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>> Redundancies and buffers that could protect us from once-in-couple-decades events are considered as "fat", and are cut off by competitive pressure. THIS. M

>> Redundancies and buffers that could protect us from once-in-couple-decades events are considered as "fat", and are cut off by competitive pressure. THIS. My brother-in-law owns a company and they put in place a ton of redundancies after the 08' crash. They're in a specialized manufacturing. After 6-7 years of stability and some of their markets recovering and stabilizing, he started getting pressure from his two partners to cut the safety nets and re-invest it in supply chain improvements. He was against it saying the same thing, "This isn't a five or six year plan, it's a permanent plan to protect the company." In short, he was outvoted. The redundancies were removed and the money was re-invested in other areas. . The last week basically saw their entire supply chain shut down, almost all of their customers shut down and yesterday they had to send everybody home and shut down themselves for the time being. My brother in law texted me saying, "This is the worst fucking "I told you so" in my life, I'm not sure we can survive this." He's meeting with his partners this week to assess the damage and how long they can survive before they'll need an influx of capital to keep the lights on. Had they kept all of their money tied up in their emergency plan, they would've been able to pivot to other suppliers and continue to serve their clients. Right now? They put all their eggs into one basket and it could very well kill the company.

stormdennis 7y ago
This is good then. The company with the cheaper but vulnerable supply chain suffers and the companies who paid a premium for robustness in their chain benefit. That's how capitalism is supposed to work I think.
- TeMPOraL 7y ago
  Except the market has very short memory. In the next couple of years, the more robust companies that survive this pandemic will get outcompeted by less robust companies, or forced to become less robust themselves.
- lutorm 7y ago
  Except those companies have already folded because they couldn't compete during "normal" times.
- robocat 7y ago
  I suspect robustness simply doesn’t work over periods of greater than a few years of competition by a vulnerable supplier. A few examples: 1. the US has built up it’s oil producing capability. If the Saudi’s keep prices low, then everything will be mothballed. So the ecosystem of businesses and skilled staff supporting the US oil industry will massively degrade quite quickly. It can’t be ramped up quickly later. 2. Huawei. Massive shock of US sanctions. Can only be saved by amazing levels of support by Chinese govt. 3. Rare earth production. China took over the market, then shut down all exports. What producers were left and why did they still exist?
  - invalidOrTaken 7y ago
    I think it can work, just not by crowd-sourced, incentive-based decision-making. Steve Jobs can do what Apple shareholders cannot, etc.
    - quanticle 7y ago
      The problem is that if Steve Jobs fails to demonstrate returns commensurate with his peers, Apple shareholders can and will oust him and replace him with another CEO who will "cut the fat" in order to boost Apple's profitability. It's easy to look at Steve Jobs and Jeff Bezos and think that a sufficiently charismatic CEO can use his or her "reality distortion field" to hypnotize investors, but it doesn't work like that over the long run. The reason investors had such patience with Jobs and Bezos is because they were demonstrably increasing their companies' market share and profitability, respectively. Under Bezos, Amazon went from a niche seller of books to the largest e-commerce site and one of the largest retailers, online or off. Under Jobs, Apple went from a has-been computer company kept alive as a prop for Microsoft to wave at the DoJ to a leader in personal computing, consumer electronics and the most profitable corporation in history. Do you think that shareholders would have kept Bezos and Jobs around if their strategies had not been delivering the tangible results, quarter after quarter, year after year? I think not. For proof, we can only look to Yahoo, which spent an enormous amount of time and money wooing Marissa Meyer from Google, only to ignominiously fire her 5 years later after she was unable to arrest Yahoo's declining profitability and relevance. A CEO of a publicly traded corporation, especially a publicly traded corporation that is financial trouble, only has so long to demonstrate success, where "so long" is measured in months or, at most years, not decades. If the CEO cannot demonstrate tangible results within that time frame, he or she will be fired, no matter how powerful their "reality distortion field". CEOs cannot transcend the crowd-sourced incentive-based decision making of the market over the long term. What the can do is spin a good story that persuades the shareholders to leave them alone for a brief period of time as they attempt to make the necessary changes in order to improve or restore profitability. If they are unable to do so, they are summarily dismissed, and replaced with someone else who can tell a better story about how they're going to improve the profitability and efficiency of the firm. No amount of Jeff Bezos or Steve Jobs charisma is going to be sufficient to persuade shareholders to accept a 10% penalty year after year in order to safeguard a little known, little understood part of the supply chain against an event that may or may not happen decades from now.

stormdennis 7y ago

This is good then. The company with the cheaper but vulnerable supply chain suffers and the companies who paid a premium for robustness in their chain benefit. That's how capitalism is supposed to work I think.

TeMPOraL 7y ago
Except the market has very short memory. In the next couple of years, the more robust companies that survive this pandemic will get outcompeted by less robust companies, or forced to become less robust themselves.
lutorm 7y ago
Except those companies have already folded because they couldn't compete during "normal" times.
robocat 7y ago
I suspect robustness simply doesn’t work over periods of greater than a few years of competition by a vulnerable supplier. A few examples: 1. the US has built up it’s oil producing capability. If the Saudi’s keep prices low, then everything will be mothballed. So the ecosystem of businesses and skilled staff supporting the US oil industry will massively degrade quite quickly. It can’t be ramped up quickly later. 2. Huawei. Massive shock of US sanctions. Can only be saved by amazing levels of support by Chinese govt. 3. Rare earth production. China took over the market, then shut down all exports. What producers were left and why did they still exist?
- invalidOrTaken 7y ago
  I think it can work, just not by crowd-sourced, incentive-based decision-making. Steve Jobs can do what Apple shareholders cannot, etc.
  - quanticle 7y ago
    The problem is that if Steve Jobs fails to demonstrate returns commensurate with his peers, Apple shareholders can and will oust him and replace him with another CEO who will "cut the fat" in order to boost Apple's profitability. It's easy to look at Steve Jobs and Jeff Bezos and think that a sufficiently charismatic CEO can use his or her "reality distortion field" to hypnotize investors, but it doesn't work like that over the long run. The reason investors had such patience with Jobs and Bezos is because they were demonstrably increasing their companies' market share and profitability, respectively. Under Bezos, Amazon went from a niche seller of books to the largest e-commerce site and one of the largest retailers, online or off. Under Jobs, Apple went from a has-been computer company kept alive as a prop for Microsoft to wave at the DoJ to a leader in personal computing, consumer electronics and the most profitable corporation in history. Do you think that shareholders would have kept Bezos and Jobs around if their strategies had not been delivering the tangible results, quarter after quarter, year after year? I think not. For proof, we can only look to Yahoo, which spent an enormous amount of time and money wooing Marissa Meyer from Google, only to ignominiously fire her 5 years later after she was unable to arrest Yahoo's declining profitability and relevance. A CEO of a publicly traded corporation, especially a publicly traded corporation that is financial trouble, only has so long to demonstrate success, where "so long" is measured in months or, at most years, not decades. If the CEO cannot demonstrate tangible results within that time frame, he or she will be fired, no matter how powerful their "reality distortion field". CEOs cannot transcend the crowd-sourced incentive-based decision making of the market over the long term. What the can do is spin a good story that persuades the shareholders to leave them alone for a brief period of time as they attempt to make the necessary changes in order to improve or restore profitability. If they are unable to do so, they are summarily dismissed, and replaced with someone else who can tell a better story about how they're going to improve the profitability and efficiency of the firm. No amount of Jeff Bezos or Steve Jobs charisma is going to be sufficient to persuade shareholders to accept a 10% penalty year after year in order to safeguard a little known, little understood part of the supply chain against an event that may or may not happen decades from now.