Quality and Productivity vs. Inflation

Quality and manufacturing professionals are in the best position to eradicate inflationary waste

Published: Monday, September 18, 2023 - 11:03

Inflation is a serious national issue. Credit agency Fitch Ratings just downgraded the U.S. credit rating—as in the “full faith and credit of the United States”—from AAA to AA+.¹ This doubtlessly reflects the fact that our national debt exceeds $31 trillion, or almost $100,000 for every American, including children and retirees. Interest on this debt is expected to be $663 billion in 2023, or 12.5% of the entire $5.3 trillion budget.²

The Federal Reserve, meanwhile, regards inflation as a threat that could require more rate hikes, which will in turn increase interest on the national debt.³ And economist Frederic Mishkin warns that while the sale of Treasury securities doesn’t change the money supply by itself, money creation does:⁴ “Financing a persistent deficit by money creation will lead to sustained inflation,” he notes.

The quality and manufacturing professions are ideally positioned to roll back inflation. The American consumer also can play a role here. The first step is to identify inflation clearly, because a prerequisite for corrective and preventive action (CAPA) is an accurate definition of the problem.

As the dragon said to the protagonist in The Wizard of Earthsea, “If you could name it you could master it, maybe, little wizard.... Would you like to know its name?”⁵ We must accordingly come up with a simple but accurate definition of inflation so we can use quality and productivity principles to master it as well.

What is inflation?

A common definition of inflation is simply “too much money chasing too few goods,” but this is arguably the effect rather than the root cause. Too much money comes from persistent deficit spending, money debasement (e.g., Weimar papiermarks, or Spain and Portugal’s discovery of gold and silver in the New World). Too few goods are the result of poor quality and inefficiency in production and delivery. The Covid-19 epidemic, for example, impaired production and resulted in shortages of goods and services.

More to the point, however, are controllable and removable wastes that raise prices while they deliver no value.

Economist Frederic Mishkin adds that cost-push inflation results when workers demand and receive higher wages, which they are in a position to do when there is a labor shortage. This requires acquiescence by monetary authorities to an increased rate of monetary growth.⁶ This is probably why the stock market reacts adversely to a very low unemployment rate. If, however, wage growth is the result of higher productivity, this will not be an issue.

Writing about the purported desirability of unemployment, Henry Ford noted, “There are those who claim that a certain proportion of unemployed men is desirable from the industrial standpoint. A crowd of men clamoring around the factory gates for jobs helps keep the men inside steady and helps keep wages down, they say.

“...This is a detestable philosophy. It is cold speculation in flesh and blood and anxiety and hunger. We don’t want any condition that is dependent on unemployment for steadiness.”⁷

Demand-pull inflation results from attempts to meet an unrealistically low unemployment target; there’s a “natural unemployment” level that results from people switching jobs.⁸ This is known as frictional unemployment. We can, however, get around these business-school definitions by stating simply that inflation is the consequence of money in the absence of utility and value. This is easily understandable from economist Irving Fisher’s equation of exchange (equation 1):⁹

• M is the money supply
• V is the velocity of money, the number of times per year the average dollar changes hands
• Pi is the price of the ith service or product
• Qi is the quantity of the ith service or product

Obviously, if MV increases without a corresponding increase in the quantity of goods and services, prices will increase. If a shortage of workers enables labor to demand higher wages in the absence of higher productivity, then many of their gains will simply be offset by higher prices. The same applies when a shortage of goods or services results in higher prices for them.

However, if the quantity of goods and services increases, then MV also can increase without any price increases—and MV represents taxable economic activity that can help offset the federal deficit.

The role of efficiency and quality

If we define inflation as the consequence of money in the absence of utility and value, then it’s clear that any form of waste (muda) is inflationary by definition. Waste, by definition, has no value or utility, but it’s something for which we must pay. This includes all of the Toyota Production System’s Seven Wastes, along with wastes of material and energy.

Among my favorite examples is Frank Gilbreth’s bricklaying improvement. The original job required the workers to pick up each brick from the ground, under which conditions each could lay 125 bricks per hour. Gilbreth’s introduction of a nonstooping scaffold eliminated the need to pick up the bricks, allowing the workers to lay 350 per hour. The workers had previously received wages, which increases MV, to essentially do 125 toe touches per hour rather than lay the 225 bricks per hour they could have laid with the better job design. The result was that buildings cost far more than they should have, and the workers received lower wages than was fair.

Mechanical engineer Frederick Winslow Taylor wrote of this, “Think of the waste of effort that has gone on through all these years, with each bricklayer lowering his body, weighing, say, 150 pounds, down two feet and raising it up again every time a brick (weighing about 5 pounds) is laid in the wall! And this each bricklayer did about one thousand times a day.”¹⁰ 

Ford added that, in general, “The undirected worker spends more of his time walking about for materials and tools than he does in working; he gets small pay because pedestrianism is not a highly paid line.”¹¹

One can still see pictures and videos of agricultural workers performing stoop labor to harvest crops and carrying them around the field, because this waste of human labor is built into the job and everybody takes it for granted. This is why we pay high prices in supermarkets, which reflects inflation. The workers receive poor wages, and the farmers’ profits are meager—all at the same time.

In general, however, waste is anything for which we pay money but do not receive value or utility. The cost of wasted materials, wasted energy, wasted cycle time as reflected in the carrying cost of inventory (one of the Seven Wastes), unnecessary transportation, and, of course, poor quality, all raise the price of the end product or service without adding to its value or utility. This, in turn, drives inflation.

Quality and manufacturing professionals are those best positioned to identify and remove these wastes, and show others how to do the same.

The ISO 50001:2018 standard for energy management systems relates directly to identifying and removing energy wastes. Sustainability comes into play when we recognize that anything we purchase and then throw away, like a consumable or a raw material, is waste.

Ford’s position was that, if he bought something, he was entitled to get full value from it. Waste wood was distilled for wood chemicals and Kingsford charcoal. Slag from blast furnaces was converted into cement and paving material. Solvent fumes were adsorbed in charcoal for reuse, to the extent that one gallon did the work of 10 before it finally dissipated.

This is a strong argument for extending the ISO 14001:2015 standard for environmental management systems to all wastes, regardless of whether they are environmental.

Business wastes

Waste isn’t, however, limited to realization of the product or service. Placing the business in an expensive venue results in higher property taxes and rental costs, as well as the need to pay inflated wages to recruit and retain workers. Higher wages don’t, however, buy more value for the workers in question. For example, it takes $1.68 to buy in New York what a dollar will buy in an average American community.¹² San Francisco, where $2.44 buys what a dollar will buy elsewhere, has an unaffordable (except by the very rich) median home price of $1.2 million.¹³

These costs are built into the prices of whatever goods or services are produced in these venues, but they add no value or utility for the customer. Ford wrote the following of large cities more than 100 years ago, and he was right:¹⁴

“And finally, the overhead expense of living or doing business in the great cities is becoming so large as to be unbearable. It places so great a tax upon life that there is no surplus over to live on. The politicians have found it easy to borrow money and they have borrowed to the limit. Within the last decade the expense of running every city in the country has tremendously increased. A good part of that expense is for interest upon money borrowed; the money has gone either into nonproductive brick, stone, and mortar, or into necessities of city life, such as water supplies and sewage systems at far above a reasonable cost. The cost of maintaining these works, the cost of keeping in order great masses of people and traffic is greater than the advantages derived from community life. The modern city has been prodigal, it is to-day bankrupt, and to-morrow it will cease to be.”

A trillion dollars in assets have left New York state as a whole. Justin Wilcox, executive director of Upstate United, said of this, “We see these firms going to lower-cost states, the same as we see New Yorkers going to lower-cost states.”¹⁵

There are other ways businesses can spend money without generating value. Ford wrote of ornate business buildings, “We will not put into our establishment anything that is useless. We will not put up elaborate buildings as monuments to our success. The interest on the investment and the cost of their upkeep only serve to add uselessly to the cost of what is produced—so these monuments of success are apt to end as tombs.”¹⁶

The capital and maintenance cost of an expensive corporate headquarters must be carried by the price of whatever product or service the company sells, but adds no value to the product or service.

The role of consumers

Ford wrote of the need to pay for only value and utility in the context of labor relations: “When the man gives more than he receives, or receives more than he gives—it is not long before serious dislocation will be manifest. Extend that condition throughout the country, and you have a complete upset of business.”¹⁷

If the employer pays more than the job is worth, the difference must be carried by the customer in the form of higher prices, which is inflationary. The employer can’t, however, pay less than the job is worth and yet expect the loyalty, commitment, and engagement of the employees.

This principle can be rephrased for all economic transactions. “When the seller gives more than it receives, or receives more than it gives, it is not long before serious dislocation will be manifest.” Fancy designer labels and brand names, celebrity endorsements, extended warranties, and junk fees are all ways for sellers to receive more than they give, and this shouldn’t be tolerated by purchasers. Our parents and grandparents who lived through the Great Depression knew this, and governed their buying habits accordingly.

“The overhead expense of living or doing business in the great cities is becoming so large as to be unbearable. It places so great a tax upon life that there is no surplus over to live on.”—Henry Ford. Image: “Money to Burn”—Jim Flanagan

We need to bring back the same practices to suppress inflation and also—this is obviously more important on an immediate level—get our money’s worth. For example:

Suppose you buy three one-pint containers of ice cream with a fancy label on them for $5 each, or $15, when the generic store brand is $3 for 3 pints. The buyer has just put into circulation an excess of $12 the seller can use to bid for goods and services, even though the seller hasn’t created any corresponding value or utility. The best course of action is to educate consumers and appeal to their self-interests.

Humans are vision-oriented, which is why restaurant menus usually include appealing pictures of meals. The companies that won’t let you buy their premium ice cream in economical 3-pint quantities similarly use fancy labels in lieu of actual value and utility. Other sellers charge astronomical prices for gourmet dog treats. Dogs don’t even care what their food looks like; they smell something to determine whether it’s edible. If it is, their agenda is to get it into their stomachs as quickly as possible. They don’t bother to even pause to enjoy the taste as people do.

The bathtub reliability curve shows why extended warranties are almost universally a waste of money. The infant mortality period, which results from manufacturing defects, is covered by the manufacturer’s warranty. The extended warranty covers the period with the lowest hazard rate. If you pay somebody for an extended warranty, you’ve not only wasted your money, you’ve circulated money in the absence of value or utility, which is inflationary.

A fancy brand name, especially on mainland Chinese-made goods, or a celebrity endorsement are good reasons to not buy something, because one is again giving the seller money without receiving value. When I went to Bed, Bath & Beyond’s going out of business sale, I found items with the company’s name on them that were made in various low-wage countries and still overpriced (vs. my perception of similar items in Target and Sam’s Club) at 40% or 50% off. I recently bought titanium eyeglass frames for a new prescription, and I treated fancy designer labels as automatic disqualifiers for the same reason. Member’s Mark (the Sam’s Club generic brand) does the job it’s supposed to do—namely, hold the lenses in place.

Junk fees mean by definition giving a seller money for which the seller doesn’t have to return any value or utility.

Summary

The definition of inflation as simply “the consequence of money in the absence of utility and value” allows us to find and eliminate its root causes. Businesses can play a role by not locating in expensive venues or spending money on nonfunctional buildings, and consumers by refusing to pay for anything that doesn’t add value or utility. Meanwhile, quality and manufacturing professionals are in the best position to eradicate inflationary waste from product and service realization processes.

References
1. Fitch Ratings. “Fitch Downgrades the United States’ Long-Term Ratings to ‘AA+’ from ‘AAA’; Outlook Stable.” FitchRatings. Aug. 1, 2023.
2. Peter G. Peterson Foundation. “What Is the National Debt Costing Us?” Peter G. Peterson Foundation. May 12, 2023.
3. Rugaber, Christopher. “Federal Reserve minutes: Too-high inflation, still a threat, could require more rate hikes.” Associated Press. Aug. 16, 2023.
4. Mishkin, Frederic S. The Economics of Money, Banking, and Financial Markets. Little, Brown and Co. pp. 563–564. 1986. 
5. Le Guin, Ursula K. A Wizard of Earthsea. Clarion Books. 2012.
6. Mishkin, op. cit., 559–561.
7. Ford, Henry. Ford Ideals: from “Mr. Ford’s Page.” The Dearborn Publishing Co. p. 76. 1922. 
8. Mishkin, op. cit., 561–562.
9. Fisher, Irving. The Purchasing Power of Money. Macmillan, p. 20. 1922. 
10. Taylor, Frederick Winslow. The Principles of Scientific Management. Harper Brothers. 1998 republication by Dover Publications Inc., 1911.
11. Ford, Henry, and Crowther, Samuel. My Life and Work. Doubleday, Page & Co. 1922.
12. Bestplaces. “Best Places to Live in New York, New York.”
13. Bestplaces. “Best Places to Live in San Francisco, California.”
14. Ford, Henry, and Crowther, Samuel, op. cit.
15. Tlaige, Amal. “158 companies flee NY along with $1T, experts react.” ABC News. Aug. 23, 2023.
16. Ford, Henry, and Crowther, Samuel, op. cit.
17. Ford, Henry. Ford Ideals: from “Mr. Ford’s Page,” op. cit., p. 17.

About The Author

William A. Levinson

William A. Levinson, P.E., FASQ, CQE, CMQOE, is the principal of Levinson Productivity Systems P.C. and the author of the book The Expanded and Annotated My Life and Work: Henry Ford’s Universal Code for World-Class Success (Productivity Press, 2013).