Month: November 2011

OM in the News: Toyota’s Assembly Line Advances

Today’s Wall Street Journal (Nov.29,2011) features the pressures facing Toyota–overcapacity, weak demand, an exchange rate for the yen that makes Japanese-made cars expensive, quality problems that forced the recall of 10 million vehicles, and the supply chain issues caused by the March earthquake and tsunami. Competitors like Honda and Nissan are moving more manufacturing overseas, to plants closer to customers. But Toyota, long a proponent of corporate social responsibility to protect Japanese jobs, has also pledged to build at least 3 million cars annually in Japan, with 1/2 for export. So the company, which wrote the book in the 1960’s on lean manufacturing and JIT, is looking for new ways to wring out efficiencies from its production systems.

Toyota sees its first new plant in Japan in 18 years as the answer. Here is why: The Miyagi factory is designed for advanced low-volume, hyperefficient production, with 1/2 the workers and 1/2 the square footage of Toyota’s 16 other plants. Inside, half-built Corollas and Yaris sit side-by-side, rather than bumper-to-bumper, shrinking the assembly line by 35% and requiring fewer steps by workers. Instead of car chassis dangling from overhead conveyor belts, they are perched on raised platforms. This is 50% cheaper, and also reduces cooling costs by 40% because of lower ceilings. Finally, the assembly line uses quiet friction rollers to move the cars along. The rollers use fewer moving parts than typical chain-pulled conveyor belts.

This is a timely article to share with your class when you discuss assembly line layout in Chapter 9. And if you show the Wheeled Coach layout video for this chapter, the 2 assembly lines make for a good comparison.

Discussion questions:

1. How can Toyota’s new layout help improve the challenges facing the company?

2. Why are other Japanese auto manufacturers moving production to the US?

OM in the News: Want Caterpillar’s New Plant in Your State?–Then Start Bidding

“Forget Kindle Fires and iPads”, writes The Wall Street Journal (Nov.26-27, 2011).”The holiday gift most coveted by local officials across the US is a new Caterpillar Inc. construction-equipment factory”. The planned $150 million factory (location announcement in the next few weeks) comes with 1,000 jobs– and election time bragging rights. So far, 2 dozen states, plus Canada and Mexico, have found enough cash for incentives to set off this major bidding war. Because Caterpillar is such a well-known brand with a long track record, it will be “asking for an awful lot from state and local governments”.

This is a great article to use in class when you discuss location decisions in Chapter 8.  First, we find that the firm is moving production of small excavators and bulldozers from Japan to North America –“to be nearer to customers”. Second, Caterpillar “says it is looking for good ports and other transportation links, as well as an established base of suppliers”. Third, the incentives. Caterpillar expects free land, road improvements, help with other infrastructure, tax relief, worker training programs, and cash. The firm is also adept at playing states against one another, and has released letters from governors of four states urging the company to move there. “If Illinois doesn’t want your business, Texas does”, writes Governor Perry.

Are these outrageous expectations? Electrolux AB, the Swedish appliance maker, won about $180 million in incentives from Tennessee when it located its new $190 million factory in Memphis last year. The plant created 1,200 jobs.

Discussion questions:

1. How would your state or local government justify a bidding war for a new plant like this one? Who pays the incentives?

2. Make a list of a dozen factors you think Caterpillar considers in its final selection process.

OM in the News: A Sea of Disk Drive Shortages

It was just a few days ago in Boston, at the DSI conference, that Jay and I were discussing supply chain disruptions with three York College colleagues–Professors Sumutka, Lam, and Palmer. We all agreed that manufacturers need to protect their supply chains from the mega-disasters we have witnessed recently.  As if to confirm, the latest Businessweek (Nov.28, 2011) featured an article called “After the Floods, A Sea of Disk Drive Shortages”, which discussed the impact of 6 weeks of flooding on the disk drive industry in Thailand.

Compared to the scores of disk drive companies whose factories there have been swamped, Seagate Technology is lucky. Its Thai factories fell outside the flood zone and are high and dry. Unfortunately, each of the 100,000’s of drives Seagate  ships every day contain parts from 130 suppliers, many of whom are still under 3 feet of water. Seagate’s CEO says that pre-flood production levels (which supplied 40% of the world’s drives) will not be reached for at least a year. The impact: anyone who needs a hard drive–from laptop and DVR makers to data centers that host websites–will feel the pinch of 20-40% price hikes and shortages. Some Seagate customers have offered $250 million up front, hoping to lock in capacity.

Disk drives, by the way, are incredibly complex, despite their cheapness. Inside each one, a suspension arm hovers above a disk spinning 7,200 revolutions per minute. Each drive has 200 parts, most of them designed for specific models.

Seagate competitor Nidec has decided not to wait for water to subside at its seven flooded Thai factories. Nidec cut a hole in the roof of one plant, sent divers into toxic waters to unbolt heavy equipment, lifted it unto boats, and then shipped it to their plants in China and the Philippines. Seagate thinks it will take a year to replace gear at suppliers and wants many to relocate to higher ground.

Discussion questions:

1. Can Seagate benefit from the flooding?

2. What is the solution to this supply chain dilemma?

OM in the News: The Making of Amazon’s Kindle Fire

The Wall Street Journal (Nov.18, 2011) has an interesting  article on the manufacture  of Amazon’s new Kindle Fire, and asks: “Is the company making any money on the $199 device”?  Two research firms that follow Apple’s production closely come up with different answers. UBM TechInsights says Amazon pays $143 for the components in the Fire.  ISuppli estimates the cost to be $203. The main difference is in the price of the 7 inch display and touch-screen assembly, which UBM puts at $50, but which ISuppli estimates to be $87.

Both firms agree that Amazon used a lot of techniques to save costs. The box the Fire comes in is the same one used to package the Fire for other retailers like Best Buy. The only accessory inside is a wall charger and cord. “Amazon’s approach was to take out everything they didn’t need”, says iSuppli.

I like this product for class discussion because its one the students care about, yet likely have very little knowledge about its inner workings.

Discussion questions:

1. Why do firms, such as iSuppli and UBM, analyze  products like the Kindle so closely?

2. Why does Amazon view the manufacturing process and component costs as a trade secret?

Good OM Reading: RX for the Emergency Room

If you want to read an excellent article about issues of quality, capacity, and bottlenecks in hospitals, see OR/MS Today (Oct., 2011), for “RX for the ER”.  The authors (one of whom is head of the ER at New Orleans’ Ochsner Hospital), write: “As an industry, hospitals exhibit technologic excellence in terms of diagnostic and therapeutic innovations. However, service delivery has been absent. The economic incentives to develop and sustain service delivery models that are viewed by the patient as efficient, useful, and valuable have been to a large degree nonexistent in a hospital environment”.

But things may be changing. Patients are demanding relevant information, more choice and better services. As a result, healthcare in the US is beginning to embrace the OM techniques that have made other sectors of American industry competitive. ERs are the perfect place to begin. And Ocshner Hospital had no choice but to reengineer its ER after Hurricane Katrina wiped out 70% of New Orleans’ healthcare services in 2005. ER volumes ramped up overnight to 180% of pre-hurricane averages and wait times tripled. Annual revenue loss, estimated to be $500,000 for every 1% of patients who leave prior to examination, is one factor in hospitals wishing to invest in a more efficient system.

Some of the highlights of the article: (1) ER arrivals tend to follow a known demand curve at different hours (contrary to what many administrators think), making staffing much more efficient; (2) the ER bed is the major resource in the department and it runs at more than 100% capacity a large part of the  day– but 75% of patients do not need a bed and are discharged that day; (3) low risk  patients do not need the services of a highly trained ER physician, and physician assistants can provide good care at 25% of the cost; and (4) registration and triage time can be reduced by 80% with lean workflow models.

This article is full of excellent graphics (10 of them) that you can use in class to make points about lean, waiting line costs and distributions, workflow, and metrics.

OM in the News: Sears Suffers as it Skimps on Maintenance

The Wall Street Journal (Nov.17, 2011) writes: ” In a holiday season when all retailers are worried about luring customers into their stores, Sears faces an extra challenge: Some of its stores are dumpy”. It turns out that the chain has skimped on maintenance at its aging stores since it merged with Kmart six years ago. “No one really comes here anymore”, says a customer at a Dallas Sears store, as she walks around an empty store devoid of any sign of holiday cheer. By contrast, the Macy’s store next door was festooned with fake presents, oversized bows, and prominently displayed Christmas stockings. Customers were streaming in.

Maintenance, our topic in Chapter 17, is important for a fresh atmosphere that signals to shoppers that products are up-to-date and worth buying. Even Wal-Mart, known for its Spartan operations, spent billions on renovations in recent years. And Macy’s just announced a $400 million renovation of its flagship NYC store. By comparison, Sears spent only $441 million maintaining all of its 3,100 stores last year. That comes out to about $1.90 per square foot. Store chains typically spend $6-$8 a foot on annual maintenance, so Sears is sitting at about 1/4 of what it needs to spend to keep stores an acceptable level at which to shop.

Consumer Growth Partners, a consulting firm, rates the Sears fleet as the most rundown in US retailing. Adds  Columbia U. Prof. Mark Cohen: “There is no viable retail strategy here. In retailing, when your stores get dark, dirty, and grim, you are past the point of no return”.

Discussion questions:

1. Why is Sears spending such a small amount on maintenance?

2. Why is maintenance one of the 10 decisions operations managers deal with?

Guest Post: The Rise, Fall, and Rise Again of the Bullwhip Effect

Today’s guest Post comes from Kelly Thomas, who is a supply chain management professional and executive at JDA Software.

Demand variability is among the most important challenges facing supply chain managers today. Demand variability that is not properly managed manifests itself in terms of the well-known bullwhip effect, which results in large inefficiencies. Jay Forrester first described the bullwhip effect in his seminal work Industrial Dynamics, published in 1961. This effect says that a change in independent demand at the consumer level leads to increasing swings in dependent demand at each point upstream in the supply chain. This effect held sway over supply chains since the beginning of the industrial revolution.

However, during the mid 2000s, it appeared that the bullwhip effect had been reduced; studies by the Federal Reserve show the bullwhip effect attenuating dramatically from the beginning of the 1990s through the middle 2000s. These studies attributed this to the widespread adoption of improved supply chain management practices and supporting information technologies. These same studies postulated the overall economy had entered a new era of lower variability.

As we know by now, the Great Recession of 2008-2009 and its lingering effects have changed a lot of this thinking. It appears the bullwhip effect has come back with a vengeance. Increasing variability caused by demand uncertainty, globalization, new product introduction, and escalating customer expectations have outstripped companies’ abilities to effectively manage their supply chains. This has led to increased interest in supply chain segmentation, driving the supply chain from independent demand, visibility and synchronization, and optimizing the use of production and inventory resources.

To support these needs, companies are now going through a technology refresh phase to support higher levels of sophistication in such areas as S&OP, demand management, order promising, inventory optimization, and customer collaboration. For example, companies such as Dell and Sony are transforming their supply chains to stay ahead of the variability curve.

OM in the News: Illegal Immigrants Vacate Jobs that Americans Find Undesireable

When I was a young child, my dad proudly took me for a tour one Saturday morning of the meat processing plant, Dubuque Packing (home of the famous Dubuque ham), where he worked. Decades later, I still recall the stench, the noise from cows being slaughtered, and the massive cold and damp rooms. Jobs in slaughter houses, as are field-hand picking jobs, are unpleasant, with low pay and skimpy benefits.  As our US population has become better-educated, we seek office and manufacturing  jobs that have set hours, higher pay, and safer conditions–things we take for granted. Businessweek (Nov.10-17, 2011) tackles a tough issue of how illegal immigrants have taken over many of the dirty jobs Americans no longer aspire to.

In particular, this lengthy article deals with Alabama, which in September passed a law making it almost impossible to employ illegal immigrants, mostly Hispanic and heavily Guatemalan (the Hispanic population had grown from 1% in 1990 to 4% today). The law follows an anti-immigration sentiment throughout the country that has accompanied the recession. With 211,000 residents out of work and high unemployment rates (18% in some rural counties), the state’s ruling has resulted in an exodus of 1,000’s of  immigrant field hands, hotel housekeepers, dishwashers, and chicken plant employees.

The result:  employers trying to fill a massive number of vacant positions with Americans. But Americans are not interested in these jobs, and it’s not just because of the hard work and low pay. We have come to think of these jobs as beneath us, says a Princeton prof. “It doesn’t have anything to do with the job itself. In other countries, citizens refuse to take jobs Americans compete for. In Europe, auto manufacturing is an immigrant job category”.

Furious employers have bombarded their legislators with complaints of unpicked tomatoes, unmade beds, and uncleaned fish. This is a thoughtful article that you may want your students to read as you teach Chapter 10.

Discussion questions:

1. Why is this an important OM issue?

2. Should illegal immigrants be hired to do the jobs Americans don’t want?

OM in the News: The Panama Canal’s “Fat Lane” and US Supply Chains

What do Warren Buffet, the Panama Canal, and products from Asia  to Wal-Mart  have in common?The Wall Street Journal (Nov.11, 2011) writes that they are all part of the complex calculus of changing  global supply chains. Right now, about 70% of US imports from Asia arrive by ship to the West Coast, with much of those goods transferred to Buffet’s Burlington Northern RR for transit to the rest of the nation.

But in 2014, Panama will rock the world of logistics with the opening of its new “fat lane”– a game changer  that  creates a threat to western ports and railroads. It takes about 18 days to make the ship and train journey from Asia to West Coast and then across the country. The all-water route through the canal takes 22 days. But the ship-to-rail route costs 10-25% more.

With the expanded Panama Canal, the Wal-Marts and Targets of the world are planning to ship more product to East Coast ports on huge ships that can carry 12,000 standard 20-foot containers–3 times the current capacity. This avoids labor strife in the past decade that clogged West Coast ports, and helps diversify  logistics systems. It has also triggered a raft of upgrades at East Coast ports to accommodate the bigger vessels.

The reaction from western ports:  Our speed of delivery and superior facilities will stem any loss of business. Many customers don’t want time-sensitive inventory sitting on ships traversing all-water routes. If your goods are stuck in the supply chain, they’re not passing the cash register. Besides, future ships (already being ordered) will carry 18,000 containers, which will not fit through the expanded canal.

But the Journal concludes that the expansion will be good for all ports. It will facilitate rising trade with Latin American for commodities, create round-the-world service by larger ships, and make the US logistics system more competitive globally.

Discussion questions:

1. How does the expansion impact East Coast retailers?

2. What are the OM advantages of the wider canal?

Good OM Reading: Analytics–The Widening Divide

Why don’t more managers embrace the business analytic tools we use in so many aspects of our OM courses?  A new report by MIT Sloan Management Review (Nov.8, 2011) answers the question with a survey of 4,500 executives regarding the integration of analytics in their enterprises. The report,  Analytics: The Widening Divide,  concludes that cultural biases, such as the need for new management competencies and organizational resistance to new ideas –more than technological hurdles–are the primary barriers.

First, a definition of business analytics: “the use of statistical, quantitative, predictive, and other models to drive fact-based planning, decisions, execution, management, measurement, and learning. Analytics may be descriptive, predictive. or prescriptive”.

The MIT Sloan report breaks companies down into 3 categories: Transformed (heavy users), Experienced (moderate users), and Aspirational (companies least experienced in the use of business analytics). The good news is that the number of firms in the 1st two categories, who use analytics for competitive advantage, has surged by 57% in the past year. The Aspirational group’s use of analytics actually declined by 5%. Transformed organizations have set the pace in expanding use of analytics and were found to be 2.2 times more likely to substantially outperform industry peers.

The Transformed group keenly appreciates the value of precise and real-time decisions, and is 3 times more likely to focus on speed of decision-making than Aspirational firms. This means managing operations and improving output levels based on real-time supply and demand management. Inventory replenishment processes, for example, are automated and production is optimized in these companies. As a case study, the report follows McKesson, which processes 2 million hospital orders per day. McKesson does so by embedding algorithms into customer orders to manage the inventory process without human intervention.

When students ask you why analytics are important in your OM course, this report provides a ready response.

OM in the News: Apple’s Supply-Chain Secret?

 Businessweek (Nov.4-10, 2011) describes the “world of manufacturing, procurement, and logistics ” in which Apple excels.  “Apple has built a closed ecosystem where it exerts control over nearly every piece of the supply chain, from design to retail store”, writes the magazine. “The iPhone maker spends lavishly on all stages of the manufacturing process, giving it a huge operations advantage”.

This is a great article to ask students to read, as it describes the critical role of OM in one of their favorite companies. “Operations expertise is as big an asset for Apple as product innovation or marketing”, says the former head of SCM at HP. With its volume –and ruthlessness–Apple gets big discounts on parts, manufacturing, capacity, and air freight. This enables the company to handle massive product launches without maintaining huge inventories, all the while earning 25% profit margins.

As one example of details in the supply chain, Apple bought up all the available holiday air freight space  to ensure its new translucent blue iMacs would be widely available before Christmas–paying $50 million to do so. The move handicapped Compaq when it later wanted to book air transport.  Apple also decided to fly iPods directly from Chinese factories to consumers homes, allowing the buyer to track the phone’s progress around the world on its web site.

The company recently announced it plans to double capital expenditures on its supply chain to $7.1 billion next year, while committing $2.4 billion in prepayments to key suppliers. The tactic ensures availability and low prices. Because it  locked up all available screens to use in its iPhone4 debut last  year, competitors like HTC couldn’t buy the screens it needed. 

 While life as an Apple supplier may be lucrative because of volumes, Apple  does squeeze prices to the bone, and may require suppliers to keep 2 weeks of inventory within a mile of Asian assembly plants.

Discussion questions:

1. In what ways do Apple’s retail stores provide an OM advantage?

2. How does Apple use SCM as a strategic weapon?

OM in the News: “Thin Supply Chains” and Thai Flooding

Workers at Japanese hard-drive maker Nidec Corp.’s plant in Thailand have a remedy for the flooding that has shut 1,000’s of factories there. They use narrow wooden boats to ferry boxes of delicate motors across a flooded plain to a truck that will haul them to Bangkok. But The Wall Street Journal (Nov.3, 2011) asks: “Are the companies to blame for some of the economic costs of the disaster”? Some experts say, yes, that flooding in Thailand should serve as a warning to companies world-wide: thin supply chains for critical components are vulnerable to disasters.

“Companies  never see the big picture, and see where the potential problems in their supply chains might be; and this is especially true as these supply chains become more geographically dispersed”, says a McKinsey & Co. partner. Thailand’s flooding (as did Japan’s earthquake) has ricocheted around the world in ways few businesses expected. For example, about 1/4 of the world’s hard-drive output is under water. And Honda’s main Thai plant is semi-submerged, choking off the supply of key components to factories around the world. (The Honda factory in Brazil is cutting production by 1/3). In all, 7 of Thailand’s industrial parks are flooded.

Supply chain experts say much of the disaster “could have been averted if companies themselves hadn’t been so focused on saving money by using lean supply chains”. In a country prone to major flooding,  insurers may now be reluctant to offer coverage, forcing manufacturers to move out. Nidec has already announced plans to transfer some output to the Philippines and China, even as its workers in Thailand paddle out to salvage what they can from the plant.

Discussion questions:

1. Discuss the danger in “thin” (lean) supply chains.

2. What is the solution for the OM manager?

OM in the News: Fiat Threatens to Quit Italy

Fiat CEO Sergio Marchionne has recently threatened to cease manufacturing in Italy if he cannot bring down operating costs and increase productivity. This article in Businessweek (Oct.28-Nov.4, 2011) can make for an interesting class discussion on a whole variety of OM issues, from efficiency to capacity to productivity to union relations to off-shoring. The standoff between Italy’s largest manufacturer and one its hard-line unions (metalworkers–who are 12% of the workforce) is emblematic of the challenges facing the country. Italy’s industrial competitiveness has been eroding steadily, while Eastern European rivals have been working hard to improve conditions for corporations. The World Bank just ranked Italy 87 th in terms of ease of doing business; Hungary, Poland, and the Czech Republic all scored better.

Let’s look at the productivity gap (see Chapter 1). Fiat’s 22,000 factory workers in Italy assembled 650,000 cars in 2009. But the 6,100 employees at its plant in Tychy, Poland, built 600,000 vehicles. The Italian workers, in effect, each made 30 cars a year on average, compared to about 100 in Poland. And auto workers in Italy earn $38.55 an hour, more than 3 times the wage paid in Poland.

This productivity gap has Marchionne pushing Italian unions to agree to more flexible hours and to limit strikes and curtail absenteeism. (12,000 workers took part in an Oct. 21st strike).  Says the union head: “Fiat workers, not its managers, want to keep the company in Italy”.    An impasse with unions could end up with production shifted to other locales in Europe and the US–a move made easier by Fiat’s ownership of a controlling stake in Chrysler. An Italian economist writes: “If Fiat moves abroad, it will become a metaphor for a country that cannot be reformed, that has lost all hopes in the future”.

Discussion questions:

1. How is this also an issue for American auto makers?

2. Relate the article to news regarding Greece’s economic problems.

OM in the News: Is Boarding the Most Annoying Airline Delay?

I guess the answer is yes, given that yesterday’s New York Times (Nov. 1, 2011) ran a front page article on the woes of airline boarding.  Airlines have been complicating the process of boarding  for decades, writes the Times. First travelers have to be sorted by priority: 1st class, frequent flyers, elite cardholders, military in uniform, families with kids, and so on. Then there is the issue of seats  for those who paid priority boarding fees, the matter of more roll-ons in the aisle from checked-baggage fees, and of course,  the fact that planes are fuller. Boarding time has actually doubled— and it now takes 30-40 minutes to board 140 passengers, up from 15 minutes about 20 years ago.

 Operations scheduling techniques (Ch.15) have been used by every airline to find creative solutions to speed boarding. Spirit Airlines says the answer is to charge $20-$40 per carry-on bag. This “stress-free” boarding saves 6 minutes on average. American Airlines switched a few months ago to boarding passengers earlier who pay $9-$19 extra (and hence find a space for their bag). The rest of the passengers are brought in as 3 groups, sorted out in a spread throughout the plane. This method has cut boarding by 4-5 minutes.

US Airways hired ASU profs to develop a “reverse pyramid” to save time. Passengers with window seats in the back board first. Then, gradually, passengers are brought on to the front of the plane in a staggered pattern. Southwest, which can board its planes in 15 minutes, claims the root of delays is the practice of assigning seat numbers. So it assigns passengers to one of 3 boarding groups.

The conflict: all the extra fees for early boarding and baggage will add $12.5 billion to the bottom  line of US airlines this  year, up 87%  from last year.

Discussion questions:

1. Research has shown that “back-to-front” boarding is the slowest method. Why is it still used?

2. How else can OM help solve this problem?

OM in the News: Harada–How America Can Fight Against Low-Cost Labor in China

Norman Bodek has visited Japan 78 times to study the Japanese continuous-improvement philosophy. On his most recent trip Bodek met with Takashi Harada, who has developed the ultimate recipe for competing against low-cost labor in China and India. The Harada Method, reported in IndustryWeek (Oct.25,2011), is one part monozukuri (or product excellence) and one part hitozukuri (or people excellence), and is steeped in respect for people. The Harada Method is designed to help shop-floor workers develop their skills and capabilities–on their own.

The key, says Bodek, is “self-reliance”, where “you, the worker can make a decision for yourself and your company and for your customer that is right. This is missing in so many American corporations. You call a company and the first thing you get is ‘ This call is being recorded’ . Why are they recording it? They don’t trust their people, and they don’t empower them to be trusted”.

The Harada Method, already taught to 55,000 managers at 380 companies in Japan, is enormously popular there because Japan (like the US) is struggling to compete with low-cost labor in China and other emerging economies.

Through the method, workers are encouraged to pick a skill that they’d like to master, and to set goals to help them accomplish it. Employees write down their goals, create a step-by-step plan to attain them, measure themselves against their goals and receive feedback and guidance. To achieve hitozukuri, managers provide lifelong training and mentoring of employees. “What I’m trying to do is get American mangers to focus on their people — recognizing that developing people doesn’t even cost you anything. It doesn’t”, says Bodek.

Discussion questions:

1. Compare the Harada Method to some of the  quality improvement philosophies used in the US.

2. How can ordinary people become heroes in their own lives, and how does this apply to the factory floor?