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Sunday, May 2, 2010

Lean Manufacturing

Interesting article on 'lean factories',

Factories are no longer doing shifts of 'batch work', with large numbers of workers doing the same thing. They are running lower inventories. While this is more efficient, it is also less robust. According to the article, this makes it very difficult to cut workers or cut costs. This suggests manufacturing will no longer follow the pattern of lay-offs to slim down the company to a more productive level, and will instead follow a pattern similar to dot-com startups--they run onto the last instant, hoping conditions improve, and then declare bankruptcy. Needless to say, this increases counter-party risk, as suppliers expecting payment and customers expecting products are left in a lurch.

In an economy with a robust pool of alternative suppliers, this may not be an issue. But in an environment dominated by a small number of large firms, it could be catastrophic, as the larger companies become 'essential industries', for whom no alternative exists.

The danger is not failure, but sudden failure. Reducing the information asymmetry that permits such surprises would be worthwhile, perhaps through increased mandatory disclosure. Quarterly reports may have been meaningful half a century ago, but the speed of finance has increased by several orders of magnitude.

How to institute a reporting regime that is useful without creating an undue regulatory burden? Sarbanes-Oxely may be the Glass-Steagal of our era, due for repeal decades later.

Given mandatory metrics, accounts will devise ingenious ways of meeting them, demanding increased standards on how those metrics are met, until another arcane body of law and regulation emerges. Mandatory 'transparency', rather than 'reporting' may be solution--a federal agency capable of subpoena-ing raw data on demand, to assess financial stability.