17 February 2015

The Customs Computer $30 Million Blowout

Yet another major IT project has gone off the rails. This time it is something called the Joint Border Management System (JBMS), a system designed to upgrade and link systems currently operated by Customs and the Ministry of Primary Industries (MPI). It was supposed to be finished by the end of 2012 at a cost of $75.9 million. Three years later, the development is still not complete and the budget has ballooned to $104.1 million.

This is merely the latest in a series of similar debacles. They are practically unavoidable, given the model used by government for IT procurement. It has been described as the "waterfall" model. Mike Bracken of the UK's Government Digital Services described it as "writing most when you know least". A group of public servants write massive tender documents attempting to guess the needs of end users years in advance. The scope of the projects is such that only a few large consultancies can qualify to tender. The selected consultancy then gets on with over-running budgets and missing delivery deadlines.

When it all becomes public, everyone runs for cover and the hapless Minister nominally in charge is left to take the flak. In the JBMS project, Customs, MPI, the Department of the Prime Minister and Cabinet and the State Services Commission were all called to put out the fire. Official Information requests were declined (on the usual grounds of 'commercial confidentiality') and an embarrassing law suit with IBM was avoided, but not before a few more millions were spent getting legal advice from Crown Law and Chapman Tripp. Those suits don't come cheap.

Does it have to be this way? After all, banks do on-line banking, Amazon sells books, clothing retailers of all sizes sell clothing, Trademe manages an auction site and airlines sell tickets on-line. None of these well-functioning systems were developed using the waterfall model. They were not the product of any grand design and all started as relatively small projects, run by in-house teams or small-scale contractors. Unlike public servants, the owners of those businesses did not have access to lavish amounts of other people's money. Many of the early versions of these successful applications failed miserably, but were soon replaced by others that did not.

Matt Ridley, a member of the British House of Lords, said in an article published in The Times, "[The systems that] succeed allow for plenty of low-cost trial and error and incremental change. It's the mechanism Charles Darwin discovered that Mother Nature uses. Rather than a grand 'creationist' plan or a big leap, natural selection incrementally discovers success through trial and failure. From the English language to an airliner, everything successful has emerged by small steps."

The current Customs system, Cusmod, was developed around the same time as trackstock, the Warehouse Management System that we use at DSL Logistics. We like to say that trackstock is very good indeed, because it incorporates fifteen years of mistakes. Every time something goes wrong, our small in-house team of developers comes up with solutions which improve the functionality of the product. Cusmod, on the other hand, looks substantially the same that it did fifteen years ago. Of course it is outdated and no longer fit for purpose. Instead of breaking the system up into smaller units and developing the capability to maintain them in-house or by using local developers, the departments went for another big bang approach and propose to replace the whole thing by spending over $100 million of taxpayers money.

The idea that a group of public servants can specify the myriad requirements of users, years in advance, is nothing short of arrogance. Yet, New Zealand is awash with very smart developers that deliver solutions to businesses of all sizes, day in and day out. Unlike massive projects like Novopay or JBMS, those systems actually work, in a way that no public sector IT system has ever done.

The rationale for JBMS was never very clear. At one stage, it was trumpeted as making it easier for businesses to register with the bureaucracies, a step that every business must undertake exactly once in its life time. The need for a 'single window' arose from the decision to keep two separate agencies working on border control, contrary to what every commission of inquiry convened on that topic over the years recommended. A single border control agency is the norm in comparable countries. It soon became apparent that the real purpose of the exercise was to upgrade the control systems of both agencies, while keeping two chief executives and their coteries of deputies.

Customs already records details of every transaction in a modern relational database. That provides the mechanism for the collection of statistics and the management of the revenue collection functions. The same data can also be used for intelligence purposes. There is no discernible need to create a new mega system to improve intelligence gathering. If the data being collected is not sufficient, new fields need to be mandated. Customs officers need to receive better training on how to query their databases and produce better analytics. If the tools that they have at their disposal are not good enough, then any of the many local software developers can provide them with query/reporting tools by lunch-time, at a fraction of the IBM costs.

Does such an approach work? It does. According to Matt Ridley, British minister for the Cabinet Office Francis Maude "began by centralising controls so that he had to sign off any IT contracts of more than one million pounds (now raised to five million), then built up an in-house capability to offer cheaper and better design, and opened procurement to smaller companies. Government contracts with outside IT suppliers are now shorter and smaller. Some of the savings on offer were so vast that civil servants refused to believe them. In one case, 98.5 per cent of the cost of an existing contract was saved by letting a contract to a small British business rather than an incumbent multinational IT firm, and it worked better."

Internal Affairs Minister Peter Dunne represented New Zealand at the inaugural meeting of the D5 Digital Leaders' Summit in London in December 2014. The D5 is a grouping of fine nations – United Kingdom, New Zealand, South Korea, Estonia and Israel – considered amongst the most advanced in the provision of on-line government services. Its establishment was a British government initiative. We hope that Mr Dunne learned something at that meeting.

30 March 2014

Pretending to Solve Housing Affordability

The government is finding it difficult to have a real impact on the affordability of houses. It has now come up with some pretend solutions.

The issue is actually quite simple. Some City Councils are run by people who believe that we should all be living in high rises near train lines, so we can ride a bicycle to the closest lentil-and-soy-latte shop. To achieve this vision of life in East Berlin circa 1975, they prohibit people from building houses where they want. Then, the cost of the remaining land goes up, astronomically. As it would.

The government does not seem to have the stomach to stem the ideological onslaught from the central planners, so something else is needed to try to convince people that they are doing something. Minister Nick Smith put out a consultation paper that suggested exempting building products from anti-dumping laws. Apparently, plaster-board from Thailand and nails from China were found to have been sold too cheaply in New Zealand, so the local manufacturers persuaded an earlier government to protect their profits by slapping a large protective tariff against competition from imports, using the arcane anti-dumping laws.

The Minister is right when he says “I worry that high duties on some imported building products, combined with limited competition in New Zealand is allowing excessive margins by building product manufacturers”. That is just as true when the same tariffs are applied to canned peaches, diaries and hog bristle paint brushes which are all subject to anti-dumping duties.

The Ministry said, “there is no intention to reform the fundamentals of [the anti-dumping] regime, such as by introducing a full public benefit test which would measure the impact of anti-dumping duties on New Zealand consumers”. So, they propose to change it just for building products, presumably because housing affordability is always in the news.

The Minister also proposed to corrupt the duty concession system, which exempts duty on goods without locally manufactured equivalents, again just for building components, again just to be seen to be doing something (other than the obvious). This principles-free approach to public policy reminds me of Muldoon who, when confronted with the problems caused to our exporters by the high costs of protecting local manufacturers, offered to eliminate duties on agricultural tractors.

12 October 2013

Importers Profit From Exchange Rate?

When the NZ dollar goes up a notch, two things happen: (1) some exporters complain and (2) importers are accused of profiteering. That is understandable, as a higher dollar makes exports more expensive and imports cheaper. Understandable, but not necessarily right. Importers who see their costs reduced when the currency goes up, would love to increase their profits by keeping their prices at the same level. In that respect, they are no different from school teachers, firemen, stevedores and all the other folk who would like to have higher incomes. The problem is that, when their costs go down, so do their competitors’. If they fail to meet the competition’s price reductions, they lose sales, pure and simple. So, when their costs go down, so do their prices, much as they would love them to stay the same. The final consumer is the winner, both directly in the form of lower prices and indirectly in the form of lower inflation. Without the downwards pressure of import prices, the Reserve Bank would have to increase interest rates.

Things are not that simple either, when it comes to exports. Many exporters of manufactured goods import components and raw materials denominated in US dollars but export most of their wares to Australia. When the NZ dollar rises against the US dollar but stays down against the Australian dollar (as happened in recent times), those manufacturers get a double dose of good news: their inputs are cheaper and their finished products remain competitive in the Australian market. Other exporters, such as primary producers, are not so fortunate, as they have a relatively lower level of imported inputs and sell their produce in US dollar markets.

International traders, be they importers, exporters or both, operate in a regime of perennial volatility. In a small country like New Zealand, the currency bobs up and down like a cork in the ocean. It is little more than a waste of effort to complain. It is an even bigger waste of time to pretend that a country like New Zealand can do anything useful about the value of its currency. To attempt to do so would be much like trying to soak up the incoming tide with a beach towel.

Every time some wise guy intones gravely “the New Zealand dollar is over-valued”, we wonder where that superior wisdom comes from. The dollar is always valued at the exact amount that someone is prepared to pay for it, from one minute to the next. No country has ever devalued its currency to prosperity, otherwise Zimbabwe would be richer than Switzerland. When people clamour for a lower dollar, they are in effect asking for a reduction in other people’s salaries, as most of what we consume in New Zealand is imported.

Australians Miss Out on China Free Trade Agreement

New Zealand and China have a free trade agreement (FTA). For most items of clothing imported from China to New Zealand, the current duty rate is 6.3%, reducing to 4.2% in January 2014, 2.1% in 2015 and zero in 2016. However, if those items are imported from a third country – even if made in China – then the duty rate that applies is 10%.

This affects mainly Australian retailers with stores in this country, who source their goods from China for both countries and then sort them for distribution in their Australian DC. Chinese garments shipped from Melbourne to Auckland end up paying a duty of 10%, losing the benefit of the FTA preferential rates. The only solution to this problem is to have the New Zealand requirements shipped here direct from China.

Customs Fees Increased

Customs have increased their ‘transaction fees’ from $38.07 to $46.89 (+23.17%) for imports and from $14.56 to $17.94 (+23.21%) for exports. The department clips this ticket for most shipments with a value of over $1,000 that come in to or out of this country. The Customs fees were introduced by former Minister Jim Anderton. Until then, the costs of operating what is basically a law enforcement service were met from general taxation. Paying Customs a transaction fee makes as much sense as paying the Police a fee when you report a theft. It now costs importers about the same to file an entry as it costs them to produce it in the first place. Customs are providing a service to the community at large, not to the individual importers and exporters who are obliged to file entries with that department.

09 October 2013

Reshoring: Buzzword or Reality?

Reshoring is jargon for bringing manufacturing back from China. It is happening in the US, driven by a combination of higher labour costs in China and lower domestic energy costs from fracking. Intangibles, like the efficiencies from having design and production in the same facility and lower costs of automation, also have a bearing. IKEA has recently opened a factory in North America, to cut its delivery costs to that market.

In our own area of third-party logistics (3PL), we are finding that doing pick-and-pack in Auckland is now costing not much more than doing it in Shanghai. We expect the Chinese cost advantage to disappear altogether before long, as their labour costs continue to increase in double digit annual percentages. The transit time from our distribution centre (DC) in Shanghai to retail stores in New Zealand is counted in weeks, while that from the Auckland DC is counted in hours. The best solution is to operate a mixed service, where some base lines are packed in China while others, more time-sensitive, are stored at destination for rapid fulfilment.

Speed to market is becoming increasingly important. Zara, a giant Spanish clothing retailer, spent a lot of time and money setting up a system to attach security tags in the DC, as the normal practise of having that task done by employees in the stores added a few intolerable hours to final availability. Their garments are, in the main, put through a steam tunnel and shipped in hanging bags, ready for retail on arrival. This method is now used by most large European retailers, as the mall rents are too high to waste precious floor space preparing garments for sale. This trend is also developing in New Zealand.

09 August 2013

100% Bullshit

A mouthpiece of the Chinese government, said it was time to ask the government of New Zealand about quality control. It called New Zealand's 100 per cent Pure campaign to boost tourism, a "festering sore". The editorial was commenting on Fonterra’s shipments of milk products infected with botulism.

The manager of Sanford was reported as saying that although there had been no direct impact on the firm so far, he was concerned about the "public ridiculing" in the Chinese media of the "Pure New Zealand idea".

The late Owen McShane saw this coming back in 2001. He posted this in a chat room at the time: “The fault lies with our tourism board for promoting our country as 100% pure, because purity in this context defies definition and leaves us open to this sort of response. Purity is a dangerous concept in political or commercial life. Gold is not sold as pure but 99.99% pure. Of course we are not 100% pure because nothing is. And compared to what? Even if we locked up all our streams from cattle and sheep does this mean we have restored "nature" and hence 100% pure - not unless someone can persuade me that no Moa ever crapped in a stream. And birds don't process their shit as well as mammals. I am suggesting that Federated Farmers take the Tourism Board to the Advertising Standards Authority for false advertising and raising expectations to impossible levels. Repeat, purity is a dangerous concept. Ask the German Jews or the survivors of the Taliban.”

The usual suspects said, then and now, that the claim is just innocent puffery. Tourism New Zealand spokeswoman Deborah Gray said last year that some people were confusing the campaign with an environmental issue. "The 100 per cent Pure New Zealand campaign is a marketing campaign not an environmental promise," she said. Fools.

25 July 2013

Shipping Cartels To Become Illegal

The international shipping industry in New Zealand has long enjoyed an exemption from the Commerce Act. Shipping companies routinely publish advertisements saying that representatives from a number of lines met and collectively decided to increase their prices by a certain amount effective from a certain date. Anyone else in any other industry trying to do the same would most probably face prosecution, followed by stiff penalties.

The Importers Institute has argued for a long time that there is no reason to for the exemptions. Shipping company clients - exporters and exporters – have to compete in environments where price collusion is illegal. The current government decided to refer this issue to the Productivity Commission. The Commission’s Chair Murray Sherwin said, “Current exemptions for shipping companies from the Commerce Act should be removed so that normal competition laws apply.”

The government decided to accept this recommendation and announced that “international shipping to and from New Zealand will be regulated under the Commerce Act, improving oversight and delivering competitive outcomes for exporting industries.” We applaud this decision and look forward to the efficiency improvements that usually result from increased competition.

Producer Cartels Continue To Under-Perform

Like the Shipping Cartels of yesteryear, some producer cooperatives owe their existence to political decisions to exempt them from anti-trust laws. In 2001, the Dairy Industry Restructuring Act exempted the dairy industry from certain sections of the Commerce Act and paved the way for the creation of Fonterra. So, how is the cooperative faring?

It is difficult to assess the success or otherwise of our dairy quasi-monopoly. As we said back in 1998, in correspondence with the then Dairy Board, “we know that the performance of [State export] monopolies is indeed very good, mainly because they keep saying that it is. It is, however, apparent that it is not good enough to withstand competition from other exporters.”

One way is to look at what economists call the 'counterfactual’. We know that Fonterra is doing well but, could or should it do as well as, say, Nestle? We know that free competition leads to efficiencies everywhere and that is the main reason why centrally planned economies invariably fail. What is so special about producing milk or kiwifruit that requires us to protect producers from normal market disciplines?

Take the case of infant formula. Fonterra was negligently hoodwinked by its joint venture partners in China who had no qualms in poisoning babies by adulterating milk formula for a quick buck. Ironically, this resulted in a strong preference by Chinese parents for infant formula made in New Zealand. In a normal competitive market, a normal competitive company would have spotted the opportunity and met the market demand quickly.

Not Fonterra, though. Selling of infant formula was to be done through their approved channels only and in a time frame that best suits the bureaucrats who run the cooperative. So, enterprising Chinese traders started buying cans of infant formula in New Zealand supermarkets in large quantities and shipping them for sale in China, for a handsome profit (cans of imported formula can retail in China for as much as $70 each). There was so much of that happening that local supermarkets started rationing sales.

One of our freight agents in Honk Kong asked us to quote freight costs for forty containers per month. We declined to quote, on the grounds that we anticipated that the authorities would put an end to this embarrassing trade, sooner or later. And so it came to pass: the Ministry of Primary Industries and Customs swung into action and lowered the boom. Products that had been approved as being safe for New Zealand consumers would in future be exported to China only by State-approved exporters.

Five years after the melamine adulteration scandal, Fonterra announced plans to launch its own infant formula brand in China in 2013, looking to grab a share of a market estimated to be worth US$6 billion annually and projected to double by 2016. In the meantime, Chinese companies started buying up land and setting up factories in New Zealand to produce their own brands.

What Is 3PL And Why Is Everyone Doing It?

3PL is an acronym for third party logistics, what used to be called contract warehousing and distribution. The idea is that, instead of each importer or exporter having their own storage and handling facilities, they subcontract those functions to a specialist. In recent years, the move to contractors has accelerated, as evidenced by the number of large new facilities being built every month around airports and other industrial areas.

The economics are compelling. Take an example of a small importer, who rents a small warehouse cum showroom with an office in the mezzanine. The office employs the boss and two clerks, the warehouse has a manager, a forklift, some racking and one picker. The sales are outsourced to commission agents and temporary warehouse workers are employed during peak times. The annual cost of the warehouse and equipment rent plus staff amounts to at least $200,000.

Any 3PL operator should be able to handle that importer’s volume for about $50,000. An experienced operator should be able to offer significant improvements in operational efficiency. The boss has a clear choice: continue business as usual or add $150,000 to the bottom line. A no-brainer, surely.

The 3PL model enables efficiencies that are not otherwise possible. Take for example the case of some clothing retailers that we work with. A significant proportion of their sales is of base products, which can be more or less predicted quite a bit in advance. In those cases, it makes sense to have them packed by store in China, where labour costs are still marginally lower than ours.

On arrival, the 3PL operator simply cross-docks the cartons and immediately ships them to the final destinations, after recording the movement for tracking purposes. The rest of the stock is received in bulk and put away in locations, to be distributed daily against store allocations. All items stored and shipped, whether cross-docked or picked locally, have total visibility through a tracking website.

The same model applies in reverse for exports. The 3PL operator can consolidate orders to be cross-docked on arrival by his agents overseas and manage stocks for local fulfilment. The key to both of these models is that the 3PL operator must have a robust network of experienced overseas agents capable of accurately sending and receiving the large amounts of data involved, providing real-time visibility.

The ability to handle large volumes of data and reporting movements accurately is at the heart of a successful 3PL operation. In DSL Logistics, we like to boast that our warehouse management system is very good indeed, as it includes every error that we have made in the last 15 years! The fact that we developed it in-house has helped a lot, as off-the-shelf systems rarely cater for more than one type of industry and, when they try, they become too complex, expensive and inflexible.

So, what can go wrong when moving to 3PL? Quite a lot, really. Importers and exporters need to satisfy themselves that the intended contractors have the ability to accurately manage their stocks and report movements. They need to have robust and tested software – and that does not mean Excel spreadsheets! The contract itself needs to be well designed, with performance targets that are measurable and reviewable.

Some importers want the selected 3PL provider to operate their legacy warehouse management system, going so far as to provide remote terminals with VPN tunnels to their own network. This may help to keep down the costs of integration, but is not true 3PL; it merely amounts to outsourcing the warehouse rent and employment of pickers. The major efficiencies of 3PL are simply not possible under that model. A true 3PL model involves the trader exchanging information with the 3PL operator, system to system.

The best way for an importer or exporter to assess the suitability of a 3PL provider is to talk to existing client references, particularly in the same or similar industries. When no reference sites are provided, importers shouldn’t rush to be the first. Companies that own lots of ships and planes or move large amounts of cargo throughout the world are not necessarily those best suited to do local 3PL work. Taking care with the appointment and negotiation of the contract will pay handsome dividends.

Industry News

When Mindless Bureaucracy at the Border Damages Trade

Exports of meat from New Zealand were held up on Chinese wharves for a couple of weeks. The problem? The goods were accompanied by certificates issued by MPI, the Ministry of Primary Industries. That’s the latest name of the agricultural certification department. From time to time, our bureaucrats love to spend a few million dollars redesigning logos, changing their letterheads and websites. Why? Because they can. For many years this outfit was known as MAF, originally the Ministry of Agriculture and Fisheries, later changed to Ministry of Agriculture and Forestry.

It turned out that the Chinese Customs manual said that the certificates had to come from MAF. Some low level border official detected shrewdly that MPI is different from MAF and put the shipments on hold. The issue could have been sorted out quickly with a phone call, but that is not how some border services work. Ministers and Ambassadors were brought in and, after much high level discussion, the containers were released.

The irony is that, only a few months ago, MPI took action to close down our own approved container handling facility in Auckland, because our approval was for Daniel Silva Ltd and the company had since changed its name to DSL Logistics Ltd. The decision was rectified promptly, but we had to admit to a tinge of schadenfreude when we heard Minister Nathan Guy give a serve to the department’s Director General for neglecting to inform the Chinese bureaucrats of the name change.

Smuggling is not Black and White. Yeah, Right.

Zespri, the cooperative that holds a State-granted monopoly on the export of kiwifruit, has been involved in what seems to be a spot of old-fashioned smuggling into China. They produced two invoices: one with false low prices for Customs duty purposes only and another with the real sale price. The difference was made up by transfers, some of which reported as being in suitcases full of cash. The Chinese importer got sent to jail for 13 years and Zespri copped a large fine.

NZ Kiwifruit Growers Incorporated is conducting the obligatory inquiry. Its chief executive, Mike Chapman, was reported as saying "Nothing in China is black and white, but the media has portrayed [this case] as black and white." We are sorry to tell Mr Chapman that, in our experience of seeing smugglers operating, there are not too many shades of grey in these matters - in China, New Zealand or elsewhere. It is difficult to imagine that a large private exporter would do this sort of thing and risk the company’s name and reputation.

Air New Zealand Admits Collusion

The Commerce Commission has been running investigations into a number of airlines and major freight forwarders alleged to have colluded to increase freight costs for exporters and importers. Similar investigations have taken place in Europe, the United States and Australia. Here in New Zealand, ten airlines were fined $35 million.

The airlines negotiated penalties with the Commerce Commission, but Air New Zealand held out. It repeatedly and aggressively claimed that it was innocent, spending over $10 million in legal fees in the process. At one stage, general counsel John Blair said the airline “remains adamant it has not breached competition law”. Air New Zealand accused the Commerce Commission of grandstanding to "justify its existence".

Rob Fyfe’s replacement as chief executive, Christopher Luxon, seems to have a more pragmatic approach. The airline has now decided to admit some guilt and settle for a fine of $7.5 million plus costs.