Tuesday, October 9, 2012

Is Cost Still King?

Is cost still king? Maybe it’s ruler in a constitutional monarchy with representatives from environment, quality, security, and other factors, but how much power does it still hold?

Last year I sat in our professor’s office rambling excitedly about a potential local food value-chain project in Western Pennsylvania. He cautioned me to think critically about which people were willing to pay for local and organic food, and how much. I kept coming back to this conversation as I read this week’s articles on Manhattan micro-factories, customer led and crowd-sourced design. At first, I thought, why have I wasted all this time studying when I could have been out there soldering and making things like kinetic sculptures.* And next I thought, all of this must be awfully expensive. I know the articles praised these tiny industrialists for being profitable, and supposedly producing reasonably priced products utilizing new prototyping technologies but I am skeptical about the scalability of scale-less manufacturing across most industries. The author of “Putting the Customer in Charge of Design” dropped $72 on a child’s shirt.[1] That may be worth it for “originality” for some people, but not most. I was also surprised that the “Atoms are the New Bits” article claimed that “the economic crisis has triggered an extraordinary shift in the business practices of (mostly) Chinese factories, which have become increasingly flexible, Web-centric, and open to custom work (where the volumes are lower but the margins higher).”[2] Shouldn’t economic crisis mean that people are less willing to pay higher margins for custom work? Show me these people that are designing their own clothing and cars right now. I will show them a Target and my Toyota Corolla.  

So, what does this have to do with local food? Our first week we read foundational articles about supply chain management, that suggested that more than cost matters.[3] Consumers care about quality, environmental impact, and a variety of issues. But with the exception of extremely niche high-end industries like high fashion, most consumers care a lot about cost. My purchasing patterns are probably exemplary of many others, where, regardless of other factors and concerns, cost is king. I care a lot about food and I spend all of my time cooking, eating, and studying. But as a professional student I’m in and out of odd jobs. When I’m making money, I buy organic and local. When I’m not, it’s conventional produce. And my conventional veggies are incredibly (artificially) cheap because agribusiness has not only adulterated our food supply but because it has taken advantage of economies of scale. In “In Defense of Food,” Michael Pollan urges those of us who can afford to eat high-quality food to do so, not only for our own health benefits but because supposedly we can eventually encourage the market to shift from unhealthy practices to better ones. There’s plenty of evidence of this (Walmart organic division) but it only goes so far. Most people in this country can’t afford to buy local, organic, or high quality food because they just can’t offer the same economy of scale. A Freakonomics article from 2011 breaks down the inefficiencies in buying local.[4] Certain regions of the United States have a competitive advantage for production. Those buying local in California can get their hands on good food year round. Those of us in New England are looking at a different story. Furthermore, going local in food and disrupting these economies of scale might cause exactly the type of problems locavorism is supposed to address. I can’t say this better than the economists:

“A local food system would raise the cost of food by constraining the efficient allocation of resources. The monetary costs of increased input demands from forsaken gains from trade and scale economies will directly bear on consumer welfare by increasing the costs of food. And, as we try to tackle obesity, locavorism is likely to raise the cost of precisely the wrong foods. Grains can be grown cheaply across much of the country, but the costs of growing produce outside specific, limited regions increase quickly. Thus, nutrient-dense calories like fruits and vegetables become more expensive, while high fructose corn syrup becomes relatively cheaper.

Maybe the difference between going micro with food systems versus some of the other industries discussed in the articles is that those industries identified areas where they had enough of a competitive advantage to make sure higher margins weren’t that much higher. They also specialized in once in awhile purchases. It may be easier to justify a premium on something you buy once, like a custom shirt or car, then premiums on something you buy on a daily or weekly basis like food. But overall economies of scale still matter, because the incentive of being a large player in a market when it’s not a monopoly pushes costs lower and makes more things available to more people. The “Atoms” article talks about democratizing the market for producers, but it won’t necessarily democratize the market for consumers. I doubt the author Cory Doctorow’s prediction that “The days of companies with names like ‘General Electric’ and ‘General Mills’ and ‘General Motors’ are over. The money on the table is like krill: a billion little entrepreneurial opportunities that can be discovered and exploited by smart, creative people” will be true anytime soon.

[1] Putting Customers in Charge of Design (NY Times, May 14, 2010)
[2] In The Next Industrial Revolution, Atoms Are The New Bits (Wired
Magazine, January 25, 2010)
[3] Outcome-Driven Supply Chains (Melnyk, Davis, Spekman, and Sandor, MIT
Sloan Management Review, Winter 2010, pgs. 33-38)
Your Next Supply Chain (Interview with Fine and Simchi-Levi, MIT Sloan
Management Review, January 2010)
[4] The Inefficiency of Local Food http://www.freakonomics.com/2011/11/14/the-inefficiency-of-local-food/
*In my micro-factory we would semi-mass produce kinetic sculptures that are activated when your doorbell rings. The ball runs along the wall length sculpture and through different chains, loops, hoops, and bells, eventually a pulley system pours a glass of wine for an arriving guest, making delightful noises all along. I’m going to make millions. 

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