July 2011 – The OM Blog by Heizer, Render, & Munson

OM in the News: Trouble on the China Express

The title of the lead article in today’s Wall Street Journal (July 30-31, 2011) , “Trouble on the China Express“, ironically may answer the question my dinner companions had for me last night. They asked, “Do you think China has overtaken the US and moved us into the 2nd place among nations”? The Journal‘s use of the bullet train crash last week (plummeting off a viaduct after a lightning strike, killing 40 people and injuring 190 more) is, as the paper writes, “an apt metaphor for the country’s hurtling economy over the past decade: a colossal investment project, born of the state, steeped in corruption, built for maximum velocity, and imposed paternalistically on a public”.

“Do not be desirous to have things done quickly”, said Confucius 25 centuries ago. It ” prevents their being done thoroughly”. But the Chinese leaders have hyped high-speed rail with abandon. Using imported technology, they have modified the designs and sold them as their own. A few weeks ago, the Railways Minister bragged that its technology was so superior to Japan’s that “they cannot be mentioned in the same breath”.

And it’s not just the technological glitches. The bullet train project (planned to stretch 10,000 miles at a $300 billion cost by 2020), appears to be riddled by corruption. One Chinese blogger (and there are 485 million Chinese using the Internet) wrote: “When a country is corrupt to the point that a single lightning strike can cause a train crash, the passing of a truck can collapse a bridge, and drinking a few bags of milk powder can cause kidney stones, none of us are exempted”.

The Journal concludes: The crash “has transformed a symbol of Beijing’s pride into an emblem of incompetence and imperious governance”. Does that answer my dinner companions’ question?

Discussion questions:

1. What impact can corruption have on efficient OM?

2. What are the concerns about such rapid expansion?

3. What other quality crises has China faced recently?

OM in the News: Vertical Integration at Brazil’s Petrobras

One of the most promising petroleum producers in the world, Petroleo Brasileiro SA (or Petrobras), controls huge new oil deposits off Brazil’s southeastern coast. For years, pumping oil has been its only business and the key to its profitability as the world’s third-biggest energy company. But The Wall Street Journal (July 27,2011) reports that Petrobras has decided to embrace vertical integration, a topic we discuss in Ch. 11, Supply Chain Management (see Figure 11.2). In an effort to boost its “downstream” business, the giant firm is now in the shipbuilding, petroleum refining, and petrochemical businesses.

Petrobras is in the process of building 4 refineries across Brazil to make the country self-sufficient in refined fuels. (Its fast-growing consumer base is buying cars and fuel at a faster rate than the nation can refine without importing). It is also adding a $2 billion petrochemical plant in an effort to squeeze more revenue out of every drop of oil. Like other big energy firms that have moved into plastics and other derivatives, Petrobras will be adding plastic bottles and polyester fibre to its product list. “We see opportunity for profits in many other businesses beside crude”, says a Petrobras director.

Is vertical integration always a good idea? Private investors in the firm say the $18 billion being put into building ships (at a cost higher than they would pay to have them built in Korean shipyards), the refineries, and the plastics factory, are a waste of money. “The company has enough to do just to get that oil”, says a BlackRock fund manager. “Everything else is a distraction”.

Petrobras responds that the new ventures are creating jobs and helping to develop the towns in which the new facilities are being built.

Discussion questions:

1. What are the advantages of this “forward integration”?

2. Why is vertical integration a danger to firms like Petrobras?

OM in the News: Product Enhancement and the McDonald’s Happy Meal

Under pressure from 550 health organizations to stop marketing “junk food” to children and to retire Ronald McDonald (the clown mascot), McDonald’s has chosen the path of product enhancement (Ch.5) as a preemptive strike. The New York Times (July 27, 2011) reports today that the firm will start to fill its Happy Meal boxes with apple slices and smaller portions of french fries this September. By next April, the new menu will be rolled out to all 14,000 restaurants.

The food industry overall has come under increased scrutiny as childhood obesity levels have risen. San Francisco last year banned the inclusion of toys in kids’ meals unless there is a fruit and vegetable included. New York City has a similar rule in the works. Instead of developing all new kids’ products (or including vegetables), McDonald’s is responding with 1/2 the number of fries and a 20% lower calorie count.

The new Happy Meal, containing 4 chicken nuggets and a small Coke, weighs in at 410 calories (vs. 520 in the older product), 17 grams of fat (vs. 23 g), and 58 grams of carbs (vs. 69 g). The firm decided against making apples a total replacement for fries when only 11% of customers showed an interest in that option. While some critics praised the changes (Mrs. Obama called them “positive steps”), one NYU prof called the move a “sham”, in part because McDonald’s is not limiting sodas. In fact, sugar levels go up with the Coke and apple together.

Discussion questions:

1. What are the operations challenges in changing the Happy Meal?

2. Do students believe legislation is an appropriate means to make menus healthier?

3. How are other restaurants responding with children’s menu options.

OM in the News: GE Moves X-Ray Headquarters to China

In Ch.8, we list seven reasons why companies select one country in which to locate over another. One of the seven, proximity to markets, leads to a disturbing headline in yesterday’s paper. The Wall Street Journal (July 26,2011) reports the General Electric is moving its 115 year-old x-ray business headquarters unit from Wisconsin to China–its first business unit to be based there. The move, to be completed this year, includes the chief executive and members of the executive team. It is the latest sign of China’s growing importance to GE, which GE CEO Jeff Immelt calls the company’s “second home market”. Earlier this year, Immelt finalized a deal with the state-owned Aviation Industry Corp. to inject GE’s avionics business with a 50-50 joint venture based in China.

GE sees accelerated sales in China’s fast-growing health-care market, with that country’s central government increasing its public health budget by 16% this year, to $26 billion. “As the company grows more global, it’s increasingly important for us to be close to our customers”, says the head of GE Healthcare Global X-Ray. The company wants to develop more medical equipment specifically for the Chinese market. In China, GE Healthcare already employs 700 engineers who are focusing on developing more affordable products for rural health clinics.

Last year, GE launched the Brivo CT, a scaled down CT scanner for less-developed hospitals, and in 2009 it rolled out a low-cost digital x-ray machine for the Chinese market. The company declines to say how many new employees will be added at the Beijing HQ, but adds it does not expect job losses in Wisconsin.

Discussion questions:

1. What are the implications of GE moving an entire multi-billion dollar business unit abroad?

2. What are the dangers to GE in partnering in high-tech areas like avionics and medical imaging with China?

3. What are the other location decision factors, and how do they come into play here?

OM in the News: Probability the Space Station Crashes

Now that the last Space Shuttle has been retired, much debate has focused on the reliability of the Russian Soyez capsules as the sole means of reaching the $100 billion International Space Station (ISS). Prior to that , our July 11th blog discussed the overall reliability of the Space Shuttle, which at Rs=.98 suggested one fatal crash every 50 missions (and indeed there were 2 crashes in the 135 flight life of the Shuttle). But, interestingly little has been mentioned in the press about the reliability and safety of the ISS itself.

Today’s Orlando Sentinel (July 25,2011) brings to light 3 important facts: (1) the ISS will be abandoned in any event by 2020 (if it lasts that long), (2) the probability of it taking a disabling strike from space debris is 16.6%, and (3) the probability of a fatal collision is 1 in 13. NASA’s own task force found slightly worse odds, with a 0.125 probability that an astronaut will die or the station would have to be abandoned.

The problem is space junk–those 1,000’s of pieces of old rockets and satellites that were destroyed in space. “The orbit they are flying in is the worst possible. The Russians blew up all kinds of things in that orbit”, says a retired NASA exec. (That 1 in 13 chance of a disastrous collision with space junk is, of course, the same as what a card player faces in drawing an Ace from a deck). NASA estimates that there are 500,000 pieces between 1-10 centimeters (large enough to do damage) floating around –and 20,000 more deadly pieces (larger than 10 cm). Just 4 weeks ago, a piece of debris caused a big enough scare to send the 6 astronauts on board the ISS scrambling to Soyez escape capsules. The debris passed within 1,100 feet of the Space Station–the closest near-miss yet.

Discussion questions:

1. Discuss the role of manned space exploration in light of the probabilities given.

2. What are the main operations issues vis-a-vis the ISS?

OM in the News: How to Get Passengers to Board the Plane Faster

In Chapter 15, we discuss Southwest’s strategic advantage in being able to turn around its planes faster than competitors. Part of that process means getting passengers on board and ready to go as quickly as possible. Yet, as The Wall Street Journal (July 21,2011) points out, “Boarding an airline can be a bit like the after-Christmas sale at Wal-Mart. Passengers jockey to get better positions in line. The aisles become clogged with travellers stuffing luggage the size of a 4th-grader into overhead bins”. To address the problem at American, that airline just finished a 2-year study to try to speed up its boarding.

The result: AA rolled out a new strategy–randomized boarding. Travellers without elite status now get assigned randomly to boarding groups instead of filing onto planes from back to front. American says the new system can shave 3-4 minutes off the average 20-25 minutes. And every minute cut saves the airline $30/flight.

After first observing 1,000’s of arrivals and departures to see where the process slowed down, American found that one time factor was baggage–more bags are being carried on to avoid fees. “Back-to-front” slowed because only 2 people on average got to their seats at a time, while everyone else standing and waiting filled bins at the front of the plane —and was the most time-consuming. ( Alaska Airlines, US Airways and Continental all use “back-to-front”, by the way).

Computer simulations revealed that “window-middle-aisle” (used by United Airlines and Delta) –meaning boarding passengers in window seats 1st, followed by middle and then aisle–was faster. But randomized boarding worked even better. Multiple passengers got to their seats at the same time. Bins filled more evenly. The process reduced the number of bags that needed to be checked at the gate by 20% because more overhead space was available. And, the system proved calmer when tested on real flights.

Discussion questions

1. Why do the airlines use such diverse boarding systems?

2. Why does Southwest, which uses a “1st-to-check-in” boarding system, turn its planes around faster than other airlines?

OM in the News: Mexican Truck Drivers and the Supply Chain

July 6, 2011 marked the resolution of a long-simmering NAFTA dispute between the US and Mexico over long-haul, cross-border trucking. Although NAFTA came into effect 17 years ago, the trucking deal was still bogged down over two legitimate issues: (1) border security and (2) union and independent trucker opposition to the loss of high-paying jobs to lower-priced Mexican drivers (who earn about 1/2 of their US counterparts).

Businessweek (July 20-27, 2011) reports that transporting goods across the Mexican border is a complicated business, involving customs brokers, warehouses, and lengthy inspections for drugs and illegal immigrants. Under the current system, Mexican trucks haul their merchandise to the border, where a transfer truck takes it across. A US truck picks it up on our side. In time, a Mexican driver will be able to haul goods from any Mexican city straight through to Chicago or New York. To qualify for service on US roads, Mexican drivers will have to learn rudimentary English and US highway laws.

Is it a good trade-off? Businessweek strongly endorses the idea. With trade among Canada, Mexico, and the US at$1 trillion (triple since the start of NAFTA), the magazine writes: “US potato farmers, along with producers of pork, cheese, and other goods, can look forward to reduced Mexican tariffs with the resolution of the trucking deal. Higher wages and wider prosperity in Mexico are very much in the US national interest”.

US truckers will strongly disagree. While Mexican drivers will surely benefit, American drivers are loath to travel into Mexico. The country lacks the smooth roads, fuel stations, and accommodations available in the US–and has violent drug gangs to boot. In effect, the trade-off balances a more efficient supply chain with the disruption of workers in this industry. It’s no wonder the Obama administration announced the agreement with little fanfare.

Discussion questions:

1. Is the lower transportation cost good, or bad, for OM?

2. How does this change impact the supply chains served by the truckers?

OM in the News: Is Wal-Mart’s Sustainability Index Sustainable?

Two years ago, Wal-Mart CEO Mike Duke dropped a bomb on the retailing world when he announced that his firm would be creating a “sustainability index” to measure the environmental and social impact of every product sold in its stores. Wal-Mart had not suddenly turned green (see our blog of May 17, 2011 )–it turns out that a vast amount of money is to be made by reducing energy and waste up and down the supply chain. Duke’s message suppliers was clear: “Treat the planet well and get prime access to its 200 million customers each week; pollute and despoil, and you will be shunned”.

But as Fortune (July 25, 2011) reports, Wal- Mart had no idea how hard the job of creating the index would be. Five million dollars into the project, it has only examined 7 products closely so far. The trouble with a scoring system (and others have tried it), is that in the end consumption is about trade-offs. How much phosphate was used to make a laundry detergent? How much waste was generated by the zipper factory in China? Is soil erosion less important than carbon emissions? A company may get high marks for recyclable packaging, but Stonyfield reduced its carbon footprint by switching to yogurt cups that aren’t recycled. (Cups made from plants, it turns out, generate fewer greenhouse gasses than recycled plastic ones). And Patagonia’s switch to organic cotton for jeans (from synthetic fabrics) now requires 1,200 gallons of water to manufacture a single pair!

Many companies in the developing world don’t even recognize the words “corporate sustainability policy”. Hank Paulson says he asked the manager of a Chinese factory about the belching smoke pouring out of his plant. The response: “See those two camels and a goat? When they fall over from pollution, we turn off the factory”.

Discussion questions:

1. Why is the index so hard to create?

2. Name some products with trade-offs that would impact their score.

OM in the News: That’s One Gigantic Shoe Warehouse

One of the largest warehouses in the US is about to open its doors in a new 1.82-million-sq. ft. building near the Port of Los Angeles. Skechers USA, Inc., the nation’s no.2 footware company chose the area because, in the world of international trade, Southern California remains the hub of choice. The Los Angeles Times (July 1, 2011) points out that the LA/Long Beach Port is the highest rated cargo movement region in the US in terms of container counts, rail connections, and infrastructure. Skechers needs the space to handle all the containers of shoes made in China by its contract manufacturers (the firm keeps 300 staff there just to stay on top of the contractors).

How big is the new $1/4 billion distribution center? First, it takes 1/2 minute to drive from one end to another at 60 mph. It’s 2,900 feet long and 700 feet wide, enough to hold 40 football fields. It’s the size of 17 Wal-Marts. There are 270 truck bays. But more importantly, it will replace 6 smaller warehouses. In the old system, workers had to handle shoes 3 times as they moved from building to building, adding costs, including the wages of truck drivers. “Now”, says the COO, “no one will have to touch it to do the same amount of work”. Instead of “7,000 pairs of shoes an hour, with the new warehouse, we’re expecting to be able to move 18,000-20,000 pairs of shoes every hour”. In effect, the move allows Skechers to get out of the trucking business.

At the LEEDS-certified warehouse, conveyor belts which are programmed and pressure sensitive will move the shoes and prevent product pile up, which happens with traditional belts. Storage racks are operated by robots that pick up the boxes and bring them to the desired locations.

Discussion questions:

1. What are the advantages and disadvantages of such a massive distribution center?

2. Why is proximity to West Coast ports become important to logistics?

OM in the News: Disney Service Quality Spreads to Medicine

Disney has been long respected for excellent customer service and for treating its “guests” with the personal touch that improves the theme park visit. Disney’s “on-stage” and “off-stage” approach to separating public and private areas is well-known, with “cast members” (employees) always maintaining a magic image to the public. The Orlando Sentinel (July 16, 2011) now reports that Disney has designed a program for health-care professionals to assure that patients are as satisfied with a trip to the hospital or doctor’s office as they are with a trip to the theme park.

For $3,500 each, health-care workers spend 3 1/2 days at Disney, learning to pay closer attention to the patient experience. “Oftentimes in health care, the patient in the bed is almost secondary”, says a consultant. “Everyone comes in looking at their task instead of the patient”.

When Disney worked with Florida Hospital to open a new children’s pavilion a few months ago, the plan includes simplified name tags, new uniforms, a ban on cell phones, greeting patients with a smile, and kneeling down to talk to children at eye level. (Our Table 6.5 in the Managing Quality chapter relates to these “determinants of service quality”).

“By exceeding expectations, doctors can attract new clients through referrals from satisfied patients”, says Dr. Chris Smith, a S. Carolina family doctor who attended the Disney program. At Smith’s office, the receptionist is now a “greeter”. And he has established off-stage private break rooms for staff to relax, vent, or do things a patient should not see. Just like other industries, doctors are learning that every service activity matters.

Discussion questions:

1. Ask students to describe a positive and a negative medical service experience.

2. What other quality tools can medical professionals employ from non-medical fields?

OM in the News (with Video Tip): 3-D Printing of Body Organs and Concrete Buildings?

It was just July 7 when we blogged about a 3-D printer creating a crescent wrench as strong as the original. That blog was accompanied by a short video showing the process from start to finish–one certain to entertain your class. But today’s Wall Street Journal (July 16-17,2011) has raised the 3-D printing bar potential way beyond plumbing tools. With the title, “How Close Are We to Printing New Organs?”, the Journal describes how a whole dummy kidney made of biocompatible materials and cells, was “printed” on stage at a TED talk a few months ago. With about 90% of patients needing a transplanted organ seeking a kidney, being able to create a “self-derived” kidney would save many lives and spare people the expense and pain of dialysis.

Such “printed” kidneys that would be able to work in the body (they are structural, but lack blood vessels) are still years away, but the rate of advance means the 1st autologous transplant may still happen this decade. Already, synthetic windpipes, grown with a patient’s own cells, are being transplanted. (The windpipe of the patient is scanned, molded from a porous medical plastic, and infused with cells from the patient in a bioreactor).

And the concrete in our blog title? Here is a 3-minute video of a concrete structure being built by a grander and rougher 3-D printer at a British university. The architect makes the design, after which the printer extrudes concrete from a nozzle to build up the object, layer by layer. Printed concrete products are proving to be stronger than the cast ones. They also have the advantage of a hollow interior through which a building’s wires and pipes can be run. And the ducts in the concrete parts look uncannily like blood vessels needed in the 3-D kidneys. Pretty exciting advances in OM technology!

Discussion questions:

1. Why is 3-D printing, which has been around for a decade, now becoming such an important tool?

2. Ask students to research the costs of 3-D printers.

OM in the News: Service Quality vs. Maintenance Time at Disney World

You might not think that maintenance of Walt Disney World’s monorail line in Orlando would be a controversial topic (see Ch.17). But the Orlando Sentinel (July 12, 2011) reports that plans to give maintenance crews more time to work on the aging system are certain to anger Disney’s premium-paying hotel guests. Disney had previously kept its trains running until at least 1 1/2 hours after theme parks closed. Now service will shut down 1 hour after normal closing hours.

The beef is that guests who stay at these hotels on Disney property have “late night privileges”. This means the parks will stay open for them–and not for regular guests– as late as 3 am and then reopen at 7 am. But Disney says that trains take 90 minutes to “cycle down” and another 90 to “cycle up” the next morning, leaving only 1 hour of downtime for maintenance.

Reliability has suffered in recent years, perhaps because of the limited repair time. In 2009, the monorail system lost power at 1 am and it took Disney’s crews 3 hours to unload the weary passengers. “It’s been pretty obvious that transportation maintenance is one of the areas they cut back on during the recession”, says the popular website Disney Blog. The blog also predicts Disney will suffer a backlash from guests staying at the most expensive hotels on the property, since they are the ones who “expect the most preferential treatment”.

Discussion questions:

1. Discuss the tradeoff between customer service and the need for more maintenance time.

2. What else can Disney do to deal with the problem?

OM in the News: Technology Puts the Brakes on Truckers

Who doesn’t remember the romantic age of the US trucking industry? Powered by cheap diesel, drivers could do pretty much as they pleased on the open road. The days of open-throttles were made famous by Bert Reynolds’ 1977 movie, “Smokey and the Bandit”. Using his CB radio to skirt police traps, the hero shreds speed limits on a cross-country beer run. Well, those days are gone.

The Wall Street Journal’s article (July 11,2011), “Firms Put Brakes on Truckers”, describes the technology trucking companies are using to wring better fuel economy from their fleets. Firms are putting computerized governors on trucks’ engines, cutting top speeds from 70 mph to 65 mph. Titan Transfer is even paying bonuses to drivers who get the best fuel economy–and chewing out drivers who don’t. Every decline of 5 mph improves an 18-wheeler’s fuel use by 1/2 mile per gallon–big savings to the shippers.

Today, a driver’s every move is electronically recorded and relayed back to dispatch centers. The black box in the cab is wired to a satellite dish near the roof that beams the truck’s location, its speed, and even what gear it’s in back to the company in real-time. When one driver tried to shift into neutral going down a hill, to override the truck’s governor, a red light immediately flashed telling him to pull over and call HQ for a tongue-lashing.

Drivers, understandably, are not happy about covering less distance each day, as they are paid by the mile. This cuts take-home pay and makes the old-time, cross-country run stretch from 3 days (at 80 mph) to 4 or 5 days. But even some reluctant drivers agree that 65 mph saves not only fuel, but lives.

Discussion questions:

1. What are other ways that technology can help make the trucking industry more efficient?

2. Make the case, from the driver’s perspective, why the changes are not efficient.

OM in the News: NASA’s Last Space Shuttle Launch

When the final Space Shuttle launch took place on July 8th, an era of tragedy and triumph that dominated space travel for a generation drew to a close. I worked at NASA headquarters in the late 1970’s during the planning for the 1981 inaugural launch of Columbia, and always followed the program closely–to this day I can watch every launch from my backyard in Central Florida! In 1982, Prof. Paul Meising (SUNY-Albany) and I published four OM-related cases about the Shuttle, which appeared in earlier editions of the Heizer-Render OM text. They dealt with Shuttle reliability (Ch.17), astronaut assignment (Ch.15), forecasting demand (Ch.4), and ordering external tanks (Ch.12).

Looking back on the Shuttle program 30 years and 135 missions later, several facts stand out. First, with a 98% reliability rate (Rs=.98), one would expect a major problem every 50 launches. And indeed, with the explosions of Challenger in 1986 and Columbia in 2003, NASA was almost statistically due for a 3rd disaster. The Wall Street Journal (July 9-10, 2011) quotes Duke space historian Roger Launius as follows: “It was a magnificent failure. It was the most technologically sophisticated launch vehicle ever, but it never made human spaceflight safe, reliable, or economical”.

Launius was correct. Our 1979 forecasts at NASA for 500 flights within the 1st decade–basically a launch a week starting in 1986–were off by 90%. Our pricing structure assumed that private companies, foreign governments, and the Defense Dept. would cover all the bills as full-paying customers. We budgeted each launch at $15 million, when in reality the average cost rose to $1.5 billion–100 times the promised price. Now, as the Russians are charging us $20-30 million per seat to ride to the Space Station, a piece of American history draws to a close.

Discussion questions:

1. Was the Shuttle program a success overall?

2. Why did the program never reach its budget and schedule targets?

OM in the News: How Operations Management is Helping United and Continental Merge

The “productivity challenge” that we discuss in Chapter 1 comes to the forefront in the merger last October of two mega air carriers, United and Continental. Now the world’s largest airline (with more frequent flyer members than France has citizens), United Continental has turned to OM to lead the integration efforts. Shaving a half-cent off per-mile operating costs can boost profits by $260 million per quarter–something Wall Street was promised with the merger.

Businessweek (July 4-11, 2011) reports how “33 integration teams are making thousands of decisions, ranging from the fastest way to clean 1,260 airplanes and board passengers to which perks to offer in the frequent-flier program“. Most of the decisions are OM-related and team members come from technology, labor, fleet management, and network planning. In technology alone, the carriers have 1,400 separate systems, programs, and protocols. (Continental had 600 programs for tasks such as crew scheduling, dispatching planes, and managing cargo, while United had 800).

Economies of scale favor big airlines, but mismatches complicate every detail. Workers, for example, come from different labor unions with dissimilar work rules. United has 1st class cabins, while Continental has just business and coach. And history has not been kind. Pilots and flight attendants at US Airways (the merger of US Air and America West) are still operating under separate contracts with different pay, schedules, and work rules–6 years after their marriage! Delta has been bogged down in a labor dispute over pay and work rules since its merger with Northwest in 2008.

That’s why United Continental execs are so focused on the minutiae of the operations integration. “It’s not important how many things come from United and how many from Continental”, says the VP-Integration Management. “Keep the emotions out of it and don’t keep score”.

Discussion questions:

1. Why does OM drive a successful airline merger?

2. Why have other mergers run into problems?