Month: June 2019

OM in the News: Can the Incentive Wars End?

State Line Road is the 12 mile north-south street that divides the part of the region between Kansas and Missour

States and local governments spend $45 billion annually on various economic subsidies for businesses. Concerns have mounted in recent years about the wisdom of competing for business using tax incentives. Research has shown that economic incentives make little difference in where a company ultimately chooses to locate. Despite that, localities can end up engaging in bidding wars, pushing up the cost of new jobs.

Now Kansas and Missouri are nearing a truce in an economic border war that has cost hundreds of millions of dollars and created barely any new jobs, writes The Wall Street Journal (June 26, 2019). The neighboring states would agree to cease using one of the most popular tools in the economic-development toolbox: lucrative tax breaks in exchange for a promise of investment and jobs. Politicians regularly tout the number of new jobs created under such programs.

Companies in the Kansas City region have long been able to take advantage of its unique geography, where the Kansas and Missouri border runs right through the metropolitan area. Companies could receive tax incentives for moving from one side of town to another, even if they just moved jobs from one spot to the other and didn’t create net new jobs.

Since 2011, 5,526 jobs have moved from the Kansas side to the Missouri side, with Missouri paying $151 million. In that same period, 6,729 existing jobs moved from the Missouri side to Kansas for a cost of $184 million. In total, $335 million has been spent on such company relocations. Can the Kansas City truce work elsewhere? “There are opportunities for broader regions to work together,” said one local CEO. “But at the end of the day, people want to attract companies and jobs and prosperity for the part of the country they’re responsible for.”

Classroom discussion questions:

  1. Suggestions for solving this thorny problem?
  2. Discuss some of the recent massive location incentive packages.

OM in the News: Apple Wrestles With Conflicts in its Supply Chain

Tim Cook in China recently

Apple is asking suppliers to study shifting final assembly of some products out of China, as trade tensions prompt the company to consider diversifying its supply chain, reports The Wall Street Journal (June 19, 2019). While any major changes would be difficult and could take time to implement, Apple is looking into the feasibility of shifting 1/3 of the production for some devices to S.E. Asia.

Manufacturers of apparel, footwear and other low-margin items have been moving out of China for years due to rising costs, and tariffs have accelerated that trend. Many tech companies, however, find it more difficult to move. Among China’s chief attractions are well-developed chains of suppliers and reliable infrastructure, much of it built in the past 20 years. A plentiful labor force skilled in precision manufacturing as well as trained engineers and pro-business government policies also make China appealing. And for those companies looking to sell into the large Chinese market, producing in the country is more competitive than importing.

Apple remains deeply rooted in China. About 1/5 of its total sales are recorded there, while on the manufacturing side its supply chain accounts for three million jobs. Foxconn, which assembles iPhones, iPads and Macs, is, however, ready to shift some Apple production to plants elsewhere. It has also put more than $213 million into India recently and is looking to invest in Vietnam.

Outsourcing to China helped solidify Apple as one of the world’s largest and most profitable companies. CEO Tim Cook helped build the company’s sophisticated and efficient supply chain there, relying on Foxconn and others to crank out hundreds of millions of iPhones annually.

International moves won’t come easy. Production equipment and assembly lines would need to be dismantled and packed,. They then must be reinstalled, tested and calibrated, and their output rate adjusted. Software and environmental-control systems would need to be put in place, and line operators, engineers and quality managers must be available and trained.

Classroom discussion questions:

  1. Why isn’t more of Apple’s manufacturing coming to the U.S?
  2. What are the advantages and disadvantages of moving production?

OM in the News: Amazon’s Plane Ambitions

Amazon is expanding its domestic air-cargo operation, adding smaller jets to its rented fleet to link its distribution centers and extend the reach of its next-day delivery service. It is aiming to reach the capacity of its free 2-day option, which is available for more than 100 million products. The firm is also experimenting with local collection centers, its own delivery vans, on-demand taxis and even its own employees to speed deliveries to consumers at a lower cost, bringing it into direct competition, in some cases, with companies that also deliver its packages. FedEx recently said that it would end its air-shipping agreement with Amazon to concentrate on rapid delivery for other retailers that are making more sales online.

Amazon is renting another 15 Boeing 737’s converted to carry cargo, in addition to 5 it’s already leasing, alongside a fleet of 40 larger planes it uses to ship packages around the U.S. It expects to have a rented fleet of 70 planes by 2021 as it takes stronger control of its own logistics operations, writes The Wall Street Journal (June 19, 2019). “These new aircraft create additional capacity for Amazon Air, building on the investment in our Prime Free One-Day program,” says Amazon’s VP. Amazon is opening three more air cargo centers this year, in Fort Worth, Texas, Wilmington, Ohio, and Rockford, Ill. A new hub at Cincinnati’s airport that can handle 100 planes is due to open in 2021.

Amazon continues outsourcing its flying rather than start an in-house carrier. The domestic industry is highly regulated and has a history of turbulent labor relations, creating high barriers to entry.

Classroom discussion questions:

  1. How is Amazon taking more control of its logistics operations?
  2. What are the strengths and weaknesses of this approach?

OM in the News: The 737 MAX’s Supply Chain Disruption

Fuselages under construction at Spirit.

The grounding of Boeing’s 737 MAX is pushing some aerospace supply chains into a slow descent. Some suppliers are reconsidering decisions to keep making parts for the plane at full steam, The Wall Street Journal (June 14, 2019) writes, as inventories swell and a timeline for recertifying the plane remains hazy.

The new look at production highlights the tough economics of shifting gears in big supply chains for high-cost manufacturing operations. The grounding of the 737 MAX is stretching into its fourth month. Suppliers have largely kept pumping out parts, betting the grounding would be relatively short-lived. Some even saw it as a chance to catch their breath after years of blistering deadlines. Stopping and restarting production can be more costly and disruptive than keeping assembly lines humming, even at the expense of building inventories, but the calculation is changing as Boeing’s jet remains in limbo.

German seat maker Recaro initially kept production lines going full throttle but now is dialing back as fewer seats are needed in the short term. CFM International, which makes the MAX’s engines, has so far kept producing at its pre-grounding target rate, but is considering slowing that down. CFM also wants to make sure the company can quickly provide technical support to airlines once the MAX is cleared to fly again. Around 500 MAX planes have been idled. Their engines will need some maintenance from CFM before airlines can use them again.

Spirit AeroSystems, which makes the 737 fuselage, is still building 52 of them a month– matching Boeing’s pre-grounding output for the plane. Boeing has since throttled back to 42 planes a month.  Boeing pays for the parts on delivery, but Spirit is keeping them at storage sites. The large fuselages are lined up outside the company’s Kansas facility. It is storing wing flaps and pylons, used to mount engines, indoors.

Classroom discussion questions:

  1. What are the OM issues involved in this production slowdown?
  2. What is the role of the engine manufacturer in the MAX shutdown and startup?

OM in the News: Walmart Wants to Put Groceries Into Your Fridge

The new grocery-delivery service will initially be offered in Kansas City. Pittsburgh, and Vero Beach, Fla.

Walmart is opening a new front in home-delivery services: carting milk, eggs and other groceries and leaving them in the fridge. This fall, Walmart in 3 cities will start delivering online grocery orders directly to refrigerators in shoppers’ homes and garages. The workers will wear body cameras clipped to their chests, allowing customers to watch live streams of deliveries being made while they aren’t home. Workers will enter residences equipped with smartlocks, internet-connect devices that can be controlled remotely to unlock a door.

The service, Walmart InHome, marks the latest attempt by retailers to adjust to changing shopping habits and solve the last-mile delivery problem, especially for groceries, reports The Wall Street Journal (June 7, 2019). Walmart workers will need to be with the company for at least a year to make deliveries. Walmart also added short biographical profiles of its delivery workers to the pilot service’s consumer app, which helped humanize them. “Customers didn’t know who was coming into their homes, so we changed it,” the firm stated.

The retailer is working to grab market share in online grocery shopping to maintain its place as the country’s largest grocer. Walmart this year plans to offer online grocery pickup from over 3,000 store parking lots and 1,600 stores that offer grocery delivery, mostly by joining with crowdsourced delivery firms.

Amazon offers a similar in-home delivery service for Prime members in 50 cities, called Key by Amazon. But drivers don’t deliver fresh groceries, and they leave items just inside a door, garage or the trunk of a car, not a refrigerator.

Classroom discussion questions:

  1. Who is the target customer for this service?
  2. What operational difficulties might be encountered?

OM in the News: As Ice Melts, Shippers Look to Arctic Route


An Sovcomflot icebreaking supply vessel moored in Murmansk, Russia.

As we note our discussion of Transportation Mode Analysis (Example S4) in Supplement 11 (Supply Chain Management Analytics), speed of transportation is critical.

So it is no surprise, writes The Wall Street Journal (June 6, 2019), that Arctic routes are drawing greater attention as the global climate warms and polar ice recedes, potentially opening new paths between Asia and Europe. The mostly frozen Northern Sea Route (NSR) seaway is considered a likely commercial lane because it already is used in warmer seasons to move part of Russia’s extensive energy exports.  Russia is promoting the lane as the shortest distance to ship containers from Asia to Europe, and a possible rival for routes that now take ships through the Suez Canal.

Russian shipping giant Sovcomflot tankers crossed the NSR more than 100 times last year, handling crude exports from Gazprom’s port oil facility in northern Russia. Crude tankers account for about 45% of ship traffic on the NSR. “The driver for transportation economy is basically distance, and the NSR cuts sailing time by around 20% compared to the route across the Suez,” says the CEO of Sovcomflot. “Cargo will always find the fastest way to move.”

Denmark’s A.P. Moller-Maersk, the world’s largest container ship operator, sent a small container vessel across the NSR last summer from Vladivostok to St. Petersburg. The Venta Maersk saved more than 10 days of sailing time compared with travel via the Suez.

Classroom discussion questions:

  1. What country will lose out if the NSR is successful more months?
  2. Is the time it takes to ship from China to the U.S. becoming an issue for suppliers?

 

 

OM in the News: Tesla’s Secret Source of Cash

For years, Tesla has hauled in revenue by selling credits to other carmakers that needed to offset sales of polluting vehicles to U.S. consumers. “These sorts of transactions have largely been shrouded in secrecy — until now,” reports Industry Week (June 3, 2019). GM and Fiat Chrysler just disclosed that they reached agreements to buy federal greenhouse gas credits from Tesla.

The deal with GM will come as a surprise to those who thought years of sales of plug-in hybrid Chevrolet Volts and all-electric Chevy Bolts would leave GM in the clear with regard to regulatory compliance. But demand for its battery-powered vehicles will still be dwarfed by its gas-guzzling trucks and SUVs in coming years. Fiat Chrysler disclosed agreements to buy credits from Tesla that were reached in 2016, 2018 and earlier this year. Fiat says that “U.S. standards are getting stricter at a pace that far exceeds the level of consumer demand for electric cars that is required for compliance.”

Tesla has generated almost $2 billion in revenue from selling regulatory credits since 2010. Its home state of California has a mandate that requires carmakers to sell zero-emission vehicles in proportion to their share of the state’s auto market, which is the largest in the country. If manufacturers don’t sell enough non-polluting vehicles, they have to purchase credits from competitors like Tesla to make up the difference.

GM’s credit purchases illustrate how challenging the U.S. fuel efficiency requirements are getting, even for automakers that are adding more zero-emission vehicles to their lineup. While all automakers complied with U.S. rules in model year 2017, most large manufacturers cashed in credits to get there.

Classroom discussion questions:

  1. The cost of purchasing greenhouse gas credits is a direct cost to those purchasing standard internal combustion engine cars. Is this a fair cost to those customers?
  2.  Tesla’s owners also purchase less gasoline per mile traveled and therefore pay fewer taxes to maintain roadways. Should this disparity be addressed?

 

OM in the News: Boeing’s Configuration Management Problem

An aerial photo shows 737s parked on the tarmac at the Boeing Factory in Renton, WA.

On page 178 of Chapter 5, Design of Goods and Services, we introduce Configuration Management, and define it as “the system by which a product’s planned and changing configurations are accurately identified and for which control and accountability of change are maintained.” The recent news of Boeing 737 wing components prone to cracking and the ability to trace them to the specific planes on which they are installed reminds us of just how important this OM technique is.

More than 300 Boeing 737 jets, including the Max, may have faulty wing parts that don’t meet strength and durability standards, reports CNBC.com (June 3, 2019). The FAA plans to order airlines to remove and replace the parts if their aircraft are affected. As many as 148 parts made by a Boeing supplier, Spirit AeroSystems, could be “susceptible to premature failure or cracks,” the FAA said. (Slats are pieces on the front of the wing and move along a track to create lift during take-off and landing.)

The requirement to remove the parts in question on certain 737s creates a new wrinkle for some airlines that are scrambling to ensure they have enough aircraft during the peak summer travel season. Airlines that fly the 737 Max have had to cancel thousands of flights through August as the planes remain grounded. Boeing said it is planning to provide replacement parts for its airline customers affected by the slat track issue “to help minimize aircraft downtime while the work is completed.” Boeing informed the FAA that leading edge slat tracks may not have been properly manufactured and pose a safety risk.

Classroom discussion questions:

  1. What suggestions do you have for Boeing avoiding this issue in the future?
  2. How is this a supply chain issue?

 

Guest Post: Student Perspective on the MyOMLab Forecasting Simulation

Wende Huehn-Brown is Professor of Supply Chain Management at St. Petersburg College in Florida.

This post is a followup on my prior Guest Post (April 15, 2019). Today, I would like to share my students’ perspective on the forecasting simulation in MyOMlab. It deals with the retail industry as operations consultant. The students enjoyed this because of their own experiences in retail and as customers.

I teach this class online and having further online resources in MyOMlab to enable student learning is great! Sure, I have hundreds of pencasts and tutorials on doing the analytics, but the simulations are a practical approach to learning the lessons. Do you remember using a graphing calculator? I don’t, so was surprised to have 40% of the students talking about that old forecasting method! They also commented on how they learned to use ExcelOM and found it more accurate and faster with less steps.

Not only does the simulation provide students with further insight on applying the lesson and using technology for analytics, but also the events that happen during the simulation are realistic. Many of my students commented on connecting this simulation to the real world was quite enlightening to consider how the events may affect supply and demand–such as how external conditions can affect market prices.

They also got quite excited when they saw their accuracy improve, even to 0% error. If you can keep the MAPE relatively low, you even get a $10,000 bonus in the simulation. 60% of the students commented on how this imaginary bonus helped to motivate them and keep them focused on achieving the 10% MAPE goal. I guess even in a simulation incentives are motivating!

Students enjoyed how the simulation made learning fun. Several students commented how they want to plan more time to do it again to further improve. One student reflected on a on a key lesson he learned regarding wasting time with non-algorithmic solutions. The simulation showed him to have more faith in his spreadsheet modeling skills.

OM in the News: FedEx Goes the “Last Mile” on Sundays

FedEx just announced it would start offering Sunday deliveries to most U.S. homes, the latest sign that online shopping habits are pressuring companies to revamp their operations to fulfill orders as they are placed. With people ordering everything from saunas to sandwiches online and expecting to have them quickly appear at the door, retailers and carriers are racing to adapt to service the last mile, writes The Wall Street Journal (May 31, 2019).

And Amazon, whose sprawl of warehouses has upped the ante, is promising 1-day delivery on many items later this year. “Online shopping is 7 days a week,” says FedEx’s CEO. “So there is increasing demand from online shoppers and e-commerce shippers for 7-day service.”

With the change, FedEx plans to deliver many of the packages it currently drops at local post offices. The shift will seek to lower costs by building density along FedEx Ground routes, while also shifting 2 million packages daily out of the U.S.P.S’s network.

FedEx and UPS have invested heavily in recent years to manage the volume of e-commerce packages moving through their sorting facilities. Until recently, the companies have taken steps to outsource last-mile delivery to the Post Office, worried that home deliveries would be less profitable than shipments between businesses. But as the volumes climb—to 50 million domestic packages a day—the companies are adjusting their operations to boost market share and handle weekend deliveries. They are also experimenting with more immediate delivery options, including drones and robots (both the subjects of recent blogs).

At the same time, FedEx’s traditional business of rushing deliveries by jet across the globe has slowed. Amazon, Walmart, and others have expanded their warehouse networks, adding locations near more U.S. cities where they can store goods and ship them shorter distances.

Classroom discussion questions:

  1. What major market shifts caused FedEx to add this Sunday service?
  2. What new OM issues will FedEx face now?

OM in the News: Blockchain on the Seas

As discussed on pages 453 and 586 of the text, blockchains have huge potential to add efficiency and security to operations. Two major European ship operators have just joined a blockchain platform formed by Maersk and IBM, in a significant boost for the adoption of the technology across the logistics industry, reports The Wall Street Journal (May 28, 2019).

The addition of France’s CMA CGM and Swiss’s Mediterranean Shipping to the effort called TradeLens means the 3 carriers that control 1/2 of all seaborne containerized cargo capacity will make the movement of freight in international supply chains more transparent and potentially generate substantial annual savings.

Maersk and IBM in 2016 kicked off the blockchain platform for container ships, which carry the vast majority of consumer goods, furniture, manufacturing parts and other basics of global commerce. Large companies such as Walmart, P&G and DuPont, along with 100 ports, have been testing the technology to get a better view of their supply chains, from raw materials to finished goods.

For ocean carriers, the blockchain technology allows trusted participants to share information as goods move through supply chains. The system also promises to reduce the cost of paperwork. Maersk said the cost of the required documentation to process and administer many of the goods shipped each year makes up 1/5 of the actual physical transportation costs.

The French carrier’s decision to join TradeLens  is “a signal that the whole notion of blockchain tourism is over and that we are at a tipping point for scale where participants will share data in a trusted fashion,” said an IBM exec.

Classroom discussion questions:

  1. Explain how blockchain works.
  2. What impact is blockchain intended to have on this industry?