Swarf: The Twinge Factor

By Lloyd Graff

Today’s Machining World Archives September 2010 Volume 06 Issue 07

Several years ago Graff Pinkert had a deal with a fellow who made a good living buying surplus machinery from government stockpiles and reselling it around the world. We talked about his bidding strategy and he told us his approach.

He would assess his risk in bidding on a bulldozer or crane and put down a price he was comfortable with. Then he would put down successively higher figures. When he reached the number that made his stomach twinge, he circled it and let it settle in his body for a while.

He told us he had learned from hard earned experience that the stomach twinge bid was the one that usually succeeded. The comfort zone bids won occasionally, but generally were also-rans.

I think the “twinge rule” is one of the most important and difficult laws to master for a business person. In business we negotiate with fear every week. Over time, many people understand their personal risk tolerance.

Some are adrenaline junkies and look forward to their “twinge” moments. Most people despise the fearful reaches and value predictability and safety.

The writer, Wayne Dyer, has written about going to a spa where there were a dozen sitting pools with temperatures ranging from very cold to very hot. Almost everybody gravitated towards the two pools that were around 100 degrees. He tried every pool and found he enjoyed them all.

Fear and uncertainty are constant companions in business today. The “twinge test” still works for those of us who can live outside the tepid zone.

The DMG/Mori-Seiki USA partnership is starting to pay dividends. I recently talked with a client who’s buying one and possibly two expensive DMG twin turret lathes. He liked the DMG technology, but he told me he would not have considered buying DMG if they were not selling through Maruka on the East Coast. Maruka is the Mori distributor based in Rocka-way, New Jersey, and it now also sells DMG. He trusts them, he respects his salesman, and he believes in Maruka’s support.
The DMG/Mori-Seiki showroom in Hoffman Estates near Chicago is a superb facility, but it is the reliability of Maruka that will ultimately make the New York sale of a $500,000 machine tool.

Are we in a period of deflation in America? Will prices for goods and services, real estate and machinery trend downward for the foreseeable future? Will wages also move down? Will the value of cash be greater and illiquid assets like homes and machinery get harder and harder to sell?

This is a question of enormous importance to not only econo-mists and statisticians, but to everyone who doesn’t live in a cave. The bond market is alerting us to the possibility of deflation, with the 2-year U.S. Treasury paying a .5 percent return and the 10-year yielding 2.6 percent. And this is in a period of trillion dollar federal deficits with foreigners supposedly skittish about U.S. debt.

If people are scared about repayment of principal or debasement of the currency, they will not accept less than three percent for 10 years.

The “sky is falling” inflation vigilantes who play the bond market were near apoplexy a few months ago about the pandemic of government deficits. Now many of the Henny Pennys, like Mohamed El-Erian of Pimco, are warning of deflation ala Japan in the 1990s.

I don’t think anybody really knows if we are entering a prolonged period of deflation, but I think that developing a contingency plan for deflation is wise. And the first commandment would be “Thou shall not own real estate.”

The worst thing to own during deflation is land and buildings. Better to rent with short-term leases and options to renew in case prices start to go way up. Small business people have traditionally built wealth by owning their buildings and renting to themselves, but this is absolutely wrong during deflation. Tokyo real estate has been a terrible investment for the last 20 years.

Leasing machinery and cars would be the way to go if prices slide. If a new Haas VF2 machining center dropped $10,000 in price over three years, the used value would depreciate accordingly.

An additional kicker is the likely appreciation of the U.S. dollar against foreign currency, which we have seen happen with the yen’s rise. This would make imports cheaper.

Deflation would bring wage deterioration and givebacks. We are already seeing a lot of this. We may soon be asking the counter intuitive question “Is my pay decrease in line with deflation?”

For the investor, big multi-national companies with well protected dividends would be the ticket. A company like Altria that pays six percent by selling to tobacco addicts might be a good bet, if you can stomach owning the stock.

If one figures in the recent drop in home prices, we are in a deflationary period now. It’s a depressing prospect, but if you adapt to it, perhaps you can make it work for you.

As the details gradually emerge from the BP oil spill it becomes more and more clear that the management in London had incentivized the troops in the field to skimp on maintenance to enhance the company’s bottom line. There probably is a connection between the BP refinery explosion at Texas City back in 2005 and the Deepwater catastrophe in the Gulf. It appears to me that London had incentivized its employees to emphasize the short-term bottom line and ignore the future consequences (see “Book Review”).

With the U.S. productivity statistics showing incredible improvement in efficiency month after month, it prompts the question of whether productivity incentives are always good long-term.

In the machining game, there is a danger in setting productivity targets that invite people to game the system. If one machine operator or shift is competing with another the temptation for sabotage in the plant is real. When teams compete against norms and other teams, the peer pressure within teams can become destructive to the enterprise. In a coal mine, where tonnage means everything, safety is often neglected, which may culminate in tragedy.

Sales incentives based on monthly or quarterly results often end up with employees gaming the system.
I’m interested in your experience with incentives.

I had the opportunity to spend several hours with Mitch Liss of Edsal Manufacturing (interview on page 34), a major producer of steel shelving and office furniture with sales of $200 million, based in Chicago. Mitch gave Noah and I an insider’s view of purchasing politics by big box retailers and huge catalog sellers.

He said that within massive organizations like Wal-Mart or Grainger you find two distinct parties influencing purchasing decisions, the buyers and the global (strategic) sourcing groups.

The shelving buyers, who work closely with the sourcing people, have the responsibility of making the final call about what product makes it to the sales floor or catalog and how much is ordered. The sourcing guys are charged with scouring the world to find cheaper shelves. Their salaries and bonuses are dependent on increasing the amount of dollars out-sourced, primarily from China.

The purchasing guys have little interest in where the product ultimately comes from, as long as it sells well. This drives a guy like Mitch Liss crazy because every rack and shelf he makes is a sitting target for the strategic sourcing dudes.
What bugs Liss is that the incentives are rigged to favor foreign placement of orders, even though he usually offers an equal or lower final price to the reseller.

His biggest irritation is with Costco, who he’s been trying to sell to for eight years without success. He says he can sell a better product for less money than the Chinese currently supply, but the buyers refuse to allow him to be seriously considered head-to-head against the competition. Evidently, for the Costco buyers, the idea that an American firm based in Chicago can undersell the Chinese is so ridiculous that Edsal cannot even demonstrate its products side-by-side at Costco headquarters in Washington state.

Interesting how Costco has remained blind to the fact that Edsal sells millions of dollars of products to Home Depot, Lowe’s, Menards, Grainger and McMaster-Carr.

I would think that an American company would at least get a fair look by a firm that sells most of its goods in this country.

Chelsea Clinton married Marc Mezvin-sky recently. Why should I care?

I care because Chelsea is American royalty and she just married a Jew. And not a plain clothes Jew or a hidden heritage Jew like John Kerry, but a practicing one. For better or worse, I grew up seeing everything through a Semitic lens. Bernie Madoff was a colossal thief, but for me it’s worse because he was a Jewish thief. I cared that Scott Feldman won 17 games for the Texas Rangers last season because he is Jewish. I voted for Al Gore in 2004 because Jewish Joe Lieberman was the vice presidential candidate.

For my generation of post World War II Jews, life is about proving Hitler did not win in his effort to exterminate us. The phenomenal success of Jews in America during the last 50 years in business, politics, science, the arts, academia etc. and the amazing ascendance of Israel, despite being surrounded by militant enemies, afford me great pride. When Elena Kagan was confirmed to the Supreme Court she became the third Jew on the Court. To most of America, she’s another New York liberal woman, if they care at all, but to me she is an MOT—a Member Of the Tribe, which makes her important. I keep score and I always will.

My acute sense of Jewish success in the U.S. scares me. I wonder when the next wave of jealousy and resentment will pop up like a mushroom. Personally, I am ashamed of my Jewish brethren at Goldman Sachs, whose cynicism and greed helped bring on the economic collapse of 2008. I am surprised that the resentment against Wall Street has not morphed into overt anti-Semitism and that the Tea Party movement has stayed away from “blaming the Jews,” which was common during the Great Depression.

When I heard the title of the new Steve Carell movie was “Dinner for Schmucks” I feared it was Hollywood turning on the Jews, but now I think I’m just ultra-sensitive about the topic.

I have taken a chance in writing about my Judaism and my Jewishness. It may be risky for business reasons, but to my surprise I feel very little pushback for it.

This country has changed in my lifetime—for the better. Chelsea Clinton was married under a chuppah, the canopy traditionally used in Jewish weddings, by a rabbi and a reverend, and the traditional Jewish Seven Blessings were read. It wasn’t that big a deal in the press. The father of the groom was a former congressman who had been in jail and married a congresswoman. But who keeps score anymore?

Summer jobs have run their course in 2010, for those lucky enough to get one. My first summer job was in 1960, when I was 16 years old. I found it by placing a situation wanted ad in the Chicago Tribune. I advertised my skill as a writer, perhaps slightly embellished (well, doesn’t everybody) and promptly heard from a small magazine publisher located in downtown Chicago. His name was Hadley and he published The Civil Service News which was a job posting rag, and Midwest Ports, a nondescript magazine about local shipping.

Hadley hired me for a little more than minimum wage, gave me a desk, and told me to write some stuff for Midwest Ports. The job was a blur. The exciting part was the 20 minute train trip to the Loop, working in the office building next to the Shubert Theatre, and occasionally eating at Wimpy’s Hamburgers for lunch.

I worked for Hadley, who wore sunglasses indoors, for six weeks. He was a grouchy curmudgeon so I stayed away from him as much as I could. Then out of nowhere he called me into his office and fired me. No explanation, just bye bye. One of the ad guys called me over while I was packing my pencils. He said Hadley had learned I was Jewish, which was all he needed to know.

It was an interesting lesson for a teenager to learn in his first summer job.

My wife Risa was cleaning out the garage and found a duffel bag packed with clothes, tools, photos and batteries. It was a “catastrophe” bag we had put together after September 11th, 2001.

We pitched the big jar of peanut butter and the oatmeal but kept the family photos and blank writing journals. It also held $120 in cash, which seems like a paltry sum for feeing Armageddon.

I know I am superstitious, but I wish we had kept the duffel bag as it was, just so we would never need it. I don’t think the idea is obsolete. I’m going to update a new “fee fast” bag with new pictures including our grandchildren, son-in-law and daughter-in-law, if for no other reason than to remind me about what is really important in life.

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