05.12.08

J.I.I.T.

Posted in Old Posts at 2:17 am by Administrator

J.I.I.T.

(Just In Island Time)

By John Galt

May 12, 2008

For those of you who have had the pleasure of visiting many of the fine Caribbean islands to the south of my location, you discovered a paradise, generally speaking, of laid back people working hard to get by on low income, beautiful scenery and the pressures of our major cities and industries only a distant memory. Even on the island that should sink from all it’s hedge funds based there, Grand Cayman, the laid back atmosphere can be savored and enjoyed without the modern day rush and torture of schedules and bosses who demand deadlines or have variable goals much like your wages, salaries or bonus program. In those islands there are generally time zones which we have here in the states; there are some islands in the Central Time Zone, some in the Eastern Time Zone, some further east in the Atlantic Standard Time Zone, and of course all of them located in the “Island Time Zone.” What is ITZ you ask and why should you care? “Island Time” is a local anomaly which can best be characterized not by what time zone it relates to, but when a certain event, production quota, or goal is met. Basically it can be summed up like this:

If it’s 8 a.m. in Miami, it’s “whatever” in the islands.

While some people think it’s funny, especially when you are on vacation and have those adult beverages with the funny umbrellas in them, it’s not so funny when you are attempting to conduct business. And America, that’s right the good old U.S. of A. is about to adopt “Island Time” as it’s standard of delivery and not by the choice of the consumer or business community. It’s the result though of the consumer and business community imitating an ostrich attempting to kiss subterranean earthworms and praying this problem would never come home to roost. It’s here. It’s now. It’s ugly. And “IT” is going to change our way of life for at least ten to fifteen years hence.

J.I.T. (Just-In-Time) Theory

For the sake of brevity, I will not go into a prolonged explanation of J.I.T. theory or the concepts that have been preached for decades now inside the United States that allowed our cost structure in the manufacturing sector to remain low and industries still based here to attain some degree of competitiveness. There are numerous books on the subject and if you wish to really dig into it, I highly recommend the book JIT Is Flow by Hiroyuki Hirano. The basics of J.I.T. theory were developed to eliminate a problem which has haunted the industrial revolution since day one and that is an over supply of materials required for the productions of goods. Many industries faced the problem of developing new products or lines for market, then spending excessive percentages of their finances to acquire the raw materials and store them, then implementing the production only to see the new product or line fail, causing the company in some cases to go out of business. The lack of flexibility in the storage and production process lead many corporations to stock gazillions (that’s a fancy financial word for wasted dollars) of dollars worth of raw materials that may or may not be usable in other production facilities and if the new line failed, ending up as a warehousing store until those materials can be liquidated. The cost of storing raw materials, not just in physical space and manpower but the tax obligations that came along with it also introduced a new pricing issue which kept some manufactured goods higher than need be until the J.I.T. concept was perfected in the late 1980’s. Even though Henry Ford introduced it, it took the introduction of low cost, high speed truck transportation to allow the concept to really take off. As a participant in the ramping up of J.I.T. from the transportation industry side of things in the late 1980’s it was obvious that the key factor for heavy manufacturing (defense industry, automotive, home appliance, heavy equipment, etc.) and consumer goods to attain the low cost advantage to maximize profits, it required a relatively cheap supply of energy. This required efficient transportation, usually truckload or expedited LTL (Less-than-Truckload) and some cooperation with the railroads in the intermodal arena. Visually speaking, this graph illustrates the implementation where J.I.T. efficiency is maximized relative to inventory cost for manufacturing and should give everyone some idea where the problems will start to occur.

The no-brainer observation of the century is that when peak efficiency in a J.I.T. system is achieved, inventory costs are at their lowest. The problems that could interrupt this concept though are numerous and the U.S.A. is just now beginning to see what happens when the key ingredient, low transportation cost, is destroyed by inflation and the associated impact in the ultimate cost of finished goods. This impact though can be translated to other raw materials which require little processing for the market and have an ultimate destination of our consumer markets. The introduction of the J.I.T. system for the growing, processing, importation and/or distribution of foodstuffs was considered a revolution in the 1990’s and enabled restaurants in Miami to serve salads with produce from Salinas, CA year round as teams of drivers moved the product cross country in three to four days, something the rails only dreamed of doing for over a century. The movement of foodstuffs via the truckload transportation system allowed many grocery stores to eliminate not just the need for intermediate storage facilities that were expensive to keep under contract, but allowed the consolidation of internal warehousing facilities to cut costs and enable expansion (in some cases ‘over-expansion’) into new markets. The inventory control and supply system allowed Detroit to briefly experience a Renaissance in the 1990’s after the 1991-92 recession which lasted until early into this century as the issue of inventory cost control appeared to be well managed and the idea that raw material costs never entered into long term strategic planning; especially since the implementation of NAFTA and other trade agreements gave manufacturers an out for modernizing aging facilities by shifting sub-assembly to other nations. Since we are now entering into uncharted territory, the model as somewhat over-simplified above, is now entering into not just uncharted territory, but a minefield.

The Inventory Minefield Explodes

Boom. Oil prices appear to have found a new floor. And it’s about ten floors higher than housewares and men’s apparel so this department store is teetering on disaster; especially since it’s only fifteen floors high and housewares was on the 8^th Floor! As the chart below so subtly illustrates, theoretically, transportation costs always follow oil prices, no matter what the bobbling boondoggleheads of Bubblevision tell you.

(Chart does not reflect real prices/theory only)

If you do not believe this statement or “theory” then call and try to book an airline ticket at the same price you did one year ago. As I’ve discovered (but not shocked) the charges added on to the ticket fees are stunning. Since they want to continue to advertise “low, low airfares” they have to find other fees like a “fuel surcharge” or “if you have size 13 feet or larger charge” on to each fare. Needless to say, the uninitiated are shocked and stunned to discover there is a “fuel surcharge” no just on airline tickets but on the cost of goods delivered to grocery stores, factories, etc. Most people accept the other fees but fail to grasp the real reason behind them because those people with size 13 feet are freaks anyways and should pay more (And I did, but that charge was called a “luggage fee” on my ticket-the airline let my feet slide). Since the 1990’s Gulf War One situation caused a “surprise” oil price shock, fuel surcharges have been a staple of the transportation industry and never have been repealed except for brief durations. The average consumer who has not dealt with Fed Ex, UPS, or any transportation outfit has no clue that one, two or now thirty percent charges are being added for “fuel surcharges” to the bill and that is where we enter into the proverbial uncharted territory for the J.I.T. methodology and the American way of life. The price of energy does have an eventual and stunning impact on demand but unfortunately, it’s not the “demand” for goods one has to be concerned about; it is the demand for transportation services and the woefully unprepared infrastructure America is awakening to in the year 2008.

I DEMAND My Tomatoes Tomorrow

Year	TOTAL (Billions$)	Truck%	Rail%	Water%	Oil Pipe%	Air%
1960	47.8	68	19	7	2	1
1970	84.0	74	14	6	2	1
1980	213.7	73	13	7	4	2
1990	351.9	77	9	6	2	4
1999	561.8	81	6	4	2	5

Source: Transportation in America 2000, page 4-7, Eno Foundation

The American people are spoiled rotten brats. My being one of them can attest to this as an undeniable fact and the proof is that my family does not have to butcher a chicken at night for dinner, grow my own produce unless I want to, nor cut my own firewood for warmth in the winter unless I elect to (getting a fireplace would be the first prerequisite for that to occur of course). I can get fresh tomatoes year round be they grown twenty miles east of me in Central Sarasota County or all the way from California if need be. If you look at the table above, courtesy of the Eno Foundation with the latest data I could obtain via the U.S. Department of transportation, you could easily see that as oil prices fell dramatically, the reliance on the trucking industry for America’s transportation of goods across this nation grew steadily. This trend appears to have continued un-interrupted through 2006 (Source: US DOT/RITA ):

Then again, we did not have oil futures at $126 per barrel in 2006, much less the concept of $100 oil was foreign and thought to be impossible (BOOYAH!). The chart above should be considerably revised by 2010 if oil continues at it’s current pace as the affordability of air and truck transport, be it for non-essential or essential goods and service, will impair the ability of the companies to maintain a reasonable cost structure. The theory that the “Mexican drivers will fill the void” is so laughable at this point in time is not even funny. And for some reason I do not see Federal Express or UPS outsourcing it’s overnight packages to Aero Mexico to absolutely positively get that box from Miami to Los Angeles. Thus the dilemma. With the increasing societal problems due to a massive increase in transportation costs, you can see where this will end. The trans-national nature of goods for production or consumer consumption will eventually cease or be so greatly reduced that that transportation system, as constructed now, will start to disintegrate. I do not mean a “physical” destruction, but the carriers which currently have been moving fresh foodstuff and materials for JIT production schedules will be fiscally incapable of operating. The chart below is my crude attempt to point out what will happen as we plummet towards that dangerous intersection where demand decreases to a point of no return.

At some point, which is a moving target as of now, the intersection displayed above will put the transportation industry on a point of no return. I could add a third line to that chart to illustrate energy costs but that’s not the point. Demand will rebound for goods but the transportation services will be incapable of meeting those demands due to the reduced number of companies available. While many people think that there will be no rash of bankruptcies and liquidation of our transportation assets, I simply remind everyone to review the news stories this year and the rapidity of the collapse of several minor players in the airline industry, the troubles of the majors, oh, and the daily stories of Mom and Pop trucking companies and owner operators going out of business. While that seems like a reach and just the pontifications of a “doomer” like myself, what was on the “mainstream” media last week (well, as “mainstream” as Glenn Beck can get) during the Glenn Beck Program and his interview with Byron King of Outstanding Investments where the premise of $200 per barrel oil freaked Mr. Beck out because Alaskan King Crab Legs would be a distant memory for Mr. and Mrs. Main Street America as the price became prohibitive and the delicacy a treat for the super rich only (you can watch the interview here ). And if that’s not enough misery for only May of 2008, as of the quarterly reports through May 9^th, the Trucking industry’s earnings are down 34% (From WSJ, Earnings by Industry Q1 2008 ). As oil prices stabilize then accelerate with the next down leg of the dollar, the American people are going to experience the opposite of “JIT” and that would be what I am attempting to outline here and what Byron King was stating on Mr. Beck’s program:

Welcome to “Island Time” or whenever it gets to you or your market.

J.I.I.T. and You

Source: www.bizchartweb.com and the NY Times

The little snippet from above starts to paint a mosaic for you just like I attempt to do when I broadcast my show or post articles from east Bumblesville, IA about a local company having financial problems or a large corporation dumping those problems on the American public. If you start to take those small stories, reflect on them week after week as I do, you suddenly realize the “big picture” and it’s not so pretty. Harper’s magazine did a May cover story about the bogus economic data promulgated from our various Federal agencies that are supposed to report data for the nation’s people to make financial decisions. Yet time and time again, the data has been politicized much like our economy, and that’s the danger of the new JIIT system we are about to stumble into. Look at that slice of heaven from above and think; non-essentials are declining in demand, prices are skyrocketing in reality if you follow John William’s CPI calculations at www.shadowstats.com, and the supply of domestic transport is starting to decline as freight rates plummet while costs explode. This will not end well and here’s another theoretical chart for you to ponder:

(FEN= “food, energy, necessities” for this chart)

Once again, this is just a chart to illustrate what will happen as oil prices continue to increase and the demand for “Food, Energy, and Necessities” (FEN) stabilizes with the higher oil prices. The chart does not reflect real data but the theoretical curve where it breaks and the domestic capacity eventually breaks down, creating a void which has only one solution and it’s the path we are on as a nation unless the dollar is stabilized and commodity prices brought under control now.

The recession we are in according to Warren Buffett, Milton Friedman and others is not encountering the usual build up of inventory in the retail sector thanks to the JIT philosophy but that double edge sword could cut both ways in the near future. The “efficiencies” introduced over the last two decades has given the management teams of various corporations that feeling of invulnerability if the markets suddenly turn around and demand for their products increase. That theory is wonderful if, once again, we are dealing with $50 or $75 oil; but that theory has been shot out of the saddle along with Mr. Bucky and “if” we have the turnaround being pronounced by the talking bubbleheads in the second half of this year, the lack of capacity and inventory will hit home and cause shortages in certain goods furthering price increases based on the olden ideas of supply and demand, even without our dollar being revived.

So what is this solution and how does it impact you as the time to market for all goods extends outward and perceived shortages become reality in some regions of the nation?

Hi, I’m from the government and I’m here to help you.

That’s right. In other nations when a dislocation occurs within a capitalist system, of which ours has been dying for years thanks to the introduction of quasi-socialist policies, the government intervenes and assigns transportation resources based on a bureaucratically designed strategic allocation tables. This would mean, for example, gasoline being rationed in regions where the supply/demand balance is out of kilter. A better example would be the assignment of transportation resources, a de facto re-regulation via Executive Order where trucks that were hauling plastic widgets from Long Beach to Bentonville, AR are ordered to handle canned foodstuffs from California to Newark, NJ instead and the widgets put on the backburner. If you do not think this is possible, study world economic history; it has happened before and will again unless the situation is brought under control. The rationing of transportation resources would be a huge wake up call for America, but by the time that happens it will be too little, too late. The railroad industry is furiously attempting to rebuild neglected infrastructure in anticipation of future events but the work could take up to a decade to complete; and that’s barring no interference from the environmental whackjobs suing to block every new project.

The impact was brought home by the perceived rice crisis created by the mainstream media, exacerbated by an easy to panic public and demonstrated annually in Florida, Texas, Louisiana and Alabama with each hurricane that threatens our coastlines. During the pre-storm approach period, it is not uncommon to see panic stricken people lined up in grocery stores buying anything canned in sight, plywood to build three new homes and enough generators to power Bells Run, KY for a year. Amazingly, most of these people who “prepare” for the storm return most of these goods at the alleged end of the season in October only to come back and buy the same stuff at a higher price (usually) the next storm season. This is the mentality we are up against in America. There is no perceived crisis because there have been no actual shortages or supply interruptions so panic is either created by media hysteria or regional problems. Unfortunately for these souls, the problem has already occurred, the storm has already hit and they are just standing on a slab and do not realize they have been wiped out yet. The inflationary storm is ongoing and destroying their savings, retirement and ability to deal with the new economic reality we are living in. When I proclaimed earlier this year “buy stuff now” I meant it. And now meant ‘NOW’ and not on Island Time (whenever). The American people will have to soon accept a new reality, probably within twenty four months, that the cost of energy will outstrip the ability for new transportation resources to come online. This void will further inflate prices for all goods and services but worse, it will create an inherent instability in the JIT system causing the prices of foodstuffs and necessities to outstrip any wage gains or inflation adjustments to fixed income accounts. This is where the government will step in and begin to allocate not just welfare checks, supplemental emergency energy income grants and expanded medical care (Universal Health); it will cause the government under the guise of “emergency powers” to re-regulate the airline and ground transportation industries to allocate resources to insure food supplies into the major cities. This is a situation where there are no winners except for my readers and listeners who wish to survive the coming Econoggedon by purchasing products for the future that retain value (precious metals come to mind) and are functional necessities that have no expiration (Clothes, farm implements, etc.). Meanwhile the sheeple will continue to line up at Costco to beg for that extra 50 lb. bag of rice they will never consume because following the heard is their way of life. After they get it, go home and switch on Bubblevision they can all relax and feel reassured that their investments are “safe” and the world will be wonderful according to the experts on Island Time:

“Whenever. Tomorrow. Eventually. But it will get here. Or you’ll get there.”

I’ll take my preparations now thank you. Because “whenever” tomorrow gets here, I may not like the look of the new reality these clowns have designed for the rest of us.

I wonder if that taxi I called for in St. Thomas ever arrived at the restaurant..……

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