Containers – As Global Trade Accelerators and Enablers

A long time ago, ships were loaded the same way cars are, today, after a Costco shopping trip.

You put in the large items first and then try to squeeze in the smaller items around the larger ones. Or something like that. 

But containerization changed everything, argues an article in The Economist:

It was the brainchild of Malcom McLean, an American trucking magnate. He reckoned that big savings could be had by packing goods in uniform containers that could easily be moved between lorry and ship. When he tallied the costs from the inaugural journey of his first prototype container ship in 1956, he found that they came in at just $0.16 per tonne to load—compared with $5.83 per tonne for loose cargo on a standard ship. Containerisation quickly conquered the world: between 1966 and 1983 the share of countries with container ports rose from about 1% to nearly 90%, coinciding with a take-off in global trade (see chart).

The macro effects?

The results are striking. In a set of 22 industrialised countries containerisation explains a 320% rise in bilateral trade over the first five years after adoption and 790% over 20 years. By comparison, a bilateral free-trade agreement raises trade by 45% over 20 years and GATT membership adds 285%.

Read the full article for a fascinating look at why and how this came to be (reduced costs are not the only reason for the revolution).

Excess Cash – A Problem for Countries, Not Just Companies

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One of the things you learn in Corporate Finance courses is that “excess cash” is bad for companies. 

On the one hand, companies want to have enough cash to cover their working capital needs and contingencies. But on the other hand, if their cash holdings are more than 10 to 20% of their “operating” needs, it creates other problems.

Executives and managers may be tempted to build empires via acquisition (because they can) and this results in acquisitions that have an unfortunate tendency to suffer massive write-offs in the future. The stock market may undervalue the company because it thinks having that much cash indicates managers’ incompetence. And that last line of thought may attract activist shareholders who think they know (link to a Finance Professor’s take-down of David Einhorn for the latter’s views on Apple) what’s best for the company. 

Anyway.

It turns out (as can be expected?) that “excess cash” creates problems for countries too. Case in point: Norway.

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Happy Employees = Profitability? Or Profitability = Happy Employees?

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In all the years I’ve shopped at Whole Foods or Trader Joe’s, for that matter, I’ve never met an unhappy employee.

The guys refilling the produce bins, the ones behind the sandwich counter (at WF) and the cashiers helping you part with your money – they are all unfailingly polite, friendly and helpful. [A cashier at Whole Foods once "told" me to buy strawberries instead of blueberries because there was a 2-for-1 sale on strawberries that day.]

Shopping at Costco, similarly, is a pleasant experience – though the folks there exude an air of competence and efficiency, in place of the friendliness at the other two places. 

It would be reasonable to therefore conclude that the steady growth and profitability of all three retailers is somehow related to the happiness/friendliness/efficiency demonstrated by their employees. It would also be logical to assume that perhaps these workers were paid more than their counterparts at other retailers. 

And you would be right. 

What would be wrong though, is to conclude that “Companies that invest in higher salaries for low-level employees find success in a competitive market“, as the tagline for a recent article in The Atlantic did. 

That’s the kind of correlation-causation conflation (alliteration, my new friend) that should make all thinking beings shudder. But why do they do it? Because it is beguilingly easy to do so (and we all do it on a daily basis).

In the case of Costco, Whole Foods and Trader Joe’s – what makes them profitable to begin with is a combination of the following: locating stores in affluent neighborhoods, not stocking a gazillion products and offering high-end, high quality and/or difficult to buy elsewhere, goods. 

Taken together, these conscious strategic decisions

(a) attract customers with the ability and the willingness to spend a lot of money (more money than what a typical Walmart shopper might spend, at least)

(b) enable them to control various operational costs (non-labor, non-wage costs)

(c) create conditions ripe for profitability

[As an aside, specific to Costco, its membership fees, which are of course almost all pure profit, act as a barrier to entry for those that might not be a good Costco customer…so it is likely using this to make sure that only a certain kind of customer steps in to its' stores.]

These companies’ labor practices, including higher wages, benefits, scope for advancement and training, complement their core business strategies, in two ways: 

Cost reduction (HBR article from 2006) because employees stay longer:

Costco’s practices (wages and benefits) are clearly more expensive, but they have an offsetting cost-containment effect: Turnover is unusually low, at 17% overall and just 6% after one year’s employment. In contrast, turnover at Wal-Mart is 44% a year, close to the industry average. In skilled and semi-skilled jobs, the fully loaded cost of replacing a worker who leaves (excluding lost productivity) is typically 1.5 to 2.5 times the worker’s annual salary. To be conservative, let’s assume that the total cost of replacing an hourly employee at Costco or Sam’s Club is only 60% of his or her annual salary. If a Costco employee quits, the cost of replacing him or her is therefore $21,216. If a Sam’s Club employee leaves, the cost is $12,617. At first glance, it may seem that the low-wage approach at Sam’s Club would result in lower turnover costs. But if its turnover rate is the same as Wal-Mart’s, Sam’s Club loses more than twice as many people as Costco does: 44% versus 17%. By this calculation, the total annual cost to Costco of employee churn is $244 million, whereas the total annual cost to Sam’s Club is $612 million. That’s $5,274 per Sam’s Club employee, versus $3,628 per Costco employee.

And increased sales (via James Surowiecki in The New Yorker):

The big challenge for any retailer is to make sure that the people coming into the store actually buy stuff, and research suggests that not scrimping on payroll is crucial. In a study published at the Wharton School, Marshall Fisher, Jayanth Krishnan, and Serguei Netessine looked at detailed sales data from a retailer with more than five hundred stores, and found that every dollar in additional payroll led to somewhere between four and twenty-eight dollars in new sales. Stores that were understaffed to begin with benefitted more, stores that were close to fully staffed benefitted less, but, in all cases, spending more on workers led to higher sales. A study last year of a big apparel chain found that increasing the number of people working in stores led to a significant increase in sales at those stores.

The reasons for this aren’t hard to divine. As Fisher, Krishnan, and Netessine show, customers’ needs are pretty simple: they want to be able to find products, and helpful salespeople, easily; and they want to avoid long checkout lines. For a well-staffed store, that’s no problem, but if you don’t have enough people on the floor, or if they aren’t well trained, customers can easily lose patience. One of the biggest problems retailers have is what is called a “phantom stock-out.” That’s when a product is in the store but can’t be found. Worker-friendly retailers with more employees have fewer phantom stock-outs, which leads to more sales.

But despite that, any of them could decide, tomorrow, that they can live with unhappy employees or with employees that make minimum wage and fewer benefits if such a move didn’t damage the bottom-line (such damage can come from some customers choosing to go elsewhere where employees are “fairly” treated – or – from their brands being damaged and reducing their ability to price products at a premium). 

And that’s where the progressive visions of their founders and CEOs come into the picture. 

John Mackey at Whole Foods and Costco’s Jim Sinegal (and Costco’s current CEO, Craig Jelenik) believe in paying their employees living wages and more. More power to them…I would do the same thing. But only if I was running a retail business that was structured to be profitable, to begin with. 

40, 60 or 80 Hours A Week?

 

Punch Clock

I once heard a story about a rich merchant who, on his deathbed, tells his sons that after inheriting his wealth, they must never let sunlight fall on them on their way to and back from work. One son wastes his inheritance by building a covered walkway from his house to the family store. The other one “wisely” understands his father’s wishes to mean that he must leave for work before sunrise and never return until after the sun sets – and of course, prospers.

These pre-historic attitudes to the many virtues of working long hours are sadly still prevalent, as illustrated by two managers’ cringe-inducing quotes in an NYT article:

One manager said: “So this one guy, he’s in the room at every meeting. Lots of times he doesn’t say anything, but he’s there on time and people notice that. He definitely is seen as a hard-working and dependable guy.” Another said: “Working on the weekends makes a very good impression. It sends a signal that you’re contributing to your team and that you’re putting in that extra commitment to get the work done.”

While I hope that these managers and their thinking is an exception, I suspect they may actually be the rule – thanks to the inertia of pre-set attitudes, among other things. 

Productivity is measured and rewarded today, especially in the “knowledge economy”, based on results and accomplishments – not the time spent at the office. Smart companies and managers should update their thinking accordingly.

The full article, written by a Harvard lecturer and Brookings Institution fellow, discusses different means to enhancing productivity while minimizing the focus on meaningless metrics like time spent at the office and is well worth a read.

The Other End of The Spectrum

At the other end of the spectrum, we have workaholics who live to work. Some do it because they are passionate about it and enjoy it and work doesn’t really feel like work. But like alcoholism, could workaholism indicate something deeper and unhealthier?

In March, meanwhile, Psychology Today cited recent research that outlines four basic types of work addict, namely (to paraphrase): The manic perfectionist, the stress junkie, the muddled multi-tasker, and the guy who never seems able to let a project go. An article in the same publication last year explored the narcissism and sundry neuroses that underlie the disease. Such categorizations may, on the surface, seem largely academic, but there is real-world aim here: namely to make people aware that they have an identifiable condition, and therefore make it more likely that they will seek help.

In the U.S., for example, telling people that you work too much or that you worked through your vacation is generally a badge of honor – regardless of role and title. 

Putting in 80 hours a couple of weeks in a row to meet a critical deadline or pulling an all nighter because a critical document or presentation needs to be sent out is understandable (though I doubt the quality of the work produced in these marathon sessions), but people that are simply unable to switch themselves, their laptops or their phones off may be asking for it:

“We’re beginning to look at work addiction from a cellular level now,” says Robinson. “The workaholic operates on the fight-or-flight response, which leads to a drench of cortisol, norepinephrine, and adrenaline. It can lead to heart disease and heart attacks, diabetes, compromised immune systems, and gastro-intestinal problems. We know this, the studies are pouring out.”

Still with me? Read the full article yourself before its too late.

Out of Touch, but On Top of Life

 

Many people would rather give up…certain things but can’t imagine giving up the Internet. Blame Dopamine and other neurotransmitters.

New research shows how “disengaging” periodically (just email, not the Internet, not even  Facebook) actually helps productivity and overall life satisfaction (if you ever thought, in a seditious moment, if perhaps work is, or was, a means to that anyway?).

Management consultants may be surprised to see that no less than BCG was used as the guinea pig in the research…

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