econlife - How Golf is Like Dior Perfume by Elaine Schwartz

At an elite club in Pinehurst, North Carolina, people are still playing golf…just a bit differently.

Check-in moved from the golf shop to the starters shack. At the end of a round, a “head nod” or “club tap” has replaced the traditional handshake. Also avoiding the hands, bunkers have to be flattened with your feet rather than the community rake. As for the hole, the flagstick can no longer be moved but the cup could be raised an inch. Then, players just need to tap it with the ball.

Where are we going? To how producing hand sanitizer, like a golf game, will require some new resources because of the coronavirus.

Production Changes

Sanitizer

A craft distillery in Litchfield, Ct. that switched the alcohol destined for its bourbon, gin, and vodka to a production line making hand sanitizer has been getting hundreds of calls from customers. Another spirits maker said it was combining ethanol, vegetable glycerin, and hydrogen peroxide to make its sanitizer. Supporting the shift, government regulators suspended a law that required red tape.

Larger companies also have reallocated their resources. Bacardi said its Puerto Rican plant would turn out more than one million bottles of sanitizer. Somewhat similarly, in the factories that make Dior, Guerlain, and Givenchy perfumes and cosmetics, LMVH will produce a hand sanitizer gel.

This is the LMVH sanitizer dispenser. They just needed to use their water, glycerin, and ethanol:

Ventilators

During WW II automakers churned out the tanks and planes we needed for the war effort. The switch from cars and trucks to tanks and planes was close enough for their assembly lines. Now though, the suggestion that they could make ventilators might be too distant. Repurposing the robots that make the cars might not be feasible. But an electronics maker has said it would make face masks and an office furniture company hopes to produce protective equipment.

Our Bottom Line: Production Possibilities

As one academic explained, “When you are repurposing a factory, it really depends on how similar the new product is to the existing products in your product line.” She was actually describing the increasing costs shown by a typical production possibilities curve.

A production possibilities curve illustrates the maximum amount that the factors of production–your land, labor, and capital–can produce for the two items on your graph. Unlimited, the choice of items ranges from specific goods or services like wheat and barley to categories that include farm goods and factory goods. The key for us though is that the curve is bowed out. The reason? Cost increases when you change your resources from one item to another. And sometimes, as with auto companies making ventilators, you cannot switch them at all because the cost would be too great.

Below, I’ve drawn a production possibilities curve for factory and farm goods. As you move from one point on the curve to another, you are actually switching resources from the farm or the factory to the other one:

At a golf course and in a perfume factory, you can switch how you use your land, labor, and capital. And both would say it has a hefty cost.

My sources and more: From golf to sanitizer, WSJ was my destination for seeing the shift in resources as was the NY Times. Meanwhile, The Cut had a good un-gated article about LVMH’s sanitizer.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - The One Thing We Should Know About Making Sneakers by Elaine Schwartz

Like an iPhone, your sneaker is really a bunch of components that wind up in one factory.

Now though, all of that is changing.

The Old and New Way to Make a Sneaker

The Old Sneaker Supply Chain

Starting with design and ending with the manufactured shoe, we have an 18-month supply chain. A new shoe needs a design, a pattern and prototype testing. From there factories need specs, tooling and sample production. Once ready, the shoe moves through a manufacturing process and shipping that can take 120 days.

Take the “outsole.” It begins as some rubber that comes from one place and is shaped somewhere else. Add to that some stitching and gluing and a midsole in still another factory.  The process at that point is pretty labor intensive and remains that way until we have a sneaker, a cargo ship, and a 60-day journey to a U.S. retail destination.

After design, this is the four-month supply chain:

The New Sneaker Supply Chain

Knowing that consumers expect speedy fashion cycles, sneaker planners are trying to accelerate their supply chain.

At the design stage, the need for sample testing is being replaced by a virtual reality. Here, Nike working with NOVA (DreamWorks animation) has created virtual prototypes. Here also, 3-D printing is a time saver when it eliminates the need for factory-made samples.

Meanwhile, Adidas has been experimenting with a state-of-the-art “Speedfactory.” Shifting from labor intensive procedures to a capital intensive process, Adidas not only combined the old links but also took them closer to the consumer:

The goal is to compress the old supply chain down to four months:

Our Bottom Line: Structural Change

A speedy sneaker supply chain is about much more than one industry. Called structural change, that new supply chain affects land, labor and capital. It means that labor could need different skills and upgraded capital might boost productivity. Together, they jumpstart economic growth and upset the status quo.

The moving assembly line at Ford Motor was one of many reasons we’ve had structural change in the past. With the moving assembly line, chassis assembly time decreased by a whopping 9.7 hours per car. Combine that with consumers clamoring for the Model T during the 1920s and you get the perfect economic synergy between demand and supply.

Structural change that fuels economic growth could be shown through the following production possibilities graph. The arrow points to a new maximum potential output:

So, when you think about making sneakers, the one thing to remember is structural change.

My sources and more: H/T to the Marketplace podcast for alerting me to Quartz’s sneaker articles, here and here.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.

econlife - What a High Social Score Can Get You in China by Elaine Schwartz

In Suining, near Shanghai, China tried out a social credit system in 2010. The whole country might have something similar in 2020.

Suining

In Suining, if you were older than 14, you started with a social score of 1,000 points. Then though, your behavior determined where you wound up. Caring for an elderly parent got you an extra 50 points while helping the poor added another 10. But if you were convicted of drunk driving or bribing an official, you lost 50.

After adding in a host of other criteria like education and even jaywalking, people got a point tally and then a letter grade. Individuals with an “A” could go to the best schools and get the best jobs. But if you were a “D” citizen, you were denied certain licenses and governmental services.

China

Countrywide planning for a social scoring system formally began on June 14, 2014 when the State Council published its “Planning Outline For the Construction of a Social Credit System.” While all is not yet in place, they do have many local experiments (like Suining’s) and several national programs. The national lists have been created by groups that include China’s Supreme Court, the People’s Bank of China and the National Tourism Administration.

One person on the Supreme Court’s “discredited” (also called dishonest) list told of being unable to get a plane ticket or travel on a high speed train. For not paying a fine, he was also prohibited from staying in luxury hotels and buying expensive real estate. More serious offenders have a voicemail saying, “The person you are calling has been listed as a discredited person by the local court. Please urge this person to fulfill his or her legal obligations.”

In a 2016 article, the Wall Street Journal had this perfect summary of what China could create:



The results:

Our Bottom Line: Three Economic Questions

Economic systems need to decide how they will produce and distribute goods and services. A market economy mostly uses a “bottom-up” approach. Based on countless decisions from households and businesses, people get what they want and need. By contrast, China’s social scoring system is “top-down” control.

The one common thread shared by bottom-up and top-down economic systems is the three basic questions they have to answer:

1. What? We have to ask which goods and services should be produced because the supply of all land, labor and capital is limited.
2. How? When making goods and services, we have to select our land, labor and capital.
3. To whom? And finally, we have to know how wealth will be distributed. Will it be equal or market-related…or based on social scoring?

My sources and more: Thanks to marketplace.org for reminding me it was time to take a second look at China’s credit scoring. My first stop was a chock-full-of-facts Wired article. But the Atlantic had the insight and the WSJ link to some resistance while here and here are more from WSJ.

Ideal for the classroom, econlife.com reflects Elaine Schwartz’s work as a teacher and a writer. As a teacher at the Kent Place School in Summit, NJ, she’s been an Endowed Chair in Economics and chaired the history department. She’s developed curricula, was a featured teacher in the Annenberg/CPB video project “The Economics Classroom,” and has written several books including Econ 101 ½ (Avon Books/Harper Collins). You can get econlife on a daily basis! Head to econlife.