After The Election: The Hidden Flaw Holding Back Full Recovery

By Luke Ho-Hyung Lee

Post-election America: it was a hard-fought campaign on both sides, but incumbent Pres. Barack Obama won with his message of “let's finish what we started.”

His next step domestically is tackling the "fiscal cliff" (with a compromise solution tied to a Grand Bargain... or not).

Moving ahead, new policies will be announced, and some cabinet changes made.  Obama's January inauguration will precede a measured economic recovery in 2013.

That’s the good news.

The bad news: this scenario might be as good as it gets.  The upcoming recovery won’t boost middle- and working-class households in a meaningful way.  It won't be a sustained, permanent fiscal recovery.

But this isn't necessarily the Obama administration’s fault.  Since the 2008 fiscal meltdown, government officials, policy experts, and financial gurus of all stripes and credibility levels have rolled out any number of ideas aimed at solving our continuing financial crisis and revitalizing the economy.

Little has worked so far.  The lack of significant job creation and its twin symptom of high unemployment, stagnant or dropping wages, stagnant or dropping worker productivity, decreased consumer spending and its twin symptom of increased household debt, and volatility in the housing market are all side effects of something much larger.

Policy makers are focused on the symptoms, not the problem.  The real problem is far more fundamental and systemic than a few leading economic indicators. 

And this fundamental problem is invisible to nearly everyone.

This unseen, and therefore unaddressed, problem means that an even bigger and longer-lasting crisis -- a true economic tsunami -- lies ahead for the world as a whole, not just the U. S.  Industries around the globe will continue to shed valued (and valuable) jobs, in turn harming consumer-driven economies and creating a self-sustaining downturn.

This downturn will continue until the world economy either "breaks" permanently -- or the fundamental problem is recognized and addressed.

At its heart, the flaw is our mistaking efficient markets as being effective markets and failing to recognize the significant and profound difference.

The solution starts with acknowledging that domestic manufacturing needs to be the backbone of any significant economic recovery. 

The "experts" will say, of course, that America doesn't "do" manufacturing anymore.  Our economy is all about service, finance, software, and entertainment. 

That's not strictly true, of course:  the auto industry is still a major player.  Just ask Ohio and Michigan. 

The fact manufacturing isn't considered a primary element of our economy is the big reveal of our fundamental problem.  We can encourage entrepreneurs, innovators, and inventors in any number of ways, but if the basic conversation assumes that new manufacturing at any significantly higher level would simply shift overseas -- we've been misled that job creation is and will be the primary direct benefit of American innovation and entrepreneurship.

"Job-Killing Machines" in the Modern Information Age

But this is the case now, and it's because over the last 20 to 30 years of the Information Age, we have shifted our “real market” process (basically, the physical supply chain process) to a more efficiency-oriented supply-side environment.

This shift essentially created numerous domestic "job-killing machines," as large firms focused on efficiency and profitability generated by information technology and advanced networking systems. This altered the whole economic environment, making the destruction of jobs a major result of this efficient, "intelligent" streamlined process.

Isn't efficiency good for the economy?  In a balance-sheet recession, no.

Here’s why:

Think of the manufacturing and supply chain network – from product manufacturer to distributor to retailer and finally to the consumer – as a long stretch of highway, leading from the countryside, through the mountains via tunnel, over a bridge spanning a river, and into a city.  The highway passes a variety of buildings, ultimately leading to a retail store. The companies in these buildings are members, whether they can afford it or not, of this highway "network."  The network is the connected supply chain.

The highway, tunnel, and bridge are all well designed and maintained. It's an example we can see over and over in the U. S. and other nations. 

In this specific case, however, imagine that the highway, tunnel, and bridge are privately owned.  The companies located along the highway are part of the same conglomerate.  Moreover, the owners aren’t AT ALL interested in opening this transportation system to the public – not even to collect tolls.  They simply want the highway-tunnel-bridge system for their own, private use because of its competitive advantage.

That’s a major problem, and unlikely to happen in any rationally run country. Right?

Wrong.  The same thing is happening throughout our economy, but in less obvious ways. 

Example: A Private Information-Based Supply Chain Network 

Let's look at just one example:  Zara, the world’s largest clothing retailer, has developed a private IT-based supply chain network that vertically integrates its logistics and collaborative functions.

The Arteixo, Spain-based firm’s network is so efficient it now needs just two weeks to develop a new product and get it onto its stores' shelves -- compared to a six-month industry average.

This competitive advantage lets Zara launch around 10,000 new designs each year, far more than its competition.  By one measure, Zara has been remarkably successful:  Bloomberg Markets named Chairman Amancio Ortega the third richest person in the world this year.

What happened to other players in the industry?  Most smaller designers, manufacturers, and retailers are far less competitive (or efficient) than Zara.  A few lucky groups (including suppliers, designers and distributors) were brought into Zara’s system. 

Because of the resources pulled into Zara's closed network, combined with the chain's cost efficiencies, the larger fashion retailing industry’s supply chain became seriously unstable.  Most other companies lost their businesses.

As a result, jobs for middle- and lower-income workers in this industry have continually and relentlessly decreased. 

And Zara is in no way an isolated case:  due to the superior position of large companies with their own private, highly efficient supply chain networks (think Wal-Mart), small- and medium-size companies worldwide have likewise seen their businesses weakened and often destroyed.

Jobs in those smaller companies also have been lost – and they haven’t been replaced in anything resembling equal numbers by the larger firms.

There are three primary reasons why jobs replacement isn’t happening: 

(1) the aggressive adoption of IT systems that can identify redundancies (eliminating similar positions within the domestic marketplace),  (2) off-shoring and outsourcing manufacturing to lower labor-cost countries (shifting jobs out of the domestic market), and  (3) broad adoption of robotic machines and automation processes (eliminating jobs from entire industries, period).

This is strongly correlated with the decline of the self-generation, or recovery/rebuilding, capability of the economy (and once again illustrating why Henry Ford paid premium wages to his workers: he wanted them as customers).  But the workers impoverished by Zara cannot afford even its cheaper goods. 

These private information-based supply chain networks have been the major job-killing machines in the modern Information Age.  This is competition by relative size.

Competition Through “Public” Supply Chain Networks

As to our current supply-chain networks, we can say that while these private networks are efficient, they aren’t -- in terms of larger economic priorities -- in any way effective. 

These winner-take-all closed, efficient systems harm larger economic goals and objectives because they eliminate jobs as part of their natural process.

An open, effective supply chain network would allow network members to take advantage of efficiencies of scale and information systems, while reducing the advantages of size alone.

An open, public supply-chain infrastructure would shift the emphasis from only cost-per-unit to competition by price, quality, and service, that is, absolute competition.

The existing efficiency-oriented mass production process and mass-market consumption model would be altered into a more effectiveness-oriented, diversified, or individualized production and consumption system. 

In our example of the private highway-tunnel-bridge system, the owners can keep their closed network. But we’re going to build a toll-based system nearby, open to whoever can pay the reasonable fee. 

This open, membership-based system means a broad range of businesses -- low-tech to high-tech and everything in between -- can benefit from shared, intelligent manufacturing and distribution networks. 

A public system will spark business growth and lower the cost of entry into any number of domestic markets. 

Owing to these changes, local employment conditions will improve considerably, and the business environment for middle- and small-sized companies and for the general service industry will ease significantly. 

Moreover, companies that off-shored and outsourced to lower labor-cost countries would come back to the domestic arena.

The (Open, Public, Membership-based) Road Ahead 

This synergy for employment would be a positive force for economic recovery and revitalization.  The improvement of the self-generation capability of the market could finally be transformed into a permanent structural force to steady, and then increase, the level of consumer spending. 

It's only when we're ready to discuss the realities of manufacturing's role in our domestic economic future -- and the advantages of an open system to foster innovation, production and distribution -- that we can also discuss the realities of a sustained, and sustainable, economic recovery.

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About the Author: 

Ho-Hyung (“Luke”) Lee (luke.h.lee@ubims.com) is the founder and CEO of UBIMS, Inc. ("Ubiquitous Market System") He's by training a lawyer, an international businessman and entrepreneur – and an inventor.  Lee has figured a clear way out of the current economic crisis and developed the modern world's first Public Information-Based Supply Chain Infrastructure - UBIMS Inc. 

  

UBIMS Changes Supply Chain Quality

                                  by Jess Parmer

We have stressed on this blog over the last few years the price and competitive improvements that will result from adoption of the UBIMS platform by end-user businesses and suppliers.  In capsule form, these improvements result from UBIMS’s direct assault on time and space constraints imposed by private supply chains in the service of ultra-large job-killing machines in our domestic economy, and in the world at large.  End-users—not limited to local retailers and service providers, but also including the retail customer—and employees have, under the regime of competition by size, suffered disproportionately.  The UBIMS solution offers definable relief from immediate impacts of the rigged private supply chain, but is there more?

One answer to such a question may be intuited from the U.S. healthcare system’s coming adaptation of unified service and supply platforms:  the leading innovators in IT applications in population health incorporate from the start of the change process careful attention to customer satisfaction alongside development of provider confidence in the outcomes fostered by IT change.  The nature of these developments, while not yet universal, is useful for thinking about what improvements may be sought in other real, functioning markets through UBIMS.  Is it realistic to expect a UBIMS public supply chain to reduce prices, to cut delays, and at the same time to improve quality—whether stated as quality of service, or of manufacture, or as measured in some other way?

Perhaps a better analogy than the health care system can be imagined:  suppose for a moment that all delicatessens in a large city could order directly from manufacturers all the foods not made in-house on a UBIMS platform.  Delicatessens typically allow customers small samples, such as a slice of corned beef or several bites of potato salad, prior to purchase.  All delis powered by UBIMS could collect customer impressions of quality in this exact moment and forward it directly to manufacturers, linking these to manufacturers’ lot numbers, dates of expiration, nutritional information, etc.  Amazon, for instance, solicits customer responses right on the page where orders can be placed, and Amazon’s vendors also request and publish on the same page customer satisfaction rankings.  But Amazon itself also has a stake in this, often being their vendors’ competitor, so that it is small wonder that the Amazon supply chain is littered with warnings about limited numbers of items available.

But since UBIMS is a public supply chain platform, it will have no stake in the availability of specific items, or in their prices, and via the UBIMS rule of fair trade no stake in delivery cost.  In fact, the analogy with amazon.com goes only so far in explaining the power of a public supply chain platform.  The after-market in private passenger vehicles, despite the viral growth of CarMax and its imitators and the availability of accident databases by VIN number, presents numerous opportunities for informing consumers as fully as possible prior to purchase.  Even with such highly standardized products, UBIMS would find room for operation through owner service records and parts replacement validation, just to name a pair of areas in this massive market that would benefit from a public supply chain platform.  The popularity of the PBS Radio show, Car Talk, illustrates the breadth and depth of opportunities in this market.

A third example of a market that could develop rapidly under a UBIMS public platform is that of consumer appliances:  Consumer Reports touches only one edge of the information potentially usable from implementation of UBIMS here.  The problem in this area is that there is virtually no public aftermarket in used appliances, as our landfills testify.  Even smaller cities could benefit from a fact-based market in these, as landlords seek to fill semi-furnished rentals and new homebuyers stock their properties with appliances—often in the futile hope of avoiding a large home-improvement loan to do so.  Emergent technologies in heating and cooling can also complicate purchasing plans by lacking long service records.  A data-based approach to this market could convert a scrap operation into a thriving after-market business in major household appliances, or turn the small appliance department of a large used-goods store into a business with reliable profits, ending forever the appeal of cheap imported goods in this market and giving the big-box stores some real competition.  Buying reliable used appliances could come to resemble buying clothing in stores where you get to try things on before purchase, the difference being that someone else has tried on the appliance and told you his or her experience with a specific example of product.

The basic product of the UBIMS supply chain system is information relevant to market participants, publicly available in a model of cooperation and validation under an overall model of absolute competition, as opposed to competition based on size alone.  Quality assurance is the fundamental criterion of markets in goods and services—quality that is assured by reliable information in an open system that cannot be gamed or otherwise compromised.  This is the medium- and long-term promise of UBIMS, and it is why the UBIMS public supply chain platform will become the commercial platform of choice.

Job-Killing Machines in the Modern Information Age

by Luke Ho-Hyung Lee

We have developed numerous “job-killing machines” in the real market (or supply chain process) through the use of IT and networking technology over the last 20 to 30 years of the Modern Information Age.  These machines have significantly contributed to the shift to a more efficiency-oriented supply side environment by killing jobs and have altered the whole economic environment.  Strangely, it seems nobody has recognized this yet, and no expert has considered this at all in his or her public ruminations about the economy.

What are the job-killing machines in the real market process?

As you may have recognized, every company on the supply side has aggressively adopted IT and electronic networking mainly to increase its own productivity and efficiency in the functional real market process.

By developing many kinds of market (transaction or supply chain) systems and applications through the use of IT and networking technology in this way, two major effects are to be observed: (1) the number of transactions and functions in the supply chain process has shrunk remarkably—as with Wal-Mart, e-buyer, e-seller, and e-auctioneer systems, and existing e-marketplace systems in the real market process—and (2) numerous collaborative activities to increase efficiency of function have arisen in all sectors of the real market.   

Finally, by integrating those two major activities, numerous private information-based supply chain networks (mostly in big companies) have developed in all industries, and virtually only the big companies benefit.

Due to the superior position of big companies with their own efficient supply chain networks, the businesses of small- and medium-size companies have weakened and eventually been destroyed, and accordingly, many jobs in those companies also have been killed.  Moreover, these private information-based supply chain networks have contributed to the shift to a more efficiency-oriented supply side environment and changed the whole economic environment in the Modern Information Age.  That is, a mutually complementary relationship between the supply side and the existing market process has been firmly established, and this has completely altered the economic environment.  Thereafter, the following activities have been significantly facilitated in almost all industries on the supply side by killing numerous jobs in the domestic market: (1) aggressive adoption of IT progress, (2) off-shoring and outsourcing activities toward lower-labor cost countries, and (3) broad adoption of robotic machines and automation processes equipped with information (software) devices.

In this situation with the private information-based supply chain networks in the real market process, employment has continually and inevitably declined, and policies aimed at improving it have been unsuccessful.  Therefore, it could be said that private information-based supply chain networks have been the major job-killing machines in the Modern Information Age.

What is the private information based supply chain network?

Let me explain more details about the private information-based supply chain network with an example, the Zara case:

Zara, the largest clothing company in the world, developed a private information-based supply chain network by vertically integrating its logistics and collaborative functions through the use of IT and networking technology and now needs just two weeks to develop a new product and get it to its own stores, compared with a six-month industry average, enabling Zara to launch around 10,000 new designs each year, far more than its competition.

Zara has been remarkably successful over the last 20 to 30 years, and as a result, Amancio Ortega, Chairman of Zara, was named the fifth richest person in the world by Forbes in 2012.

But what happened to others in the industry?  Most small individual designers, manufacturers and stores were much less competitive than Zara, and most of them in their supply chain lost their businesses. That is, the whole supply chain in this industry became seriously unstable. Only some of them could be subordinated to Zara for survival.  As a result, the employment situation for middle- and lower-income workers in this industry has seriously and relentlessly deteriorated.  Unfortunately, Zara is no longer an isolated case.

Large companies in every industry have developed similar private information-based supply chain networks for their own distribution, and those big companies have used their supply chain networks only for their own benefit.  Thereafter, sadly, the employment situation for middle- and lower-income workers has seriously worsened in almost all industries, worldwide. 

Let me ask you directly:  “Without first replacing those job-killing machines, can you change this worsening course of the employment situation and revitalize the economy?  That is, can you solve the current economic crisis only with the old economic policies or stimulus plans?”  I believe it to be impossible in most existing market or supply chain processes.  That’s the real problem.

What should we do then?

Remember, we had also developed numerous private information networks in information until the Internet as a meta-platform was introduced and popularized in 1996.  What has happened in employment since then?

On the basis of the Internet, we could have developed numerous web-based software applications, software platforms such as Facebook and platform devices such as smart phones. Further, we could also have developed numerous platform-based software applications on the basis of those software platforms and platform devices. That is, we could have created numerous new businesses and jobs in the IT and Internet sectors of the market. Those meta-platform, software platforms, and platform devices were major job-creating machines in the information process, or so we were told at the time.

A question is raised: “Why haven’t we developed such a meta-platform or platforms also in the real market process?”

Unfortunately, without being aware of it, we have made a simple but serious mistake in developing many kinds of market, transaction, or supply chain systems and applications based on information technology.  As a result, information technology has been used in the wrong way in developing those systems and applications.  Thereafter, no competing public information-based supply chain infrastructure as a meta-platform in the real supply chain process has been developed.  (Please see more details about the mistake in “The Real Cause of the Current Economic Crisis and a Suggested Solution”.)

Another question is raised: “Is it possible to develop such a meta-platform as a job-creating machine also in the real market or supply chain process?”

To answer this question, we must be clear about what the Internet is.  It is a meta-platform for efficiently transferring information (digital codes) between multiple information sources and recipients.  Is it also possible to develop such a meta-platform for efficiently transferring physical objects and services between multiple suppliers and customers?  Yes, it is possible.  The concepts are the same, even if one is for transacting information and the other one is for transacting the sale and purchase of physical objects and services.

I believe the conditions and circumstances for the development of such a meta-platform, that is, a new public information-based supply chain infrastructure, are already in place.  That is, information technologies, facilities, devices, and people are already in place to develop it.  The only issue that remains is the will to develop it.  Moreover, the solution is already in sight.  It only needs to be implemented.  Once decision-makers are willing to make the necessary choices, it will be relatively easy to implement, and it will not take long to see positive results.

I believe there will be no sustainable solutions for the current economic crisis until the existing job-killing machines, that is, the private information-based supply chain networks, are replaced by a new job-creating machine, that is, a new public information-based supply chain infrastructure (or platform) that helps rather than disrupts and destroys existing businesses.

I would strongly recommend that governments and leaders of the Western countries, especially the United States and the Euro-zone countries, initiate the development of this new job- creating machine, and provide the active assistance and support necessary to revitalize their own economies and also the world economy, and that we do so immediately.

Time is running out.  The old private supply chain networks continue to shed jobs and wreck businesses.  This new public information-based supply chain infrastructure can and will reverse these effects in time to avert collapse.

About the Author

Ho-Hyung (Luke) Lee (luke.h.lee@ubims.com) is by training a lawyer, an international businessman and entrepreneur – and an inventor. He is currently the CEO of UBIMS, Inc. ("Ubiquitous Market System"). UBIMS, Inc. is a patent-pending startup with a new business method and system for the information-based public supply chain infrastructure.

To have Prosperity or to have Decline, it depends on Your Choice

by Luke Ho-Hyung Lee

How many public bridges as infrastructure are in the San Francisco Bay area? How many those bridges are in the United States? How many in the whole world? 

If all of those bridges were not public infrastructure but private, and only the owners (mostly big companies) could use their bridges for their own benefit, what would have happened in our economy and society?

The most likely development would have been that, due to the superior position of big companies in efficiency, the businesses of small- and medium-size companies would have weakened and eventually been destroyed, and accordingly, many jobs in those companies would also have disappeared.  Job creation in the market as a whole would have been sluggish as well.  In addition, while the profitability of the general service industry was also seriously diminished, we would have experienced a risk of a vicious cycle with a rapid reduction of total consumption.  Correspondingly, the expanding gap between poor and rich would have become inevitable.… Our society could have anticipated increasing unrest.…  

In this situation, what actions should national governments have taken?  First of all, they ought to have adopted a series of powerful expansionary monetary and fiscal policies, and stimulus plans aimed at preventing the vicious economic cycle due to reduced total consumption, and not have hesitated to activate deregulation to revive the overall market.  Moreover, in order to calm climbing social unrest, the implementation of generous welfare policies--even populist policies--would have been unavoidable….  As a result, numerous national fiscal statuses would have continued to get worse, pushing weaker national economies toward default.

 

Even if the above is a hypothetical scenario on the basis of "what if,” it looks uncannily similar to the situation that the world economy including the US has experienced over the last several years.

We have developed numerous information-based private supply chain networks in the market over the past 20 to 30 years of the Modern Information Age through the use of advanced information technology.  As a matter of course, most of these networks have been developed mainly by large companies and are used only for their own benefit.

Then, how about the information-based public supply chain infrastructure?  Even if it is hard to believe, no such public infrastructure has been developed at all--not a single one in the whole world!

How could this happen?  Unfortunately, a situation analogous to that imagined world without public bridges has actually happened in the supply chain process of the Modern Information Age.  The real problem is that no one (except me) has recognized this until now. 

Unfortunately, without being aware of it, we have made a simple mistake in developing numerous supply chain systems based on information technology over the last 20 to 30 years.  As a result, information technology has been used in the wrong way in developing those supply chain systems. Thereafter, no competing information-based public supply chain infrastructure could have developed in the market.

What "mistake"?  Even if some technological expertise is required, it is a fact that one of the most important factors in real (or physical) transactions, that is, overcoming the restrictions of time and space, was ignored.  Therefore, “efficiency increase” developed as the narrow focus of the real supply chain process, and “the construction of fair market conditions” has proven almost impossible. In simple words, unfair market conditions grew organically in the private supply chain process of the real market.  In this situation, the introduction of a system like the information-based public supply chain infrastructure was never considered at all.

Even if it was a simple mistake, when compared with the economic results, it could be one of the most expensive mistakes that human beings have ever made in modern commercial history.

However necessary a public infrastructure seems for markets or societies, it cannot be said that the status quo will be destroyed immediately. Nevertheless, it will also be very difficult—realistically speaking, impossible--to improve the status quo, no matter what we do.  Supply-side inefficiencies will always attract the critical eye of the large corporate supply chain manager, whose solutions will cost jobs, thereby reducing demand.  Onshoring programs will fail, because they seek to make an effect become a cause.  This is how the status quo will gradually worsen until it becomes intolerable, and then it will crash all at once.  Considering the current rapidly deteriorating global economic and social situations, the end of the line seems very near.  

If so, what urgent actions should governments in the world, especially the US Federal Government, take? It stands to reason that they should develop the information-based public supply chain infrastructure as soon as possible and implement it quickly and effectively in their own markets.  That is, governments should initiate such actions as soon as possible to overcome this grave situation, with the cooperation of the private sector and academia before it is too late.

I believe that the level of our future national competitiveness and prosperity will depend on who fastest develops the appropriate, effective information-based public supply chain infrastructure in its market in the next five years of the Modern Information Age.

The choice is in your hands, to have prosperity or to have decline.

About the Author

Ho-Hyung (Luke) Lee (luke.h.lee@ubims.com) is by training a lawyer, an international businessman and entrepreneur – and an inventor. He is currently the CEO of UBIMS, Inc. ("Ubiquitous Market System"). UBIMS, Inc. is a patent-pending startup with a new business method and system for the information-based public supply chain infrastructure.