After reading the 12 comments to the proposed question, I have decided to weigh with my opinion. The comments appear to be dancing around what system thinking really is and where it originated, etc. Also the misconceptions of what lean is and what six sigma is and the combination of Lean Six Sigma or LSS. So lets define lean as the elimination of all non-value added actions (waste has too narrow of a connotation). Six Sigma is defines as an organized way to leverage decade old tools in order to eliminate variability in processes. Lean DOES NOT improve quality or excellence of a product, service or organization. Six Sigma DOES NOT improve throughput or cycle time. LSS starts to go toward system thinking by combining the two together in order to derive synergistic effects not feasible with each set of tools individually in isolation.
Now let’s dive into Systems Thinking and the convergence with QMS and LSS. Systems’ thinking has been around since the beginning in time. Aristotle was one of the first to put into a philosophical dialogue. What is the ultimate synergy of system working in perfection? Well look at Earth’s ecological systems and also the human body. Systems’ thinking is man’s philosophical approach to try and understand these complex systems and how they interact with great positive value generation with effortless ease. Now let’s get back to how this relates to value generation for organization and mankind. Remember that organizations were created by man for the sole purpose to benefit man – not for the exploitations of man. Also there is symbiotic relationship that not exists between man and the environment – earth’s ecological systems – but also between each other the communities. Here is quote from an article I just read by Tito Conti, “Quality and Value: Convergence of Quality Management and Systems Thinking”. “Systems thinking is a way of thinking that STRIVES to UNDERSTAND the complexity of the reality we are immersed in, in the particular the reality of socio-cultural systems. … ever increasing complexity of man-made systems, the dynamics imposed by exponential growth of technology … we cannot escape the systems thinking challenge.’
Very humbling to reflect. LSS can be a tool to create simplicity and then co-operations between departments, business units and thus human. Synergetic effects of social systems (which is work people!) has value generated that, if positive and aligned, is greater than the sum of the values individual units could generate in isolation. Quality is neutral and excellence is not quality, but has been misused often enough o be widely accepted by professionals. Excellence is just a product of the interactions among systems and not the sum of the actions of individual parts. We all understand that excellence of one individual unit does not translate into excellence for the entire organization, right? An organization culture and structure must be designed with system and integral thinking, which takes higher levels of critical thinking. LSS should only used for the sake of aligning the workforce toward a common goal and drive out fear and selfish agendas – ONLY LEADERSHIP can bring this together. Last thing – pay attention to Maslow’s laws on human, social interaction and behavior. The perceived gratification received by people, through motivation and engagement, is directly proportional to the value generated for the organization. This is leadership at the fifth level, which sees the interaction of systems through whole brain – 4-lens perspective of the global whole and breaks it down in simple forms for the alignment of people toward a common vision!
Friday, December 12, 2008
Wednesday, January 23, 2008
Business Continuity and Sustainability: The Convergence of QMS, SCM, and CRM
Tactical deployment of initiatives must be aligned with strategic targets and corporate goals in order to attain sustainability and continuity of a business in this emerging and dynamic global environment. Key performance indicators (KPIs) and balanced scorecards are tools that can effectively and proactively align customers (CRM), operations (QMS and MES), finance (SCF), and human capital (QMS and CRM) into sharp focus that supports continuity. Six Sigma is also a tool and is ever evolving and changing to meet the demands of global processes and systems. Six Sigma can not improve processes speed, but does ensure focus on doing the right activities correctly. Lean manufacturing (part of the six sigma tool belt) can not bring processes under statistical control or improve capabilities, but does ensure that the focus is on working on the right activities.
These tools support and allow a company to build a structure of sustainability. Business sustainability and continuity only truly happens when best practices (established through management’s commitment and dedication to Quality) becomes best habits of the entire workforce. This can be facilitated by
Making continuous improvement the way of conducting business.
Identifying primary inhibitors to process and system flows.
Exploiting optimization actions to forecast non-value added activities (wasteful steps and activities) and eliminating them.
Balancing top speed and efficiency in operations with the highest quality feasible with present process/system through strong focus on revenue generation, cost structures, and customer satisfaction.
Includes in all of the processes the necessity for receiving inspection, quality planning, and supplier surveillance (even internal suppliers).
Develop training programs and succession plans that are proactive and have the foresight to aggressively address future market demands and needs of customers.
Proactively addressing emerging trends on a strategic level will prepare a company for tomorrow’s tactical issues.
Product recalls negatively impact shareholder value (SHV) and erode the company’s and product branding efforts. This can be minimized by implementing continual improvements of Quality Management Systems (QMS), Manufacturing Execution Systems (MES), Supply Chain Management systems (SCM), and Customer Relationship Management systems (CRM) through
Reducing/eliminating the cost of poor quality.
Mitigating risks of recalls through aggressive risk assessments.
Ensuring compliance to regulatory and quality standards.
Dedication to improving consumer safety and satisfaction.
This brings what are the required actions and activities to achieve the means of sustainability, which include
Develop, establish, implement, and execute an effective Corrective Action Board (CAB) that has cross functional representation responsibilities for continuous process improvement as well as manage quality, tractability, and risk mitigation assessments at all levels and across all boundaries. Adopt and drive a QMS that facilitates a culture change.
Establish continual improvement QMS actions into real time reporting in order to increase visibility of product, process, and system information across all of the value chains. Eliminating silos of information and knowledge is a necessity of visibility, which supports business sustainability.
Ensure that traceability and threshold levels for non-conformance incidents are intertwined within every process and system. Automate collection of quality data from the manufacturing floor and suppliers.
Develop, establish, Implement, and execute and effective Continuous Improvement Team (CIT) that focuses on process traceability and non-conformance root causes across all boundaries.
Establish quality dashboards and supplier scorecards that ensure process data is exploited into actionable intelligence and knowledge for quicker decision-making.
Integrate process traceability data across all value chains that support visibility and performance across all boundaries.
Ensure all supply chains have integrated traceability and commitment of suppliers to traceability, especially the global suppliers.
This leads to the need to start measuring and improving on the metrics of
Percentage of Product in compliance, which is the percentage of product produced, that is in compliance to processes against total products is greater than 98 percent.
First Pass Yield, which is the share of finished product that goes through the process the first time without defects, is greater than 95 percent.
Response time to non-conforming shipments, which is product discovered to be out of compliance and the average time needed to locate and quarantined is less than one hour.
On-Time delivery, which is the ration of product delivered on-time (not early or late) to the total product delivered is greater than 95 percent.
Benchmark and improve performance in these key categories, which include
Process – through the standardization of processes across the organization.
Organization – through establishing ownership of executive management for the traceability and risk mitigation initiatives.
Knowledge Management – through delivery of process and system data into information that is turned into actionable intelligence for quicker decision making. Action intelligence is defined as delivering the right data to the right person in a usable format in real time so appropriate actions (decisions/judgments) are taken with a minimum of intermediaries or pushing the decision-making process down to the lowest level (establishing intent).
Technology – through exploiting technology that supports and drives compliance and traceability programs.
Performance Management – through abilities to measure business performance that drives continuous improvements proactively.
Traceability and genealogy programs are supported by QMS, SCM, CRM, and ERP systems. It is the use and exploitation of these tools that improve the visibility and functionality of processes and systems. This drives accessibility to relevant employees in real time – eliminating lag time – which increases responsiveness and focus on working on the right activities. The effectiveness of the structures implemented will be based on the existing technology. The benefit of continuous improvement programs will be aided by new technology adoption and integration into QMS, SCM, and CRM systems.
These tools support and allow a company to build a structure of sustainability. Business sustainability and continuity only truly happens when best practices (established through management’s commitment and dedication to Quality) becomes best habits of the entire workforce. This can be facilitated by
Making continuous improvement the way of conducting business.
Identifying primary inhibitors to process and system flows.
Exploiting optimization actions to forecast non-value added activities (wasteful steps and activities) and eliminating them.
Balancing top speed and efficiency in operations with the highest quality feasible with present process/system through strong focus on revenue generation, cost structures, and customer satisfaction.
Includes in all of the processes the necessity for receiving inspection, quality planning, and supplier surveillance (even internal suppliers).
Develop training programs and succession plans that are proactive and have the foresight to aggressively address future market demands and needs of customers.
Proactively addressing emerging trends on a strategic level will prepare a company for tomorrow’s tactical issues.
Product recalls negatively impact shareholder value (SHV) and erode the company’s and product branding efforts. This can be minimized by implementing continual improvements of Quality Management Systems (QMS), Manufacturing Execution Systems (MES), Supply Chain Management systems (SCM), and Customer Relationship Management systems (CRM) through
Reducing/eliminating the cost of poor quality.
Mitigating risks of recalls through aggressive risk assessments.
Ensuring compliance to regulatory and quality standards.
Dedication to improving consumer safety and satisfaction.
This brings what are the required actions and activities to achieve the means of sustainability, which include
Develop, establish, implement, and execute an effective Corrective Action Board (CAB) that has cross functional representation responsibilities for continuous process improvement as well as manage quality, tractability, and risk mitigation assessments at all levels and across all boundaries. Adopt and drive a QMS that facilitates a culture change.
Establish continual improvement QMS actions into real time reporting in order to increase visibility of product, process, and system information across all of the value chains. Eliminating silos of information and knowledge is a necessity of visibility, which supports business sustainability.
Ensure that traceability and threshold levels for non-conformance incidents are intertwined within every process and system. Automate collection of quality data from the manufacturing floor and suppliers.
Develop, establish, Implement, and execute and effective Continuous Improvement Team (CIT) that focuses on process traceability and non-conformance root causes across all boundaries.
Establish quality dashboards and supplier scorecards that ensure process data is exploited into actionable intelligence and knowledge for quicker decision-making.
Integrate process traceability data across all value chains that support visibility and performance across all boundaries.
Ensure all supply chains have integrated traceability and commitment of suppliers to traceability, especially the global suppliers.
This leads to the need to start measuring and improving on the metrics of
Percentage of Product in compliance, which is the percentage of product produced, that is in compliance to processes against total products is greater than 98 percent.
First Pass Yield, which is the share of finished product that goes through the process the first time without defects, is greater than 95 percent.
Response time to non-conforming shipments, which is product discovered to be out of compliance and the average time needed to locate and quarantined is less than one hour.
On-Time delivery, which is the ration of product delivered on-time (not early or late) to the total product delivered is greater than 95 percent.
Benchmark and improve performance in these key categories, which include
Process – through the standardization of processes across the organization.
Organization – through establishing ownership of executive management for the traceability and risk mitigation initiatives.
Knowledge Management – through delivery of process and system data into information that is turned into actionable intelligence for quicker decision making. Action intelligence is defined as delivering the right data to the right person in a usable format in real time so appropriate actions (decisions/judgments) are taken with a minimum of intermediaries or pushing the decision-making process down to the lowest level (establishing intent).
Technology – through exploiting technology that supports and drives compliance and traceability programs.
Performance Management – through abilities to measure business performance that drives continuous improvements proactively.
Traceability and genealogy programs are supported by QMS, SCM, CRM, and ERP systems. It is the use and exploitation of these tools that improve the visibility and functionality of processes and systems. This drives accessibility to relevant employees in real time – eliminating lag time – which increases responsiveness and focus on working on the right activities. The effectiveness of the structures implemented will be based on the existing technology. The benefit of continuous improvement programs will be aided by new technology adoption and integration into QMS, SCM, and CRM systems.
Monday, January 21, 2008
Leadership for the Future, A Supply Chain Management perspective
Future leadership will not only require, but demand higher levels of thinking. It will be necessary for combating the competitive and uncertain landscape of evolving business. Integrity coupled with the ability to learn and execute compelling business strategies will be needed to achieve success. Business agility to lead ahead of customer’s lifestyles and expectations through customer-enabling and engaging resources will allow this achievement and stay ahead of the competition. The accuracy of anticipation of the customer’s expectation will be essential to success. Additionally, embracing more inherent risk and uncertainty will allow innovations and the ability to stay calmly focused toward the end result.
Human capital will no longer exist as an asset, but as an essential tool for survival in the new world of global business. Customer and knowledge management systems will not only improve interactions and engagement, but allow opportunities to be exploited effectively. Real-time value between suppliers and customers (value chains) as well as corporate accountability and governance will be demanded by customers. Social responsibility will govern and direct innovations and sales. This will take planning, education, implementation, and execution of various initiatives. One vital aspect will be planning for risk and ensuring business continuity. Leadership must understand the interlocking and dependence of technology, processes, systems, security, energy sources, supply chains, customer logistics, and people for seamless business continuity.
The key to this interlocking dependence of interactions is the human capital residing within a company. The success of these interactions is directly related to the discipline of intent established and reinforced by the leadership of the company. Decision, made by people, make or break any situation. Slow decision-making causes handicaps in favor of your competition. The quicker and more effective decision-making processes are, then the less disruption occurs. People ensure business continuity, not machines. Business systems and strategies need to be flexible, agile, and adaptable to disruptive events of uncertainty created in the global business landscape.
One suggestion is to adjust to listening and focusing on the customer’s needs and expectations and to stop marketing in order to shape the customer to what the company wants the customer to want. Listening skills must be dramatically improved among all the employees and needs to start at the top and work down to the lowest level. Develop this skill throughout and disrupt the present and create the future. This is because there is a continuing of convergence of technologies occurring, which will include nanotechnologies, biotechnologies, information technology, cognitive science, and all other technologies.
There will be a great future demand for fluid markets, which rely on technology to provide a seamless flow of communication and money in a virtual creation that services the real world. This will create the need and opportunities for:
v Virtual Supply Chain Networks
o Super efficient and fluid
o Establishment of digital currency as the norm to increase market interactions
o Establish relationships and drive commerce for specific projects and timeframes
v Knowledge-Value Engineering Processes and Systems
o Virtual supply chains leveraging positions globally
o CRM and KM exploitation in a virtual interactive environment
v Security and Risk Management
o Business continuity
o Energy terrorism
o Leverage and exploit green technologies
v Food Production and Distribution
o Focusing on local suppliers
o Logistics used to maximum sourcing
o Virtual supply chain management
v Nanoenergy and Nanotechnology
Future business environment will have a much greater degree of complexity, fierce competition, and accelerated change. Innovations will be across all boundaries and will be disruptive technologies to the present norm. It will technology and peoples ability to exploit emerging technologies that will enable companies to increase their market share, profitability, competitive advantage, and survival rates. This will encompass supply chain management (SCM), supplier relationship management (SRM), and supply chain execution (SCE) interacting with manufacturing execution systems (MES) and transforming entire processes and systems through human assets. These supply chain transformations will be the beginning of virtual engagement. This evolution will include the convergence of finance, economics, manufacturing and procurement tasks into one fluid engagement, which will be essential for business. The movement of goods, services, transactions, and interactions from the manufacturer and the end customer must occur instantaneously or very fluid. Distribution channels currently driven by physical distribution will have to become virtual and digitized, which will drive these value chains into automatic engagements.
Economic dominance of a company or industry will depend on the degree of sophistication and complexity achievable in the SCM realm. The power and value of the supply chain vale chain will be the continuity proactive approach to inventory management and procurement. Processes and systems must become derived from models that have been developed for predicting the emergence of proactive actions that must be seized and executed in real-time. This will be facilitated by virtual cooperation and collaboration between companies and all of their values chains. This includes the reduction of inventories (improvement in the company’s cash flow) without worrying about delivery and price increases and an overall improvement in workflow. Information technology (IT) processes and systems (eProcurement and eLogistic) will be leveraged and exploited in order for a company to differentiate themselves in the future market from their competitors.
Paradigmatic shifts of supply chains must provide smart solutions and support real-time decision-making, which will facilitate the speed and accuracy of deliveries will be essential for the next generation. Companies will have to embrace and understand the limitless web-centric technologies, present and emerging, because these systems will become the foundations SCM. On-demand supply chains, business intelligence, and transparency will be the only way to develop, seize, and exploit opportunities. Companies must be able to leverage
v Proactive Predictive Forecasting
o Data mining for niche markets
o Anticipation of customer needs
o On-demand for customer demands
o Transforming information into the ability to drive on-demand decision-making into a business asset.
v Knowledge Management Systems
o Instantaneous cooperation and collaboration of human capital
o On-demand information and knowledge about competition, customers, value chains.
v On-Demand Service
o Driven by customer expectations and not cost or efficiency
o Flexible and agile where the customer’s wishes are anticipated with efficiency and low cost (defines the leader).
v Interconnection of Networks
o Interacting of knowledge across all systems via advanced IT systems.
o Value chain efficiency driven
v Electronic Markets
o Systems that allow all systems, networks to communicate – regardless of company, IT structure, or country.
o Elimination of manual or paper Accounts Payable (AP) systems and development of an electronic instantaneous transaction system.
o An interactive structure that allows customers to customize their degree of engagement.
v Smart IT Systems and Collaborative IT infrastructures
o Drilling down to transparency in transactions, communications, confirmations, and validation.
o Decision support structures with customers, suppliers, partners, and competitors.
This will be supported by the development and execution of artificial intelligence and knowledge management systems, which have embedded decision-support structures for improving the algorithms for predictive modeling and automatic logistics management.
Finance and banking infrastructure will be the tie in, but invisible to the value chain system. The strategic influence of procurement and its relationship with finance is needed for future success. The collaboration and alignment gap that currently exists needs to be closed in order to capitalized on present and future opportunities. On-demand and real-time data mining will drive decision making and the maximization of resources. Continual optimization through continual updating and improvements in data mining will fluidize the flow of the value chains. This will develop the futures and options markets, which will be based on virtual supply chain systems. This will consist of customer relationship forecasting and anticipating the customer needs. Purchasing interests in supplies before the customer realizes they even need them will be the measure of success. Eliminating lead times due to options trading of customers and hedging for investors. Inventory futures will be a portion of the supply chain and a means to earn money on residual cash or cash in transit.
There will be a reshaping or paradigm shifts in the value chains that include supportive linkages, alliances, and channels of distribution. Strategic planning must incorporate and take in consideration future business objectives, landscapes, and the evolving customer needs and demands. Transformations in education, training, financial systems, and manufacturing will occur and lead to their eventual convergence. The world will become reshaped through disruptive innovation where the irrational presence becomes the rational future and the reality of tomorrow.
Fierce battles for talent, intellectual property, capital expertise, and technical expertise will be waged in the near future. Proactive companies with strong leadership will stride through these times effortlessly and become the global leaders. Leaders will have to create order in the mist of chaos and provide fulfillment to the demands of employees and customers. Leaders will have to simultaneously plan for today and tomorrow. They will be the glue that holds the organization together. The most valuable asset will be the leader that has the ability to adapt and remain nimble throughout chaotic environments.
Supply chain relationships will need to be a strong focus. Sustainable competitive advantage in the global market will be through continuously innovating with supply chain partners. The partnership will have to be not only dynamic, but multifaceted and acknowledgement of the
v Benefits of a close-knit collaboration
v Supply chain processes and their improvements
v Technologies underlying in them and the emerging technologies
This will take global vision and focus will consist of
v Instantaneous expectations of delivery
v Necessity of quicker speed to market
v Continuous innovation of disruptive technologies
v Flexibility, agility, and nimbleness to react to change
This will be supported by a collaborative network which provides
v Strategic relationship focus on goals
v Supportive IT portals and visual platforms
v Forward thinking toward the end customer with a focus on outdated and cumbersome intermediate distribution channels.
v Demand-driven value chains which will become a must and not a nice to have.
v Real-time management of operations, inventory, finance, suppliers, and customers where decision making processes deliver instantaneous results that feedback into a continual loop.
v The convergence of sales, marketing, procurement, operations, and finance through interactive and supportive processes that move swiftly to proactively meet the customer’s demands.
These collaborative networks will be leveraged and designed to improve responsiveness and to reduce uncertainty. This allows engagement into collaborative efforts to become fluid and transparent. The key that allows any of this to function and operate is people and their interactive skills and talent. This will be facilitated by a standardization of IT structures and platforms. The interlinking of customer responses and reactions into scheduling, inventory and operational management systems will result in a powerfully effective knowledge management network. Standardization will be aided by an intermediate step of a web-centric platform, which will support various IT structures and allow them to freely interact. Financial planning and forecasting as well as value chain execution will help drive this end. Poor forecasting and excessive inventories will become a huge handicap in the SCM system. Proactive and predictive modeling through these knowledge management systems will support JIT inventories and eliminate these inefficiencies. This is all facilitated by supply chain intelligence (SCI), which is driven by
v Continual, focused, and disciplined evaluations
v Plan-Do-Act cycles
v Access to real-time data about global responses within the value chains
v Development of security plans that support business continuity and recovery plans
Inventories are money not earning interest and a waste of working capital’s potential, which is drain on net profits, shareholder value creation, and liquidity. Radio frequency identification device (RFID) is a growing technology that facilitates automatically and transparently receiving, storing, and shipping goods with minimal human interaction. This eliminates human error and speeds up the transactions. RFID allows for real-time interaction to occur between multiple parties simultaneously. The supply chain needs to be designed to
v Ensure continuous availability of goods and services.
v Provide the uninterrupted supply of materials at the highest quality (feasible).
v Allow for real-time engagement of Sales/Marketing data and information and customer trends.
Focusing in on working capital optimization helps improve financial performance as well as maintain and even improve customer satisfaction. This can be achieved through supply chain finance perspective and paradigm shifts in inventory management practices. Working capital improvement metrics include
v Reducing inventories (finished products, raw material, and work-in-process)
v Days Sales Outstanding (DSO)
v Measuring the effectiveness of the use of short-term financing
v Measuring the effectiveness of investing cash in the short-term
This can be driven by improving the accuracy of operational budgets, which reduces the need for cash-on-hand and increases the investment opportunities in the short-term. Improvement in cash management are driven by
v Accuracy of Operational budgets (including RM, Finished goods, etc.).
v Active and interactive cash management strategies.
v Improve the accuracy and functionality of cash flow forecasting and strive toward real-time cash flow balances.
v Active engagements of the Sales force to reduce DSOs.
Facilitating accurate real-time cash flow balances will allow for better cash management, lead to a reduction in costs of transactions (eInvoicing and A/P), and elimination of finance charges within the supply chain structure. You will not get extended payment terms from your suppliers. Actually to strengthen the supply chain and reduce your inventories and improve supplier reaction times is counter intuitive. Need to strive to reduce the payment terms and then demand JIT and other strategies from the supply chain in return. This will help drive all of the efficiencies out of the supply chain.
Corporate risk management also needs to be a strong focus. The complexity, uncertainty, and inherent risk in the global markets require continual monitoring of emerging problems and issues. Risk management involves
v Re-evaluating global strategies
v Strengthening of core competencies
v Becoming more risk-adverse by guarding against over-extension of resources.
This includes focusing and developing a strong SCM program that fully integrates the operational aspects of the business. These programs must be developed, implemented, and executed from a strategic and tactical perspective instead of the current basic operational perspective of today. This is because to do so may lead to
v Poorly engineered products and processes
v Products recalls
v Excess inventory costs, thus a drain on cash flows
v Unsellable inventory that must be reworked or scrapped
v Diminished levels of customer satisfaction
v Loss or erosion of market share and profitability
Long distance suppliers may have multiple intermediaries or steps which include
v Manufacturer to port and warehouses
v Transport and logistics providers
v Forwarders, stevedores, etc.
v Customs brokers, etc.
These are all information intensive transactions and include various complexities that must be recognized and dealt with, which include
v Dealing with custom agents and forwarders
v Monitoring of long distance suppliers
v Planning and forecasting for long transit times
v Addressing and adapting to cultural differences
v Financial issues such as currency exchange issues
There are means that companies can work with the US customs department to minimize some of these complexities and thus potential delays in deliveries to facilities. One program is the Customs – Trade Partnership Against Terrorism (C-TPAT). Companies bringing in goods from outside the US can register and become responsible for the security aspects of their supply chain. This allows goods to be quickly processed through customs and reduces the transit time as compared to competitors. Global trade will be dominated by those companies which can navigate the ever-changing custom requirements and regulations the best. Companies must focus and map out global transport and demand further efficiencies. Inefficiencies include poor port clearance documentation and poor duty payment coordination. Systems and processes must create a responsible and knowledgeable environment about containers and various shipments from cradle to grave. Companies will be required at any given time and step to
v Know the shipments contents
v What is in the container, packages, etc?
v Who has opened it?
v Who has moved it, loaded it, etc.?
Actively and proactively managing the supply chain has financial aspects that directly impact inventories and working capital. There are balance sheet implications include goods in-transit inventory, which start with purchase order issuances or master POs. This works further back into the chain and the development of Vendor Managed Inventory (VMI). There needs to be a trigger for the financing or payment when inventories are pulled and used in Production. This will be further facilitated by the trend to move away from traditional methods of payments (letters of credit, banker’s agreements, etc.) and move to more innovative open account SCM finance structures and systems.
Human capital will no longer exist as an asset, but as an essential tool for survival in the new world of global business. Customer and knowledge management systems will not only improve interactions and engagement, but allow opportunities to be exploited effectively. Real-time value between suppliers and customers (value chains) as well as corporate accountability and governance will be demanded by customers. Social responsibility will govern and direct innovations and sales. This will take planning, education, implementation, and execution of various initiatives. One vital aspect will be planning for risk and ensuring business continuity. Leadership must understand the interlocking and dependence of technology, processes, systems, security, energy sources, supply chains, customer logistics, and people for seamless business continuity.
The key to this interlocking dependence of interactions is the human capital residing within a company. The success of these interactions is directly related to the discipline of intent established and reinforced by the leadership of the company. Decision, made by people, make or break any situation. Slow decision-making causes handicaps in favor of your competition. The quicker and more effective decision-making processes are, then the less disruption occurs. People ensure business continuity, not machines. Business systems and strategies need to be flexible, agile, and adaptable to disruptive events of uncertainty created in the global business landscape.
One suggestion is to adjust to listening and focusing on the customer’s needs and expectations and to stop marketing in order to shape the customer to what the company wants the customer to want. Listening skills must be dramatically improved among all the employees and needs to start at the top and work down to the lowest level. Develop this skill throughout and disrupt the present and create the future. This is because there is a continuing of convergence of technologies occurring, which will include nanotechnologies, biotechnologies, information technology, cognitive science, and all other technologies.
There will be a great future demand for fluid markets, which rely on technology to provide a seamless flow of communication and money in a virtual creation that services the real world. This will create the need and opportunities for:
v Virtual Supply Chain Networks
o Super efficient and fluid
o Establishment of digital currency as the norm to increase market interactions
o Establish relationships and drive commerce for specific projects and timeframes
v Knowledge-Value Engineering Processes and Systems
o Virtual supply chains leveraging positions globally
o CRM and KM exploitation in a virtual interactive environment
v Security and Risk Management
o Business continuity
o Energy terrorism
o Leverage and exploit green technologies
v Food Production and Distribution
o Focusing on local suppliers
o Logistics used to maximum sourcing
o Virtual supply chain management
v Nanoenergy and Nanotechnology
Future business environment will have a much greater degree of complexity, fierce competition, and accelerated change. Innovations will be across all boundaries and will be disruptive technologies to the present norm. It will technology and peoples ability to exploit emerging technologies that will enable companies to increase their market share, profitability, competitive advantage, and survival rates. This will encompass supply chain management (SCM), supplier relationship management (SRM), and supply chain execution (SCE) interacting with manufacturing execution systems (MES) and transforming entire processes and systems through human assets. These supply chain transformations will be the beginning of virtual engagement. This evolution will include the convergence of finance, economics, manufacturing and procurement tasks into one fluid engagement, which will be essential for business. The movement of goods, services, transactions, and interactions from the manufacturer and the end customer must occur instantaneously or very fluid. Distribution channels currently driven by physical distribution will have to become virtual and digitized, which will drive these value chains into automatic engagements.
Economic dominance of a company or industry will depend on the degree of sophistication and complexity achievable in the SCM realm. The power and value of the supply chain vale chain will be the continuity proactive approach to inventory management and procurement. Processes and systems must become derived from models that have been developed for predicting the emergence of proactive actions that must be seized and executed in real-time. This will be facilitated by virtual cooperation and collaboration between companies and all of their values chains. This includes the reduction of inventories (improvement in the company’s cash flow) without worrying about delivery and price increases and an overall improvement in workflow. Information technology (IT) processes and systems (eProcurement and eLogistic) will be leveraged and exploited in order for a company to differentiate themselves in the future market from their competitors.
Paradigmatic shifts of supply chains must provide smart solutions and support real-time decision-making, which will facilitate the speed and accuracy of deliveries will be essential for the next generation. Companies will have to embrace and understand the limitless web-centric technologies, present and emerging, because these systems will become the foundations SCM. On-demand supply chains, business intelligence, and transparency will be the only way to develop, seize, and exploit opportunities. Companies must be able to leverage
v Proactive Predictive Forecasting
o Data mining for niche markets
o Anticipation of customer needs
o On-demand for customer demands
o Transforming information into the ability to drive on-demand decision-making into a business asset.
v Knowledge Management Systems
o Instantaneous cooperation and collaboration of human capital
o On-demand information and knowledge about competition, customers, value chains.
v On-Demand Service
o Driven by customer expectations and not cost or efficiency
o Flexible and agile where the customer’s wishes are anticipated with efficiency and low cost (defines the leader).
v Interconnection of Networks
o Interacting of knowledge across all systems via advanced IT systems.
o Value chain efficiency driven
v Electronic Markets
o Systems that allow all systems, networks to communicate – regardless of company, IT structure, or country.
o Elimination of manual or paper Accounts Payable (AP) systems and development of an electronic instantaneous transaction system.
o An interactive structure that allows customers to customize their degree of engagement.
v Smart IT Systems and Collaborative IT infrastructures
o Drilling down to transparency in transactions, communications, confirmations, and validation.
o Decision support structures with customers, suppliers, partners, and competitors.
This will be supported by the development and execution of artificial intelligence and knowledge management systems, which have embedded decision-support structures for improving the algorithms for predictive modeling and automatic logistics management.
Finance and banking infrastructure will be the tie in, but invisible to the value chain system. The strategic influence of procurement and its relationship with finance is needed for future success. The collaboration and alignment gap that currently exists needs to be closed in order to capitalized on present and future opportunities. On-demand and real-time data mining will drive decision making and the maximization of resources. Continual optimization through continual updating and improvements in data mining will fluidize the flow of the value chains. This will develop the futures and options markets, which will be based on virtual supply chain systems. This will consist of customer relationship forecasting and anticipating the customer needs. Purchasing interests in supplies before the customer realizes they even need them will be the measure of success. Eliminating lead times due to options trading of customers and hedging for investors. Inventory futures will be a portion of the supply chain and a means to earn money on residual cash or cash in transit.
There will be a reshaping or paradigm shifts in the value chains that include supportive linkages, alliances, and channels of distribution. Strategic planning must incorporate and take in consideration future business objectives, landscapes, and the evolving customer needs and demands. Transformations in education, training, financial systems, and manufacturing will occur and lead to their eventual convergence. The world will become reshaped through disruptive innovation where the irrational presence becomes the rational future and the reality of tomorrow.
Fierce battles for talent, intellectual property, capital expertise, and technical expertise will be waged in the near future. Proactive companies with strong leadership will stride through these times effortlessly and become the global leaders. Leaders will have to create order in the mist of chaos and provide fulfillment to the demands of employees and customers. Leaders will have to simultaneously plan for today and tomorrow. They will be the glue that holds the organization together. The most valuable asset will be the leader that has the ability to adapt and remain nimble throughout chaotic environments.
Supply chain relationships will need to be a strong focus. Sustainable competitive advantage in the global market will be through continuously innovating with supply chain partners. The partnership will have to be not only dynamic, but multifaceted and acknowledgement of the
v Benefits of a close-knit collaboration
v Supply chain processes and their improvements
v Technologies underlying in them and the emerging technologies
This will take global vision and focus will consist of
v Instantaneous expectations of delivery
v Necessity of quicker speed to market
v Continuous innovation of disruptive technologies
v Flexibility, agility, and nimbleness to react to change
This will be supported by a collaborative network which provides
v Strategic relationship focus on goals
v Supportive IT portals and visual platforms
v Forward thinking toward the end customer with a focus on outdated and cumbersome intermediate distribution channels.
v Demand-driven value chains which will become a must and not a nice to have.
v Real-time management of operations, inventory, finance, suppliers, and customers where decision making processes deliver instantaneous results that feedback into a continual loop.
v The convergence of sales, marketing, procurement, operations, and finance through interactive and supportive processes that move swiftly to proactively meet the customer’s demands.
These collaborative networks will be leveraged and designed to improve responsiveness and to reduce uncertainty. This allows engagement into collaborative efforts to become fluid and transparent. The key that allows any of this to function and operate is people and their interactive skills and talent. This will be facilitated by a standardization of IT structures and platforms. The interlinking of customer responses and reactions into scheduling, inventory and operational management systems will result in a powerfully effective knowledge management network. Standardization will be aided by an intermediate step of a web-centric platform, which will support various IT structures and allow them to freely interact. Financial planning and forecasting as well as value chain execution will help drive this end. Poor forecasting and excessive inventories will become a huge handicap in the SCM system. Proactive and predictive modeling through these knowledge management systems will support JIT inventories and eliminate these inefficiencies. This is all facilitated by supply chain intelligence (SCI), which is driven by
v Continual, focused, and disciplined evaluations
v Plan-Do-Act cycles
v Access to real-time data about global responses within the value chains
v Development of security plans that support business continuity and recovery plans
Inventories are money not earning interest and a waste of working capital’s potential, which is drain on net profits, shareholder value creation, and liquidity. Radio frequency identification device (RFID) is a growing technology that facilitates automatically and transparently receiving, storing, and shipping goods with minimal human interaction. This eliminates human error and speeds up the transactions. RFID allows for real-time interaction to occur between multiple parties simultaneously. The supply chain needs to be designed to
v Ensure continuous availability of goods and services.
v Provide the uninterrupted supply of materials at the highest quality (feasible).
v Allow for real-time engagement of Sales/Marketing data and information and customer trends.
Focusing in on working capital optimization helps improve financial performance as well as maintain and even improve customer satisfaction. This can be achieved through supply chain finance perspective and paradigm shifts in inventory management practices. Working capital improvement metrics include
v Reducing inventories (finished products, raw material, and work-in-process)
v Days Sales Outstanding (DSO)
v Measuring the effectiveness of the use of short-term financing
v Measuring the effectiveness of investing cash in the short-term
This can be driven by improving the accuracy of operational budgets, which reduces the need for cash-on-hand and increases the investment opportunities in the short-term. Improvement in cash management are driven by
v Accuracy of Operational budgets (including RM, Finished goods, etc.).
v Active and interactive cash management strategies.
v Improve the accuracy and functionality of cash flow forecasting and strive toward real-time cash flow balances.
v Active engagements of the Sales force to reduce DSOs.
Facilitating accurate real-time cash flow balances will allow for better cash management, lead to a reduction in costs of transactions (eInvoicing and A/P), and elimination of finance charges within the supply chain structure. You will not get extended payment terms from your suppliers. Actually to strengthen the supply chain and reduce your inventories and improve supplier reaction times is counter intuitive. Need to strive to reduce the payment terms and then demand JIT and other strategies from the supply chain in return. This will help drive all of the efficiencies out of the supply chain.
Corporate risk management also needs to be a strong focus. The complexity, uncertainty, and inherent risk in the global markets require continual monitoring of emerging problems and issues. Risk management involves
v Re-evaluating global strategies
v Strengthening of core competencies
v Becoming more risk-adverse by guarding against over-extension of resources.
This includes focusing and developing a strong SCM program that fully integrates the operational aspects of the business. These programs must be developed, implemented, and executed from a strategic and tactical perspective instead of the current basic operational perspective of today. This is because to do so may lead to
v Poorly engineered products and processes
v Products recalls
v Excess inventory costs, thus a drain on cash flows
v Unsellable inventory that must be reworked or scrapped
v Diminished levels of customer satisfaction
v Loss or erosion of market share and profitability
Long distance suppliers may have multiple intermediaries or steps which include
v Manufacturer to port and warehouses
v Transport and logistics providers
v Forwarders, stevedores, etc.
v Customs brokers, etc.
These are all information intensive transactions and include various complexities that must be recognized and dealt with, which include
v Dealing with custom agents and forwarders
v Monitoring of long distance suppliers
v Planning and forecasting for long transit times
v Addressing and adapting to cultural differences
v Financial issues such as currency exchange issues
There are means that companies can work with the US customs department to minimize some of these complexities and thus potential delays in deliveries to facilities. One program is the Customs – Trade Partnership Against Terrorism (C-TPAT). Companies bringing in goods from outside the US can register and become responsible for the security aspects of their supply chain. This allows goods to be quickly processed through customs and reduces the transit time as compared to competitors. Global trade will be dominated by those companies which can navigate the ever-changing custom requirements and regulations the best. Companies must focus and map out global transport and demand further efficiencies. Inefficiencies include poor port clearance documentation and poor duty payment coordination. Systems and processes must create a responsible and knowledgeable environment about containers and various shipments from cradle to grave. Companies will be required at any given time and step to
v Know the shipments contents
v What is in the container, packages, etc?
v Who has opened it?
v Who has moved it, loaded it, etc.?
Actively and proactively managing the supply chain has financial aspects that directly impact inventories and working capital. There are balance sheet implications include goods in-transit inventory, which start with purchase order issuances or master POs. This works further back into the chain and the development of Vendor Managed Inventory (VMI). There needs to be a trigger for the financing or payment when inventories are pulled and used in Production. This will be further facilitated by the trend to move away from traditional methods of payments (letters of credit, banker’s agreements, etc.) and move to more innovative open account SCM finance structures and systems.
Monday, October 15, 2007
Reflections about the current economy
The current shape of the yield curve suggests that interest rates are expected to increase in the future. This increases the demand for long-term funds by borrowers like Java and creates a downward pressure on the supply of long-term funds by investors or banks. Investors will increase the supply of short-term funds or a downward pressure on the demand for these short-term funds. The 3-month treasury has already dropped from 4 percent to 3.85 percent. The current spread between the 3-month and 6-month treasury is about 15 bps or less than 25 bps difference between notes and a revolver. The trade deficits and weak dollar will continue to pressure interest rates, due to the demand for compensation for the currency risk. The age of dollar dominance is about to end (as evident by the dollar weakening against all currencies), which will lead to higher interest rates within the USA. This also creates further upward pressure on inflation. Current treasury rates are unattractive to foreign investors and will be attracted to the higher rates abroad. As foreigners either shy away from treasuries or start selling off their current treasuries and do not purchase more, then higher rates will have to be offered to attract investors. The other risk is carry trade and a crowding out effect by foreign traders. Borrowing short-term funds from the USA and lending long-term funds outside of the USA will place upward pressures on interest rates. Higher taxes are expected due to Bush’s tax cut expiring and the Democrats winning both houses and the Presidency in 2008, which also increase the upward pressure on interest rates. Additionally, protectionism and increased government regulations will further weaken the dollar and spur inflation upwards. The context of the current macroeconomics equity is just too risky at this time. Any disappointments by the Federal Reserve will drive the equity markets down.
Read the article via this link about the weak dollar and reasons why.
http://articles.moneycentral.msn.com/Investing/JubaksJournal/WhyTheDollarKeepsDropping.aspx
Read the article via this link about the weak dollar and reasons why.
http://articles.moneycentral.msn.com/Investing/JubaksJournal/WhyTheDollarKeepsDropping.aspx
Thursday, October 11, 2007
MBA 821 - Reflections on Module 3 - Behavior of Stock Market??
Your responses should demonstrate reflective thought:
These reflections are about the equity markets being efficient or not and the three types of efficiency, Weak-form, Semi-Strong form, or Strong-form. This of course, based on comments from Robert Prechter, assumes that these equity markets follow the same logic and rational as economics or the theory of supply and demand. Prechter argues that movements in the equity markets are socionomic and not economic in nature and do not follow the supply and demand theory. If the market followed the supply and demand markets, then investors would sell stock at the top of the market instead of investing more money and buy at the bottom instead selling the stock. Investors follow the socionomic aspect of following the herd or crowd type psychology. Additionally, the supply of a stock is higher at low prices when compared to higher prices which is opposite of the supply and demand curves.
What form do you think is represented on the NYSE?
I would say if one had to chose one it would be weak-form efficiency. This is due to the fact that there is still insider information (i.e. managers knowing more than the market) and other information financial institutions know about the company that causes a stock to rise or fall. This is also due to the creativity that resides in the valuation of a stock. Certain measurements are deemed more valuable at certain time frames and less valuable in others. But assuming more transparency in financial statements, fundamental analysis of a company is a way to sift through and find value stocks or growth stocks that are still growing at acceptable rates. The investor must also be aware of the future economic condition predictions and the socionomic aspects of these predictions. The last thing is which industry the company resides in and if it is stable economic industry, a lagging or leading economic industry.
Do you think stock exchanges in emerging markets have a different level of efficiency?
NO not really. There is enough to argue that all of the market movements have nothing to do with efficiency and everything to do with how society views and assesses risk in the market. The mood of society dictates equity market movements. Emerging markets have a higher degree of risk associated with them due to more insider information and corruption within foreign countries and companies. Less regulation and different accounting regulation cause investors to assign risk.
Does this impact your view in regard to investing in common stocks? Explain.
A little. Shows that the long-term view is the best and has been touted by wealthy investors is right on the mark. Do not get caught up in the herd or crowd movements of speculation of equity markets. Fundamental analysis and holding a stock for a long-term is the best way to invest. If the investor truly believes in the stock and it is undervalued, then they should buy the stock on the downturns to strengthen their position and lower their cost per share and set a long-term price of the stock in which to sell. The socionomic aspect of the market is just riding the waves and chasing after the latest fade or trend.
These reflections are about the equity markets being efficient or not and the three types of efficiency, Weak-form, Semi-Strong form, or Strong-form. This of course, based on comments from Robert Prechter, assumes that these equity markets follow the same logic and rational as economics or the theory of supply and demand. Prechter argues that movements in the equity markets are socionomic and not economic in nature and do not follow the supply and demand theory. If the market followed the supply and demand markets, then investors would sell stock at the top of the market instead of investing more money and buy at the bottom instead selling the stock. Investors follow the socionomic aspect of following the herd or crowd type psychology. Additionally, the supply of a stock is higher at low prices when compared to higher prices which is opposite of the supply and demand curves.
What form do you think is represented on the NYSE?
I would say if one had to chose one it would be weak-form efficiency. This is due to the fact that there is still insider information (i.e. managers knowing more than the market) and other information financial institutions know about the company that causes a stock to rise or fall. This is also due to the creativity that resides in the valuation of a stock. Certain measurements are deemed more valuable at certain time frames and less valuable in others. But assuming more transparency in financial statements, fundamental analysis of a company is a way to sift through and find value stocks or growth stocks that are still growing at acceptable rates. The investor must also be aware of the future economic condition predictions and the socionomic aspects of these predictions. The last thing is which industry the company resides in and if it is stable economic industry, a lagging or leading economic industry.
Do you think stock exchanges in emerging markets have a different level of efficiency?
NO not really. There is enough to argue that all of the market movements have nothing to do with efficiency and everything to do with how society views and assesses risk in the market. The mood of society dictates equity market movements. Emerging markets have a higher degree of risk associated with them due to more insider information and corruption within foreign countries and companies. Less regulation and different accounting regulation cause investors to assign risk.
Does this impact your view in regard to investing in common stocks? Explain.
A little. Shows that the long-term view is the best and has been touted by wealthy investors is right on the mark. Do not get caught up in the herd or crowd movements of speculation of equity markets. Fundamental analysis and holding a stock for a long-term is the best way to invest. If the investor truly believes in the stock and it is undervalued, then they should buy the stock on the downturns to strengthen their position and lower their cost per share and set a long-term price of the stock in which to sell. The socionomic aspect of the market is just riding the waves and chasing after the latest fade or trend.
Saturday, September 29, 2007
MBA 821 - Reflections on Module 2
What is your view of one of the more popular tools associated with relative ratio analysis, the price to earnings ratio?
The P/E valuation tools is a great way to screen stocks. It is not perfect, but is easy to understand and apply. The investor will have to knowledge of the current market's P/E ratio and that of the sector that the stock in question resides in. No one tool for valuation is full proof, but the P/E tool is extremely easy to apply and can be done in ones head - which is valuable for quick analysis and potential decision making. Just like any tool, it is to used by the investor to aid in getting the job done and not as holy grail.
Do you think the measure of P/E is a valuable tool for stock analysis? Explain and justify your response.
As stated above, it is valuable tool for the investor. Quick and easy to apply is the power of this tool. The danger is solely relying on this tool as a catch all and the holy grail. The intent of tools is not to be this, but to aid the investor in finding their way through a maze - which direction should they go.
Are the current markets under, fairly, or over priced?
http://home.businesswire.com/portal/site/google/index.jsp?ndmViewId=news_view&newsId=20070927005589&newsLang=en
This article suggests the market may be under to fairly priced, but there are several discussions in this article that suggest otherwise. It appears that maybe only a few select sectors fit this criteria and not the market as a whole.
The current market, in my opinion, is probably fairly to over-priced – depending on the sector and specific stock. P/Es are creeping up again and this is potentially dangerous sign. Many P/Es are greater than 15 and mainly close to 20. As the market valuation gets back to more basic fundamentals, the market is probably generally over-priced and will correct itself. Companies with high P/Es will have to justify this valuation through strong operational cash flow, strong and effective R&D budgets, low debt, and not be over leveraged.
Responses to the posted article about current “bullishness” in the market and also stated are other questions about the future markets. There are several statements that suggest that the present market is undervalued or fairly valued, but the prices projected in the future may not be so bullish. The financial engineering or the creation of innovative products has lead to discovery of their flaws, which has lead to the current crunch. As stated in the article, “the summer brought several troubling financial issues to the forefront” suggest that scionomics may be playing a part in the bullish attitude. The weak dollar is also helping the market coupled with the continued “bad news” about Chinese companies. The technology sector is currently bullish and the financial sector is bearish right now. The weak dollar is making our exports cheaper abroad and any imports more expensive. Companies with strong manufacturing presence in the USA are seeing an increase, so why are consumer discretionary and services sectors and materials and processing sectors bearish? Is this because of the outsourcing of the past couple of decades is a concern? The advantages of outsourcing manufacturing are no longer being realized due to the weak dollar?
The statements in the article “…call equity markets either fairly valued or undervalued, managers participating… there may be new reasons to begin considering fixed income investments..” does not sound like a bullish statement or that the present value of stocks are really under or fairly valued by these managers. The article goes on to say how “bullishness for corporate bonds more than doubled … US Treasuries recorded one of their highest bullish scores … Are these managers just playing a scionomic game and making sure investor/society confidence remains optimistic? There appears to be a “flight to safety and that managers fundamentally believe that the bigger opportunity still lies in the equity markets … it is true that risk is being repriced ..” by the market. This statement in the article suggests to me that the market may be overpriced, but no one knows until risk is revalued – no one knows what the risk premium on equity should be over treasuries. This suggests that stocks can not be adequately valued, so how can these managers comment on the market being under or fairly valued – when they do not even understand how to value the current market? Review the current yield curve, the 1 month rate was 3.40 % and the 6 month rate was 4.20% or a pretty steep upward sloping curve. Couple this with rising fears of a recession and oil reaching $100 per barrel – is the market overpriced? The article suggests that many managers are bracing themselves for inflationary pressures and looking for safe havens for periods of recession and inflation. The strong increases in gold and silver suggest inflation is looming.
The article finally tells us where the managers see under or fairly priced stocks and it is in large cap growth and not the market as a whole. The title is thus a little misleading and meant to draw the reader in. These companies are a safe haven probably due to low debt, great cash flow, and strong brand recognition. These companies have great credit and not a default risk. These companies also will remain very liquid, due to these reasons. They can continue to offer commercial paper and issue bonds without concerns from investors. These companies also need short-term debt instruments, where small cap etc may be after long-term debt instruments. Review of the yield curve reveals that the investors are not very interested in long-term bonds. They are having strong expectations of higher interest rates to come (based on the pure expectations theory).
One last note here, the links provided are about the Feds power and ability to control the overall market and economy. It suggests that the tools the Feds has are out dated and not effective anymore. The deregulation of the industry has dampened their power. Their tools are really for depository institutions and the market is not controlled by just depository institutions. This sub-prime mess was caused by non-depository institutions, so do we need to reevaluate how the Fed operates to correct the current issues at hand?
http://www.financialweek.com/apps/pbcs.dll/article?AID=/20070924/REG/70921012/1016/ECONOMY
http://www.financialweek.com/apps/pbcs.dll/article?AID=/20070924/REG/70921011/1016/ECONOMY
The P/E valuation tools is a great way to screen stocks. It is not perfect, but is easy to understand and apply. The investor will have to knowledge of the current market's P/E ratio and that of the sector that the stock in question resides in. No one tool for valuation is full proof, but the P/E tool is extremely easy to apply and can be done in ones head - which is valuable for quick analysis and potential decision making. Just like any tool, it is to used by the investor to aid in getting the job done and not as holy grail.
Do you think the measure of P/E is a valuable tool for stock analysis? Explain and justify your response.
As stated above, it is valuable tool for the investor. Quick and easy to apply is the power of this tool. The danger is solely relying on this tool as a catch all and the holy grail. The intent of tools is not to be this, but to aid the investor in finding their way through a maze - which direction should they go.
Are the current markets under, fairly, or over priced?
http://home.businesswire.com/portal/site/google/index.jsp?ndmViewId=news_view&newsId=20070927005589&newsLang=en
This article suggests the market may be under to fairly priced, but there are several discussions in this article that suggest otherwise. It appears that maybe only a few select sectors fit this criteria and not the market as a whole.
The current market, in my opinion, is probably fairly to over-priced – depending on the sector and specific stock. P/Es are creeping up again and this is potentially dangerous sign. Many P/Es are greater than 15 and mainly close to 20. As the market valuation gets back to more basic fundamentals, the market is probably generally over-priced and will correct itself. Companies with high P/Es will have to justify this valuation through strong operational cash flow, strong and effective R&D budgets, low debt, and not be over leveraged.
Responses to the posted article about current “bullishness” in the market and also stated are other questions about the future markets. There are several statements that suggest that the present market is undervalued or fairly valued, but the prices projected in the future may not be so bullish. The financial engineering or the creation of innovative products has lead to discovery of their flaws, which has lead to the current crunch. As stated in the article, “the summer brought several troubling financial issues to the forefront” suggest that scionomics may be playing a part in the bullish attitude. The weak dollar is also helping the market coupled with the continued “bad news” about Chinese companies. The technology sector is currently bullish and the financial sector is bearish right now. The weak dollar is making our exports cheaper abroad and any imports more expensive. Companies with strong manufacturing presence in the USA are seeing an increase, so why are consumer discretionary and services sectors and materials and processing sectors bearish? Is this because of the outsourcing of the past couple of decades is a concern? The advantages of outsourcing manufacturing are no longer being realized due to the weak dollar?
The statements in the article “…call equity markets either fairly valued or undervalued, managers participating… there may be new reasons to begin considering fixed income investments..” does not sound like a bullish statement or that the present value of stocks are really under or fairly valued by these managers. The article goes on to say how “bullishness for corporate bonds more than doubled … US Treasuries recorded one of their highest bullish scores … Are these managers just playing a scionomic game and making sure investor/society confidence remains optimistic? There appears to be a “flight to safety and that managers fundamentally believe that the bigger opportunity still lies in the equity markets … it is true that risk is being repriced ..” by the market. This statement in the article suggests to me that the market may be overpriced, but no one knows until risk is revalued – no one knows what the risk premium on equity should be over treasuries. This suggests that stocks can not be adequately valued, so how can these managers comment on the market being under or fairly valued – when they do not even understand how to value the current market? Review the current yield curve, the 1 month rate was 3.40 % and the 6 month rate was 4.20% or a pretty steep upward sloping curve. Couple this with rising fears of a recession and oil reaching $100 per barrel – is the market overpriced? The article suggests that many managers are bracing themselves for inflationary pressures and looking for safe havens for periods of recession and inflation. The strong increases in gold and silver suggest inflation is looming.
The article finally tells us where the managers see under or fairly priced stocks and it is in large cap growth and not the market as a whole. The title is thus a little misleading and meant to draw the reader in. These companies are a safe haven probably due to low debt, great cash flow, and strong brand recognition. These companies have great credit and not a default risk. These companies also will remain very liquid, due to these reasons. They can continue to offer commercial paper and issue bonds without concerns from investors. These companies also need short-term debt instruments, where small cap etc may be after long-term debt instruments. Review of the yield curve reveals that the investors are not very interested in long-term bonds. They are having strong expectations of higher interest rates to come (based on the pure expectations theory).
One last note here, the links provided are about the Feds power and ability to control the overall market and economy. It suggests that the tools the Feds has are out dated and not effective anymore. The deregulation of the industry has dampened their power. Their tools are really for depository institutions and the market is not controlled by just depository institutions. This sub-prime mess was caused by non-depository institutions, so do we need to reevaluate how the Fed operates to correct the current issues at hand?
http://www.financialweek.com/apps/pbcs.dll/article?AID=/20070924/REG/70921012/1016/ECONOMY
http://www.financialweek.com/apps/pbcs.dll/article?AID=/20070924/REG/70921011/1016/ECONOMY
Wednesday, September 26, 2007
Further Reflections on Module 1 - Sub-Prime Shakeout
Financial innovation and the Global Liquidity Factory
Lets just raise the following: 1) When it is stated that derivative structures are “…virtual and not real” what does this suggest about the value of financial innovation, broadly defined as “…the act of creating and then popularizing new financial instruments as well as new financial technologies, institutions and markets” (Peter Tufano, Financial Innovation 2002 at http://www.people.hbs.edu/ptufano/fininnov_tufano_june2002.pdf).
2) Following up on the article (“Are we headed for an epic bear market?” at http://articles.moneycentral.msn.com/Investing/SuperModels/AreWeHeadedForAnEpicBearMarket.aspx?page=1) that states While you might think that the U.S. Federal Reserve can help prevent disaster by lowering interest rates dramatically, as they did Wednesday, the evidence is not at all clear. The problem, after all, is not the amount of money in the system but the fact that buyers are in the process of rejecting the entire new risk-transfer model and its associated leverage and counterparty risks.
Two questions on the claims about a global liquidity factory:
I. What does the class think of this article’s claims?
A) Completely right
B) Somewhat right
C) Too pessimistic
D) Don’t know and II.
Based on your answer to the above, how should you allocate your assets?
Articles
Peter Tufano link . Below is another link to his paper + another one on the subject.
http://www.people.hbs.edu/ptufano/fininnov_tufano_june2002.pdf
http://www.hbs.edu/research/pdf/07-082.pdf
http://www.nyabe.org/fergusonspeech.pdf
http://hbswk.hbs.edu/item/5745.html
Comments and Reflections
Interesting comments and articles, so knowing what I know now – where would I place my assets? I think Mark hit it pretty close. Precious metals (gold) are not really one place where I would put any money. This is based on history. Even though the price of gold is high right now, it really just getting back to the 1980 price after a decline for many years. But commodities are probably a great place. Now we all know that past performance does not predict future performance, but wheat has more than doubled, oil continues to increase – as well as corn and sugar. But I also know these markets are better left to the experts and I am not an expert on the commodity markets. So that being said, I would keep my liquid assets in short-term Treasuries and long-term investment in large to mid-cap value companies like GE, PEP, MMM, GLW, MSFT, and stocks like this have low betas, low to zero debt and lots of cash. Currencies would have been a good investment, but the chances that there would collaboration among global banks are probably pretty good. Also cooperation and collaboration among government, the Federal Reserve, regulatory agencies, and financial institutions will have to work together to sift through this mess and minimize the global damage. I still think the stock market is solid for the most part, but growth stocks are in potential trouble – due to the credit crunch. Problems will probably loom for 10 years. The S&P Case-Schiller Home Prices Indexes predict falling house prices in certain markets for the next five years and these devaluations are 15 to 20% - not 1 to 5%.
All of these financial innovations or derivatives started in 1986. Numerous new derivatives products were placed in the market. This is probably why many people did not understand them exactly. Derivative had been around a long time and people understood them. My guess is that they all assumed that the new derivatives were just improvements on the older ones – more efficient, etc. The financial engineers knew that the sum of the pieces were greater than the value of the whole in tact. This was proven by the corporate raiders, etc. These financial innovators just had to figure a way around the laws and regulations in order to create this value. Getting around taxes and regulations has been the single greatest motivator for these financial innovations. Turning short-term gains into long-term gains to avoid paying higher taxes or basically greed was involved to increase their profitability and cash flows. Greenspan’s dropping the federal fund rate lead to a large amount of liquidity injected into the market. These financial innovations just applied a multiplier to this existing liquidity, which allowed to easy money. Everyone seemed to forget that derivatives were created to transfer credit risk – diversify the risk – and not to create virtual money and earn high interest rates. Mortgage rates where at the lowest rate in like 30 years. Loan originators were all making in excess of $100,000/year and brokers were probably in excess of $500,000/year. All of these people work basically on commission – no loans no paycheck. If the employees were making this kind of cash (you may have 10 to 15 LOs in one office) how much do you think the financial institutions were making? Also we can all see the motivation was not to be ethical or to work on the fine line of legal and ethical boundaries in order to close the most loans. A high risk – low credit score – so what just charge them 50 to 100 bps more, the interest is still low. Also this greed lead to the ARMS, etc. mortgage product innovations, which further aggravated this entire sub prime issue. This all lead to an explosion in the M3 money supply.
M3 – includes all of the time deposits, money fund balances, Eurodollars, and repos. All basically due to the “financial innovations” of derivatives by the financial engineers. Then the Fed decided to stop tracking and monitoring the M3 money supply in March of 2006. This seems to have left the system unchecked by anyone. Why did the Fed decide to stop monitoring M3? If they stopped tracking it because they could not get their arms around it, then they just decided to stick their heads in the sand and hope for the best.
Financial institutions could use the advances in technology to improve process and system efficiencies or use technology for product innovations and marketing schemes. It is obvious that is was easier to create money through product innovations and clever marketing and packaging schemes than it was to change their operations. The short-term immediate gain without any regard to consequences was chosen instead of a more long-term approach of improving processes and systems to control and eliminate risks.
Lets just raise the following: 1) When it is stated that derivative structures are “…virtual and not real” what does this suggest about the value of financial innovation, broadly defined as “…the act of creating and then popularizing new financial instruments as well as new financial technologies, institutions and markets” (Peter Tufano, Financial Innovation 2002 at http://www.people.hbs.edu/ptufano/fininnov_tufano_june2002.pdf).
2) Following up on the article (“Are we headed for an epic bear market?” at http://articles.moneycentral.msn.com/Investing/SuperModels/AreWeHeadedForAnEpicBearMarket.aspx?page=1) that states While you might think that the U.S. Federal Reserve can help prevent disaster by lowering interest rates dramatically, as they did Wednesday, the evidence is not at all clear. The problem, after all, is not the amount of money in the system but the fact that buyers are in the process of rejecting the entire new risk-transfer model and its associated leverage and counterparty risks.
Two questions on the claims about a global liquidity factory:
I. What does the class think of this article’s claims?
A) Completely right
B) Somewhat right
C) Too pessimistic
D) Don’t know and II.
Based on your answer to the above, how should you allocate your assets?
Articles
Peter Tufano link . Below is another link to his paper + another one on the subject.
http://www.people.hbs.edu/ptufano/fininnov_tufano_june2002.pdf
http://www.hbs.edu/research/pdf/07-082.pdf
http://www.nyabe.org/fergusonspeech.pdf
http://hbswk.hbs.edu/item/5745.html
Comments and Reflections
Interesting comments and articles, so knowing what I know now – where would I place my assets? I think Mark hit it pretty close. Precious metals (gold) are not really one place where I would put any money. This is based on history. Even though the price of gold is high right now, it really just getting back to the 1980 price after a decline for many years. But commodities are probably a great place. Now we all know that past performance does not predict future performance, but wheat has more than doubled, oil continues to increase – as well as corn and sugar. But I also know these markets are better left to the experts and I am not an expert on the commodity markets. So that being said, I would keep my liquid assets in short-term Treasuries and long-term investment in large to mid-cap value companies like GE, PEP, MMM, GLW, MSFT, and stocks like this have low betas, low to zero debt and lots of cash. Currencies would have been a good investment, but the chances that there would collaboration among global banks are probably pretty good. Also cooperation and collaboration among government, the Federal Reserve, regulatory agencies, and financial institutions will have to work together to sift through this mess and minimize the global damage. I still think the stock market is solid for the most part, but growth stocks are in potential trouble – due to the credit crunch. Problems will probably loom for 10 years. The S&P Case-Schiller Home Prices Indexes predict falling house prices in certain markets for the next five years and these devaluations are 15 to 20% - not 1 to 5%.
All of these financial innovations or derivatives started in 1986. Numerous new derivatives products were placed in the market. This is probably why many people did not understand them exactly. Derivative had been around a long time and people understood them. My guess is that they all assumed that the new derivatives were just improvements on the older ones – more efficient, etc. The financial engineers knew that the sum of the pieces were greater than the value of the whole in tact. This was proven by the corporate raiders, etc. These financial innovators just had to figure a way around the laws and regulations in order to create this value. Getting around taxes and regulations has been the single greatest motivator for these financial innovations. Turning short-term gains into long-term gains to avoid paying higher taxes or basically greed was involved to increase their profitability and cash flows. Greenspan’s dropping the federal fund rate lead to a large amount of liquidity injected into the market. These financial innovations just applied a multiplier to this existing liquidity, which allowed to easy money. Everyone seemed to forget that derivatives were created to transfer credit risk – diversify the risk – and not to create virtual money and earn high interest rates. Mortgage rates where at the lowest rate in like 30 years. Loan originators were all making in excess of $100,000/year and brokers were probably in excess of $500,000/year. All of these people work basically on commission – no loans no paycheck. If the employees were making this kind of cash (you may have 10 to 15 LOs in one office) how much do you think the financial institutions were making? Also we can all see the motivation was not to be ethical or to work on the fine line of legal and ethical boundaries in order to close the most loans. A high risk – low credit score – so what just charge them 50 to 100 bps more, the interest is still low. Also this greed lead to the ARMS, etc. mortgage product innovations, which further aggravated this entire sub prime issue. This all lead to an explosion in the M3 money supply.
M3 – includes all of the time deposits, money fund balances, Eurodollars, and repos. All basically due to the “financial innovations” of derivatives by the financial engineers. Then the Fed decided to stop tracking and monitoring the M3 money supply in March of 2006. This seems to have left the system unchecked by anyone. Why did the Fed decide to stop monitoring M3? If they stopped tracking it because they could not get their arms around it, then they just decided to stick their heads in the sand and hope for the best.
Financial institutions could use the advances in technology to improve process and system efficiencies or use technology for product innovations and marketing schemes. It is obvious that is was easier to create money through product innovations and clever marketing and packaging schemes than it was to change their operations. The short-term immediate gain without any regard to consequences was chosen instead of a more long-term approach of improving processes and systems to control and eliminate risks.
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