Even though winter has set in on Chicago, there's been a few reasons to believe we could have an early thaw in January. By most accounts the last fifteen months have been rough for the economy, but a couple of unexpected customer calls are raising my hopes that we may see some improvement after the new year. That's a welcome change.
On Monday night I will be presenting "Transforming your business with the Lean Six Sigma toolkit" to the University of Chicago Business School's Entrepreneurial Roundtable in Naperville, Illinois. Some people believe that these techniques don't apply to small and midsized businesses, especially those that are not making or moving products. They might say something like, "We're in sales, not operations." My usual response is to ask them if they ever think about how they serve their customers. I then ask them if they're concerned about the value of their work. If they answer yes, then I shrug and tell them we're all in operations businesses.
It's good to do these presentations periodically, because it reminds me of why I do this for a living.
Friday, December 18, 2009
Tuesday, December 15, 2009
For what kids?
For several years my community has been debating the cost per student of our K-8 school district. In fact, the rising costs of public education seems to be a growing topic of debate in many parts of the country.
There are those who would simply raise taxes to fund school systems, because "it's for the kids" and besides, public education to our democratic society and economic power. Opponents argue that teachers, administrators and a burgeoning educational-industrial complex are bilking the taxpayer while school performance declines nationwide. Who is right?
We can argue back and forth about bang for the buck, but it’s pretty clear that there is indeed some bang going on here. Despite all the challenges that our culturally-inclusive society foists on the education system, our schools still manage to compare pretty well even against smaller, homogeneous countries. We aren’t without issues, but with the glaring exception of schools in poor environments, quality education isn’t an immediate concern. On the whole, OUR kids are getting a good education here in the USA.
But what about tomorrow’s kids? Will they find the same good schools, or will their experience be something less than ours? It is in preserving that quality education for future students where the system breaks down, and that’s where the “buck” comes into the conversation. In many communities, key components of the expense budget are growing faster than tax revenues.
For example, our local school district's 5-year financial forecast projects salary increases of around 5% per year, health insurance benefit increases of about 10% per year, and increasing retirement fund contributions of about 10% per year. Adding to this problem, changing demographic factors, such as additional instruction for growing numbers of English-learning students, will continue to drive up costs for a given standard of educational performance. On the other side of the ledger, our tax revenues are projected to increase only 3% - 3.5% per year.
That's not a sustainable fiscal situation, and sooner or later we will be forced to either raise tax rates or run out of money.
This isn’t axe-grinding or posturing, it’s just simple math.
Someone recently explained to me that Illinois' current education system relies on tax increases to cover rising costs. However, I fear that our local communities may be approaching the “peak oil” of taxation, a tipping point where new revenues will be increasingly difficult to find. Continued tax hikes will eventually change the fabric of our communities and place greater burden on households. Likewise, job cuts and other cost reductions may buy us some time but won’t solve year-over-year cost increases that exceed tax cap mandates. Besides, in case someone slept through the last 15 months, most government agencies and many communities are already flirting with insolvency. We can't expect to tax our way out of this problem.
A community member suggested that our local school board should do more than "just listen to the whims of the public." That's actually not true in the strictest sense, as school boards have fiduciary responsibility to serve the public by assuring that the district educates well and operates efficiently on an ongoing basis. Those responsibilities usually extend beyond the scope of any narrow constituency, and I believe most school boards are honest enough to keep it that way. School boards must be good stewards of a quality public education system for their entire community: the kids in the schools, the adults who fund them, and future generations of families who hope to find the same educational opportunities as we enjoy today.
We school board members must address this situation quickly, or the problem will continue to grow until it’s too big to fix with reasonable solutions. We must find a way to align our expenditures with sustainable tax revenues. That requires frank discussions with administration, teachers, and the public. It means cooperation, fiscally responsible behavior and good choices about the programs we offer. If we avoid these realities, we risk declining school performance or an eventual tax revolt.
To those of you who resist any notion of cost containment, you are living on borrowed time. This is a matter of leadership and duty. If we see this trouble on the horizon, then it's our responsibility to avoid it while we can. We can't continue to allow our problems to snowball onto future genertions.
After all, public education is for ALL the kids, and it’s unconscionable to sacrifice their future for our own benefit.
There are those who would simply raise taxes to fund school systems, because "it's for the kids" and besides, public education to our democratic society and economic power. Opponents argue that teachers, administrators and a burgeoning educational-industrial complex are bilking the taxpayer while school performance declines nationwide. Who is right?
We can argue back and forth about bang for the buck, but it’s pretty clear that there is indeed some bang going on here. Despite all the challenges that our culturally-inclusive society foists on the education system, our schools still manage to compare pretty well even against smaller, homogeneous countries. We aren’t without issues, but with the glaring exception of schools in poor environments, quality education isn’t an immediate concern. On the whole, OUR kids are getting a good education here in the USA.
But what about tomorrow’s kids? Will they find the same good schools, or will their experience be something less than ours? It is in preserving that quality education for future students where the system breaks down, and that’s where the “buck” comes into the conversation. In many communities, key components of the expense budget are growing faster than tax revenues.
For example, our local school district's 5-year financial forecast projects salary increases of around 5% per year, health insurance benefit increases of about 10% per year, and increasing retirement fund contributions of about 10% per year. Adding to this problem, changing demographic factors, such as additional instruction for growing numbers of English-learning students, will continue to drive up costs for a given standard of educational performance. On the other side of the ledger, our tax revenues are projected to increase only 3% - 3.5% per year.
That's not a sustainable fiscal situation, and sooner or later we will be forced to either raise tax rates or run out of money.
This isn’t axe-grinding or posturing, it’s just simple math.
Someone recently explained to me that Illinois' current education system relies on tax increases to cover rising costs. However, I fear that our local communities may be approaching the “peak oil” of taxation, a tipping point where new revenues will be increasingly difficult to find. Continued tax hikes will eventually change the fabric of our communities and place greater burden on households. Likewise, job cuts and other cost reductions may buy us some time but won’t solve year-over-year cost increases that exceed tax cap mandates. Besides, in case someone slept through the last 15 months, most government agencies and many communities are already flirting with insolvency. We can't expect to tax our way out of this problem.
A community member suggested that our local school board should do more than "just listen to the whims of the public." That's actually not true in the strictest sense, as school boards have fiduciary responsibility to serve the public by assuring that the district educates well and operates efficiently on an ongoing basis. Those responsibilities usually extend beyond the scope of any narrow constituency, and I believe most school boards are honest enough to keep it that way. School boards must be good stewards of a quality public education system for their entire community: the kids in the schools, the adults who fund them, and future generations of families who hope to find the same educational opportunities as we enjoy today.
We school board members must address this situation quickly, or the problem will continue to grow until it’s too big to fix with reasonable solutions. We must find a way to align our expenditures with sustainable tax revenues. That requires frank discussions with administration, teachers, and the public. It means cooperation, fiscally responsible behavior and good choices about the programs we offer. If we avoid these realities, we risk declining school performance or an eventual tax revolt.
To those of you who resist any notion of cost containment, you are living on borrowed time. This is a matter of leadership and duty. If we see this trouble on the horizon, then it's our responsibility to avoid it while we can. We can't continue to allow our problems to snowball onto future genertions.
After all, public education is for ALL the kids, and it’s unconscionable to sacrifice their future for our own benefit.
Monday, November 30, 2009
Silly Rumor #1: How China fixed socialism
I’m reluctant to begin any conversation with a sports metaphor, but I took Monday night off to watch the undefeated New Orleans Saints dismantle the once mighty New England Patriots and the one-sided spectacle is stuck in my mind. What happened to reverse the fortunes of these two organizations in so short a time? Had someone finally solved Coach Belichick’s schemes? Had the veteran players lost their edge? Were the rookies just not as good? Was the opposition more driven to prove themselves against an established foe? Was it due to all of these, or to something else entirely? Whatever the cause, the weak were now strong and the strong had fallen.
How the world has changed. China is now the world’s banker of last resort and the U.S. is perilously close to financial ruin. Communist China, whose modest reforms hit a wall twenty years ago in Tiananmen Square, has now beaten America at our own global industrial game. The Russians couldn't do it, failing year after year to forecast demand, produce efficiently or compensate workers. Neither could the Cubans, North Koreans or Vietnamese, but with limited resources and small populations they never really had a chance to dominate a global stage. Ironically, while the Ministry of International Trade and Industry steered its economy, many referred to Japan as the only communist country that worked. Japan’s greatest strength continues to be its legendary productivity, but declining birth rates have left the world’s second largest economy shackled with an aging population, slow growth, labor shortages and, most recently, price deflation.
So how did those inscrutable Chinese manage to make communism work? It's not because they're better producers; China isn’t nearly as efficient as the U.S. (Chinese industry is dreadfully unproductive compared to Japan.) However, China followed the familiar Asian formula and stoked exports while protecting nascent industries in its blossoming domestic market. Learning from the folly of Soviet –style central planning, China recognized that free markets are better at determining what to produce and when, but are also vulnerable to predatory pricing (a.k.a. dumping) from low-cost suppliers. So Beijing gradually granted equity in industrial firms, with lax regulations, leveraged its authoritarian control to hold down wages and exchange rates, and introduced reforms to entice foreign investment and foster domestic entrepreneurs. The Chinese people quickly embraced the new opportunities, forming joint ventures with western firms to access cash, technology and managerial capability. When wages began to rise, Beijing intervened to prevent the yuan from appreciating against the dollar. Many Chinese firms simply ignored patents and copyrights, instead saturating markets with “knock-off” products while saving untold millions in R&D costs. Even with these tactics in place, China benefitted tremendously when President Clinton finally granted them permanent, normal trade status with the U.S. in 2000.
The results were staggering. Most domestic manufacturers came under intense cost pressure from Chinese competitors, eventually yielding market share or succumbing altogether. Many firms like high-end Quaker Fabric of Fall River, Massachusetts, that had used innovation, design and technology to survive earlier upheavals, were unable to compete and closed their doors. Many other American companies, reading the writing on the wall, moved production to China to remain cost competitive while hoping for eventual access to the growing Chinese consumer market. Previously vibrant industries were gutted or lost entirely as capital, capacity and intellectual property surges offshore.
As U.S. consumers spend more dollars goes on Chinese-made goods, China accumulates more and more cash. The spectacular 2008 Summer Olympics was merely a coming-out party. Beijing has used their new wealth to improve its domestic infrastructure and modernize its military. They are acquiring exclusive control to raw materials and sea lanes around the globe. They are increasingly humanitarian and are building a space program. To head off dissent among the Chinese people, Beijing has slowly improved their standard of living while promoting China’s growing prominence on the world stage.
In short, China is becoming a superpower.
China’s strategy is obviously working. Whether their ascendance is sustainable isn’t as clear. I see two factors that might determine this outcome. First, China’s strategy relies on a continuous gradual improvement in domestic living standards to forestall currency appreciation and human rights protests, at least until the Chinese market can supplant the export economy. This is a catch-22 for Beijing; they must eventually create a domestic market, but even with its enormous new wealth the Chinese domestic market is still too small to pull untold millions more Chinese up from poverty.
China needs someone to buy their exports, but in the aftermath of a global recession the United States and other foreign markets may not have the money or willingness to continue cooperating with China’s export-driven ambitions. U.S.-China trade can’t remain so terribly unbalanced for much longer without bankrupting America, and even now the recession and weakening dollar should inflate the price of Chinese goods and dampen American demand. If Beijing ignores these problems and kills its golden goose, it may find the remaining wealthy nations of Europe and Asia more protective of their domestic economies. That will slow China’s growth and potentially create domestic problems.
Second, a destitute population is easily pacified with small blessings, but an affluent and educated Chinese people will almost certainly demand far greater social and political reforms than Beijing has so far proffered. China's communist leadership will face greater difficulty maintaining control of their new industrialists and middle class. Likewise, centrally managing the economy will become far more complicated as the needs and expectations of Chinese citizens grow. Whatever else happens, it’s likely that the Chinese people will eventually gain sufficient wealth to support their own economy. Communism may have helped make a workers' paradise of China, but it doesn't do so well when the proletariat make real money. That's usually when democracy steps in.
Beijing’s success may be its undoing.
How the world has changed. China is now the world’s banker of last resort and the U.S. is perilously close to financial ruin. Communist China, whose modest reforms hit a wall twenty years ago in Tiananmen Square, has now beaten America at our own global industrial game. The Russians couldn't do it, failing year after year to forecast demand, produce efficiently or compensate workers. Neither could the Cubans, North Koreans or Vietnamese, but with limited resources and small populations they never really had a chance to dominate a global stage. Ironically, while the Ministry of International Trade and Industry steered its economy, many referred to Japan as the only communist country that worked. Japan’s greatest strength continues to be its legendary productivity, but declining birth rates have left the world’s second largest economy shackled with an aging population, slow growth, labor shortages and, most recently, price deflation.
So how did those inscrutable Chinese manage to make communism work? It's not because they're better producers; China isn’t nearly as efficient as the U.S. (Chinese industry is dreadfully unproductive compared to Japan.) However, China followed the familiar Asian formula and stoked exports while protecting nascent industries in its blossoming domestic market. Learning from the folly of Soviet –style central planning, China recognized that free markets are better at determining what to produce and when, but are also vulnerable to predatory pricing (a.k.a. dumping) from low-cost suppliers. So Beijing gradually granted equity in industrial firms, with lax regulations, leveraged its authoritarian control to hold down wages and exchange rates, and introduced reforms to entice foreign investment and foster domestic entrepreneurs. The Chinese people quickly embraced the new opportunities, forming joint ventures with western firms to access cash, technology and managerial capability. When wages began to rise, Beijing intervened to prevent the yuan from appreciating against the dollar. Many Chinese firms simply ignored patents and copyrights, instead saturating markets with “knock-off” products while saving untold millions in R&D costs. Even with these tactics in place, China benefitted tremendously when President Clinton finally granted them permanent, normal trade status with the U.S. in 2000.
The results were staggering. Most domestic manufacturers came under intense cost pressure from Chinese competitors, eventually yielding market share or succumbing altogether. Many firms like high-end Quaker Fabric of Fall River, Massachusetts, that had used innovation, design and technology to survive earlier upheavals, were unable to compete and closed their doors. Many other American companies, reading the writing on the wall, moved production to China to remain cost competitive while hoping for eventual access to the growing Chinese consumer market. Previously vibrant industries were gutted or lost entirely as capital, capacity and intellectual property surges offshore.
As U.S. consumers spend more dollars goes on Chinese-made goods, China accumulates more and more cash. The spectacular 2008 Summer Olympics was merely a coming-out party. Beijing has used their new wealth to improve its domestic infrastructure and modernize its military. They are acquiring exclusive control to raw materials and sea lanes around the globe. They are increasingly humanitarian and are building a space program. To head off dissent among the Chinese people, Beijing has slowly improved their standard of living while promoting China’s growing prominence on the world stage.
In short, China is becoming a superpower.
China’s strategy is obviously working. Whether their ascendance is sustainable isn’t as clear. I see two factors that might determine this outcome. First, China’s strategy relies on a continuous gradual improvement in domestic living standards to forestall currency appreciation and human rights protests, at least until the Chinese market can supplant the export economy. This is a catch-22 for Beijing; they must eventually create a domestic market, but even with its enormous new wealth the Chinese domestic market is still too small to pull untold millions more Chinese up from poverty.
China needs someone to buy their exports, but in the aftermath of a global recession the United States and other foreign markets may not have the money or willingness to continue cooperating with China’s export-driven ambitions. U.S.-China trade can’t remain so terribly unbalanced for much longer without bankrupting America, and even now the recession and weakening dollar should inflate the price of Chinese goods and dampen American demand. If Beijing ignores these problems and kills its golden goose, it may find the remaining wealthy nations of Europe and Asia more protective of their domestic economies. That will slow China’s growth and potentially create domestic problems.
Second, a destitute population is easily pacified with small blessings, but an affluent and educated Chinese people will almost certainly demand far greater social and political reforms than Beijing has so far proffered. China's communist leadership will face greater difficulty maintaining control of their new industrialists and middle class. Likewise, centrally managing the economy will become far more complicated as the needs and expectations of Chinese citizens grow. Whatever else happens, it’s likely that the Chinese people will eventually gain sufficient wealth to support their own economy. Communism may have helped make a workers' paradise of China, but it doesn't do so well when the proletariat make real money. That's usually when democracy steps in.
Beijing’s success may be its undoing.
Wednesday, November 25, 2009
First, a "Hello" is in order
My family will tell you that Thanksgiving is my favorite holiday. Not only do we celebrate a uniquely American tradition, but it allows us to express our gratitude and optimism for the bounty of the world. Even in this troubled time, I am grateful for the blessings of my family, my community and my business.
So who am I, and why should you care? I am Jack Kahler. I have a lovely wife and two fine sons. I am president of Avocus Group, an operations consulting and training firm based in Illinois, and I also serve on a school board.
I tend to talk a lot, so this is probably as good a time as any to begin publishing my thoughts about business, society and the economy. Some of my acquaintances would surely appreciate any reduction in my outspokenness that might result from this alternative form of expression.
Finally, let me warn you that I don't anticipate running for another public office, so my comments here might offend any readers who must resort to political correctness as a haven from reason. We can all learn something from dialog so your feedback is welcome. I won't censor you unless you're especially vulgar or offensive; in that case I might invite you to join me for drinks.
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