Month: April 2012

OM in the News: Leading the Sustainability Charge at Patagonia

Yvon Chouinar, founder and sole owner of the $414 million outdoor-clothing brand Patagonia, has just published a new book, “The Responsible Company,” which  offers detailed checklists for making money without inflicting undue societal harm. And according to The Wall Street Journal Magazine (May, 2012), even megacorporations are paying attention to him these days.

Chouinard has partnered with Walmart—an odd couple if there ever was one, in terms of size (Walmart’s revenue exceeds Patagonia’s 800-fold) and customer base—to advise the retail giant on reducing packaging and water use in its supply chains. Together the two companies teamed up to create the Sustainable Apparel Coalition, inviting other major brands, such as Levi Strauss, Nike, Gap and Adidas to join them in crafting clear, quantifiable standards for environmentally responsible clothing production.

Chouinard looks at everything Patagonia makes, shipped or processed, and resolves to do it all more responsibly. He changes materials, switching  from conventional to organic cotton—despite the fact that it initially tripled his supply costs—because it was less harmful to the environment. He created fleece jackets made entirely from recycled soda bottles.  He also convinced Levi Strauss—with more than 10 times the annual revenue of Patagonia–to embrace efforts to set data-driven benchmarks for improving apparel makers’ environmental practices. Levi’s has spent the past 18 months redesigning processes to save 45 million gallons of water, along with the energy that would have heated that water.
In 1970, Milton Friedman wrote a legendary essay for the New York Times Magazine titled “The Social Responsibility of Business Is to Increase Its Profits.” Friedman pooh-poohed companies’ charitable efforts, arguing that it’s the sole duty of a business executive to maximize profits for shareholders. But Patagonia would disagree over the role of corporate social responsibility—since 1985 it has given 1 percent of revenue (sales, not profit), totaling $41.5 million, to grassroots environmental organizations. Over the years it has convinced 1,400 other companies worldwide to join this “1% for the Planet” initiative.
Discussion questions:
1. Do companies still follow Friedman’s philosophy?
2. How has Patagonia impacted the business world?

OM in the News: Art and Science of Scheduling the N.F.L.

Howard Katz, NFL scheduling tzar

“We’re geniuses one day and absolute morons the next,” says Howard Katz, director of scheduling for the  National Football League. That’s because Katz must consider a confounding array of factors, from the N.F.L.’s expanded Thursday night package, which gives each team a game in a short week, to potential baseball playoff situations that could affect the availability of stadiums and parking lots in October.

The New York Times (April 20,2012) reports that for the networks that pay billions of dollars to carry N.F.L. games, Katz’s staff has been mostly geniuses. N.F.L. games were watched by an average of 17.5 million viewers last season. N.F.L. games accounted for 23 of the 25 most-watched television shows among all programming, and the 16 most-watched shows on cable last fall.

Designing a schedule that generates those ratings, while also guaranteeing competitive fairness, is more complicated than ever, even though software spits out 400,000 complete or partial schedules (once done entirely by hand) from a possible 824 trillion game combinations. Katz starts with thousands of seed schedules, empty slates in which a handful of critical games with attractive story lines are placed in select spots. Then the computers generate possibilities around those games.

The N.F.L. also feeds the computer with penalties for situations it prefers to avoid — three-game trips, for example, or teams starting with two road games. There are requests not to play at home on certain holidays — the Jets and the Giants typically ask not to play home games during the Jewish High Holy Days.  This year, the software generated 14,000 playable schedules, which were reduced to 150 with an eyeball test. Katz reviewed those 150 by hand, scoring them for each team and each network.

Linear programming may be at the heart of scheduling, but the process is definitely part art and part science.

Discussion questions:

1. Why is scheduling sports teams so complex?

2. Are all the teams happy with the final schedules?

MyOMLab: Getting Ready for Final Exams

Jay and I want to thank you if you chose to incorporate MyOMLab into your course this spring term. Some of you might be using MyOMLab to administer your final exams, while others will want to add scores to the Gradebook using Add Offline Items. Hopefully everyone’s students are using MyOMLab to study! Here are some  resources to answer all your “how do I” questions around finals.

Creating Online Tests:

Adding Scores to your Gradebook:

  • Most final exams are still given offline. If that is your case, learn about Adding Offline items to the Gradebook to see how you can upload the scores of your final exam to your MyOMLab Gradebook.

Help Your Students Study:

  • Manage Incompletes: Managing Incompletes will submit a zero for assignments students did not do. It also allows them to review that assignment from their Results tab for studying purposes. If students are telling you they can’t review an old assignment, you should manage your incompletes.

Power User Tip: Remember to export all your grades once the course is final. Check out the article for performing an Advanced Export.

OM in the News: Hotels Layout a New Lobby Look

As Jay and I were sitting in the lobby of the Marriott hotel on Michigan Ave. (in downtown Chicago), a few days ago at the POMS meeting, we were amazed at the crowd that seemed to be in the massive space all hours of the day. People were in mini meetings, they were watching six huge TV screens, they were drinking coffee, eating, or simply typing away at their laptops. It seems the new layout of hotel lobbies is intended to make them a place for both guests and locals to lounge and feel like they are in a living room or on the deck of an ocean liner.

Hoteliers, according to The Wall Street Journal (April 19, 2012), want a lobby that is abuzz with locals  and out-of-town guests doing business or kicking back.  Consumers, it turns out,  are willing to pay a premium to stay at such a property. Beyond the buzz, mobile workers find there’s more leg room in hotel lobbies than in coffee shops. In some lobbies, it’s possible to order food and drink from the roaming wait staff. Freelancers have taken to hotel lobbies, instead of Starbucks, and hotels are courting them with long tables and lots of outlets. When Ted Copeland, for example,  comes in for his coffee at Chicago’s Public Hotel (shown in the photo), the barista has his order  ready. Then he sets up his laptop and lingers for a few hours over the caffeine and free Wi-Fi.

A crowded hotel lobby creates an upbeat, buzz-worthy atmosphere, which over time is thought to lead to higher occupancy. “If you have an active lobby, from a customer standpoint, it does reinforce the idea that the hotel is successful and a good hotel,” says an industry consultant. Many hotels say even overnight guests, especially those under 40, are more comfortable working in a public lobby than upstairs in their rooms.

Discussion questions:

1. Why is layout so important in this industry?

2. How has Starbucks taken advantage of the lobby trend?

OM in the News: South Carolina and the Auto Cluster

Here’s a pop quiz: Where did French tire-maker Michelin, just announce it will build a new global factory—China, Mexico or South Carolina? Answer: South Carolina.

What state is about to become the biggest manufacturer of tires in the U. S.? Answer: That would be South Carolina, too, with Michelin’s new plant  (cost $950 million and employing  800  people). Other tire makers in the state are also expanding, reports The Wall Street Journal (April 20, 2012). The port of Charleston  is adding capacity to handle cargo going in and out of the area.

“Ten years ago, everyone thought Mexico would be the place for expansion,” says the head of Michelin– North America. “But we can’t tolerate the level of instability there.” As for China, labor costs are rising quickly and there’s still concern about protecting intellectual property.”

A new survey of 106 big U.S. manufacturers picked up a similar sentiment. Thirty-seven percent of the companies said they plan to bring production back to the U.S. from China, or are actively considering it. Seventy percent said sourcing in China is more costly than it looks on paper.

In Chapter 8, we  write about the unique vitality of manufacturing hubs or “clusters”—the co-location and interconnection of related industries and schools. Silicon Valley is a prime example. So too the tech corridor in upstate New York, aircraft design in Seattle, chemicals in West Virginia, and advanced engineering in Prince George County, Va., where Rolls-Royce and a group of universities recently tied up.

Michael Porter of Harvard, in a 1998 paper “Clusters and the New Economics of Competition,” wrote: “Paradoxically, the enduring competitive advantages in a global economy lie increasingly in local things—knowledge, relationships, and motivation that distant rivals cannot match.”

Discussion questions:

1. Name some cluster zones of business expertise outside the US.

2. Why did Michelin select S. Carolina for its original plant and for the new one reported here?

OM in the News: How Nylon-12 and Xirallic Haunt Auto Supply Chains

For automakers, this past year has been one supply chain trauma after another. Now The Wall Street Journal (April 18, 2012) tells the story of 200 auto execs meeting in Detroit to deal with the looming shortage of Nylon-12, an obscure resin essential to the production of fuel and break lines. Inventories of the resin are being depleted after an explosion last month at an Evonik Industries AG plant in Germany, that killed two employees. Evonik, whose plant will take many months to repair, is the only  maker of the resin. The ricochet effect is global and less than a month’s worth of Nylon-12 inventory exists.

Evonik plant on fire in Germany

Evonik makes 25% of the global supply of the specialty resin and supplies a chemical building block to another company, Arkema SA, that makes a similar amount. Arkema says shortages of the building block means it will not be able to supply customers with the resin. “There will be no quick solutions,” says the Journal. GM has put together a global team from its purchasing, engineering, and supply departments working to allocate resins and prioritize its needs.

Last year, production in Japan of Merck’s Xirallic, the shiny pigment in some automotive paints, was disrupted by the tsunami and subsequent nuclear power plant problems. Auto makers had to limit or stop taking orders for some cars that used the pigment for certain colors because the plant was the industry’s primary supplier of the pigment. The Merck plant was repaired, but disruption rippled through the industry for more than 6 months.

Discussion questions:

1. Why is a replacement for Evonik so difficult?

2. How can global supply chain disruptions be minimized?

OM in the News: Where to Locate the Next McDonalds–in Your Hospital?

We all know that hospitals can be dangerous places to spend a few nights. Here are just a few statistics on annual deaths in US hospitals due to  preventable errors (as cited from a variety of studies): 44,000-98,000 (Institute of Medicine, 1999); 195,000 (Health Grades, 2004); 180,000 Medicare patients (US Department of Health, 2008); and 99,000 (AHRQ, 2009).  But what we would not expect as a reason for our demise to be hospital food. Maybe that is why a group of 1,900 doctors is starting a move to rid  hospitals of our favorite fast food chain, McDonald’s,  that has found a location strategy in a crowded market.

It turns out that 22 hospitals currently have contracts with the fast food industry leader, reports MarketWatch (April 10,2012), including the Cleveland Clinic and Children’s Memorial Hospital of Chicago. “Kids are being treated for diet-related conditions like diabetes on one floor in the hospital and given the wrong message by being offered the world’s most recognized junk food brand on another floor in the hospital,” says the  former president of the American Diabetes Association  “The practice earns McDonald’s an undeserved association with healthfulness among parents and children alike.”

A  study in the  Pediatrics demonstrated that allowing a McDonald’s  to operate inside a hospital affects hospital guests’ consumption on the day of their visit, and boosts the perception of the “healthfulness” of McDonald’s food. To address this concern, the group just sent a letter to the 22 hospital administrators last week,  noting: “It’s no surprise that McDonald’s sites stores in hospitals. For decades, McDonald’s has attempted to pose itself as part of the solution.”

In 2009, Dallas’ Parkland Health & Hospital System replaced a McDonald’s with a smaller chain offering healthier food. McDonald’s had been the only chain restaurant at the hospital for 20 years.

Discussion questions:

1. Do your students think locating McDonald’s in hospitals is an ethical issue?

2. Into what other types of facilities has the firm expanded?

OM in the News: How to Recoup American Manufacturing Jobs

Businessweek (April 15-22, 2012) reports that Gene Sperling, director of the National Economic Council, recently spoke before the Conference on the Renaissance of American Manufacturing,  making the case for manufacturing in the US.  Sperling  argued that manufacturing deserves special attention because it produces “positive spillovers” for the economy. (New research shows that when a factory locates in a county, the productivity of other plants in the county rises.)

Manufacturers also account for most innovation. And innovation tends to wither when it’s separated from production. “For example,” Sperling said, “when we lost consumer-electronics manufacturing, we gave up a claim on future innovation. We lost in follow-on products like advanced batteries, flat-panel display technology, and LED lighting. When we lost consumer-electronics manufacturing, we also lost the capability to make and design the batteries, including lithium-ion batteries, used in computers, cell phones, and other consumer devices.”

The U.S. lost 34 percent of its manufacturing jobs from 2000 through 2009, and employment in manufacturing has risen only about 4 percent since. Some experts claim  manufacturing employment is in an unstoppable downtrend because fewer workers can produce more. Sperling argued that higher productivity, far from being a job killer, can lower prices, thus increasing demand for the products and saving jobs. The problem, he said, is that output is down. The physical quantity of goods made in the U.S. declined 5 percent from 2000 to 2010.

To Sperling, the solution is to boost output—which will require faster productivity growth, not slower. His plan includes denying companies a deduction for moving costs when they shift jobs abroad; making the research and development tax credit permanent; funding manufacturing training programs in community colleges; and building regional hubs for manufacturing innovation that bring together industry, government, and academia.

Discussion questions:

1. Why are some industry leaders opposed to Sperling’s plans?

2. Why are manufacturing jobs important to the US economy?

OM in the News (with video): Boeing’s 4th Generation 737 Takes Shape

If you’ve ever flown, chances are you’ve ridden on a 737. Boeing’s strategy of product enhancement (Ch.5) has made the 737 the best-selling commercial aircraft in history, with 9,745 built since 1968. The newest version, the 737 Max, which is scheduled to make its debut in 2017, is designed with new engines to burn less fuel than its three predecessors, to help airlines’  costs and leave less of a carbon footprint on the environment.

Before the Max, writes USA Today (April 14-15, 2012), there were three versions of the plane: the Original that took flight  in February 1968; the Classics, which began flying passengers in 1984; and the Next Generation, which made its debut in 1998 with new wings and engines that enabled it to go farther and faster  while burning less fuel. All represented enhancements in the original concept of a narrow-body jet with the ability to fly medium to long-haul distances.  (Here is a great time-lapse 2.5 minute video of a 737 being built for Southwest that you can show in class).

At its most basic, the Max will be the same 737 stalwart the public has come to know. It’s a single-aisle jet that will ferry up to 215 passengers, but with higher efficiency. Outfitted with new engines, the Max will use 10% to 12% less fuel than its most current peer, the Next-Generation. That holds particular appeal for airlines, with jet fuel making up 25% to 40% of their costs, and whose profitability is threatened as the price of crude oil stays around $100 a barrel.

Even with Max, demand remains so high for the 737 that Boeing in January began delivering current model 737s at the unprecedented production pace of 35 a month. It plans to ramp up to 42 a month at the start of 2014 . Will a  completely new single-aisle plane will arrive eventually? “It’s something that we’ll definitely do at some point,” says Boeing.

Discussion questions:

1. Why has Boeing chosen product enhancement over a new single aisle plane?

2. How have cell phones been enhanced over the past 2 decades?

OM in the News: Red Lobster’s Vertical Integration Into Lobster Farming

In what could be an underwater gold mine, Orlando-based Darden Restaurants plans to create the world’s largest lobster farm in Malaysia, allowing it to sell the crustaceans in Asia and supply them to its chains such as Red Lobster, according to a story in the Orlando Sentinel (April 9, 2012). The lobster farm would partially shield  Darden from rising seafood prices, while creating a new revenue stream. Lobster farming, a field in its infancy because it has been notoriously difficult, could also keep prices lower for consumers but pose tougher competition for fishermen.

Darden plans to  build the 23,000-acre production facility, which will employ 12,000 workers and eventually churn out 40 million pounds of lobsters each year. That’s about $1 billion worth.

Darden says it will take a while to get to that point — at least 2029. It will take several years to start producing food and at least a decade before lobster sales have a big impact on the company’s bottom line. “There’s a growing world demand for lobster products of all types,” says Darden’s VP of Purchasing and Supply Chain Innovation. The project, which will take an investment of $650 million, will be Darden’s “crown jewel” of environmentally friendly seafood production.

But as we noted in this blog just a few days ago (with regard to Delta Air Lines’ plans to buy a jet fuel refinery), vertical integration (Ch.11) moves most companies outside their core competencies. And lobster farming is a tough business for any company to master. Lobsters take a long time to mature and consume a lot of food. They also cannot make the trip all the way from Malaysia to the US alive.

Discussion questions:

1. Why is Darden venturing outside its expertise in restaurants (its chains also include Longhorn Steak, Olive Garden, and Bahama Breeze)?

2. What other restaurant or fast-food chains have successfully vertically integrated? How and why?

OM in the News: Mercedes Heads East To Hungary

Businessweek (April 7-14,2012) reports that Mercedes has began production at its new $1.07 billion factory, located in Kecskemét, Hungary to make its B-Class compact. By heading so far east, CEO Dieter Zetsche is betting that Hungary’s rock-bottom wages will allow the automaker to wring more profit from its small-car, luxury lineup. “This could be the final big plant by a European carmaker in the region,” says one auto analyst. “ The growth and expansion have shifted to Asia and Latin America.”

Hungarian workers are paid a fifth of the about $61 per hour German workers cost, so Mercedes will use the factory to profitably meet its goal of boosting sales 27 percent, to 1.6 million vehicles by 2015. The Kecskemét plant is the first new Mercedes factory since the brand began producing cars in Alabama in 1997. Manufacturing costs at the plant are 30 percent lower than in Germany.  Lower production costs, including increased parts-sharing among models, are part of Mercedes’ plans to save €6 billion by 2017 to offset rising raw material costs and increased spending to lower carbon-dioxide emissions of its vehicles. With about 40 working hours spent to assemble the Mercedes compacts, the savings are about $2,000 per car.  Daimler aims to reduce the average hours spent assembling a vehicle in Hungary to 30.

In Europe, auto sales are poised to decline for a fifth consecutive year in 2012. The region’s automakers will likely use about 65 percent of production capacity this year, down from 71 percent last year. The unused assembly lines could manufacture an additional 10 million vehicles. Given the capacity overhang, it will take plant closures and job cuts to make auto production in Europe profitable again, says Sergio Marchionne, CEO of Fiat Chrysler, who last year closed a Fiat plant in Sicily. In February, Mitsubishi also said it will stop making cars at its factory in the Netherlands.

Discussion questions

1. Why is Mercedes “heading east” to Hungary and “west” to the US?

2. Is capacity an issue with the firm? Other automakers in Europe?

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Good OM Reading: That Used To Be Us

I just finished reading Thomas Friedman’s latest book, That Used To Be Us, his follow up to The World is Flat. In it, Friedman and coauthor  Mandelbaum, analyze 4 challenges the US faces—globalization, the revolution in information technology,  chronic deficits, and  excessive energy consumption—and spell out what we need to do now to sustain the American dream and preserve our power in the world. Here are just a few excerpts to give you a flavor of a book you can read in a few evenings.

1. It’s no longer good enough to have one of the best schools in the US; the country’s educational system must be world class to compete with countries like Singapore, where the biggest complaint from parents is that students are not being challenged enough.

2. In the labor market, we must operate as though “no job is safe.” Not just low-skill jobs are being shipped overseas but highly skilled technical work as well. “There is no job that is America’s God-given right [to keep] anymore,” says former H-P CEO Carly Fiorina.

3. The authors quote the governor of Pennsylvania, Edward Rendell, complaining that the NFL postponed a game because of a snowstorm. “It goes against everything that football is all about. We’ve become a nation of wusses.  If this was in China, people would have been marching down to the stadium,  and they would have been doing calculus on the way down.”

4. American workers  should think of themselves like new immigrants: “approaching the world with the view that nothing is owed to you, nothing is given, you have to make it on your own.”

5.  “Thirty years ago, 10 percent of California’s general revenue fund went to higher education and 3 percent to prisons. Today nearly 11 percent goes to prisons and 8 percent to higher education.”

6. “Seventy-five percent of young Americans, between the ages of 17 to 24, are unable to enlist in the military today because they have failed to graduate from high school, have a criminal record or are physically unfit.”

And these are just a few of the problems! For the solutions, read the last chapter of this interesting book.

OM in the News: Delta Wants to Pump Its Own Fuel

When we discuss vertical integration in Chapter 11 and core competencies in Supplement 11, we never considered an airline buying an oil refinery to slash its fuel bills. But as The Wall Street Journal (April 6, 2012) reports, that is exactly what Delta Air Lines is trying to do. Delta’s unconventional proposal to acquire a Pennsylvania refinery is a bet that world’s second-largest airline can save $20-$25 a barrel on jet fuel, a big advantage as industry costs now approach $140 a barrel, up 11% so far this year.

Delta’s plan is being dismissed by aviation and energy industry experts, who said owning a refinery is a risky and potentially costly undertaking for an airline. “We are a little uncomfortable about the company going outside its core expertise,” says an analyst who follows Delta. “I can’t recall any other airline buying a refinery.”

The estimated $100 million to $150 million price tag for the refinery is about the cost of a new, wide-bodied aircraft. Delta’s plan would involve using an energy company partner that would handle day-to-day operation of the midsize refinery.  Its deliberations are the boldest step yet in an airline industry struggling to mitigate rising fuel prices that are expected to continue long term. Delta, which paid more than $11 billion for fuel last year–about 36% of its operating cost– has ongoing cost-saving efforts and is investing heavily in more fuel-efficient planes.

Other carriers, of course, also work hard to control their largest cost. Air Canada scours the globe for vessel shipments of jet fuel that it brings to its home airports in an elaborate supply chain of fuel-storage depots, pipelines and docks, leased rail cars, barges, and trucks. Fuel costs are up about 25% over last year.

Discussion questions:

1. What is Delta’s core competency and what are the chances this approach will be successful?

2. What are some other examples of vertical integration in major businesses?

OM in the News: Amazon Warehouse Jobs Push Workers To The Limit

The physical demands at the Amazon warehouse in Campbellsville, Ky. take a toll on employees, reports the Seattle Times (April 4, 2012). “Just as Amazon tracks and analyzes the habits of online shoppers, the company has created a hyper-efficient warehouse culture where worker performance is continually monitored and measured in pursuit of slashing costs and shipping times.” Three former workers at Amazon’s warehouse in Campbellsville told the Times there was pressure to manage injuries so they would not have to be reported to OSHA, such as attributing workplace injuries to pre-existing conditions or treating wounds in a way that did not trigger federal reports.

A former Amazon safety official in Campbellsville wanted to discuss reducing the work pace when temperatures pushed over 100 degrees, but says he never dared broach the subject with management. “I knew that was off the table — not an option,” he said.  Instead, he outfitted roving managers with backpacks full of Gatorade, which they served to workers so the workers wouldn’t have to leave their posts.”  Managers said the company created a work environment where employees who complained about such conditions risked retaliation and firing.

More than 15,000 full-time employees, earning stock and health benefits, work at Amazon’s fulfillment centers (warehouses) in the US. The firm is expanding at breakneck speed to staff its global network of 70 centers–17 opened just last year. And as we noted a few days ago in this blog, Amazon just bought Kiva Systems, a warehouse robot company which Amazon believes will increase employee productivity dramatically.

At Campbellsville, Amazon was viewed as an economic savior when it opened in 1999 with 700 jobs. The town’s biggest employer, Fruit of the Loom, had just shut its factory and unemployment topped 22%. Jobs at $14/hour are high in the region.

Discussion questions:

1. How do these conditions compare to companies in Asia?

2. What is Amazon’s position regarding unions?

OM in the News: Apple Audits its Suppliers in China

Apple effectively just wrapped its own knuckles publicly, with the publication of an audit of the working conditions at Foxconn, its biggest Chinese supplier. Apple CEO Tim Cook, showing serious leadership, completed the factory tours and committed his company to improvements and further monitoring of its Asian supply chain–particularly regarding

Tim Cook at Foxconn

overtime. Does this mean that the days are gone when Foxconnn would rouse 8,000 workers from their sleep in company dorms to put them on the iPhone assembly line at midnight?

The Wall Street Journal (March 30,2012) reports widespread breaches of work rules at Foxconn, including 60 hour work weeks and other health and safety violations. (The Journal piece includes a 4 minute video on Cook’s visit and an analysis of the impact of the audit on Apple’s reputation and sales.)  The audit of 35,000 workers building iPads, iPhones, and iPods at 3 Foxconn factories, found the majority of workers exceeding China’s legal maximum of 36 overtime hours a month–with the average working 80 hours.  The probe is one of the most detailed investigations of a Chinese manufacturer and the 1st major outside audit of Apple’s supply chain. Foxconn would have to hire tens of thousands of extra workers to comply.

The investigation, conducted  by the Fair Labor Association (FLA),  also found an array of  issues such as inadequate risk analysis and missing protective systems. More than 43% of the workers had experienced or witnessed an accident and “felt generally insecure,” said the FLA.

Foxconnn is already among the best of suppliers in China in terms of working conditions. Conditions at many of the others are incredibly grim. By putting pressure on the top end, Apple is likely doing all Chinese workers a favor.

Discussion questions:

1. Why did Tim Cook visit his Chinese suppliers?

2. How long will it take to implement major changes in working conditions in this supply chain?