Friday, June 6, 2014

General Motors CEO asks workers to "Call Me". Is this unprecedented in the Corporate Boardroom?

Mary Barra, the recently appointed CEO of General Motors, has been criticized for her response to the ignition switch malfunction" that resulted in deaths of drivers of GM vehicles.  It is something that occurred before she became the CEO so I willing to cut her some slack.

According to an internal investigation this problem was an accident waiting to happen (forgive the pun) and completely avoidable. Bureaucratic inertia and territory protection (i.e. CYA) seem to have been at the forefront.

In her message to employees (FOUND HERE) about the results of an internal report she said the following:
"So if you are aware of a potential problem affecting safety or quality and you don't speak up, you are a part of the problem. And that is not acceptable. If you see a problem that you don't believe is being handled properly, bring it to the attention of your supervisor. If you still don't believe it's being handled properly, contact me directly."
 Odd a CEO telling rank and file employees to contact them directly with an issue.  Unprecedented, right?

No.  In a terrific book I read a year or two ago "The Power of Habit: Why We Do What We Do in Life and Business" by Charles Durhigg tells the story of former US Treasury Security Paul O'neil who became an unlikely CEO of the steel conglomerate ALCOA.

For instance, consider one event about six months into O'Neill's tenure, when he got a telephone call in the middle of the night. A plant manager in Arizona was on the line, panicked, talking about how a piece of machinery had stopped operating and one of the workers -- a young man who had joined the company a few weeks earlier, eager for the job because it offered health care for his pregnant wife -- had tried a repair. He had jumped over a yellow safety wall surrounding the press and walked across the pit. There was a piece of aluminum jammed into the hinge on a swinging six-foot arm. The young man pulled on the aluminum scrap, removing it. The machine was fixed. Behind him, the arm restarted its arc, swinging toward his head. When it hit, the arm crushed his skull. He was killed instantly. 
Fourteen hours later, O'Neill ordered all the plant's executives into an emergency meeting. For much of the day, they painstakingly re-created the accident with diagrams and by watching videotapes again and again. They identified dozens of errors that had contributed to the death, including two managers who had seen the man jump over the barrier but failed to stop him, a training program that hadn't emphasized to the man that he wouldn't be blamed for a breakdown, lack of instructions that he should find a manager before attempting a repair, and the absence of sensors to automatically shut down the machine when someone stepped into the pit. 
"We killed this man," a grim-faced O'Neill told the group. "It's my failure of leadership. I caused his death. And it's the failure of all of you in the chain of command." 
The executives in the room were taken aback. Sure, a tragic accident had occurred, but tragic accidents were part of life at Alcoa. 
Within a week of that meeting, however, all the safety railings at Alcoa's plants were repainted bright yellow, and new policies were written up. Employees were told not to be afraid to suggest proactive maintenance. And O'Neill sent a note to every worker telling them call him at home if managers didn't follow up on their safety suggestions.
Wish we had more CEO "brass" like this today.  Maybe we would not be in such a mess.
Read more about this particular incident and how workers calling him personally made a huge difference in the company turnaround---HERE from the author.
The whole book is worth a read too.  It covers a broad range of topics and is NOT a business book. More psychology I would say.  

Thursday, June 5, 2014

Nice map illustrating the minimum wage and number of workers affected.

Here is a handy-dandy easy visual from The Brookings Institute to show students what the minimum wage is in each US State and an estimate as to much of the labor force earns up to 150% of that wage.

States without a number in them have utilized the Federal minimum wage of $7.25 as their floor wage

Each State CAN impose a minimum wage ABOVE the federal level (see those numbers in each State) but cannot set it below it.

The color coding shows, as a percent of that States labor force, the number of workers who earns LESS than 150% of that States required minimum wage.

For instance, in Texas 150% of the minimum wage is $10.86 ($7.25 X 150%) and between 27.1%-32% of the labor force earns that amount OR LESS (blue-ish area)

In California 150% of $8.00 is $12.00 and 32.1% or more earn that amount or less (purple area).

The authors of the study wanted to show how an increase in the minimum wage would impact many more workers than those just earning at or below the mandated wage (Federal or State).

The implication is those who now earn more than the minimum wage (up to at least 150% of it) will get a "bump" in pay as those at the lower end of the pay spectrum see a higher mandatory hourly wage.

They estimate about 16 million workers would be affected (in a positive way) by an increase in the minimum wage.

The authors are careful to explicitly mention they are not taking into account ANY employment OR dis-employment affects of a high minimum wage.  That is a BIG caveat!

Source: The Brookings Institute

Wednesday, June 4, 2014

Number of hours worked has returned to pre-recession levels. Must be good news, right?

Here is a graphic showing the number of hours worked by different sectors of the economy classified by how they have fared since 2007 (just prior to the recession---Dark GRAY area).  Go HERE for the short and informative article on the topic.

I inserted a RED line to show the point of the official end of the recession (late 2009) where hours worked SHOULD start increasing for all sectors, presumably, as the recovery got underway.

Total hours worked has returned to pre-recession levels (mentioned in the article). But there has been a reshuffling of those work hours from higher paying construction and manufacturing jobs to lower paying leisure and hospitality.  A significant part of healthcare job growth is in lower paying home health aides.

Construction jobs suffered the biggest drop as a result of the recession and has held pretty steady at its low point with only a tiny increase in hours worked in the past 4 years.

I believe construction will eventually pick up, but unless manufacturing is defined in a new way I do not believe employment in that sector will increase dramatically.  Technology is the pinch there.

Construction workers might experience a boom building manufacturing plants and infrastructure but they will be staffed by machines and robotics.

Source: St Louis Federal Reserve

Tuesday, June 3, 2014

Purchasing Power Parity (PPP)---as simple as I can make it for the novice (me!)

I have blogged several short mini-lessons on the concept of "Purchasing Power Parity (PPP)" but I am never satisfied that I explained it properly.  Heck, not even sure I explained it enough for ME to get it!

Here is another attempt.

Assumption #1: Today the actual market currency exchange rate in the Foreign Exchange Market is $1.00US will exchange for $1.00A ("A" is the Australian Dollar).   So, the reciprocal is $1.00A will exchange for $1.00US. The currencies are at "parity" with one another--there is an even one to one trade off between the two currencies.

Assumption #2:  An American decides to go on vacation to Australia to visit The Great Barrier Reef.  It costs $15,000 Australian dollars to do so.  An Australian decides to go on vacation to the US to visit Disney World.  It costs $10,000 US dollars to do so.  Everything about each vacation is the same except the experience, which we will assume yields the EXACT same satisfaction (or "utility") for the American and the Australian. They are equally happy, only in different ways.

Even though the vacations are priced differently in their respective currencies, Purchasing Power Parity suggests that buying power of one currency should be EQUAL to the buying power of the other currency when purchasing identical/similar goods and/or services. Whether that is in Australia or the US---does not matter.

Given the relative nominal prices of the vacations above, the PPP exchange rate would be $1.00 US = $1.50A and $1.00A = $.67 US.

In other words, when an America exchanges $10,000 they will receive $15,000 Australian dollars ($10,000US X $1.50A) and when an Australian exchanges $15,000A they will receive $10,000 US dollars ($15,000A X $.67US).

This is what the exchange rate SHOULD be but remember from assumption #1 the ACTUAL exchange rate is:  $1.00US = $1.00A, and vice versa.

Give the actual exchange rate, the American would have to give up $15,000 US in order to get the necessary $15,000 Australian dollars for the vacation.  That is $5,000 ,or 50%, MORE than at PPP!

The Australian would have to give up $10,000A to get $10,000 US.  That is $5,000, or 33%, LESS than at PPP!

Because the Australian has to give up FEWER Australian dollars to buy US dollars relative to PPP, the Australian dollar is said to be OVERVALUED relative to the dollar.

Because the American has to give up MORE US dollars to buy Australian dollars relative to PPP, the US dollar is said to be UNDERVALUED relative to the Australian Dollar.

What will happen in the "Long Run" according to PPP theory?

Because American vacations are cheaper for Australians they will take more of them. This will serve increase the Supply of Australian dollar in the FOREX and depreciate the Australian dollar.  The corresponding increase in Demand for Dollars will appreciate the US dollar in the FOREX.

Because Australian vacations are more expensive for Americans they will take fewer of them. This will serve to decrease the Supply of US dollars in the FOREX and appreciate the US dollar.  The corresponding decrease in Demand for the Australian dollar and will depreciate the Australian dollar in the FOREX.

The exchange rates will adjust so that, all else equal, the buying power of one currency will have the same buying power of the other currency, regardless of which of the two countries a purchase is made.

That's Purchasing Power Parity (PPP) as simple as I can make it.

Hope it  helps A LITTLE! :)

Monday, June 2, 2014

Nice data on food waste in the US. You won't believe how much of it YOU are responsible for!

Reference the data below.  According to the always informative USDA Economic Research Service, in 2010 the estimated amount of food available at the retail level was about 430 Billion pounds.  

Of that, 133 Billion pounds were wasted (not used, thrown away, rotted, etc).  Read that again.

That is 31% of the food supply.  Read that again.

The number circled in RED, 1,249 represents the per person (US) caloric loss from that 133 Billion pounds in lost food (based on population of 313 million).

That could supplement the diets of hundreds of millions people in the developing world and bring them up to developed world levels.

Sadly, this analysis is only a parlor game. Logistics, Logistics, Logistics.  It is a rubrics cube of coordination and will.

It is a nice reminder of the importance of reducing the consumption of perishable food items to what you, well, actually can consume, and to "reuse" the leftovers to avoid throwing away.

Sunday, June 1, 2014

"Food Inflation" is on its way in 2014. But the reason for it is not what you may think it is.

"Food inflation" is likely on its way to the US, and the world for that matter.

When we here the word "inflation" the first thought is usually "too much money chasing too few goods (services)" and look to Monetary policy as the culprit. Maybe...but maybe not.  Sometimes the fundamentals of Supply and Demand in various markets are at play.

Here are data from the USDA ERS site that show the change in prices of the basic food groups for the past couple of years and projections for the remainder of this year.  Does not look encouraging at the checkout line.

If you go to the site they give a nice overview of the why prices in select categories are increasing.

The short story version is there seems to be a perfect storm of variables coming together to conspire to raise prices---weather and disease (plant and animal) working to limit or decrease supply on the Supply-Side. Demand from recovering developed economies (US, Europe) and emerging developing countries (China, India, etc) is putting upward pressure on the constrained food supply chain.
Source: USDA ERS
Here is one interesting point made in the USDA ERS analysis I think is important to understand as well.
Additionally, it appears as if supermarkets are maintaining minimal price inflation on packaged food products, possibly in an effort to keep prices competitive in light of rising cost pressures for most perishable items. Therefore, ERS has revised the forecast for sugar and sweets downward to 1 to 2 percent and for nonalcoholic beverages downward to 1.5 to 2.5 percent for 2014.
Competition serves to minimize, or at least soften, the REAL changes in prices of many goods at the actual point of purchase.

Grocery stores have to consider YOUR whole grocery basket of stuff you purchase when pricing their products AND what other stores are doing at the same time.  They may play a little "rob Peter to pay Paul" with the inventory.  In order to minimize the price increases of the perishable goods you see above, they will likely decrease prices of other non-perishable goods where they may have more pricing discretion.

So, market fundamentals are increasing the prices of many diverse individual food items at the same time, and competition between stores is working to minimize (albeit not stop) those price increases.

That is what I call a reasonable explanation.  Maybe not one that makes us happy, but more reasonable than the one I started out with.

It only took a little more work.   :)
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