Tuesday, August 19, 2014

Economics of street vendors

While stuck in traffic, I watch the “vendedores ambulantes” weave their way through the cars and trucks. My mind frequently flashes back to my college accounting professor. He taught me terms like FIFO, LIFO, overhead costs, and value added. At the time I had decided to file all that information in my brain’s category of “when is this going to be of any use to me?” Yet right in front of me I see those economic terms played out in real life.

“Vendedores ambulantes” are vendors who set up a stall at the beginning of every workday and take it down at night. They pack up all the merchandise and store it for the night in some other location, frequently in a nearby parking lot. Some vendedores ambulantes staff a stall while others look like walking display counters.

They exemplify low overhead. They don’t pay for a building and all the intendant costs in order to make profit even if they sell a meager amount.

My favorite low-overhead sellers are the silver jewelry vendors at Xochimilco. They work their way up and down the canals through the “floating gardens”, but not by paddling their own boats. They skillfully step from boat to boat, timing their movements to show their wares to the boat’s passengers and then make a graceful exit onto another passing boat. Essentially they are walking on water.

Most vendors buy their inventory wholesale and then simply sell them at higher retail prices. But some have figured out how to add value to what they sell. A good example are the Castro brothers at Teotihuacan who sell postcards.

Postcards? You might have thought they went the way of travelers’ checks and public telephones, but the Castros do a brisk business selling postcards of the pyramids – 10 cards to a packet. Their father, the late Paciano Castro, came up with one of the most marvelous marketing schemes I’ve ever seen. Buying postcards from him became a history lesson.

During the viceroyalty period cochineal dye was the second (after silver) most important source of wealth for Spain from Mexico. Paciano Castro would demonstrate where the dye came from by smashing cochineal insect eggs infesting a flat leaf cactus paddle. He then would rub the bright red die on an envelope containing 10 postcards. Then he would take sap from the cactus and use that to seal the dye on the paper.

Visitors wanting a souvenir of cochineal buy a packet of postcards from one of the Castro brothers. The Castro sons have ratcheted up the value added by selling the envelope inside a bag made from century plant fiber.

Managing the amount of inventory is key for vendors. I remember learning about two strategies for moving inventory in that same college class—LIFO (Last in First Out) and FIFO (First in First Out). Those are helpful concepts when waiting in line too. While waiting in line in a bank or government office you definitely want to be FIFO. In these queues I move quickly to get to the head of the line.

However there are some queues that are best to think of as LIFO – such as when boarding the shuttle bus from the airport terminal to the car rental depot. It’s best to be the last one to board those shuttles to be first on line at the car rental counter.

Sometimes businesses want to hold no inventory. Just-in-time production is the catch-phrase. The parts arrive at the assembly plant just as they are needed. It takes skillful coordination or an assembly line can come to a halt for lack of a part. Today’s package express companies with guaranteed delivery times are an essential part of this manufacturing concept.

But you don’t need a big assembly plant to take advantage of just-in-time inventory. I found it on the beach at Chachalacas, Veracruz.

Far from town, close to the hill-sized sand dunes, with a spectacular view of the Gulf of Mexico, was a six-table restaurant with an extensive menu. The structure over the tables and the adjacent kitchen were all made with palm fronds—low overhead.

I figured out the inventory system when a member of my party asked for an uncommon soft drink. The grandmother first said it wasn’t available and then corrected herself. Out of the corner of my eye I’d seen a young man who I thought was a customer nod affirmatively. When our orders for fish and soft drinks had been placed the “customer” got up, walked around behind the kitchen and departed on a motorcycle. From the kitchen came chips and salsa, and before they were finished I heard the motorcycle returning. Immediately after its arrival, the soft drinks came from the kitchen. Soon I could hear fish sizzling on the grill.No inventory. No waste. Everything just in time.

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