LEAN in Economy: a new dimension to JIT for economies in recession

Today, I was going through the concept of Lean Production, as has been pioneered by Toyota through its legendary Toyota Production System, famously known as the TPS. Of its two key concepts, is Just In Time (JIT). Quoting from Toyota worldwide website, JIT is: Making only "what is needed, when it is needed, and in the amount needed!"
But my intention here is not to inform you about either of these. You can google it and will find numerous article and research reports on them. I came across one very deeply inspiring illustration, based on JIT which I share here with you.

Source: The Elsmar Cove Site

To describe it, when the inventory level in the production system is high (which is opposite of what is followed in JIT), the problems of not only the production but the firm as a whole is submerged in it. This leads to only the surfaced problems coming in the eyesight. As an extension of what has been shown here, some problems may actually build one upon the other and create a sea-bed of problems, much like an iceberg (This idea was conveyed to me by my esteemed Operations Management Professor)
To use this model in the current economic downturn that has uncovered the problems (or opportunites in disguise), I propose the following illustration:

(Copyright Image) Click to enlarge

When the Sensex was making its dream-run, no one was bothered about any of the trifle matters that are being taken up. But the same guys have started nitpicking at each and every action of the companies. Even the launch of "People's Car" Tata Nano was not without its skeptics, who wondered if Tata will be able to sell as many as it wished.

Now, coming to the hidden ineffeciencies of the market:

• Business Ineffeciency
• Pareto Ineffeciency
• Production Ineffeciency
• Agency Problem
• Monopoly

Will write in the next post about how an economic recession (as low level of inventory) exposes these ineffeciencies.

Tata Nano: People's Car finally to be launched on 23rd March

Tata Nano, the world's cheapest car, will be launched at a function in Mumbai on 23rd March 2009. After a series of hiccups starting from quashing of the ideation by industry experts to the Singur protests; Nano has been in the eye of the storm.
In spite of many security and emission concerns, Nano is being projected as a comfortable, safe, all-weather car, high on fuel efficiency and low on emission, on its official website: www.tatanano.com
It will be interesting to note the flurry its launch will create, since it has been priced in a segment midway between a bike and Maruti-800, the lowest priced car on Indian roads till now.
There have been interesting demands from customers too, the most notable being allowing online payment and purchase of Nano. Prospective customers have expressed their desire to book this sweet-sensation on the internet, over and over again here. But, as of now State Bank of India will be the sole booking agent for Nano. So, I guess we have to wait a little longer to buy a car online, just as we buy a book, laptop or mobile.
On the other part of the globe, giant companies like GM, Ford and Chrysler LLC are on the verge of bankruptcy. They have already taken huge financial aid from the US Govt. More about it in the next post.
As of now, all eyes are set on the Nano launch. Will this little wonder pull the sale of cars out of its recent slump, remains an important question. The adjoining graph from SIAM showing the trend of Automobile production in India in the last one year, clearly hints at the hit this industry has taken in the wake of the worldwide economic slump.
The sales of passenger vehicles in India has followed a similar trend. But, the optimism lies in the recovery it has made in January, breaking a downward streak of more than one quarter.

Layoff Times

As if the failing economy and string of bank failures over the world were not enough, here is the real motivation to look for a suitable job. Yes, the companies all over are laying off, citing various reasons. These companies are large corporations and are widely known the world around. So, the impact of the layoffs would be far greater than just job loss for their employees. They will spread the doom message faster than wildfire.
Yahoo has led by example, a leaked memo guides the managers who are to lay off employees about the do's and dont's they must follow. And then there is Microsoft CEO Steve Ballmer, who says that he is laying off 5000 employees to increase efficiency and readjustment.
Contrast this with the layoff a few (21 to be precise) workers at Intercontinental Hotel at Mumbai. The hotel lobby was vandalised and rampaged as a protest by MNS (a political party in Maharashtra) members. Even though the hotel may not reinstate its employees, this sends a strong and ominous signal to the companies in India, that hope to cut cost and save their skin by laying off some of its employees.

Wishlist 2009

I am privileged to experience blogging in the break between two lectures at IIM Indore . I was thinking of writing on this topic since December last, but was at a loss to start with the apt wish that should grace the first priority.

But, reading the Letter from Apple CEO Steve Jobs to all at Apple (nasdaq: AAPL), in which he has hinted that his health-related issues are more complex than he originally thought; has triggered the flush of wishes. So, here is my Wishlist 2009:

1. May Steve Jobs return healthy after the medical leave of absence. This would put an end to the flurry of rumours about his health. Steven Paul Jobs, the charismatic founder of companies like Apple and Pixar, has such a fan following that a mere mention of his ill health triggered a drop of 6.4% today.
(Pic Courtesy: Forbes)
Jobs has disclosed that a hormonal imbalance has led to his loss of weight throughout 2008. He also skipped the keynote address at MacWorld conference, held on January 6, 2009.


2. May the Satyam Scandal not hurt the IT reputation that India has gained in the last two decades.
After the skeletons of financial bungling and corporate misadventure tumbled out of Satyam's closet; there are doubts being raised about the IT services industry in India. The fact that Satyam was awarded Golden Peacock award from the World Council for Corporate Governance for excellence in corporate governance, raises serious questions about the mismatch between the reality and perception on Indian IT industry. R.Raju, the now jailed erstwhile CEO of Satyam has stated in his confession that the margin on which Satyam opearted was a low as 3%. This is way below the margins quoted by its peers.
It is also being seen as the Enron of India by several people. The World Council for Corporate Governance has compared Satyam to Enron and the chief economic adviser to a $2bn family-run conglomerate, J K Organisation has said "The idea of corporate governance has not sunk in (India) as much as it should". As per the latest reports, Satyam was stripped of the award on 7th January.


But, with companies like Infosys, Wipro and TCS, lead by iconic leaders like NR Narayanmurthy and Azim Premzi, the core of Indian IT industry is still the same. Maybe there was an odd fish in the pond, but that does not mean that all fishes and the pond in particular is tainted.

3. May the Mumbai Terrorist Blasts not affect the economic leadership of Mumbai, the city of dreams.

The Mumbai terrorist attack on 26/11 was targeted at the destroying the image of the city of dreams as the driver of Indian economy. But, Mumbai has withstood many such attempts in the past, and will surely emerge this time stronger.
According to Dr. David Lanegran of Macalester College: in 1999, Mumbai accounted for 20% of India's total employment in industry and 11% of India's employment in total. It handled 30% of India's exports and imports and is the subcontinent's largest port. After surge in globalization and rapid economic development in India, the contribution of Mumbai has risen and is probably the reason of the 26/11 attacks.

The new year: 2009

After a hiatus of a week, this is my first post in the new year 2009. So, lets talk about the year first. This year has been named by different groups and organizations all over the world as the year of so many diverse things and beings, that drawing a single point out of them seems a tough task. To list a few interesting ones:

1. Year of the Thaw: CNNMoney.com
2. International year of Astronomy: UNESCO and International Astronomical Union
3. Year of the Ox: Chinese calendar
4. Year of the Gorilla: UN Environmental Programme
5. International year of Natural Fibres: Food and Agriculture Organisation

Rumour or Satyam (Hindi: Truth)

Ever since my last post on Agency Problem at Satyam, things have unfolded in quite an unexpected way at Satyam. We have seen many rumours going around the market, only few of which can stand the veracity test.

The first was regarding the allegation that Mendu Rammohan Rao, dean of the Indian School of Business, one of the independent directors of Satyam, was not consulted before calling off the Maytas acquisition. This issue raises questions on the corporate governance followed at the leading IT company of India.

To placate the investors and regain the lost trust, Satyam announced that it will consider issue of dividends to the shareholders. There was also the news of a possible buyback of shares. Both of these proposals will be decided upon during the board meeting on 29th December. If we look the comparative figure of the dividend history of top Indian IT companies like Infosys, Wipro and TCS, alongside that of Satyam, the observation that strikes us is that Satyam has never been a huge dividend distributor. Its dividend rate has been a flat 175% in the last few years.

(Source: Capitaline database)
Click on image to enlarge

Thus as expected, the market and Satyam's shareholders were not enthused with this new gimmic and its scrip continued its fall southwards.

(Source of data: Bloomberg)
Click on image to enlarge

As if this was not enough, we had rumours of the Chairman and Founder, B Ramalinga Raju, resigning from the board. Though later it was passed off as baseless. But, one issue did raise its head due to the spread of this rumour. Unlike its competitors Infosys and Wipro, Satyam has not groomed any future leader who can replace Raju in case of his retirement or resignation. So, the talk of the need of a succession plan will keep making rounds of the town, for the time to come. Speculation was also rife that Wipro Technologies might acquire Satyam, that was later denied by both the companies.

And then came the worst of them all, but this time it was no rumour ! The World Bank had barred Satyam Computer Services from doing any businesswith it for the next eight years. During the last five years, the World Bank had paid Satyam hundreds of millions of dollars for its global IT maintenance and service. There was a slew of rumours this time, as to the actual reason of this harsh action. But, as is clear from the World Bank group statement, Satyam was debarred for providing improper benefits to Bank staff (i.e. Bribery) and for failing to maintain proper documentation. The bank also verified that Satyam was not involved in malicious attacks on the Bank’s information systems, as was rumoured. So, for now the one-week high powered drama seems to have subsided, but what took 22 years to build was surely dented in a few days time.

The World Bank Group Statement on Debarment of Satyam
(Copyright image)
Click on image to enlarge

Countries in Recession

(Copyright image)
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Recession, the technical name given to two consecutive quarters of negative growth for any country, is looming over the world like a sinister scarecrow. Economists say that economic activity has its own regular ups and downs, with a regular pattern of economic expansion, also called Recovery and economic contraction, infamously known as Recession. They also state that it is a cyclical phenomena, and give it another name: Business Cycle. So what causes this recession and what are its ramifications?

The causes of recession are wide and sometimes unexplained. But the main reasons can be listed as:

1. Decrease in the consumption by the public, mainly due to low consumer confidence (Paradox of Thrift)
2. Decrease in investment by the Government, to control rising budget deficit
3. Decrease in investment by the Companies
4. Less demand of goods in the foreign market, more important for export-oriented countries
5. Bubble busts, like the dot-com bust of 2000 and housing-bubble bust of 2008
6. Some other politico-economic causes like currency crisis, war, etc.
For a more detailed explanation of causes of recession, refer this page.

The fallouts during and after recession can have far reaching effects, mainly categorized under political, economic, social and technological effects: (Some of them might refer to controversial events)

Political	Loss of people’s faith in the ruling party Failure of International Organisations, like the League of Nations Government changes in the ailing countries Setback to Climate change talks & treaties Rise of extreme nationalism and protectionism
Economic	Rise in Unemployment Increase in bankruptcy Disinflation Banks’ willingness to lend decreases Failure of Stock Markets Lower interest rates Increased monopoly in the market Fall in productive capacity of the economy
Social	Rise in criminal/illegal activities Less expenditure on welfare activities Pessimism rises leading to fall in birth-rate and increased suicides Rise of a new class in the society: formerly middle class
Technological	Less spending in new and breakthrough research areas Investment in green technology reduces Evolution of innovative and cost-effective technology

As of today, most of the major economies of the world are witnessing negative growth. The following table highlights the countries in recession and their GDP as a % of the World GDP:

Countries in Recession	GDP (nominal) as a % of World GDP
USA	25.30
Japan	8.02
Germany	6.08
Italy	3.86
Sweden	0.83
Denmark	0.57
Ireland	0.48
Hong Kong	0.38
Singapore	0.29
New Zealand	0.24
Latvia	0.05
Estonia	0.04

Source: IMF

USA, the largest economy, has witnessed a dip in its growth in the last quarter, with sharp rise in unemployment.

According to National Bureau of Economic Research, an independent research organization, US has been in recession throughout this year. A recent release on its website states that Real GDP of United States decreased at an annual rate of 0.5 % in the third quarter of 2008. This is attributed to decrease in consumer confidence, leading to less consumer spending. Other factors like negative contributions from the residential fixed investment and equipment and software are cited as the reasons of this slowdown. A list of all US business cycles can be found here.