The Suez Canal and Industrial Distribution

As you all probably know, there is a ship stuck in the Suez Canal, which is blocking transit. You may not think this directly affects you, but it will. It’s just a matter of time.

I own an HVAC distributor, and HVAC is a subset of industrial distribution. Most manufacturers are still reeling from last year’s Covid issues. Commodities like copper, steel, aluminum and sliver were already spiking in price before this latest logistics issue.

I spoke with one of my major component suppliers this week. The cost of a container from Asia to the US was $5k last year. This year it is $15k. And there simply aren’t enough to go around.

While the Suez blockage doesn’t directly affect this trade route, it does affect the overall global logistical issues – and wreaks havoc on just in time producers.

I have one manufacturer of HVAC equipment that suspended all new orders a few months ago as they grapple with staffing issues.

When you combine all of this, I don’t think that there is any question that there will be finished good shortages again this Summer. First affected will be stuff made “over there”. We are already seeing shortages on things like ductless mini split systems because of the continuing port slowdowns on the west coast of the USA. It isn’t even Summer yet.

Here is where it affects you. The guys who have the stuff will win. Hands down. I made an enormous inventory investment this Winter and Spring, placing orders far in advance of what I normally would. I’m not going to let that investment go to waste – and I’m not spending basically every waking hour getting stuff in my barns to help my contractors get their jobs done for nothing. If I’m the only guy who has it (and trust me, on some things, I will be) – the price just went up. It’s nothing personal, just business.

Believe me when I say that I wish my life were easier and yours cheaper, but I won’t be alone in this. If you end up with an issue with anything from car parts to electrical to something as simple as a washer breaking down, you will be paying more in the very near future.


77 thoughts on “The Suez Canal and Industrial Distribution”

  1. You have nothing to apologize for, Dan. This is what drives the real economy — entrepreneurs seeing an evolving potential opportunity and adjusting to be in a position to meet the legitimate future needs of customers. Let’s hope many others are doing the same as you, because that will cushion the impact of any future supply interruptions.

    Our problem we have is a Political Class which cares only about the make-believe financial economy and often acts to impede the proper action of the real economy.

  2. Price is not only the return on the cost of the good being exchanged, it is a signal of where opportunities are for substitute products and where production should be directed. Temporarily high prices attract more resources and production, low prices discourage production and cause resources to flow where there are better opportunities. The more complicated the production process, the slower the market will adjust. That can hurt. This decentralized decision making allows markets to adjust to changes in circumstances faster and more efficiently than central direction. It just won’t meet the social justice equity outcome where HVAC goes first to those most unable to pay the price. Life is full of lessons on things like budgeting for emergency funds, routine service scheduling to extend the life of machines, seeking second hand solutions, etc.

    Now let the SJW advocates seek to control prices (increasing and extending the shortage), subsidize low income households (increasing the demand and further increasing the shortage) and ration available supply. Our recent toilet paper shortage only with greater effect. Serious supply shortage events and demand shifts (toilet paper) are not pleasant, but they are a fact of life and should be allowed to impart some wisdom across all levels of economic engagement. Look for more blue cities and states instituting emergency controls and or emergency subsidies. Above the prosperous middle class, the high income folks will feel the least discomfort because they will more likely to be able to circumvent the market social justice measures with cubic dollars. Keep us posted Dan.

    The higher your income and accumulated wealth, the more you are generally able to avoid such market disruptions. One of the perks of adopting middle class values including long term perspectives and actions offering more economic maneuver room.


  3. What are you sorry about? You haven’t invented transportation crisis, you didn’t send the Chinese virus into the world. On the contrary, you put an extra time and effort so your business functions as smoothly as possible in the circumstances.
    Our politicians did all that – and they are not apologizing. On the contrary, Albany is discussing another tax raise on working people, to the tune of $7Bln. That’s their universal answer to the crisis they’ve manufactured.
    What bothers me is that people continue voting for the very turncoats who betrayed them.

  4. the circumstances seem odd, I guess it’s a shipment of chinese goods that were to be disenbarked in rotterdam, and distributed all throught europe, so they have steer out of the red sea, through the houthi checkpoints down east africa, over the capes and into west africa, how long will that take,

  5. The inventory people will likely break even. That’s a lot of money sitting on the shelves, to be maximized only under rare events like the blockage and COVID. Lean Mfg’s on time is the way to go. Nonetheless, good for you. Btw, are you serving the residential or commercial markets?

  6. JayBee – I respectfully disagree on you wrt inventory, as I come from the old school of you can’t sell off of an empty cart. Lean manufacturing is the way to go, until you can’t, which is now, and you have to idle your production lines and hope everyone will return from the unemployment line after you start back up.

    Turns are taking a beating right now, but that will improve. We serve resi and light commercial (up to 25 tons) markets. Heavy commercial and industrial is a different world – but they will be facing the same issues.

  7. In 1924, my grandfather took over and eventually bought a hardware store owned by a relative in the Colorado mountains. By the end of WWII he was a dealer for International, Oliver and White farm implements. He also sold Maytag appliances, including kerosene refrigerators and gasoline powered washing machines. He sold sheep shearing equipment as far away as Canada and Mexico.

    My father told two anecdotes: In one, the International rep was taking him to task about carrying too much parts inventory when the warehouse in Denver could supply anything the next day on the train. He answered that his customers didn’t need it the the next day, they needed it right now and he was in business to serve them not International Harvester Corporation. The other was a farmer that came in for an ax and complained that he could get it for $5 less from Monkey Ward. My grandfather reduced the price, then put the ax behind the counter. When the farmer asked what the idea was, my grandfather answered that he could come get it in a week, the same as Monkey Ward.

    Ford just announced that they were going to build a new plant in Mexico rather than the U.S. The cartels are stealing billions worth of oil from Pemex, how long before they’re holding parts shipments and plant managers for ransom? What happens when the border is so choked that shipments take days or weeks or forever?

    The Ever Given incident is just the latest. In the last few months two container ships have lost more than 2,000 containers at sea between China and the U.S. with more damaged. The undamaged containers are just now arriving at their destination, many months late. Before that were a couple of fires where the owners of the goods in the undamaged containers were assessed additional fees of thousands of dollars per container to collect them, many months after they were originally expected.

  8. Excellent stories MCS. We have a lot of things like meters and such that we sell that guys can get on Amazon or wherever on the cheap and we say something similar to the ax story. Also, if the item goes south or if you need technical help, whaddya gonna do, call Amazon?

  9. My brother and I spent around an hour on that exact subject about a week ago. I have no idea how many results you get if you go on Amazon and search for DMM (digital multimeter). I’ve been using them for 40+ years and am sort of the family authority.

    One of the things I pointed out was that if you look at a few of the results, you see pretty fast that a lot of the “sellers” have no idea what they are selling, they’re just some sort of drop shipping thing. You can find meters with similar specs for $20 or less to several hundred, all mixed together. Another was that the rating of a meter as to what IEC class of circuit it is safe to use it on is strictly up to the manufacturer. It is nothing more than an assertion that that meter meets that classification. There is no central authority that tests them for compliance. There is a UL standard that’s parallel, but good luck finding it mentioned and there is a significant problem with counterfeiting the mark.

    So your life may literally depend on taking the word of some manufacturer in China, if you can even identify them, as to whether or not that meter will transform itself into a ball of plasma, incinerating the hand and arm holding it, if you should connect it to the wrong circuit or use the wrong setting. Finding a handheld DMM not made in China is probably impossible but if it is being sold by Fluke or Amprobe, to name just two, there is some assurance that they have designed and made sure they were built to the class claimed on the front.

    That leaves out the problem of counterfeits. The “name” brands are at least looking to stop that, so there is a pretty good chance that you’ll get genuine if you don’t pay $30 for a $150 meter.

    Here’s a reasonable explanation of the IEC classes.

  10. MCS – I believe most of the Fluke stuff is made in Vietnam but I might check a few boxes on Monday. From what I have heard they actually put up the factory to their spec, rather than contracting with a company to make meters, which I consider a good move.

    We also sell a few other brands, as you gotta have a price point. But the meters we sell are all industry spec stuff, nothing is a no name.

    In fact all of the tools we sell are made for professionals – and I wouldn’t have it any other way. Its a completely separate market from the weekend warrior garbage you will find in the home centers or Harbor Freight, as you likely know.

    The techs appreciate our selection and know that if they have a problem, they get a new one, no questions asked (as long as the tool isn’t obviously abused/misused) and that’s the end of it. We can take it up with the vendor later as these guys don’t have time to dicker over a meter or hand tool. We are a value added company and always will be. At least as long as I am running the show.

  11. JayBee: “Lean Mfg’s on time is the way to go.”

    To add to Dan’s real-world experience, a little bit of history. Lean manufacturing/Just In Time inventory got popularized by Toyota. The important point is that Toyota initially applied JIT to their internal within-the-factory processes. Yes, JIT reduces inventory and therefore costs. But a lot of Toyota’s interest was that big stocks of inventory (Work In Progress) disguised inefficiencies in their complicated multi-stage manufacturing processes. When inventories were cut to the bone, all those hidden inefficiencies became obvious — and fixing those internal inefficiencies was where the real cost reductions and quality improvements were made.

    Since then, JIT has been widely applied to components bought in from the outside. Problem is — the manufacturer has much less control over something that is delivered to the factory gate versus some intermediate product he makes internally. As Dan says, JIT works until it doesn’t. And when externally-supplied JIT stops working, the manufacturer has a real problem — one that he has very little ability to deal with, since he is totally dependent on the outside supplier. Boeing’s financial disaster with the development of the B787 is a classic example of how JIT can go very wrong indeed.

    This is analogous to the recent discussion on this blog about “free trade”. Free trade within a country can be a great benefit, by promoting efficiency-generating specialization — analogous to a company itself making all the components it needs. Free trade (and resulting specialization) across national boundaries can similarly create benefits, but it also creates unavoidable vulnerabilities. Smart businessmen and smart politicians understand the trade-offs and prepare accordingly. Unfortunately, smart politicians are in short supply in the West.

  12. Just in passing, the so called “just in time” inventory system is primarily used in the grocery business. And in the last year of COVID, the normal delivery schedules have been cut back. Thus, if you go to the store in the best of times today, you find some empty shelves or a lesser selection. In times of crisis, you find things that are normally common to be non-existent.

    Here in Colorado the same storm that froze Texas [for some limited values of froze. Texas houses and plumbing are not built for that kind of cold that we consider usually normal] caused no real damage but rather panic. People hit the stores hard. Walmart, Kroger, and Safeway were out of pretty much everything and it took about a week to get back to normal after it warmed up. And we run out of the strangest things. For St. Patrick’s Day, our small town ran out of cabbage for the corned beef and cabbage.

    Now, I live in a small town, and like many mountain folk we keep a stockpile of food in case of storms, etc. In the larger urban areas, people are used to full grocery stores everywhere whenever they want. If/when externally supplied JIT food deliveries turn into wait-listing, people will become extraordinarily testy. I note that in pre-COVID times most urban areas had a 3 day supply of food in stores AND warehouses.

    It is not only prices that are going to be the problem.

    Subotai Bahadur

  13. Works until it doesn’t work can be said of lean and inventory based philosophies.

    Once the accounting department takes you to task in front of a whole bunch of important people regarding the cost of carrying parts, including the damage and destruction of certain components (HEPA filters that dried while waiting for that emergency or control devices that no longer work with the new BMS) and the space and storage conditions required, especially when lead times are further cut via next day shipping, the certainty of carrying inventory becomes doubtful. That’s just HVAC. Add high grade water systems and upstream components, steam sterilization units, primary testing lab equipment, etc, and you are making career moves for a whole bunch of people in the accounting and finance world…to your detriment and the maintenance department.

    A combination of good component reliability engineering, maintenance practices, and luck, and you’ll survive the next round of layoffs.

  14. The important point is that Toyota initially applied JIT to their internal within-the-factory processes.

    This. Harley-Davidson created a warehouse in the sky back in the mid-70s with tens of thousands of internally built subassemblies floating around on overhead conveyors. The problem was, a manufacturing defect in any one of those subassemblies would take a long time to be noticed and purged or, worse, bikes would get shipped with defects before the problem was noticed. Internal JIT reduced that problem. As I recall they replaced the conveyors with parts runners, who would just go to the various subassembly areas and grab the parts when they were needed, which put some human quality control in the internal receiving process.

  15. Anyone remember The Long Winter? The town shopkeeper gets ahold of some wheat as the town is starving (he pays Almonzo to go get it, actually), then announces he’ll only sell it for an astronomical price. The townspeople are about ready to lynch him, till Pa makes a speech that he has the right to set his price, but come spring he’ll be ruined because someone else will set up another shop and no one will ever buy anything from him ever again, so he backs down and sells it at a much lower price. Basically the message is the combination of freedom and community that we seem to have lost. It seems like you know your customers well Dan so you’ll take care of yourself but not screw them. That sense of market and community being intertwined has been destroyed in the past few decades, and it’s not clear how to get it back.

  16. Once upon a time, I worked in a factory/warehouse less than a mile from a Toyota assembly plant. We used to joke that JIT was really YKMI. Toyota had one or two day’s supply of our parts, which simplified their workflow, but we were required to guarantee that we would NEVER, NEVER miss a day in resupplying them. There were other component suppliers near us, providing bigger components, that had hourly delivery trucks. Lean also means YKMI.

    “You keep my inventory.”

  17. The “Just in Time” systems grew out of better inventory control, as I see it. Long ago, before medical school, I worked for Sears. That was an education in bad inventory control. In the Boyle Street Store, one of Sears largest retail stores and headquarters for catalog sales for part of the country, the sales slips for warehouse items went to a staff of little old ladies who were long term, very long term, employees. There were about six of them and each had a department. When each went on vacation, nobody took over her desk. They had long vacations so the sales slips would sit for 4 or 5 weeks. Then each would return and never catch up. When I worked there, the warehouse inventory records were several years out of date. Nobody knew what was in there. After Sears, I worked for a while programming an IBM 650 mainframe and wondered why Sears did not adapt some sort of computerized inventory control. That was about 1960.

  18. Brian – that’s exactly correct. There is no way I will jam customers I have had for over 30 years but we will make money on the investment. Other contractors who have chosen our competitors over us will have to pay more but again its a fine line as you never want to burn a bridge especially in the small markets that I deal in.

  19. you never want to burn a bridge especially in the small markets that I deal in.

    A motto I first heard attributed to Harry Truman was “His decline began when he took his friends for granted and tried to bribe his enemies.” In a pure referral situation, which I was in for 40 years, you could be tempted to add another source of referral but not at the cost of losing a loyal friend. Another way to express this is “You dance with the one that brung you.”

    In the small community that I practiced surgery in, my competitors were other surgeons I had known for many years and mostly trained with. You would think we would have all joined together but personalities (Not me) made that impossible. As a result, inferior surgeons appeared from time to time but soon left. Pure competition.

  20. JIT was actually developed by Henry Ford in the teens. The only thing he kept an inventory of was bulk raw materials that came by ship coal, ore and such.

    Of this only enough to get him through the winter and the lakes iced over.

    His JIT was never internal. Neither was Toyota’s.

    Pretty much everything in the Lean toolkit we use today and often call the Toyota Production System was already in place at Ford by 1920.

    John Henry

  21. Perhaps a bit more on Ford internal jit

    Ford motor company was highly integrated and made a lot of their components in-house.

    But the did also purchase a lot of outside components as well, like chassis from Dodge Brothers.

    Externally sourced stuff was in JIT. Except bulk stuff in winter.

    John Henry

  22. I wonder if the ship grounding was really an accident?

    Perhaps it’s just coincidence but it is a Chinese ship. Taiwanese, sure, but I don’t think think we know how much influence red China has in the company.

    China recently (past 5 years or so) opened several rail lines between China and Europe, England and so on.

    What a great week to be a Chinese rail Salesman or woman! “nice shipment you’ve got there. Be a shame if it got stuck because of a canal blockage.”

    John Henry

  23. John H: “His [Ford’s} JIT was never internal. Neither was Toyota’s.”

    There is lots of room for claims about priority and for semantic discussions on what constitutes JIT. Here is an observation from the book “The Machine That Changed The World“, by j.P. Womack et al., (1990). Book is subtitled “Based on the Massachusetts Institute of Technology 5-Million-Dollar 5-Year Study on the Future of the Automobile”:

    (Page 62) – about Toyota’s JIT kanban system — “This simple idea [in 1946] was enormously difficult to implement in practice because it eliminated practically all inventories and meant that when one small part of the vast production system failed, the whole system came to a stop. In [Toyota manager] Ohno’s view, this was precisely the power of his idea — it removed all safety nets and focused every member of the vast production process on anticipating problems before they became serious enough to stop everything.

    It took Eiji Toyoda and Ohno more than twenty years of relentless effort to fully implement this full set of ideas — including just-in-time — within the Toyota supply chain“.

    There is much more in the book.

  24. I have always thought of Toyota as the origin of the CQI movement. “Lean” manufacturing is part of it but quality improvement is what I have thought of as the Toyota system. I even wrote about its application here. The model for JIT has seemed to me to be WalMart. I agree the early Fiord experience applies but that was a different time and Ford, whose biography I have, was a pioneer in many things.

  25. Mike K: “I have always thought of Toyota as the origin of the CQI movement.”

    This is where we start to count the angels dancing on the heads of pins. Toyota certainly did much to demonstrate and thus popularize Continuous Quality Improvement methodology — and a key part of that scheme was reducing “Work In Progress” types of inventory for reasons already discussed.

    It is also worth noting that much of what was called “quality improvement” was basically “manufacturing output consistency”, where Toyota implemented the ideas of American W. E. Deming, which US companies like GM had laughed off. Seems like the standard story of history — GM post-WWII was on top of the world, arrogant and not interested in anything from outside their own walls; Toyota was struggling and needed an edge, and was eager to try anything new. That story has been repeated innumerable times over the last few thousand years.

    Of course, many will say that Deming built his ideas on the statistical methods developed by Shewart at Bell Labs. Everyone stands on the shoulders of giants, as Isaac Newton observed — building on what has been learned before.

  26. Mike, which biography?

    There are a number of good ones but for this discussion the very best is his 1923 autobiography “my life and work”

    I’ve studied taught and worked with lean manufacturing since the 70s and probably read 100 books on the subject.

    Many were very good but the absolute best is life and work. He lays out the how and why.

    Ohno, in his great book “the Toyota Production System” gives Ford all credit for its invention.

    Life and work was out of print in English for almost 75 years until I privately published an edition to share with clients about 15 years ago. It has never been out of print in Japanese.

    John Henry

  27. Re quality:

    Ford was doing Deming while Deming himself was still a teenager. Henry Ford, very early on realized that quality had to be defined as the absence of variation. Not as an achievable goal, since there will always be variation, but as a target.

    He realized that the traditional definition of quality as being “within specifications” as being akin to “good enough” and good enough never is as the saying goes.

    The key to absence of variation is measurement. If you are measuring to thousandths of an inch, you will only manufacture to hundredths.

    Some here may know who Carl Johansson was. The Johansson Gauge Block System (commonly called Jo Blocks) allowed measurement to millionths of an inch back in the 1880s. Ford was so impressed with Johansson that he bought the company, and installed Carl in an office with an interconnecting door. He and Edsel Ford were, supposedly, the only 2 people who had the privilege of entering Ford’s office without knocking.

    In Henry Ford’s later book, “Moving Forward” 1931, there is a chapter called “A millionth of an inch” that may have been written by Johannsen, was certainly reviewed by him. It is about metrology and measurement at Ford Motor Company.

    I’ve had it on my website for a number of years now. You can read it here:

    I have all 3 of Ford’s books, Life and work, Today and tomorrow, and Moving Forward as PDFs and will be happy to share. Drop me a note at

    Something that REALLY PISSES ME OFF is that we, American Industry, knew all this stuff in the teens and 20s. It was not secret, Henry Ford was happy to share his methods in books, plant tours, speaking and more. He showed, in the Toledo and Ironton railroad, the Detroit General Hospital and the Ford school/apprenticeship program what it would work in any kind of organization.

    But we, American manufacturers, got lazy and complacent in the 30s and lost much of it.

    Then, when the Japanese implementations of 50 year old American methodologies became successful in the 70s and 80s, we got all giddy about adopting so-called Japanese manufacturing philosophies.

    Kind of the way some folks get giddy about chinese medicine such as acupuncture and aromatherapy and the like.

    John Henry

  28. I mentioned that I have been involved with manufacturing and lean manufacturing since the 70s.

    In all that time I never, not once, heard Henry Ford mentioned in conjunction with lean.

    Then, about 2001, I was ordering some books from Productivity Press and saw Henry Ford’s “Today and Tomorrow” in the catalog. I thought I knew all I needed about Ford but I do enjoy industrial history so threw it in the cart.

    I got it and it blew me away. If you want to know why we should recycle, this book has a lot of good info.

    That caused me to search out “My Life and Work” which, as I say, changed my thinking on manufacturing management and lean dramatically. I also found a used copy of Moving Forward which was about the transition from the very singular Model T to the more varied Model A production with a lot of other interesting stuff as well.

    Someone mentioned Womack and the machine that changed the world. Good book and I second the recommendation. I even use a quote from Womack to close my Lean Changeover workshop.

    Henry Ford’s Model T really was a machine that changed the world. In so many ways, almost all for the good.

    Apologies for all the bloviation. It is a subject I am passionate about and I tend to get carried away at times.

    John Henry

  29. Good thinking as long as you don’t mind paying for the warehouse and all the people who work in it, and all the material handling equipment, and you don’t care about the cost of capital, and you don’t mind eating all that inventory when new technology renders it obsolete.

    Otherwise, great plan!

  30. Rule of thumb for inventory carrying cost is 30% per year.

    Carry $1mm worth of inventory and it will cost you $300,000 every year.

    Cost of capital

    That’s a lot of money that is not necessary.

    That will vary. Keeping piles of coal might be 25%. Frozen drugs, 35. But it will generally be in the 30% range.

    As far as jit being ykmi, yes, there is some of that. There should not be. Jit requires leveled production with schedules shared with suppliers.

    Suppliers don’t, in theory, need to carry inventory because they just produce to the customer’s schedule.

    John Henry

  31. Bill and John Henry – I feel that most industrial distributors would argue on the 30% figure for a couple of reasons.

    Obsolescence happens, but not that often. Almost everything that we sunk a bunch of money on will be sold eventually. Obviously when is the million dollar question. That was part of the equation. The enormous installed base provides a safestop of sorts. As products get phased out in favor or more energy efficient ones or different preferences, there is always a market for homeowners and businesses that want to fix/repair rather than replace/upgrade.

    Cost of capital is extremely low right now.

    The other cost is that if you don’t have it, it costs you 100% because you don’t get the sale. I admit I am from an old school that preaches a lot of inventory, and it has it’s ups and downs. However right now, in this market, with things so uncertain and choppy, it’s the place to be.

    I see that they freed the ship today, that is great news, although it is another ripple in shipping – a ripple that wasn’t really needed right now.

  32. There are a number of good ones but for this discussion the very best is his 1923 autobiography “my life and work”

    That’s what I have. Sounds like I should read the other one, too. Not that I have any practical application anymore.

    During my year at Dartmouth, there was a lot of time spent on Deming and CQI. The Dartmouth medical faculty had written most of Hillary’s health plan. Paul Batalden ran the CQI part of the program and was a bit of a mentor to me. I spent that year and lots of money to learn how to apply the Toyota idea to Medicine. I had been chair of the committee on medical quality for the Medicare review outfit in CA. Jack Wennberg was the go to guy on variation in Medicine. He had written a hugely influential paper on variation in tonsillectomy in small towns in Vermont. It resulted in the disappearance of tonsillectomy in American kids. Others there at the time were working on similar projects on prostate enlargement and coronary bypass results.

    Unfortunately, my time was probably wasted as I found that insurance companies and HMOs were largely uninterested in quality. Kaiser is the best and does lots of Deming-inspired things but most are concerned only with cost and rationing. I had had back surgery and had to retire from surgery. I thought this would be a second career but it wasn’t. Some insurance companies, like Blue Cross, just wanted to “rent” my degree and have me sign off on their rationing rules. I was not for sale and so went back to teaching medical students for 15 years.

  33. Something that REALLY PISSES ME OFF is that we, American Industry, knew all this stuff in the teens and 20s.

    WWII may have had something to do with that. The federal government massively financed production which reduced the need to worry about capital tied up in WIP inventory. After that war US manufacturers had a near monopoly so they so they saw no need to lean out their inventory/production systems.

    The main problem with lots of WIP inventory is quality. Each individual department wants to get ahead of the game so they don’t get caught w/o sub-assemblies, shutting the factory down. In Harley’s case, the gas tank department supervisor wants lots of finished gas tanks in stock in case the department’s welder goes down, etc. So, left unchecked, each department builds up lots of stock. Then when a defect in one of those sub-assemblies gets caught on the finished goods line the factory has to go back and cull each and every one of the defective parts. And hope that none of the defective parts were installed on product shipped to customers.

  34. Interesting discussion about inventory, Just In Time, quality, carrying costs, etc. All important stuff. And, as John Henry points out, all known about for a very long time. Much of it ignored today by a culture that emphasizes the financial economy over the real economy.

    But let’s not lose sight of some very important practical issues — length of the supply line, and the counterparty in the outsourced manufacturing.

    It is one thing for an automobile manufacturer to outsource the JIT making of the vehicle seats to a specialized manufacturer on the other side of the road — a manufacturer subject to the same contract law as the automobile manufacturer. It is quite another situation to outsource part of the manufacturing chain to an entity on the other side of the world owned by a potentially hostile government.

    A recurring theme in human conduct is that we take an excellent concept and push it beyond reasonable limits. Eventually, suffering ensues. Caveat emptor.

  35. Much of it ignored today by a culture that emphasizes the financial economy over the real economy.

    Almost ironic that Ford got into serious trouble in the late 50s, early 60s by turning the company over to accountants. Iacocca got them refocused. The unmentioned theme of “Ford vs Ferrari” was this issue.

    Boeing seems to have done something similar. The move to Chicago was inexplicable otherwise. I think Boeing has a lot of H1B visa holders, too.

  36. Boeing! What can we say? As we all know, Boeing has some very major technical challenges to deal with right now. So how is Boeing addressing those challenges and improving its performance? Take a look at the glossy photos in Boeing’s 2020 Annual Report — women, pregnant women, women with good suntans.

    “A few of the near-term aspirations we aim to reach by 2025 are to achieve parity in retention rates of all groups, increase Black representation by 20% in the U.S. and close representation gaps for historically underrepresented groups.”

    I would love for Boeing to climb back out of the hole its financially-oriented managers dug for themselves and succeed — but a technological company which is focusing on bust size and skin pigmentation instead of on technical skills is stacking the dice against itself.

  37. Boeing’s current business is built around keeping politicians happy, above all else. Someone could write quite an epic book about the Boeing/NG AF tanker fiasco several years ago. I assumed that they moved to IL to expand their sponsor group beyond the WA Congressional delegation. It’s kind of amazing they haven’t relocated to NOVA yet…

  38. Note that the Boeing CEO from 2015-2016, Dennis Muilenberg, is in fact an engineer. (BS Aerospace Engineering, Masters in Aeronautics & Astronautics.)

    Re the Chicago headquarters, remember that Boeing has at least two major businesses: commercial and military. I don’ t know to what degree these operate as truly autonomous business units, but to the degree they do, it should’t matter so much where corporate HQ is. And in a multidivisional company, the corporate HQ *can’t* be colocated with *all* of the business units.

  39. Just list all the things Boeing can’t put on the cover of their annual report: 737 MAX, Starliner, 787 and KC-46. They’re lucky they weren’t forced to use kittens. The next Boeing that crashes, I’m sure the statistics of all the tranies on the line will make it all better and console the bereaved.

  40. “Boeing has at least two major businesses: commercial and military. I don’ t know to what degree these operate as truly autonomous business units”
    Well in the AF tanker fiasco I mentioned above, they just got the military to purchase a modified version of an airframe they were phasing out for commercial production, so I don’t think they’re even remotely autonomous.

  41. Transferring products from one business to another doesn’t keep you from running them as independent business units, though. If GE Power chooses to adopt a jet-engine design from GE Aviation and modify it as a power-generation turbine, this doesn’t mean the two units are not being run as separate businesses. (The question of how GE Aviation gets compensated for their intellectual property does exist, at least in theory, if the *design* is all that’s transferred and the manufacturing is done by GE Power…if the engines are manufactured by Aviation and then modified/accessorized by Power, it’s just a transfer-pricing issue)

  42. Dan, I’ll stand by the 30% but I was speaking of Manufacturing inventory cost.

    If I had to guess I would say it would hold true for an industrial distribution business as well. But that would only be a guess free I have very little expertise in that area.

    I think you run a distribution business. Have you ever calculated, as opposed to estimated, the carrying cost? If not proprietary, could you share it with? The percentage.

    John Henry

  43. I stand by my opinion that the Boeing move was a symbol of corporate focus being lost on engineering.

    A very good friend of mine is an American Airlines captain. He was a Marine F-18 pilot in Gulf War I and two of his sons are Marine aviators. He used to say “If it’s not Boeing, I’m not going.” Now he flies an Airbus without a quibble.

    Boeing did pretty well with the B 29, the B 52 and the 707 while in Seattle. I have no objection to leaving Seattle as it is becoming a leftist hellhole but Chicago ?

  44. Another risk of China sourcing:

    Anyone with production in China that asserts that none of their goods are produced with slave/forced labor is lying. They don’t know, are prevented by the Chinese government from finding out and if in country, will be detained if they press the issue too far. If it hasn’t happened already, I would expect forced labor will be forced into the supply chain of major brands like Apple to try to forestall action from the West.

  45. Re the Chicago headquarters, remember that Boeing has at least two major businesses: commercial and military. I don’ t know to what degree these operate as truly autonomous business units, but to the degree they do, it should’t matter so much where corporate HQ is. And in a multidivisional company, the corporate HQ *can’t* be colocated with *all* of the business units.

    We have a winner! For those that don’t like the corporate headquarters being in Chicago, where should it be? In Seattle co-located with the commercial airplane division? Or St. Louis co-located with the fighter jet division? Or Philadelphia co-located with the cargo helicopter division? Or Mesa, AZ co-located with the combat helicopter division? Or El Segundo, CA co-located with the satellite division? Or Decatur, AL co-located with (at the time) the launch vehicle division?

    The move to Chicago was a move of the corporate accountants to a neutral site to allow the CEO of the commercial airplane unit in Seattle and the CEO of the defense and space unit in St. Louis enough autonomy to run their own companies.

    Just list all the things Boeing can’t put on the cover of their annual report: 737 MAX, Starliner, 787 and KC-46. They’re lucky they weren’t forced to use kittens.

    Plenty of things they could have used: The F-15EX, the Block III Super Hornet, the EA-18 Growler, the AH-64 Apache, the V-22 Osprey, the T-7 Red Hawk, the MQ-25 Stingray. They didn’t have to get woke. That was a choice.

  46. David F: “Note that the Boeing CEO from 2015-2016, Dennis Muilenberg, is in fact an engineer. (BS Aerospace Engineering, Masters in Aeronautics & Astronautics.)”

    True. But Judas Iscariot was a Disciple.

    Muilenburg was CEO up until he was fired in 2019 — well into the 737 MAX problem. The biggest achievement of his stewardship was Boeing buying back a slew of its own shares. That financial engineering boosted Boeing’s share price and “earned” Mr. M. some very big “performance-related compensation”. The money was real — the performance, not so much.

    In an earlier Boeing Annual Report, there is a photo of Muilenburg surrounded by about 30 or so of his recent hires. At least 2 of them were white males. It goes to show that an engineering degree does not protect the holder from the bad ideas which have been destroying US businesses.

  47. The complete consolidation of the defense contracting world in the 90s and 2000s was a catastrophe for everyone except for defense contract officers who only have to deal with a few companies, generals who can get paid ever more insane salaries to sit on the boards of the few companies left, and politicians who can rake in massive amounts of lobbyist cash from them. The level of original thought and creativity in that entire system is miniscule, because it’s not rewarded in the slightest, and the time and cost overruns that have become common should be a national disgrace. And at some point it’s going to bite us in the butt.

  48. The level of original thought and creativity in that entire system is miniscule, because it’s not rewarded in the slightest, and the time and cost overruns that have become common should be a national disgrace.

    I’ve been watching a lot of 50s/60s military movies lately and I’m amazed at the vast number of military jets which were CONCURRENTLY deployed back then compared to today. I understand the concept of diminishing returns on engineering refinement and breakthrough technology, later generation planes are simply going to be more complex in order to squeeze out some strategic/tactical advantage which warrants putting them into the field, but I’m not really than keen on putting all of the defense procurement eggs into 2-3 baskets (Boeing, Lockheed, Northrup) – that’s not really what I see as a competitive environment. For a superpower we should be able to keep more than 3 military aircraft manufacturers viable – they simply need to be leaner.

    Why be innovative and creative when your bread is going to be buttered regardless of how lacking in creativity your firm is?

  49. TangoMan: “For a superpower we should be able to keep more than 3 military aircraft manufacturers viable – they simply need to be leaner.”

    One would hope so — but look at the situation with civilian aircraft manufacturers. Back at the beginning of the jumbo jet age — within living memory — there were 3 US manufacturers of jumbo jets. That has now shrunk to only one — the so-disappointing Boeing. At least part of that loss of US manufacturers can be traced to the rise of Airbus — heavily subsidized by our European “allies” with the specific aim of taking the business away from the US.

    But what goes around, comes around. Now Airbus (like Boeing) has to contended with the Chinese Comac C919 which is soon to hit the market — and China’s deep pockets to subsidize a plane which will probably undercut Airbus prices by about 40% are much deeper than European pockets. Meanwhile, Russia is testing its own MC-21 passenger jet, again targeted directly at Airbus/Boeing. Of course, Brazil’s Embraer has carved out a very strong position in the regional jet market which US manufacturers for some reason ignored.

    It seems to be tough for the largest economies in the world to support more than one civilian aircraft manufacturer each. And maybe not even that — Airbus planes are already being built in China; how long until Airbus is effectively a Chinese company, a division of Comac? And what does the civilian market tell us about the challenge to building multiple competitors in the much smaller market for military aircraft?

    The day we will have to lose all hope is when some genius in the Pentagon recommends buying the next generation of Air Force fighter jets from lower-cost China. And I really wish that was a joke rather than a possibility!

  50. @John Henry – I have never really calculated it but I am sure there is a way. There certainly is a cost, but I (obviously) believe that cost is well worth it in the current situation. Smarter people than me have likely come up with a formula for industrial distributors (I think Texas A and M has a distribution college of some sort). It certainly can’t be anywhere near that 30% number as I do have a firm grip on cash flow and we wouldn’t be floating as well as we are if it was that number.

    Basically, the options are do I invest this money in the stock/bond market or my business, where after (time x) there is a return of 20% or so after all is said and done? All I know is that my contractors will be happy this Summer when they have access to product and their competitors do not.

  51. The US government is headed down a path of unleashing 1970s level inflation. Over the course of the 20s, physical inventory will appreciate faster than cash.

  52. The day we will have to lose all hope is when some genius in the Pentagon recommends buying the next generation of Air Force fighter jets from lower-cost China.

    It looks to me like the Pentagon is headed toward the “Diversity, Inclusion and Equity” route and we will soon have quotas of race members working on military production. I still wonder how many H1B visa coders were writing the 737 MAX flight control system.

    In testimony to congressional investigators probing the fatal crashes of two 737 MAX jets,Michael Teal, the chief engineer on Boeing’s 737 MAX program who signed off on the jet’s technical configuration, said he was unaware of crucial technical details of the flight control system that triggered inadvertently and caused the crashes.

  53. Great discussion.

    Here is a calculation I’d like to see: The cost to the world economy of the Suez Canal stoppage (CCS), versus the cost to widen and deepen the canal enough to have two lanes in even the narrow portions (CWD). I bet CSS > CWD. How to organize the funding and organization to widen the bottleneck?

  54. John Henry, have you read Christy Borth, Masters of Mass Production (1945)? It is very good on Johansson’s importance. A pamphlet issued by GMin 1947, American Battle for Abundance: A Story of Mass Production, by Charles Kettering and Allen Orth, is also very good in the importance of precision measurement.

  55. Here is a calculation I’d like to see: The cost to the world economy of the Suez Canal stoppage (CCS), versus the cost to widen and deepen the canal enough to have two lanes in even the narrow portions (CWD). I bet CSS > CWD. How to organize the funding and organization to widen the bottleneck?

    Good question. I’m guessing that Trump might have been interested in pursuing this topic, whereas now it’s a dead letter.

  56. Lex:

    It is my understanding that the current president of Egypt has been pushing that for a long time, however Egypt can neither fund it nor do it even vaguely efficiently. It would take foreign investment and construction, which would be impossible from both sides. Egyptians would reject foreign “colonialists” coming in, and foreign investors will remember the seizure of the original Canal by Egypt.

    Subotai Bahadur

  57. According to wikipedia, the recent Panama Canal expansion project cost ~$5B, which is a pitiful amount of money. And it required a whole bushelful of international agencies to fund, demonstrating mostly how inefficient and corrupt the global aid system is. I can’t imagine digging a second lane for the Suez canal would be more money, or be particularly harder to organize.
    Idea for a novel–the Suez ship blockage as conspiracy between China and corrupt Egyptian officials as cover story to justify deal to get China to pay to build a second Suez shipping lane, and thereby obtain a chokehold on global trade routes…

  58. Brian — Not that it means anything, Cixin Liu’s prize-winning SciFi trilogy “The Three Body Problem” includes an episode in which a ship is disassembled in the Panama Canal. Good book! Well worth reading. Financial poseur Niall Ferguson was very taken with that book — thought it gave insights into how China sees the world: Don’t take a chance on the other guys being friendly — destroy them before they destroy you.

    Of course, China now controls the Panama Canal, thanks to Jimmy Carter. Did you ever imagine the day would come when Carter would look like an improvement compared to what we have now?

  59. “Egyptians would reject foreign “colonialists” coming in, and foreign investors will remember the seizure of the original Canal by Egypt.”

    A superior model would be to create a “Canal Zone” organized as a private company, with a 99 years lease from Egypt, a mix of fixed fee and percentage of profits from operation, and have the major powers guarantee the physical security of the Canal Zone and free navigation by treaty. Egypt would own it, so no hurt pride, and it make more money than it does now. It is ridiculous that this globally critical, and increasingly outdated, piece of infrastructure is totally reliant on a corrupt and incompetent third world regime.

  60. Egypt would own it, so no hurt pride, and it make more money than it does now.

    Disagree, their pride would be hurt because they are not in charge. Your scenario is much like what we see with the Achievement Gap in our public schools. We KNOW how to fix it, we have real-world pilot programs which close (mostly) the Black Achievement Gap – the KIPP schools are effective, the problem is that the students must attend school for an additional 2 hours per day, attend half-days on Saturday and attend for an additional month compared to the public school system, all told that extra time amounts to a doubling of instruction time per year in order to “close the gap.”

    This solution will never be implemented because it would require most Black students to go to a separate schooling system, “Separate but equal” is a non-starter, the solution of requiring all students to commit to all of that extra instruction defeats the goal of closing the gap.

    So rather than admit that most of the Black students are educationally deficient and require longer periods of REPETITIVE instruction, the powers that be wish to maintain the illusion of equality and so most Black students are ill-served by public schooling.

    To remove Egyptians from controlling the Suez is to admit that they can’t manage that infrastructure, to have Westerners manage it successful would compound the insult. They won’t volunteer themselves to be insulted in this way, no matter how many riches are promised them.

  61. This might sound nuts, but has there ever been any talk of the Israelis cutting a new channel from the Gulf of Aqaba, say from Eilat, to the Med? Might be a nice competitor to the Suez Canal and a huge money maker.

  62. “To remove Egyptians from controlling the Suez is to admit that they can’t manage that infrastructure.”

    Have Egyptians on the board, have an Egyptian as a figurehead CEO, pretend then are competent and give them titles and salaries as if they were actually doing things that matter. There are ways to do it. The rest of the world needs that waterway to be developed and stay open.

    Dan’s link shows serious discussion of a rival canal to be run by the (competent) Israelis and Emiratis. Imagine the USA, Israel, various Arab powers and other interested parties told the Egyptians in a closed door meeting that it was either (1) agree to the creation of a capable organization to develop and maintain the canal, with certain increased long-term revenue to Egypt and whatever face saving gestures Egypt wanted, or (2) an expensive rival that would compete with Egypt’s Suez canal and cost Egypt a fortune, and that everyone preferred Egypt to go along with Option 1 to save the expense and trouble. Egypt would have to cave.

  63. Egypt would have to cave.

    The Curley Effect is operative here. Same with Black educational dysfunction. To implement that KIPP solution would create massive social good in America and improve the lives of millions of Black kids/adults but it would also expose an ugly truth and reduce the power of those who benefit from Black educational dysfunction.

    Think of the internal political pressure which would play out in Egypt if some leadership faction was tempted to take the deal you’re offering, the opponents would blast it out through their faction’s channels and whip up a mob of folks focused on national pride, accuse those who want the deal of selling out Egypt in exchange for bribes. Look at how many idiots we have in America who bought, hook, line and sinker, the Russia Collusion narrative which was complete fiction. This Egyptian scenario would actually be based on truth, so a much easier sell to a people who want to be proud of their heritage and culture and their control over the Suez.

    The Israeli alternative would be capital intensive, so much like the Chunnel, for which the plans and engineering existed for half a century or more, but never got built until the financing could be arranged. It’s one thing to finance such a project if it taps into a captive market – for the Chunnel, the alternatives were ferry boats and airplanes, so there was a market where there was no direct competition, just alternative, less efficient, more time-consuming, competition. An alternative canal though would be competing against the Suez, an already fully amortized project, so to capture market share all the Egyptians need to do is lower tonnage fees, where the Israeli project would need to earn enough to carry the financing costs. This makes the project riskier, from a financing perspective. This is likely the same reason for why we’re not seeing the Nicaragua Canal project being realized – the Panamanians could make it a financial albatross for the backers.

    If the game theory is restricted solely to the Suez and incentives focused on the canal operations, then it is the Egyptians who have the strongest hand – they could bankrupt the Israeli venture if they were willing to engage in price competition. To get the Egyptians to cave would require very significant political threats and a demonstrated willingness to follow through on those threats, but we’re no longer in a uni-polar world, we’ve seen how the Chinese are making inroads into African trade at America’s expense by simply delinking commerce from human rights conditions, so if we play hardball it’s like that the Chinese swoop in and are Egypt’s saviors. I doubt we have the muscle to enforce the strong measures which would be needed to get Egypt to bend to our will.

    The Curley Effect distorts governance, look at how the Democrats are addressing illegal invaders – they’re not governing to benefit America, they’re governing America to benefit Democrat interests. If we do that here, we can’t expect Egyptians to be rational actors.

  64. The Israel canal idea has been around for a while. One concern might be that the Egyptians could cut their rates to less than Israel would have to charge.

    Water from the Mediterranean could also be diverted to the Dead Sea – 1000 ft below sea level and evaporating – to generate electric power.

  65. Draining the Mediterranean would save the world by reversing the much anticipated rising ocean levels caused by ice melt. We have the green new canal!


  66. Back to inventory.

    30% per year carrying cost might be a good rule of thumb for an automobile assembly supplier; and running inventory as close to zero as possible is a good plan for items like dashboard assemblies and car seats, which are customized, color-coordinated and not easily re-purposed, and which take up a lot of space. Less true for items like lug nuts, which are used on lots of vehicles. Still, there is no benefit in sitting on a years supply of lug nuts.

    The problem is when the accountants enforcing the inventory rule throw out their brains. I have seen cartons of two-year-old nuts, bolts and washers scrapped (off to a mini-mill, not a land-fill) to meet a “turns” requirement. The re-order was pretty much simultaneous.

  67. An Israeli channel from the Gulf of Aqaba to the Mediterranean?

    According to GoogleEarth, the straight line distance from Aqaba to Gaza is 136 miles, passing over mountainous territory to heights of at least 2,200 ft. If memory serves, D. H. Lawrence mentioned the magnificent cliffs and rock formations around Aqaba in his “Seven Pillars of Wisdom”. That would be some canal! And trading the Egyptians for the Palestinians does not sound like a step forward.

    Anyway, those crazy Europeans are going Green(ish). No more fossil fuels, no more oil. There goes all the oil trade passing through the Suez Canal. If the Euros have their way, we are already at Peak Canal.

  68. @Gavin – I am working my way through 7 Pillars right now. I can’t believe I had never read it until now. It is amazing. I found it at a garage sale for $5, ends up it is an early edition with lots of pictures of the guys and drawings and maps too. I think it is a $100 book but never mind that, the story is fantastic.

  69. I’m not aware of any problems with the Suez Canal that are from deficient Egyptian management. The just past problem was a forecast wind that blew the ship out of the channel, probably exacerbated by the decision to increase speed for better steerage. This provided the momentum to drive the stern hard aground on the opposite bank when the bow went aground. Tugs were also available to assist the passage but were foregone, probably to save money. All of the recent problems have been caused by ships breaking down in some way during the passage or failing to navigate properly.

    The canal was just widened and deepened a few years ago. Allowing two way traffic would require a channel much more than twice as wide as the present one or possibly a parallel one at a distance. The Ever Given grounding was a walk in the park compared to two ships colliding. They’d still be working to open the canal a year from now.

    I doubt there would be an increase in traffic to pay for it. There isn’t a shortage of capacity apparent. They might be able to increase fees on account of shortened wait times but they already compete with the route around the Cape of Good Hope. Depending on rates for cargo and fuel costs, many ships have chosen to round the Cape rather than pay the toll.

    While the Suez Canal is essentially a furrow in a large pile of sand, the Israeli proposal would have to deal with mountain ranges as pointed out above.

  70. Calling China, Calling China, China come in please:
    “Egypt’s Suez Canal must move quickly to upgrade its technical infrastructure if it is to avoid future shipping disruption, shipping industry sources said, as the major trade route tries to bounce back from a costly six-day closure…It was not clear yet if the Canal would opt to extend a second channel south of the one that Egypt opened in 2015 at a cost of $8 billion along a 70-km portion of the waterway. Such an extension would allow traffic to continue flowing even if a ship were grounded.”

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