Sunday, July 01, 2012

Brain leak: Pricing, Labour Costs and Politics

Price is NOT the sum of cost plus profit, but the fee the buyer is willing to pay and the seller is willing to accept.

"The successful producer of an article sells it for more than it cost him to make, and that's profit. But the customer buys it only because it is worth more to him than he pays for it, and that's his profit. No one can long make a profit producing anything unless the customer makes a profit using it. " [Samuel B. Pettengill]

There is little point producing something which does not recover the total costs of supply. Note that is the total costs of supply, not costs of production. More often than not people complaining about undercutting, and product dumping, are only comparing unit costs of production, when should be comparing total costs of supply for the enterprise, along the industrial food chain. Furthermore costs are not altogether tangible, also time and risk are important considerations. Most costing theory is based on production and retailing of goods, rather than services. Services can be considered partially analogous to perishable goods (typically foods).

If I go out and buy something, then the price paid is part of the cost of supplying to my business. There is a cost associated with seeking out, researching and finally purchasing of the item. For small business such costs are typically ignored: most of the labour supplied by owners is typically ignored because it has no identifiable cost. For small business owners the profits of the business equals their personal income, no profit then no wages. As for employees, they are paid or owed, whether the business makes a profit or not. Furthermore employees are often paid to produce stuff that cannot be sold.

A business is not exactly a tribe, a cohesive social group, battling for survival in the wilderness of the economy. A business is something of an abstract entity which resides on paper in the form of its financial accounts: its has no social purpose, no soul, and cares not for people or the environment. It is thus not surprising that many new businesses are centred around the invention, selling and buying of financial instruments: simply a scrap of paper. When everything is reduced to monetary terms, all that matters is getting money to flow in your own direction so that can exchange it for the essentials of survival. All that is required is a mutually agreeable transaction.

Consider: Have an IOU for say $2, which will eventuate 2 years from now. Cannot wait 2 years, need $1.50 now, so I sell the IOU for $1.50 to someone who is willing to wait for 2 years. A year later that person sells it for a $1.20 to someone who is willing to wait the remaining year. Now multiply by millions and take that the original IOU was based on wishful thinking.

Business is in general a high risk real world experiment: a game of chance. Except this game of chance potentially has better odds than the lotto, than poker, than poker machines, than casino's. You get rich owning the casino and the poker machines, not playing them. Gambling is just using money to make money. Just like banks use other peoples money to make money. If no willing participants, no willing buyers, then there would be no transactions of exchange and no business. During the 1990's just about every business adopted the mantra: the purpose of business is to make profit.

Thus instead of getting industrual engineers (IE's) to minimise costs, to eliminate waste, instead optimise for maximum profit. After all the minimum cost of everything is zero: don't do it. If choose to do it, then maximise profit, and the simplest way to maximise profit is to increase unit price. But increase in unit price tends to bring about a reduction in sales volume. But this may not be a problem, as Akio Morita of Sony pointed out, will supply 10,000 units at $100/unit or 100,000 units at $1000/unit. The wholesale distributor thought he had his graph upside down. But not so. Supplying 100,000 units required significant investment in increasing the capacity of production, with the risk of only having a supply contract for one year. There after Sony set up their own distributors. As may also be aware Sony betamax video format is apparently superior to VHS, but they lost market since nothing to put on the tapes: a supply chain problem. Which they resolved by part or fully purchasing CBS: now they have no problems putting stuff on any new media format they may invent. Given the merging of computers and home entertainment multimedia centres, what ever new format emerges is likely to be totally transparent to the user: or is that opaque and hidden. Basically already at the point where data is stored on some remote drive somewhere, and downloaded to some usb device, or wireless technology device.

After all just how many times can people change, LP's, audio cassettes, video cassettes, CD's, DVD's to still some other media. Similarly 5-1/4 disks, 3.5 disks, Zip disks, CD's, to memory sticks. Further more just how many of these things can individual people own. How many photo albums, family video's? How many books, and how much paper can one person accumulate? I'm personally buried in books and paper.

For business to continue with its its forward distribution, it really needs to develop the reverse channels of distribution, so as to unclog the channels and permit movement and flow, to develop a cycle. Its like a magic number slider game: cannot play if there is not an empty space to move into. To play the game also similar to a rubiks cube, have to be willing to scramble the order thus far achieved to reach the final fully ordered solution.

Thus far business has used "built in obsolescence", whilst this ensures that people have to replace goods and so provides for continuity of the business, it hasn't resolved the problem of where to get rid of the old stuff. Simplistically, it is supplying defective goods, and not providing, space to move new goods into. It's not just a little matter of video cassettes out, and DVDs in. The problem extends to the cities, to nations to the world.

Take Singapore and Hong Kong, almost a constant state of construction. I recollect some figure of 1 apartment every 2 minutes in Singapore. These near city states, have next to no land available for construction. It is definitely a magic slider game: the people are the sliders and buildings are the spaces. Existing buildings either require further internal division, extra floors adding above, or demolishing and replacing with taller buildings. For example knock down a 10 storey building and replace with a 20 storey building, move people from another 10 storey building into the new building and knock the empty building down.

Here in Adelaide, we are considered to be a large rural town: have a general reluctance to new developments and especially opposition to large mulitstorey buildings and high density dwellings. However, the city is spreading too far. The building industry keeps pressuring government to release more land. Not sure what they mean by that: I assume changing zoning of existing land, though some times they are referring to government selling off its land. In the CBD many government office buildings have been sold and converted to appartments. In the suburbs blocks of land are getting smaller and houses larger. The traditional Australian dream home, was on a 1/4 acre block, this dropped to a 1/6th of an acre, and now local government development plans specify minimum land areas and minimum frontages and minimum set backs. A block typically minimum of 300 sq.m if isolated, if part of a group 200 sq.m (eg. retirement units).

Market gardens have disappeared under housing, and more and more rural land is being sold for housing. All largely because they get more money now, by selling the land, than working the land producing food and fibre. Australia basically has houses built on prime agricultural land, and farms land with shallow soils: no deep plough agriculture here.

Now houses are typically large so that children can stay at home longer in formal education. But that has problems. For example high wages for parents to pay off a family house. Children who want independence, their own place, but cannot get because there are no low cost rental accomodation for singles and couples. There is a lack of accomodation for school leavers and the retired. Houses have become a financial investment for retirement, and so the owners oppose the construction of high density student accommodation and retirement villages. The result is retirement houses are in short supply and extremely expensive, the sale of the large house won't cover the cost of the house and provide money to live off. This results in people moving to remote rural and coastal regions where property is cheap, but facilities like hospitals poor. Its not natural: money based decisions are driving human behaviour against nature.

On Professions/Engineers
Also consider the growth of professions. These arise from some nonsense about protecting the welfare of the public. Professions are an alternative to a union, though a profession may also have a union (eg. IEAust and APESMA). A profession gives the impression that they are there to serve some greater need, and not just themselves. But it is nonsense, the greater need is secondary to serving themselves. During the nineties, most unions and professional bodies changed their legal structure and became full trading companies, with constitutions which maintain the rights of members of the orignal association. Thus the IEAust became Engineers Australia (EA). Creating legislation is not about the public welfare its about business: not profits for EA, but for the big businesses who make use of the EA, it is also about politics. Holding office in EA is good for promotion within the big businesses. Purchasing the post nominal detritus on annual subscription sold by EA, is good for promotion within the big business. Creating legislation which restricts practice to those who purchase the postnominal detritus, is also good for the big businesses. It doesn't have anything to do with technical competence or the welfare of the community. Sorry, but the EA/IEAust assessment process is the dumbest in the world it is so generic the stage 2 competences could apply to a retail sales assisstant, it has nothing to do with technical competence: and that applies to the newly revised stage 2 competences as well as the previous. The American FE/PE exams and the IStructE part 3 exam assess technical competence. The EA/IEAust work practice report stuff is far too much he says she says. It assumes that someone is actually under the supervision of someone who is competent. The work practice report just becomes hyperbole. I would place B.Eng. MIEAust CPEng NPER 2nd to the top of my list of incompetents. The IEAust keeps dragging Queensland up, because of registration of engineers, RPEQ: they are top of my list. The RPEQ's self certify way beyond their authority and competence: the Queensland's system is stupid not something to be held up as a bench mark. How do I know? Because manufactured structural products flow into SA, where we don't have registration, but demand an independent technical check. So the Queensland stuff first rejected for lack of independence, then when checked, further rejected because not technically correct. If going to have restrictions make sure they are valid.

The Queensland system was reviewed by the competition watchdog, because national consultancies considered it was an hindrance to cross border business. The basic conclusion was that it was in the interests of the public welfare most especially with respect to the building industry and also with respect to amusement rides. At the time there was some failures of amusement ride equipment. The IEAust response take MIEAust away from someone. Who cares? Many don't have in the first place, nor care about getting. In the review report there was a large appendix which tended to indicate that in Queensland a large amount of the work was done by 2 year qualified engineering associates, and consulting businesses also owned by such: their work needed to be reviewed and approved by RPEQ's. All very well but, there appears to be a lack of checking on the RPEQ's. A high quality assessment process is not a once off exercise: it cannot be achieved by granting authority and responsibility to individuals. There is need for constant monitoring: the more established the technology the greater the communities expectations for achieving expected performance requirements.

As I remember the IEAust appeared to loose its status as a reliable indicator of technical competence around the 1980's. First I think union type laws prevent job advertisements stating a requirement for MIEAust, they typically have to make reference to elligible for membership. Some Australian standards make a reference, to MIEAust being the definition of engineer when so referenced: but there is little that actually requires an engineer. Also standards are recommendations, for the building code of Australia (BCA) to be incorporated into law, and its referenced standards, the language in those codes and standards needs changing. The BCA makes reference to CPEng and NPER, but that is just one option, the primary requirement is suitably qualified. That is important, because when it comes to new technology, an engineer may not be suitably qualified.

To create NPER and develop legislation which restricts, requires adequate number of registrants. Thus since its creation the IEAust has had periods of fast tracking MIEAust to CPEng NPER. The consequence of that is diminishing the whole system back down to the unreliable nature of MIEAust as valid indicator of technical competence. Competence has to be sustained in the workforce and in society, and the IEAust needs to work at that, it did not do so. I reiterate the proposal and achievement thus far is not about the community, it is about the status and recognition of those with a B.Eng, about political power, a grab for work, an illusion hiding monopoly and cartel controlling prices. This is already in play.

Take a look at something else to see how it all starts. The workers in child care facilities have recently been on the news declaring they cannot survive on minimum wages and should be on the same industrial award as teachers and educators not the state/federal minimum for those not otherwise covered by an award. The 90's saw a period of rationalisation attempting to minimise the number of awards: so try to create common professions and trades at various levels of responsibilty. This in turn partially aligned with the Australian Qualification Framework (AQF) providing recognition of education and training.

On Professions/Child care Workers
The child care workers argument: they are not just minders but educators, responsible for the early development of children before school. Meanwhile the parents of the children are paying somewhere between $70 and $100 per child per day for child care. This is apparently equal to the mothers wages: which I think is more the issue than the mothers just working for child care (some article been written saying its a shared cost: which it is). Apparently the mothers are not working because they need the money now, but because they will need the money at some future date, and they contend they will have trouble getting back into the workforce if they don't stay in it.

Industrial Relations
The Australian industrial awards represent semi-regulation of the labour market. The awards set minimum conditions of work, minimum wages, maximum hours, define ordinary time, time and a half and double time, and possibly career progression. Market pay rates however may be higher than the award minimum. A sense of equity has been lost from the culture, so that whilst in the past there was little difference in wages,  there are now deliberate attempts to ensure wage relativities: the greater importance or one person or profession over an other. This is somewhat silly at a society level, unfortunately attempts to create enterprise level agreements meet opposition from unions. Take engineers for example, they believe they should be paid more than a drafter: rubbish. Such view stems from a single minded view of organisational structure, a single type of business, with engineers at the top controlling. With also the view that those controlling should get paid the most. Once again refer back to small business, due to the industrial awards the owners are highly likely to earn less than the employees. Only the owners income can fluctuate up and down with changes in the market. The result is that the workforce typically shrinks and contracts rather than wages.

Engineers think they should be paid more than a teacher and more than scientists, because engineers have 4 year degrees and the other only 3 year degrees. Once again rubbish. Engineers also always dragging doctors up: once again nonsense arguments. The importance of a profession is not merely relative to a society, but also a point in time, and to an enterprise and a situation. There is no point holding doctors in high esteem when people are starving, the important people are the farmers. Once food is in high supply then feeding twice the amount of food to the sick maybe possible, and doctors may then become important, for production of food is taken for granted. If doctors are taken for granted, then they also loose importance: there has to be sickness and ailments which only doctors can treat for them to be of high value. So there is the doctor versus pharmacist, and the pharmacist versus the local supermarket.

So if attempting to determine the cost of something need to place a cost on labour. But what is the cost of labour? Its what the worker is willing to work for. The cost of labour may however be distorted by unions and government interference. A business can keep operating by contracting wages back to award minimum only if the workers agree, but they cannot reduce to lower than award minimum. Some local businesses, have attempted to work at less than industry awards, to keep traditional enterprise going, but whilst have the agreement of the workers, the unions may otherwise oppose. The current labor government (thats a joke, should try reading constitution doesn't mention anything about political parties: further executiive council is not the government it executes the will of the government: all members of parliament and the senate are the government. But let mass media talk about government and opposition. Anyway thats another story.)

The labor party basically drove a campaign against the previous governments "workers choices" system, and with a partial mandate to make union membership compulsory. Their view being that unions defend the industrial awards, so all persons who benefit should contribute to the funds. They oppose enterprise agreements and individual contracts. During the nineties, and "the recession we had to have" under a labor government the unions were making agreements to the effect: can reduce labour force as long as those that stay behind get paid more. Not surprising membership of unions only 40% of workforce. As stated earlier, they have the legal structure of full trading compaines and have employees on staff. They are businesses, cartels, they sell labour, and shouldn't be granted any form of government sanction. Political power is extremely important to pricing.

How to cost labour, or services? APESMA publishes guidelines for determining contract rates. Basically start with the award minimums of 38 hours/week and 52 weeks/year, to get 1976 hours/year. These hours are what everyone gets paid for, but not the hours they actually work. These hours are therefore reduced for sick day allowance, vacation time, long service leave, and a multitude of other benefits provided in the industrial awards. Then an allowance of 20% is allowed for extra time searching for work between short term contracts, thus two charge out rates are determined: one for short term contracts another for long term contracts. This is for labour hire only, so no costs of equipment considered. Now this determines the hours worked and actually billable, but what about the price? Where do we get the price from to determine the hourly rate? Well thats simple, pull a number out off a hat. You, the individual choose what annual salary you want, and divide this by the expected billable hours to get an hourly charge out rate. A starting point is the industrial awards, and the APESMA salary surveys.

At the end of the day however the income generated over a year may be greater or lower than that estimated, and likewise the hours worked. No real need to mess around with the hours, just pull a number out off a hat for the hourly rate. Large consulting engineer business tend to rely on contractors, they allow the business to expand and contract as the economy varies, contractors have a fixed rate no time and a half, or double time, and contractors, even casual labour, may work some 50 to 90 hours per week. Contractors may also work until they have the job complete. So whilst workers, work 9 to 5 (not sure where that actually comes from: try 8:30 to 17:15, to provide 45 minutes unpaid lunch break. And forget about the 37.5 or 38 hours/week in the awards.) Contract drafters may work through the night, and be on their way home, when the employees are just starting work. Contractors can have several days, to months off, due to the income they have generated whilst working, and not generated through high fees, but by working a full years hours in half a calendar year (365.25*24=8766 hours/year, sleep 1/3rd leaves, 2/3rds for activity: 5844: a life of luxury).

People who make a living doing what they like, and therefore don't require income and time off work to pursue other interests, are unlikley to determine hourly rates following guidelines like those put out by APESMA. The problem is rooted in Simonian Simplification of (S2,S-squared as my lecturer called it). S2 is the simplistic view that all persons behave the same, that they act in self interest, and that the collective behaviour benefits the individual in the group. As shown in much of mentioned above, the collective behaviour of individuals result in adverse effects on the individual. For example if everyone opposes contruction of retirement homes to maintain value of their property so that can finance retirement, then have no alternative buildings for retirement. A house is not a financial investment, it is a life support system: it should be designed and built to be livable now and in future retirement. Is it in any way possible to put money aside for future needs? I don't believe it is possible, the value of money is itself pure fiction.

If the purpose of business is maximum profits, and the simplest way to do that is to increase price, then the costs to labour increase (they have to pay more for goods they need). Labour therefore demands a greater share of the business profits, without shouldering any of the variable risk: their increase in income is permanent: if not sustainable it will be met by future unemployment for some if not all. With increase in labour costs, the profit to the business decreases. it remains as in the past, a never ending poltical battle to grab what the individual or collective considers a fair share of the available but limited resource: in general the single resource of money.

-- Interrupt for tea --

Business and Geography
The purpose of the abstract financial entity on paper may well be to increase profits, but that is not the purpose of the people who breathe life into a business enterprise. There are increasing calls to buy nationally produced goods, and still further calls to buy goods produced more locally, to use more local businesses. People have a connection to place: after all they have or are investing a great portion of their lives into a mortgage on property which locks them to that place. I have mentioned in previous blogs that in the past people in Adelaide have had a mortgage on a house here, whilst renting and working interstate. They being unable to sell their house in Adelaide since no employment for others to move to. Houses are not a financial investment, and increasingly they are poor life support systems. New types of housing are required along with alternative business structures. It should also be noted that many cities also have the legal structure of full trading companies.

Economics texts attempt to differentiate between capitalism and communism and between economic and political systems. Doing so is not all that helpful. The problem of scarcity which economics supposed to study, generates the need to exercise power and control over limited resources: economics is political. The difference between capitalism and communism is purely academic, it has no practical value: reality is a continuous spectrum of alternatives. A market is just an ecosystem of exchanges which supports a cycle of life. The invisible hand of the free market gives rise to markets in regulation and centralised planning. Modern western government is just a market sector with businesses vying for their share.

Just about everything has been reduced to economics. Marriage maybe a religious ceremony, but mostly it is a civil law contract for economic gain: typically restricted to a single partner with non-commercial benefits and advantages. But mostly an economic contract. When take divorce into consideration and the custody and support of children. Then it represents the formation of a special kind of economic entity which cannot be broken. Increasingly businesses are being seen has holding similar responsibilities to their employees has parents do to their children. Whilst government has similar responsibilities as parents to its citizens.

Now citizenship is a strange thing. I hold dual citizenship: Britain and Australia. Prior to the 1986 Australia act, most commonwealth subjects with permanent residency, automatically gained similar rights to Austrailian born citizens. The 1986 Act and associated laws was going to change that, so prior to its introduction many immigrants took up Australian citizenship. But it was silly, British subjects required to swear allegiance to the Queen, the head of the commonwealth, her heirs and successors. Like already required to do that by nature of birth in a monarchy. Which therefore raises a question, why don't all citizens have to swear allegiance to the nation which they expect to support them? Like if have a true democracy, and the government has true legitimacy, then the majority of inhabitants of the land will owe allegiance: if not then the nation, the government is illegitimate. Further if the government is little more than a business enterpise which provides certain services through a collective centrally planned model, then will people buy services from the available providers. Under the Australian system it is compulsory, mandated to vote the useless, dishonest, integrity lacking low skilled politicians into power. Its relatively pointless exercise since just a bunch of fools changing seats. As I mentioned above, there is not meant to be a so called government and opposition: that is a creation of the mass media. There was no problem at the last election, for once everything went right, not wrong as the media made it out to be. We the people, the electorate, elect representatives. They form parliament and the senate, collectively the government. From these the governor general appoints the members of the executive council to advise and execute the will of the government. The prime minister is not supposed to belong to a political party and represent that party, the prime minister is supposed to represent the government and the electorate.

But politics divides the government along party lines, and it also suits the mass media to create stories. In practice the political party with the majority of seats forms the executive council and the governor general agrees, more over the governor general ultimately ends up being appointed by the political party. The political party excluded from the executive council, then becomes the shadow cabinet or opposition. The executive council then dictates to the government, rather than executing the will of the government, because it is now referred to as the government. If the opposition doesn't oppose enough the mass media call them weak, if they oppose too much they are referred to as obstructive. It seems to exist for the benefit of mass media rather than actually carry out the functions of government. Australia also has a unique industrial relations system, with unions belonging to a state level trade and labour council (TLC), and the TLC's belonging to the national Australian Council of Trade Unions (ACTU),  which resides in the Australian Capital Territory (ACT) along side the federal government. Labour has a significant influence over government, an influence which business is largely and deliberately excluded from. At the last election the unions basically destroyed the resident government, but they didn't achieve that much of a success, to place the Labor Party with a clear majority: hence a perceived problem. Surprisingly they did this by opposing a set of industrial relations reforms called "workers choices", and they did it with advertising amongst which was an advert where by some twit in a suite says he was laid off and job given to someone else for $25,000 less. Laid off, the true revolutionaries would have put him against a wall and shot him. The cost difference is someones entire salary. But no, you are supposed to feel sorry for him and his family, which no longer has an income. Sorry! But no way, some people didn't and don't have incomes in the first place because industrial awards set minimum rates which are too high: and to a certain extent make the employees the biggest bludgers in the land. Loosing sales to imported goods, dumped on the shores. Not really dumped, but produced by people who are actually working trying to achieve the life of luxury which Australian's and most westerners take for granted. Loosing overseas markets because of the same problem.

Ability to Buy
A small cold-formed steel shed may only cost around say $2000, and may provide a simple shelter. We have regulations which hinder building sheds and turning them into houses over a period of years, which was common in rural fringes. Still even in the suburbs there are houses whereby verandahs and garages have been converted into extra living space without actually compliying with BCA requirements: this is usually highlighted when background checks on approvals are checked at sale time. Anycase we have expected levels of quality for various products, housing and others. Various organisations keep checks on quality supplied, such as Choice magazine. None the less individuals can still choose to live in a shed if they wish to, if they can find some place to do so: however typically costs more than a garden shed, and otherwise made habitable, but at significantly lower cost than a brick veneer on timber framed house.

In developing countries after buying food even with government assistance, people have less than $2 to spare at the end of the year, it would therefore take 1000 years to pay off the capital on a $2000 shed. If we make it, we cannot sell it to them, for our labour costs are too high. They however can make at much lower costs, and exported to the west, supply costs can be significantly lower than local. Such lower prices allows westerners to redistribute their income, more surplus for nonessentials, for luxuries. But at some point we cease to have employment and cannot buy anything. The invisible hand of the economy doesn't care about community: the community has to care.

Now Australia has raw materials, from mining and agriculture, and whilst a major supplier in these areas, it doesn't mean have great control over prices. First we don't have the population to produce, first a shortage of numbers, and secondly a cultural shift away from such hard manual labour. A land increasingly of:, business executives, sports stars, entertainers, and retailers.

Retailers are political
Retailers are political. Whilst most capital cities are more or less open 24/7, Adelaide the sleepy backwater rural town, has vocal business associations which hinder such trading: and bills are passed in state parliament to set trading hours. Its seems everything is on the basis of one in all in, one out all out. The argument is that small business cannot afford to employ staff to operate 24/7, if they are not open when the big retail stores are  then they loose business income and may have to shutdown. Secondly the owners of large shopping plaza's and malls, typically require all stores to be open, since looks bad when most stores are closed. This is an entirely different issue to operating hours restricted due to noise and traffic generated by industry.

As mentioned above the suburbs once contained market gardens and rural fringe. It was possible to go for a drive not too far into the country and buy fruit and veg direct from farmers from road side stalls, also flowers on mothers day. This practice died out a while back. Whilst an increase in population may have increased traffic flows along roads, getting to and from the road side stalls wasn't exactly an hazard. But retailers basically squashed the practice, on the basis of such declared hazard. The other issues raised were rents on shops, versus using public property (questionable if stall on farmers land). Basically the new bricks and mortar retailers were loosing market share to these road side stalls, so they removed the suppliers. Approaching Mothers day, families with gardens may have sold flowers at the street side. But once again retailers loosing market share squashed the practice, as I beleive a license is now required to set up such flower stall. Though people may give the fruit grown in their gardens away via roadside stalls.

Get the Government to Make Your Products Mandatory
It is not about free markets but exercise of power in the political arena. Take bicycle helmets, smoke alarms and residual current devices RCD's, these items have become compulsory and mandated by law with fines for non-compliance. This mandatory requirement is largely to create a large enough market to sustain business providing. (And these power brokers want to know why the republic debate keeps failing. The people don't want to give such draconian governing political parties any greater power, and desire a democracy not a republic: want to get rid of the ruling elite.)

Retailers and Credit Cards
Retailers most recent activities concern credit charges and online sales. For use of credit cards they wanted to charge people a higher price: argument it costs them more. Missing issue, the point of accepting credit card is guaranteed payment compared to no guarantee with a cheque. This in turn results in higher sales, and potentially improved cashflow. Now there is a bank advertising, on basis that customers who use credit cards are withholding payment to the retailers, who typically have to wait 4 days before getting funds on credit card payments from banks. I think the bank is offering same day. Still seems to be missing the point: like business to business operates on time frames of anything from 30 days to 120 days. Some manufacturers also supply the retailers with goods on credit and take them back if the retailer doesn't sell. The retailers don't really have a difficult time, and mostly have lost this argument.

Retailers and Online Sales
The argument against online sales is that there is no goods and services tax (GST) on online sales, and typically no import duties. Not altogether true, such taxes and duties will be applied as passes through customs, and is dependent on the cost. The retailers lost this argument. People not really concerned about a 10% GST, it is significantly less than the 2 to 5 times the price retailers are selling stuff at.

Delivery/Transportation Costs
I typically order books from Amazon. I did try engineers australia books at one time, but if not going to filter metric from imperial units, and dificult to find books they advertsie in Engineers Australia magazine, and the delivery time still around 4 weeks whats the benefit? The Amazon website is easy to navigate, almost allows me to look through books as I would in a retail store, and separates book price from delivery costs. I recently found out about Booktopia an Australian equivalent of Amazon, so I thought I would check out their prices: far more expensive and just as long to wait, and books not in stock. Their pricing is likely all wrong. Namely it appears, they have added the price of obtaining a single book from over seas source to each and every book, the highest possible delivery price. To this is then added the delivery fee to get the book to the buyers door, or maybe they have supposedly free delivery. The problem is that for the overseas delivery fee a large number of books can be obtained. A buyer can therefore hold off on buying books until they can minimise their transportation costs.

Business needs to know what to hide in prices and allow to vary without the buyers knowledge and what needs to be disclosed. If detail too much then buyers argues about not wanting or otherwise not getting. If don't include any detail, then buyer may go elsewhere.

Whinge about dumping, and fee's being undercut, but don't expect anyone to take it as a serious and real issue: it identifies no grasp of the uncertainty and experimental nature of business. Price is simply a number pulled out off a hat, which the seller hopes to get the potential consumer to agree to.

Farmers, Small Retailers and the Supermarket Chains
Farmers and small retailers have been critical of the big supermarkets and retail stores, and the competition watchdog. Apparently checks by the watchdog, indicate no wrong doing on the part of the big retail chains. Competition is apparently good and so is the loss of small local stores, all that matters is lower prices and access to greater array of goods. Destruction of community not an issue. That action taken by the individual in their best interests, taken collectively not good for the community and in turn ultimately not good for the individual. Human behaviour needs regulating. Unfortunately government controls are seldom regulators, just interfering control. A true regulator is dynamically adaptive: it returns a system to an equilibrium position even if its a shifted position.

As mentioned above there is much done by small business which is not counted as a cost, but is so counted by large business. People coming from large business and setting up their own small businesses, tend to count costs others in their new market do not count. Their prices thus appear too high. They are paying more attention to what they want rather than what the market needs. When it comes to service industry, there is a fine line between what you believe is required and what the market actually wants.

Satisfying Market Needs, Not Yours
The child care workers are simply minders not early development educators. Some of the agencies may provide early development education, and have people qualified to do so, but not all. Furthermore how does early development education differ from traditional parental care? The issue is that there is a market, and an acceptable market price, but no clarity as to what is being purchased. The parents primarily require some facility in a convenient geographical location: they find and then pay the price. There is not a great deal of option, as with schooling. With little option, market prices can be near constant across suppliers, but with vastly different supply of services: and costs incurred.

Unlike engineers, architects are regulated in all Australian states. But for what purpose? The SA building contractors Act, grants architect as being equal to licensed building works supervisor and doesn't need to obtain such additional license. The act is mostly concerned with supply of housing. People mostly go direct to builders, building designers and drafting service businesses rather than to architects. Architects are seen as people who design works of art not practical buildings. Architects also seen as people who charge extortionate prices for conceptual scribble no use to anyone: except an architect who is going to develop further for still more fee. Architects may have set the original datum for consultancy fees, but others can supply more for such fee, do it faster, or otherwise supply faster and more for lower fees. They are not supplying architectural services, because they don't have that which makes an architect an architect, and thus makes the architects services unique. What ever that something is, most people have no need for and don't want to buy at the price offered.

As far as the buyer is concerned they get the same from an architect as they get from a drafter: a set of drawings which will be checked for compliance by a building surveyor, and development approval granted. What they want is a building, and they typically wanted it last week. So they typically go to builders, the builders may produce their own drawings or employ a drafter. If they go to an architect, the drawings likely produced by a drafter, and specification written by another specialist not an architect. So the question is what did the architect supply other than additional cost?

With builders the cost of the drafting maybe hidden in the cost of the building: and otherwise considered free. The problem with that approach is that some buyers get the drawings from one builder then shop around for lower building price. Similar happened with timber suppliers and free material take-offs. Now more builders and timber suppliers charge a separate fee for drawings and material take-off's. A cost which was once an overhead and distributed across all projects becomes an explicit upfront charge to the project. Also something which may have been done in-house may now be outsourced. The result is that services which once appeared to be free, now sky rocket in price. The price increases because the new suppliers are businesses in their own right, and now incur additional overhead costs. Drafters once housed in the builders premises now require their own offices. Further these drafters now have other issues to consider, other then the needs of say a builder. Drafting becomes a product, an end in itself rather than a means to an end.

Similarly goes for engineers. The buyer simply gets a collection of drawings and maybe a pile of numbers. The drafting service can be isolated from the engineers. Then the engineers simply provide the numbers, which is a lot clearer than what the architects are supplying.

Once a product is released to the market, it will be put to uses way beyond the original intents of the designers. Engineers are in the main ignorant of the history of the market place. Art and crafts first, trade second, drafters, then designers and finally applied scientists and engineers. Engineers are not the top of an hierarchy: the hierarchy is their work of fiction. Engineering associates, technicians, and technolgists are not subordinate to engineers. They only become subordinate when employed by engineers.

Many small businesses would benefit from engineers on staff. But they view engineers as too expensive, compared to sales people on commission, and the trades people they employ. I would have thought the sales commission would surpass the industrial award for engineers. I think the real problem is engineers arrogance and consequently the perceived little value that engineers would bring to the business. That is the engineers do the numbers, and only do the complex calculations, other people can do the rest. The engineer is seen as highly specialised and of limted value. Whilst engineers themselves also tend to refuse to contribute all that they could to an enterprise: for example design drawing is below them and a drafter should be employed: or they produce conceptual drawings and expect a work shop detailer to do the rest. Put simply they are educated for, and get their training in businesses which have high division of labour, and cannot actually take a job from start to completion. Consequently engineers do become of limted value. With the emergence of software to do the numbers, engineers of even less value. Further it should be noted that in many instances engineers have been imposed by regulations. Things were being built long before drawings and long before calculations, and long before need for regulatory approval to go ahead and build. So drafting, architectural and engineering consulting services are services not entirely wanted, and an imposed cost to be eliminated as fast as is possble. Standard designs and computer software are providing the means of eliminating this unwarranted cost. The historical role of engineers was pushing technological frontiers forward, not life safety. Many engineers are definitely inline for a rude awakening: well especially if they cannot get their grab for work legislation passed. Life safety is not a quantitative issue resolved by carrying out complex calculations, it is a qualitative issue. A lot more community consultation is required for large projects, and there is a lot more feedback on all products.

There is a market place, people with needs which need satisfying. The task of a business enterprise is to identify these needs and find a way to satisfy from the resources they have available, and at the same time satisfy the needs of the members of the enterprise. Need to get rid of the concept of employee which is rooted in the the old master and servant laws, which control employment. Companies can do that since they are independent legal entities.

I believe entities like the IEAust are duds, currently redundant. We have more libraries, more educational institutions, and more indusry specific organisations. Better to be an alumini of a university than a graded member of the IEAust. Further learning will come from the university, not an institution like the IEAust, its time has been and gone. Well actually its time had gone when it was created, it was too late to the game. a A matter of business, economics and politics.

A degree acredited by the IEAust is irrelevant as is WFEO. Their activities only show partial understanding of the market, one high end sector, and yet their assessment process is dismally inadeqaute for the sector considered, whilst otherwise either over the top or completely irrelevant to the rest of the market. hence desire for legislation to gain an helping hand. Not necessary, as I've already said its about big business. Big business can operate what ever internal systems it wants, it doesn't have to impose such on the rest of us though. Does the market want to pay for these extra costs, do they actually get any value from them? The basic answer is they don't want to pay the current costs, and no they won't get any extra value. The extra value is wishful thinking, it cannot be guaranteed. It is upto businesses and individuals to provide value.

Price is a number pulled out of a hat. Do what ever complex calcuations desire to arrive at a number, but ultimately it has to be agreed to by the buyer and it ultimately becomes a number pulled out of a hat. The task is finding out how to supply for the market price, or how to get the market to accept the price desired. For example a buyer may consider a price of $1000 too high, but otherwise accept 6 smaller fees of $200 each. Working out the features, details and value of what is being provided and assigning appropriate prices is the main task, not working out a notional hourly rate. Hourly rates are crazy, they don't contain value, simply work more hours get paid more, but still fail to provide the value promised.

Costing Methods and Pricing are Important
Costing methods and pricing are important. Quantity surveyors typically cost structures by the weight, say $1000/tonne of fabricated steel. Beside my figure possibly being out off date, the figure is fiction. The only way to reduce the cost of the building is to reduce its weight: but it is the inherent labour cost that needs to be reduced not the weight. Other costing is done by the area, so that only way to reduce the cost is too reduce the building area. Basically the adopted costing methods require removing value from the structures not waste: reduce resistance, reduce useable area.

Roughly speaking once a structure is engineered its material content is fixed. However the cost of the structure can be reduced by redistributing that material to reduce labour costs. For example C75 girts at 600 c/c have almost identical material content to C150's at 1200 c/c, but installation labour is reduced for latter. Such cost reduction cannot be realised for shed suppliers because shed erectors either charge a fixed fee or work out on the basis of building plan area. Change costing methods and can change price and demonstrate greater value to buyers.

Buy versus DIY
Shed suppliers along with carport and veradah builders also have a marketing problem. Small builders and house owners consider the prices are extortionate, even when they work out material costs based on retail prices of materials. Stuff which has passed through my office with prices on, has indicated similar to myself. It becomes even more pronounced when start asking questions and identify two people required for 2 days to install many of the items: based on industrial award rates of pay, there seems a lot of profit in there. But then again there is all the unaccounted for over head of attempting to sell the things, and the sales commission for the sales person who does sell. The point is, that whilst it may be a legitimate cost of doing business, it is not value to the buyer, and it shouldn't be there or it otherwise needs turning into value. For example the house owners most likely wouldn't have thought to build if such wasn't available in the market. Putting the idea in the market does have value. To a certain extent development approval authorities attempt to protect this value, and require each supplier to produce own evidence of suitability and not base their building products on the RD&D of other suppliers. Similarly for owner builders. They all have to get designs done, and that can eliminate the cost saving, since the market suppliers have distributed design costs across the sales of 1000 or more units per year.

It is simonian simplification to assume your costs are the same as everybody elses. To start with most new businesses have lower cost technology than existing players in the market, and so lower startup costs. That technology also makes them faster, and able to do more and with higher quality. Existing business has a multitude of internal politics and history to resolve before they can get full benefit from new technology. That can mean for example that a new start up can charge 80% of the market rate and make significant profit for their actual costs are say only 20% of market rate. They are not working at a loss, they are trying to make the service more accessible to a greater market: their concern the needs of the market, not the status and prestige of a profession. Secondly they probably really like what they are doing, and don't need extra money to pursue the activities they would rather be doing. There are lots of hidden intangibles in prices.

Sun 2012-Jul-01  01:03AM