The Political Economy of Waste (5): Waste in the production process and through marketing

Kevin Carson wrote an excellent study on how much of our economy is actually unproductive and non-contributive.

You can read the full text here. And here is our wiki entry.

We present now it’s typology elements:

Internal Waste in the Production Process

“The internal culture of cost-plus markup and lack of cost-minimizing incentives in the typical corporation results in pathological levels of waste production. The Sloanist approach, “batch-and queue thinking,” entails (as the authors of Natural Capitalism put it) optimizing each step of the production process in isolation, “thereby pessimizing the entire system.”

The normal Sloanist approach is to adopt the highest-speed, most specialized form of machinery at each individual step of the production process, and then minimize the unit costs of that step by running the machinery at full speed regardless of whether there’s a need for it at the next step, and then fill up the warehouse with finished goods without regard to whether there are orders for them. Under the Sloan system, if a machine can be run at a certain speed, it must be run at that speed to maximize efficiency. And the only way to increase efficiency is to increase the speed at which individual machines can be run.

American factories frequently have warehouses filled with millions of dollars worth of obsolete inventory, which is still there “to avoid having to reduce profits this quarter by writing it off.” When the corporation finally does have to adjust to reality, the result is costly write-downs of inventory.

– It did not take much of a mathematician to figure out that, if all you really care about is the cost of performing one operation to a part, and you were allowed to make money by doing that single operation as cheaply as possible and then calling the partially complete product an asset, it would be cheaper to make them a bunch at a time. .. It stood to reason that spreading set-up costs over many parts was cheaper than having to set-up for just a few even if it meant making more parts than you needed for a long time. It also made sense, if you could make enough parts all at once, to just make them cheaply, and then sort out the bad ones later. Across the board, batches became the norm because the direct cost of batches was cheap and they could be immediately turned into money—at least as far as Mr. DuPont was concerned—by classifying them as work-in-process inventory.

The Sloan system focuses, exclusively, on labor savings “perceived to be attainable only through faster machines. Never mind that faster machines build inventory faster, as well.” A machine can reduce the labor cost of one step by running at enormous speeds, and yet be out of sync with the overall process.

Large batch operations are completely out of scale to the production process as a whole, and the process isn’t geared to actual demand.

The large corporation exists in an external economic environment of restricted competition, with reduced pressures for efficiency. Its internal incentive structure is governed primarily by bureaucratic empire-building and managerial self-dealing rather than traditional market standards of efficiency. To the extent that there are pressures for cost cutting at all, they are skewed by a management accounting system that (as we saw above) exempts senior management salaries and new capital expenditures from the category of costs, and an incentive structure that encourages hollowing out long-term productivity for the sake of making the short-term numbers.

Coupled with an insulation from competitive pressure to minimize costs, the general environment of centralization, irrationality and stove-piping results in an enormous waste of inputs from poor product and systems design.

One example is the lack of whole-systems thinking” in product design, as well as the design of production processes. Sloanist management accounting tends to cost components in isolation and maximize the efficiency of each stage of production in isolation, even when the effect of the separate “cheaper” components and processes working in combination is an increase in overall costs. Optimizing components in isolation tends to pessimize the whole system—and hence the bottom line. You can actually make a system less efficient while making each of its parts more efficient, simply by not properly linking up those components. If they’re not designed to work with one another, they’ll tend to work against one another. ”

External Waste from Marketing and Planned Obsolescence

“The imperative of running machinery at full speed, without regard to demand, results in all kinds of waste within the production process. Maximizing the output of each individual machine without regard to downstream demand results in enormous stocks of in-process inventory. Maximizing the output of the factory as a whole, by undertaking production that’s not driven by orders, results in warehouses full of inventory. And the Sloanist accounting system, by counting the consumption of inputs as the creation of imaginary “value” to be sold to inventory, provides the same perverse cost-maximizing incentives that prevail among Pentagon contractors and public utilities.

But the same imperative also results in enormous wastes in society at large. Undertaking production to maximize the utilization of capacity, without regard to preexisting demand, requires the costly exertion of power over external society to guarantee a market for what is produced. The result is a “supply-push” distribution model, in which the costs of distribution and marketing rise astronomically compared to the costs of production.

Ralph Borsodi’s book The Distribution Age was an elaboration of the fact that, as he stated in the Preface, production costs fell by perhaps a fifth between 1870 and 1920, even as the cost of marketing and distribution nearly tripled.124 The modest reduction in unit production cost was more than offset by the increased costs of distribution and high-pressure marketing.

Supply-push distribution and high-pressure marketing carry enormous costs. According to Borsodi, over a couple of decades around the turn of the 20th century the majority of groceries bought by consumers shifted from bulk commodities to packaged brand-name goods. Before the change, almost all flour, oatmeal, and the like were generic; production was driven by retailers’ orders, as they depleted their storage bins in response to spontaneous customer demand.126 The only real marketing cost, by the producers of bulk commodities, was in convincing grocers that they sold a better grade of the commodity than their competitors. There was no direct marketing to the consumer, as with brand-name goods; the customer simply decided how much flour she needed and asked the grocer for it.

Under the new “push” system, the producers appealed directly to the consumer through brand-name advertising, and relied on pressure on the grocer to create demand for what they chose to produce. Brand loyalty helps to stabilize demand for a particular manufacturer’s product, and eliminate the fluctuation of demand that accompanies price competition in pure commodities. ”

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