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Resource Allocation 101

Resource Allocation 101

It is a simple assumption. Companies, as owners of the business, decide on resource allocation. But what if there are others who have an entirely different sense of resource allocation?

What happens to the business?

One assumes business owners come up with a bright product idea, market test, discover it can be done profitable given assumptions about production costs, raise capital, launch, in the process also setting up production facilities.

In doing so, they decide on a resource configuration.

Depending on the kind of product and technology required to produce, this will prescribe the kind of labour required, their technical profiles, in turn deciding (guided by market norms) what they may cost.

Capital costs, machinery, facilities and labour, together with any bought in inputs give the total cost profile. Provided selling prices are higher than cost per unit produced, and can be made to stick even in the face of growing competition, the business may prove viable, profitable and subject to taxation.

Many years ago, the present-day platinum producers in the Rustenburg area faced this basic business decision, just like any other business.

And given the type of platinum deposits they had, the mining technology at their disposal, and the abundant labour available, they made a fateful decision.

With or without any gentle guidance of a political nature, given sensitivity about retaining mining licenses.

They opted for labour-intensive operations, with relatively low-wage and basically skilled staff being a relatively large proportion of costs.

The years went by, the companies proved profitable, they expanded operations aggressively, they became less profitable, until the industry proved too optimistic by far and production went into surplus, with the Rustenburg mines the highest cost operations.

Then a new contender rode into town. AMCU, a new mining union made itself at home in the Rustenburg area. It convinced the 80 000 strong platinum labour force that it could deliver a better wage and benefit deal that the existing majority union (NUM).

Listening careful to platinum miners, it was obvious that many, if not all of them, found themselves in dire living circumstances. Miners had acquired lifestyles, and financial obligations, on a scale far larger than still covered by their wages. For a while, access to unsecured borrowing allowed many to continue, but this made their basic financial condition only worse.

With only limited promotion and upskilling opportunities in a fixed resource allocation model, mining labour and their union concluded that the only way the miners could ease their plight was to demand a substantially higher wage package from their rich employers, and not taking "no" for an answer.

A strike began, with both parties endlessly explaining their negotiation position to each other, but not giving way on the essence. The mines taking the view that to agree to the wage demand would make them unviable, and miners taking the view they would take nothing less than R12500 per month, compared to much less earned today.

The mines still tried to stick with their low-cost labour-intensive business model, being physically unable to change it quickly into a highly mechanized, high-cost labour model needing a lot less staff to run operations (with a huge number of job losses).

Rustenburg miners and their union had an entirely different resource model in mind, best described as a minimum needs social model, in which the existing labour force would have their wages more than doubled to cover their present lifestyle needs, and this on the assumption that their employers are rich and can afford to pay.

One can see how this approach can work to accommodate a few very worthy politicians and friends on a national scale, though even they fulfill a function, and some at least possibly are worth the money.

But extending this model to the working labour force is another matter.

Two different approaches entirely to a simple business proposition, namely whether I want to risk my capital, and hire you at a certain price, considering what you can contribute, and try to make some money; compared to whether I want to work for you, given my lifestyle ambitions and costs thereof, given my sense of self-worth and what I think you can pay.

Both parties acting in good faith, thinking they fully understand the situation and demanding reasonableness from the other party to agree to their way of reasoning.

After 17 weeks of striking, with both parties no closer to any agreement, a labour court judge this week offered to take a closer look (non-binding), potentially mediating between the two parties who proved willing to give this a try.

Nothing to lose, while it could produce the needed fig leaf that could be the elusive face saver for either party to do a deal.

It is bad that this is playing in our prime export sector. But so far this argument is only affecting 80 000 out of 10 million formally employed people in SA. That's less than 1%. The other 99% plus are still kind of adhering to the operating model as applied by business throughout the economy (and in the public sector), and applied worldwide, as described above.

The AMCU approach has so far not spilled over to other sectors in the economy, even though many unions for many years now have made very robust wage and benefits demands, though nothing on this scale.

A comparable case was minimum agricultural wages being demanded, and partially granted early last year, but again not close to the demands made today in the platinum sector.

The old-fashioned economic model assumes one acquires an education, or work skills through experience, and if these can be economically deployed, finds a job that can hopefully be sustained. If there is to be a sizeable increase in real remuneration, it is a function of improved productivity or ability to make this worthwhile to the employer.

Which, in a roundabout way, is suggesting government to be failing in educating people adequately, and not properly assisting the economy to grow faster so that it may absorb more labour productively and increase the quantum of work skills and real income.

To turn the world upside down, and wanting to follow a social model, where workers are paid what they think they need rather than what they can really contribute is somewhat novel.

It is one thing having this problem afflicting 1% of the labour force.

But if this struggle were to prove contagious, and starts to affect a much larger part of the economy, a much bigger problem will have come into view.

For either the country starts shutting down parts of the economy until reality prevails. Or we opt for the hyperinflation solution. Yes, we can have R12500 a month, and while we are at it we can make it R100 000 a month, or indeed R1million.

If you are a Zimbabwean you will know what this means. For the Rand will lose value faster than the Kwatcha ever did.

Perhaps we should think more carefully whether we want jobs or not. And whether we want to be paid in old-Rand or new-fangled Kwatchas? We shouldn't take too long thinking about it. Time costs money. And operations and jobs can always be shifted to another country. As too many are in any case already doing.

Good luck to the judge. This is a difficult one, as 101 exam papers go.