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Column 1: 21 December 2005. 2006 and quality programs So often in life what is predicted does not actually materialize. Occasionally, those responsible for the predictions come clean, as does The Economist in its current edition of “The Year in….” Highly commendable and refreshing in an age of “it weren’t me”, which is visibly seen in the daily utterances of politicians and business leaders alike. (The soon to be held Enron trials will undoubtedly provide a spectacular example of such mea non culpa exhibited in the atmosphere of a circus.) Whatever serious magazine or television channel one watches, it seems there are sober and sage prognostications for the coming year: 2006. Of course, it is an annual event – a tradition, in fact. So, with so many bold views available, why not also join in the folderol of crystal ball gazing and see what the next twelve months might have in store for quality and business improvement? What do we know for sure? 1. In 2006, as they reach the age of 60 years, the first of the “baby boomer” generation will begin to retire. This fact has been known for several decades. As noted in an article of mine en masse the boomers will affect many business sectors: from health care to travel, to retirement homes, to automobiles, to styles and fashion. Your quality programs must ensure your products, packaging and services suit the boomers’ needs and tastes is essential and fit for the boomers’ purposes. Remember: that segment was the generation of protest in the 1960s and fearless of complaining if dissatisfied with what it gets. Have your customer support services and warranty systems fully debugged and ready to rock! 2. The economic forward march of emerging nations will continue apace. Mega nations China and India will do well provided they develop their hinterlands and domestic economies so that they are less reliant than at present on exports to richer nations: notably America. Of course, they will present two challenges. Firstly, their low costs of production will provide fearsome competition for European and North American business especially which can expect to lose ever more jobs if they do not address their own avoidable costs. Secondly, learning what those nations’ customers want and then providing it in the manner they want it will be challenging, but also an opportunity. Some firms are well prepared: others are not. In short your quality program must fight the never-ending battle of eliminating or reducing avoidable costs and be capable of ascertaining what are different nations’ customers’ needs and expectations. Together with other ASEAN nations, India and China are the markets to be reckoned with. Indeed, 2006 will also witness Vietnam becoming a member of the World Trade Organization, the WTO. That is a good thing as it helps to free up for the future another market for the world’s goods and help Vietnam also to prosper through international trade. Even though those nations are becoming more important in determining the shape of world trade, especially on the consumption side, undoubtedly the world’s economy will depend in large measure on how well goes the American economy. 3. American consumers cannot continue their past and present buying spree that, for years, has provided the largest national sinkhole for world exports. The household debt burden is at almost historic levels. Indeed, the result has been a current account deficit (a.k.a trade gap) that reached a reported $68.9 billion in November 2005. That’s a lot of money. Indeed it represents an annual rate closing in on $850 billion, an amount far greater than that I quoted in my March keynote address, of $650 billion. The combined effects of rising interest rates, flattening or falling house prices that no longer allow them to finance their profligacy and higher energy costs, especially gasoline and heating fuel, will make them tighten their belts. Americans savings rates have been negative for several months. So, expect the global economy to take a pause, if not the start of a recession, unless either corporate American spending or another nation’s spendthrifts prop up global demand. Though some press pundits confidently claim corporations will pick up the slack investing in IT and expanding capacity, the following factors must be considered. Firstly, the USA’s gdp is comprised by approximately 66% of consumer activity. Thus, corporations must spend at a ratio of two to one to just make up any slack in consumer slow down. Secondly, corporations tend to worry about expansion and investment if they are uncertain about a spending slow down in the rest of the economy: manufacturers do not want to be left with excess capacity or unsold inventories, they want capacity utilization to be as high as possible. And, management has not been struggling to implement JIT and lean management only to create fat. Thirdly, many publicly traded US firms annually increased their dividends in the last few years, thereby boosting their share prices. Once a dividend level is set, it becomes an expectation and share prices are savaged when there is any perceived risk of or an actual shortfall. So, as revenues stagnate or fall, boards may well choose to maintain profit and payout levels rather than divert some of those funds to expansion and additional corporate spending. The most sensible purpose for such expenditure would be, therefore, to build exports rather than hoping for increased USA domestic spending. In my view, trusting that US corporate spending will make good any downdraft in American consumers’ spending is somewhat risky. The world economy would feel the effects. One cannot bet the incoming Chairman of the US Federal Reserve Bank, Mr. Bernanke, will be able to reduce interest rates and flood the world with money to stave of a global recession this time. That will require a joint effort by many nations. But, how about Japan and Germany increasing their appetite for imports? 4. The German economy is operating sub-par and is unlikely to improve much as the nation faces internal economic restructuring requiring a dramatic change in its labor laws (benefits and job security, a long considered entitlement hamper Germany’s international competitiveness). Its new coalition government will probably be gridlocked, reducing the chance of real reform. It would be another German miracle if it were not. So, whatever restructuring that does occur will be done at the level of the ordinary firm facing its own global competitive crisis. Germany will continue to happily export but may not be much of an importer. And, of course, since it got what it wished for (an international currency, known as the Euro and a central bank similar to the now defunct Bundesbank) it does not control its own economic destiny and global competitive position. If it did, it might be able to adjust its own bank rates and exchange rate to spur its export performance. Japan’s recovery after years in the doldrums is attracting cautious optimism among the financial chattering classes (i.e. economists.) Though Japan is improving and may wish to buy your products and services, it may undergo an important shift when present Prime Minister Koizumi is replaced later in 2006. What then will happen? Will his program of reforms continue or will Japan slip back in performance? Personally, I am optimistic the Japanese economy will help to maintain some of the global trade momentum by importing more. Which does not just mean physical goods will be plunked down in its ports: yes, you guessed, the famous Japanese tourists may well return, spending their money on trinkets and memorabilia of the places they visit and click camera shutters. Those places will have two things in common: the Japanese shutterbugs and all that memorabilia bearing a label, “Made in China”! Though the Japanese market may open up more in 2006, to enjoy a bit of it, remember the Nipponese are discriminating customers. They will buy such prestigious brands as Gucci, Coach or Louis Vuitton handbags, Boeing aircraft, Burberry coats and scarves, and Eric Clapton blues albums but eschew shoddy. If you want to sell to them, your quality program really must get it right. If I were a quality VP, it would be a mouth-watering challenge. 5. Energy costs will not dramatically fall. Do not expect oil to trade below $50 per barrel. Natural gas prices will likely remain near present high levels. Sadly, there is too much disarray in the OPEC nations’ internal affairs and Middle Eastern politics are “iffy”. Hope, though, that in post-election Iraq, things will quiet down. The world does need a stable Iraq, exporting its oil helping to maintain supplies at decent levels and prices, building back up its economy with the proceeds. I wish them well. Worse still, if the US dollar falls, which is highly likely, the price of oil will rise accordingly as it will take more dollars to provide the same international spending power for the oil producers. We have seen before a glut in petrodollars held by oil exporting nations. Will they spend them on luxury goods, ostentatious excess as has happened before? Probably not. On arms? Probably. But not to the extent we witnessed a couple of decades ago. Middle Eastern leaders know well their survival depends on internal development and spreading a decent amount of the wealth to the population. Prestigious construction projects and infrastructure are likely targets. Development of their educational systems and diversifying their economies away from oil will occur at a measured pace. In running your business, plan for oil being at $100 per barrel. That way you will be ready for the worst and pleasantly surprised if it is less. Your quality program must embrace energy management. And see if your revenue side is preparing to offer your goods and services to the oil producing nations. 6. Stealthily overshadowing everything, will be the outcome of the present round of negotiations at the WTO, the so-called Doha round. At present, things do not look good as the battle lines are drawn between developed nations and emerging nations. The issue, of course, is agriculture. Unless wealthy nations lower their barriers to produce from developing nations, such as those in Africa, and simultaneously phase out their (often egregious) subsidies of their domestic farmers, (France and the European Common Agricultural Policy take note) there could be a dangerous deadlock and precipitous fall into protectionism. Once it begins, protectionism could spread faster than Avian Flu. A vaccine based on common sense is to be prescribed. But, like one for Avian Flu, it will need swift development as soon as one can isolate the first cases that break-out, analyze the virus’ DNA and rapidly begin phased trials. In all likelihood, the round will at best end in political fudge, resolutions about “moving towards” (whatever), “steady progress” towards (whatever). Expect lost opportunities and ever deepening resentment, festering away around the world prompting well meaning people to continue their violent protests at future trade meeting and economic “summits”. 7. Airbus Industries’ new plane, the A380, will enter service with some of the world’s airlines. Able to accommodate as many as 800 passengers this latest technological marvel will enable greater numbers of people to travel afar, experience other nations and, perhaps, make new friends. (My personal view has long been that international travel that brings people together is good for world peace and trade.) The plane will boost the tourism industry. That is something from which every country can benefit, especially the poorest ones who need the associated influx of tourists’ money. Just as happened when Boeing introduced its famous 747, about 35 years ago, few airports are ready for the new arrival. Terminal buildings and passenger handling facilities need upgrading to deal with the numbers involved. This will provide a small fillip for the construction industry and airport services sector. City fathers should encourage their local airport to get ready and press for A380s to serve their community. Taxi drivers, hotels, restaurants, museums, theaters and shops that peddle trinkets and memorabilia (“Made in China”) would all gain. As manufacturing becomes a smaller proportion of developed nations’ economies, tourism as a key element of the service sector becomes more important. If you operate in the service sector, and perhaps are involved in tourism, remember that air travel makes smaller the world but makes greater customers’ expectations. The globetrotting public knows what is and is not world class in accommodation and service. Your quality program must respond accordingly and a growing number of those tourists will be baby boomers having more free time on their hands, the money to travel and a willingness to complain when dissatisfied. 8. The flat tax movement will take greater hold in Europe and elsewhere but not in America. Complex taxation legislation is a huge burden on business costs. The costs of compliance are another form of avoidable costs. 9. The Euro will survive 2006. Italy won’t renounce it and reintroduce the Lira, which was hardly one of the world’s hard currencies when it existed, anyway. 10. Expect the global price of all manner of commodities, especially copper, aluminium, wood and constructional material to rise. This will be due to the growing demand of China and other emerging nations. As input costs increase, your quality program’s ability to identify sources of waste, alternative materials and designs using a range of tools, including VA and VE will be important contributor for maintaining profit and employment. Globalization means few if any firms will enjoy pricing power. 11. The reality of a global labor market for skilled people will become more pronounced. Chinese salaries will rise and wage differentials of its highly qualified people and those in the west will narrow. The same will occur in India. Even though they are producing many more university graduates than does, for example, America, both of those countries are showing signs of labor tightness in some areas. So, even though they will still be able to undercut western wages for some time, as their currencies strengthen, their labor and costs rise the issue for western firms is this: are we getting ready for the global business opportunities that will return to our shores as that differential fades? Yes, your wages and salaries may have to fall (will the American automotive unions please note), but theirs’ will rise. If superior productivity, lower avoidable costs and quality can bridge the gap, things will look better. Disaster management When it comes to Avian Flu, the prospects of a pandemic will increase. And this is not akin to the dire warnings about a Y2K meltdown that did not materialize. For business the key question is: does your quality program also contain plans and procedures for effective disaster management? It must address the potential effects on your supply chains and employee attendance. Crucially, the arrangements must be audited and tested for effectiveness long before an outbreak starts, for then it will be too late. A foreseeable weakness will be for any rehearsals to be given the casual care and attention given to company fire drills: generally half-hearted affairs. That would be a mistake. Even introducing hand-washing policies at building entrances might be a simple and effective precaution. Having a supply of facemasks, just as firms keep on-hand supplies of hard hats and protective eye goggles would be something of a start. And, while there is time, companies might adopt a policy to introduce video conferencing with their customers and suppliers to reduce the need for business trips. Cutting down the amount of international physical contact may help stave-off a global disaster. At least it might contribute to slowing down the progress of the Flu around the world. As the capital and running costs of video conferencing have dropped so much in the last few years, it is increasingly affordable and may offer considerable savings over business trips. Regardless of Avian Flu prevention, though, one can expect video conferencing as a business to explode in 2006. While we look at possible disasters what are some of
the other major risks to business for which our quality programs must
be ready to adapt? Effects on quality people Matters deserving especial attention would be these:
Prevention is the key. Work with management, raise issues,
perform management audits (management
audits is available from amazon.com). Input costs – waste management;
alternatives; VA/ VE may have some effect. Will you have pricing power
– do not expect it as globalization continues, few will enjoy that
luxury. 1. What won’t happen:
2. Things that won’t improve:
Have a good year.
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