Postponement and the Wealth of Nations


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This presentation is going to propose a new ethical concept on ‘Fair Value Chain Creation’ (FVC²) for academic discussions. The FVC²-concept applies Fair Trade principles to exports from developed countries to the less developed, awarding a ‘Fair Value’ label to products which undergo further value adding in the destination/host market. The FVC²-concept could be summarised as the marriage of social and environmental factors and systems thinking in value chain analysis to obtain a globally balanced ‘Fair Value Chain Creation’, which responds to the social and economic ecosystem as a whole. The challenge is to develop frameworks and political as well as market forces allowing and driving people to design value chains with the needs and intentions of ‘Fair Value’ in mind.

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Postponement and the Wealth of Nations

  1. 1. 3rd Dialogue on Social Market Economy, Zwickau 2009
  2. 2. Postponement and the Wealth of Nations Dipl.-Ing. Andreas Rutsch Prof. Dr.-Ing. habil. Christian-Andreas Schumann Prof. Dr. rer. pol. Tobias Specker
  3. 3. Table of contents <ul><li>Opportunities </li></ul><ul><ul><ul><li>Innovation and global value chains </li></ul></ul></ul><ul><ul><ul><li>The principal </li></ul></ul></ul><ul><ul><ul><li>Globalization </li></ul></ul></ul><ul><ul><ul><li>Postponement </li></ul></ul></ul><ul><li>Vision </li></ul><ul><ul><ul><li>Market potential </li></ul></ul></ul><ul><ul><ul><li>Fair value chain/creation </li></ul></ul></ul><ul><ul><ul><li>Product transformation curve </li></ul></ul></ul><ul><li>Conducting research </li></ul><ul><ul><ul><li>Conceptional funnel </li></ul></ul></ul><ul><ul><ul><li>Future research questions </li></ul></ul></ul>
  4. 4. Opportunities
  5. 5. Innovation in global value chains <ul><li>It is partly owing to the easy transportation of gold and silver from the places where they abound to those where they are wanted, that the price of those metals does not fluctuate continually like that of the greater part of other commodities, which are hindered by their bulk from shifting their situation, when the market happens to be either over or under-stocked with them. The price of those metals, indeed, is not altogether exempted from variation, but the changes to which it is liable are generally slow, gradual, and uniform. In Europe, for example, it is supposed, without much foundation, perhaps, that, during the course of the present and preceding century, they have been constantly, but gradually, sinking in their value, on account of the continual importations from the Spanish West Indies. But to make any sudden change in the price of gold and silver, so as to raise or lower at once, sensibly and remarkably, the money price of all other commodities, requires such a revolution in commerce as that occasioned by the discovery of America. </li></ul><ul><li>(Smith (1784) and Cannan, 1994) </li></ul><ul><li>As the supply chains becomes more efficient, there will be new opportunities to move processes upstream [and downstream] </li></ul><ul><li>( Brockmann, 1999) </li></ul><ul><li>The logistics revolution is an attempt to bridge the gap between supply and demand more effectively. Main aspects are changes in production and in logistics. </li></ul><ul><li>(Bonacich and Wilson, 2008) </li></ul><ul><li>Advances in technologies in […] logistics, and the decline of trade and investment barriers around the world have allowed production processes to be fragmented. The production process can now be divided into discrete tasks which can be conducted in either geographically concentrated locations or distant locations. </li></ul><ul><li>(OECD, 2007) </li></ul>
  6. 6. The principal <ul><li>(German Machine Tool Builders’ Association, 2009) </li></ul><ul><li>The importation of gold and silver is not the principal, much less the sole benefit which a nation derives from its foreign trade. Between whatever places foreign trade is carried on, they all of them derive two distinct benefits from it. It carries out that surplus part of the produce of their land and labour for which there is no demand among them, and brings back in return for it something else, which may satisfy a part of their wants, and increase their enjoyments. By means of it, the narrowness of the home market does not hinder the division of labour in any particular branch of art or manufacture from being carried to the highest perfection. By opening a more extensive market for whatever part of the produce of their labour may exceed the home consumption, it encourages them to improve its productive powers, and to augment its annual produce to the utmost, and thereby to increase the real revenue and wealth of the society. These great and important services foreign trade is continually occupied in performing, to all the different countries between which it is carried on. They all derive great benefit from it, though that in which the merchant resides generally derives the greatest, as he is generally more employed in supplying the wants, and carrying out the superfluities of his own, than of any other particular country. To import the gold and silver which may be wanted, into the countries which have no mines, is, no doubt, a part of the business of foreign commerce. It is, however, a most insignificant part of it. A country which carried on foreign trade merely upon this account, could scarce have occasion to freight a ship in a century. </li></ul><ul><li>(Smith (1784) and Cannan, 1994) </li></ul>Development of the German Machine Tool Industry 2003-2008 in Mill. EUR 2003 2004 2005 2006 2007 2008 %−06/05 %−07/06 %−08/07 Production * 8 448 8 912 9 700 10 072 11 769 13 254 +4 +17 +13 Exports 4 965 5 546 6 136 7 055 7 759 8 206 +15 +10 +6 * excl. installation, repair/maintenance
  7. 7. Globalization <ul><li>The general industry of the society never can exceed what, the capital of the society can employ. As the number of workmen that can be kept in employment by any particular person must bear a certain proportion to his capital, so the number of those that can be continually employed by all the members of a great society, must bear a certain proportion to the whole capital of that society, and never can exceed that proportion. No regulation of commerce can increase the quantity of industry in any society beyond what its capital can maintain. It can only divert a part of it into a direction into which it might not otherwise have gone; and it is by no means certain that this artificial direction is likely to be more advantageous to the society than that into which it would have gone of its own accord. </li></ul><ul><li>(Smith (1784) and Cannan, 1994) </li></ul><ul><li>Machinery Abstract #2 © Paul Kelpe, 1934 </li></ul><ul><li>One of the defining features of economic globalization is that it ties together the fates of people at opposite corners of the earth in new and complex way. </li></ul><ul><li>(Jaffee et al., 2004) </li></ul>
  8. 8. Postponement <ul><li>What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity [product] cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage. The general industry of the country, being always in proportion to the capital which employs it, will not thereby be diminished, no more than that of the above mentioned artificers; but only left to find out the way in which it can be employed with the greatest advantage. It is certainly not employed to the greatest advantage, when it is thus directed towards an object which it can buy cheaper than it can make. The value of its annual produce is certainly more or less diminished, when it is thus turned away from producing commodities evidently of more value than the commodity which it is directed to produce. According to the supposition; that commodity could be purchased from foreign countries cheaper than it can be made at home. It could, therefore, have been purchased with a part only of the commodities, or, what is the same thing, with a part only of the price of the commodities, which the industry employed by an equal capital would have produced at home, had it been left to follow its natural course. The industry of the country, therefore, is thus turned away from a more, to a less advantageous employment, and the exchangeable value of its annual produce, instead of being increased, according to the intention of the lawgiver, must necessarily be diminished by every such regulation. </li></ul><ul><li>(Smith (1784) and Cannan, 1994) </li></ul><ul><li>Postponement is the delaying of operational activities in a [logistics as well as manufacturing] system until customer orders are received rather than completing activities in advance and then waiting for orders. </li></ul><ul><li>(Krishnamurthy, 2007) </li></ul>
  9. 9. Vision
  10. 10. Market potential <ul><li>But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as many other cases, led by invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was, no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. </li></ul><ul><li>(Smith (1784) and Cannan, 1994) </li></ul><ul><li>Why implement postponement?: improving delivery reliability [proximity to markets and demand] , lowering total logistics costs, improving inventory cycle times, speeding up distribution, lowering production costs, improving customisation of products, lowering obsolescence costs, and lowering import duties. </li></ul><ul><li>(Harrison and van Hoek, 2005) </li></ul>
  11. 11. Fair Value Chain/Creation (FVC²) © Alexander Breunig, 2009 <ul><li>The FVC²-concept applies Fair Trade principles to exports from developed countries to the less developed, awarding a ‘Fair Value’ label to products which undergo further value adding in the destination/host market. </li></ul><ul><li>(Rutsch and Schumann, 2009) </li></ul>
  12. 12. Supply chain postponement <ul><li>(cf. Yang et al., 2004) </li></ul>
  13. 13. <ul><li>(Gandolfo, 1994) </li></ul>Product transformation curve FVC² price premium E equilibrium CC isocost K capital L labor QQ isoquant Labor-saving technical progress Capital-saving technical progress FVC² market potential
  14. 14. Conducting research
  15. 15. <ul><li>(cf. Business for Social Responsibility and IDEO , 2008) </li></ul>Conceptional funnel <ul><li>The challenge is to develop frameworks and market forces that allow and drive people to design value chains with the needs of ‘Fair Value’ in mind. </li></ul><ul><li>The need for regulations, which could be visualized in first place via utilizing a market-specific ‘Fair Value Creation’ or ‘Fair Value Chain’ label. </li></ul><ul><li>By offering ‘Fair Value’ companies are using the possibilities of postponement within the value chain as a vehicle to facilitate sustainability concerning environmental besides social circumstances. Not to forget, creating local jobs at the point of sales strengthens the directed market of each value chain. </li></ul><ul><li>(Rutsch and Schumann, 2009) </li></ul>‘ Fair Value Chain/Creation’ Labelling initiative Goods ‚ Fair Value‘ goals ‚ Fair Value‘ framework Schematics Concept
  16. 16. Future research questions Engineering dimension Economic-sociopolitical dimension Concept ‘ Fair Value’ framework <ul><li>What are product-related value-added services? </li></ul><ul><li>How to design for ‘Fair Value’? </li></ul><ul><li>What formerly made contribution reflects to the idea of ‘Fair Value Chain Creation’? </li></ul><ul><li>Which existing instruments do apply for the definition of a ‘Fair Value’ framework? </li></ul><ul><li>What aspects should the framework capture? </li></ul><ul><li>Estimated social and environmental impacts? </li></ul>Schematics ‘ Fair Value’ goals <ul><li>Degree of sectoral adaptability of logistics and manufacturing postponement? </li></ul><ul><li>Where to place value-added services economically efficient in a value chain? </li></ul><ul><li>Economies of scale of postponement upon the customer order decoupling point? </li></ul><ul><li>What mechanisms and benchmarks characterize the decision-making process? </li></ul><ul><li>Upon the results and given possibilities in product design and postponement, which goals are lifelike and reachable? </li></ul><ul><li>Host employees’ qualification and labor market capabilities? </li></ul><ul><li>Where to place value-added services with regard to economic aspects? </li></ul>Goods Labelling initiative <ul><li>Product-related inherent percentage of ‘Fair Value’ with respect to the value chain and the value added? </li></ul><ul><li>Economic impact of the labelling initiative? </li></ul><ul><li>How much is the customer willing to pay more, the price premium, for ‘Fair Value’? </li></ul>
  17. 17. Thank you for any questions and comments! Dipl.-Ing. Andreas Rutsch [email_address] Fair Trade is sometimes characterized as being a ‘third way’ between Free Trade on the one hand and protectionism on the other! (Moore, 2004) If Fair Trade has been co-opted, then we may need to look elsewhere for better models, and Fair Trade may itself need to attempt to rediscover its radical edge. (Moore et al., 2006)