November 2014 – The OM Blog by Heizer, Render, & Munson

OM in the News: Sustainability and the Ford F-150 Truck

“Bucolic upstate New York is an odd place to be building the future of the U.S. auto industry,” writes Forbes (Nov. 24, 2014). Yet here, in a factory that makes aluminum cans for the beverage industry, workers are gearing up for a crucial role in the launch of the next generation of America’s bestselling vehicle.The Novelis plant is the birthplace for Ford’s innovative new F-150 pickup, 700 pounds lighter–and thus more fuel-efficient to meet government requirements–because its steel body panels have been replaced by lightweight aluminum. The stakes could not be higher. The F-150 pickup is Ford’s crown jewel, generating $20 billion in revenue annually and 40% of its annual profits.

Novelis, the world’s largest aluminum recycler, showed Ford how it could afford the switch to higher-priced aluminum (adding about $750 per truck) by using recycled scrap instead of buying virgin aluminum mined from bauxite. Together they created an innovative supply chain that allows Ford to recover a big chunk of its aluminum costs by selling the scrap back to its suppliers and reusing it. The rest of the industry is watching closely. Tough new fuel-economy laws require automakers to double their fleetwide average to 54.5 mpg by 2025.

Here’s how it works: When a vehicle body panel is stamped, about 40% of the metal winds up as scrap. Instead of gathering up all the various metal scraps from its stamping plants, Ford installed pneumatic scrap-handling equipment that will separate the aluminum alloy on conveyors and deposit the scraps in dedicated containers. Novelis contracted a fleet of 150 trailers to ship the scrap back to its plant for reprocessing. The scrap is then melted in a 2,000-degree furnace. Once the molten metal is ready, it is cast into massive 30,000-pound ingots for subsequent processing. It’s then ready to be rolled into sheets 1/16 of an inch thick and shipped in giant coils back to Ford’s stamping plants, where the process begins anew.

Novelis’ goal is to have 70% recycled content in its automotive sheet by 2020, up from 10% five years ago.

Classroom discussion questions:

1. Why is the switch to aluminum a big risk for Ford’s F-150?

2. What are the advantages of this process?

OM in the News: A Crack in Apple’s Supply Chain

Shortly before 7 a.m. on Oct. 6, the CEO of GT Advanced Technologies called Apple with bad news: GT, which was to supply Apple with superhard sapphire screens for its new iPhones, had just filed for bankruptcy. The filing surprised Apple. Only one year earlier, Apple and GT had hailed a $1 billion plan to build an Arizona factory that would produce 30 times as much sapphire as any other plant in the world. Instead, the alliance turned into a rare—and public—misstep for Apple, whose strict management of its global supply chain has helped it become one of the world’s biggest companies. “From the making of the first iPhone in 2007, Apple repeatedly has pushed its suppliers to achieve the improbable, while driving hard bargains on price and time to market,” writes The Wall Street Journal (Nov. 20, 2014).

GT’s meltdown underscores the promise and peril for Apple suppliers. An Apple deal can generate billions in revenue. But it also means adapting to huge fluctuations in demand, at razor-thin profit margins and little room for error. “This is not easy money,” said one longtime Apple supplier in Asia. GT’s COO told the bankruptcy court that Apple had turned his company into a captive supplier, “bearing all of the risk and all of the cost. GT couldn’t make a profit at Apple’s dictated pricing.”

Apple turned to GT while seeking to solve a big problem with iPhones: scratched or broken screens. Sapphire is one of the hardest materials on earth, now typically produced synthetically, in furnaces that reach more than 3,600 degrees. It also is expensive—more than 5 times the cost of glass. Apple consumes 1/4 of the world’s supply of sapphire to cover the iPhone’s camera lens and fingerprint reader. Early last year, the company began looking for a much larger supply, to cover the iPhone’s screen. Producing sapphire proved to be the biggest problem. It takes 30 days and costs $20,000 to make a single ingot. Apple claimed more than half the GT ingots were unusable.

Classroom discussion questions:

1. Why did the venture between Apple and GT fail?

2. What issues face companies that supply one major customer?

Teaching Tip: Taking an Inventory of Your OM Teaching Practices

Here’s a great resource I discovered in Faculty Focus (Nov. 19, 2014): the Teaching Practices Inventory. It’s an inventory that lists and scores the extent to which research-based teaching practices are being used. The inventory takes about 10 minutes to complete and is designed for use by individual faculty. It is a self-report inventory, with the power to promote a comprehensive review of and reflection on your personal teaching practices. Inventory items are organized into 8 categories: 1) course information provided to students; 2) supporting materials provided to students; 3) in-class features and activities; 4) assignments; 5) feedback and testing; 6) other (such as pre-post testing); 7) training and guidance of TAs; and 8) collaboration or sharing in teaching.

Of course, the insights provided by the inventory are a function of the truthfulness with which it’s completed, but if you’re using it on your own, there is no reason to be less than candid. The inventory comes with a scoring rubric that gives points for practices to improve student learning. It would be best to first take the inventory (a clean copy is available here), score it using the rubric in Appendix 1 of the original research article , and then read the article, which explains and justifies the point values. The article also contains the scoring results from 179 inventories, which offer something against which individual scores can be benchmarked. Although the practices are listed individually on the inventory, many are related and mutually reinforcing. If some of the practices are not being used, they can be implemented incrementally.

How strongly can I suggest that you take this inventory? At the very least, spend time looking at it. The data it provides is such a contrast to the judgmental, summary feedback provided by end-of-course student ratings. The inventory is predictive only in the sense that it identifies practices that research has shown help students learn—and who among us wouldn’t want to use those kinds of practices?

OM in the News: Amazon’s Robots Get Ready for the Holidays

These orange robots are the fruits of Amazon's 2012 purchase of Kiva Systems for $775 million — These orange robots are the fruits of Amazon’s 2012 purchase of Kiva Systems for $775 million

“Amazon‘s robot army is finally falling into place,” writes The Wall Street Journal (Nov. 20, 2014). The Seattle online retailer has outfitted several U.S. warehouses with squat, orange, wheeled Kiva robots that move stocked shelves to workers, instead of having employees seek items amid long aisles of merchandise. At a 1.2-million-square-foot warehouse in Tracy, Calif., Amazon just replaced 4 floors of fixed shelving with the robots. Now, “pickers” at the facility stand in one place and wait for robots to bring 4-foot-by-6-foot shelving units to them, sparing them what amounted to as much as 20 miles a day of walking through the warehouse. Employees at robot-equipped warehouses are expected to pick and scan at least 300 items an hour, compared with 100 under the old system.

In May, Amazon said it planned to deploy 10,000 Kiva robots by year-end, up from 1,400 at the time. At the heart of the robot rollout is Amazon’s relentless drive to compete with the immediacy of shopping at brick-and-mortar retailers by improving the efficiency of its logistics. If Amazon can shrink the time it takes to sort and pack goods at its 80 U.S. warehouses, it can guarantee same-day or overnight delivery for more products to more customers. The robots could also help Amazon save $400 million to $900 million a year in fulfillment costs by reducing the number of times a product is “touched.” The robots may pare 20% to 40% from the average $3.50-to-$3.75 cost of sorting, picking and boxing an order.

This is our 4th blog about the Kiva robots at Amazon over the past few years. To read earlier posts and view a short video, just type Kiva into the search engine box on the right.

Classroom discussion questions:

1. Why did Amazon buy Kiva Systems?

2. What are the advantages and disadvantages of using robots in the fulfillment process.

OM in the News: Airbus Invents the “Flying Doughnut”

The Airbus design would revolutionize air travel

“Airbus’s design for a future aircraft looks less like a conventional airliner and more like something from a 1950s sci-fi comic,” writes The Financial Times (Nov. 17, 2014). If a patent application filed by the European aerospace and defense group takes off, future passengers could fasten their seat belts in cabins shaped like giant doughnuts – or flying saucers.The UFO-like shape addresses a problem facing aircraft designers. Cylindrical shapes are good at containing the stresses of pressurized cabins, but huge pressures on the cylinder’s front and rear ends need to be managed with strong, heavy structures.

Other futuristic ideas that the company have patented include the idea of an economy class seat for standing passengers shaped like a bicycle saddle; immersive virtual reality helmets for delivering in-flight entertainment; and, most alarmingly of all, a windowless cockpit.

The “flying doughnut”, however, is the company’s most radical reinvention of aircraft structure. The “simple and efficient” solution would involve passengers not only receiving their in-flight meals from trolleys negotiating curved aisles, but also learning an entirely new way of boarding. Diagrams in the patent application show passengers entering the aircraft through steps leading up to doors arranged around the hole in the doughnut’s middle.

The design fits with the concepts some aerospace companies have been considering as they pursue the next step in fuel efficiency. One exec at GE Aviation said designs such as Airbus’s could be aerodynamically more efficient than traditional designs. “It is an approach that reduces the overall fuel burn for the aircraft.”

Classroom discussion questions:

1. Why is this an important OM issue?

2. What are the advantages and disadvantages of the doughnut concept?

OM in the News: Iowa–Home of Corn and Facebook

Facebook's servers require only 75 employees in this massive facility — Facebook’s servers require only 75 employees in this massive facility

Among the big draws in Altoona, Iowa, population 15,000, are Adventureland, a Bass Pro Shop, and the Prairie Meadows casino. “And now,” says The Wall Street Journal (Nov. 15-16, 2014), “it has Facebook’s new data center.” The social network just opened the $300 million facility, a move that highlights the intense competition and lavish tax breaks available from small communities looking for technology bragging rights. Nearly 3 times the size of the city’s sole Wal-Mart, Facebook’s warehouselike structure is packed with refrigerator-sized stacks of computer servers and thick coils of cables. The Altoona facility was built on millions of dollars of tax breaks and about 18 months of negotiation.

Facebook isn’t Iowa’s first high-tech catch. Microsoft is spending $2 billion on a data center nearby in Des Moines. Google is expanding a facility in Council Bluffs.

States and cities long have vied against each other to lure factories, sports teams and corporate headquarters. Iowa, the county’s largest producer of corn and soybeans, is among more U.S. states rolling out a green carpet for those farming bits and bytes. Officials say data centers broaden their tax base, create well-paying technical and construction jobs and confer bragging rights that will lure companies with bigger hiring plans. They also contribute to the local economy without stressing infrastructure such as roads and sewage plants.

But it remains an open question whether the cost of these facilities in tax breaks and services works out in their favor. Altoona provided Facebook a 20-year exemption on paying property taxes, and Iowa agreed to $18 million in sales-tax refunds or investment-tax credits through 2023. Facebook pledged to spend at least $300 million on the project and create jobs paying $23.12 an hour. “For the tax breaks they often receive, the centers produce few jobs or spinoff benefits,” said an Iowa State U. prof. Tech companies aren’t looking for incentives alone. Availability and pricing of electricity, which can exceed 2/3 of the cost to run a data center, are among the most important factors.

Classroom discussion questions:

1. Are these unusual incentives?

2. What are the risks to each side–Altoona and Facebook?

OM in the News: Walmart’s Inventory Dilemma

At this N.Y. Walmart, the produce section is poorly stocked

The dairy section in the Walmart supercenter near Queens, N.Y., was sparsely stocked. Some gallon jugs of milk were dented, others soiled with what looked like dirt. The meat aisle had run out of ground beef patties and strip steak, and residue streaked some shelves. But the disarray and out-of-stock items at this store appear to be examples of wider inventory problems that Walmart is facing. Last month, the retailer issued a confidential “urgent agenda” memo to its 4,965 U.S. store managers pushing them to improve performance in their grocery departments to maximize the chance that items will sell before their expiration dates. The memo also urges managers to reduce backup inventory to trim costs, but warns them not to exceed weekly employee budgets for their stores.

The inventory problems often stem from Walmart’s failure to have enough employees in its stores to do the many chores needed, like marking down aging items, rotating milk or getting needed goods from the back room to stock shelves. “The fact that they don’t do some of these things every day, every shift, shows what a complete breakdown Walmart has in staffing and training,” says one industry expert (The New York Times, Nov.12, 2014). And a new investment report writes: “If its employees’ growth had kept up with square footage growth in the U.S. over a number of years, Walmart would have 200,000 more employees than its current 1.3 million.”

A visit to the back of the N.Y. store, as well as various YouTube videos shot by employees, point to great clutter and thousands of cases waiting to be put on shelves. A customer service manager at a Louisiana Walmart said, “Understaffing from the sales floor to the front end has greatly affected the store.” She said substantial staffing cuts began in 2010, and added that there used to be 5 customer service managers per shift, while now is there just one. “That,” she said, “sometimes causes long lines and customers having to wait 30 minutes.”

Classroom discussion questions:

1. Why has inventory control been a major OM issue for Walmart?

2. Is this really an inventory problem?

OM in the News: India vs. China As the Next Manufacturing Power

With its chronic blackouts, crumbling roads, and other infrastructure woes, India should have no appeal for Abbott Laboratories’ VP John Ginascol, who is responsible for ensuring that the company’s food-products factories run smoothly worldwide. He can’t afford surprises when it comes to electricity, water, and other essentials. “People like me,” he says, “dream of having existing, good, reliable infrastructure.” Yet Abbott has just opened its first plant in India (producing Similac baby formula), and Ginascol has no complaints. The officials “were able to deliver very good, very reliable power, water, natural gas, and roads,” he says. “Fundamentally, the infrastructure was in place.” In an attempt to build its industrial base nationwide, India is pushing the Make in India campaign, easing restrictions on foreign investment in property projects and overhauling the railroad system., reports BusinessWeek (Nov. 6, 2014).

China became an export powerhouse because of its vast pool of low-wage workers, but it’s no longer so cheap to manufacture there. Pinched by double-digit increases in China’s minimum wages, many companies are looking for low-cost alternatives. Southeast Asian countries such as Vietnam and Indonesia are attractive, but they lack the deep supply of workers available in India. The hourly labor cost in India for manufacturing averages 92¢, compared with $3.52 in China. But, says U. of Maryland Prof. Anil Gupta, India hasn’t come close to matching China’s investments in the roads, ports, and power networks that companies want. “Lousy infrastructure essentially eats up any advantage the country may have on the labor front.”

Micromax, for example, is the top local smartphone brand in India. The company takes advantage of its Indian roots to win customers, but when it comes to putting its phones together, it looks to factories in China. To produce locally, a company such as Micromax would need to have lots of its suppliers nearby; that exists in China, not in India. “You need to have cameras, screens, touch panels, chip sets. You need all that to be around you,” says its Chairman. “If you are able to build that ecosystem, then the Make in India story comes true.”

Classroom discussion questions:

1. What factors have kept India behind China in manufacturing thus far?

2. What are the advantages and disadvantages of locating in India vs. Vietnam or Indonesia?

OM in the News: Coach Gets More Crowded

“Skinny is all the rage on the runway right now,” writes The Wall Street Journal (Oct. 29, 2014). Delta, United, American, Southwest and other airlines around the world have installed seats with trim metal frames and ultrathin cushions, squeezing rows closer together to pack more people on each flight. Three-quarters of Delta’s domestic fleet and 1/4 of United’s now have the new slim-line seating. The lightweight seats—and even some new, skinnier bathrooms—improve airlines’ bottom line, with less fuel burned per passenger and more tickets sold per flight. (The new seats weigh just 24 pounds per passenger, or 30% less than traditional models). But passengers can feel the pinch: Some complain about stiff padding and knee-knocking issues, and liken flying in the new seat to squeezing next to strangers on a crowded park bench.

Each row of coach seats used to have 32 or 33 inches of space front to back for a seated passenger between seat backs—a measurement called seat pitch. But now many big airlines are down to 31 inches of seat pitch. United goes as tight as 30 inches on some of its Boeing 737s. And it’s going to get worse. Boeing just announced the launch of new, denser seating on 737s called 737 MAX 200, aimed at low-cost airlines. The new MAX 200 version will be fitted with 200 seats. The current version of the same plane typically has 160 seats. Seat pitch on the new version will be as tight as 28 inches.

A survey by TripAdvisor of travelers who had tried the new seats found 83% said they were less comfortable than traditional seats. United, Delta and others say other coach improvements such as video on-demand and Wi-Fi help compensate for tighter seating. “Seats need to be comfortable. But other aspects are important, too, including entertainment, appearance and service,” says Delta.

Classroom discussion questions:

1. From an OM perspective, what are the advantages and disadvantages of the new seats?

2. Why are passengers concerned about the thinner seats?

OM in the News: Levi Strauss’s Push for More Ethical Factories

In an attempt to bolster its ethical credentials and meet the demands of increasingly fussy millennial consumers, Levi Strauss is offering a new financial incentive to suppliers as far away as Bangladesh and China to meet environmental, labor and safety standards. The jeans maker is providing lower-cost working capital to those of its 550 suppliers who do best on those measures. The project sprang out of the 2013 Rana Plaza factory collapse in Bangladesh, which left more than 1,100 dead and prompted new scrutiny of international fashion brands’ supply chains.

“The move reflects two important trends in globalization,” writes The Financial Times (Nov. 4, 2014). As consumers fret about the conditions under which their clothes are made, fashion brands are facing greater pressure to ensure their suppliers in places like Bangladesh, Cambodia and Vietnam abide by higher standards. In some cases that issue, together with rising wages and costs in China and other production centers, is leading to brands “reshoring” production closer to home. But the combination of those pressures and the way global supply chains are becoming ever more intricate is also leading multinational companies to build tighter bonds with suppliers and to use new tools to manage them.

Levi Strauss’s VP of sustainability said the company now relies on “fewer, more capable” vendors and that its relationships go back an average of 10 years with top contractors. The firm claims to require its suppliers to abide by some of the strictest labor standards in the garment industry and employs full-time inspectors to visit factories around the world. It also is rare among fashion brands in publishing a full list of the factories and suppliers it uses around the world. It has, however, had dark chapters in its past. In the early 1990s Levi Strauss was accused of using Chinese prison labor to make clothes. It withdrew production from China on human rights grounds for five years, becoming an example of the potential pitfalls of doing business in China.

Classroom discussion questions:

1. Why is Levi Strauss making this move?

2. What are the advantages of having fewer vendors?

Teaching Tip: Using Guest Lecturers in Your OM Class

When I was teaching at Rollins College, one of my favorite classroom experiences was bringing in guest lecturers. Philip Crosby, the famous quality guy, lived in Winter Park and showed up every semester for 15 years. Alan Nagle, former CEO of Tupperware, was a regular, as were a number of VPs from Darden, Frito Lay, and Wheeled Coach. Now that I am semi-retired, I give 3-4 guest lectures per semester in other profs’ classes, at schools all over Florida and as far away as Mexico. It is really fun, and I remember the key points in having successful guest speakers: (1) Keep it interesting; (2) Keep it short; (3) Keep it interactive; and (4) Feed them! I will never forget the visits from Tom Rao, at Frito-Lay, who always brought a case of chips to each class. Students would just munch away, totally mesmerized with the free snacks.

So as you face the perpetual challenge of keeping each class session fresh and interactive, I suggest you consider this old idea. Guest lecturers have benefits for your learners and for you. Seeing a new face in front of the room can liven up the class; but there are also deeper pedagogical reasons for using guest lecturers, notes Faculty Focus (Nov.3, 2014). Here are a few to consider. None of us is an expert on everything, so bringing in speakers with proven expertise in a topic provides added credibility to our content. Research has shown that in a course with profound practical applications, such as OM, voices from the field carry as much credibility as we profs provide. Having a guest lecturer also opens your lesson design to new options. For example, you and your guest can work together to field questions or even debate issues. Let students apply their critical thinking to compare points of view.

Guest lecturers, of course, should be treated very well, especially if you want their help in future courses. Provide as much lead-time as possible so they can prepare and so you can share their materials with your students. Be very clear with guests about the content you want covered, the time (no more than 45 minutes!) and technology available, and the class size and composition. Letters of thanks are always a good idea (with a copy to your Dean or Department Chair).

Good OM Reading: Can Parking Behavior Predict Productivity Gains?

One of the well-known experimental studies of people’s behavior is the “Stanford marshmallow experiment” in 1970 in which children were put in an room and given the following instructions: they are given one marshmallow and can eat it immediately; however, if they wait for 15 minutes without eating it, they will receive another marshmallow. The most interesting finding is that more than 10 years later, the children who resisted the temptation to eat immediately and earned the second marshmallow “were significantly more competent” and achieved higher SAT scores. In general, people who exhibit the ability to delay gratification tend to do better in career and life.

And every once in a while, we come across an academic journal article that is equally fascinating. The concept is that at the macrolevel, a metric that measures the overall effort of delaying gratification across economies would better gauge or explain economic growth differences across countries. Prof. Shaomin Li, at Old Dominion U., proposes a novel metric in his fascinating article in The International Journal of Emerging Markets (No. 4, 2014): the way that people park their cars.

Back-in parking takes more time and effort than head-in parking. Yet, it is easier, quicker, and safer when exiting. Thus Li conjectures that people who take the trouble to back in demonstrate the ability to delay gratification; they want to invest more time and effort now so that they can enjoy the fruits of their labor later. They demonstrate a culture of long-term orientation. Such behavior, says Li, should be positively associated with taking time to study, saving more money and working harder in order to enjoy life later, a trait that contributes to national productivity gains and economic growth. The table summarizes the analysis.

OM in the News: Burger King–A Tale of Two Countries

Anthony Moore, at Tampa Burger King, calls his wage "very inadequate" — Anthony Moore, at Tampa Burger King, calls his wage “very inadequate”

Hampus Elofsson, ending his 40-hour workweek at Burger King, had paid his rent and all his bills, stashed away some savings, yet still had money for nights out. That is because he earns $20/hour — the base wage for fast-food workers throughout Denmark and 2.5 times what many fast-food workers earn in the U.S. “You can make a decent living here working in fast food,” he says. “You don’t have to struggle.”

In Denmark, fast-food workers are guaranteed benefits their American counterparts could only dream of, writes The New York Times (Oct.28, 2014). There are 5 weeks’ paid vacation, paid maternity and paternity leave and a pension plan. Workers must be paid overtime for working after 6 p.m. and on Sundays, and they often get their work schedules a month in advance.

In contrast, fast-food wages in the U.S. are so low that half of the nation’s fast-food workers rely on some form of public assistance: they earn an average of $8.90 an hour. As a shift manager at a Burger King near Tampa, Anthony Moore earns $9 an hour, typically working 35 hours a week and taking home around $300 weekly. Not surprisingly, turnover rates differ significantly: Danish estimates are that 70% of Burger King and Starbucks workers stay for more than a year. By contrast, McDonald’s found its workers’ average tenure in the U.S. was 8 months.

So if Danish chains can pay $20 an hour, why can’t those in the U.S. pay the $15 an hour that many activists and fast-food workers have been clamoring for? Economists say the comparison is “apples to autos” because of fundamental differences between Denmark and the U.S., including Denmark’s high living costs and taxes and a generous social safety net. The Danish fast-food restaurants are also less profitable than their American counterparts. The higher wages and the higher menu prices help explain why there are 16 McDonald’s per million inhabitants in Denmark, but 45 McDonald’s per million in the U.S.

Classroom discussion questions:

1. Why does the U.S. restaurant industry predict “a wave of woe if pay were to jump toward Denmark’s levels?”

2. What are the advantages and disadvantages of each system?