This was my original outline or back ground research so that I could understand the development of supply chain management. . The finished report is posted on here as well.

1. A Supply Chain Model
For Short Seas Shipping
A Thesis Presented to
The Faculty of the International Transportation Management
State University of New York
Maritime College
In Partial Fulfillment
of the Requirements for the Degree
Master of Science in International Transportation Management
by
Captain John M. Beasley, ME, MA

2. “Instead of giving attention to competitors or to demand,
our prices are based on an estimate of what the largest possible number
of people will want to pay, or can pay, for what we have to sell.”
Henry Ford

3. A Supply Chain Model For Short Seas Shipping
ITM Department Chairman: Dr. Larry Howard
Thesis adviser: Captain Stash Pelkowski, Esquire
Table of Contents
List of Abbreviations
List of Charts
List of Photographs
List of Spreadsheets and Financial Models
Executive Summary
Abstract
A.1 Define the economy
A.2 Define supply chain management
A.3 Define the new market - management and creation as the product.
A.4 Define the objectives of supply chain management
A.5 Prepose a supply chain model built around Short Sea Shipping
Purpose of the Master’s Thesis
Structure of the Master’s Thesis
Introduction
1: Brief History of American Business 1900’s - 2000’s
1.1: The Early American Business Model Lassiez-Faire Capitalism
1.2: The Emergence of Corporate Capitalism and Economies of Scale
1.3: Taylor and the Efficient Factory.
1.4: The Depression of the 1930’s and The Decline of Lassiez-Faire Capitalism
1.5: New Deal Social Costs, Taxation and the Cost of Goods Sold
1.6: The Post War Boom Years and ROI
1.6: The Marshall Plan in Europe and Asia
1.7: World Economic Recovery
1.8: The Decline of US Industries in the 1970’s and 1980’s
1.9: The Emergence of the Japanese Business Model
1.10: US Cost Structures and Return on Investment
1.11: Corporate Raiders and Asset Liquidation
1.12: The Emergence of Supply Chains and New Business Models

4. 2: Brief History of Supply Chain Management
2.1 Formally emerged in the 1980’s
2.2 Defining the Need for New Business Models
2.3 New sources for products (Asia)
2.4 New Managerial Skills and Accounting Trials
2.5 Decline of the product based business model.
2.6 Emergence of the customer oriented business model
2.7 Management Freed to Choose Production Sources
3: The Objectives of Supply Chain Management
3.1 Various Processes Discussed - (outlined in Appendix) SCOR - GSCF
3.2 Types of Supply Chains (efficient vs. responsive)
3.3 Objectives of Supply Chain Management
3.4 Supply Chain Control Mechanisms
3.5 Supply chain drivers & supply chain feeder activities (dependent activities)
3.6 Supply chain partners and investors
3.7 Measuring Effective Supply Chain Management (MIS)
4: A Business Model for Short Sea Shipping
4.1 DOT Proposal To Fund Short Sea Shipping and new ship construction
4.2 Building a Supply Chain for Short Sea Shipping:
4.3 Turning Consumption into Production - supply chain partners and investors
4.4 Some impediments to Short Sea Shipping
4.5 Define the Business Operation - Ship as a franchise - liner conference
economies of scale afforded by franchise SCM
4.6 Ship Design - Ro/Ro with re-definable space, container, passenger, ferry
4.7 Modular interior design based on containers as modular spaces
4.8 Containers as the key to interior design, fuel tanks, reefer storage, etc..
4.9 Container factories, modular housing, retirement communities,
4.10 Movement of goods,
4.11 Human Resource models - business design - staff training
4.12 Diverse product development
5. The Management System as the Key to Success
5.1 MIS System design - management dashboards (Black)
5.2 Ship cost structures; construction and operating costs (Nadolny)
5.3 Break-Even Financial Analysis for short sea shipping
5.4 Selling franchises on a per ship basis

5. 5.5 Minimizing ship maintenance costs and spares inventory
5.6 PERT Charts - influence diagrams of the supply chain
5.7 Financial Models of the business
5.8 Sensitivity and Monte Carlo Simulation analysis
5.9 Defining useful Linear Programming models
Bibliography
References
Index
Appendix
1: SCC supply chain models - SCOR brochure
2: GSCF supply chain models - SCM brochure
3: DOT - Tiger 2 - funded program for Short Sea Shipping and ship design
4: Container types and layout opportunities
5: Modular housing, offices, and work spaces brochures
6: Planner’s Lab modeling software
7: MIS dashboards examples
8: Marketing data analysis pad - 1985
Key Words; supply chain, supply chain management, supply chain history, U.S. business history,
supply chain development, supply chain methodology, logistics, short seas shipping, DOT short
seas shipping initiative, MIS, management information systems, maritime industry, handy size
ships, liner conference, container ships, ferry ships, ro/ro ships, small cruise ships, modular ship
design, ship franchise, container based modular homes, container based modular offices,
container based modular factories, ship break-even analysis, SCOR, GSCF, Planner’s Lab,
Lassiez-Faire Capitalism, corporate capitalism, shop capitalism, handicraft capitalism,

6. List of Abbreviations
3C’s – Customer, Company (or Costs), Competition
3PL – Third Party Logistics Provider
4P’s – Product, Price, Place, Promotion
ABC – Activity Based Costing
AGV – Automatic Guided Vehicle
ANSI – American National Standards Institute
AP – Accounts Payable
APQC – American Productivity and Quality Center
AR – Accounts Receivable
ASN – Advance Shipping Notice
ASP – Application Service Provider
ATP – Available to Promise
AVL – Approved Vendor List
B2B – Business To Business Transactions
B2C – Business To Customer Transactions
BOL – Bill of Lading
BOM – Bill Of Materials
C2C – Cash to Cash Cycle Time
CDF – Cumulative Distribution Function
COD – Cash On Delivery
COFC – Container On Flat Car

7. COGS – Cost Of Goods Sold
CTP – Capable to Promise
CPG – Consumer Product Goods
CPI – Consumer Price Index
CPP – Cost Per Pallet
CPM – Critical Path Method
CPRF – Collaborative Planning, Replenishment and Forecasting
CRM – Customer Relationship Management
CRP – Conference Room Pilot
DSCA – Downside Supply Chain Adaptability
DC – Distribution Center
DFM – Design for Manufacturing
DFMC – Design For Mass Customization
DFR – Decreasing Failure Rate
DOT – Department Of Transportation
DRP – Distribution Requirements Planning
DSD – Direct Store Delivery
EAI – Enterprise Application Integration
EBIT – Earnings Before Interest and Taxes
EBITDA – Earnings Before Interest, Taxes, Depreciation and Amortization
EDI – Electronic Data Interchange
EDLP – Everyday Low Prices
EOQ – Economic Order Quantity
EPC – Electronic Product Code

8. ERP – Enterprise Resource Planning Software
FEU – Forty Foot Equivalent Unit
FIFO – First In First Out
FOB – Free On Board – Freight On Board
FTL – Full Truck Load
FTZ – Free Trade Zone
GCD – Great Circle Distance
GL – General Ledger
GPS – Global Positioning System
GSCF – Global Supply Chain Forum
HR – Human Resources
HUB – Central Shipping Facility
IATA – International Air Transport Association
ICC – interstate Commerce Commission
IFR – Increasing Failure Rate
ISO – International Standards Organization
ISO 9000 – EU business process standards
JIT – Just In Time
JIT–II – Bose company adaptation of JIT
Kaizen – Japanese business practice
Kanban – Toyota’s JIP inventory control process
KPI – Key Performance Indicator
LASH – Lighter Aboard Ship
LOC – Letter Of Credit

9. LIFO – Last In First Out
LIFR – Line Item Fill Rate
LP – Linear Programming
LPN – License Plate Number
POF – Perfect Order fulfillment
LTL – Less than a Truck Load
MCM – Mass Customization Manufacturing
MES – Manufacturing Execution System
MRO – Maintenance, Repairs and Operations
MRP – Material Requirements Planning
MRP II 2nd Generation Material Requirement Planning
NAFTA – North American Free Trade Agreement
NHTSA – National Highway Traffic Safety Administration
NM – Nautical mile 6067 feet, 115% of a statute mile (5280) or 1852 meters
NVOCC – Non Vessel Owning Common Carrier
OEM – Original Equipment Manufacturer
OFCT – Order Fulfillment Cycle Time
OFR – Order Fill Rate
OLAP – On Line Analytical Processing
OLTP – On Line Transaction Processing
OSHA – Occupational Safety and Health Administration
OTI – Ocean Transportation Intermediary (broker)
PLM – Product Lifecycle Management
PM - Project Manager

10. PMP – Project Management Professional
PO – Purchase Order
POD – Proof of Delivery
POS – Point of Sale data
PPI – Producer Price Index
QA – Quality Assurance
QFD – Quality Function Deployment
RDC – Regional Distribution Center
RFID – Radio Frequency Identification
RFQ – Request For Quote
ROI – Return On Investment
ROP – Re-Order Point
Ro-Ro – Roll On Roll Off
ROWC – Return On Working Capital
S&OP – Sales and Operational Planning
SaaS – Software as a Service
SCE – Supply Chain Execution
SC – Supply Chain
SCEM – Supply Chain Event Management
SCM – Supply Chain Management
SCMM – Supply Chain Management Model - GSCF
SCMC – Supply Chain Management Costs
SCOR – Supply Chain Operations Reference (model)
SCP – Supply Chain Planning

11. SEC – Securities and Exchange Commission
SKU – Stock Keeping Unit
SME – Subject Matter Expert
SNP - Supply Network Planning
SOA – Service Oriented Architect
SPC – Statistical Process Control
STB – Surface Transportation Board
SRM – Supply Relationship Management
TEU – Twenty Foot Equivalent Unit
TIGER – Topologically Integrated Geographic Encoding and Reference
TMS – Transportation Management System
TOC – Theory Of Constraints
TOFC – trailer on Flatcar (piggy backing)
TQM – Total Quality Management
UCC – Uniform Commercial Code
ULD – Unit Load Device (air freight container)
UPC – Universal Product Code
USCA – Upside Supply Chain Adaptability
USCS – Upside Supply Chain Flexibility
VAN – Value Added Network
VAR – Value Added Reseller
VAT – Value Added Tax
VMI – Vendor Managed Inventory
VICS – Voluntary Industry Commerce Solutions

12. VMI – Vendor Managed Inventory
WBS – Work Breakdown Schedule
WIP – Work In Progress
WMS – Warehouse Management System
WTO – World Trade Organization
XML – Extensible Markup Language
ZS – Zone Shipping (intermodal carriers)
Abstract
A.1 Define the Economy
The United States is in a very interesting economic situation. World War II, the Korean War, and
finally Ping Pong diplomacy with China afforded American industry an opportunity to invest in
many economies around the world. These American companies became multinational and then
global businesses. Probably due to tax laws and investment strategies, revenues from these
international investments are not often repatriated to the United States. On the one hand
international companies that were once thought of as American are doing rather well in their
international investments, not withstanding the current economic recession that began in 2008.
The domestic industrial manufacturing sector in the United States is in decline. This is largely

13. due to unfavorable cost structures, such as, state and federal taxes levied on business income, the
cost of capital on Wall Street, the cost of labor and the methods used for funding social
programs. All of these factors combine to increase the cost of goods sold (COGS) on products
manufactured in the United States to a point that American products and services are not
competitive in the world marketplace. American goods have lost the comparative advantage that
they commanded from 1900 until after World War II. One could argue that the combination of
economic choices favored by the U.S. Federal Government has created a flight of capital out of
the United States. The United States has a number of systemic issues that need to be addressed;
unfavorable taxation methods, labor laws that include social services, a trade deficit and a fiscal
deficit.
A.2 Define Supply Chain Management
Supply chain management can be thought of in a number of ways. The traditional movement of
components through a production process. In this narrow sense, all the materials and
subassemblies that feed an assembly line constitutes a supply chain. Henry Ford provides the
logic for establishing a supply chain in his autobiography, and in his second book, Today and
Tomorrow. A more contemporary vision of a supply chain is “an integrated process wherein a
number of various business entities (i.e., suppliers, manufacturers, distributors, and retailers)
work together in an effort to: (1) acquire raw materials, (2) convert these raw materials into
specified final products, and (3) deliver these final products to retailers.” “This chain is
traditionally characterized by a forward flow of materials and a backward flow of information”
Christopher defines a supply chain as; “A network of connected and interdependent
organizations mutually and co-operatively working together to control, manage, and improve the
flow of materials and information from suppliers to end users.” The Global Supply Chain Forum
(GSCF) defines SCM as “ the integration of key business processes from end user through
original suppliers that provides products, services, and information that add value for customers
and other stakeholders.” The Council of Supply Chain Management Professionals' (CSCMP)
defines SCM as, “Supply chain management encompasses the planning and management of all
activities involved in sourcing and procurement, conversion, and all logistics management
activities. Importantly, it also includes coordination and collaboration with channel partners,
which can be suppliers, intermediaries, third party service providers, and customers. In essence,
supply chain management integrates supply and demand management within and across
companies.” Supply Chain Management is defined by Mentzer “as the systematic ,strategic
coordination of the traditional business functions and the tactics across these functions, within a
particular company and across business within the supply chain, for the purpose of improving the
long term performance of the individual companies in the supply chain and the supply chain
members collectively.” “Supply chain management is the management of all internal and
external processes or functions to satisfy a customer’s order (from raw materials through
conversion and manufacture through shipment).” Metz provides the following definition of
supply chain management; “SCM is a process-oriented approach to managing product,
information and funds flow across the overall supply network, from the initial suppliers to the
final-end consumers.”

14. A.3 Define the Product: Management of SCM.
Building upon both of these product driven concepts of a supply chain, one can envision a new
concept of supply chain management. A management company, typically organized as a mutual
fund, would receive a fee or percentage for designing and managing functional supply chains,
and may have no vested interest in the business enterprises producing the products or services.
The management team would identify areas of consumer demand sufficient to drive a supply
chain, organize optimal financial resources, assets, suppliers, manufacturers, distributors, and
retailers internationally to capture sufficient market share to reward the companies providing
feeder products and services to sustain a supply chain. Typically, the traditional supply chain
moves products into the market to make a profit on the demand items, the supply chain drivers.
The supply chain driver is usually the final step in the supply chain, the finished product for
which consumer demand exists. Typically, the objective in selling a supply chain driver is to
obtain whatever the market will bear to maximize profits. In this new vision of feeding a supply
chain pipeline, the end product, the supply chain driver, need not be exceptionally profitable. The
objective of the supply chain pipeline is designed backward starting with the customer and with
customer demand, and the supply chain is designed to meet that demand. The profit is realized
by the supply chain feeders on their component parts provided to create the final product, the
demand item, the supply chain driver. Since profit is taken all along the supply chain by the
companies feeding the supply chain, the partners, profits realized on the demand item, the supply
chain driver that sustains the supply chain feeders, the partners, need not meet industry return on
investment (ROI) averages. An example of this strategy is Jet Blue. Jet Blue realizes on average
a 5 percent return on investment (ROI) on assets of 3.8 billion. Jet Blue stock is an
underperforming stock. However, Jet Blue feeds a tremendous supply chain pipeline composed
of taking delivery of a new Air Bus 300 jet every 12 weeks, jet fuel, food, and consumer
services. In industries such as passenger air travel, supply chain profitability objectives have
been redefined by companies like Jet Blue. Traditionally operated companies such as Eastern
Airlines, Continental, United Airlines, and American Airlines that are attempting to make a profit
on the supply chain driver, air passenger fares and freight shipping, are operating at a clear
disadvantage.
When supply chains were vertically owned, corporate entities had a great deal of flexibility
where they took a profit in the supply chain. For example, it might be prudent to have a Canadian
or Mexican subsidiary in the supply chain realize the profit prior to moving the products into the
United States, thereby reducing the US tax burden that would accompany the sell of these
products in the United States. These supply chain management strategies allowed vertically
owned companies greater opportunities to maximize after tax profits. The degree of flexibility
available to a supply chain management company is not as great as is available in vertically
owned supply chains, however opportunities still exit to maximize after tax profit. The
opportunity still exists to transfer paper losses from one investment vehicle to another to help
maximize investors composite return on investment (ROI).
Supply chains can be used in a seemingly infinite number of patterns to generate optimal cash
flows for the entire supply chain, taking advantage of market specific labor costs, currency

15. exchange rates, capital interest rates, types of ownership in investments, and tax structures. It is
important to consider that the profit need not taken at the point of sale to realize a profit on the
entire supply chain. Without reverting to unethical practices, costs can be transferred up or down
a supply chain to optimize after tax cash flows. For the contemporary supply chain managers an
important consideration in designing LP and NLP optimization models is that the objective is to
maximize profit on the supply chain feeders, not the supply chain drivers. The volume of product
produced that drives the supply chain should reflect the maximum number of units that can be
sold at a minimum price that provides the maximum profit to the supply chain partners, while
maintaining the minimum allowable return on investment (ROI) for the company marketing the
supply chain driver.
German companies, such as Mercedes Benz, BMW-Mini Cooper, Volkswagon - Audi (USA) and
Smart Cars (USA) are notorious examples of companies still trying to maximize a return on
supply chain drivers, rather than on supply chain feeders: Unless, these companies are marketing
their products to their U.S. subsidiaries at a value added wholesale price thereby realizing their
profit at the wholesale level, i.e., upon importing their products into the US market. This would
minimize the profits taken in the U.S. market while insuring a positive cash flow to the parent
company. In the event of a loss, that loss would be recognized at the subsidiary in the U.S.
market, and would not effect calculations of profit and loss or stock values of the manufacturing
company in their home market. The loss could be, for accounting and tax purposes, entirely a
paper loss. In the event the loses were actual cash losses, and not an accounting convention used
to redistribute asset values across the corporate structure, the subsidiary is an expendable entity,
should that need arise.
From the vantage point of contemporary supply chain managers, the logical design objectives of
a supply chain are becoming more important than the individual manufacturing firms that
provide the tangible products that are pulled through that supply chain. To a greater and greater
extent products are becoming enter-changeable commodities due to CAD, CAM and computer
operated tooling. Excess industrial capacity exists worldwide and has eroded traditional market
share, despite there being six billion potential customers on the planet. The critical factor in
business success is often the objectives conceived within the design and implementation of the
supply chain. As one observes supply chain operations, the design and implementation process is
driving industrial growth opportunities. The process that creates and manages a sustainable
supply chain is replacing the producer of the products as the determining factor in business
success. Production capacity is becoming a resource, not unlike capital or labor, that can be
shopped, transported across markets, and readily exchanged to minimize costs and maximize
efficiency.
A.4 Define the objectives of supply chain management
to define a market, to command the resources, processes, necessary to address demand, to
sadisify that demand by providing the customer the correct product, service at the right price so
that they feel they received value and are at least ___________ and hopefully
______________.

16. A.5 Prepose a Supply Chain Model Built Around Short Sea Shipping
The intention of this masters thesis is to define a process for building a sustainable business built
upon the supply chain driver, short seas shipping, utilizing all available
Purpose of the Master’s Thesis
To explore the emerging idea that in as much as excess industrial capacity exists worldwide, the
current determining factor in business success is supply chain design and management. The
product that largely determines the success or failure of supply chain drivers in the marketplace
is increasingly management acumen. Therefore, when one is examining a supply chain,
increasingly it appears that the product is the process of creating and sustaining the supply chain.
Certainly, the demand item remains the driver providing the cash flow to the supply chain
feeders, but the means to realizing a profit on the supply chain is largely process design, rather
than production. The tangible products within the supply chain have largely become
commodities, that are available through numerous sources. The choices in designing and
managing the supply chain have become as important, or more important, than the manufacturer
of the product itself. The supply chain example developed in this masters thesis is a start up
business for short sea shipping based on the model of European Ferry Boats and the DOT
proposal for an East Coast Maritime Highway Initiative. The Marine I-95 corridor as defined is
1000 miles long connecting the facilities of Port Canaveral, Florida, Baltimore, Maryland and
New Bedford, Massachusetts [1] . The initiative also provides funding for new US flagged ships
that can accomodate roll on / roll off (ro/ro), and container cargo.
Introduction
Chapter 1
Chapter 1 reviews the economic history of the United States from 1900 to 2000. The chapter
covers Lassiez-Faire Capitalism and it’s origins in the Protestant Reformation in Northern
Europe. Some of the characteristics of Lassiez-Faire Capitalism are discussed. Reactions against
Lassiez-Faire capitalism, alternative economic theories discussed, and the emergence of state
sponsored corporate capitalism. Prior to the depression in the 1930’s, Lassiez-Faire Capitalism
was the dominant economic model in the United States, 80% of Americans were self employed
or employed in handy craft industries. After World War II, 80% of Americans were employed by
either the government or corporate capitalist enterprises. Between 1945 and 1965 the United
States enjoyed economic ascendancy largely due to the destruction of industrial capacity in
Europe and Asia. During World War I and World War II, U.S. agriculture and manufacturing was
able to sell all their products at a considerable markup, making it possible to obtain 15% or more
return on investment (ROI) on rather safe investments. After both wars, investors continued to
desire to make excessive returns on investments. In Europe and Asia the average cost of capital
for safe investments, often referred to as risk free or nearly risk free investments, carries a return

17. of 2% to 5% return on investment (ROI). The American addiction to large returns on investment
capital periodically requires investors to take greater and greater risks. The United
States economy cycles between boom and bust economic markets, with growth cycles averaging
four years and average down cycles lasting one year.
In the 1970’s and 1980’s the United States economy stalled in the face of inflated oil prices, the
end of the gold standard, and monetary inflation. The Japanese had studied the U.S. industrial
model well, and had improved upon it. By the 1970’s and 1980’s U.S. exports to Europe and
Asia were declining, while imports from Japan were accelerating. United States investors rallied
behind a commercial real estate boom, even as demand for commercial real estate was declining.
In the 1970’s and 1980’s American corporations complained that they could not compete with
Japanese companies, because their cost structures were different. During World War II, as part of
the ‘New Deal’ and ‘Win the War’ government spending programs, the federal government had
required American businesses that accepted federal government contracts to assume the social
burdens for health care and retirement benefits. These requirements for social benefits combined
with a grater than average cost of capital and high employee wages made the cost of goods sold
(COGS) higher in the United States than in Japan or in many European countries. American
companies could not compete because social costs were being added into the cost of goods sold
(COGS) and driving up production costs, rather than having these social costs collected on the
consumption side as a value added tax (VAT). Critics of value added tax schemes (VAT)
complained that consumption taxes penalize the poor and are socially unjust.
At the same time as the economy stalled in the 1970’s and 1980’s, a new specter began to haunt
corporate capitalism, corporate raiding. U.S. companies had amassed large amounts of real assets
in the course of business, and these assets were not generating revenue streams. Corporate
raiders could put together a cartel, buy controlling interest in a company, assume management,
sell off non-performing assets and repay cartel members who had invested in the hostile
takeover. One outstanding example was Disney Company. Walt Disney had recently died, his
brother Roy Disney took over control of the company. When the oil crisis hit, Disney revenue
streams suffered. Roy Disney assured investors that they had nothing to worry about, Disney had
huge amounts of fixed assets. An investment cartel, headed by the ‘wunderkind’ Michael Eisner,
funded by tobacco money and other financial interests bought controlling interest in Disney. The
cartel replaced Roy Disney as president, and began to reap the benefits of corporate control of
Disney.
U.S. based companies were in an awkward situation, as they could not compete due to
unfavorable cost structures and tax burdens that drove up their cost of goods sold (COGS). At the
same time there was excessive industrial capacity worldwide. This potentially exposed

18. underperforming corporate assets to corporate raiders. Corporations began to shield assets and
move real assets off the corporate books. U.S. companies had to reinvent the U.S. business
model to compete. After studying the efficiency of Japanese business practices one model that
emerged was what was called, supply chain management.
The business model that served for the past fifty years, is no longer working. As managers, we
need to review recent business history and try to borrow from the past and piece together a new
approach to doing business. Supply Chain Management is an approach for dealing with product
production, distribution and sales, however SCM requires a business plan, a marketing strategy.
Chapter 2
Chapter 2 provides an overview of supply chain management. Certainly, supply chain
management has existed for centuries in the military field, and one can argue that supply chain
management has been a focus of the industrial revolution since the 1800’s. One can argue that
primarily the focus of management has changed. None the less, the modern concept of supply
chain management (SCM) emerged in the 1980’s, which encompasses various definitions “a
supply chain may be defined as an integrated process wherein a number of various business
entities (i.e., suppliers, manufacturers, distributors, and retailers) work together in an effort to:
(1) acquire raw materials, (2) convert these raw materials into specified final products, and (3)
deliver these final products to retailers.” “This chain is traditionally characterized by a forward
flow of materials and a backward flow of information” (Beamon, p. 2) “A supply chain is an
integrated manufacturing process wherein raw materials are converted into final products, then
delivered to customers” (Beamon, p. 2). A supply chain, in its simplest form, can be divided into
two basic functions: As a production, planning and inventory control process and as a
distribution and logistics process. (Beamon, p. 2)
Since the 1980’s this new business model termed supply chain management (SCM) has evolved
through stages of development. Downsizing in the declining U.S. economy of the 1970’s and
1980’s, combined with a fear of the Japanese efficient manufacturing model characterized by
Kanban, just in time (JIT) inventory control and Keiretsu fueled the need for an American
response. Electronic Data Interchange (EDI) grew into Enterprise Resource Planning (ERP) and
provided the ability to cost effectively track products electronically through the production and
distribution processes. Globalization of supply and demand provided the ability to outsource
work and move products across national boarders into what became a global production network.
The internet made visibility throughout the supply chain a reality, as well as MIS management
information dashboards. Vertical integration gave way to core competencies and specialization.
Companies began to create vertical partnerships that afforded them some of the benefits of
vertical integration, termed virtual integration, without exposing corporate assets (Lavassani, p. )
Electronic tracking provided a degree of inventory control that would have impressed John D.
Rockefeller. In as much as supply chain management attempts to feel out the desires of the
customer and fill those needs, supply chains attempt to use a pull marketing strategy rather than a
push marketing strategy. A push marketing strategy usually relies upon economies of scale to
lower production runs and offset expenses associated with warehousing and securing inventory
until it is sold.

19. Chapter 3
Chapter 3 defines the logic and tools used to design a supply chain. If a product is a functional
commodity, that is “stable, with predictable demand and a long life cycle and low profit
margins” [Fisher, 130] then the supply chain must minimize costs. If the product is innovative,
demand is unpredictable, the market life cycle is short or unpredictable, then the supply chain
must be responsive. Commodities must have an economical supply chain that minimizes costs
while innovative products require a responsive supply chain that can deliver to match variable
demand.
Chapter 4
Chapter 4 proposes a business model for implementing a business venture based on short sea
shipping. The objective is to combine numerous compatible supply chain drivers to share the
costs necessary to support all the supply chain feeders used to produce ships, and a near coastal
shipping industry. Supply chain drivers such as passenger travel, recreational passenger cruises,
gaming, shipping of cars and RV’s, combined with container shipments and ro/ro trade so that
short sea shipping does not have to provide the entire revenue stream to support the business.
Other proposed services include ferry service for rv’s, small ship cruising, a casino, delivery of
modular housing, modular factories and modular educational facilities. The product that I am
developing is supply chain management expertise, all the tangible products are tools utilized to
profitably pull large quantities of products through a supply chain designed around the DOT
short sea shipping initiative.
Chapter 5
Chapter 5 defines costs structures for ro/ro ship construction, ship operation, performa financial
models, break-even analysis, the available market for each product service category or separate
business unit (SBU), market share requirements to reach break-even by SBU. Sensitivity analysis
is used to define the quality of our current state of information. Sensitivity analysis uses the
value of perfect information as a means to define the value of better information. Stochastic
modeling using Monte Carlo simulations is performed on the performa financial models. Monte
Carlo defines random markets in which the company must compete, averages the income streams
from one or two thousand iterations, theoretically representing one or two thousand years of
operation, and defines a probability distribution that reasonably defines the risks inherent in the
investment as proposed. By obtaining better information, the swings in the Sensitivity model
income streams can be better understood and narrowed, thus eliminating some of the risk in the
investment. By reframing the model parameters in the Monte Carlo financial model,
relationships can be understood, and the probability of the business ventures success can be
improved. Finally linear programming can be used to define the most economical path through
the supply chain for many elements of this project. Some examples where LP can be useful are
ship construction and materials delivery, product offerings aboard the ship, product space
allocation on the ro/ro ship, cruising speeds and routing.

20. Conclusion, either the project will present a favorable financial probability or it will not. As a
marketing researcher, the requirement is to keep working until one discovers a path through the
business plan that provides a high probability of success. Conventional wisdom in the DSS and
IT community suggests that one should strive for 9:1 odds, that is a 90 percent probability that
the venture will generate positive cash flows before presenting the package to top management
or available fundings sources. In the real world, time, labor and money constraints often dictate
2:1 odds, a 67 percent probability, one standard deviation above the mean, as the minimum hurtle
rate. This tendency has been called ‘satisficing’ by Herbert Simon, meaning an answer that is not
optimal, but rather satisfactory that solves the problem. This is often the difference between
Operations Research theory and practice.
Structure of the Master’s Thesis
Chapter 1 describes a big picture, long view of the United States economy touching on social,
political, and economic factors that drove the economy roughly between 1900 and 2010. The
objective is to provide a cultural and economic context to explain and understand the business
environment as it progressed over the decades.
Chapter 2 provides an overview of supply chain management. The modern concept of supply
chain management (SCM), which encompasses various definitions “a supply chain may be
defined as an integrated process wherein a number of various business entities (i.e., suppliers,
manufacturers, distributors, and retailers) work together in an effort to: (1) acquire raw materials,
(2) convert these raw materials into specified final products, and (3) deliver these final products
to retailers.”
Chapter 3 details the mechanics of supply chain development and supply chain management.
Various types of supply chains are defined as well as strategies and models such as SCOR -
GSCF and SCM. These models are intended to define and standardize the application of supply
chain management.
Chapter 4 proposes a business model for implementing a business founded on short sea shipping.
The objective is to use supply chain management to group various supply chain drivers so that
they generate enough revenue to pull a large number of products through the supply chain and
into the U.S. market. The supply chain is a consumer of products, producers of the products are
the beneficiaries and the supply chain managers receive a management fee.
Chapter 5 defines costs structures for ro/ro ship construction, ship operation, performa financial
models, break-even analysis, the available market for each product service category or separate
business unit (SBU) and market share requirements to reach break-even by SBU.

21. 1: A Sketch of American Business History 1900’s - 2000’s
1.1: The Early American Business Model Lassiez-Faire Capitalism
One question that might arise at the outset, is why do we need to wade through twenty pages of
U.S. business history to consider a proposal about building a viable business model for short seas
shipping? The United States has economic issues and challenges. American business people have
to understand the nature of these economic problems to be able to figure out how to maneuver
around these issues, these economic land mines, and thereby design a business model that has
the potential to succeed.
To discuss the history of business, it is important to understand the business environment within
a historical context. Certainly, a historical context presents its own set of challenges. History is
culturally anchored, interpretive, and selective in its choice of materials. Arguably, society is
driven by economic processes that define the culture. Business practices arise within a social
context. Understanding the social context of business often explains the evolution of peoples
thinking and provides a context for their decision making.
As an example of this principle, the early investors in the first North American English Colonies
hoped to find gold and silver and repeat the success of the Spanish colonies in Mexico, Central
and South America. This was the primary intention of the Virginia Company of London, and the
Plymouth Company. When gold and silver were not found, to recoup their investments in these
failed colonies, the trading companies turned toward tobacco and the immigration business.
Interestingly tobacco and immigration have remained a staple of the American economic system.
A number of the early immigrants lured to the North American English colonies were Protestant
Christians from Northern Europe. They brought with them the economic model and logic of the
Protestant reformation. One thrust of the Reformation was an attempt by the poor peasant classes
to gain economic freedom from the ruling or managerial classes in Europe. To gain economic
independence the newly freed serfs had to impose a harsh social ethic upon themselves. The
peasant indentured classes in Europe did not allow themselves common social extravagances;
such as flashy clothing, gaming, alcohol consumption, drugs, and prostitution. Through
Protestant church association they encouraged each other to abstain from sin and vices. The
church and the community moved to minimize and eliminate any activity that undermined the
economic stability of the common people. This social ethic is most purely presented by John
Calvin. The North American Colonies were considered to be 85% Calvinist up until the post-

22. Civil War era of the 1870’s to 1890’s when there was a large influx of Roman Catholic
immigrants. The mentality of these Calvinists was a business mentality, because they had to be
prosperous in business to remain economically independent and not slip back into indentured
servitude, sharecropping, and serfdom. The Protestant work ethic as it was called is well
preserved in the writings of Ben Franklin in his Poor Richard’s Almanac, Advice to a Young
Tradesman, Necessary Hints to Those Who Would Be Rich, as well as his Autobiography. The
Protestant reformation that so influenced the early American colonies, was largely an economic
reform that had as its objective, extending social standing to the serfs, and indentured classes
across Europe. The common people, the traditional peasant classes, obtained social standing
through literacy, industry and abstinence. According to an estimate by Alexis De Tocqueville in
his travel log Democracy in America, the Americans had a 95% literacy rate. England and
Germany had about a 31% literacy rate, while De Tocqueville and others calculated France to
have a 15% literacy rate. This social foundation provided by the protestant work ethic would
define the American economic market from the colonial period until the great depression of the
1930’s. The Protestant work ethic championed a type of capitalism referred to as shop capitalism
or handicraft capitalism. A critique of shop capitalism and handicraft capitalism is well presented
by Marx and Engels. Their solution for the ills of shop capitalism is absolutely absurd. The
handicraft economic model that emerged from the Protestant reformation was a type of business
patterned on the economic model of the Catholic monastic communities. Although we often do
not reflect on the economic foundation of European monasteries, they were, by in large, highly
successful business ventures.
Shop Capitalism grew out of the Protestant reformation, therefore the economic model mirrored
their social model. These businesses typically had a shop foreman, usually the business owner,
and workers. The distinguishing characteristic of shop capitalism is the absence of a managerial
group or managerial class. The business owner lived frugally, typically reinvested the bulk of the
businesses profits back into the business to help insure the success of the venture. The
managerial functions were largely supplied by a collection of trade associations. The typical
small business would belong to 3 or more trade associations. A number of businesses would join
together and share the expenses of market research, attending trade shows, sending delegations
to investigate the competition, product design, trade practices, product standardization, as well as
opportunities for export to other countries. Shop capitalism is often considered in concert with
Laissez-Faire capitalism. Laissez-Faire capitalism is principally a belief in unregulated free
markets, and that businesses should not be regulated by the government. Shop capitalism, apart
from not wanting to be controlled and regulated, was by its nature difficult to control. Shop
capitalism was characterized by low startup costs, versatility, and an ability to increase
production by allowing new members to join trade associations. On the negative side, they had
little staying power during economic downturns. They could not increase production during
national emergencies. Competition often drove quality production facilities out of business.
These were the origins of business in the United States until the period between the American
Civil War and World War I.
1.2: The Emergence of Corporate Capitalism and Economies of Scale

23. During the American Civil War the United States Federal government awarded lucrative
contracts to companies as a means to obtain supplies for the war, and as a means to promote
loyalty. The size of the contracts often turned small family owned businesses, such as the Dupont
gunpowder factory, or the Vanderbilt Steam Ship Lines into financial empires. The opportunities
presented by the Civil War and World War I provided the chance for many American businesses
to become mega-corporations often called the big business. This big business had the ability to
provide large quantities of products through mass production. The government could more
readily employ big business to provide large quantities of goods for national defense. The mega-
corporations also found that the production of large quantities of the exact same item, such as
303 British Infields, Sopwith Camels, Hog Island supply ships, dough boy uniforms, combat
boots, or steel helmets, could significantly lower production costs. The opportunities provided by
the American Civil War, the Spanish American War, and World War I, to supply large quantities
of military hardware provided business with some insights into the possibilities of economies of
scale. American business experienced what was called the second industrial revolution.
1.3: Taylor, Ford and the Efficient Factory
In the 1890’s Frederick Taylor (1856 - 1915) worked for Bethlehem Steel where he helped create
what was called high speed steel, for which he received a gold medal in the Paris Exposition.
Taylor was the father of scientific management. He performed time and motion studies. His first
book, Shop Management was published in 1900. In 1911 he published his major work, The
Principles of Scientific Management that provided the basis for what became the efficient
factory. Taylor felt that the scientific method would give American businesses an edge against
the competition and help sustain the high wages and high standard of living that Americans
enjoyed. The gist of the scientific method was to do time and motion studies to determine the
minimum number of movements necessary to do a job in the least amount of time. Each
employee was specially trained to minimize their time and effort. Workers were supervised to
insure that they continued to use the most time efficient methods to do the assigned job. Taylor’s
system expanded the number of managers and their activities. Taylor ascribed to a top down
authoritarian model and believed that there was one way to do a job that minimized the amount
of time and labor required to do the job. That minimalist process was the ‘one correct way’ to do
that job. Taylor revolutionized manufacturing saving companies untold millions of dollars.
Taylor’s time and motion studies helped keep American industry competitive and helped foster
the second industrial revolution.
Henry Ford was an advocate of scientific management, however he might argue that there was
not only ‘one best way’ there are always other options that may yet improve upon todays best
ideas. “Everything can always be done better than it is being done.” “We get some of our best
results by letting fools rush in where angles fear to tread.” The concern for Ford was that the
system design would become frozen and the company would lose its competitive edge. His
analogy was to a chisel. The chisel is only as good as the sharpness of its cutting edge, so long as
the edge is as sharp, the chisel will be able to do its job. Ford said the secret to a successful
production company was simple: So long as the company continues to improve efficiency, lower
production costs, while improving reliability and customer value, the company need not worry

24. about competition or finding a market for their products.
Henry Ford’s logic and practical bent of mind, as presented in his 1922 autobiography, My Life
and Work, and his 1926 volume, Today and Tomorrow, are simply outstanding. Either book
should be mandatory reading for all business school students. Taiichi Ohno, the manager at
Toyota largely responsible for the Toyota Production System (TPS) that propelled Toyota from a
small unknown auto company to one of the top auto manufacturing companies in the world, was
asked how he arrived at these production ideas, he said by reading Henry Fords book, Today and
Tomorrow. A copy of Henry Ford’s book is on the desk of every manager at Toyota.
Taiichi Ohno’s comment rings true after studying lean production with their focus upon muri -
which Ford called testing and design. The Japanese mura translates into Ford’s production
process planning that flows when everything is right and proportional. Muda is quality control
based on a review of the process. Relating to supply chain designs, Ford said “In the beginning
we made very few of our parts and none of our motors. Since, at that time [1903], we could not
afford to buy machinery, the entire car was made according to my designs, but by various
manufacturers, and about all we did, even in the way of assembling, was to put on the wheels,
the tires, and the body. That would really be the most economical method of manufacturing if
only one could be certain that all of the various parts would be made on the manufacturing plan
that I have above outlined. The most economical manufacturing of the future will be that in
which the whole of an article is not made under one roof--unless, of course, it be a very simple
article. The modern--or better, the future--method is to have each part made where it may best be
made and then assemble the parts into a complete unit at the points of consumption.” “It would
make no difference whether one company or one individual owned all the factories fabricating
the component parts of a single product, or whether such parts were made in our independently
owned factory, if only all adopted the same service methods.” “In fact, it might be better to have
the ownership widely scattered.” Ford is advocating assembling the product as far down the
supply chain as possible, and farming out the work to the most economical sources. Ford
outlines a lean manufacturing environment, and details the elements that must be controlled to
minimize production costs. He stresses the importance of eliminating dead space and dead time
between activities in the assembly line. “Our machines are placed very close together--every foot
of floor space in the factory carries, of course, the same overhead charge. The
consumer must pay the extra overhead and the extra transportation involved in having machines
even six inches farther apart than they have to be.” Ford said the business must be customer
centered, “We start with consumer, work back through the design, and finally arrive at
manufacturing. The manufacturing becomes a means to the end of service.” Perhaps equally
important, Ford defines a lean financial model. Ford would not issue dividends on stock, as he
saw that as an attempt to get paid twice on an investment. The investors wanted 5% or 6%
dividends as well as stock appreciation. Ford believed in reinvesting the profits back into the
business to insure asset growth. The wisdom of Fords financial methods were realized in 1919
when his son Edisel Ford bought out the minority stockholders. Edisel paid $1,250 dollars per
hundred dollar investment. Ford explains in some detail what is wrong with the logic used to
develop the common American business model followed by Wall Street investors. He also
explains how to defeat the American business model. Ford concludes that one should set their

25. selling price based on the cost of production, not on what the market will bear, and this move
will eliminate inferior competition. Further, that to insure success, everything should be done to
continually lower production costs, rather than changing cosmetic styles to attract the attention of
new customers. Ford was not trying to make a sale, Ford was attempting to make a customer for
life. “By working and producing they make it possible for the purchasing world to keep coming
to that business for the type of service it provides, and thus they help establish a custom, a trade,
a habit which supplies them with a livelihood. That is the way our company grew.”
Henry Ford has no less than 50 aphorisms that are worth committing to memory and living by. It
is interesting that Adolf Hitler read Henry Fords book in the 1920’s and became an admirer of
Ford’s business practices. Hitler came to share Fords dream of creating a universal car for the
common people. Hitler called his effort, the people’s car, or in German, dem VolksWagon. It is
interesting to consider that Henry Ford defined a business model in the early 1920’s that
successfully competes with the common Wall Street business model. His business model
predicted the economic crash of 1929. Ford’s model was adopted by a number of Japanese
companies, who are now defeating the Wall Street business model. At the same time, many of
these U.S. companies were sending managers to Japan to study Japanese management methods,
and they returned to the U.S. with tales of Sun Tzu and the benefits of the Samurai spirit
embodied in Zen Buddhism. They are introducing such Japanese terms such as muri, muda,
mura, that apparently had their origin in Henry Ford’s plain English. William Edwards Deming,
another American business hero in Japan, suggested in his 14 points of successful management
that this process is normal. People working within a system have a difficult time identifying the
critical success factors within that system, while outside observers are better able to identify the
critical success factors within an organization.
1.4: The Depression of the 1930’s and The Decline of Lassiez-Faire Capitalism
It is somewhat difficult to reconstruct the mindset of the era between the two great European
wars. On the one hand, Darwin and Nietzsche were thought to herald insights into the nature of
social organization, while Plato and Christianity were dismissed as relics of a bygone age.
Darwin with his suggestion that it is the survival of the fittest and Nietzsche with his maxim that
all social organization is a will to power, led many, including Englishman Herbert Spenser to
formulate a theory of Social Darwinism. Almost every group of people was presenting a theory, a
justification for their groups success. This was true in England, France, Germany, America,
Japan, and among many social groups such as the Jewish community. All these groups, faced
with peril of Darwinian extinction, were hoping to survive.
This mentality was reflected in the business community as well. In the course of business, it was
believed that the largest corporations, the most powerful corporations, would prevail and the
smaller companies would be consumed. The objective was no longer simply profits, but power,
domination of the competition, domination and control of the markets. It was a war, a battle for
survival of the fittest. This new insight provided an alternative focus for business activities rather
than simply profitability. If one combined economies of scale, that were so imperative in
deciding the outcome of national emergencies, with a will to dominate and control the markets,

26. the answer was corporate capitalism, the big business. Big business was good for the
government, because corporate capitalism could be used by the government to meet their social
objectives.
Until the great depression of the 1930’s the majority of Americans, somewhere close to 80% of
the people, were employed by shop capitalism or self employed. During the great depression and
World War II, there was a significant transfer of labor, so that after World War II in the 1950’s,
roughly 80% of working Americans were employed by corporate capitalism, or a government
agency. This was a significant change in the economic structure of the United States. In 1927
John Maynard Keynes, wrote a small book, The End of Laissez-Faire, in which he expressed the
hope that shop capitalism would give way to corporate capitalism, and provided the reasons this
would be beneficial.
Corporate capitalism provided many advantages over shop capitalism. The ability and
willingness to take on great social programs such as building super highways, hydroelectric
dams, harbors, bridges, canals, airports, skyscrapers, community development, not to mention
military facilities and military hardware. The problem with these huge corporations that thrived
on economies of scale is that they were capital intensive, asset intensive, and energy intensive.
They became profitable the closer they came to reaching full production capacity. Likewise, as
production declined, the leverage offered by economies of scale began to work against them.
Economies of scale provides the same sort of leverage that debt financing provides. As long as
the business operation covers its fixed and variable expenses, the use of leverage is optimal,
however as production declines each unit produced must contribute a larger and larger portion of
the overhead expenses. Economies of scale require large production runs of some sort of
products to remain profitable. When the economy declines, consumption declines, corporate
capitalism can burn through tremendous amounts of cash just avoiding bankruptcy. Strictly
speaking, corporate capitalism cannot adjust to rapid declines in consumption. To meet the
challenge of production declines, large corporations must have their assets paid for with equity
capital. These assets necessary to do business, but not directly related to production are typically
referred to as underproducing assets. Even having little or no debt financing, corporations found
that they were not able to remain profitable after the economic crash of 1929. Between 1927 and
1931, the first few years of the Great Depression, GDP in the United States declined 27%.
During the Great Depression in the 1930’s big business in Europe and America began to fail. The
Italian Fascist leader, Benito Mussolini used the failure of corporate capitalism in Italy to pursue
his own social agenda. Mussolini said that the failure of corporate capitalism proved that
business required direction and state intervention to survive. The Fascist relations with corporate
capitalism was called state capitalism, or state sponsored corporate capitalism. Mussolini’s
relations with corporate capitalism worked, and the Italian economy was one of the first
economies to recover from the Great Depression. Other nations, such as the Soviet Union,
Germany, and the United States tried to model an economic recovery plan benefiting from the
lessons learned in Italy.
The response to the Great Depression provided a basis for a partnership between corporate
capitalism and government. In the United States, government contracts carried provisions that

27. required corporations that submitted bids for government contracts to provide government
mandated wage standards, employment benefits, various types of medical benefits, and matching
retirement and unemployment benefits. These benefits made working for corporations more
lucrative than self employment. The new wage standards established by government contracts
combined with the Federal Housing Administration (FHA) home loan guarantee program clearly
redefined the United States economy. In the short term, the government New Deal programs
combined with the Win the War programs provided an era of outstanding prosperity in the United
States. Unfortunately, during this era, the government used government funded contracts as a
means to provide what was called a living wage and social welfare to American workers. People
who were employed by either large corporations or government agencies were provided social
benefits; while farmers, the self employed, retired, and unemployed citizens were, for the most
part, not extended social benefits. This was a significant social transition, from the Calvinist
Colonial period onward a major definition of success and character development was self
employment. After the Great Depression, working for a large government funded corporation or
a government agency was the more prudent career path.
1.6: New Deal Social Costs, Taxation and the Cost of Goods Sold
When the United States federal government entered into business with corporate capitalism
during the Great Depression, they placed the burden of social services largely on corporations.
This had the effect of increasing the cost of goods sold, generally American corporations were
carrying the burden for social services such as medical benefits and retirement benefits. Since
these benefits were paid by industry, they became part of the cost of doing business, which
increased the product costs, the cost of manufacturing across U.S. companies. As long as the rest
of the world had their economic capacity destroyed by the war, the United States could charge
anything they wanted for their products and find an available market. Once the other nations in
Europe and Asia rebuilt their economies and either did not offer social services, or funded their
social services from the consumption side of the economy, typically as value added taxes (VAT)
rather than the production side of their economy, their product costs, their costs of goods sold,
remained lower than American production costs.
A second issue facing corporate companies in the United States is the cost of capital. In Europe
and Asia the cost of capital, equity capital, is typically 5 percent, at that rate the capital doubles
every twenty years. Some countries, typically in Asia may have a capitalization rate of 2 percent,
whereby the capital doubles every fifty years. If one begins to combine a number of these cost of
doing business in the United States; a higher cost of capital, higher labor costs, higher social
costs, and add to that state and federal taxation, these cost structures make it very likely that
American products will not be able to compete in international markets and that imports into the
United States will have a comparative advantage.
1.6: The Marshall Plan in Europe and Japan
The Marshall plan helped provide the funding for rebuilding the industrial foundation of much of
Western Europe. The Soviet Union did not allow eastern block countries to accept aid from the

28. United States. The main feature of the Marshall plan was to take products from the United States,
sell them in Europe and then give the money to England, France, Germany, Holland, Italy,
Belgium and a few others nations. All these nations distributed the money to businesses, except
for Germany. Germany lent the money to businesses and they had to repay it. Germany
maintained the industrial building program, and today that fund, setup with about 1 billon US
dollars in 1947, has about 121 billion dollars available to lend out to Germany companies to
expand their businesses and factories. The contrarian or revisionist view of the Marshall Plan is
that U.S. companies were supposed to help bring modern factory design and scientific
management to Europe. Some of these U. S. companies became part owners of European and
eventually Japanese companies. World War II provided an opportunity for American companies
to expand into international markets.
The international investments the U.S. companies invested in these offshore ventures did not
have to be repatriated back to the United States and U.S. taxes did not have to be paid on this
offshore income. The U.S. companies became at first multi-national corporations, and then given
an opportunity to invest in Japan and China after 1971, they become global corporations. These
global companies produce products for local markets around the world. There are many
examples of international businesses such as Coca Cola, Ford, Firestone, General Electric,
Standard Oil Mobil/Exxon, Aramco, General Motors, Western Electric, and DuPont. These
companies income streams are not primarily tied to the United States economy. Many companies
have developed a business model that allows them to gain access to local markets around the
world, but also because the cost of doing business in the United States is currently unfavorable.
1.8: World Economic Recovery, and the Decline of US Industries
In the 1970’s and 1980’s the United States economy stalled. The U.S. lost control of the oil fields
in Iran, that combined with support for Israel, allowed a number of Middle East countries the
opportunity to setup a cartel and raise oil prices. Higher oil prices, high labor costs, high taxes,
declining exports, increased imports, the end of the gold standard and monetary inflation, all
combined to put the United States into a recession. To put inflation into perspective, the
following graph shows the value of a 1913 dollar representing the base year having 100 percent
buying power. The 2006 dollar had 4.9 cents buying power, or 1:20 the value of the 1913 dollar.
At that point, in light of higher fuel costs, Japanese products, particularly fuel efficient cars and
trucks, combined with a lean Japanese business model made their products cheaper to buy and
cheaper to operate. The Japanese Keiretsu manufacturing philosophy; lean, agile extended
enterprise partnerships and strategic alliances that allowed for just in time (JIT) inventory control
systems were state of the art. Add to that the tighter production tolerances provided by Total
Quality Management (TQM) and the Japanese system was absolutely inspired. It was the
vindication Japanese management needed on the long road back from defeat.
After World War II, the economic capacity of Europe and Asia was diminished to a level equal to
the early days of the industrial revolution in the 1800’s. In 1945 an estimated 40 percent of

29. European industrial capacity remained. This situation provided U.S. manufacturing businesses an
opportunity to export a great deal of machinery, manufacturing equipment and building
materials. Even thought European production capacity was substantially rebuilt by 1951, the
demand for machinery, manufacturing equipment and building materials lasted into the late
1960’ or even early 1970’s. The oil crisis of 1973 provides a convenient cut off point for that era
of U.S. importation to Europe. The following graphs show changes in annual European
production capacity.
1.9: The Emergence of the Japanese Business Model
The Japanese paid close attention to American production techniques in the 1940’s and 1950’s.
According to Taiichi Ohno one of the designers of the Toyota Production System (TPS)
developed between 1948 and 1975. Ohno’s two biggest influences were Henry Ford’s books,
Today and Tomorrow and My Life and Work as well the teaching of professor W. Edwards
Deming. From Ford they learned a foundation for lean production and supply chain
management. Lean production was tweaked to become Just In Time (JIT) manufacturing. JIT
has been described as “the right part in the right place at the right time.” Waste [is] any activity
that does not add value to the final product. JIT uses down time, excess capacity, as a time for
regrouping, staging, repairing, and insuring that the production process runs smoothly. The
objectives of JIT are;
1: Uniform or constant production levels. Excess demand met through output of daily inventory.
2: Minimize or eliminate setup and retooling downtimes. All retooling a one step process.
3: Setup smaller production runs.
4: Reduce supply, production, and delivery lead times.
5: Continual training of workforce to empower employees.
6: Design a zero defects quality control policy.
7: Require zero defects from all suppliers.
8: Obtain and move parts in small quantities with a kanban type card system.
JIT operated in concert with a Kanban control system. Kanban are cards that determine
production and transportation schedules. When a card drops into an in box, production begins.
The card always requires the same number of units to be produced or shipped.
Quality Circles (QC), Toyota’s ‘respect for people’, was an attempt to involve the workers in the
quality process, a deficiency Toyota perceived in Ford’s relations with his workers.
From Deming Toyota learned Total Quality Management (TQM) and Statistical Process Control
(SPC). SPC aims at keeping production within a statistical range, so that the deviation from the
design specification is miniscule, resulting in zero defects. So, whatever the design objective is,
SPC aims at consistently maintaining that objective. A histogram of the production distribution is
printed on a control chart that defines a set of descriptive statistics.

30. TQM has to some degree been refocused and repackaged in the United States as Six Sigma.
Deming defined TQM in his famous 14 points. Toyota published their own 10 points for
management. Point number nine in the Toyota list is unexpected, “Think ‘outside the box,’ or
beyond common sense and standard rules.”
Deming’s 14 Points
“Point 1: Create constancy of purpose toward improvement of the product and service so as to ,
stay in business and provide jobs.”
“Point 2: Adopt the new philosophy. We are in a . We no longer need live with commonly
accepted levels of delay, mistake, defective material and defective workmanship.”
“Point 3: Cease dependence on mass inspection; require, instead, statistical evidence that quality
is built in.”
“Point 4: Improve the quality of . End the practice of awarding business on the basis of a price
alone. Instead, depend on meaningful measures of quality, along with price.”
“Point 5: Find the problems; the system of . There should be and in every activity so as to yield
a continual and a decrease in costs.”
“Point 6: Institute modern methods of training and education for all. Modern methods of on-the-
job training use control charts to determine whether a worker has been properly trained and is
able to perform the job correctly. Statistical methods must be used to discover when training is
complete.”
“Point 7: Institute modern methods of supervision. The emphasis of production supervisors must
be to help people to do a better job. Improvement of quality will automatically . Management
must prepare to take immediate action on response from supervisors concerning problems such
as inherited defects, lack of maintenance of machines, poor tools or fuzzy operational
definition.”
“Point 8: Fear is a barrier to so drive out fear by encouraging effective two-way communication
and other mechanisms that will enable everybody to be part of , and to belong to it. Fear can
often be found at all levels in an organization: , fear of the fact that it may be necessary to learn a
better way of working and fear that their positions might be usurped frequently affect middle
and , whilst on the shop-floor, workers can also fear the effects of change on their jobs.”
“Point 9: between departments and staff areas. People in different areas such as research, design,
sales, administration and production to tackle problems that may be encountered with products

31. or service.”
“Point 10: Eliminate the use of slogans, posters and exhortations for the workforce, demanding
zero defects and new levels of productivity without . Such exhortations only create adversarial
relationships.”
“Point 11: Eliminate work standards that prescribe numerical quotas for the workforce and
numerical goals for people in management. Substitute aids and helpful .”
“Point 12: Remove the barriers that rob hourly workers, and people in management, of their right
to pride of workmanship. This implies, abolition of the annual merit rating (appraisal of
performance) and of .”
“Point 13: Institute a vigorous program of education, and encourage for everyone. What an
organization needs is not just good people; it needs people that are .”
“Point 14: to and productivity must be clearly defined and a management structure created that
will continuously take action to follow the preceding 13 points.”
TQM functions within the context of the Japanese business strategy that is called Kaizen, which
roughly translates to constant improvement. In this system, business is said to have two primary
functions. Management is either improving the production process or it is maintaining and
sustaining the current process. Management and workers are either improving the current
standards or they are maintaining the current standards.
In the early seventies, fuel prices went from $0.36 cents a gallon to $1.25 cents a gallon in the
fall of 1973. There was a boycott of the U.S. due to the U.S. support for Israel. The European
recovery was just about complete, and orders for U.S. machinery and manufacturing equipment
dried up. The Europeans and Japanese further distanced themselves from the U.S. position on
providing support for Israel. The U.S. economy was faced with a number of challenges;
monetary inflation as the Bretten-Woods gold standard failed, declining production, high labor
costs and poor quality control measures. The U.S. economy stalled, while the Japanese
responded to the international crisis with a level of dedication and determination that the United
States had not considered necessary. Within this economic environment, U.S. companies had to
scramble to stay in business. Business as usual was not good enough to meet the many
challenges that faced U.S. industry in the 1970’s and 1980’s. In this environment new business
methods and strategies had to be developed, and one of them that emerged during this era was
supply chain management (SCM).
1.11: Corporate Raiders and Asset Liquidation

32. The economy of the 1970’s and early 1980’s was described as Stag-flation. Economic growth
was stagnant, and inflation was eroding buying power. The Bretton Woods agreement that
pegged the price of an ounce of gold at $32 U.S. dollars, failed. The idea of Bretton Woods was
to create stability in the money supply knowing that the money could be converted into gold at a
fixed rate. The problem was that Europeans, typically French, and Middle East oil countries
insisted on actually cashing in the U.S. dollars for gold. The system designed to stabilize the
monetary system failed. The result was paper money, script, backed up by faith in the U.S.
government and it’s power to buy goods, services, and real assets. Inflation would have occurred
due to the failure of Bretton Woods, however the double whammy occurred when OPEC raised
oil prices about 300 percent over the course of one year. This set the United States and Europe
into a recession. The following chart shows the fluctuations in gross domestic product (GDP) for
the U.S. economy in the 1970’s and 1980’s .
Japan was one of the few economies that prospered in the 1970’s. Manufacturing and production
declined in the 1970’s for a number of reasons. Europe and Asia were not buying U.S. industrial
goods to the extent that they had in the 1950’s and 1960’s. The Oil embargo and rising prices and
inflation sent the economy into a protracted recession. The economy was stagnating while the
money supply was inflating. The 1970’s and 1980’s were a very difficult decade for U.S.
businesses. Add to these economic woes that the U.S. had a different set of cost structures than
the Japanese. American companies were expected to provide an ROI of at least 10 percent
annually. Labor costs were higher in the U.S. compared to other labor market costs, and as well
the U.S. government required larger corporations and all corporations that applied for
government contracts to provide social services as a part of the contract. All these expenses, the
cost of capital, the cost of labor, and the cost of social services, combined with inflation and a
declining economic market to make the 1970’s and 1980’s deadly for businesses. By 1980
corporate bankruptcies were up 50 percent.
Following the 1973 OPEC price wars, a number of factors went wrong in the American
economy. If we just review some basic business ratio’s and acid tests, the nature of the problem
becomes apparent. Liquidity, current assets and current receivables were down as orders
declined. Liabilities were rising due to a 300 percent fuel cost increase driving transportation and
utilities costs up. There was monetary inflation. The declining value of the U.S. dollar was
inflating asset values. Turnover ratios were getting worse. The working capital to inflation rate
was eroding the value of the cash on hand, and the ability of companies to pay their current
liabilities. Days cash on hand was declining in the face of reduced orders. Customer days to pay
were increasing. Asset to sales ratio’s were declining as fixed asset values and total asset values
were rising due to inflation. The dollars required to produce one dollar of income seemed to be
increasing due to inflation. Total asset values, or market values, were increasing while net sales
were declining. Return on investment (ROI) was declining. Price to asset ratios were low,
meaning the assets were undervalued, which suggests poor management. Income after tax was
down, while asset values were up. Owners equity was increasing due to inflation, while the
return on investment was declining. Stock price to earnings ratios were down. Return on

33. investment (ROI) and stock values were declining due to poor earnings. Break-even numbers
changed as well, fixed costs were increasing due to inflation and increased shipping costs of all
items, while contribution per unit was down because the inflation rate and the fuel related
shipping and utility expenses could not all be passed on to the consumer. Sales prices could not
keep up with inflation and fuel adjustment costs. Debt was decreasing as a percentage of total
asset value due to inflation. People could not borrow money fast enough with the hope of paying
it back with cheap inflated dollars. The problem was, declining cash flows from poor sales
revenues was hampering loading up on debt. In the early years of the crisis, interest rates were
still in the 6 to 8 percent range. By the 1980’s interest rates would soar to 20 percent, as the
government tired to pull dollars and liquidity out of the market.
A new type business activity emerged from this market, it was called corporate raiding. When
stock share values dove significantly below asset values, the opportunity existed to buy up
controlling interest in the business, vote out management, put in agreeable management and sell
off underperforming assets, which was called asset stripping. This was called downsizing, or
streamlining the business, focusing on core competencies.
1.12: The Emergence of Supply Chains and New Business Models
The 1980’s demanded a new business model to allow U.S. firms to be competitive in the world
market. These new business plans were interspersed with opportunism. In this era a number of
industries were deregulated to allow them to compete in the free markets. Often competition
tended toward high risk schemes. One misfortune of the 1980’s was the savings and loan crisis.
These thrifts were non-profit lending institutions designed to help working class Americans
layout a plan for buying a home. The S&L’s helped with strategies for saving up the down
payment money, choosing a home, and qualifying lenders for government backed federally
insured home loans, and veterans loans. In the 1980’s savings and loans were deregulated by the
Depository Institutions Deregulation and Monetary Control Act of 1980. S&L’s were allowed to
compete with commercial banks. S&L’s in an attempt to increase revenues began to make loans
on large commercial developments. The inherent problems with S&L’s was presented in the 1946
Frank Capra film, It’s A Wonderful Life. In a nutshell, S&L’s were using short term savings and
eventually after deregulation short term brokered certificates of deposits (CD’s) to make long
term investments in houses and eventually office buildings and shopping malls. While interest
rates were rising from 7 percent to 20 percent, deposits were readily available. Investors and
S&L managers saw as opportunity to make some big money, and so they took larger and larger
risks to make it happen.The point that interests me is one made by Henry Ford, in My Life and
Work. He said that American capitalists tend to try to charge as much as possible for their
products rather than trying to sell as many products as possible. He also said American
businesses continually gravitate toward higher return with higher risk rather than lower risk with
lower returns. American business is risk preferring.
In this selective sketch of American history, what of this can be useful in designing a new
company or supply chain?

34. 1.13 Summary
Like the shop capitalists, we need to find a way to cut overhead, and that means cutting out
unnecessary levels of management. Some of the layers can be removed through automation, such
as management information systems (MIS). Some can be farmed out to organizations that
provide management, accounting, finance, and marketing as a service. It is important to find
ways to more efficiently use management expertise. This may be achieved through the
development of franchises, franchise management companies, and buying services, just as the
shop capitalists bought cooperative services through trade associations. In other words, to use
supply chain techniques to move routine management services to the lowest cost providers.
Like Henry Ford and Scientific Management (SM) we have to find ways to streamline
management, labor and production. Every option should be investigated that helps lower cost
structures to get these costs competitive with international cost structures. To be able to compete
with ships flagged in the United States, build in the United States, and staffed with American
officers and crews, requires thinking outside of the box. Like Germany, we have to be alert to
opportunities that will generate cash flow into the future, such as financing, self insurance funds,
and franchising, to make certain that assets are properly employed and that they provide a long
term return on investment (ROI).
Like the American companies that became international companies, we need to look at cost
structures, taxation, labor costs, and define a business model that is competitive and is not
limited to the United States market. Once an operative model is established the objective should
be to export that business model and product out to other markets around the world.
The 1980’s and 1990’s taught us that the market dynamics in the United States do not favor a
traditionally established business model. The cost structures in the United States, as they are
configured with obtaining debt or equity capital that requires a 10 percent plus ROI, labor costs
that are out of line with international labor costs, federal and state taxation choices that require
businesses to adopt less than optimal business strategies to offset a 20 percent to 35 percent tax.
Business is faced with the task of designing alternatives business models and determine which of
the models has the highest probability of success.
It is poetic justice that the Japanese would reinvent the competitive business model and teach it
back to the Americans in the 1980’s and 1990’s. The Japanese provide a very good model for the
Americans to follow. The Japanese lost the war, they did not win. The Japanese had to focus on
the basics to regain what they lost during the war. The United States, like 5th century Athens
after the defeat of Persia, and Rome after the defeat of Carthage, entered a period of hubris.
Henry Ford notes in his autobiography a similar attitude emerged in the United States after
World War I. Just like the Puritans who had to make a virtue of necessity, and Henry Ford, who
had to forge a business model from necessity, we too have to build business models based on
necessity, not business models based on opportunism.

35. Like the supply chain business models that emerged in the 1990’s, when American industry was
no longer competitive in the industrial markets, we have to look at a number of options in
decision trees, sensitivity models, and Monte Carlo probability distributions to see what models
work on paper.
All of these lessons learned in business over the last hundred years needs to be part of the critical
review process when designing business models for short seas shipping. There are a large
number of options, or variables, available. When designing business models we need to have that
information and those options (variables) in mind.