Let's elevate our gaze from Batley & Spen, excellent result as this is (as Elby pointed out in the comments on yesterday's piece below), and before the footie starts up again. Back to proper C@W stuff: and for those who missed it in all the excitement, an Amazon warehouse has been bubbled for sending hundreds of thousands of perfectly serviceable items for scrap every month - indeed, with a target of 130,000 items per week, no less! The knee-jerk reaction to this is obvious enough and, being someone who abhors inefficiency & waste, I felt it myself.
But that's it, isn't it? Knee-jerk. What's the analysis?
"Analysts suggested goods might be being destroyed in this way because it is cheaper to dispose of them than to continue storing the stock. Similar investigations in France and Germany have found evidence of the practice in other Amazon warehouse." (Well of course. And anywhere else in the world, we may be sure.)
Here's the analysis I'd want to see. What if any is the role of the following factors?
- retail price maintenance? (i.e. not wanting to cannibalise prices by offloading at deep discount instead of scrapping). If so, at whose behest - Amazon or the manufacturers / importers?
- contract terms imposed on suppliers by Amazon? (e.g. £xx per month warehouse charges if a single item is left unsold). If so, do such charges bear any relationship to cost? At whose cost of capital?
- industry practice elsewhere? Maybe every bulk distributor/retailer is doing the same, but mostly flying under the radar because they are much smaller & less high-profile than Amazon
- are all laws & regulations on recycling / waste disposal / landfill charges etc being observed?
- are other relevant externalities being priced correctly? (can't think of any at the moment, retail / logistics not being my specialist subject; but I bet there are some: over to Mr BQ ...)
I'm also willing to bet that, on a given set of 'reasonable' assumptions on each of the above, there could be a hard-nosed, wholly-logical economic rationale for the practice we've glimpsed here. The hard fact - often deeply counter-intuitive to the layman - is that sometimes the marginal value of hard tangible commodities is zero, or even negative. Happens in the energy business (my sphere) all the time, exemplified by (e.g.) wholesale electricity / gas / oil prices going negative (respectively: frequent / rare / only once ever). Like the concept of a negative inventory in storage which, again, happens in my game all the time.** By the lights of whatever calculation this would be, scrapping wouldn't be "inefficient" or "wasteful" at all.
But it's still intuitively abhorent, and if I were a policy maker, I'd be saying two things.
1. Show me small tweaks on the pricing of the externalities that gives a different economic outcome; and if that turns out to be easy, we'll regulate accordingly. There are strong parallels with our perennial debate over what's the "optimum" degree of self-sufficiency: it depends upon your assumptions, of course. PS, I'm particularly interested in things that have Amazon as their principle economic 'victim', because it's pretty damned obvious that right now Amazon is under-taxed by a big margin, i.e. effectively subsidsed already.
2. We're going to ban it, period. And before the free-marketers rise up and howl "traitor", well I'm a free-marketeer too; so let me give you precedents. Many years ago, the largest UK North Sea oilfield (Forties / BP) had no gas gathering system. Oil production almost always yields associated gas, generally captured and piped away as a perfectly valuable by-product, or used locally as fuel. But in its permitting application BP made the case that in this particular instance, the field was so far offshore, and the amounts of gas relatively small, that no economic gas recovery was possible: pipeline would cost too much don'tya know, old boy. But the nation wanted the oil production to go ahead - so the gas (which in absolute terms was actually rather a lot) 'had to be flared'. And so it was, for many years.++
Well, BP's 'economics' were there to be audited alright. We may be sure the numbers added up, down and sideways: spreadsheets are like that. But one day the government had had enough, and told BP to sort itself out. Lo and behold, BP had another look, and found a way. Like so many things, you don't know what you can do until you must (see the Piper Alpha story we've recounted before: one of the most powerful economic lessons I know).
Waste on that scale is an abomination. If the 'numbers' show it's the right thing to do, well the inputs are wrong and they need to be changed. That can be arranged.
**These are the real-world phenomena which completely screw the minds of econometricists, those 'academic' astrologer-charlatans who leech off unconfident and gullible managements and governments. I was once told that negative power prices couldn't exist because the mathematical representation that was used to model them couldn't accommodate a negative. Pfft. By the standards of the physics of the day, Watt's steam engine was also impossible. A good job us practical types are allowed to just get on with things. Oh, and by the way, there is a perfectly good way of modelling it - just need to work a bit harder, that's all.
++ The entire Russian oil industry used to work like this, BTW, flaring its associated gas: and the Russian gas industry flared its NGLs! Could be seen from space at night.