Month: December 2011

OM in the News: Meet the Electric School Bus

“Forget the Prius”, says today’s Wall Street Journal (Dec.28,2011). “The future of electric is the school bus”. It seems that Americans just love long drives in fast cars too much for electric cars to be our country’s solution to green transportation.  But the routine runs of electric school buses are another matter. Whereas most current school buses run on diesel fuel, have the aerodynamic profile of a box, and get mileage in the single digits (5-6 mpg), a new generation of zero-emission, hybrid buses may be slowly taking over.

School buses, it turns out, are perfectly suited to be electric vehicles. They cover short distances on daily runs, follow set and predictable routes (making it unlikely their batteries die during the route), and spend a lot of the day sitting in depots, giving them plenty of time to recharge. They also make frequent stops, which while bad for fuel efficiency in a conventional bus, actually helps recharge electric vehicle batteries while  brakes are applied.

Money is the prime obstacle, in that a hybrid costs 60% more than a diesel school bus. But hybrids can improve fuel economy by 65% and if budgets were not hurting so badly in many school districts, fleets would be expanding rapidly.  School districts can recover the $30,000 price differential in 3-5 years through  fuel savings once the investment is made.

Navistar Int’l, Trans Tech, and Smith Electric Vehicles are three of the major players in the electric school bus industry.

Discussion questions:

1. Why is this an OM issue?

2. In what other ways can a school district use sustainability (Ch.7) to actually save money?

OM in the News: OM and the Christmas Rush at UPS

“Lots of people like a white Christmas, but the notion keeps United Parcel Service up all night”, writes the Wall Street Journal (Dec. 23, 2011). Which is why UPS picked Louisville and its mild climate for its sprawling global hub. The  Worldport spans the length of 90 football fields and employs 6,000 graveyard shift workers to fulfill its next day service. And during this busy holiday season, even desk job employees jumped in to handle the overload as it travelled down 155 miles of conveyor belts.

About 125 jets –up from 85 the rest of the year–landed each night this season, all between 11pm and 3am. The packages had to be sorted and reloaded onto planes before sunrise to reach their final destinations. It’s all about operations management, just as it is for FedEx (which we describe in the Global Company Profile for Chapter 8, Location Strategy). If a flight is late and the package misses its delivery, freight operators generally have to eat the cost of the shipment. Each late delivery subtracts $5-$30 from UPS’ bottom line.

UPS meteorologist at the status board

A “hot status board”on the wall lists cities and regions where UPS positions spare planes and crews, prepared to “rescue volume”, that is, packages stuck somewhere because of weather or mechanical problems. More than a million such packages are indeed “rescued” every year at UPS. If they had been late, the loss would have been $20 million.

Discussion questions:

1. Why did UPS select Louisville as its Worldport hub?

2. Why is OM at the heart of UPS’ business?

OM in the News: Honda Revs Up Plants in the US

When discussing global OM issues in Ch.2, the news that Honda is shifting a major chunk of its manufacturing to the US over the next 2 years is noteworthy. The Wall Street Journal (Dec. 21, 2011) reports that the 63-year-old company is accelerating its move away from Japan after two huge challenges: natural disasters and the yen’s gain of 40% to the dollar since 2007.  (The yen was 78 to the dollar this week, compared to 120 a few years ago). Honda plans to  grow to 2 million cars  in N. America, up from 1.29 million last year. This is to be done by building a new factory in Celaya, Mexico and expanding all 7 existing US plants.

With the expansion, Honda will export 200,000 to 300,000 vehicles a year from N. America, a tenfold increase, while reducing exports from its Japanese plants by 50%.  Because of the strong yen, “It is virtually impossible to make money on exporting vehicles from Japan in the short and medium term”, says the president of American Honda. For the US, the move means good news: thousands of new auto-related jobs and a boost for US suppliers that make components for Honda. The Greensburg, Indiana, plant alone will go from 100,000 to 200,000 Civics per year and add 1,000 jobs.

“It’s almost an economic necessity that they co-locate exports outside of Japan”, adds an industry consultant. “You can expect others to follow”. Today,  37% of Honda’s global production is in N. America: this will grow to 50% after expansion.

Toyota, likewise, has begun making its Corolla in Mississippi and is looking to expand its Baja, Mexico factory. Both firms saw earnings drop 50% this quarter.

Discussion questions:

1. Why are many foreign auto makers now expanding in the US?

2. What is the risk to Honda of transferring a large part of capacity offshore?

Guest Post: Using MyOMLab for Exams at Temple University

Today’s Guest Post comes from Professor Howard Weiss at Temple University’s Fox School of Business. Howard, the developer of both Excel OM and POM for Windows,  is also Director of  Temple’s EMBA program.

When myomlab first became available in the Fall of 2009 I had some qualms about using it for my exams because it was new technology and I was worried that there might be technical problems. On my midterm exam, I gave my usual paper exam except that I put one question on myomlab in order to see how the process worked. It worked flawlessly. Even when one or two students had some issue in the middle of the exam, the exam reopened at the same point where it closed. For my final exam I gave half of the problems on paper exams and half on myomlab. The students loved getting their myomlab grade immediately. Of course, I loved not having to grade those exams and I also loved that students had different data from each other for the same problems.

When I surveyed my students they requested that the entire exam should be from myomlab. I am not sure how much of their opinion was positive towards myomlab and how much was negative towards my own questions but I certainly had no reservations about accommodating the students. Since that first semester I have used myomlab exclusively for my undergraduate exams. It is even nicer to use myomlab now than when it first came out because it now has a feature that allows me to enter my own problems or questions into the exam.

There can be one downside to using myomlab. Myomlab does not give partial credit in the way a professor would. For example, on my written exams, if a student entered a wrong demand rate in an inventory model but otherwise interpreted the results properly I would give half credit even though all of the answers would be wrong. In myomlab, the student gets no credit. Of course, I have warned my students about this and told them they need to be extra careful when using myomlab just like they need to be extra careful when filing a tax return. Myomlab is as unforgiving as the IRS when mistakes are made!

OM in the News: When Supply Chains Break

The new Fortune (Dec.26,2011) article “When Supply Chains Break”  (pp.29-32) ends with the following line:  “The real cost advantage may not go to the manufacturer with the nimblest supply chain but to the company with the most robust one”.  The opening line is:  “Manufacturers have spent years building low-cost global supply chains. Natural disasters are showing just how fragile those networks really are”. Sure enough, with hundreds of Hondas in the flooded plant in Thailand just floating in 15 feet of water, it is surreal to think of how we teach the lean supply chain concept.

Invented by Toyota, and perfected in the era of globalization, lean supply chains completely decentralized manufacturing. Manufacturers developed a network of suppliers whose components arrived at assembly plants at the moment they were needed. There was  no pesky inventory to manage, suppliers kept costs down by locating near cheap labor, and consumers enjoyed lower prices.

But the tsunami, earthquake, and flooding in the past year (costing  a total of  $240 billion in Japan and Thailand) have resulted in economic disruptions felt well beyond Asia. Seagate’s CEO predicts its shipments of hard drives (it has 2 plants in Thailand) won’t be normal until 2013. While the computer industry needs 175 million hard drives a year, suppliers can now put out only 125 million, a shortfall of 29%. Apple and HP have already told investors that their earnings will suffer from the floods.

It is not surprising then that manufacturers are starting to rethink their global infrastructures. “The question is”, says one industry expert, ” has the quest for lowest-cost production and hyper-lean supply chains overridden and exposed vulnerability to significant business risk?” For Seagate and many others, the answer is a resounding “yes”. Carlos Ghosn, Nissan’s CEO, said just last month: “”There is going to be another crisis”.

Discussion questions:

1. What should manufacturers do to prepare for the next crisis?

2. What other firms have been impacted, and how, by these disasters?

Good OM Reading: Sustainability Nears the Tipping Point

Now that your Fall semester is complete and you have some time for holiday reading, we can give you a sneak preview of the upcoming MIT Sloan Management Review (Winter, 2012) article on the  characteristics of companies that are profiting from sustainability practices and the factors that have driven the recent surge in sustainability adoption.The article also highlights the challenges companies face in building a business case for sustainability.

Results from this, MIT’s third annual sustainability survey, indicate that an increasing number of managers and companies are taking sustainable business practices seriously. Two-thirds of respondents said that sustainability is critically important to being competitive in today’s marketplace. And despite ongoing economic uncertainty, many companies are increasing their commitments to sustainability initiatives. In fact, 31% of respondents said their companies are profiting from sustainable business practices. Yet, it should be noted that “green” still ranks only 8th on companies’ agendas for action.

The article also points out that sustainability comes from both internal and external drivers. External factors include regulations, green score cards and other metrics, media, climate change science, resource scarcity, and consumer demand. “Consumers today have higher expectations that brands deliver sustainable products: sustainably sourced, produced and packaged, but remaining competitively priced”, says the head of sustainability at Kimberly-Clark (maker of Huggies and Kleenex).

Yet internal drivers may be more influential than external ones. “I would say the internal drivers are 80% responsible for our sustainability efforts”, states the VP of Clorox, who sees benefits relating to operating costs, revenue growth, brand integrity, and employee engagement.

This is a good article to keep handy when you are teaching Supplement 5, Sustainability.

Video Tip: Delivering Fast Food and Groceries in Asia

 I was about to blog about a video of how the Home Plus  Korean supermarket chain has extended its “storefronts” into that country’s subway system. It’s a great 2.5-minute clip that your students will enjoy and which will lead to class discussion about layout, location, and logistics. As  the #2 food chain in Korea,  Home Plus wanted to catch up in sales with E-Mart, but without adding more stores. The virtual  stores  on the subway platform allow customers waiting for trains to scan items with their smart phones. The products are delivered to their homes shortly after the customers  arrive themselves.

But then yesterday’s Wall Street Journal (Dec.13, 2011) followed with a story along a similar vein.  Titled “Asia Delivers For McDonald’s”, the Journal reports that in cities from Beijing to Seoul, McDonald’s and KFC have set up armies of motorbike delivery drivers carrying specially designed boxes delivering Big Macs and buckets of chicken wings. More than 1/2 of KFC’s 3,500 restaurants in China offer delivery, sometimes in just 15 minutes (with a goal of under 30 min.) for orders placed either on-line or by phone.  And more than 2,000 new KFCs will be added in China in the next decade with the service. “We will probably stop building call centers as more people buy online”, says KFC’s CFO.

“If you can’t come to us, we’ll come to you”  is  McDonald’s slogan in Asia, says the firm’s regional president. Equipping its kitchens to handle  delivery involves laying out an area for assembly. Orders are packed in battery-powered induction heating boxes and insulated coolers that both fit on the back of the yellow and red scooters. The flat delivery fee is about $1.

Discussion questions:

1. Why did the online supermarket delivery system (eg., Webvan) did not succeed in the US?

2. Why do we have more drive-throughs  in the US?

OM Syllabi: St. Petersberg College, Rollins College, President University, Goldey-Beacom College

We are pleased to share the OM syllabi of four additional colleges that are teaching from our text this month. To see the 27 schools previously posted, just click on the OM Syllabi link in the right hand column.

St. Petersberg College, Dr. Wende Huehn-Brown, MAN 3504.Wende’s course provides a good model of blended learning, with 80% of the course completely on-line. She uses MyOMLab for assignments.

Rollins College, Dr. Michele Boulanger, INB 365. Many months ago, we posted my MBA syllabus at Rollins. Here is Michele’s undergrad class, which is taught in the International Business Dept., and includes 20 international mini cases. She also uses MyOMLab.

President University (Indonesia), Suresh Kumar. Suresh teaches the course at this new university, in English, using our OM 10/e. (The text, by the way, has been translated into Indonesian, and is available in  Chinese, Korean, Turkish, Spanish, Portuguese, European, and Indian versions).

Goldey-Beacom College, Dr. Robert Donnelly, MGT 481. Bob’s very interesting  post on this blog (Dec.2, 2011) details how he treats simulation in his course.

OM in the News: Shipping Our Batteries to Mexico for Cheaper Recycling

When we discuss the 3R’s of Sustainability in Supplement 5 we emphasize how important it is to build sustainable production processes.  But the  lead article in The New York Times (Dec.9,2011) asks what really happens when our American car battery industry claims to have the highest recycling rate for any commodity–97% of the lead is recycled–and most states mandate that stores take back old batteries. It turns out that spent batteries we turn in are increasingly being sent to Mexico, where their lead is usually extracted by crude methods that are illegal in the US, exposing plant workers and local residents to dangerous levels of a toxic metal.

The rising flow of batteries is the result of strict new EPA standards, making domestic recycling more difficult and expensive. (The allowable lead levels have dropped by a staggering amount in the past 3 years and cost of compliance is about $20 million per plant). So about 20% of batteries (20 million) are being legally shipped to Mexico this year (up from 6% since the new EPA rules), with many more smuggled across covertly. “Along the border, where US vigilance focuses on drugs and illegal immigrants, there is little effort to staunch the flow”, writes the Times.

Whereas lead battery recyclers in the US now operate in sealed, highly mechanized plants outfitted with scrubbers, the vast majority of Mexican plants just break the batteries, releasing the lead as dust and emissions. Spent batteries house up to 40 lbs. of lead, which can cause high blood pressure, kidney damage, abdominal pain in adults, and serious neurological development in children. Lead pollution remains in the ground for decades. The EPA says it “does not inspect, monitor, or verify the Mexican facilities.” Adds a Dallas recycler: “We’re shipping hazardous waste to a neighbor ill-equipped to process it and we’re doing it legally, pretending it’s not a problem.”

Discussion questions:

1. Do your students view this as an ethical dilemma?

2. What other harmful products do we ship abroad for recycling, and why?

Video Tip: Lean Six-Sigma at Franciscan St. Elizabeth Hospital

I just came across a wonderful 5-minute video about lean six-sigma that Mark Graban mentioned in his blog–one of my favorites– about Lean Hospitals (see our Links We Like on the right side). The video is narrated by Brian Hudson, a  researcher at Franciscan St. Elizabeth Hospital.  Hudson was trying to improve the time it takes to get a patient with chest pain from “door” (arrival at the hospital) to “balloon” (insertion of a tube to unblock a clogged artery) down  from 114 minutes to the national standard of 90 minutes. A faster “door to balloon ” time often is the difference between life and death for a heart attack patient.

A year after Hudson started his research in 2007, using lean 6-sigma, he had been able to get his hospital’s average to 74 minutes. In 2009, Hudson suffered a heart attack, watching the clock in the emergency room the whole time with the same mental checklist he had developed for doctors. If you don’t show this video in class, watch it yourself–it may save your life!

OM in the News: Why Indian Firms Outsource Even More Than American Ones

The front page headline in the New York Times (Dec.2,2011) reads “Outsourcing Giant Finds It Must Be Client, Too”, describing how most employers in India rely on contract hiring agencies to avoid India’s restrictive labor laws. India, of course, is known the world over as a prime innovator of outsourcing for foreign firms which take advantage of its cheap, English-speaking labor force. Less well-known is the extent to which Indian companies outsource their own jobs within their own country.

To skirt laws that prevent companies from laying off workers, Indian firms hesitate to hire permanent employees, instead turning to firms like TeamLease to field “temporary employees”. Factories employing more than 100 workers, for example, are not allowed to lay off employees without government approval. Economists assert that firms will continue the outsourcing trend, although they are reluctant to admit to it because of political and societal pressures. Already, 1/4 of India’s industrial laborers and perhaps 1/2 of service sector workers are on outsource contracts.

Walk into any of India’s shiny new shopping malls and many of the store clerks, janitors, and security guards will be on the payroll of outsourcing companies. Firms like TeamLease supply workers who are paid half of what a “permanent employee” can earn, with few benefits to boot. Today, one of TeamLease’s biggest clients in India is Whirlpool. It has hired 1,850 salesmen for the American giant and sent them to stores to sell appliances. This avoids the myriad of employment laws and taxes that differ by region and simplifies Whirlpool’s entry into a new market.

Discussion questions:

1. How does outsourcing impact Indian companies and employees?

2. What are the disadvantages of outsourcing in general?

Guest Post: Teaching Simulation at Goldey-Beacom College

Today’s Guest Post, by Dr. Robert Donnelly, Professor of Management at Goldey-Beacom College, in Delaware, describes how he teaches simulation (Module F). Bob is the author of a new Business Statistics text appearing in 2012, published by Prentice-Hall.

Simulation is one of my favorite topics in the OM course here at Goldey-Beacom College. Students seem interested in learning how many relatable applications involve simulation. I use the video sports games as an example. I also show them Strat-O-Matic baseball cards which is a dice game based on actual player performance from the previous season.

I like to schedule this topic at the end of the semester because it allows me to revisit the EOQ and waiting line problems that I cover earlier in the course. I present simulation as an alternative approach when the assumptions for the EOQ and waiting line models don’t hold true. Then I apply simulation to the overbooking problem with airlines and hotels. As consumers, most students don’t realize the benefits to overbooking until they work through a simulation model.

I also demonstrate Extend, which is simulation modeling software. I set up the queuing model with this software in class (Problem F.8) and simulate 40,000 customers and compare these results with what we found doing it on the board. I show them an Excel file that simulates the inventory problem from the Render-Stair  Managerial Decision Modeling book (Chapter 10) and compare that to what we did in Module F. We wrap up the topic by talking about two actual business examples where the simulation model resulted in significant savings for the companies.

I like this topic because it catches the students’ attention and, for the most part, they do well solving these types of problems on  exams.

OM in the News: How “Green” is That Company?

A Rollins College colleague stopped by yesterday to tell me about his research relating sustainability to corporate success. He has shown that “greener” companies yield higher net profits than their less-ecologically responsible competitors. But who determines each firm’s water usage, carbon emissions, workforce well-being, recycling  levels, and a score of other sustainability factors? The new Businessweek (Dec. 4,2011) tries to address who the arbiters of sustainability are with its article “The Race to Decide Who’s Greenest”.

It turns out that investors and the public are demanding detailed information on metrics that define sustainability. And in response, scores of rating outfits have sprung up, each trying to be the judge of who’s really green. One of the largest, Global Reporting Initiative (GRI), provides over 100 metrics on such areas as workplace safety, toxic waste spills, and recycled materials. But GRI does not audit company survey replies and does not judge performance. Newsweek rates companies on their commitment to the environment. Dow Jones publishes an index of “most sustainable companies”.  And the Ethisphere Institute ranks the “World’s Most Ethical Companies”.

In 2000, there were 21 such raters. By 2010, that number swelled to 108. IBM’s environmental affairs chief says: “It’s our collective American culture to rate. Look at Dancing with the Stars“.

Wal-Mart has created its own Sustainability Consortium and index for tracking its 1,000’s of suppliers’ green efforts. It is creating standards for cotton towels, TVs, yogurt, and scores of other products. Each product has its own specific set of metrics. “We want to make sure we are measuring the right things”, says Wal-Mart’s director of sustainability.

The bottom line: With more than 100 groups ranking companies on sustainability, is it time for global reporting and assessment standards?

Discussion questions:

1. How is sustainability good for operations management?

2. Why do OM managers need a “green” index?