Thoughts on Pres. Duterte’s Martial Law

If I get a piso for every martial law post I read over social media platforms, I’m probably a millionaire right now. Everyone has an opinion about it, coming from both sides of the spectrum. But most are for it which you’d start thinking maybe martial law is a good thing. Well given the context of it’s declaration, it probably is to some extent. But have you heard about the Gaussian curve aka the bell curve? Taleb labeled it as the GIF because it’s limited, follows a normal distribution and failed to consider outliers. But I digress.

It can be said that a certain policy or law or act, in this case, martial law, will follow a normal distribution or a bell curve in that this act or policy or law (think of death penalty) will only be effective to a certain degree, at a certain level, and once it reached its peak, the costs (social, political, economic, human) starts to outweigh its benefits (security, peace and order, quashing rebellion?). You love it now. You support it now. You think it’s the right thing to do given the circumstances. You think it’s effective. You think non-Mindanaoan should shut up (because they have no right to question any of it). They don’t live in Mindanao anyway right? And you are probably proud of it. But once abuses start to surface, effectiveness starts to wane, fails to completely quell armed conflict and rebellion, life starts to get a little shitty as the day goes by, then you’ll be asking whether it was right to impose martial law in the first place. But, you will retort, you are absolutely sure and confident beyond measure (that you even villify those who oppose it) none of these martial law byproducts are going to happen. And i’m going to ask you this: Have you seen the future?

Remember that much like a war, this martial law is fluid in that it’s arbitrary and subject to the mood of the president, the situation on the ground, a single event, or a simple misunderstanding which could extend it beyond the timeline originally planned.

I hope we don’t get to the point where the debate of martial law imposition is already moot (because the situation created by this martial law is already worse and irreversible) and the cost is so great that we start asking Jesus or Allah to turn back the clock!

I don’t question the context of PDuterte’s declaration of martial law. It’s obviously a clear and present danger. But is it really necessary? If necessary, should the entire Mindanao be placed under martial law? The conflict area is only contained in Marawi. Marawi’s land area is only .009% of Mindanao’s total land area. Can’t the military isolate, nuetralize, and engage the enemies within the conflict zone? Yes they have symphatizers around ARMM regions but we already have formidable military presence in those areas. Do the president and military need additional teeth (martial law) to maintain peace and security throughout Mindanao when we already have more than enough resources to neutralize the enemies and sympathizers outside the conflict zone? Do all these perceived benefits of martial law far outweigh the short and even long term social, economic and even political costs? Are you ready to be paranoid? Have we not learned from the lessons of the past? Our children will be paying for our decisions today! I wouldn’t mind if martial law was limited to Marawi and neighboring towns. But entire Mindanao? Why? It send a terrible signal to everyone outside. Lenders are less likely to lend liberally. Businessmen will less likely secure financing. Investors will shun Mindanao in the short run and potentially in the long term. Remember SM Zamboanga? Yeah, they ditched plans for a full fledged mall in the short to mid term. And if businesses starts feeling the pinch? They will start firing people! They will start employing less and less to maintain margin or just breakeven or shut business down for good because it’s no longer feasible given the current business environment.

I hope this martial law will only last as long as it takes to neutralize the armed groups in Marawi. Otherwise, it’s reasonable to assume history will probably repeat itself.

You think (the effects) of this martial law is going to be very different from Marcos martial law? Maybe yes. Maybe no. How would you know? Can you see the future? Have you seen your own future? You seem to be so confident this martial law is going to end up being good for everyone? Everyone thought MNLF won’t invade Zamboanga City or Titanic was unsinkable (not even Jesus can sink this) or Clinton will beat Trump, or Moscow will not invade Georgia, or global warming is just a liberal policy makers’ wet dream until ice caps started melting years earlier , or the US real estate market was robust until it suddenly bombed out. No one really knows anything about the future.  Prediction and forecasting is a hit or miss affair and it involves 99% luck and confluence of different events. Not even the weatherman can confidently predict the weather next day so I suggest you stop, take a deep breath, and reassess your position about this martial law going to be different in a good way than the previous one because no one really knows. Not even glorified quants can formulate complex computer programs to guarantee an equities future performance. But I can confidently tell you this, the last time we had martial law about 70,000 people were imprisoned and 34,000 tortured, according to Amnesty International, while 3,240 were killed from 1972 to 1981. During this dark chapter of Philippine history, thousands of people were subject to various forms of torture. Prisoners were electrocuted, beaten up, and strangled. They were burned with a flat iron or cigars. Water was poured down their throats, then forced out by beating. Women were stripped naked and raped, various objects forced into their genitals. The Marcoses also plundered the country’s coffers, with various estimates putting the amount at between $5 billion to $10 billion (credits: @kaifrancisco). Will the PDuterte martial law human and economic tolls be comparable to Marcos martial law? Maybe not. Or maybe even worse. No one really knows. So it’s always, always better not play with fire or risk burning the entire place down.

So i’m hoping, and I’m sure everyone is hoping too, that this martial law is going to be short and swift and limited to Mindanao.

PH politics and the evanescence of shame by Gideon Lasco

“They, of all the people, know the true nature of scandal. Many of them have faced it; many have emerged unscathed. Some have gone into hiding, only to come back famous. Some have been accused, and even convicted, of the most vicious crimes, only to return to the highest echelons of power. The people, fickle as the Paris mob during the French Revolution, have spurned them, only to eventually welcome them with open arms.

The tenacity with which our politicians have survived and thrived speaks not merely of their character but also of ourselves as a nation. Ours is the power of the vote, but why is it that Election Days never become days of reckoning for our politicians, the days when we call them to account for alleged misdeeds and past (mis)conduct? If our political scandals are as riveting and entertaining as thriller movies, how come we never demand that we watch the ending?

Consider the case of Juan Ponce Enrile. One of Ferdinand Marcos’ top henchmen, he by his own admission participated in a fake ambush that served as one of the pretexts for the declaration of martial law. For many years he was minister of defense, and it was only when support for the dictatorship was eroding that he finally disavowed his being among the privileged “Rolex 12” and went on to become an “Edsa hero.” By the time Cory Aquino was inaugurated president, many Filipinos had forgiven—and forgotten—his role in the atrocities that necessitated the Edsa Revolution in the first place.

But it was just the first act in Enrile’s long political life. Barely a year after the restoration of democracy, he began to figure in a series of coup attempts against Cory Aquino that hobbled the nation’s attempts to crawl back from political and economic instability. Years later, he would be among the senators who blocked the release of the second envelope during President Joseph Estrada’s impeachment trial, and by May 2001, he had become so unpopular that he couldn’t even win a Senate seat.

But three years later he was back in the Senate, and he would even go to become a Senate president—an admired elder wearing the robes of a presiding officer in Chief Justice Renato Corona’s own impeachment trial. Today, amid fresh allegations of corruption, his political life continues to unfold, his advanced age his surest defense against further incarceration. Like his role in martial law, his involvement in the many coup attempts and scandals would likely remain an unsolved mystery.

Of course, we have the example of the Marcoses themselves. When Bongbong ran for the Senate in 1995, he decisively lost, placing 16th in a field led by Gloria Macapagal Arroyo—then the darling of the public. Neither could fifth-placer Imelda win as president in 1992. Indeed, when the memories of martial law were still fresh, the Marcoses couldn’t win in the national elections. But by 2010, Bongbong had become a victor, winning an impressive 13 million votes to land him in the Senate, like his father before him. In his bid for the vice presidency, he would gain an even greater following, and today he is viewed as a leading contender in the next presidential election.

Their alleged misdeeds have been forgotten, and like the proverbial masamang damo, our politicians themselves have survived, often as bedfellows of the people who persecuted them, sometimes as the persecutors of their bedfellows past. Longevity, as it turns out, is better than righteousness.

Today we are rightfully interested in Sen. Leila de Lima and Edgar Matobato, but we seem to have forgotten Janet Lim Napoles and Joc-Joc Bolante. The Ampatuan massacre, one of the most atrocious crimes to ever have happened in our country, is now a distant memory. We debate over who are destabilizing the country at the moment, but we have forgotten those who destabilized us in the past; we have even rewarded some of our most notorious putschists with Senate seats. When we see Joseph Estrada, we no longer see President Erap alias Jose Velarde, plunder convict, but the jolly mayor who contemplates how best to solve Manila’s traffic woes. When we see GMA, we no longer greet her with “Hello, Garci!” but address her as Madame Deputy Speaker.

Some of them may well be innocent of some, if not all, of the things of which they were accused; we must not underestimate the efficacy of “black propaganda.” But we will never know because investigations are never concluded; they merely fade away into oblivion. Probably because they were never true, to begin with. Or probably because they were true—and hence there was an effort to hide them. We will never know.

We will never know, because we are no longer interested to know. We will never know because we have forgotten why we wanted—and needed—to know. And because an eternity has passed between then and now, it is too late to know what truly happened. Like the fragments of a dinosaur bone that can never definitively settle the question of whether the prehistoric animal had feathers, what remains of the truth of the past, if at all it is excavated, is subject to interpretation and debate, a matter of opinion, contingent on today’s prevailing knowledge.

And this explains, at least in part, why our politicians can get away with anything and everything. They know the electorate too well. In a nation without memory, they understand—and take full advantage of—some of the principles that govern our political processes: the evanescence of shame, the frailty of truth, and the virtue of power.

(“Philippine politics and the evanescence of shame”, Philippine Daily Inquirer, October 6, 2016 Photo from Malacañang.

Precision Worldwide, Inc.

Written Case Analysis 


I.  Summary

 Precision Worldwide, Inc. (PWI) manufactures industrial machines and equipment for sale in numerous countries. Repair and replacement parts account for a substantial part of the company’s business. The replacement part in question, steel retaining rings, occurs in the machines manufactured only in PWI’s Frankfurt Germany plant. Henri Poulene (HP), a French firm, recently introduced a superior plastic retaining ring that replaces the steel ring. PWI’s steel ring has an average normal life of 2 months while HP’s plastic ring last four times than that. Additionally, the plastic ring is less costly to manufacture.

The PWI sales manager, Gerhard Henk, is asking when this product will be available for him to sell. Bodo Eisenbach, the PWI development Engineer, estimates the plastic rings can be produced by mid-September at a tool and equipment cost of about $7,500. PWI currently has about $390,000 worth of finished steel rings and special steel inventories. Special steel inventory cannot be sold in its current form even for scrap. Hans Throborg, general manager of PWI German plant, agreed to sell plastic rings on limited basis until the large inventory of finished rings and special steel on hand are exhausted.

Henk strongly opposed the sale of any steel rings once plastic ones become available. He argued that since production cost of plastic rings are lower, the inventory problem would be irrelevant and suggested that the inventory be sold, or if impossible, thrown away. He also said that once customers who purchased steel rings find out of plastic rings being sold elsewhere, it would harm the sale of PWI machines.

II.        Problem Statement

 When should PWI sell plastic retaining rings?

III.        Objective

  1.  To minimize losses associated with steel retaining
  2. To maintain lucrative revenue stream from retaining rings market.

IV.  Areas of Consideration

 1.   Cost of finished steel rings and unused special steel inventories

PWI currently possess large quantity of steel rings on hand and substantial inventory of special steel. After a thorough survey, Hans Thorborg had found out that the special steel could not be sold, even for scrap. He also learned that the inventory of special steel had a cost of $110,900 and represented enough material to produce approximately 34,500 rings. If sales of the steel rings continued at its current pace of 690 rings per week,  by mid-September, there are about 15,100 finished on hand at  a cost of $167,292.90. (15,100*($1,107.90/100))

2.    Selling price and manufacturing cost of steel and plastic rings

Henri Poulene is said to be selling the plastic ring at about the same price as the  PWI steel ring which is at $1,350.00 for 100 rings. The plastic ring’s manufacturing cost is only $279.65 per 100 rings. PWI’s total manufacturing cost of 100 steel rings is $1,107.90. This is almost 300% more than the cost of plastic rings currently being produced and sold by Henri Poulene.

Current special steel inventory could be manufactured by PWI during slack period at only 70% of direct labor. Total manufacturing cost during slack period is $569.49.

100 Plastic Rings 100 Steel Rings No labor saving 100 Steel Rings

With labor saving

Selling Price $1,350.00 $1,350.00 $1,350.00
Materials $17.65 $321.90 $321.90
Direct Labor 65.50 196.50 137.55
Direct Overhead 52.40 157.20 110.04
Variable Cost $135.55 $675.60 $569.49
Contribution Margin 1,214.45 $674.40 $780.51

3.    Differential cost of plastic and steel rings

The differential cost between plastic and steel rings is $540.05. It is relatively more expensive to produce steel rings compared to the new plastic rings currently offered by Henri Poulene.

100 Plastic


100 Steel




Materials $17.65 $321.90 $304.25
Direct Labor 65.50 196.50 131.00
Direct Overhead 52.40 157.20 104.80
Variable Cost $135.55 $675.60 $540.05

4.    Lifespan of steel and plastic rings

The steel ring being manufactured by PWI has a normal life of about two months, depending upon the extent to which the machine was used. The plastic rings are said to be four times the wearing properties of the steel ring. The implication of this is that it will destroy demand for steel rings.

5.    Effect on customers’ loyalty (upon learning of new superior plastic rings) but was not made aware of it

PWI decided that if it had to sell the plastic rings, it will be limited to those markets where competitors like Henri Poulene have presence. It was because PWI expects that the plastic rings would not be produced by other companies except Henri Poulene for some time, therefore no more than 10% of PWI market would be affected.

However, the decision to sell the plastic rings on limited areas raises concern on the effect to customer loyalty once they find out that a more superior product is out in other markets at a relatively comparable price of steel rings currently being used on their machines.

6.    The effect of failing to respond to direct market competition

Henri’s Poulene’s plastic ring is the best alternative to PWI’s steel ring. Although reportedly even on selling price, tests indicated that it’s four times the wearing properties of steel rings, potentially destroying demand for PWI’s steel ring.


V.        Alternative Courses of Actions

 1.    Continue selling steel rings until inventories are exhausted. Thereafter introduce    plastic rings to the market

PWI should first sell all inventories of steel rings and convert special steel into finished products before selling the plastic rings. This will ensure that manufacturing costs associated with existing inventories are recovered.

By mid-September, there will be 15,100 finished rings left on hand and another 34,500 that can be produced from existing inventory of special steel. This can be manufactured during slack periods wherein only 70% of labor is employed. At the current pace of 690 rings sold per week, it will take 18 months to dispose all inventories of steel rings.

Rings Var. Cost Months of


Previously Finished Rings 1/ 15,100 $102,015.60 5.5
Special Steel (Raw) 2/ 34,500 196,474.05 12.5
Total 49,600 $298,489.65 18.0
1/ (15,000/100) * $675.60

2/ (34,500/100) * $569.49

Steel Rings
Volume 49,600
Revenues (49,600/100) * $1,350.00 $669,600.00
Variable Cost 298,489.65
Contribution Margin $371,110.35


On the same 18-month period, PWI could have sold 12,400 plastic rings (49,600/4). This is based on test results which indicated that plastic rings wearing properties are four times that of steel rings. The equivalent contribution margin from selling plastic rings is $150.591.80.



Volume 12,400
Revenues $167,400.00
Variable Cost 16,808.20
Contribution Margin $150,591.80



  1.  PWI will be able to recover the costs of previously finished steel rings amounting to $102,015.60.
  2. PWI will recover cost of special steel raw material amounting to $110,900.00.
  3. PWI’s contribution margin will increase by $371,110.35.



  1. PWI may lose market share with prolonged inaction over Henri Poulene’s entry into the retaining rings
  2. Lost opportunity to increase profit margin from plastic rings sales amounting to $150,591.80.
  3. Continued sale of steel rings may harm sales of PWI machines as customers find suitable alternatives to replacement


2.    Continue selling steel rings until plastic rings are ready for the market. Thereafter, scrap all unsold steel rings and special steel

PWI will sell plastic rings in all markets and scrap all unsold steel rings and special steel inventories once plastic rings are available for sale.

Plastic Rings Steel Rings
Volume 12,400 15,100
Revenues $167,400.00 $203,850.00
Variable Cost 16,808.20 102,015.60
Contribution Margin $150,591.80 $101,834.40
Sunk Cost (Special Steel) 0.00 $110,900.00



  1.  Net positive contribution margin of $48,757.80 despite scrapping 15,100 steel rings
  2. PWI will maintain its dominance in the retaining rings market by canceling out whatever advances HP has already
  3. Sales of PWI machines will not be
  4. PWI will not be affected from dip in demand of steel rings since it has already shifted to plastic rings


  1. Inventory loss from special steel of $110,900 because it’s not saleable in its current
  2. Plastic rings will undermine PWI’s long-run profitability in the retaining ring market as it will take longer for customers to replace worn-out rings and place re-orders.

3.      Continue selling steel rings until plastic rings are ready for market. Thereafter, sell both plastic and steel rings with steel sold at reduced priced until all inventories are exhausted.

PWI should make both plastic and steel rings available in the market albeit steel  rings at lower price to exhaust all steel inventories and recover its cost before phasing out the product completely. The minimum price of steel rings that PWI should take is $979.21. This is in consideration of the contribution margin of plastic rings which is $1,214.45 per 100 rings, lifespan and the corresponding replacement or reorder frequency.

Plastic Rings Steel Rings
Selling Price $1,350.00 $979.21
Variable Cost 135.55 675.60
Contribution Margin $1,214.45 $303.61
Replacement Frequency 1 4
Equivalent Contribution $1,214.45 $1,214.45




Steel Rings Total
Volume 12,400 49,600
Revenues $167,400.00 $485,688.16 $653,088.16
Variable Cost 16,808.20 335,097.60 351,905.80
Contribution Margin $150,591.80 $150,590.56 $301,182.36



  1.  Total contribution margin from both steel and plastic rings is $301,182.36.
  2. PWI will maintain its dominance in the retaining rings market by canceling out whatever advances HP has already
  3. Sales of PWI machines will not be
  4. PWI will recover the cost of special steel


  1. There is a good chance customers will still prefer plastic retaining rings for its superiority and cost effectiveness relative to replacement frequency thus undermining revenues from steel
  2. Lost profit on steel rings due to reduced

4.   Continue selling steel rings until plastic rings are ready for market. Thereafter, sell plastic rings on the French market only and continue selling steel rings in all other markets.

PWI should sell plastic rings only where competitors selling plastic retaining rings are present. In this case, PWI should only concentrate on selling plastic rings on the French market, which account for 10% of the company’s total volume of rings sold. Plastic rings sales volume at 10% is 1,240 while steel rings sales volume at 90% is 44,640.


Rings Var. Cost
Previously Finished Rings 15,100 $102,015.60
Special Steel (Raw) 29,540 168,227.35
Total 44,640 $270,242.95
1/ (15,000/100) * $675.60

2/ (29,540/100) * $569.49

Plastic Rings Steel Rings
Normal sales volume for either rings 12,400 49,600
PWI Market Share 10% 90%
Volume sold based on market share 1,240 44,640
Revenues $16,740.00 $602,640.00
Variable Cost 1,680.82 270,242.95
Contribution Margin $15,059.18 $332,397.05



  1.  Total contribution margin from both steel and plastic rings is at $347,456.23.
  2. PWI will maintain its dominance in the retaining rings market by canceling out whatever advances HP has already
  3. PWI will recover the cost of special steel inventory amounting to $110,900.00 and variable cost of previously finished ring inventory of $102,015.60


  1. There will be a negative impact on customer loyalty once these customers become aware of the availability of a superior retaining rings made of plastic being sold by PWI in other
  2. Sales of PWI’s industrial machines could be affected if customers learns of a cheaper replacement parts not available to


VI.        Recommendation


Thorborg of PWI is facing a key decision whether he should authorize production of plastic retaining rings and sell them simultaneously with steel rings or wait until all finished steel rings and special rings inventories on hand are disposed before selling any plastic ring. This is amidst the introduction of a retaining ring substitute made of plastic by a French competitor, HP, for French market. Based on the preceding analysis of the alternative courses of actions available, we therefore recommend that PWI implement alternative course of action number 4.

The impact of this action will both allow the recovery of costs associated with steel rings inventories and halt HP’s advance into the French retaining rings market.


VII.        Potential Problem Analysis

 The potential problem lies in the fact that a superior retaining ring product is only being made available in the French market by PWI and not all its areas where they have major presence. Henk voiced his strong opposition to this plan. He said that once customers who purchased steel rings find out of plastic rings being sold elsewhere, it would harm the sale of PWI machines.

He is justified, if only retaining rings in question are major industrial components, meaning its value is significant enough command attention among industrial machines customers. 100 retaining rings only cost $1,350 or just $13.50 apiece. This amount is immaterial in an industrial settings where machines cost between $18,900 to $28,900. Secondly, differences in product features, even from a single manufacturer, are common. This is done to maximize profit margins or increase market share or both. Third, the product in question is confined to industrial use; meaning only industrial consumers are using it. It’s highly unlikely they will start comparing the features of their retaining rings, especially between companies located in different countries.

Therefore, the likelihood that customers will know of the presence of superior retaining rings in other markets is remote. Even then, the amount is insignificant. The important thing is to ascertain that PWI made industrial machines are as competitive as ever especially with the entrance of Japanese companies and other makers in the industry.


Daron Acemuglo and James A. Robinson

Nations fail economically because of extractive institutions. These institutions keep poor countries poor and prevent them from embarking on a path to economic growth. This is true today in Africa, in places such as Zimbabwe and Sierra Leone; in South America, in countries such as Colombia and Argentina; in Asia, in countries such as North Korea and Uzbekistan; and in the Middle East, in nations such as Egypt. There are notable differences
among these countries. Some are tropical, some are in temperate latitudes. Some were colonies of Britain; others, of Japan, Spain, and Russia. They have very different histories, languages, and cultures. What they all share is extractive institutions. In all these cases the basis of these institutions is an elite who design economic institutions in order to enrich themselves and perpetuate their power at the expense of the vast majority of people in society. The different histories and social structures of the countries lead to the differences in the nature of the elites and in the details of the extractive institutions. But the reason why these extractive institutions persist is always related to the vicious circle, and the implications of these institutions in terms of impoverishing their citizens are similar—even if their intensity differs.

In Zimbabwe, for example, the elite comprise Robert Mugabe and the core of ZANU-PF, who spearheaded the anticolonial fight in the 1970s. In North Korea, they are the clique around Kim Jong-Il and the Communist Party. In Uzbekistan it is President Islam Karimov, his family, and his reinvented Soviet Union–era cronies. These groups are obviously very different, and these differences, along with the variegated polities and economies they govern, mean that the specific form the extractive institutions take differs. For instance, because North Korea was created by a communist revolution, it takes as its political model the oneparty rule of the Communist Party. Though Mugabe did invite the North Korean military into Zimbabwe in the 1980s to massacre his opponents in Matabeleland, such a model for extractive political institutions is not applicable in Zimbabwe. Instead, because of the way he came to power in the anticolonial struggle, Mugabe had to cloak his rule with elections, even if for a while he managed actually to engineer a constitutionally sanctified one-party state.

In contrast, Colombia has had a long history of elections, which emerged historically as a method for sharing power between the Liberal and Conservative parties in the wake of independence from Spain. Not only is the nature of elites different, but their numbers are. In Uzbekistan, Karimov could hijack the remnants of the Soviet state, which gave him a strong apparatus to suppress and murder alternative elites. In Colombia, the lack of authority of the central state in parts of the country has naturally led to much more fragmented elites—in fact, so much so that they sometimes murder one another. Nevertheless, despite these variegated elites and political institutions, these institutions often manage to cement and reproduce the power of the elite that created them. But sometimes the infighting they induce leads to the collapse of the state, as in Sierra Leone.

Just as different histories and structures mean that the identity of elites and the details of extractive political institutions differ, so do the details of the extractive economic institutions that the elites set up. In North Korea, the tools of extraction were again inherited from the communist toolkit: the abolition of private property, staterun farms, and industry.

In Egypt, the situation was quite similar under the avowedly socialist military regime created by Colonel Nasser after 1952. Nasser sided with the Soviet Union in the cold war, expropriating foreign investments, such as the British-owned Suez Canal, and took into public ownership much of the economy. However, the situation in Egypt in the 1950s and ’60s was very different from that in North Korea in the 1940s. It was much easier for the North Koreans to create a more radically communist-style economy, since they could expropriate former Japanese assets and build on the economic model of the Chinese Revolution.

In contrast, the Egyptian Revolution was more a coup by a group of military officers. When Egypt changed sides in the cold war and became pro-Western, it was therefore relatively easy, as well as expedient, for the Egyptian military to change from central command to crony capitalism as a method of extraction. Even so, the better economic performance of Egypt compared with North Korea was a consequence of the more limited extractive nature of Egyptian institutions. For one thing, lacking the stifling control of the North Korean Communist Party, the Egyptian regime had to placate its population in a way that the North Korean regime does not. For another, even crony capitalism generates some incentives for investment, at least among those favored by the regime, that are totally absent in North Korea.

Though these details are all important and interesting, the more critical lessons are in the big picture, which reveals that in each of these cases, extractive political institutions have created extractive economic institutions, transferring wealth and power toward the elite. The intensity of extraction in these different countries obviously varies and has important consequences for prosperity. In Argentina, for example, the constitution and democratic elections do not work well to promote pluralism, but they do function much better than in Colombia. At least the state can claim the monopoly of violence in Argentina. Partly as a consequence, income per capita in Argentina is double that of Colombia. The political institutions of both countries do a much better job of restraining elites than those in Zimbabwe and Sierra Leone, and as a result, Zimbabwe and Sierra Leone are much poorer than Argentina and Colombia.

The vicious circle also implies that even when extractive institutions lead to the collapse of the state, as in Sierra Leone and Zimbabwe, this doesn’t put a conclusive end to the rule of these institutions. We have already seen that civil wars and revolutions, while they may occur during critical junctures, do not necessarily lead to institutional change. The events in Sierra Leone since the civil war ended in 2002 vividly illustrate this possibility.

In 2007 in a democratic election, the old party of Siaka Stevens, the APC, returned to power. Though the man who won the presidential election, Ernest Bai Koroma, had no association with the old APC governments, many of his cabinet did. Two of Stevens’s sons, Bockarie and Jengo, were even made ambassadors to the United States and Germany. In a sense this is a more volatile version of what we saw happen in Colombia. There the lack of state authority in many parts of the country persists over time because it is in the interests of part of the national political elite to allow it to do so, but the core state institutions are also strong enough to prevent this disorder from turning into complete chaos. In Sierra Leone, partly because of the more extractive nature of economic institutions and partly because of the country’s history of highly extractive political institutions, the society has not only suffered economically but has also tipped between complete disorder and some sort of order. Still, the long-run effect is the same: the state all but remains absent, and institutions are extractive.

In all these cases there has been a long history of extractive institutions since at least the nineteenth century. Each country is trapped in a vicious circle. In Colombia and Argentina, they are rooted in the institutions of Spanish colonial rule (this page–this page). Zimbabwe and Sierra Leone originated in British colonial regimes set up in the late nineteenth century. In Sierra Leone, in the absence of white settlers, these regimes built extensively on precolonial extractive structures of political power and intensified them. These structures themselves were the outcome of a long vicious circle that featured lack of political centralization and the disastrous effects of the slave trade. In Zimbabwe, there was much more of a construction of a new form of extractive institutions, because the British South Africa Company created a dual economy. Uzbekistan could take over the extractive institutions of the Soviet Union and, like Egypt, modify them into crony capitalism. The Soviet Union’s extractive institutions themselves were in many ways a continuation of those of the tsarist regime, again in a pattern predicated on the iron law of oligarchy. As these various vicious circles played out in different parts of the world over the past 250 years, world inequality emerged, and persists.

The solution to the economic and political failure of nations today is to transform their extractive institutions toward inclusive ones. The vicious circle means that this is not easy. But it is not impossible, and the iron law of oligarchy is not inevitable. Either some preexisting inclusive elements in institutions, or the presence of broad coalitions leading the fight against the existing regime, or just the contingent nature of history, can break vicious circles. Just like the civil war in Sierra Leone, the Glorious Revolution in 1688 was a struggle for power. But it was a struggle of a very different nature than the civil war in Sierra Leone. Conceivably some in Parliament fighting to remove James II in the wake of the Glorious Revolution imagined themselves playing the role of the new absolutist, as Oliver Cromwell did after the English Civil War. But the fact that Parliament was already powerful and made up of a broad coalition consisting of different economic interests and different points of view made the iron law of oligarchy less likely to apply in 1688. And it was helped by the fact that luck was on the side of Parliament against James II.



Daron Acemuglo and James A. Robinson

THERE ARE HUGE DIFFERENCES in living standards around the world. Even the poorest citizens of the United States have incomes and access to health care, education, public services, and economic and social opportunities that are far superior to those available to the vast mass of people living in sub-Saharan Africa, South Asia, and Central America. The contrast of South and North Korea, the two Nogaleses, and the United States and Mexico reminds us that these are relatively recent phenomena. Five hundred years ago, Mexico, home to the Aztec state, was certainly richer than the polities to the north, and the United States did not pull ahead of Mexico until the nineteenth century. The gap between the two Nogaleses is even more recent. South and North Korea were economically, as well as socially and culturally, indistinguishable before the country was divided at the 38th parallel after the Second World War. Similarly, most of the huge economic differences we observe around us today emerged over the last two hundred years.

Did this all need to be so? Was it historically—or geographically or culturally or ethnically—predetermined that Western Europe, the United States, and Japan would become so much richer than sub-Saharan Africa, Latin America, and China over the last two hundred years or so? Was it inevitable that the Industrial Revolution would get under way in the eighteenth century in Britain, and then spread to Western Europe and Europe’s offshoots in North America and Australasia? Is a counterfactual world where the Glorious Revolution and the Industrial Revolution take place in Peru, which then colonizes Western Europe and enslaves whites, possible, or is it just a form of historical science fiction?

To answer—in fact, even to reason about—these questions, we need a theory of why some nations are prosperous while others fail and are poor. This theory needs to delineate both the factors that create and retard prosperity and their historical origins. This book has proposed such a theory. Any complex social phenomenon, such as the origins of the different economic and political trajectories of hundreds of polities around the world, likely has a multitude of causes, making most social scientists shun monocausal, simple, and broadly applicable theories and instead seek different explanations for seemingly similar outcomes emerging in different times and areas. Instead we’ve offered a simple theory and used it to explain the main contours of economic and political development around the world since the Neolithic Revolution. Our choice was motivated not by a naïve belief that such a theory could explain everything, but by the belief that a theory should enable us to focus on the parallels, sometimes at the expense of abstracting from many interesting details. A successful theory, then, does not faithfully reproduce details, but provides a useful and empirically well-grounded explanation for a range of processes while also clarifying the main forces at work.

Our theory has attempted to achieve this by operating on two levels. The first is the distinction between extractive and inclusive economic and political institutions. The second is our explanation for why inclusive institutions emerged in some parts of the world and not in others. While the first level of our theory is about an institutional interpretation of history, the second level is about how history has shaped institutional trajectories of nations. Central to our theory is the link between inclusive economic and political institutions and prosperity. Inclusive economic institutions that enforce property rights, create a level playing field, and encourage investments in new technologies and skills are more conducive to economic growth than extractive economic institutions that are structured to extract resources from the many by the few and that fail to protect property rights or provide incentives for economic activity. Inclusive economic institutions are in turn supported by, and support, inclusive political institutions, that is, those that distribute political power widely in a pluralistic manner and are able to achieve some amount of political centralization so as to establish law and order, the foundations of secure property rights, and an inclusive market economy. Similarly, extractive economic institutions are synergistically linked to extractive political institutions, which concentrate power in the hands of a few, who will then have incentives to maintain and develop extractive economic institutions for their benefit and use the resources they obtain to cement their hold on political power.

These tendencies do not imply that extractive economic and political institutions are inconsistent with economic growth. On the contrary, every elite would, all else being equal, like to encourage as much growth as possible in order to have more to extract. Extractive institutions that have achieved at least a minimal degree of political centralization are often able to generate some amount of growth. What is crucial, however, is that growth under extractive institutions will not be sustained, for two key reasons. First, sustained economic growth requires innovation, and innovation cannot be decoupled from creative destruction, which replaces the old with the new in the economic realm and also destabilizes established power relations in politics. Because elites dominating extractive institutions fear creative destruction, they will resist it, and any growth that germinates under extractive institutions will be ultimately short lived. Second, the ability of those who dominate extractive institutions to benefit greatly at the expense of the rest of society implies that political power under extractive institutions is highly coveted, making many groups and individuals fight to obtain it. As a consequence, there will be powerful forces pushing societies under extractive institutions toward political instability.

The synergies between extractive economic and political institutions create a vicious circle, where extractive institutions, once in place, tend to persist. Similarly, there is a virtuous circle associated with inclusive economic and political institutions. But neither the vicious nor the virtuous circle is absolute. In fact, some nations live under inclusive institutions today because, though extractive institutions have been the norm in history, some societies have been able to break the mold and transition toward inclusive institutions. Our explanation for these transitions is historical, but not historically predetermined. Major institutional change, the requisite for major economic change, takes place as a result of the interaction between existing institutions and critical junctures. Critical junctures are major events that disrupt the existing political and economic balance in one or many societies, such as the Black Death, which killed possibly as much as half the population of most areas in Europe during the fourteenth century; the opening of Atlantic trade routes, which created enormous profit opportunities for many in Western Europe; and the Industrial Revolution, which offered the potential for rapid but also disruptive changes in the structure of economies around the world.

Existing institutional differences among societies themselves are a result of past institutional changes. Why does the path of institutional change differ across societies? The answer to this question lies in institutional drift. In the same way that the genes of two isolated populations of organisms will drift apart slowly because of random mutations in the so-called process of evolutionary or genetic drift, two otherwise similar societies will also drift apart institutionally—albeit, again, slowly. Conflict over income and power, and indirectly over institutions, is a constant in all societies. This conflict often has a contingent outcome, even if the playing field over which it transpires is not level. The outcome of this conflict leads to institutional drift. But this is not necessarily a cumulative process. It does not imply that the small differences that emerge at some point will necessarily become larger over time. On the contrary, as our discussion of Roman Britain in chapter 6 illustrates, small differences open up, and then disappear, and then reappear again. However, when a critical juncture arrives, these small differences that have emerged as a result of institutional drift may be the small differences that matter in leading otherwise quite similar societies to diverge radically.

We saw in chapters 7 and 8 that despite the many similarities between England, France, and Spain, the critical juncture of the Atlantic trade had the most transformative impact on England because of such small differences—the fact that because of developments during the fifteenth and sixteenth centuries, the English Crown could not control all overseas trade, as this trade was mostly under Crown monopoly in France and Spain. As a result, in France and Spain, it was the monarchy and the groups allied with it who were the main beneficiaries of the large profits created by Atlantic trade and colonial expansion, while in England it was groups strongly opposed to the monarchy who gained from economic opportunities thrown open by this critical juncture. Though institutional drift leads to small differences, its interplay with critical junctures leads to institutional divergence, and thus this divergence then creates the now more major institutional differences that the next critical juncture will affect.

History is key, since it is historical processes that, via institutional drift, create the differences that may become consequential during critical junctures. Critical junctures themselves are historical turning points. And the vicious and virtuous circles imply that we have to study history to understand the nature of institutional differences that have been historically structured. Yet our theory does not imply historical determinism—or any other kind of determinism. It is for this reason that the answer to the question we started with in this chapter is no: there was no historical necessity that Peru end up so much poorer than Western Europe or the United States.

To start with, in contrast with the geography and culture hypotheses, Peru is not condemned to poverty because of its geography or culture. In our theory, Peru is so much poorer than Western Europe and the United States today because of its institutions, and to understand the reasons for this, we need to understand the historical process of institutional development in Peru. As we saw in the second chapter, five hundred years ago the Inca Empire, which occupied contemporary Peru, was richer, more technologically sophisticated, and more politically centralized than the smaller polities occupying North America. The turning point was the way in which this area was colonized and how this contrasted with the colonization of North America. This resulted not from a historically predetermined process but as the contingent outcome of several pivotal institutional developments during critical junctures. At least three factors could have changed this trajectory and led to very different long-run patterns.

First, institutional differences within the Americas during the fifteenth century shaped how these areas were colonized. North America followed a different institutional trajectory than Peru because it was sparsely settled before colonization and attracted European settlers who then successfully rose up against the elite whom entities such as the Virginia Company and the English Crown had tried to create. In contrast, Spanish conquistadors found a centralized, extractive state in Peru they could take over and a large population they could put to work in mines and plantations. There was also nothing geographically predetermined about the lay of the land within the Americas at the time the Europeans arrived. In the same way that the emergence of a centralized state led by King Shyaam among the Bushong was a result of a major institutional innovation, or perhaps even of political revolution, as we saw in chapter 5, the Inca civilization in Peru and the large populations in this area resulted from major institutional innovations. These could instead have taken place in North America, in places such as the Mississippi Valley or even the northeastern United States. Had this been the case, Europeans might have encountered empty lands in the Andes and centralized states in North America, and the roles of Peru and the United States could have been reversed. Europeans would then have settled in areas around Peru, and the conflict between the majority of settlers and the elite could have led to the creation of inclusive institutions there instead of in North America. The subsequent paths of economic development would then likely have been different.

Second, the Inca Empire might have resisted European colonialism, as Japan did when Commodore Perry’s ships arrived in Edo Bay. Though the greater extractiveness of the Inca Empire in contrast with Tokugawa, Japan, certainly made a political revolution akin to the Meiji Restoration less likely in Peru, there was no historical necessity that the Inca completely succumb to European domination. If they had been able to resist and even institutionally modernize in response to the threats, the whole path of the history of the New World, and with it the entire history of the world, could have been different.

Third and most radically, it is not even historically or geographically or culturally predetermined that Europeans should have been the ones colonizing the world. It could have been the Chinese or even the Incas. Of course, such an outcome is impossible when we look at the world from the vantage point of the fifteenth century, by which time Western Europe had pulled ahead of the Americas, and China had already turned inward. But Western Europe of the fifteenth century was itself an outcome of a contingent process of institutional drift punctuated by critical junctures, and nothing about it was inevitable. Western European powers could not have surged ahead and conquered the world without several historic turning points. These included the specific path that feudalism took, replacing slavery and weakening the power of monarchs on the way; the fact that the centuries following the turn of the first millennium in Europe witnessed the development of independent and commercially autonomous cities; the fact that European monarchs were not as threatened by, and consequently did not try to discourage, overseas trade as the Chinese emperors did during the Ming dynasty; and the arrival of the Black Death, which shook up the foundations of the feudal order. If these events had transpired differently, we could be living in a very different world today, one in which Peru might be richer than Western Europe or the United States.

MGT Group: Reconstructing the Supply Chain After a Cross-Border Factory Relocation (A Written Analysis of the Case)

 I.            INTRODUCTION

Two years after being acquired by MGT Group, LSD is still poorly performing. It suffers from low on-time delivery of orders, low inventory turnover, vague market segmentation and product overlap with another MGT owned company resulting to costly wastage of resources.

MGT is a global company established in 1945 and headquartered in Lille, France. It specializes in design and manufacture of high-precision control systems for aviation, aerospace, medicine, electronics, transportation and energy industries. On the other hand, LSD, a company based in Rouen, France, specializes in design, manufacture, and sale of high-precision valves for aviation, navigation, and energy industries. MGT’s acquisition of LSD enabled it to expand its product lines and market.

However, by the second quarter of 2007 and $13M spent on LSD, MGT still sees no sign of improvement. Recognizing market saturation in Europe and an opportunity in the newly rising market in Asia, MGT decided to close its LSD factory in France and relocate it to MGT Fuzhou Co., Ltd. in China. Fuzhou is a wholly owned subsidiary of MGT focused on design and production of high-precision electronic systems.

Kevin Lurton, Vice Chief for Operation at MGT’s Control Systems Division, was charged with closing and relocating LSD factory from France to China. Lurton is faced with the challenge of setting up a new supply chain strategy system in China while effectively managing the supply risks during the transition period.

In setting up the new supply chain system, Lurton studied customer demands, the complexity of supply and production processes and came up with an agile strategy. This strategy is anchored on the need to respond quickly to customers’ changeable, diverse and unpredictable demands without leading to high risk supply disruption.


How would Kevin Lurton build an efficient supply chain system for LSD in China?

III.            OBJECTIVES

  1. To create a flexible, adaptable and consistent supply chain system in order to cut procurement lead time and achieve customer responsiveness.
  2. To be able to minimize supply shortage and distribution risks.
  3. To be able to enhance LSD’s profit margin by reducing manufacturing costs.
  4. To be able to accelerate time to market of LSD’s products.
  5. To maintain LSD brand’s global competitiveness.


1.      Time Constraint

After pouring millions of dollars to revive LSD, MGT still saw no sign of improvement and has grown to become a financial burden to the Group. Eager to extricate itself from the awkward situation, MGT decided to close down LSD French factory and relocate it to MGT Fuzhou Company’s China factory within one year.

With the overriding need to substantially cut operating costs quickly and steadily given the MGT’s declining ability to attract outside investments due to the financial crisis, making the transition to China must be swift or further losses will mount which could hurt MGT’s reputation as an industry leader and respected brand.

2.      Instability of French Supply Chain

Closing LSD factory in France would naturally create disturbance and unrest among the stakeholders of the French factory. The suppliers in particular will be hit harder as LSD scales back supply orders and prepares to move to China. As a result, certain suppliers will demand shorter payment periods, higher prices, larger minimum orders or even terminate supply contracts as they may also look on cutting similar losses from overstocking of raw materials and components.

3.      Complexity of French Supply Chain

LSD’s French supply chain was complex to manage. There are bottlenecks that pose negative influence on the supply chain resulting to longer procurement period for key raw materials and components. In addition, the minimum orders for these raw materials and components tended to be very high. There’s also the very low concentration of suppliers. LSD has 481 high-precision valve products involving 4,329 types of raw material inputs. However, supplier concentration is very low, only 113 in all, resulting to poor bargaining power. The complexity of the French supply chain resulted in long supply cycle, high controlling difficulty, and high system’s costs.

4.      Material Procurement Cycle and Purchase Cost

The procurement lead times for raw materials and components sourced from French suppliers are very long. Supplier production time for machining material is 8 weeks and another 2 weeks for air transport including customs inspections or a total of 10 weeks. Materials for casting take longer to produce at 12 weeks. Other metal processing’s production time is 6 weeks and non-metal items take 2 weeks. All in all, casting takes 14 weeks purchase time, 8 weeks for metal processing and 2 for non-metal processing materials. The result is a procurement team always under heavy pressure to meet production deadlines and relevant freight and customs expenses drive the total purchase cost up by 10% to 25%.

5.      Inventory Pressure

LSD factory has accumulated a large amount of raw materials inventory in the warehouse worth approximately $2.6 million. This is due to the low production efficiency of LSD prior to 2007. These raw materials inventory are needed to be transferred to China and poses to be a logistical burden not to mention high cost of freight and customs duties.

6.      Fuzhou Company’s Imperfect Supply Chain

The raw materials needed to manufacture Fuzhou’s products are all provided by internal suppliers and the company was responsible for purchasing only low-value, non-important materials from local suppliers, accounting for approximately 30% in its total procurements. Manufacturing LSD’s high-precision valves would make Fuzhou responsible for the procurement of all needed raw materials, thus setting a higher demand and pressure on its ability in supply chain management.

7.      Risk from Macro-economic Fluctuation

Macro economic factors might pose great impact on the management and operation of a global supply chain. LSD transfer was carried out amid international economic fluctuations which could shake regional trade agreements, tax policies, import and exports tariffs, force labor costs up and even limit the ability of companies like MGT to attract outside investments.

8.      Understanding Customer Demand for LSD’s products

Accurate understanding of customer demand is essential towards designing and implementing an efficient supply chain system. Every link of the system is geared towards customer satisfaction otherwise the supply chain will be unsuccessful.

An analysis was conducted in order to understand LSD’s niche market and identify other industry players, LSD’s products were not intended for refuelling ordinary vehicles and all its suppliers are from transportation industry that uses LSD’s high-precision valve products for special purpose equipments or projects. In terms of geographical distribution, LSD has its major market in the US but its products were also widely used in developed and developing nations.

Profit driven sellers typically put harsh demands on delivery dates without lowering expectations for high quality. These sellers typically ask for short delivery time after placing an order therefore placing higher pressure on a manufacturer’s supply chain management.

9.      LSD’s Supply and Production Process

The value flow of LSD’s high-precision valve products starts with metal and non-metal upstream raw material suppliers. These materials are then picked up by component suppliers, forming them based on LSD’s specifications and contract demands. Upon delivery to LSD, these are assembled, tested and packaged for delivery to LSD’s customers.

However, bottleneck constraints pose a negative influence on the upstream supply chain as procurement period for key raw materials and components tended to be very long. Non-regular materials, which are about 40% of the total orders, needed to be ordered on special basis and takes 6-8 weeks to manufacture and suppliers demand large minimum order quantity resulting to higher inventory risk. Some key raw materials components are also imported. Transportation and customs clearance takes about 2 weeks and transported by air which is very expensive. In sum, the supply chain featured a long supply cycle, high controlling difficulty, and high system costs.

10. New Supply Chain’s Strategic Objectives

The old supply chain was prone to “bullwhip effect” because of its overall uncertainty and complexity. Bullwhip effect is an occurrence in the supply chain where order sent to the manufacturer creates a larger variance than the sales to customers. To counter this effect, the most appropriate strategy for the new factory’s supply chain system should be an agile one. The strategic objectives of an agile supply chain are fast and flexible response to customer demands with minimal supply shortages and distribution risks with the help of an inventory buffer and the pooling of other resources. This can be done through the monitoring of rate of on-time delivery and average delivery time. This could be achieved by mainly cutting the procurement time.

11. Merger and Acquisition

The 60-year history of MGT is also a history of acquisitions and mergers and the company has stepped up its efforts since 1998. Between 1998 to 2007, it acquired over 20 design and manufacturing companies. With these acquisitions, MGT has accumulated substantial knowledge about the processes and milestones involved in this kind of business transaction. MGT management and its board also understand that mergers and acquisitions are essential strategic business policies geared towards sustaining the company’s growth through synergy, diversification and even elimination of competitors.

12. Supplier Evaluation and Accreditation Policy

MGT has worked hard at finding and developing suppliers that meet its own needs and even building a scientific system for supplier evaluation and accreditation. MGT has a three-step supplier evaluation system usually carried out on a monthly, quarterly or annual basis. This evaluation calls for real performance measures based on four major dimensions of delivery time, service, cost and quality. This supplier evaluation system took into consideration the company’s strategic needs and its subsidiaries actual operational requirements. This evaluation policy, while not very efficient, has succeeded in ensuring quality and fairness.


1.      Build a Centralized Supply Chain in China

Building a centralized supply chain system will mean a common, localized supply chain for Fuzhou and LSD where the central authority responsible for decision-making is made at the management level of Fuzhou’s supply chain team. Fuzhou Company will also be responsible for building upstream supply chain relationships for LSD.

This supply chain organizational structure will leverage on Fuzhou’s excellent management team and a high performing staff that has cultivated a unique corporate culture focused on professionalism, excellence and devotion to their respective duties and responsibilities.

The centralized supply chain system will also leverage on standard sourcing of raw materials, processes, and even technology decisions resulting in economies of scale and improve bargaining power with suppliers while enhancing internal operational efficiencies and knowledge sharing.


a. Cost savings from increased purchasing power and economies of scale

b. Substantial cost reduction from a single, streamlined supply chain unit.

c. Fast implementation of supply chain for LSD leveraging on Fuzhou’s established supply chain system.

d. Lower inventory risk by leveraging on increased bargaining power to lower down minimum order quantities for raw materials and components.

e. Consolidation of supplier base that will help buffer supply disruptions.
f.  Fuzhou Company boosts an excellent pioneering management team and a high performing staff.
g. Localized supply chain helps eliminate raw materials and supply chain bottlenecks, high system costs and accelerates time to market.

a.  Cultural differences from LSD and Fuzhou management teams could get in the way of creating a common supply chain.
b. Fuzhou’s expertise is not with high-precision valve products.
c. Fuzhou has imperfect supply chain.

2.      Build a Decentralized Supply Chain in China – Integrate Quick Response (QR) and Quality Control (QC) Systems

LSD will control its own supply chain by linking with new, localized upstream raw materials and component suppliers. Learning from the complexity and instability of French supply chain system, the new China supply chain will integrate two important systems: Quick Response and Quality Control systems designed to respond quickly and accurately to customer orders while maintaining LSD’s strategic competitive advantage through high quality products.

MGT has worked hard at finding and developing suppliers that meet its own needs even using scientific system for supplier evaluation and accreditation. LSD can leverage on MGT’s three-stage supplier evaluation process in order to select and accredit new suppliers that will fulfil LSD’s strategic needs.

A QR system is designed to work throughout the supply chain system in order to produce a closer relationship between supply and changes in demand. QR is particularly effective in highlighting any change in customer requirements, which will enable LSD and its suppliers to develop new methods of meeting these changing demands.

QC is relevant in increasing customer satisfaction and reducing manufacturing waste. This will also ensure that throughout the manufacturing process of LSD’s high-precision valves, product quality is constantly monitored and improved.


a. Speed in implementing supply chain processes and resolution of issues.
b. Flexible and fast response to customer demands with minimal supply shortages and distribution risks.
c. Less resistance from Fuzhou Factory’s management because its supply chain system will not be disrupted.
d. Improves satisfaction at the site and business unit level at LSD.
e. Minimizes risk of deploying low quality products to customers.
f. Localized supply chain helps eliminate raw materials and supply chain bottlenecks, high system costs and accelerates time to market.

a. Decentralization means little sharing of information and coordination between LSD and Fuzhou’s on supply chain matters.
b. Could not leverage on economies of scale.
c. High controlling difficulty and supply cost due to reduced bargaining power with suppliers.

3.      Form Strategic Partnership with Chinese Suppliers

There is a need to foster longer-term and co-operative relationships in the supply chain system. This is due to the increasing competition, changing customer preference and demands. LSD’s successful cross-border relocation entails the management of fundamental processes involved in the satisfaction of its customers. One of this is forming strategic partnerships with suppliers in China. This partnership will allow LSD to take advantage of the resources and expertise of its suppliers in the hope of satisfying its own customers.


a. Minimal supply disruption and shortage risks resulting in faster and flexible response to customer’ changeable, diverse and unpredictable demands.
b. Promotes production efficiency and product quality
c. Reduces production costs
d. Reduces time to market
e. Facilitates information sharing that improves overall corporate strategy.
f. Cuts ordering and procurement time therefore achieving average product delivery time.
g. Improve customer satisfaction.
a. Since most of the benefits goes to the buyer, suppliers are hesitant to form strategic partnerships with manufacturers.
b. Suppliers may have to increase investments in equipment and new technologies, putting a strain on its cash flow and affecting its relationship with the manufacturer.
c. Different cultures of supplier and manufacturers-buyers will lead to frictions in the supply chain.

4.      Vertically Integrate

Implement backward integration strategy by gaining ownership or control of strategic upstream raw materials and component suppliers in China through mergers and acquisitions. This will align external supply chain capability based on LSD’s long term strategic needs and manage an extended enterprise that behaves as if internal to the company. This will secure stable input of raw material and component resources. Furthermore, MGT has a long history of successful acquisitions and has the resources to control or own strategic suppliers.


a. Minimal supply shortages and distribution risks resulting to fast and flexible response to customer’ changeable, diverse and unpredictable demands.
b. Promotes efficiency and reduces transaction costs.
c. Production is more efficient
d. Improved profitability and cash flow
e. Facilitates information sharing that improves overall corporate strategy.
f.  LSD increases power in the marketplace
g. Minimal risk of supply disruption and shortages
h. Cuts ordering and procurement time therefore achieving average product delivery time.

a. High cost of acquisition and mergers.
b. Higher costs if the company is incapable of managing new activities efficiently.
c. Implementation and integration is not easy.
d. New competencies may result in culture clashes and increased bureaucracy will result to reduced flexibility.

5.      Build a Supply Chain Anchored on the Principle of Just-in-time (JIT) Manufacturing Model

JIT production model is designed to meet demands, producing high-precision valves based on a given number of customer orders. Products are only manufactured once there is demand, not manufacturing them in advance. The overriding principle of JIT is to increase production efficiency while avoid wastage, overproduction, waiting and excess inventory.

While JIT is a manufacturing strategy, this model in an integral component in helping efficiently manage the supply chain system of LSD by giving increased emphasis on supplier relationships. Supplies come at regular intervals throughout the day and are synchronized with production demand and the optimal amount of inventory is on hand at any point which is then moved directly to customers.

a. Very low inventory risk since products are only produced when there is demand for it.
b. Reduces inventory costs while improving flow of goods.
c.  Increases efficiency on supply chain system.

a. Susceptible to Bullwhip effect
b. Eliminates inventory buffer causing inventory shortages in case of sudden demand surge
c. High supply shortages and distribution risk.

The success of LSD’s cross-border transfer from France to China hinges on the ability of MGT to implement a successful China supply chain swiftly and minimize supply disruptions as possible.

Based on the analysis of the issues facing Kevin Lurton and MGT’s as a result of cross-border factory relocation to China from France and the alternative courses of actions enumerated, I therefore recommend that Kevin Lurton implement alternative courses of action number 2, Build a Decentralized Supply Chain – Integrate Quick Response and Quality Control Systems and number 3, Form Strategic Partnership with Chinese Suppliers

These alternatives will be keys towards implementing an efficient new supply chain system for LSD in China.


The implementation of the alternative courses of action selected will be divided into short-term and long term strategies.

Short-Term Strategy Implementation

 The short-term strategy will be the implementation of a decentralized China supply chain for LSD, and at the same time embedding the Quick Response and Quality Control systems into the supply chain management. It has 4 phases which will be carried out in 2008, leading towards the realization of a localized supply chain.

Year 2008

Phase 1

Phase 2

Phase 3

Phase 4

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Strategy Development Stage

Situation Analysis and Conceptual Design

Strategy Validation

Detailed Design Validation of Supply Chain and Quick Response Systems


Identifies local vendors in China who can supply the raw materials and components needed for manufacture of high-precision valves

Putting Infrastructures in Place – Strategy Integration

Testing and Enabling the China Supply Chain and Quick Response systems


Initiate contact with suppliers. Starts three steps supplier evaluation and accreditation program.

Realizing the benefits

Delivering the Localized Supply Chain


Finalizes firm orders and sign supply contracts.

Phase 1 is the analysis of the current supply chain system and where the gaps and weaknesses exist. The result of this will be consolidated into a conceptual design ideal for the new supply chain system in China. Considerations should be made on all aspects of the new supply chain in this phase like warehouses, factories, suppliers, distributors and even retail outlets. This is done in three months starting on January until March 2008.

Phase 2 is to validate the assumptions underpinning the conceptual design, which will then form a detailed blueprint of the future strategic supply chain model and concepts. The quick response system design shall also be embedded early in this phase. Simultaneously with this is the process of identifying potential vendors in China who can supply LSD with raw materials needed to manufacture its products. This also done in three months starting in April and ending in June of 2008.

Phase 3 involves deploying an appropriate infrastructure which includes aspects such as process design, organizational design, performance measurement       and information systems. At the same time, the team should initiate contact with potential suppliers and commencing the three-step supplier evaluation and accreditation process. This is finished between July and September of 2008.

Phase 4, the final stage of the implementation strategy is about embedding the new supply chain system infrastructure and delivering the benefits to MGT. There should already be firm orders and supply contracts signed. This is done starting October and ending in December 2008.

Long-Term Strategy Implementation

The long-term strategy is the formation of strategic partnership with Chinese suppliers. LSD enters partnership agreements with strategic suppliers who can complement LSD’s long-term manufacturing requirements.

The long-term strategy implementation will have three phases to be carried out in 2010.

Year 2010

Phase 1

Phase 2

Phase 3

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec


  • Review of Supply Chain Strategy and Market Priorities
  • Supply Chain Analysis
  • Market Identification

Stakeholder Discovery

  • Discovery of Customers/Suppliers
  • Stakeholder Dialogue
  • Business Plan Development

Pilot Development and Launch

  • Pilot test selected development program
  • Use pilot result to validate approach
  • Launch the partnership

The first phase of developing strategic supplier partnership is the diagnostic phase. This involves the review of LSD’s current market priorities and existing supply chain strategies to identify major flaws, leverage points and impacts of its existing strategies, key market trends, and financial benefits. High leverage supply chain opportunities are identified in this phase. This is done in four months starting in January and ending in April 2010.

After concluding phase 1, the team then moves to phase 2, the stakeholder discovery. Under this phase, the team engages with existing suppliers and customers through structured interviews and meetings to explore major opportunities for joint development. Business plans for at least 10 potential pilot initiatives are created to capture identified partnership opportunities. This will be finished in 5 months starting in May and ending in September of 2010.

Phase 3 will be concerned with the pilot development and launching of significant new strategic partnership based on the business development plans created in Phase 2. The pilot development details the value propositions and key marketing messages for the new strategic partnerships, the goals, roles and commitments of each partners, and setting up operational requirements. The new partnership is then launched by LSD and partner suppliers. This phase will take 3 months starting on October and ending with the launching in December of 2010.


The French supply chain system was mired with complexity and instability resulting in long supply cycle, high controlling difficulty and high system costs. LSD’s pre-transfer inventory turnover ratio is only 1.1, on time delivery is only at 72% and more alarmingly, LSD’s order delivery time is 12 weeks, all resulting to a dismal 89% quality yield. There are also bottleneck constraints that are negatively influencing the upstream supply chain resulting in longer procurement cycles and high inventory risks. The supply chain was also prone to “bullwhip effect”, a trend of larger and larger swings in inventory tied to customers’ unstable demand patterns.

In China, MGT Fuzhou Company’s supply chain system was far from perfect and based on their processes, it is not suitable for LSD’s production requirements. Fuzhou’s raw materials are all provided by internal suppliers and the company was responsible for purchasing only low-value, non-important materials from local suppliers, accounting for approximately 30% in its total procurements.

It is therefore very crucial that MGT decentralize LSD’s supply chain in China, integrate important systems like QR and QC, in order to create a flexible, adaptable and consistent supply chain system that will cut procurement lead time and achieve customer responsiveness. This will also enhance LSD’s profit margin by reducing overall manufacturing costs while accelerating high-precision valves’ time to market therefore maintaining LSD’s global brand competitiveness.

In the long run, forming strategic partnership with Chinese suppliers will further minimize supply shortage and distribution risks resulting in fast and flexible response to customer’ changing, diverse and unpredictable demands. LSD will greatly benefit from these partnerships as it will promote efficiency in production, help reduce transaction costs therefore improving LSD’s profitability and liquidity. Additionally, LSD will be able to gain vital information and important industry forecasts, determine order status in real time and have access to suppliers’ inventory data.



There are two potential problems that may surface with the cross-border relocation of LSD’s factory from France to China. First is the human resource issue and second is the possibility of supply disruptions caused by LSD’s anxious French suppliers.

The closure of LSD’s factory in Rouen, France is sure to deprive people of jobs. They might harbour a strong grudge towards the company and it is difficult to predict how much trouble they might cause for the factory transfer. Kevin Lurton already made it clear that some of the employees are valuable to LSD’s transition and offered them a job at LSD’s China factory. Employees who can’t afford moving to China should be given the option to retire with very generous packages, over and above the minimum legal requirement. It will help laid off employees to start their own businesses or help them survive the period of unemployment while they look for another job opportunity. Those employees who are valuable to MGT and can’t afford moving to China should be offered a job at MGT headquarter located just 300 kilometers northeast of Rouen.

Similarly, LSD’s relocation to China could set off fears among French suppliers which could disrupt the supply chain even before a new one is created. French suppliers may put forward harsh demands or resort to abnormal practices such as covert price increases, supply disruption, quality tricks, and contract clause changes, all of which might harm the operational continuity of the factory. But the impact of the disruption, if any, is minimal at the very least. LSD already accumulated an inventory of raw materials worth US$2.6 million at its French warehouse. Given that the forecasted 2008 sales revenue is only US$4.83 million, LSD has more than enough inventory to manufacture high precision valves for 2008, at the time also, a new supply chain system in China has already been implemented.

In addition to human resource and supply chain issues, a more basic question needs to be addressed: why not stay in France and just fix the French supply chain? While this can be done, LSD’s concerns don’t just stop there. European market is already saturated after seven decades of development. There’s nothing more in this market now but fierce competition and low profit margin. LSD’s vague market segmentation is resulting to product overlap with another MGT owned company. Asia on the other hand is an emerging market where LSD can successfully penetrate if it can strike a balance between quality and price. An industrial product made in Europe to be sold in Asia is just not viable. LSD’s manufacturing costs are already a concern. Shipping high precision valve products to Asia is sure to drive costs up (owing to high costs of shipping and import tariffs). The result is a high priced, low margin product that Asian customers will hesitate to buy. Moving LSD’s manufacturing to China will substantially reduce direct and overhead costs (cheap labor, raw materials, eliminate importation costs, reduce shipping and other overhead expenses) while creating an adaptable and flexible manufacturing and distribution systems. The result is quality, lower-priced, and high margin products that Asian customers will buy.