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Mar 31, 2020

In our 35th "Deming Lens" episode, host Tripp Babbitt shares his interpretation of wide-ranging aspects and implications of Dr. Deming's theory of management. This month he looks at the Coronavirus crisis, past crises, and where we go from here.

 

Show Notes

[00:00:14]
Deming Lens #35

[00:00:28]
Coronavirus and China

[00:03:05]
History of Crisis'

[00:11:04]
Stock Buybacks - The Replacement for Dividends in Short-Term Thinking

[00:14:50]
Manage Like Its the Early 1900s?

[00:17:27]
Look to the Future

 

 

Transcript

Tripp Babbitt: [00:00:14] In the thirty-fifth episode of the Deming Lens, I'll discuss Coronavirus and bringing manufacturing back, some history on manufacturing crises, and a look to the future.

 

Tripp Babbitt: [00:00:28] Hi, I'm Tripp Babbitt, host of the Deming Institute podcast. This month, I'd like to talk about what everybody's talking about right now, which is the current coronavirus crisis. And you know, as I start to see some of the reports that are coming in, you know, everybody's trying to do their particular part, but -  the light has really been shined on US manufacturing or the lack thereof. So there's a new term now in our lexicon called PPE - personal protective equipment. And pharmaceuticals that are made in China. And it started getting me to reflect on some of the previous crises, so I'm going to walk through that a little bit later in the podcast. But talking about what's happening today, that China is rejecting sending some products and services and even Europe has been rejecting some Chinese products because of poor quality in the form of the products of PPE and some testing equipment. And so now there's a lot of talk about bringing some of the manufacturing back to the US. That just makes sense. Now, this is something I've advocated for many years. I wrote a LinkedIn article four years ago that I re-posted under my profile about the fact that we have some people that - some countries that we aren't necessarily completely friendly with or their governments are run differently between a communist country and a democratic country.

 

Tripp Babbitt: [00:02:27] And, you know, now we have things like the Hong Kong riots and things of that sort. And so having manufacturing here, in the article I wrote about having manufacturing in the US and especially that it doesn't make sense to be outsourcing military equipment, parts, and things of that sort to countries that may be unfriendly to us. So anyway, this crisis has has shined a light on China. And they're making some of the products, especially this PPE in the pharmaceuticals.

 

Tripp Babbitt: [00:03:05] So like I said, I started reflecting on some of the crises that we've been through. And originally, Dr. Deming talked about him going in 1950 - for those who aren't familiar with with W. Edwards Deming and his work - going to Japan in 1950, talking to leaders of Japan industrial arena that owned 80 percent of the capital or represented 80 percent of the capital of Japan at that time. And starting him down a path of qualilty why the US had used a lot of the techniques that W. Edwards Deming took to Japan, discarded them because 50 percent of the products were made after World War II in the US and it's well below that now - less than half. But because we were able to produce things in the US rapidly just to fill the demand, quality went out the window.

 

Tripp Babbitt: [00:04:19] And Dr. Deming told the Japanese that if they followed his teachings, that they would have countries the world over screaming for protection in five years. And in his words, they did it in four. So we've set sets up the scenario between 1950 and, say, 1969, which Dr. Deming says was the height of US manufacturing, that it was never any higher after that particular time period. But during that time period, Japan was improving the quality of their products that they were making. And with the help of their goods, the government and even the help of the United States in allowing those products to come over to Japan. But what happened was, is this started a steady decline in manufacturing. And in the 1970s, we saw a lot of the automobile manufacturers on the ropes of going into bankruptcy. We had Chrysler, but a lot of them because of the quality of the products and also the foresight of many of the Japanese manufacturers to make smaller cars when the whole oil embargo manifests itself during the 1970s. Then when we went to the 1980s, we, in essence, started down a path. And this is when I became active in working with an industrial distributor in the Indianapolis area.

 

Tripp Babbitt: [00:06:10] And I started as a sales rep in Evansville, Indiana. And in the early eighties, I remember calling on a number of manufacturers that were having problems competing. And there was always talk about shut downs and layoffs and things of that sort. But there was still a lot of manufacturing going on in the middle of the 80s. But during that time period, from the time I graduated from school in the early 80s until I got my MBA in the mid 80s, and then in the late 80s, you saw a steady decline in the number of manufacturers that were in the United States. And, you know, I saw the Zenith Cabinet plant, for instance, in Evansville, Indiana, close down during the time period that I was in Evansville. But there was a lot of talk about different companies being shut down because of Japan. And I there was a lot of talk also about the fact that the Japanese had lower prices and this, that, and the other. And so it's pretty well documented that the Japanese were able to not only increase productivity, but they did it through having quality products that they were making and not just how many we could make, which was the US focus, but how well we made them actually wound up increasing the productivity even faster.

 

Tripp Babbitt: [00:07:43] So we had a lot of things going on. We had Japanese then increasing their productivity. As I just mentioned, we had Paul Volcker, who the Federal Reserve who was raising interest rates in the 1980s. And in 1982, an interesting little thing happened. It was called stock buybacks. Now, if you're familiar with Dr. Deming, his work Out of The Crisis or The New Economics, he talks a lot about dividends. But what hasn't been talked about too much that I know of any way in the Deming community are stock, are the damage of these stock buybacks. And let me just talk about what these are. These are companies buying stock back from the marketplace. And it's really almost from my perspective and there's a a doctor, Lozano Alnwick, that writes quite a bit about this from the University of Massachusetts. And I'll put a link to some of the articles and some of the videos that he has out there about how you can manipulate your stock price by doing these stock buybacks. So this became something that you were allowed to do in 1980, too. And actually, there were rules put in that protected it. Now, if you can imagine, if you know, you're going to do as an executive, if you know you're going to be doing a stock buyback for your company because it's a manipulative thing to do if you have knowledge of it can be considered insider trading, at least from my perspective.

 

Tripp Babbitt: [00:09:21] Now, you may have a different view on it, but you have the opportunity to know when you're going to do it and, you know, be able to manipulate the price. And whereas Dr. Deming talked a lot about in Out of The Crisis and The New Economics. Stock dividends, these buybacks have the same type of damage associated with them, because if you can manipulate the stock price and you are getting stock options that are given to executives, this just reinforces the short-term thinking that Dr. Deming railed against in both of his books, which is, you know, dividends, dividends, dividends. Well, just because we've changed the name or added another tool that does the same damaging thing in the form of stock buybacks, it's not helpful. And what does it do? Well, it does a couple of things that stand out that are damaging to organizations and that reinforces the short-term thinking. One of the things that it does is it compromises your liquidity. So if there's an economic downturn like we have now, you're as liquid with stock as you would be with having no cash on hand or assets that are more readily liquid.

 

Tripp Babbitt: [00:10:54] The other thing that it does is it prevents the reinvestment, the need and organizations to innovate and invest in products and even people.

 

Tripp Babbitt: [00:11:04] So these are some of the damaging things associated with what happened when they allowed these stock buybacks to happen in 1982. In the 1990s, in fact, we started to see stock options, more stock options to executives, which then promoted even more of the short-term thinking when Dr. Deming is talking about dividends. So we can almost say that nowadays dividends are almost being replaced by these buybacks, so that with these executives getting bonuses based on the stock price, that they're looking for short-term things to be able to prop up the price and being able to manipulate stock buybacks as a great way to continue this short-term thinking. So in the 2000s, what happened? Beginning some of the crisis that we're seeing today around us, manufacturing's of PPE and pharmaceuticals, was China was brought into the World Trade Organization in December of 2001. And this accelerated the decline in US manufacturing jobs because just like everything else, when you're looking to cut prices and look for cheaper labor in other countries, this is everything's been moved out. And there are a number of people actually in Congress today that helped facilitate moving some of these things to China and other countries. That made things more difficult for us because they didn't have the foresight to look about what type of manufacturing was needed in in the US. So, in the 2010s, we had the 2017 tax cuts where we basically had US companies with the expectation when they built this thing is that if we lowered the corporate tax rate that people would then be investing and bringing back manufacturing in the US. But what did a lot of companies do instead, is they use the reduction to do the buybacks, these stock buybacks within their organization. Now, some of these are debt funded. And again, this gets back to the liquidity of the organization because people are just trying to look for ways to increase their stock price, to increase their options and so forth.

 

Tripp Babbitt: [00:13:47] And this is where from my perspective. capitalism really gets a bad name.

 

Tripp Babbitt: [00:13:55] So rather than investing or reinvesting profits into the organization, we're doing financial manipulation and things that are damaging to long-term viability of organizations. Which leads us back to our current situation. I foresee that manufacturing will be coming back to the US. I think there's a lot of support not only in Congress, but with US citizens, that they see that it's going to make sense to maybe have to pay a little bit more for. Pharmaceuticals or masks, so that when the time comes when we need it, that we have it available and at the quality that we need, which leads us back to W. Edwards Deming.

 

Tripp Babbitt: [00:14:50] So we've been mired for over a century now in management thinking that has prevailed and still prevails today.

 

Tripp Babbitt: [00:15:02] From the industrial revolution and the thinking of Frederick Winslow Taylor now again, I always say this, that Taylor was a rock star in his time, advanced the thinking on functional separation of work, the bypass reward, similar to some of the things that were implemented at the Ford plant by Henry Ford.

 

Tripp Babbitt: [00:15:26] All those types of things were great advances in 1910. So hopefully we've advanced our thinking since then. But what I see over all, I see signs of hope and I see signs of despair when I look to the future. And from a despair state standpoint, I still see a lot of the same short-term thinking when we have stock buybacks and focus on dividends. Just because you changed the tool from dividends, that stock buybacks, you're still in a mode as an executive or a manager of thinking very short term. And most of what Dr. Deming talks about is to get us to think long term and also think in terms of quality. So these are things that are going to need to adjust themselves as we move forward. And I can't think of a better place to start than with a foundation built off of the Deming Philosophy still to this day, only because we still have it. We still haven't adopted it whole heartedly. And there will be something that follows the Deming Philosophy. But until we move from Taylor to Deming first, it's gonna be hard to get that next thing, whatever it might be.

 

Tripp Babbitt: [00:17:04] As far as signs of hope, I do see some good things that are happening and I see CEOs taking no salary. I see a movement with all or some of the thinking that goes with millennials, especially as a boomer.

 

Tripp Babbitt: [00:17:27] You look at some of stuff and shake your head. But there's a lot of things that they have shined a light on that we need to pay attention to. And that is capitalism in its current form. And the way that management plays that out in organizations is not helping our country. It is not helping humanity, for that matter. And that we need to rethink what we're doing. And I'm seeing performance appraisals go away. I see people re-looking at things like rewards and incentives and things of that sort. But they're still way more companies that are still doing old thinking from the early 1900s. So those things are going on. Now I heard an interesting thing, and I've been a proponent of this actually for a while before even he said it. But Mark Cuban was on the other day and he was talking about, you know, in order to rebuild the middle class, one of the things that needs to happen is if we've got to stop stock options for executives, then you should be doing the same percentage of stock options for the workers, and that will help build the middle class. Plus give workers not only something to look forward tp every day because they're a part owner of a company, but it will get workers out of this paycheck to paycheck mode. And, you know, all of these things they think are positive types of feedback that we're getting and new theories that people are coming up with of how we can make this run better for everyone. And this is very Deming from my perspective, that we're trying to shift the whole curve and not just our personal curve. That's it for this Deming Lens. Hope you enjoyed it. It got me thinking that maybe some of these Deming Lenses should be more like this, talking about current events.

 

Tripp Babbitt: [00:19:46] Thank you for listening to The Deming Institute Podcast. Stay updated on the latest blogs, podcasts, programs, and other activities at deming.org.