What a German Master Can Teach Us About Vocational Education and Training (VET)


vocational education and training (VET) benefits

Mr Milz overhauled
this 100 years-old grandfather clock.

Despite having an unacceptably high unemployment rate, the US manufacturing sector has over 600,000 unfilled jobs. This is due to the fact that our educational system isn’t producing graduates with the skills that are sought by employers.

Nancy Hoffman, author of the book Schooling in the Workplace: How Six of the World’s Best Vocational Education Systems Prepare Young People for Jobs, argues that the United States should adopt a European-style education system, in which students in their last two years of high school have the option of participating in highly structured workplace apprenticeships that involve working for pay several days per week, and spending the rest of the time in the classroom. This system is known as vocational education and training or VET.

So what are VET’s advantages? Meet August Milz, a product of Germany’s VET system. As a youngster, Mr. Milz spent two years at a clock school in Germany, and then served as an apprentice at a clock manufacturing company. He went on to run a number of successful clock repair shops, and is currently the owner of A M Clock Repair SVC, Inc

Following is a recent interview with Mr. Milz. It describes how he ultimately found his calling through VET.


How did Germany develop such a strong vocational education and training (VET) system?

Unlike the US, Germany doesn’t have natural resources that are the basis of the economy. In Germany, the economy is based on production—not on the stuff that comes out of the ground. The government supports—and the system supports—learning a trade, doing something, building, working. The whole system goes back to the Middle Ages. Working in a trade was highly valued as only honorable people were eligible to participate. During this time, Germany wasn’t even a national entity; it was a political entity. In contrast, in the US, the only entity that supports education for tradesmen are the unions. For example, carpenters and electricians have to be licensed, which requires that they are able to demonstrate that they have been properly trained and educated in their specific trades.

What made you decide to go into the clock field?
Two things. One was that my schooling for higher education was interrupted because of World War II. When things normalized again, I was told that I was too old to pick up where I left off. My father had a small clock factory before the war that was closed during the war. My grandfather was a clockmaker as well..so it was a family tradition. I grew up in manufacturing.

What type of vocational education and training (VET) was available for someone wishing to learn about the clock trade?
I grew up in Schwenningen. a city located near the Black Forest where all of the major clock companies were located. There was a clock school in town. The institution had a three-year educational program involving a parallel apprenticeship. Students went to school and worked at the same time.

After going to school and apprenticing, a student got their diploma. But the diploma didn’t entitle them to own their own shop, or teach. The students had to work another 6 years under a Master, learning how to design their own mechanisms. Then they had to take an exam, which—if they passed—enabled them to become a Master. Only then could they own their own shop, or teach. That’s how the system worked.

What was your personal experience with the program?
While attending school, I worked in a factory that had a large machine shop where they made the clock’s internal mechanisms. I learned about the workings of the machinery, and how to set them up. Eventually, I was put in charge of production. As a result of this experience, I completed the entire program—schooling plus apprenticeship—within 2 years.

Does Germany still have clock schools?
Yes, it does. A couple of months ago I got a call from my nephew. His son is starting clock school, beginning as an apprentice at Junghans, where he works at the company three days a week, and then goes to school for 2 days a week. He will continue with this schedule until he finishes his apprenticeship.

In terms of the clock industry, how should VET be applied here?
There are two aspects to consider. One is designing new mechanisms; the other is repairing existing clocks. The education for each category is different. We don’t need Masters in the US, because —although the US used to be a great manufacturing center—today clocks are made in other countries, and then imported to the States. A Master learns how to design the mechanism, calculate the number of gears, and all that. There is no need or market for that. The need is for repair.

What should be done in terms of US vocational education?
For over 100 years clocks have been imported here. There are countless millions of clocks, but there is nobody to take care of them. That’s why I decided to come here to open up repair shops. There is definitely a need for a clock repair and maintenance school in the US; however, any new program must also include working as an apprentice.

August, Thank you!

[My comment: There are similarities between the plight of Doug Oberhelman, CEO of Caterpillar, whose company is unable to find qualified factory workers, and August Milz, owner of A M Clock Repair SVC, who can’t find properly-trained, clock repair people. Both individuals run businesses that are constrained by a lack of qualified workers. This is ironical, in light of our high unemployment rate.

Only by reforming our educational systems, can we hope to solve this problem. We must develop more meaningful partnerships between business, academia, and government. Ultimately, the goal should be to integrate school and work experience in a specific career area, ending the distinction between academic and vocational preparation.]

What the CEO of Caterpillar Can Teach Us About Our Educational System

Education System Needs Reform

Doug Oberhelman (right) , CEO of Caterpillar

OK, wrap your head around this one. There are 600,000 unfilled jobs in the U.S. manufacturing sector, because employers are unable to find qualified applicants.

Furthermore, the Organization for Economic Cooperation and Development issued a report indicating that more than half of American companies are having trouble finding enough skilled workers. Given our unacceptably high unemployment rate, how can this be?

At a forum about Jobs, Education and the Economy, Doug Oberhelman, CEO of Caterpillar (CAT), revealed that his firm has recently been interviewing 1,000’s of people for shop floor jobs that require “basic skills, nothing fancy.”  He was “appalled” to learn that the hiring managers at CAT rejected 60% of the applicants, because they “can’t read, they have no math skills, and they fail the drug test.”

The irony in these numbers is that the U.S. annually spends $650 billion dollars on public education, more than any other country in the world. However, Oberhelman points out that—based on his recent hiring experiences—we are throwing over $300 billion out the door.  Not only is the aggregate level of spending on education high, but the amount we spend has increased dramatically and consistently. The Cato Institute reports a “25 percent increase in K-12 per-pupil expenditures, in constant dollars, between 1995 and 2005.”

These facts suggest that putting more resources into our education system will not solve the problem. Many countries—South Korea, Finland, Canada, Netherlands, to name a few—are achieving better results using fewer resources. Rather, we must radically reform our existing institutions, so that our schools produce an educated workforce, one that is capable of performing 21st century jobs.

Inaction is not an option. We are competing against China, a country that values education. And they want our jobs! Although they don’t spend much money on it, they are starting to leverage the benefits of having produced an educated workforce. CAT makes a 20-ton, hydraulic excavator system in a dozen places throughout the world, including a facility in Victoria, Texas. CAT’s CEO indicated that the number one plant in terms of “quality, safety of employees, and almost every metric is in China.”

In conclusion, there is still somewhat of a party atmosphere in the U.S.: the economy appears to be on the mend, employers are hiring workers, and the housing sector seems to be lifting us up. But if we do not fundamentally restructure our educational system, Oberhelman suggests that the party will be over for the next generation.

In subsequent posts, I will describe some specific reforms that need to be made.

What Apple Can Teach Us About New Product Development

The iPhone 5: Disruptive Innovation, Continuous ImprovementIn his book The Innovator’s Dilemma, Harvard Business School professor Clayton Christensen popularized the term “disruptive innovation.” Products that fall into this category bring different value propositions to the market than what is currently provided by existing market participants. Although disruptive technologies underperform existing products in mainstream markets, they possess other features that new customers value. In the near term, because a disruptive technology results in worse product performance, their initial sales volume is low.

This definition of a disruptive innovation is an apt description of Apple’s first iPhone.  When it was launched in 2007, the iPhone underperformed against benchmarks that were standard in the smartphone industry. As a result, just 1.5 million units were sold in its first two quarters. Here is how the original iPhone stacked up against existing smartphone competitors, using measurements that were considered important at the time:


underperformance of apples first iphone

However, Steve Job’s creation was not just a cell phone; rather, it was the world’s first, handheld computer. Its data processing capabilities—not voice—are what disrupted the cell phone market. Although other smartphone manufacturers offered web browsers, they were clumsy and difficult to use. In contrast, Apple’s web browser made surfing the Internet easy. Compared to its rivals, the iPhone’s user interface was simple, intuitive and uncomplicated.  At the swipe of a finger on touch sensitive glass, one could get access to e-mail, text messaging, video, photography, maps, books, music, games and mobile shopping. The iPhone was a game-changer, the industry’s Swiss Army knife.

After having introduced a product that was revolutionary in some respects, but lacking in others, Apple began a structured process of enhancing features—and adding functionality—that satisfied customer needs. This is the essence of continuous improvement. For example, in 2008, iTunes was introduced, which solidified the iPhone’s role as a multi-function device that could seamlessly provide music and video on demand.

Unveiled on September 12, 2012,  the iPhone 5 is the current iteration of the iPhone. In his Wall Street Journal column All Things Digital, Walt Mossberg describes the differences between the iPhone 5 and its predecessor model, the 4S, which was introduced a year ago:

continuous improvement at apple

The incremental improvements described in the previous table are not radically new. In fact, some commentators have described the iPhone 5 as a catch-up device, adding features that are already resident on the leading Android and Windows phones. For example, many of the Android phones already feature larger screens.

In conclusion, Apple’s product development strategy does not involve releasing breakthrough technologies, year after year. Rather, disruptive innovations—such as the iPod, iTunes, iPad, and the iPhone—are unleashed, upending entrenched market competitors. Then, the worlds’ most innovative company improves upon its breakthrough product by implementing stable releases, adding features and functionality that delight its customers.

I need to bring this blog post to an end, because I have to go down my local store, and place my order for an iPhone 5. The current backlog is 4 weeks, and I don’t want to wait any longer than that!

Two Lessons That Stephen Covey Can Teach Us

Stephen Covey (1932-2012), the business self-improvement master of our times, died last week. He authored The 7 Habits of Highly Successful People, a book that has sold over 6 million copies.

In addition to having read several of Covey’s books, I saw him present at a Lessons of Leadership conference. Here are the two most important take-always from his body of work:

Lesson 1: Point Your Compass Towards True North

In his book First Things First, he differentiated between the clock and the compass. The clock represents our commitments, appointments and activities. In contrast, the compass represents our vision, values and direction. Angst occurs when there is a gap between what we do, and what is most important in our lives.

This distinction painfully struck home. Once, I was scheduled to attend a Board meeting during a day when my 4-year old son had to undergo major surgery. I elected to attend the Board meeting, rationalizing my decision by telling myself that my wife and father-in-law were at the hospital.

Although the surgery was successful, I regret my decision, realizing that I did not put First Things First, which is to be there for my son. Had I spoken up, the Board meeting could have been delayed.

Lesson 2: Invest in the Goose That Lays the Golden Egg

This lesson is based on one of Aesop’s fables.  A farmer and his wife had a goose that laid a golden egg every day. They assumed that the goose had a great nugget of gold in its inside, so they killed it. They discovered that the goose was no different from other geese. Instead of becoming rich, the coupled deprived themselves of the gain of which they were assured day by day.

Sharpen the Saw: Invest in the Goose That Lays the Golden Egg

Covey argued that we must invest energy in increasing our productivity. Using the metaphor of a saw, he suggested that we must sharpen the saw, otherwise the blade becomes dull. And a dull blade results in reduced output.

There are many ways of nurturing the goose. In a previous post, I described how playing bridge enhances one’s memory and mathematical skills. Is it surprising that Warren Buffet and Bill Gates are avid players? In tennis, I know that if I fail to do strengthening exercises, pulled muscles are the end result. My physical therapist can attest to that!

In terms of business, at Frito Lay’s Orlando,  Florida plant , the largest inventory investment is not in the potatoes, corn oil and salt seasonings that are needed to make the company’s snack products. Rather, the biggest inventory item is in parts that are required to maintain the expensive machinery. Management knows that the costs of production downtime far outweigh the investments in inventory that are necessary to keep the machines in good condition.


Some of Covey’s notions are commonsensical—they will not put him at the table with the pantheon of self-improvement thought-leaders. For example, his 7 habits include advocating “being proactive; begin with the end in mind; think win-win, etc.”

But the ideas of nurturing the Goose That Lays the Golden Egg, and setting ones compass on true north, will stand the test of time.

Lessons Learned From Kodak’s Fall

The winters in Rochester, NY can be long and harsh. I know. My son attends college there. Situated on the southern shores of Lake Ontario, the yearly snowfall averages 92 inches. But the harshness that I am referring to relates to the demise of Kodak, which was born in Rochester in 1889, and died there on January 19, 2012, falling into bankruptcy.

Given that its name was once synonymous with photography, a Kodak moment, the disintegration of this iconic corporation is particularly poignant. As recently as 1976, the company held a 90% market share of film sales and 85% of camera sales. It was the Google of its day, attracting the best technical talent from across the country. During lunch, the company played movies for its employees.

©Kodak used with permission

A disruptive technology—the digital camera—killed off the film business. Ironically, Steve Sasson, a 25 year-old Kodak electrical engineer, invented the first digital camera in 1975. This fact begs the question: how could a great company like Kodak, flush in the 1970’s with abundant resources and some of the most talented people on the planet, fail to take advantage of a product that was invented in its laboratories?

A failed business strategy and management myopia both contributed to Kodak’s downfall.

Kodak’s Failed Business Strategy

When there is a disruptive technology, firms are often unable to capitalize on the invention for fear of cannibalizing existing product sales. Kodak’s primary strategy was to sell high margin film. Known as the razor blade strategy, the company developed inexpensive cameras as a means to an end: their purpose was to facilitate lucrative film sales. In summary, its digital camera invention was held back because of management’s concerns about the negative impact on film sales.

When Sony launched a filmless digital camera in 1981, fear permeated Kodak’s executive suite. Specifically, over the next decade, Kodak invested approximately “$5 billion—or 45% of its R&D budget—in digital imaging,” according to a 2005 Harvard Business School case study. Unfortunately, with disruptive technologies such as digital cameras, the first-mover advantage is too great for late entrants to overcome. By the time Kodak realized that their razor-blade business model was dead, the horses were already out of the barn. The company was unable to catch-up to the competition.

Earlier this month, Kodak’s announced that it was exiting the film and digital camera business altogether. Sadly, all that remains of this once august corporation is the intellectual value of its patents, resulting from decades of belated investments in digital technologies.

Management Myopia

Not only was the first digital camera unwieldy—it weighed over 8 lbs.—but it didn’t even save images. Instead, they were projected onto a TV screen. It is difficult to imagine how Kodak’s mainstream customers—Mr. and Mrs. Jones from Kansas—would have bought that first, clunky digital camera.

Conventional wisdom suggests that good management involves staying close to your customers. And that is what management at Kodak did. Rather than allocating resources towards the internal development of a risky, digital camera that their mainstream customers had little interest in, the company funded projects that enhanced its position within the lucrative film market. Management at Kodak was constrained by the needs of their established customers. That is fine when making incremental improvements to existing products, but it is fatal when dealing with disruptive technologies.

In retrospect, management ought to have spun off its digital camera business to an independent subsidiary. The small business unit could have focused on meeting the needs of the customers who would have embraced it, such as hobbyists and leading-edge photographers. Apple followed this strategy with its first, Apple computer. I remember buying mine from a Chicago-based, electronics shop that catered to technical enthusiasts (techies) who were far removed from the mainstream, consumer marketplace. Over time, Apple developed its product offerings, introducing features and functionality—such as the mouse and Graphical User Interface (GUI)—that made it attractive to Mr. and Mrs. Jones from Kansas.

In his book The Innovator’s Dilemma, Clayton Christensen describes numerous instances where companies have failed at internally developing disruptive technologies. In contrast, firms that set up separate subsidiaries have been able to grow game-changing innovations into full-fledged businesses. HP did this with the invention of the ink jet printer in the 1980s. It set up an autonomous subsidiary in Vancouver, Washington, far removed from the influence of corporate headquarters in Palo Alto, California. Initially, the ink jet printer market was small and limited; over time, the company turned it into a significant business.

Small is Beautiful

I worked as a product manager at a small company that manufactured food-processing machinery for the beverage industry. New product development was the key to its success. In 1980, a large conglomerate acquired it. Within 7 years, innovation, the life-blood of the firm, dried up, and the conglomerate sold off the business.

When it comes to winning the new product development race, small entrepreneurial-driven firms will usually beat the behemoth corporation, especially when dealing with disruptive technologies.

Apple’s New iPad: A Disruptive Innovation

Apple's New iPad, a Disruptive Innovation

Occasionally, a new technology is introduced that disrupts the natural order of things. Apple’s iPad represents just such an innovation. The touchscreen display and navigation options make this computer a radical departure from the PC. [In this context, I am broadly defining the PC as either a desktop or laptop computer.]

With the iPad, you don’t have to use a trackpad—or mouse—to move a cursor around a screen. Instead, you use your fingers to touch and swipe the screen. In addition, the iPad is very light, weighing only 1.5 lbs (680  grams), and has a battery life of  9-10 hours, which is far greater than the battery life of the typical laptop computer. Combined, all of these features provide the user with a more direct and immediate relationship to computing: all cables, mice and other devices are gone. The iPad facilitates a “magical” experience, according to Steve Jobs. Certainly, it makes life easier for the customer.

Ease-of-use is one of the many reasons that the iPad has caught on like wildfire, becoming the biggest selling device in Apple’s history. For the quarter ending Dec 31st2011, the Cupertino-based juggernaut sold 15.4 million tablets, accounting for $9.1 billion in revenues or about 20% of the company’s total revenue. Compared with last year’s holiday quarter, tablet sales doubled.

We are witnessing what Harvard Business School’s Clayton Christensen calls a disruptive innovation.  Typically, inventions that fall into this category have characteristics that are radically different from existing products; however, initially, they offer lower performance in areas that are important to mainstream customers. For example, compared to a laptop or PC, the original iPad’s processor was slow; storage space was limited; and it wasn’t equipped with a keyboard. But over the past couple of years, Apple has significantly improved the performance of its tablet computer. Here are some of the features contained within the new IPad, which was released today:

  • High resolution retina display–2048×1536 pixels more than on an HD TV
  • A dual core CPU twice  as powerful as the A5 found in the iPad 2
  • A rear iSight camera with 5MP sensor and advanced optics, including IR filter, autofocus, face detection, and white balance
  • HD video recording (1080p resolution)
  • Voice dictation (there’s a new key on the keyboard for speaking into the iPad)
  • 4G LTE support: HSPA+ for up to 21Mbps or dual-carrier HSDPA for up to 42Mbps or LTE for a max of 72Mbps connectivity
  • Battery life is 10 hours (9 for the 4G models)

Regarding the future, Steve Jobs used the metaphor of the PC as a truck, and the iPad–or tablet–as a car.  America was originally an agrarian economy. Then, the truck was used for all tasks done on the farm. But as we developed into an urban economy, the car replaced the truck for many jobs.

The tablet will be increasingly used for consuming digital data—viewing videos and photos; reading news websites, feeds, and books; checking on e-mail & social media; and listening to music. In contrast, the PC will be used for heavy-duty tasks. One of you said it well: “typing a large document or programming a 1,000 lines of code is much easier with a full size, qwerty keyboard.” A PC with a blazingly fast processor, which is hooked up to a large display—including multi-monitor arrangements—can facilitate multitasking and productivity. Developers, professional photographers, graphic artists and hardcore gamers will probably continue to use the PC, at least in the near future.  But to quote Jobs once again, “as we move away from the farm, the car started taking over.”

And the data appear to substantiate Job’s prediction. During 2010, when the iPad was introduced, sales of PC’s outnumbered sales of tablet computers by a ratio of 20 to one. In 2011, PC’s outsold iPads by a ratio of only six to one. Horace Dediu, an analyst with Asymco in Finland, predicts that tablet sales will surpass PC sales in 2013.

In conclusion, the iPad symbolizes much more than just simply an incremental improvement in technology. It is evolving to become a PC replacement for many applications. The PC will survive, but its market share will continue to decline vis-à-vis tablet computers. This is no different than what occurred 60 years ago when televisions were invented. As a result, the audience of people who listened to radio shows declined greatly. Although the radio has endured, its share of the overall listening audience is small in comparison to TV’s market share.

Here are other instances where new technologies displaced existing technologies:

Apple and Innovative Disruption iPad Tablet Computer Replaces PC

How do you weigh in on this issue? Will Apple’s improvement of features and functionality enable the tablet computer to become a PC  replacement?


When Child Labor Is Ethical

Multinational corporations have experienced withering criticism for employing children in Asian factories. On the surface, this practice appears to be unethical. But is it?

When we study supply chain management, I engage my students in a discussion of this topic. Here is the scenario:

Industrial textile factory

Industrial size textile factory in developing country, workers on lunch break

“Major corporations with overseas subcontractors (such as Ikea in Bangladesh, Unilever in India, and Nike in China) have been criticized often with substantial negative publicity, when children as young as 10 have been found working in the subcontractor’s facilities. The standard response is to perform an audit and then enhance controls so it does not happen again. In one such case, a 10-year-old was fired. Shortly thereafter, the family, without the 10-year-old’s contribution to the family income, lost its modest home, and the 10-year-old was left to scrounge in the local dump for scraps of metal.” —adapted from  Principles of Operations Management

A student of mine from India said that the decision to hire the child was ethical; and the judgment to fire him was unethical. My student defended his position by stating that Americans do not understand the depth of poverty in India. In many circumstances, families rely on child labor, so that the family can survive. When he grew up, there was no compulsory education, so working did not deprive Indian school-age children from going to school. [In 2009, the Indian parliament legislated a compulsory education law for elementary school children.] Other students of mine who have grown up in developing countries—such as China and Bangladesh—have agreed with this line of reasoning.

After all, during the 19th century, the U.S. was once a developing country. For many years, we condoned the practice of employing children in the workplace. Once our standard of living improved—and universal, public education became a realistic objective—we passed child labor laws that prohibited this practice. So, in the present, does showing outrage at Ikea, Unilever and Nike amount to hypocrisy?

It is useful to examine public policy decisions through the lenses of utilitarianism. This philosophy states that, in all situations, you should act in a way that generates the greatest benefit for the greatest number of people. Everyone’s interests are considered equal. Thus, if utterly poor families are only able to survive when the children can work, it is unethical to prevent them from doing so. By permitting child labor, we are promoting the greatest good for the greatest number of people. The family remains intact as a result of the income received, while U.S. and European consumers obtain inexpensive goods from their retailers.

Although the philosophical justification for child labor is convincing, major corporations cannot withstand the negative publicity associated with these practices. Just this week, Apple indicated that they are going to have an independent firm audit its suppliers, because of criticisms over conditions at its overseas factories. So, from a public relations perspective, not a moral perspective, we cannot condone this practice.

Several years ago, Nike initiated a compromise solution. Children worked in their Vietnamese factories, but the company also provided them with food and a free education.

Do you think that it is ethical to employ underage children in factories located in developing countries? If a multinational corporation also provided educational opportunities, would that be acceptable?

Is the Announced $25 billion Settlement with Homeowners Ethical?

Mortgage Document

Unethical mortgage origination practices precipitated a $25 billion settlement with banks over alleged foreclosure abuses, including the use of forged and shoddy paperwork, a practice known as “robo-signing.” The deal will provide financial relief to an estimated one million at-risk borrowers, as described in today’s Wall Street Journal. This is a step in the right direction:  holding the financial institutions accountable for the dubious practices that they perpetuated. However, millions of mortgages owned by Fannie Mae and Feddie Mac are not covered under the deal, thereby excluding more than half of the nation’s mortgages. Moreover, the real culprits in causing the worst economic crisis since the depression are not just the banks. The government, non-bank lenders, and Wall Street are also responsible.

Paying money—rather than aggressively prosecuting wrongdoers—is never a good idea. Specifically, the settlement is poor compensation to the public for the unethical practices and crimes that were committed against it. In 2001 and 2002, members from senior management at Enron and WorldCom were prosecuted and convicted for performing various criminal acts against their stakeholders. Why have we not prosecuted the wrongdoers who precipitated the current financial crisis?

The immoral acts that I am referring to are well documented in the book Reckless Endangerment, written by Gretchen Morgenson and Joshua Rosner. Since today’s settlement pertains to mortgages, let’s look at some of the shenanigans that surrounded these products. In 2004,  lenders came up with two new types of toxic loans:

1) interest only mortgages, where borrowers simply had to pay off interest, but not principle. As a result, borrowers didn’t build up any equity.

2) negative amortization loans where the borrower paid as much interest as he wanted—any amount not paid off was simply tacked on to principle.

These two products accounted for just 6% of loans in 2003, but by 2005 they represented 29 percent of the market. They were particularly profitable for the lenders: Countrywide made 5% profits on every interest only loan between $100,000 to $200,000. Wall Street’s investment banks made even more money, by subsequently packaging them into investments called CDOs (collateralized debt obligations). Ratings agencies—such as Moody’s and Standard & Poors—then rubber stamped the securities as being AAA rated; however, they didn’t look under the hood to see what was really there. Moody’s could earn as much as “$250,000 to rate a mortgage pool with $350 million in assets, versus $50,000 in fees generated when rating a municipal bond issue of a similar size.”

Morgenson & Rosner described the entire process as being akin to a drug deal where the mortgage originators were drug pushers hanging around the school yard. The ratings agencies were the narcotics cops looking the other way. And the brokerage firms were the overseers of the cartel providing the capital to the “anything goes” lenders.

A coke dealer—who cuts their product with impure substances—knows the harmful effect that the drug will have on clients. Similarly, wall street firms that packaged impure, sub-prime loans into mortgage pools knew, well before their customers did, that the loans inside the CDOs had begun to go bad. The authors describe how in the third quarter of 2006, the traders at Goldman Sachs made bets against the same securities that their brokers were selling to their clients!

It has almost been four years since Bear Stearns fell, only to be followed six months later  by the denouement of Fannie Mae, Freddie Mac, Lehman Brothers and the American International Group. The settlement announced today represents progress, but it is inadequate recompense to the taxpayers. The leadership of the institutions that engaged in unethical practices must be held accountable. After all, they were primarily responsible for creating the current, financial morass that we are struggling to work ourselves out of.  Justice will be served only when the government redresses the larger wrongs that were committed against society.

How do you weigh in on this issue?

State of Customer Service in America


–My Kindle: Lost in Chicago & Found in Ashville, North Carolina


Customer Service Is About Customer SatisfactionFor service businesses, quality is all about customer service. When there is a customer service issue, companies that rise to the challenge create a bond between the firm and its customers. As such, customer service is the new marketing. This I learned from an experience that I had this summer.

Since we are passionate about tennis, in August we took a trip to Cincinnati where we saw an ATP tournament. We booked our round-trip flight from Chicago with United Airlines.

When we got home and unpacked, I realized that my Kindle was missing. I last recalled having it in my possession on the return flight, when I had put it into the seat-back pocket in front of me. I immediately got on the Internet, and attempted to look up United’s customer service phone number.

I found an 800 number, but became increasingly frustrated as I navigated countless phone trees, unable to successfully make contact with a human being. My frustration turned to anger when I learned that to communicate with United’s Customer Service department about a past incident, I either had to email customer relations or post a written letter.

The next day, I played golf and recounted my story. I ranted about the quality of customer service in the U.S. One of my fellow golfers mentioned that he knew someone who worked in a management position at United. He offered to intervene on my behalf. I accepted his kind gesture.

The next day, I got an email from a senior customer service representative at United. She did everything within her power to locate my Kindle. I got the sense that if my e-reader had found its way to Brazil, she would have tracked it down.  I learned that there were dozens of Kindles in the lost-and-found at United’s Chicago O’Hare terminal. In addition, I discovered that many travelers leave iPads and other electronic gadgets on airplanes.

Despite United’s valiant efforts to track down my errant, electronic device, the company was unable to find it. However, three months later—during the Christmas holidays—I got an email from Amazon, indicating someone had found my e-reader. Amazon gave me the individual’s phone number, and informed me that we would have to work out the terms of its return. I contacted the individual. He told me that he bought my Kindle at a flea market in Ashville, NC. He had paid $25 for it. He said that he tried to download a book from Amazon, but was advised that his newly purchased device had been stolen. Thus, he was unable to use it to buy books.

I agreed to pay the cost of shipping, if he would return it to me. He consented to this offer. I asked him how I would know where to send the check. He told me to  “look at the return address.” Within a week, I got a package containing my Kindle. The return address stated:

Santa Claus

Ashville, NC

My customer service contact at United was delighted and amazed at the story of how I got my Kindle back. She said that she would pass it along to those who needed to know. Two weeks later, I got a $100 voucher from United applicable to any flight that I book.

There are several lessons that I learned from this experience:

  • E-mail is an impersonal, frustrating medium for expressing customer service issues
  • In the final analysis, customer service is about customer satisfaction—on this count, United Air Lines won me over.
  • Most—but not all—people are honest
  • NEVER place anything of value within the seat-back pockets of airplanes.

What is your experience with the state of customer service in America?

China’s Supply Chain Rocked by 13.6% Labor Cost Increase

Asian drill press operatorThe supply chain in China, including thousands of mainland factories, is reeling from a 13.6% increase in the minimum wage, as reported yesterday by CNBC. As a result, the lowest salary is being pushed up to 1,500 yuan or $240 per month. The increase was caused by a series of strikes that occurred around the Pearl River Delta, a major Chinese industrial center.

Chinese export manufacturers in the Hong Kong area expect that the increase will result in the downsizing—or complete closing—of 1/3 of Hong Kong’s 50,000 factories in China. These suppliers are critical links in the supply chain that stretches all the way from China to Europe and the U.S.  In addition to the wage increase, another reason for the anticipated decline in Chinese production relates to the general downturn in global economic activity.

The gap between U.S. labor costs and Chinese labor costs is narrowing. In fact, a recent article in the New York Times described how GE is bringing back jobs to the U.S. at GE’s Appliance Park in Louisville, KY. In return, the union agreed to a two-tier labor structure, where the U.S. employees who are hired will be paid $10 to $15 per hour less than what the current union workers are making.

Let’s do the math.  The offshore jobs that are being backsourced to GE’s Appliance Park will result in U.S. workers making between $20,000 to $38,000 per year. The workers in China, who will receive the 13.6% increase in their minimum wages, will be making $2,880 per year. Thus, G.E.’s workers will be paid approximately 700 to 1,300 per cent more than their Chinese counterparts.  Jeffrey Immelt, GE’s CEO, is spearheading the U.S. government’s campaign to bring jobs back to the U.S. Are these new, Appliance Park jobs being brought back because of lower labor costs? Or, are political factors affecting the decision?

As discussed in an interview with a U.S. manufacturing executive who lived in China for 13 years, global manufacturers who are looking to minimize their labor costs are locating factories in Viet Nam, not China.  This strategy—chasing every cent of labor savings—requires rejiggering the supply chain every few years. Vietnam’s minimum wage is only US$85 per month (or $1,020 per year). Thus, Chinese workers are paid 282% more than Vietnamese workers. 

Although the labor differential gap between the U.S. and Asian countries is narrowing, it is still significant. Offshoring will continue to be attractive to firms with products that have

  • High labor content
  • Large Production volumes
  • Low variety
  • Low transportation costs

Products that meet these criteria—such as electronics assembly—will most likely never return to the U.S. Furthermore, in certain industries—for example, in computer and cell phone production—most of the companies that comprise the supply chain are situated in Asia.  Given this reality, moving production to the U.S. would be uneconomical. In these industries, hoping for backsourcing to happen is like waiting for an airplane to touch down that is simply not going to land [on U.S. shores].

In conclusion, the key determinant in terms of where to produce is based on total cost, not just labor cost. One must begin by looking at the manufacturing process to determine where the most economical location is. Although China’s increase in its minimum wage is significant, it is just one of many factors to consider.

What do you think? Is there a future for manufacturing in the U.S.? Given the labor differential between China and the U.S., do you think that we can still compete?