Essay:Why JIT is threatened, and with it, our economic system,Anyone want to dispute this with facts?
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y2k and the Fractional Reserve Economy
Sneaky aren't I? You thought this was going to be another essay about the evils of the fractional reserve banking system didn't you? Well, the banking system is evil, but this essay will be on a much broader subject than that. Namely, the fractional reserve economy and the stunning Y2k implications of substituting economy for banking.
Fractional Reserve banking for the uninitiated is simply the idea that you only have on hand for redemption a set percentage of total assets, say 5% or 10%. The other is not available in cash to be handed out when more than 10% of the people want it. In other words, the banking system is dependent upon no more than 10% of the depositors wanting their money back at the same time. There is a dual claim on your money. Both you and the bank, through the borrower , claim the money that YOU deposited. If nothing else, Y2k is the first serious test of this dual claim feature of the modern banking.
Unfortunately, our entire global economy is now based upon this same fractional reserve ideology. The idea that you only have to stockpile, or maintain an inventory, based upon a mythical 10% demand rate. Any time the demand rate goes above 10% you then execute a JIT(Just in Time) policy and restock within 24 hours. At least this is the retail theory underpinning the global, especially the American, economy.
JIT was first implemented in the United States by the founder of WAL-MART, Sam Walton from Arkansas in the early 1970's. With the ruthless precision of a visionary, he simply eliminated the concept of maintaining an inventory. This elimination increased profits and cut overhead for WAL-MART, making it into the retail power house it has become. A small inventory is kept at a central warehouse and called for by the individual store as needed to replace sold items. The retailer forces the product producer to either incur the costs of maintaining inventory himself, or adopt a JIT policy of his own. So this is why JIT has come to dominate the entire economy. It is like a game of hearts. Nobody wants to be left holding excess inventory(hearts).
This is the condition of the global economy in the last months of 1999. The concept of maintaining stockpiles is alien to the modern concept of retail ideology. In fact, it is nearly impossible for, say a grocery store, to stockpile increased inventory. There simply isn't the physical space to store it in a modern store. Of course, CNN just did a piece about Xerox trying to store 30 days of parts in case shortages happen in January, 2000. They are using leased space and it will take them the rest of the year to do it. It is fascinating to see stockpiling seriously advocated by large corporations like Xerox. Isn't this the same crowd that ignored Y2k for the last several years? Only now they say it is serious enough to warrant a 30 day parts stockpile? Who knows, maybe they read the Senate Y2k report and saw the reality behind the spin control.
The economic impact of Y2k will be immense and of a global nature. Forget about the power grid, telecommunications and the other basics for a moment; we are going to talk pure economics. The Y2k economic picture isn't pretty precisely because Y2k strikes directly at the underpinning of the modern global economy, namely Just In Time inventory. Yardeni seems to be the only economist of note, besides little ole amateur moi, that has figured out when JIT goes-the entire economy goes with it. By the middle of 2000, JIT could be renamed "It will get there when it gets there". A perfect example of this is the ill fated Hong Kong Airport opening of last year. Did you know that this one airport disruption caused a measurable drop in the entire Hong Kong GDP for the entire year? One tenth of one percent I do believe; yet, many will say that it is impossible to say what the economic effect of Y2k will be. BUNK! It is really simple; disrupt the flow of information, production or distribution and you will see immediate and devastating economic effects. And this kind of disruption is what Y2k will do. So why do people persist in saying Y2k will be a bump in the road? At the least, a bump in the road is quite capable of causing you to spend money on a wheel realignment. At the worst, you replace your front end. Don't believe me: take a Porsche and hit a pothole at 80mph and see what happens to your front end. Our modern economy is fine tuned and a precision instrument of great complexity. Why does everyone, except Yardeni, think it is a four wheel drive Sports Utility Vehicle and not the fragile sports car it really is?
You have to understand the JIT mechanism to understand why Y2k will devastate it regardless of the particular industry involved. To put it plainly, the product doesn't exist until it is produced and it isn't produced until it is ordered by someone. Granted, there is a residual inventory level maintained, but it is a pretty low level of under 50 items. Generally whatever happens to be on a grocery store shelf at any one time for instance. That level isn't very much as my personal research showed. At the local grocery store the number of say soup cans is under a hundred, usually much lower, for each brand name and soup type. That's right, go to your American, or anywhere else, grocery store and actually count the number of say Progresso Lentil soup cans. 24 is what I came up with at a medium sized urban grocery. With one soup case stacked on top of the grocery shelf for replenishment until more can be ordered. True there will another 24 of Chicken Noodle and so on down the list. The point being that the inventory depth is limited to 10 people buying 5 cans of each variety. Starting to get nervous?
Talking to the friendly grocery stocker proved fascinating. It seems the store has radio antennas in the ceiling and uses them to transmit restock orders to its warehouse 20 miles away. In this large warehouse a centralized supply is maintained and loaded onto trucks for store delivery. Micro managed, computerized and precise down to the last can of Progresso Lentil soup. The JIT inventory system in all its glory and naked efficiency. One truck out; one truck in. It is really an amazing system as long as normal customer demand is maintained. Just as fractional reserve banking is a great system for the elite as long as people have confidence in the system. As long as you can forecast that 24 cans of Progresso Lentil soup will last a week you can micro manage your inventory and make money. But what happens when 75 people show up and want 5 soup cans each? Y2k will eventually register on the populace. What happens when demand explodes in a retail system not set up to increase production rapidly? What happens when people begin to understand that whatever Y2k related product they want they can only get a few of them?
If JIT were just limited to the grocery industry perhaps we could muddle through somehow. Maybe by eating real food grown from non hybrid seed in our Y2k garden. Just kidding! But I defy gold-eagle.com readers to find anything different. Whatever the industry, or the product the story is the same. A few items actually on the shelf, with a few more in the immediate area. Then there is a centrally located warehouse with a few more items ; after that, you are right at the factory gate. All told, whatever the item I'd say were talking about under 100 until new items are manufactured. Actually, centrally located warehouse is a misnomer. It seems that Memphis, Tennessee is a airborne hub for national JIT. Largely due to Federal Express being located there, many companies have set up large warehouses and JIT things by air all over the country. We're just talking JIT here, so I won't get into global trade, embedded chip systems in manufacturing etc. etc. etc. Y2k is like the mythological Greek Hydra with its many heads. Start to write an essay about one aspect of Y2k and soon another rears its ugly head.
At least the reader should now have some idea of Y2k's likely economic impact upon our global economy. A personal experience at the grocery store described earlier will possibly help. Last summer, Duracell D batteries were on sale for $1 a battery. Within 2 days the store was stripped bare, although the probable cause was people seeking to power their boom boxes and not Y2k. I got a rain check and then proceeded to wait two weeks, repeat two weeks, before the store restocked Duracell D batteries. This being the case with normal production and distribution channels intact, what happens when Y2k hits? Don't wait until December to stock up on Y2k supplies.
WHO WILLS CAN-WHO TRIES DOES-WHO LOVES LIVES
Doug McIntosh
3 March 1999 |
