[W]e think that there are more fundamental problems in both the empirical and the theoretical work [on supply chain performance]…. In future research, we thus need to come up with…adequate methodologies that help us to understand the relationship between integrative practices and supply chain performance.1Dirk Pieter van Donk, Taco van der Vaart, A Critical Discussion on the Theoretical and Methodological Advancements in Supply Chain Integration Research (2005). http://www.pm.lth.se/fileadmin/_migrated/content_uploads/ch_1.2_01.pdf . Accessed May 25, 2019

— Dirk Pieter van Donk, Taco van der Vaart. A Critical Discussion on the Theoretical and Methodological Advancements in Supply Chain Integration Research (2005).

3.1      Supply Chains

The discussion has centered on QC Painting. Of course, payments went on to other businesses, and each of those also had costs and revenues.

We begin by tracking the $250 payment made to the supply store for paints needed for the shoe store, described in section 2.2. That was a surplus expenditure. In this instance, QC Painting was providing surplus goods and services. But the supply store was not in the business of manufacturing paint. They were in the business of acquiring paints and supplies from distributors. There were also all of the regular activities that were part of keeping the supply store operational.

Some of the supply store payments were for products provided by wholesalers and distributors, products being moved forward in the productive process. Some payments from the supply store went to purchase a delivery van; other payments were for operating costs such as salaries and monthly utilities.

To be precise, we would need ledgers for the supply store. For the purpose of this example, we use 1997 prices in Toronto, and the following estimates2Estimates are using 1997 prices. for some of their monthly payments:3What kind of income, i1 or i2? Recall that for QC Painting, about 1/10 of their contracts were for surplus. Regarding the industry: “The paints and coatings industry (in Canada) consists of manufacturers of paints, varnishes, lacquers, shellacs and stains. It includes two distinct subsectors—architectural and industrial—which are about equal in size in terms of value of shipments. The architectural coatings subsector depends heavily on the performance of the construction sector, whereas industrial coatings are linked closely to the automotive, major appliance and industrial equipment sectors” (Government of Canada, Paints and Coatings Industry Profile, https://www.ic.gc.ca/eic/site/chemicals-chimiques.nsf/eng/bt01164.html. Accessed April 24, 2019). Some architectural paints are for businesses, and others for homes and dwellings. Percentages of the total that go to basic are determined by a subset of “architectural”.

Each wholesaler and distributor dealing with the supply store received some part of the $207.50. In each case, a fraction of the fraction of $207.50 received went on to cover expenses such as incomes, rent or mortgages or loans, other operating costs of the wholesaler or distributor; and to the purchase of products one stage further back in the productive process. Continuing in this way, payments in the process were fractions, fractions of fractions, fractions of fractions of fractions, and so on.4The example starts to break down because overly small fractions of $250 are not registered in ledgers. Effects are seen on a larger scale. If, for instance, we look to the entire paint industry in Canada, instead of $250.00, purchasing of paints and coatings for application to homes amount to several hundred million dollars per year (Government of Canada, Summary-Canadian Industry Statistics, https://www.ic.gc.ca/app/scr/app/cis/summary-sommaire/3255. Accessed April 27, 2019).

How far back does this go? Production of paints begins when raw materials are mined and certain types of tree are processed. Some ingredients are manufactured. There are pigments, solvents, and resins that eventually become additives. (Pigments are both organic and non-organic.5As Benjamin-Moore posts on their website, “(q)uality begins with chemistry” (Benjamin Moore, “Quality Begins with Chemistry,” https://www.benjaminmoore.com/en-ca/interior-exterior-paints-stains/quality-begins-with-chemistry. Accessed April 27, 2019.) Many pigments are oxides or hydroxides of iron. Solvents are either oil-based or water-based.6Oil-based paints are gradually being phased out because the manufacturing process for water-based paints significantly reduces the emission of volatile organic compounds. ) Various types of processing are involved. Metals and wood products also are needed for the manufacture of cans and packaging. Packaged paints are then sent to wholesalers and distributors and eventually get to retailers. Retailers, of course, sell paints to contractors and to homeowners.

We have only mentioned a few components in the process. Production is massively complex, with numerous contributors serving different functions. A beginning toward understanding the process is to observe that the manufacture of paints occurs along supply chains.7There is an established science of supply chains and supply chain management. On structure, see, e.g., Vonderembse, Mark A., Mohit Uppal, Samuel H. Huang and John P. Dismukes, “Designing supply chains: Towards theory development,” International Journal of Production Economics, vol. 100, issue 2 (April, 2006): 223-238.) So far, however, results have not adverted to differences between basic and surplus, differences that run through the entire productive process. Ores, metals, oils and other ingredients in paint and its packaging are moved forward in a supply chain. Corresponding payments are in the opposite direction. In Figure 3.1, we provide a preliminary diagram for the generic structure of a supply chain in the paint industry. To determine whether or not a particular production sequence contributes to basic or surplus, one needs to determine the use of paint produced, after final sale.8More on this in Section 3.2.

Figure 3.1: A supply chain in the paint industry. Black arrows to the right represent materials, goods and services being moved toward finished products and final sale. Green arrows to the left represent corresponding payments.

As in the case of QC Painting, sale in a retail store need not be a final sale9See classes of payment, section 3.3, below.. There is a final sale when, for instance, a homeowner buys paints and works on their own home. But when QC Painting bought paint from the supply store that was not yet a final sale. QC Painting went on to sell such paint to customers. In other words, in each case, QC Painting played a role in a supply chain.  As already described, in some cases, contracts were for painting homes, and so part of basic production. In other cases, QC Painting contributed to surplus production.


3.2      Levels of Production

It is good to classify goods in ‘orders,’ according to their distance from the final act of consumption. Consumption goods are of the first order, goods from combinations of which consumption goods originate are of the second order, and so on, in continually higher or more remote groups.10Joseph Schumpeter, The Theory of Economic Development (Piscataway, NJ: Transaction Publishers, 2012), 16 (first German edition was in 1911). As observed by McShane, however, Schumpeter did not go on to build these distinctions into a dynamical economic theory (Economics for Everyone, viii, note 22).

Now we expand on Schumpeter’s observation. In some cases, paint contributes to production or maintenance of a home. In those cases, paint is a component in the production of a basic good which, on final sale, leaves production and enters the standard of living. Paint also is a component in the manufacture of tools that are used to build and maintain homes. In such cases, paint is a component in the production of surplus goods that are used to produce basic goods. In other words, in such cases, paint is produced at one level above the basic level. But, where tools may be used to paint a home, those same tools might, on another day, be used to paint premises of a shoe store whose operations contribute to the basic level. Then, paint is a component in the production of surplus goods at a still higher level in the process.

It is a matter of tracking final sale and usage, relative to the standard of living11Further examples include the following: Paint is used in the manufacture of tractors for corn that is consumed by people. In such cases, paint is a component in the manufacture of surplus goods (tractors) that are used in basic production, one level above the standard of living. But a tractor might also be used in producing corn that goes into the production of fuel for automobiles. In such cases, the level of production of the tractor depends on final usage of fuel in an automobile. In some cases that can be part of a standard of living. In some cases, usage of a car contributes to basic production, and in other cases surplus. Paint is also a component in the manufacture of equipment used to mine ores that ultimately go into farming equipment. In all cases, the level of production of paint depends on usage after final sale.. At any stage of a supply chain, it may be difficult to know usage of a final product. In fact, usage may vary. (For instance, for QC Painting, usage of a car varied from basic, to surplus, to usage within a standard of living.) But the issue here is not whether or not one can foresee usage. The fact is that, in instances, usage is always determinate. Consequently, percentages  are also determinate12In the case of QC Painting, approximately 60% of the car’s use was for the business and 40% for Connor’s personal use. Approximately 90% of that 60% was for homes; and 10% of that 60% was for surplus. In some cases, small businesses are home based. What percentages of a business are basic, and which surplus? What percentages of the business and for the home as a dwelling?. And, there tend to be prevailing percentages.13For QC Painting, see section 1.3.4,” Some preliminary fractions.” Other examples include the following: Small percentages of tractors are used for country fairs, and agricultural research. But a larger fraction is for use in farming. In a given year, some percentage of farming is for basic production and some for surplus. Again, some rooms in some homes are used part of the time as premises for businesses contributing to basic production, surplus production, or both; a larger percentage of homes are used as dwellings, that way contributing to a standard of living.

In Section 3.1, we drew attention to the fact that production is along supply chains. What is new here is the need to go beyond preliminary description and to recognize that supply chains operate at levels. In other words, not only are there basic and surplus production, but also there are levels in surplus production. See Figure 3.2.

Figure 3.2: Levels of production relative to the standard of living.

Figure 3.2 is not to suggest that the productive process is a rigid structure. On the contrary, as instances reveal, the whole process is flexible, shifts, adapts, changes and is developed according to need, circumstance, opportunity and trends. This means that to understand the whole dynamic structure, concretely, over time, we will also need to advert to prevailing percentages.


3.3      Entrepreneurial Units and Classes of Payment

Along a supply chain, each entrepreneurial unit14The name ‘entrepreneurial unit’ is not proprietary. It does not mean ownership or business. The issue is, the role played in production. An entrepreneurial unit may be part of a single business or a collaboration between different parts of different and/or differently-owned businesses, or as the case may be. has its role to play.15Note that emergence of products in the process is distinct from and precedes emergence from the process. The rates usually are related but are not identical. For instance, a slow-down in a local real estate market can result in a city-wide reduction in painting contracts, resulting in build-ups of unsold inventory in retail stores. This raises further issues. See, e.g., Economics for Everyone, 3rd ed., 39-42. Each unit pays for and receives materials needed to do its part, at some stage in production, at some level of production relative to the standard of living. Each entrepreneurial unit also receives payments from units one step further along a supply chain at that same level. As described in Section 3.2, and as indicated in Figure 3.2, each entrepreneurial unit can also buy goods and services from a higher level, in other words, whatever goods and services are needed to support production. Each entrepreneurial unit also has its own operating expenses.

Focusing on production, then, it is evident that there are three classes of payment, what Lonergan named initial, transitional and final:

(Initial payments) are to the factors of production within a given entrepreneurial unit. … (T)hey are wages and salaries, rents and royalties, interest and dividends, allotments to depreciation, to sinking funds, to undistributed profits. … (Transitional payments) are from one entrepreneurial unit to another as operating in the same stage of the process. In any particular stage the entrepreneurial unit might be fully self-sufficient and on its stage of the process reach from raw materials to final buyer; then transitional payments are a zero class. Lastly, … (there are) final payments [by which finished products leave a supply chain, in other words, leave production].16Benjamin Moore, e.g., does not produce paint merely to have it stored in warehouses. If there is no final sale, then “we are outside the supposition of an exchange economy; production becomes like art, for itself and not for sale” (CWL21, 249).

Figure 3.3 is a diagram for these further subtleties.17For beginners, notation may be challenging but is needed if we are to represent actual structure.

Figure 3.3: An entrepreneurial unit Ej contributes to a supply chain at a level l.18Recall that Ej is not proprietary, but functional. Note also that, to be more precise, we would include a superscript ‘l’ for level:  Ej(l). But, for the moment, we already have enough new notation in play. An index ‘j’ is used so that symbolism here lines up with discussions in CWL21, ch. 15; and Economics for Everyone, 3rd ed., 39-42. In stage j of a supply chain, enterprises are indexed by k. If we identify products – emergent both in, and from, supply chains – then we will need a third index ‘i’. Products are provided to Ej by entrepreneurial units E(j-1), that is, entrepreneurial units at an immediately prior stage in the supply chain. Each of these contributes products to Ej in order that Ej can do its part in the supply chain at that level l. In order to do its part in the supply chain, each entrepreneurial unit Ej also makes purchases from entrepreneurial units Eh, at a higher level l +1. For each entrepreneurial unit Ej , there are payments needed for factors of production. Three classes of operative payments are, then: initial njp; transitional t(j+1)j, tj (j-1), … ; and final fjh. For entrepreneurial units Ej at level l, factors of production are pjk . If l =1, a supply chain is for basic goods and services. If l ≥2, a supply chain is for surplus goods and services (see Figure 3.2).


3.4      An Exchange Economy: There are Two Types of Firm

In sections 1 and 2, the focus centered on QC Painting. In sections 3.1 and 3.2 we glimpsed something of the whole paint industry. Distinctions are not proprietary but are of economic functions. And Figure 2.1 is explanatory not only of QC Painting and its immediate transactions, but of all businesses in all supply chains in the paint industry, as well as all businesses contributing to all supply chains in an exchange economy. In other words, the general result is that “[t]here are two types of firm.” We are also drawing attention to the fact that surplus production occurs along levels relative to the standard of living.

In production, transitional and final payments at level l are expenditures, meeting demand at that level. In the special case of final payments at level l, sale removes a finished product from production. Again, the “level” is always determinate, in instances, and is relative to the standard of living to which all economic activities are directed, for better or for worse.

Not only is Figure 2.1 explanatory of individual businesses in supply chains in an exchange economy (boundary conditions pointed to by Figures 3.2 and 3.3), but it is also explanatory of an exchange economy. In that case, however, the diagram refers to aggregates. And so, understanding the state and health of an economy will require statistical results for economic events and occurrences in supply chains.


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