Month: September 2017

OM in the News: Is Amazon a Clone of Sears?

A pneumatic-tube station in the Sears mail-order plant in Chicago

A century ago, a retail giant that shipped millions of products by mail moved swiftly into the brick-and-mortar business, changing it forever. Is that happening again? “The history of Sears predicts nearly everything Amazon is doing,” writes The Atlantic (Sept. 25, 2107). 

In the last 2 years, Amazon has opened 11 physical bookstores. It just bought Whole Foods and its 400 grocery locations, and announced a partnership with Kohl’s to allow returns at the physical retailer’s stores. The company’s corporate strategy adheres to a familiar playbook—that of Sears. Sears might seem like a zombie today, but it’s easy to forget how transformative the company was 100 years ago. To understand Amazon’s evolution, strategy, and future, can we look to Sears?

Mail was an internet before the internet. After the Civil War, the telegraph, rail, and parcel delivery made it possible to shop at home and have items delivered to your door. Americans browsed catalogues for jewelry, food, and books. Merchants sent the parcels by rail. Then Sears made the successful transition to a brick-and-mortar giant. Like Amazon among its online rivals, Sears was not the country’s first mail-order retailer, but it became the largest. Like Amazon, it started with a single product category—watches, rather than books. Like Amazon, the company grew to include a range of products, including guns, gramophones, cars, and groceries.

By building a large base of fiercely loyal consumers, Sears was able to buy more cheaply from manufacturers. It managed its deluge of orders with massive warehouses. But the company’s brick-and-mortar transformation was astonishing. At the start of 1925, there were no Sears stores. By 1929, there were 300. Like Amazon today, the company used its position to enter adjacent businesses. To supplement its huge auto-parts business, Sears started selling car insurance under the Allstate brand. Perhaps the shift from selling products to services is analogous to the creation of Amazon Web Services—or Amazon’s TV shows. The growth of both companies was the result of a focus on operations efficiency, low prices, and an eye on the future of U.S. demographics.

Classroom discussion questions:

  1. What did Sears do right that Amazon can learn from?
  2. What has Sears done wrong that Amazon should avoid?

Guest Post: Teaching OM in the European Classroom

Dr. Steven Harrod is Associate Professor in the Department of Management Engineering at Technical University of Denmark.

Will this be on the exam?” In my decade of teaching OM in the U.S., this was by far the most frequent question from students. The typical American course is assessed on a running sum of credit for attendance, participation, written homework, midterm and progress exams, and a final exam, much like the bill after a stay at a Hilton resort.

Speaking from my experience in Denmark, the European evaluation process and value system is much different. One of the clearest ways I have experienced this is with Heizer/Render/Munson’s popular  MyOMLab system. In the U.S., MyOMLab was well received and many students actively worked homework assignments to accumulate grade points. Here in Denmark, the response was, “Just give us the questions and the answers, and we’ll figure it out ourselves.”

Students are definitely more independent here than in the U.S. Written exams, numerical or multiple choice, are limited to courses with more than 40 students. Since all of my courses are smaller, I have exclusively held oral exams. An oral exam typically offers the student the opportunity to set the topic of the exam. Very often the examiners are external, not participants in the course delivery, and brought in at exam time. The student has a very real chance to emphasize topics of strength and avoid topics of weakness, and is very much “in the driver’s seat.”

And the examiners often represent potential employers, which makes for a different student to job market relationship than in the U.S. Although students here desire recognition and good grades, there is a relaxed relationship between students and the job market that supports a more exploratory, investigative education. The typical course I teach here is a form of “mass customization.” The lesson plan often contains multiple streams of related concepts.

The learning environment in Europe offers some interesting opportunities for exploration and growth, but it is also dependent on the many structural and cultural elements of Europe.

OM in the News: Product Design at McDonald’s

McDonald’s is dropping the Minute Maid apple-juice box from its Happy Meals and replacing it with a watered-down organic juice with less sugar made by Honest Kids. The change is the latest step in the evolution of the Happy Meal toward healthier options as parents are increasingly turning away from 100% fruit juice in favor of water and other drinks with less sugar.

Amid a backlash against the fast-food industry for contributing to America’s obesity problem, McDonald’s six years ago reduced the size of its french fry servings in Happy Meals by more than half and added sliced apples. Later, the chain stopped promoting soft drinks as an option in children’s meals and instead started including juice, low-fat milk and water on its menu boards and in its advertising.

McDonald’s also has added low-fat yogurt and clementines as side options, and last year removed artificial preservatives, colors and flavors from its chicken nuggets. McDonald’s could, of course, still do more to make Happy Meals more nutritious, perhaps by offering vegetables and rotating in different fruits to expose children to a variety of healthy items. But a company spokeswoman said the company is proud of the changes it has made and that, “We are committed to continuing our food journey for the benefit of our guests” (The Wall Street Journal , Sept. 16-17, 2017).

Product design is an ongoing process at McDonald’s, just as it is at Apple, 3M, Honda, and other industry leaders that we discuss in Chapter 5.

Classroom discussion questions:

  1. Is product design the most important of the ten OM decisions?
  2. What other major product design changes has McDonald’s made in the past two decades?

Guest Post: An Experiential Learning Exercise for Teaching Line Balancing

Our Guest Post today comes from Brent Snider, senior instructor of Operations and Supply Chain Management at the University of Calgary’s Haskayne School of Business, and Nancy Southin, Assistant Professor at Thompson Rivers University.

Are you looking for an engaging way to teach assembly line balancing to your OM class but leery of the various games that consume significant class time and require the purchase of various materials such as Lego? We have developed a 30-minute experiential learning exercise that can help. It requires only a few minutes of photocopying, and can be done before any lecture content on line balancing is covered.

The exercise features a scenario in which a company is considering re-shoring their laptop production to improve their triple bottom line performance. Student groups are provided the required assembly tasks and then challenged to develop a task assignment that is physically feasible (i.e., satisfies precedence requirements), meets or exceeds expected daily demand, and minimizes the number of employees (stations) required. Groups must submit their solutions for review in front of the class.

Students are motivated to try their best by knowing that their design will be publicly peer reviewed, and also by a food prize for the group that develops the best design. Each submission is displayed on-screen and the class asked “how would this perform?” Through assessing the various submissions, students quickly discover potential pitfalls like exceeding cycle time, out of sequence tasks, and excessive employees. The instructor then facilitates a quick summary discussion, formalizing the “rules” for optimally balancing an assembly line.

Student surveys showed 96% of students recommended continued usage of the exercise and 92% believed the competition taught them how to determine a feasible solution for line balancing problems. Students who learned line balancing though this exercise were also found to have at least the equivalent learning as lecture based learners.

If you are looking for a low admin exercise that significantly improves student engagement when teaching line balancing, then this peer reviewed competition approach is for you. E-mail us at brent.snider@haskayne.ucalgary.ca and nsouthin@tru.ca and we will send you the full lesson plan!

 

OM in the News: How to Fix the Emergency Room Using OM Tools

Armed with new strategies borrowed from OM, The Wall Street Journal (Sept. 13, 2017) writes that “hospitals are making a push to fix one of the most irritating issues in health care: the emergency room.” Not only are wait times long, but they’re not improving. The median length of stay for patients treated in the ER and then discharged was 138 minutes in 2015-16, the same as a decade earlier. Crowded ERs and long wait times have bad effects for patient outcomes and satisfaction. I suspect that many of your students have had some ER experiences, and will have their own ideas to complement these found in the article:

Eliminate triage. One of the biggest frustrations people encounter in the ER is registration and triage. After signing in and giving information, patients see a nurse who asks questions to judge how urgently they need care and the amount they’ll need, on a 5-point scale. Then patients wait to see a doctor who may ask them the same things all over again. A patient seldom sees an MD in less than 30 minutes, even if the ER is empty.

Eliminate details that waste time using lean management. Use lean (Ch. 16) to look at all steps in the ER processes and figure out how to improve them, cutting out as much waste as possible. For example, one hospital saw nurses were taking time to escort patients to other areas of the hospital for X-rays, so it put up colored tape that patients could follow to where they needed to go.

Quickly help patients with minor complaints and those who probably just need tests. Give people with small complaints, or who need diagnostic tests their own spot in the ER–and not a bed. Redesign the ER to include an area where patients in need of a medication refill or with mild complaints can be seen right away by a professional dedicated to only such patients. Seeing low-acuity patients quickly means there’s not a huge pileup of people in the waiting area.

Classroom discussion questions:

  1. How could software help?
  2. What other stumbling blocks slow down the ER process (eg, prescheduled surgeries or admissions to the hospital, which are also mentioned in the article)?

 

Guest Post: Break-even Analysis: Excel Makes Algebra Obsolete

Our Guest Post today comes from Howard Weiss, who is Professor of Operations Management at Temple University. Howard has developed both POM for Windows and Excel OM for our text.

When I began to use Excel in my classes, my main objective was to make the computations easier for the students so that we could focus on the models, inputs and outputs. At this point though, I have changed my priorities and I think it is important for us as OM (or Finance or Stat) professors to help the students develop their Excel skills as best as we can in our courses. To that end, I have taken a different approach to teaching Breakeven Analysis.

In the past, I used to develop the Break-even point algebraically just as is done in Heizer/Render/Munson and just about every other OM or business textbook. At the computer lab I would have my students enter into Excel the Fixed cost, Variable cost, Price and then the formula for the break-even point F/(P-V).

Recently, I have instead used Goal Seek, rather than the formula, to have the students find the break-even point. Instead of entering the break-even formula, I have them create a cell for the number of units, a cell for the total revenue and a cell for the total cost based on the number of units. I think expressing the total cost and total revenue in Excel helps the student to better understand these two admittedly simply concepts. I then tell the students that instead of finding the number of units where TC = TR we will create a cell for the difference between the two and use Goal Seek to search for a difference of 0 between TC and TR. The spreadsheet for Example S5 (Supp. 7) in the textbook appears as follows, along with a capture of the Goal Seek window.

I think this approach gives the student a better understanding of both break-even analysis and Goal seek.

OM in the News: Let the Bidding Begin

Amazon’s current HQ in Seattle

If I were teaching class this week, I would start by asking my students how many would like to get a job at Amazon when they graduate. This is because, as The New York Times headline (Sept. 8, 2017) says: “Let the Bidding Begin.” Wanted by Amazon for its second headquarters: A place with a million people, a diverse population, good schools and malleable lawmakers. Room to accommodate up to 50,000 high-paid workers. 

Amazon has laid out in meticulous detail what it is looking for, even acknowledging that new laws may be required to get the high level of incentives necessary to hold the company’s attention. “This is the trophy deal of the decade,” said one industry expert.

Amazon’s detailed wish list for its new project, which it is calling HQ2, also includes on-site access to mass transit, a commute of 45 minutes or less to an international airport and easy access to a major highway. It wants excellent fiber optic internet connections, strong cellular phone service, traffic congestion figures, lists of universities, statistics on the qualifications of local workers, and recreational opportunities.

Political leaders in cities around the U.S wasted no time saying how badly they want Amazon to join them. Amazon has already been a beneficiary of generous public subsidies as part of its expansion of its warehouse network. It has received public subsidies totaling at least $613 million for 40 of the 77 warehouses it built from 2005 to 2014. Additional subsidies for Amazon data centers were about $147 million.

The average incentive package from a state usually adds up to 2-3% of wages, although recently there have been a spate of megadeals, like the $3 billion state tax credits that Wisconsin offered Taiwan’s Foxconn. Such outsize offers could end up being a “winner’s curse,” where the costs outweigh the benefits. Such gifts may not even be what is crucial. In G.E.’s recent HQ move to Boston, tax incentives were far from the most significant selling point.

Classroom discussion questions:
1. Why is this the location “deal of the decade?”

2. What do you think are the most important location factors Amazon should consider?

 

 

OM in the News: Boeing and Airbus Change the “Make or Buy” Formula

A Boeing employee working on a vertical fin assembly for a 787 in Salt Lake City. Boeing will start to manufacture some parts for its planes to tap into the lucrative aircraft components market.

“The world’s largest plane makers are testing a seemingly simple formula to smooth production, cut costs and fatten profits: Make more of the parts that go into their jets themselves,” reports The Wall Street Journal (Sept. 8, 2017). Worried about getting squeezed by parts company consolidations (like United Technologies proposed $23 billion takeover of Rockwell), Boeing and Airbus have moved to protect themselves by building more of their parts in-house. This month, Boeing started construction of a new plant in England that will make the motors that help move a wing’s flaps.  The wings for a revamped version of Boeing’s 777 jetliner also will be built at a new plant near Seattle rather bought from a supplier.

Airbus, meanwhile, is planning to build its own nacelles, the metal casings that house a plane’s engines. “We are constantly revisiting our ‘make or buy’ decisions,” said Airbus’ COO.  “The opportunity ahead of us, in terms of transforming how we design and build, how we manufacture, is even greater than some of the product innovation that we’re going to bring to the table,” added Boeing’s CEO.

Boeing and Airbus are slated to deliver new planes worth more than $100 billion this year. Under pressure to deliver all those planes, they have pressed their suppliers for cost savings and deadline commitments. Parts represent more than half the value of each of those planes and are mostly made by dozens of suppliers such as United Technologies, Spirit AeroSystems, and GE. Profit margins for plane makers have averaged 9% over the past 2 years, compared with 14% for “tier one” suppliers such as United Technologies and Rockwell, which make finished parts directly. Margins come in at 17% for tier 2 suppliers, which provide smaller components for those parts.

Classroom discussion questions:

  1. What are the plusses and minuses of changing from “buy” to “make?”
  2. What other reasons are there for Boeing to make its own parts?

OM in the News: Quality Control and the Boeing 787

American Airlines supervisors check the rudder and inspect the paint on a new 787. The tail has 13 different colors and is tricky to paint, so it gets close inspection

“Imagine you’re buying a $270 million car. You’d want to kick the tires pretty hard. That’s what airlines do with new airplanes,” writes The Wall Street Journal (Aug. 31, 2017). Delivering one widebody airplane is a big deal—each plane has a list price roughly the cost of a high-rise hotel.

Carriers like American Airlines station their own engineers at Boeing factories to watch their flying machines get built and check parts as they arrive. Then they send flight attendants, mechanics and pilots for what are called shakedown inspections.

“The rubber meets the road here,” says an American manager, as he begins checking a brand new Boeing 787. “It’s inspected and it’s inspected and it’s inspected. And yet we still find things.” American is taking delivery of 57 new planes this year.  Boeing does its own testing, but buyers do their own extra inspection–and note an average of 140 items on a plane’s punchlist.

Five flight attendants, a couple of mechanical experts and an American test pilot attack the 285-passenger plane. All the doors and panels are opened for inspection. Flight attendants shake each seat violently, grab the headrest and pull it up and jerk the cord on each entertainment controller. They test power ports, USB ports, audio jacks and the entertainment system. They open all tray tables, turn all lights on and off. They recline each seat with knee-knocking force. They flush all the toilets, blow fake smoke into smoke alarms, make sure all prerecorded emergency messages sound when required.

Inside the cockpit, an American test pilot flies the jet to its limits, making sure alarms sound when he increases air speed or slows the plane down to stall speed. He turns it sharply until “bank angle” warnings sound. Each engine gets shut down and restarted in the air. Every backup and emergency system is put into use to make sure it works.

Classroom discussion questions:

  1. Why do airlines feel the need to make the quality inspections?
  2. What tools that we see in Chapter 6 could Boeing use to improve quality even further?

OM in the News: Humanitarian Efforts of a Houston Supermarket Chain

A flooded H-E-B store. Three of the chain’s 83 stores in Houston will need to be rebuilt; the interior of one store shown.

One of the colleges within the POMS academic society is called Humanitarian Operations and Crisis Management. Hurricane Harvey, which slammed Houston, provides a great example of how OM steps up to the plate in times of a disaster. At a time when retail watchers question the future of brick-and-mortar stores due to Amazon’s continued ascendance,  retailer H-E-B is drawing widespread praise after managing to open 60 of its 83 stores in Houston, hours after the hurricane struck, writes LinkedIn’s Work in Progress (Aug. 2, 2017).

When employees couldn’t get to work, some stores still operated with as few as 5 people: one stationed at the door as crowd control and 4 working the registers, trying to get people out as quickly as possible. The behind-the-scenes operation is a complicated dance involving multiple command centers, a helicopter, private planes, military style vehicles and frequent calls to suppliers, urging them to send toilet paper.

Here are the word’s of H-E-B’s Houston president: “Coming out of a hurricane, if there’s been flooding, they’re going to want mops and bleach. I’ll take all the bread I can possibly get. Then you’re going to start to get produce. We don’t care about flowers in the middle of a hurricane. You only have so many trucks and so much space. We brought over 2,000 partners from Austin, San Antonio, the Rio Grande Valley. They hopped into cars and they just drove to Houston. For 18 hours a day, they’re going to help us restock and then they’ll go sleep on the couch at somebody’s house. We’ve called P&G and said: Send entire trailer loads of toilet paper directly to our stores. Bypass our warehouse, so you can just get it to us. I called Frito-Lay and said manufacture your bestsellers. I need Lay’s, I need Doritos, I need Fritos. I won’t turn down any delivery. We’ll take it as fast as we can.”

Classroom discussion questions:

  1. How was H-E-B able to reopen so quickly?
  2. What OM tools can be used in times of a disaster?

 

OM in the News: The “Amazon Effect” on Logistics

 

A growing number of companies are paying to track in real time everything from truckloads of pork chops to shipping containers full of exercise equipment. Logistics providers, retailers and suppliers are inking deals with software firms that use location data and weather and traffic information to monitor shipments and alert customers to events that could hold up delivery, such as a loaded truck sitting in a yard for more than an hour.

The need for these services is growing as retailers and shoppers demand faster, more-precise delivery. Many Amazon customers have become accustomed to reliable 2-day shipping, forcing other retailers to offer similar service. Businesses are making new demands of their suppliers as they trim inventories and reduce supply-chain costs. Last month, Wal-Mart said it would penalize companies that made deliveries too late or too early. “It’s the Amazon effect—customers are putting more pressure on their supplier to know where their product is,” said a supply chain analyst with Gartner.

Pork producer Smithfield Foods hires more than 230 trucking companies to ship about 1,000 truckloads of product in the U.S. a day. “Managing that is an awful lot of phone calls,” said the firm’s VP of supply chain. Smithfield’s on-time delivery rate improved to 94%, from 87%, after it began tracking truck freight with software.

With this article in The Wall Street Journal (Aug. 30, 2017), we see that some businesses are using delivery speed as a way reach competitive advantage, as illustrated in Figure 2.4 in the text.

Classroom discussion questions:

  1. What are other OM strategies for competitive advantage?
  2. Name some of the leading software providers that help track shipments.

OM in the News: Domino’s and the Driverless Car

“In the race to develop self-driving cars, much of the attention has focused on ferrying people,” writes The New York Times (Aug. 30, 2017). But delivering goods – from groceries to packages to books and more – may offer a considerable opportunity as well. The Domino’s pizza chain this week plans to start testing deliveries using a self-driving Ford Fusion sedan outfitted with enough sensors, electronics and software to find its way to customers in Ann Arbor, home of the U. of Michigan. The possibilities of pizza delivery are not hard to imagine. Americans already take delivery of billions of dollars’ worth of products sold by Amazon and other online retailers. In the future, a retailer like Home Depot could deliver building materials directly to job sites.

The Domino’s experiment offers Ford a chance to showcase its technology. As far as using such cars as a mode of delivery, Ford expects to begin producing a fully autonomous vehicle that will have no steering wheel and no pedals in 2021. Driverless vehicles are not a rare sight in Ann Arbor. The university is operating a vast pilot project to develop connected-car technologies, and self-driving Fords or Lexuses can often be seen navigating downtown streets.

Because there is no delivery person to bring pizzas to the door, customers will have to walk outside to retrieve their order. They will be alerted by text when the car is nearing their home and when it arrives. A red arrow on the car’s rear window tells customers to “start here” and directs them to a touch screen. Keying in the last four digits of the customer’s phone number causes the window to open, revealing an insulated compartment large enough to hold 5 pizzas and 4 side orders. One customer advantage of taking delivery from a self-driving car: If there’s no driver, there’s no tip.

Classroom discussion questions:

  1. What are the implications from an OM perspective of the proposed system?
  2. Do your students view this concept favorably?