Hiccup Leads to “Uneventful Event” – Without Planning and Effective Management, the Result Could Have Been a Catastrophe

Recently, our flight center experienced what, in aviation lingo, is called an “incident.”  A student and a flight instructor took off for an instrument training session.  As they climbed into the ceiling at about 800 feet, they were handed over from the airport control tower to air traffic control.  Air traffic control asked them to alter their heading necessitating a turn as they climbed toward their cruising altitude.  In executing this maneuver, the engine began to sputter.  Let me make a long story short--the pilot and the instructor followed standard procedures, recovered a smooth running engine, made the prudent decision to declare an "emergency," and were guided back to the runway from which they took off by air traffic control and the airport tower.   Soon after they landed, I became involved as the chief of my aviation operations called me to inform me of the "incident." He proceeded to debrief the flight crew, and I notified university administration.  About half-way through our tasks, the situation became more complicated when a reporter arrived at the flight center aware of the incident and asking for an interview.  We were able to connect with our VP of communications who briefed the operations chief on what to expect in the reporter's interview.  The interview went smoothly and the headline in the morning paper was ."Engine hiccup leads to 'uneventful event' for aviation student"...

The next day, I was flying to Atlanta for a meeting with administrators of university aviation programs and the airlines.  A VP from one of the regional airlines happened to be on the same flight.  After exchanging pleasantries, I began to give him the details of the "incident."  Being a 20+ year veteran of the airlines, he was able to give me a great deal of insight about what I had experienced.  As we discussed the “incident,” a number of implications became apparent to me.  First, I was amazed in retrospect at how calm and methodical every conversation that I had with the chief were.  My first knowledge of the incident came in a text message that was simple and to the point--a flight had experienced engine trouble and the instructor and student had safely landed back at our flight center.  Our subsequent conversations were methodical as he described the standard process for investigating an incident providing details as they related to this particular incident.  When the reporter arrived at the flight center, his call started with the simple statement "Things just got a bit more complicated."  Second, I realized that our discussions paralleled my experience on other occasions when flight operations were well prepared for an extraordinary event.  You hear professional athletes talk about such situations noting that the game seems to slow down allowing them almost to play in slow motion.  Many years ago, I worked for a provost who, while being a generally poor manager, had the amazing ability to get the deans’ council "over prepared" for biannual President's Cabinet retreats.  These retreats were grueling affairs where the president picked apart even the most talented administrators who were not perfectly prepared.  Typically, the provost met with us at least twice before these meetings playing the role of the president and making sure that our presentations were flawless, that we were prepared for every question, and that we had anticipated every consequence of every proposal that we would make.  While, participants from other divisions were often skewered at these retreats, we never experienced such a fate.  Our preparatory meetings were always more grueling than the actual retreats.

The record of the US airline industry is pretty amazing--just about the safest place that you'll ever be is in the cabin of an airplane.  This isn't luck.  “Incidents” happen daily at every airline and flight training program in the country--little problems occur, a standard procedure is executed to deal with the problem, lessons are learned from analysis of the problem, and new procedures are implemented to make sure the problem does not reoccur.  Lest the process become routine and sloppy, we periodically practice our ERP's (emergency response plans) in simulated exercises.  We already had one planned for later this month.

What are the implications for general management?  First, as I’m sure is evident, it makes a difference to have thought about things before they happen and to have a plan for how to deal with these things.  Scenario exercises are one way of developing such plans, but the process should be ubiquitous.  If we as managers develop a methodical, thoughtful process for approaching problems, we can “slow down the game” in the same way that a professional athlete does.  If you develop such a management style that is comfortable with thinking before making a decision, you will be rewarded with better decisions and greater support from your subordinates.

That leads to the second implication--actively engage your subordinates in this planned decision making process.  Participation in this planning process sends powerful messages to your subordinates.  Subordinates need to know that bad outcomes need to be discussed as often as good outcomes are.  They need to believe that bringing bad news to the boss will not be punished but rather rewarded.  You need to create an organizational dynamic that emphasizes that decisions need to be made thoughtfully on the basis of sound evidence and reasoning and not as “gut reactions” to a situation.

Hiccups happen.  If you and your management system are prepared, they need not lead to catastrophes.

Artificial Intelligence: The Proof is in the Pudding

While it is clear from my last several blogs that I believe that automation will drive a major restructuring of the world economy, I do not think that we are facing an end to work as we know it.  As I argued in my last blog, driverless trucks will create new jobs and demand new organizational structures.  Don't forget that the introduction of standardized shipping containers a half century ago actually increased longshoremen employment by integrating truck, rail and sea shipping thereby increasing the overall efficiency of the industry.[i]

I was at a presentation last week where an information technology prognosticator of some acclaim lamented the prospects for future employment.  The picture he painted was one where everyone was replaced by an Alexa controlled robot powered by the latest artificial intelligence (AI) apps.  No jobs are safe in this brave new world.  This is not a credible picture of future organizations.  The world chess champion, Garry Kasparov, who will always be known as the one who lost to Big Blue (20 years ago!), states the position eloquently:

Waxing nostalgic about jobs lost to technology is little better than complaining that antibiotics put too many gravediggers out of work.  The transfer of labor from humans to our inventions is nothing less than the history of civilization.  It is inseparable from centuries of rising living standards and improvements in human rights.[ii]

Let me tell you why I think Kasparov is right.

First, as Kasparov notes in his article, advancing technology has always created more and new jobs.  He offers a quick list including app designers, 3-D print engineers and genetic counselors.  These displacements create short-term adjustment problems as universities and technical training programs implement new curricula and workers make their way through training.  Unfortunately, these feedback loops are sometimes slow resulting in significant amounts of frictional unemployment.  There are long-term adjustment problems as well since many workers do not want to be or cannot be retrained.  This may justify, as I have argued in earlier posts, readjustment compensation for displaced workers.  

Second, creativity is a uniquely human capability.  A recent article in the Harvard Business Review by Tony McCaffrey (“There Will Always Be Limits to How Creative a Computer Can Be”) provides excellent analysis of this point.  While AlphaGo, the latest computer program capable of beating world champions (the ancient game of Go in this case) was able to develop an almost unbeatable approach to playing Go, its decision making patterns could neither be either understood nor summarized for external review.  How limiting is the factor?  McCaffrey and his colleague Lee Spector developed a mathematical proof establishing that even the fastest computer cannot explore all of the options posed by a problem.   Thus, there are serious limits on the ability of a computer program to analyze complex problems and understand how systems work.  Work life is more than playing Go or Chess.

Third, computer programs in isolation may not even be the optimal strategy for winning Go and Chess.  While much has been made of the inability of world masters to beat computer programs at board games, the success of individuals against computer programs in certain circumstances has received much less attention.  Stephen Cramton and Zackary Stephen, a couple of amateur chess players, developed a computer program to assist them in playing chess.  This combination of computer program and humans was able to win a tournament against both master level players and various computer programs.[iii]  This is a very interesting result. It suggests not only that there are elements of chess strategy that are not well duplicated by a computer program but also that the social facilitation of group decision making that has been long documented in the group dynamics literature is still important in the age of automation.  Teams are a ubiquitous element of organizational life and AI is not going to change that.  I suspect it will make teams even more important. 

What does this mean for logistics?  We should be excited at the prospects of improved efficiencies that will be offered by AI applications to mechanical tasks from driving trucks to operating warehouses.  The optimal application of these technologies will involve computer programs serving as aids to the decision making and operating processes.  The challenge will be to develop organizational structures that facilitate the synergy between decision makers and AI.  It is clear to me, however, that the winners will be those organizations that can effectively orchestrate this combination.

_____________________________

[i] Mark Levinson, The Box (2^nd Edition). Princeton:  Princeton University Press, 2016.

[ii] Garry Kasparov, “Learning to Love Intelligent Machines,” Wall Street Journal, April 14, 2017.

[iii] Chris Baraniuk, “The Cyborg Chess Players That Can’t Be Beaten,” BBC Future, December 4, 2015 (http://www.bbc.com/future/story/20151201-the-cyborg-chess-players-that-cant-be-beaten?ocid=ww.social.link.email).

Automation Will Restructure the Trucking Industry: Are You Ready?

In a recent blog, I talked about the impact of increased automation and robotics on jobs in the logistics industry.  While jobs numbers attract the most attention both within the industry and in the popular press, the more significant and complicated issue relates to the impact on the structure of the logistics industry itself.  A recent Brookings report by Joseph Kane and Adie Tomer sheds light on the complicated nature of this issue (Brookings:  Automated Trucking).

Kane and Tomer make four important points about driverless vehicles in the trucking industry.  First, the truck driver’s job is much more complicated than just driving a truck.  At the very least, the job involves inspection, loading and unloading, and equipment maintenance.  Most of these job elements are relatively low on their “degree of automation”—materially lower than the national average.  Thus, the arrival of driverless trucks will create a new set of complimentary jobs both for the trucking companies as well as for warehouses and retailers.   Third, these complimentary jobs will range from semiskilled (loading and unloading) to very technological (monitoring and repair of vehicles) in nature.  Finally, since trucking is regulated at the national, state and local levels, it will take a considerable amount of time to standardize regulation to allow complete implementation of driverless trucks.

As I suggested in the earlier blog, logistics companies should plan and prepare for changes that driverless vehicles will bring.  Certainly, the automotive industry is investing heavily in the development of such vehicles.  GM reported last week that it planned to invest $14 million and hire over a thousand workers to establish a new center focused on self-driving cars.[1]  Similarly, Ford[2], Audi, BMW and the other major car manufacturers have announced similar plans.  The prospects are attracting significant investments from the likes of Google[3] and Uber.[4]

Similar research for trucking is underway at companies like Embark and Otto.  What is needed, however, is innovation that focuses on the unique challenges of the trucking industry.  One such strategy is being developed by Starsky Robotics.[5]  This company is experimenting with the retrofitting of trucks with robotic controls to allow it to ease into driverless vehicles.  They recently completed a 180-mile delivery with robotic control of 85% of the trip.  Their goal is a system that would allow a single driver to monitor and control 10 to 30 trucks.  Essentially, they are developing systems comparable to airliner autopilot systems where, on the typical domestic flight, only 5% of the flying is pilot controlled.[6]

Planning and restructuring cannot end with just the driver.  As Kane and Tomer note, driverless trucks will increase not decrease the need for skilled labor in the trucking industry.   It will also demand new ways of connecting these functions that will require software and systems that have not yet been developed.  If, as they note, only 60% of today’s workers in trucking are truckers, this percentage will plummet in the near future.   The education and training industries must be prepared to educate the new workers.  At the same time, however, the trucking companies must begin defining the new jobs and organizational structures that will accompany the driverless or semi-driverless truck.

 

[1] https://www.nytimes.com/2017/04/13/business/gm-expands-self-driving-car-operations-to-silicon-valley.html?_r=0

[2] http://money.cnn.com/2017/02/10/technology/ford-argo-self-driving-cars/

[3] https://www.nytimes.com/2016/12/13/technology/google-parent-company-spins-off-waymo-self-driving-car-business.html

[4] https://www.bloomberg.com/news/features/2016-08-18/uber-s-first-self-driving-fleet-arrives-in-pittsburgh-this-month-is06r7on

[5] http://fortune.com/2017/02/28/starsky-self-driving-truck-startup/

[6] https://www.theatlantic.com/technology/archive/2016/03/has-the-self-flying-plane-arrived/472005/

Will Trucks Go the Way of Horses?

There’s much talk these days about productivity and production. I’ve blogged previously on this topic. US productivity peaked with the "Dot.Com Bubble" and has been very weak since 2010.[i] A possible resurgence, according to many, lies in artificial intelligence and robotics. On the other hand, these very innovations that could increase productivity and competitiveness may displace more workers than the most aggressive critics of globalization think were eliminated by international trade. The implications for logistics are particularly important.

Let’s unpack these issues.

First, what are the implications of automation for manufacturing employment? This week’s Economist has an interesting article reporting on the work of Daron Acemoglu (MIT) and Pascual Restrepo (Boston University).[ii]  These economists report on research that suggests that the addition of each industrial robot per 1,000 manufacturing jobs reduces manufacturing employment by 6 workers.   At present, the impact is small—between 360,000 and 670,000 jobs. But the application of such high tech manufacturing is everywhere from sneakers[iii] to motorcycles.[iv]  It is hard to imagine that the pace of automation will not increase, eliminating the need for many low-skilled manufacturing jobs.

Second, what are the overall implications for US employment? While many individuals including Bill Gates have argued that the implications are dire and that we should respond by taxing robots employed in manufacturing, I think thoughtful planning is a more useful approach. This week’s Economist article notes that the overwhelming majority of employment growth in recent years has been in services and the services depend on a growing labor force. Furthermore, to the extent that high tech manufacturing is able to increase the manufacturing base in the US, this growth will yield new jobs. Unfortunately, as I observed in an earlier blog, these jobs will require significant amounts of education and/or retraining. This will require action at both company and national levels. A tax such as Gates has suggested in combination with a great deal of planning may well be the appropriate strategy.

What are the implications for logistics? The Economist article provides us with a clever example. As the title (“Remember the mane”) implies, there is a comparison to horses. Automobiles and other vehicles virtually eliminated all employment for horses. Horses went from a critical part of agriculture and transportation to a hobby and a minor part of the gaming industry in the blink of the eye. I have recently been reading Jane Smiley’s Some Luck[v], which chronicles Iowa farm life in the early 20^th Century. If her insight is correct (and I’ve found her to be an accurate observer of sociology in her previous books), few farmers thought that mechanized farm machinery would ever replace their reliable horses. Driverless vehicles will be the next innovation in logistics. The cars are being tested in cities at the present time. The trucks will be on the highways sooner than you think. And planes could be pilotless (or, at least, co-pilotless) even sooner. It is very difficult to slow progress.

This week’s Economist article challenges us to “respond with more determination and care than horse-owners did a century ago.” I would echo that challenge to the logistics industry. Do not doubt that these changes are coming. Plan and prepare for the industry-wide changes that they will bring. Be on the cutting edge not the cutting floor.  

 

[i][i] Martin Neil Baily & Nicholas Montalbano, “Why is US productivity growth so slow? Possible explanations and policy responses,” Brookings Report, September 1, 2016.  www.brookings.edu/research/why-is-us-productivity-growth-so-slow-possible-explanations-and-policy-responses.

[ii] “Remember the mane,” Economist, April 1, 2017, p. 70. http://www.economist.com/news/business-and-finance/21719761-probably-not-humans-have-lot-learn-equine-experience-will-robots 

[iii] “The new manufacturing footprint,” Economist, January 14, 2017, p. 60.  http://www.economist.com/news/business/21714394-making-trainers-robots-and-3d-printers-adidass-high-tech-factory-brings-production-back

[iv] “Digital rider,” Economist, December 10, 2017, pp. 64-65.  http://www.economist.com/news/business/21711506-startup-uses-digital-engineering-enter-market-new-motorcycle-brand-springs

[v] Jane Smiley, Some Luck (Knopf, 2014).

 

Has Donald Trump Awakened the Sleeping Logistics Giant?

During the 1980’s, I worked as a consultant for FedEx helping to develop the company’s first quality management system.  Two tangential elements from my experience stand out to me today.  First, I remember a conversation between Fred Smith and Jim Barksdale where they wondered if it were possible that there were over a million packages to be shipped overnight.  In 2012, that number topped 25 million.  Second, I remember that the tiny office off to the side of the sorting hub (a manual not a technological operation at that time) that housed the US Customs Service was the most feared part of the organization.  “They can shut the entire sort down in less than a minute” was a refrain that I heard every time I stepped into the hub.  Growing from less than a million packages a night to over 25 million has a lot to do with the growth of e-commerce, but it can also be attributed to globalization. 

Like most of American industry, logistics managers and executives in the various parts of the shipping and delivery business are wondering what new trade policy under the Trump administration will mean for their industry.  The potential problems are multifold.    An article in this week’s Economist [i] does a good job of outlining the issues. 

Higher tariffs represent the biggest threat to trade with the potential to cut demand for cross-border purchases.  This could become more complicated, however, as customers could choose to order directly from foreign retailers such as Alibaba keeping their purchases under the $800 limit and avoiding tariffs all together.   The trade impact, in this case, would fall heavier on US retailers than on foreign ones. 

A second threat could come from the disruption of trade agreements and free trade zones.  Today, most goods flow freely within the industrialized world.  A breakdown in multilateral trade agreements begun with Brexit but potentially being followed by action by the Trump administration could result in complications with customs codes resulting in higher prices for shipping services and again a dampening of overall demand.  

On Thursday, Fred Smith was in Washington testifying before Congress on the benefits of international trade.  He has gone so far as to urge FedEx employees to contact their Congressional representatives urging them to oppose Congressional and Executive actions that hamper free trade.[ii]  The Economist reports that he has, without a public announcement, shifted his attention to lobbying from day-to-day operations at FedEx.  Fred Smith has been amazingly effective advancing the company’s interests in Congress whether it related to deregulation of the air cargo industry in 1977[iii] or labor legislation in the 1990’s.[iv]   This will be an interesting and a consequential fight.  The mantra attributed to Fred Smith in the 80’s at FedEx was “Who wins the fight between a bear and an alligator depends on where you have the fight.”  This will be an interesting and a consequential fight, and Fred Smith has been in this swamp before.

 

[i] http://www.economist.com/news/business/21716074-fedexs-founder-will-spend-more-time-campaigning-free-trade-logistics-companies-fear?frsc=dg%7Ca

[ii] http://www.bizjournals.com/memphis/news/2017/01/25/fedex-employees-encouraged-to-contact-congress.html?ana=yahoo&yptr=yahoo

[iii] http://marketrealist.com/2016/03/fedex-concept-blossomed-industry/

[iv] http://www.nytimes.com/1996/10/12/business/federal-express-knows-its-way-around-capital.html

Transportation Infrastructure & Trade: A Tale of Two Cities and Two Countries

I just returned from a week-long trip to Germany, where I was working with a German university on a partnership in global logistics—one that would link Bridgewater State University with universities in Germany, England, Malaysia, and Vietnam. Seeing the culmination of the U.S. presidential election from Europe was amazing. But that’s not where I want to go with this blog. Two of the highlighted issues of this presidential campaign were U.S. infrastructure (specifically, roads and bridges) and the impact of international trade on the loss of jobs. On both of these issues, the contrast that I saw between Germany and the U.S. was dramatic.

Infrastructure

Over 70 years ago, General Eisenhower experienced the German Autobahns first hand; and as president, he began the process of building our system of interstate highways. If you’re old enough to remember cross-country travel in the 1950’s or earlier, you remember travel that was slow and inefficient. Today’s highway system is quite different. The logistical marvels that we have experienced in the last 50 years clearly result, in large part, from our investment in our interstate highways and the trucking systems that they spawned. Unfortunately, underfunding and the resulting deterioration of our highway system jeopardize our future. 

The contrast to Germany is as stark today as it was in 1944.  German roads (whether between cities or around city neighborhoods) are marvels of quality and efficiency.  I cannot remember the last pot hole that I experienced on a German road.  Asphalt is pristine and smooth.  Traffic bottlenecks seem much less onerous than they do here.   Eisenhower would be shocked that today’s comparison of US and German roads harkens to the contrast that he observed during World War II.

If American roads are going to be great again, we simply have to make the kinds of investment that the Germans have been making for almost 100 years. If not, our logistical systems will simply fall apart. The good news is that President-Elect Trump talked about this issue throughout the election. Maintaining U.S. international competitivity in the upcoming decade will necessitate substantial investments in the repair of our roads and bridges. 

International Trade

I’m from a textile and furniture town in North Carolina (High Point). The town I was visiting in Germany (Reutlingen) shares very similar roots. Prior to World War II, Reutlingen was also a textile town. Today, High Point and Reutlingen are approximately the same size (100,000 inhabitants); but the similarities end quickly. 

Reutlingen saw the post-war future of manufacturing shifting to high technology and away from low-wage textiles. As textile production left Germany searching for low-wage opportunities in the American South and then Asia, Reutlingen retooled physical facilities and its workforce for high-wage, high-technology production. Today, the focus is on advanced-technology manufacturing, biotech, and medical and environmental technology. Reutlingen boasts a Bosch plant producing automotive electronics for Mercedes and other high-end automobile manufacturers. Reutlingen is reputed to be the wealthiest city in Germany.  It has a large vibrant downtown that is free of automobiles. The city becomes greener every time I visit.

The High Point economy is quite a contrast.  Only one manufacturer remains within the top 10 employers in the city—a school bus manufacturer.   Furniture manufacturing and textiles are pretty much gone.  The company that I worked for one summer during high school, Myrtle Desk, went out of business and the abandoned plant where I worked burned down a few years ago.  Downtown has been taken over by the furniture market; and with the exception of “Market Time,” the sidewalks are pretty empty.  The city has tried to build two malls in my lifetime—neither succeeded.  One has been converted into a church and office complex and connects to the retirement apartments where my mother lives.  The other is a shadow of what it was when it was built just 20 years ago and is gradually being turned into classroom space for the local university.  High Point is wealthy but far from the level of Reutlingen.  High Point, like many other US cities,responded slowly to changes in the world economy.   They emphasized low-wage/low-tech textiles and furniture manufacturing long after it was clear that such manufacturing was going elsewhere.  High Point would say that it has been victimized by free trade.  I’d disagree.

The contrasts that I saw on my trip were stark. Germany invests heavily in its roads and bridges. They may be the best in the world. Furthermore, Germany invests much more than we do in worker retraining and industrial policy, leaving it much less dependent on industries that are vulnerable to competition from low-wage countries. These are critical factors for the logistics industry. Our logistics system will not continue to operate effectively with crumbling roads and bridges. Likewise, we need to identify strategies that will expand high-value manufacturing giving us products that will compete both at home and abroad. 

NAFTA and Logistics

Interestingly, the NAFTA debate of the current election cycle has focused primarily on US–Mexico trade generally ignoring the US–Canadian relationship.  Sometimes we forget how significant this latter relationship is[i]:

1. The largest bilateral trading relationship in the world—approaching three-quarters of a trillion dollars and supporting almost 2 million jobs;
2. The longest international border in the world—crossed by 400,000 people each day;
3. The largest integrated electrical power system in the world—and, lest we forget, Canada is the largest supplier of foreign oil to the US; and finally,
4. The largest system of Foreign Direct Investment in the world with the US being the largest source of FDI in Canada and Canada being the 3^rd largest source of FDI in the US.

There can be no question that the United States and Canada are uniquely joined.  Even pre-Brexit, our interdependencies were much more significant than those of the European Union—we share a common language and a common level of economic development and it has now been over two centuries since we raised arms against each other.  

NAFTA created a $19 trillion dollar common market of 470 million customers.  Importantly, it was the first trade agreement that combined developed nations (the US and Canada) with a developing one (Mexico).[ii]  This is a remarkable achievement and represents an element that is critical to the future resiliency of the partnership. 

Despite Ross Perot’s warning of a “gigantic sucking sound” and Donald Trump’s recent declaration that NAFTA is a total failure, most economists argue that the agreement has had a net positive impact on all three countries.[iii]  Unfortunately, the effects have been uneven; and the post-election period will probably focus on worker adjustment programs to ease transitions from old into new jobs or to financially compensate displaced workers.  I do not, however, see a renegotiation of NAFTA on the horizon.  As a matter of fact, I think that a post-election Congress is more likely to support TPP albeit in a form that provides more worker retraining and displaced worker provisions.

The reason I expect this outcome relates to one of the most important, but frequently ignored, statistics surrounding the NAFTA relationships.  Today, approximately 40 percent of the average US import from Mexico is attributable to US value-add.  The comparable statistic for Canadian imports is approximately 25 percent.[iv]  The success story of NAFTA is not free trade but integrated economies.  For example, consider the construction of a Bombardier Learjet.  With the exception of Irish wings, the Learjet 85 is a North American product—fuselage constructed in Mexico and engines built in Canada but designed by Pratt & Whitney in the US. Automobiles are similarly North American with the parts and labor of the majority of cars spread across the US, Canada and Mexico.  When Ford recently decided to shift production of compact cars to a plant in Mexico, it retooled the plant to produce high end trucks and SUV’s at no loss of US jobs.  Actually, auto-making jobs in the US have grown by 200,000 since the end of the Great Recession.

Importantly, since the NAFTA partnership is not homogeneous, it creates opportunities for Canada and the US to utilize lower wage rates in Mexico strategically (as in the case of low margin compact cars) to compete with products from low wage Asian nations.   The development of cluster industries exploiting our heterogeneous North American comparative advantages is likely to grow in future years.  In particular, both demographics (a young Mexican workforce) and energy (huge US and Canadian reserves of low cost natural gas and clean Canadian hydroelectric power) as important hedges against Asian Tigers.  

The unevenness of the impact of trade agreements, however, is real.  Trade boosts overall GDP while redistributing the portions to capital and highly educated workers at the expense of low skilled workers.  Thus, the trade discussion needs to move forward considering funding for increased worker training and displaced worker compensation as a condition for lowered trade barriers. Economist Jeffrey Sacks goes so far as to argue that companies benefiting from free trade should be taxed to provide the funds to compensate displaced workers. 

This strategy should be very familiar to people within the logistics industry. Mark Levinson's landmark book, The Box, provides a great description of our experience with the introduction of standardized shipping containers.  To allow the introduction of standardized containers over the objections of longshoremen in the 1960’s, shipping companies agreed to share the efficiency gains through guaranteed but unnecessary jobs.  Surprisingly (or not), the efficiency gains were so great that the introduction of the new technology resulted in labor shortages not surpluses in the very first year of the agreement.

The world economy is not perfect, but it is hard to make a rational case for isolationism.  I, for one, think that rational analysis will lead us back to a discussion of how to make trade work to the betterment of our economies in the upcoming months.  For logistics, this means an increasingly important role in making the transportation system an increasingly efficient part of the world economy.

 

[i] https://www.whitehouse.gov/the-press-office/2016/03/10/fact-sheet-united-states-%E2%80%93-canada-relationship

[ii] https://www.foreignaffairs.com/videos/2014-06-06/foreign-affairs-focus-carla-hills-nafta-20

[iii] http://knowledge.wharton.upenn.edu/article/nafta-20-years-later-benefits-outweigh-costs/

[iv] https://www.foreignaffairs.com/videos/2014-06-06/foreign-affairs-focus-carla-hills-nafta-20

Is Our Transportation System Magnificent, Mysterious or Just Maddening?

If you followed my recommendation to check out Parag Khanna's new book Connetography, and were frustrated to find it to be a dense, academic read, you will be pleased with my latest recommendation, Door to Door.  The author, Edward Humes, is definitely more geared to popular writing having written 14 books, earned a Pulitzer Prize and being a regular writer for the Wall Street Journal, Forbes and the New York Times.  In Door to Door, Humes tackles the same issue as did Khanna--how important are logistics and supply chains to the economy and our life styles?  His answer is both entertaining and frightening.  He begins by describing the congestion of the Los Angeles highway system and follows with a detailed description of the transportation footprint (how many miles of transportation are involved in a product’s production process) of a ubiquitous product--the soda can.  Quickly, he convinces us that our lives depend on as well as are being destroyed by the transportation required for even the simplest products in our market baskets. 

Humes has four basic themes within his book:

1. Our everyday products have gigantic transportation footprints;
2. As a result, every part of our transportation system is terribly congested;
3. Increasingly sophisticated application of information technology is our only path around this congestion; and
4. Failure to make significant investments in our transportation infrastructure could be perilous.

He does not, however, see our prospects as hopeless. He describes five trends that have the potential to change the calculus of the transportation dynamic:

1. The transformation of China into a modern economy raising their wage structure and making increased foreign investment in Chinese manufacturing less attractive;
2. The re-shoring to the U.S. of off-shored manufacturing;
3. The development of 3-D printing manufacturing potentially allowing products to be made even as they are being delivered;
4. The expansion of sharing/crowd-sourced traffic apps and ride sharing (Uber, for example); and
5. Driverless cars, trucks and airplanes.

The net effect of these changes will be to reduce the amount of driving on American roads and to increase the degree to which products are manufactured here in the United States as opposed to abroad.  Actually, per capita driving peaked in 2005; and only our recent experience in cheap gasoline has caused the annual rates to increase in the last two years.   Clearly, the change is even more dramatic for Millennials—driving by 16 to 34 year-olds has dropped by almost 25 percent in the last decade!  The growth of Uber and similar “sharing economy” companies is likely to change traditional travel patterns even further.   And driverless vehicles could be a reality as early as 2020.

Just as Khanna provided a comprehensive picture of the supply-chains from a global perspective, Humes provides an understandable and entertaining picture of what these supply-chains mean for you and me in our everyday lives--dare I say "where the rubber meets the road"?  If you're interested in a frightening and informative read, Door to Door is a book you shouldn't miss.

Shanghai Pilot Free Trade Zone: A Look into the Future or a Snapshot of the Past

Any visit to China is striking. The size of everything is overwhelming.  The contrast of old and new is striking.  If you’re revisiting, the obvious growth is a shock.  If, as was the case for me, the time span between visits is over 10 years, the change can be almost impossible to fathom.  

In the interim between my visits, China created the Shanghai Pilot Free Trade Zone. This 11 square mile industrial/international trade park located outside of the city and adjacent to the airport opened in 2013 to experiment in financial and foreign investment changes designed to make the Chinese economy more open and accommodating.   It is impressive.  From the ornate entryway reminiscent of gateways into Chinese communities to massive warehouses for imports and exports to high rise headquarters for multinationals and Chinese administrative offices, this is obviously a new and different China.  My group saw everything from a wine importer with a cellar to rival almost any in the world to a retail store that was a mini Wal-Mart.  The names on the outside of buildings were a virtual "who’s who" of multinationals. 

The most interesting part of the Zone to me, however, was a visit to the trade administration building. This is the comprehensive service center for the Zone—the place where you go to fill out all of the paper work that lets you conduct business.  The building is the tallest in the Zone, and it was hopping with activity.  Imagine a Department of Motor Vehicles office in any U.S. state and you’ll get the picture.  But this is China—we’re talking about the DMV on steroids.   We were only allowed to enter in groups of five, and what we saw were lines after lines of individuals.  The individuals not standing in lines were sitting waiting to stand in lines.  And, of course, our guide pointed out the line that you stood in to find out which of the other lines you needed to stand in.  Our guide talked exclusively about rules, regulations and bureaucracy while assuring us that the strategy was to make doing business easy and convenient.  I had my doubts.

My research upon returning home confirmed my observations—“all that glitters is not gold” in the Shanghai Free Trade Zone. Let me direct you to three articles that I found informative.

• One year into the operation of the FTZ, MacKenzie Sigalos argued that the FTZ was a “dud” noting that trade reform was slow and that there was significant confusion about what can and cannot be accomplished in the zone. http://money.cnn.com/2014/10/06/news/economy/shanghai-free-trade-zone/)
• A year later, an article in Worldwide Financier (http://www.financierworldwide.com/impact-of-chinas-free-trade-zones/#.V8LptPkrLX5) noted that the impact of the FTZ on both foreign and domestic trade had been negligible. Government reforms had been limited and impact on the Chinese economy in general had not been significant.
• Reporting from Shanghai, Gabriel Wildau argued last September that the FTZ “lacked relevance” http://www.ft.com/cms/s/0/8cec0faa-6364-11e5-9846-de406ccb37f2.html. While he notes that clearing goods through customs has now fallen from weeks to days, progress in market liberalization has been slow.

None of this should be surprising. Even getting goods across the US-Canadian border can be complicated and unreasonably slow. And everything about the Free-Trade Zone is not negative--moving clearances from weeks to days is significant.  It does emphasize, however, that there are no easy solutions to any problems. Infrastructure enhancements like the Shanghai Free-Trade Zone are important steps to more open trade.  Cultural impediments cannot be ignored.  Truly free trade will come at the end of long negotiations and even longer experience with trade relationships. 

U.S. Productivity: Is there a Crisis?

In a recent blog (“Chinese Manufacturing Productivity”), I wrote about the problems of Chinese productivity, noting that, while growth rates were high, the absolute level of productivity was between 15-30% of OECD averages. This week, we were disappointed, but not surprised, to learn that US output per hour worked fell 0.5% in the second quarter to end up down 0.4% over the last year.[1] Most writers point to the beginning of the Great Recession as the proximate cause of this decline.  However, productivity actually began to fall before 2008.[2]

I recalled that, back in the early 2000’s, I invited one of the regional Federal Reserve Bank presidents to speak to MBA students at my university. He proposed that productivity increases spurred by the revolution in information technology had reset the classic relationship between unemployment and inflation. He predicted continuing growth in both productivity and GDP and declines in unemployment without any impact on inflation.  But the promise of information technology and unlimited productivity growth faded.   And then came 2008! 

So where are we?  Have we found the 21^st Century equivalent of “stagflation” (low growth coupled with high inflation of the late 70’s) in a new equilibrium of anemic growth despite low interest rates? Not necessarily.

The driver that led to what Alan Greenspan and Robert Shiller characterized as “irrational exuberance”[3] was the impact of information technology on the economy. Information technology drove productivity and productivity drove growth. However, despite the expectations of my Fed prognosticator, this cycle came to an end. When you add in the impact of the Great Recession, you get the slow growth recovery that we’re now experiencing. A recent article by Neil Irwin, [4] one of The Upshot writers at the New York Times, posits three theories for our current situation:

1. The Depressing Scenario—technology has done what it can and productivity will not improve;
2. The Neutral Scenario—the economy is so dramatically changed that our measures just can’t keep up;
3. The Happy Scenario—we’re in a stage of investment in new technologies that will take several years to kick in but will ultimately yield dramatic productivity increases.

Personally, I subscribe to the Happy Scenario. A recent Brookings Report[5] detailed some of the drivers of such a perspective:

• New technologies in energy
• Industrial robotics
• 3D printing and active manufacturing
• Big Data
• The “internet of things”
• Investment in infrastructure

Each of these drivers has significant implications for the logistics industry. While research on driverless vehicles and Big Data may be consuming huge investments today with minimal returns, no one doubts their ultimate impact.  Furthermore, the presidential candidates of both political parties have championed investment in rebuilding our network of highways and bridges. The impact of even a modest increase in such spending will have a dramatic impact on GDP and productivity and, particularly, on logistics productivity. 

Is this a time to be complacent? No. Do we want to chauvinistically ignore Chinese productivity growth?  No.  As I argued in my last blog, it’s time to “double down” on innovation and technology not to abandon them.

 

[1] Associated Press: http://nyti.ms/2b3hFED

[2] Nick Bunker: http://equitablegrowth.org/equibableblog/did-the-great-recession-reduce-u-s-productivity-growth/

[3] https://www.amazon.com/Irrational-Exuberance-3rd-Robert-Shiller/dp/0691166269/ref=sr_1_1?s=books&ie=UTF8&qid=1470767557&sr=1-1&keywords=irrational+exuberance

[4] http://NYT.ms/1TgrJVD

[5]https://www.brookings.edu/~/media/research/files/papers/2013/3/us%20productivity%20growth%20baily%20manyika/us%20productivity%20growth%20baily%20manyika.pdf