Older Workers in the Minimum Wage Pool

As the US economy weakens, increasing number of adults are finding themselves in minimum wage jobs that are traditionally done by young adults. The minimum wage jobs do not pay enough for a sustainable living and these are not meant to. For an efficient labor market these wages should be cleared at the market price that matches demand with supply.

WSJ says:

Weakness in the economy is accelerating a structural shift in employment patterns. More adults, including unemployed college grads, older workers, former welfare recipients, immigrants and working adults seeking second jobs, are competing for low-skilled hourly posts.

The increase in supply of labor will place a downward pressure on the wages. The increasing gas and food prices will continue to make to make it difficult for these adults and unemployed college grads to sustain a living.

The problem could get worse during this summer with the June 24th minimum wage hike. Business owners grappling with increasing prices of raw materials and supplies that cannot be passed on fully to their customers cannot let their thin margins erode with a wage increase. Any artificial increase in wages when supply far exceeds the demand will cause the businesses to not hire, aggravating the situation.

The alternative is to reallocate capital from social spending projects to infrastructure projects. May be even adopt a version of McCain's tax holiday plan, except instead of giving the tax holiday to the customers use the $6 billion dollar gas tax collected over the 90 period to fund startups, invest in special education for job training and other job creation projects.

Woz Talk

Some excerpts from Woz.

"If you are persuasive and likable, people will do a lot of things for you"

"It seems wrong to buy something for 6 cents and sell it to someone for $6. Shouldn't you
tell them you bought it for 6 cents?"

"Getting a Job at HP working on Scientific calculator was like you loved Apple computers and found a job at Apple"

"It wasn't software back then, it was hardware!"

" I hardly ever used it, I just wanted to create it" (on his rigged up Video Terminal form TV with Keyboard and modem)

"We were people like yourself, not money people or CEOs, we gave away our code"

"Sometimes we all have dreams that cost a lot of money. Stick with whatever money you have and do what you can."

"We went to the venture capitalists but we could not speak like business people."

" Why didn't the HP spin me off? They couldn't do my product, due to their corporate culture."

"What would it take for a Robot to make a cup of coffee? That Robot has to live a long life to do these things".

"After a while you get old and go into management"

"We did not realize the world was changing, the software was going to be more important"

" I can't understand why you won't let me put a ringtone in the iPhone"

Watch Steve Wozniak Speak

Steve Wozniak, Apple co-founder, is talking at Haas School of Business today at 1930PDT.
Watch the live feed at this link.

Pricing at the Gas Pump

What are the cost components of a Gasoline retailer? How is the $3.50 we pay gets allocated? An amazingly well written article on gasoline retailer pricing models is available at the National Association of Convenience Stores (NCAS) website. The article gives a clear explanation, rooted in economics, of why the prices at the pump reflect the current crude oil prices even though the retailer bought the current inventory at old prices.

A gasoline retailer typically seeks to establish a retail price based on the cost of replacing the gasoline currently at the retail location, not the cost of that product itself. Basing prices on "replacement costs" is especially critical when wholesale prices fluctuate frequently. A retailer must generate sufficient cash from its current retail sales to purchase its next delivery of gasoline; otherwise, the retailer would be constantly using debt to finance wholesale gasoline purchases.

Here is a broad cost structure of retail gasoline (source NPR), and California. Variable Costs (per gallon): Cost of Goods Sold Crude Oil: $2.50 (fluctuates daily, market prices, cost to refineries) Refiner Margin: $0.25 Distribution Margin: $0.07 Credit Card fee: 2% = $0.07 Federal tax: $0.184 State tax: $0.38 (varies state to state) Total: $3.479 The credit card fees are incurred at percentage of dollar amount. Master card charged 2%. Fixed Costs: Since the gas retailers usually have other services including convenience store, the fixed costs are part of the whole operation and not just gasoline sales. The fixed cost components are: Real estate Employees Maintenance So the contribution margin from a gallon of gas priced at $3.50 to the retailer is about less than 5 cents. That does not look like a considerable margin for the business.

Using Pascal's Wager in Supporting Corporate Environmentalism

Is it a corporation's role to invest in the environmental projects and try to reduce the impact on the environment? While there is still confusion around the data on the causation of Global warming how can a manager decide to invest shareholder capital in Green projects?

There is line of argument that justifies the need for sustainability projects that is analogous to Pascal's wager. Pascal's wager defined for faith in god, stated using decision theory, looks like

	God exists (G)	God does not exist (~G)
Living as if God exists (B)	+∞ (heaven)	−N (none)
Living as if God does not exist (~B)	?? not specified perhaps N (limbo/purgatory/spiritual death) or −∞ (hell)	+N (none)

So the dominant strategy is to pick Living as if God exists.

In the environmental context, companies are advised to act now, because it is a dominant strategy to pick "Living as if Global warming is an effect of industrial activities".

However, unlike the religious argument, this assumes that all these environmental friendly initiatives are NPV positive projects. That is investing in them, even if it turned out "God does not exist", has a positive NPV at the discount rate the corporation uses for its investments. That sure is a big if, not supported in the data. In fact there is more data to suggest otherwise.

The bottom line is shareholders trust the corporation and its executives to invest in projects that have a higher return on investment than the investors can find for themselves.

I believe in reducing consumption and waste. These are necessary for operational excellence. But should the strategy be aligned along Green themes?

CO2 Share: Walmart Vs Small Store

I am still not convinced about the impact of CO2 emissions on global climate change. However I decided to do a comparison of CO2 footprint of Walmart vs small stores. Since there are so many discussions around supporting local mom and pop stores vs. big box retailers, I wanted to do a comparison of these two along just this one dimension (commemorating the Earth week). To make it an even comparison I used CO2 tonnes per dollar of sales and per employee.

I assumed that the retail stores are on the average 4000 square feet and owned one car driven for 20,000 miles for business purposes. Since no free calculator for small business is available, I used an estimate that mirrors an household of similar size and people. Hence I underestimated the electricity spent on large refrigerators, continuous lighting, store display signs and the CO2 impact of distribution of goods to the stores.

For Walmart, the published data says $19.2 million tonnes and it includes all their trucks, corporate jets, stores and corporate offices.

The total US retail sales is $4.2 trillion (retailindustry.about.com).
The single stores' share of total retail sales is 50% (same source).
US Census data says, the number of retail stores with less than 10 employees as 796,000. These numbers give a very high annual per-store sales (about $2 million). This should be treated as an overestimate of actual numbers.


Here is the comparison. On a per dollar sales, Walmart looks about 50% as bad. On a per employee basis, Walmart is way better.

Caveats:

1. For small stores, the CO2 footprint is underestimated and the annual sales numbers are overestimated.
   
2. Walmart's numbers include the entire corporation and non retail related activities.
   
3. Walmart has large economies of scale and can ride their experience curve to make large positive impact on their CO2 footprint.
   

Getting your suppiers to pay you to play

Home furnishings retailer Linens N Things is on the brink of filing bankruptcy. The New York Times reports that some of their suppliers are tightening contract conditions and stopping shipments. The question to ask is would the suppliers be better off by helping LnT at this crucial time or by choking it further and hastening its bankruptcy.

Gilbert W. Harrison, Financo’s chairman, said that despite its financial problems, Linens ‘n Things has several attractive assets like its real estate.
...
But suppliers have an incentive to keep Linens ‘n Things afloat, Mr. Harrison said. Without the chain, they will have to deal with only one major customer, Bed, Bath and Beyond.

The questions the suppliers must be grappling with are

1. What are the chances a LnT turnaround or a potential buyer rescuing LnT?
2. What is underneath the problems?
   
3. What is the expected cost of LnT going down, both from lost account receivables and from future pricing squeeze by Bed Bath and Beyond?
4. What is the expected cost of reviving LnT and for how long they have to keep it up?
   
5. Would they be the only vendor stuck with supporting LnT? Would everyone else go with it? What is the critical mass required that improves the changes for turnaround?
6. If they are he first, would everyone else follow? Should they wait for someone else to move first? What if everyone waits for the other to move?

“Vendors want to keep this company alive,” Mr. Harrison said. “The last thing they want to see is for it to die.”

Operations is Child's Play

I spent a fast semester learning Operations.
How do you maximize profit when the inventories have to scrapped at the end of each day?
How can you predict future demand?
How do you know how much to order?

News Vendor model to the rescue, if you know the past demand history.

Kids these days learn this just by watching Cyber Chase on PBS, particularly one specific episode, aptly titled as "Past Perfect Prediction". The kids run a some sort of oil change garage to raise money. They have to order Cryoxide, the raw material that costs $15 a can and expires at the end of the day. They charge $32.5 for the service. They place an order for Cryoxide the previous day and it gets delivered in the morning.

Past Perfect Prediction

Convinced that the last piece he needs to activate his powerful new machine is hidden in Slider's garage, Hacker threatens to evict the teen unless he pays up on an old debt. Enter the kids and Digit. As a way to raise the money, they convince Slider to open the garage for business – just like his dad did. They do, but quickly discover that there's more to it than meets the eye. Can they unlock the past to find the key to saving Slider's future?

On the first day they order 66 cans based on one receipt they find in their father's files. As it turns out they could use only 30 of the cans, wasting the other 36 cans. They figure out that that was just one data point and it was also from a Saturday whereas they started work on Monday. Their initial search gives them one past receipt for each day of the week. Not satisfied with the dataset they search more and find the receipts for the whole month. They find the average demand for each day and place a order for each remaining day of the week.

Perfect. They end up using every can everyday and end up making a wheelbarrow load of money.

Now if only I had seen this.

Questioning Going Local

I wonder if Go Local campaign has any economic merit. I wonder if it is really fair for the very locals the campaign targets to help.

1. Why go local?
2. Why should you pay a higher cost to buy local when the market offers a lower price in places that are "non local" and products that are "non local"?
3. Do we know for sure that the value creation (environment, labor, community impact) are all demonstrably higher with local vs. non local?
4. Why pay for the inefficiencies of a local store or producer? If Wal Mart squeezes out the inefficiencies to provide customers with lower cost, would it simply not be better to take capture the added value?
   
5. Do you stop at goods and services for local? How about ideas? Should you listen to and cultivate only the local thought leaders?
6. What does it mean when a bookstore says Buy Local? Should people only read books written by local authors and printed using paper produced from local trees by local paper companies and sold in local bookstores?
7. What about the locals who work in chains? Is it fair to deny them their right to earn a living by working in a place that offers them the best value?

Business Plan Doctor

Who is a business plan doctor?
Professor Rashi Glazer of UC Berkeley said he has a reputation as a "business plan doctor". When many of the startups whose business plans get rejected turn to Glazer for help. He described how the typical call would go,

Founders: We heard you are the business plan doctor could you help us?
Glazer: Let me ask you something about your business plan.
You say in your plan you have a great product,
you describe the founders as smart people from Berkeley and Stanford,
in the market section you show hockey stick growth,
and in your competitor section you have three words, There is none.

Founders: (very excited that they got the right guy), Yes on all, so would you help?

Glazer: I just told you what the problem is. Your market description and competitor section do not agree. Any market that is growing at the rate you describe is going to have competitors. Saying there is none convinces the VCs that either you did not do your work or that the market isn't really there. If you think it is indeed a new product with no competitors think about the substitutes. No one is going to believe you when you say there are no competitors. When there are no competitors there are no customers too.