Logistics Today

by Merlin Hernandez

Shipping is a vital component to logistics and supply chain management. With the rising strategic importance of global sourcing and international marketing, logistics planning has become a strategic priority. Shipping has thus assumed greater importance in the external environment with the globalization of commerce. The Internet has sped up communication and supported ease of information transmission for documentation and confirmations. Huge challenges remain, however, in delivery times, language and cultural differences, infrastructural capability (bureaucracies, roads), costs, payment methods, and currency exchange rates. Differences in legal systems and international laws can also influence import-export restrictions, duties, and tariffs that exist between and among countries.

Shipping and other logistics costs now account for more than 10% of sales revenues and are beginning to erode the economic advantage of operating internationally. This is fueled by the complexity of this aspect of business operations for which many companies do not have the expertise. Additionally, prior to going global, many large companies have had fragmented internal logistics that are siloed by brand or department. An overall enterprise-wide strategic approach to logistics management and greater attention to logistics planning may be indicated. The advantages are better management of economies of scale through improved consolidation and broader-based decision-making. This will be more readily achieved in a flatter organization with enhanced functional integration for more efficient procurement and order delivery. But even without any organizational re-structuring, a single shipping department can go a long way to leverage cost savings across the range of shipping needs.

Businesses seeking the advantages of global sourcing or to tap into lucrative international markets would find it especially useful to establish a long term relationship with a professional shipping firm like an international shipping broker or freight forwarder to help navigate the complex channels and legal requirements. This is especially beneficial to small businesses.

Mission and Vision

by Merlin Hernandez

There are many organizations that place mission statements on little brass plaques in the lobby and they sound good but provide no real direction to the operation of the business. These are usually poorly defined mission or vision statements that are so loose that both employees and customers see them as window dressing of no real significance. A company mission is supposed to outline its broad purpose which would include where the firm sees itself in the long run and how the business will avoid the pitfalls to getting there. The mission is the basis for the development of specific high quality quantitative targets that measure performance. Mission statements define the business of the firm and may include primary point(s) of differentiation for competitive advantage.

The mission statement that is rife with superlatives comes from a lack of understanding of what a corporate/business mission is intended to convey and the process for arriving at it. A mission originates in carefully defined business or even personal goals of business owners to communicate the purpose and direction of the business. The mission informs strategic choices and is really the business strategy from the perspective of customer need– what we can do for you. It is also important to note that the mission is a living organism that must change as the business accommodates change to reflect new needs to be fulfilled, new types of customers, or different delivery systems dictated by market forces or a changing environment.

A vision is that aspect of the mission that forms the long-term basis of the corporate culture from organizational values to product functionality. The vision provides the impetus for all aspects of operations to direct both the strategic and tactical perspectives. A vision is essentially the architectural side of the business model while the mission might be seen as the engineering function. Sometimes too strict an adherence to the strategies of the mission, which defines corporate policies, can maintain a narrow focus at the expense of emerging economic and social realities. A well-articulated vision can widen the policy scope beyond purely economic performance to allow for strategic adjustments to emergent trends.

A common misunderstanding is having a purely product vision that maintains a narrow focus on sales or service. Mission statements emphasize the “highest quality” or “best service culture” as if these will occur in isolation from other business values and activities. The mission and its vision will also need to encompass other roles and responsibilities of the organization for long-term comparative advantage. Central to a firm’s vision are issues of broad stakeholder value, ethics, social responsibility, and governance.

Outsourcing Twist: Jobs come home

by Merlin Hernandez

Outsourcing has essentially been characterized as the transferring of US jobs to emerging economies like India, China, and The Philippines to take advantage of lower wages and taxes as well as environments that are less regulated. Outsourcing industries have spanned manufacturing, technology call centers, human resource administration, medical billing/coding, and health insurance benefit management to name a few.

But many of the tech jobs did not go overseas but were outsourced to overseas companies operating in the US. For example, some call centers remained in the US but the work was contracted to Indian companies and workers were brought in from India to do the work. With the level of unemployment in the US, it would seem bizarre for H1B visas to be granted to foreign workers. The argument in favor of the practice is that these “guest” workers are contract professionals brought in to fill shortages in the tech industry, and fast-tracked for US residency ostensibly to maintain the level of proficiency in the workforce.

Many analysts question whether there is a shortage of US technology workers. They suggest that firms operating in the industry prefer to hire younger foreign workers at lower wages while more experienced professionals are sidelined as being too expensive. Supporters maintain that H1B visas secure the best talent to keep US innovation alive and American business competitive in the global market. But it has been found that may visa workers were doing non-technical jobs that could have gone to the average US college graduate.

The obvious question is why this is allowed when there are USCIS stipulations that jobs under H1B can only be offered to a foreign worker if no US worker can be found to perform the job. The answer apparently lies in the fact that H1B workers are paid less than industry norms and come at a much lower overall cost. H1B legally mandated prevailing wages have not caught up with the realities of the tech industry and fall way below the market wage – sometimes more than 50% lower. Moreover, workers may not receive benefits like health insurance and pension plans, and employers do not have to pay into unemployment insurance. Foreign workers not only cost less but under the terms of their visas, they are not free to leave the contracting employer till the end of the contract, and longer if they are awaiting US residency status – a veritable modern day indentureship system to provide a stable body of cheap expertise.

With increasing numbers of foreign workers seeking H1B visas and sustained public outcry against outsourcing in general, the USCIS intensified its scrutiny of applications by US businesses to import workers, and imposed more stringent visa policies. The cost of visas almost doubled to $4,500 per application and the rate of H1B admissions dropped significantly. The vigilance is part of the government’s move to limit work visas to foreign nationals as a way of addressing domestic unemployment. At the same time there is a Senate proposal for tax incentives to businesses for repatriating outsourced services. Not to be left out in the cold, Indian outsourcing firms began to hire US workers for their US operations where their most lucrative customers are based. These firms have gone even one step further to network with universities to better prepare students for tech jobs.

As the US economic recovery gains momentum in 2013, it can be expected that the insourcing of previously outsourced American jobs will escalate. US investors, looking for opportunities in growth industries are likely to compete aggressively for a greater share of the outsourcing pie.

October Insights 2012: A monthly eye

by Merlin Hernandez

The global financial environment remains uncertain and Eurozone problems will continue to be a major risk factor. Both the Fed and the ECB will take pressure off credit markets by increasing capital flows for some while. Business gains are increasingly less driven by market share considerations but more on cost control for margin improvement, and improved quality and service for added customer value.

But employment levels and consumer spending have not yet recovered sufficiently to sustain pre-recession production volumes. Lowering inventory and carrying costs as well as reduced production could see further shut downs and layoffs in the fourth quarter and going into 2013. The incentives created by QE3 and low interest rates seem a little slow to sink in and business remains cautious and in no great rush to embark on new projects in the general pre-election malaise.

Monetary policy in a lingering recession will of necessity be concerned with stimulating growth. QE3 increases liquidity to re-ignite investment but effectively devalues the US dollar. We can, however, expect an increase in demand for US exports as a result which provides another engine for growth. The other advantage, of course is a reduction in the trade deficit which will ultimately strengthen the dollar.

Some analysts are predicting increased inflation and a rise in the price of commodities and natural resources necessary for production. and the risk of general price increases. But commodities were down October 31 as a response to the much anticipated Chicago PM Index falling just short (49.9) of the 50 point mark for economic expansion. Supply and demand will clearly be the final arbiters and it is fair to project that with increased international trade, demand would be the lever to keep prices down.
Precious metals, however, are negative betas and we can expect gold and silver prices to fall as investors re-direct money back into the economy.

For October, the market has hopscotched through the rumor mill of a debt downgrade (denied by Fitch), and sputtering growth in a housing sector weighted down by less than expected growth in previously owned homes in spite of some increase in new home sales. But the Department of Commerce reported that spending on both consumer products and durable goods showed a little above the 2% annual growth rate in the third quarter. The Department of Labor reported a decrease in jobless claims for the same period. Both DOC and DOL reports are important economic markers.

Perhaps the most important indicator of growth moving toward 2013 is the Dow Jones. Even though the Dow is not really representative of the overall market, it does reflect the movement of stock prices to provide an indication of the tide of investor interest. There has been significant growth in energy (Chevron, Exxon), basic materials (Alcoa, Tech Resources, CFI Holdings), and industrial goods (Caterpillar, Emerson) which is an indication of the economy readying itself for increased production. Combined with the availability of investment capital, Fed support for housing/construction through QE3, some early movement in the sector, and low interest rates, the economy does appear to be poised for sustained growth. It would depend on how fast entrepreneurs and investors get off the starting block post election.

Ethics and Social Responsibility

by Merlin Hernandez

Earlier this year, it was revealed that the Chesapeake Energy CEO and founder profited enormously from personal investments in company wells through bonuses that were part of his board-approved compensation package. The bonuses may not be quite illegal. However, they bare a fundamental weakness in governing regulations and may yet face mandated clawbacks. But the issue does reflect a corporate governance culture that was not broad enough to be congruent with emerging values in the society. Taking wider stakeholder value into consideration in the face of high unemployment, displaced military veterans, mortgage foreclosures, and the mangled American dream, corporate America has come under more scrutiny than ever. Even with record profits, executive compensation is still expected to bear some relationship to wages across the board in order to be seen as morally appropriate.

And then there is that slippery slope from practices that may be viewed as unethical to those that may be downright illegal. A few months later the Chesapeake CEO was stripped of his chairmanship by a board more responsive to the tide of ethical expectations amidst revelations of personal loans to the CEO from a firm that also finances the company. This was a direct contravention of Sarbanes-Oxley restrictions and a major conflict of interest. All of this while there are reports that capital spending has exceeded cash in operations in every quarter since 2003 – not necessarily a sign of impropriety but a red flag in terms of efficient stewardship nonetheless. The Chesapeake head was also accused of collusion and bid-rigging in suppressing land prices in Michigan in violation of anti-trust laws. The IRS, DOJ, and SEC launched investigations.

A brief study of Chesapeake’s core values explains a lot. There is an almost missionary emphasis on a commitment to “environmental excellence.” Business philosophy, operational values, commitment of resources, and regulatory compliance are focused on environmental protection in a myopic view of the company’s social responsibility. To this extent, Chesapeake appears to validate its values by its actions. But the overarching constructs that would comprise organizational ethics and fiscal responsibility have not been given prominence within those values. This is especially important for a publicly traded company as it leaves clear gaps for questionable, unethical, and perhaps illegal behavior by members of the corporation.

Inadequate governance policies remain a fundamental flaw in risk management. It can expose a business to legal liability, cause damage to the corporate image, and result in loss of public confidence in the stock. Contemporary business is slowly coming to the realization that sound ethics and a keen sense of social responsibility are more than elements of good corporate citizenship. It is indeed good business.

Focusing the Business

by Merlin Hernandez

A resource-based business model uses the analysis of resource capabilities as an integrative tool that would inform the business scope. It focuses the business on what is possible and what is not to avoid the risk of overextending the reach of the venture. A small business would be better positioned for success by adopting strategies that their resources can support. Understanding what available resources would allow involves examining the strengths and weaknesses of financial, human resource, knowledge base, information and communication systems, other tangible assets like operating space, and intangible assets like patents, copyrights or special recipes.

The analysis explores how internal resource competencies impact business strengths, reduces weaknesses and might be structured to take advantage of opportunities in the external environment. Since the resource base will determine costs, market reach for a new venture will need to match resource capabilities for a product offering that closely matches resources and competencies. The way an organization integrates and deploys these resources with creative and unique strategies to circumvent external threats is what provides sustainable competitive edge.

Unique differentiating factors to satisfy the specific and emergent needs of the target market can also help to insulate the business from competitive threats. A well- differentiated business would rely on value-creating resources like strong expertise in the area of business, a product that is unique and not readily available in the market space, experienced and knowledgeable personnel, the availability of high quality supplies, good local supplier relationships, a unique capacity to quickly craft an individual-need offering to reduce the level and quality of competition and adequate financing. These would comprise organizational strengths.

In the high competitiveness of contemporary markets, meeting unique customer needs becomes an important factor of differentiation for a business. This may involve offering different versions of a product through minor adjustments, marketing new applications for use which add new benefits, or adding new marketing channels that make the product(s) more readily available. The key is to incorporate value-adding elements to the product throughout the value chain from concept to customer use.

Such differentiation will facilitate the servicing of a niche sector to which the product appeals or one that is under served in the marketplace. Niche marketing is based on customer needs that are not being met by mass-market products. This creates an opportunity for an astute entrepreneur. Structuring the business to fill these needs will minimize competition and have heightened profit potential.

There is often an initial weakness in adequate capital investment which might entail postponing the venture until the capital position improves or finding an investor or partner to enhance readiness. But a good resource-based business model, with clear differentiation characteristics, and an appropriate market niche can be almost immediately be leveraged to explore identified opportunities in the market as long as activities remain tethered to the resource base and core competencies. This could narrow the focus of the business initially but can provide evidence of viability to lenders or potential investors. Small-scale success demonstrates the business acumen and sound management that would attract the required investment capital down the road.

Internet Privacy

by Merlin Hernandez

See article on Internet transactions published on October 8, 2012

After reading my article on Internet Transactions, one of my friends expressed surprise that there was no real comprehensive legal framework for internet transactions. Some transactions are subject to existing contract laws but interstate and international commerce where laws may be different present problems – which state/country’s laws apply. Hence the CISG umbrella for international arbitration. The area of privacy, however, is particularly volatile. I think the issue of the differences in laws relating to both domestic and international internet transactions is also one of the main reasons why there seems to be an overall reluctance by the US judicial system to wade in an enact legislation to govern privacy considerations in internet usage.

But perhaps a more salient issue is the rate of new technological inventions and applications. The changing landscape might essentially make draft legislation outdated before it even becomes law. The current legal framework for online privacy rests mainly on two federal laws, the Electronic Communication Privacy Act of 1968, and the Children’s Online Privacy Protection Act. Since then, new and emerging internet technologies and usage have created a minefield of inquiry that has essentially stumped the judicial system and the FTC itself.

Part of the problem appears to be that legal architects are of necessity seeking to legislate behaviors within a fragmented approach. There is really no overall statutory structure for internet privacy, sites are not required to have privacy policies, and there is no generalized “right of privacy” unless there are violations that are paralleled in an offline setting. Perhaps in order to give some form to the inquiry, the first order of business might be to create some kind of charter of internet privacy rights and develop a body of law that would safeguard them.

The fluidity of internet usage which influences the structure of internet marketing will continue to have lawmakers struggling to catch up. In such an open-ended environment, arbitration is probably the most viable form of dispute resolution.

Restaurant Outlook

Value creation/low cost

By Merlin Hernandez

The restaurant industry is one with low barriers to entry but new ventures often have a short lifespan. The effects of the recession saw strong contraction in the business especially for mid-range independent operators. As the economy slowly improves, the performance of the restaurant industry is on the rise and it is expected to outpace the national economy in terms of growth. Research shows that the low-cost fast food sector is proving to be the most resilient to economic fluctuations and has risen in importance as both the model and menu of choice.

Healthier fast foods are emerging ahead of eat-in restaurants as a feature of value, price and convenience. Food trucks have added a new dimension to the fast food trend offering revised traditional fare, salads, and fresh fruit smoothies, as well as more natural ethnic food for a different healthy eating experience. These trends are likely to continue as long as prices remain at the lower end of the scale.

The luxury end of the trade has demonstrated some immunity to economic contraction but consumers in that sector are abandoning conspicuous consumption to place a stronger emphasis on more esoteric value. Value is described as relevancy and engagement in response to long term need. Current trends show that nutrition, healthy meals, local sourcing of fresh ingredients, and environmental sustainability have become top trends. This points to strong value added strategies and deeper customer relationships as critical in the current restaurant trade.

But the fastest track to revenue growth remains low-cost volume business. Rather than eliminating high-priced fare, some restaurant owners at the higher end are opening separate, lower-cost outlets inside their high-end eateries. This straddles different income ranges to widen the business platform and target fast turnover at lower prices. Survival is translated as maintaining optimum business volumes for greater profitability. It is a diversification strategy that allows the integration of two distinct business units operating out of the same premises at no additional fixed costs. The business benefits from economies of scale in expanded output that will bring higher margins.

In terms of marketing, the National Restaurant Association reports that social media savvy consumers patronize restaurants more frequently than the general restaurant consumer. Social media outlets like Facebook and Twitter are becoming major marketing channels for restaurants along with the increased use of brand memberships and discount coupons to build customer loyalty.

Is recession necessary?

by Merlin Hernandez

A look at the value of a recession to the economy might provide some insights to whether recession is necessary. In periods of protracted expansion, consumer optimism is high and so is spending. The downside is that the savings rate plummets as prudence is set aside in the euphoria of plenty. Consumption rates grow steadily while capital formation stagnates. The foundation of economic stability is thus undermined by the imbalance between consumption and savings. But the economic climate will remain bullish, propped up by low interest rates and increased national debt that continues to favor consumption, increase inflation, and obliterate capital.

An important strategy to reverse the trend and shunt consumption and savings back into balance is to encourage fiscal responsibility by increasing interest rates as a means to reduce spending. As interest rates rise, people are scared into curtailing their spending habits which favors saving over consumption, making capital formation possible once more. In this sense, a cycle of recession is necessary to the business cycle to slow spending and build capital reserves.

Child Labor

by Merlin Hernandez

I wrote this quite some time ago and then vacillated about posting it because I did not wish to open a can of worms here. Then I thought of all the cultural practices in the world that have validity within their contexts but are frowned upon because of judgments based on Western values. But respect for diversity has one fundamental prerequisite – an open mind.

I have somewhat of a controversial position when it comes to child labor and I am not so quick to brand the practice exploitative or a sweatshop environment. There are certain macroeconomic considerations that would cause the equation to fall on the side of child labor in certain economies/communities. It is an important variable to family income and survival as imported inflation pushes up prices for some basic necessities and money earned by the children helps to keep a roof over the family and food on the table. This is not to say that there are no exploitative elements to the practice but the conditions under which children are allowed to work – age limits, hours per day, types of occupations, wage scales, ventilation etc. – need to be legislated. It should be part of the corporate responsibility to advocate for legislation as well as systems for enforcement that will govern appropriate conditions of work when companies operate in these economies.

The negativity associated with child labor is essentially a part of our western bias but some economies simply do not have that luxury at this stage of their development. Besides, the work of children has always contributed to the family income, even in the West. Whether we labeled it chores or paid work, children have tended animals, done the milking, fed the chickens, gathered nuts and grains, planted the crops, hunted the family dinner…And it was no hobby. It was necessary work. So perhaps now they spend time in factories.

Western outrage may reduce the use of child labor in these countries but that might be catastrophic for both the family and the economy as the disposable incomes and spending power of families shrink significantly ultimately causing the economy to contract. Less family income – as an indicator of personal income per capita, adjusted for inflation – means less money circulating in the economy to purchase goods and services. The result would be that the National Income Index – which also measures GDP – could fall below the desired benchmark for economic health. Let us say that a government needs to borrow money to build schools or health facilities, their national income index would be one determinant of whether they get the loan or not. In such fragile economies, child labor becomes a valuable source of real income.

In many cases in the developing world, the barrier to dispensing with child labor does not only lie in corporate profitability but also in some of the macroeconomic and cultural imperatives of host economies. From an ethical perspective, governments need to act in the best interest of their reality and allow conditions that contribute to the stakeholder good which includes the families who depend on those incomes. Large corporations can always introduce more advanced technologies for faster production and less dependence on labor but it will alter the relationships among members of a community as well as their ownership of their roles within the means of production. In the lexicon of economic development, “appropriate development” will factor cultural practices like child labor but in a way that straddles the ethical, human and economic needs of emerging economies. None of this is to imply that there are no sweatshops operating in these countries but we have to be mindful that there are many cultural practices that have validity within their particular contexts, and restrain ourselves from any attempt to impose our values in our analysis of those practices.

Companies like Nike and Martha Stewart might have dedicated some of their resources to advocating for strict regulation of child labor practices while leading by example with programs like a homework center, tutoring for the children they do employ, and provision of textbooks, supplies to the schools, and a child welfare health clinic. Pandering to uninformed biases at home and not being proactive partners in the personal development of their child employees for the ultimate socioeconomic growth of their host economies is more of an ethical violation than employing children. Corporations should recognize the incredible opportunity a comprehensive child labor program presents in the corporation positioning itself as a real partner in the development of the host country. It is indeed a win-win for both partners.