.

With so much evidence around, I am tempted to consider carbon footprint as a cost management parameter. Organisations are under continuous pressure to reduce costs and delegate this responsibility to functional heads. This approach does not take systemic view, department inter-relations and is unable to locate the high cost centres which should be prioritised first. ABC (Activity Based Costing) is a systemic approach but is costly and difficult to implement. Carbon footprint can be an alternate approach. Any area with high relative carbon footprint is indicative of high energy consumption, high wastage in that area. Once zeroed on priority area, one can then use various measures, implement 'Lean' (Refer my blog post 'Lean Is Green') etc.

However, during my recent conversation with an expert in the field of Carbon Footprint consulting, I was told that cost savings go hand in hand with reduction on carbon footprint only up to a point. After a certain stage, any further reduction in carbon footprint involves major overhaul in operations and product which results in increased costs. Now we come to the second use of Carbon Footprint as the product differentiator in marketing.

As awareness of climate change grows, consumers would prefer environment friendly products and will be ready to pay a premium for it. Companies can get return on their investments by marketing their products as 'Green'. That day is not far off when a count of Carbon Footprint will be printed on a product similar to the Price or Calorie count. And consumers along-with looking at price, will also look at carbon footprint count before deciding to buy a product. Promoting consumer awareness and Green differentiation can incentivise companies to go that extra mile beyond cost savings.

Sustainable Design: What Qualifies & What Does Not?

Sustainability has made successful inroads in day to day functioning of organisations. Use of energy-efficient devices, minimizing usage of paper, green buildings are some examples. Also individuals today are more conscious. They now segregate household wastes, voluntarily use public transportation, reduce water and electricity usage. However much scope for sustainability gets locked-in in design stage. An energy efficient building by design saves lot more than any retrofits or conservative usage can. It is similar to engineering design of the product that decides the reliability, ease of manufacturing and maintainability later on.

While making our business plan on E-Waste recycling, we stumbled upon a similar issue. Electronic waste has plastic, glass and various metals, all mixed in them. Disassembly of electronic products is not an easy task. But then we came to know about a directive from EU which suggests electronic manufacturers to design the products for ease of dismantling to facilitate their recycling. In this age of high consumerism, where products have short life, ease of disassembly for recycling certainly qualifies as a sustainable design. However, from my aeronautics experience, in design there is always a compromise among the wishlist parameters. The question is that whether a mobile company will agree to compromise on other design features (like style, feel, function, cost etc..) to make their phone easily recyclable?

Not long ago we used pencils made out of wood. Then due to concerns over cutting of trees and deforestation, pencils made of plastic came to market and became an instant hit. But then plastic pencils were not entirely bio-degradable. What can be a sustainable design in this case? A pencil made out of bio-degradable plastic or a wooden pencil manufacturing company with a system in place to plant new trees to offset its usage of wood. A case in point is the sustainable palm-oil effort from Unilever, where they try to ensure that the raw material does not come from deforestation but from a source where Palm trees are replenished after they have been cut.

As evident from above examples, a sustainable design not only considers proper disposal of product but also considers proper source of raw materials for the product. A typical 'Cradle to Cradle' (a term coined by Walter R. Stahel in 1970s) approach.

Hence a sustainable design may have following qualifiers:

- The raw materials used are either coming from a closed loop recycling process or from environment where the source is being replenished.

- At the end of its life, the product may either decompose into nature or is broken down to be used as raw material again.

- The product itself shall not cause any harm to environment during its useful life.

At first glance, these would look enough as qualifiers for sustainable design. But if one looks deeper, one will realize that the affects of processing and handling are not being considered. A mobile handset made of recycled parts can be hailed as a sustainable design, but what if the production process entails release of toxic chemicals, CO2, toxic gases and excessive water usage? What if the Palm oil production plant is very polluting though using the raw material from a sustainable source?

So we add one more qualifier to our list.

- The processing and handling of the product, till it reaches the customer hands, shall not harm the environment.

Closed-loop manufacturing and Green transportation are some means by which one can achieve the above qualifier.

Its easier said than done to make a integrated design which satisfies all the four qualifiers. Logistic partners, manufacturing partners, suppliers and even customers (to ensure proper disposal) have to work together to make a perfect sustainable system. Many companies attempt to do it in their own way and succeed in satisfying some of the qualifiers. Unilever works with suppliers. Walmart works with the logistics and stores design. Preserve, a recyclable plastic goods manufacturer, works with customers by establishing collection points at food stores.

While meeting the above qualifiers, it is important to avoid 'Over-Kill'. Its similar to over-design of a product without any value engineering. A real life example being, a British supermarket selling single bananas, each wrapped in recyclable paper tray covered with recyclable plastic. Now what stops them from selling cover-less single banana with price sticker on its skin? Similar is the case of Eco-blings, which cost lot more and do not provide any significant savings. Such designs do not add any significant value though they may fool one to believe so.

Now I wish to leave the readers with some food for thought. We are aware of motion sensors being used in restrooms and other places which switch on and off the lights. These devices are hailed as electricity savers. But on other hand such sensors continue to consume power throughout their life (also known as Phantom power). So is it a sustainable design? Or the old wisdom of switching the light on when entering and switching it off when leaving is too difficult for humans to follow. Can any technology that saves humans the effort which is rightfully theirs to do can be hailed as sustainable design?