June 2022 – The OM Blog by Heizer, Render, & Munson

OM in the News: The Battle for Chip Manufacturers

A Taiwan-based company plans to build a $5 billion factory in Texas to make silicon wafers used in semiconductors, but the deal hinges on financial incentives bogged down in Congress.

GlobalWafers said its planned factory in would be the first U.S. silicon wafer-facility in more than two decades and create as many as 1,500 jobs, as well as helping fuel the expansion of the U.S. chip-making industry. But the firm said the plant will require financial incentives included in the Chips Act, which is aimed at increasing chip production in the U.S. “If the Chips Act is not passed, we have to pivot to South Korea, as costs there would be substantially less,” said the CEO. (The Chips Act would provide $52 billion to build up the U.S. semiconductor industry).

South Korea, Japan and members of the E.U. are all offering hefty subsidies to ensure stable supplies of chips that power consumer, industrial and military products amid a global shortage, reports The Wall Street Journal (June 27, 2022).

The GlobalWafers plant in Texas would contribute to a U.S. effort to boost domestic production of advanced semiconductors and reduce reliance on imports by supplying materials to companies such as Intel and Taiwan Semiconductor (TMSC). These leading semiconductor manufacturers have pledged significant investments in new U.S. factories to make chips to meet strong demand, and to relieve shortages that have disrupted production of a range of products, including automobiles.

Silicon wafers made by TSMC, which is among the leading semiconductor manufacturers that have pledged significant investments in new U.S. factories

The existing U.S. manufacturing capacity of silicon wafers will be able to supply only 20% of the estimated domestic demand by 2025, and the wafers won’t be suitable for some of the advanced chips planned to be manufactured at the new production facilities currently being built by Intel, TSMC and Samsung. Most advanced semiconductors, as well as silicon wafers, are manufactured in Northeast Asia. In 2021, 92% of the world supply of advanced semiconductors came from one company, TSMC.

The U.S. share of the global semiconductor market has fallen to 10%-12% from 40% previously. “In search of cheap labor, we’ve watched a lot of our manufacturing leave our shores,” said the U.S. Commerce Secretary. “As a result, the lack of chip production in the United States is hurting our economy and also our national security.”

Classroom discussion questions:

Why is this an important OM issue?
What might happen if the Chips Act fails to pass Congress?

Teaching Tip: A 5-Question Checklist for Better OM Course Design

Whether you’re a veteran or new OM educator, Harvard Business Publishing (June 21, 2022) offers the following syllabus checklist to ensure you set clear, measurable course objectives that align with your graded assignments and instruction topics. Answer yes to the 5 questions below and you’ll have a well-designed course that will more effectively teach students what you want them to learn.

1. Are my course objectives clearly defined and relevant? Take a fresh perspective every semester.

2. What do your students want? Try a pre-course survey. Ask: “Where do you want to work? What do you want to do? What are your goals and aspirations for your career?” Perhaps use some of our text’s 100+ case studies that relate to specific goals.

3. What do businesses want? Try connecting with people in the field and asking, “What do you wish you’d learned when you were an undergrad or grad OM student?” Ask the same of your alumni.

4. Do your assessments adequately measure student progress? Find a way to measure whether students are grasping the material and meeting their goals. Try giving quick, ungraded assessments consisting of a few short questions. Or do entry tickets before students sit down or exit tickets at the end of class, depending on whether you want to assess how well they grasped the reading assignment or what they just learned in class.

5. Do instructional experiences align with the objectives? Students don’t like busy work. So when you’re planning out assignments, discussion topics, lectures, and guest speakers, be clear about how they all align with the course objectives. For example, if you’ve assigned a group project for a case study or a MyOMLab simulation, explain to your students how this will help them learn. Let them know this exercise is teaching them to collaborate, work in teams, and be a leader—skills they will need in their future careers.

One big complaint from students is that we can go off on tangents with topics that don’t end up on tests or graded assignments. This occurs when there’s a lack of alignment between your course objectives and your instruction, assignments, and assessments. If you use your end goals as drivers for planning, your syllabus will have purpose, structure, and transparency—and your students may be more willing and active participants in your class.

OM in the News: Misplacing the Blame for the Baby Formula Shortage

Due to global supply chain disruptions over the past 2 years, Americans are getting used to product shortages, but they were still surprised by the recent shortage of baby formula, putting babies at risk.

As an immediate relief measure, military planes were recently used to transport baby formula from Europe and Australia to the U.S. Also, Abbott Laboratories, closed by the FDA in February, 2022, just resumed production at its Michigan plant. Despite this, Americans learned that this crisis will not end yet.

There is plenty of blame to go around, write Professors Babich (Georgetown U.) and Tang (UCLA) in Industry Week (June 17, 2022). There are many culprits they say, except for one that has been widely blamed: industry concentration, which is an innocent bystander.

The leading suspect is Abbott’s Michigan baby formula plant, which had poor quality control issues for years, but was not shut down by the FDA until Feb., 2022. The crisis would have been less severe had Abbott adopted the Toyota Production System, our topic in Chapter 16, by fixing its own quality issues sooner.

The runner-up suspect is the FDA. Its inaction and lack of urgency dates to 2019 when it was warned about Abbott’s quality issues. The FDA’s bureaucratic inflexibility means that milk formulas sold in Europe are banned in the U.S. because they exceed the FDA’s nutritional standards due to technicalities, like labeling. Its failure to do its own job is one root cause of the shortage.

Then there is the federal Women, Infants, and Children (WIC) program that funds over half of the baby formula purchased nationwide. The WIC contracting process has an unintended outcome of enabling the “approved” state provider to become a near-monopoly of the formula market for that state.

The press blamed the milk formula crisis on industry concentration–too few U.S. manufacturers. Politicians also tagged this as the culprit, as 90% of all production of baby formula is controlled by 4 companies. But industry concentration is a result of economic forces. Milk formula is a staple with stable demand, so there is no incentive for producers to invest in “just-in-case” capacity.

The crisis may continue beyond Abbott’s plant reopening. Once panic buying mentality sets in, it is difficult for consumers to switch back to normal purchasing habits.

Classroom discussion questions:
1. How is this an OM issue?

2. Explain why the WIC program has impacted the shortages.

OM in the News: Manufacturers Head South

Caterpillar’s planned relocation of its global headquarters to Texas from Illinois comes as the equipment maker and other companies expand their manufacturing bases south. Manufacturing employment has been on the rise in many Southern and Southwestern U.S. states in recent years, as companies target the regions for new factories, plant expansions and corporate bases, seeking what some executives have said is a growing available workforce and cheaper real estate.

Florida, Texas and Arizona increased their manufacturing employment the most in the five years through 2021, while New York, Washington and Illinois lost the most manufacturing workers over that same period.

Ford announced its new investments in Kentucky and Tennessee outside the Kentucky State Capitol

Ford Motor said it would spend $11.4 billion along with a South Korean partner to build four factories in Tennessee and Kentucky that would support electric batteries and vehicles. Toyota said that it would invest $1.24 billion in a North Carolina battery and car plant. Leprino Foods is investing $870 million in a new mozzarella plant in Texas, and Novelis intends to build an aluminum rolling plant near Mobile, Ala.

“Companies investing in southern parts of the country have cited benefits including growing workforces, more affordable housing, availability of physical infrastructure and quality educational systems,” writes The Wall Street Journal (June 16, 2022). Southern and Southwestern state lawmakers have worked to make their states friendly to new or established manufacturers, letting companies deduct energy spending from sales-tax bills, for example, or providing exemptions from local property taxes and tax credits that can be resold to other businesses. States in the South and Southwest have typically lower unionization rates than states in historic union strongholds such as Illinois and New York. In 2021, 15% of Illinois workers were represented by a union, compared with 4.7% in Texas.

Such factors, as we discuss in Chapter 8, Location Strategies, can be meaningful in the manufacturing industry, where profit margins often are thin. “A big reason you see this migration is it has a lower cost of business to operate in this area,” said the head of the Texas Business Association.

Classroom discussion questions:

List all the factors that manufacturers consider in making location decisions.
What is meant by a “right-to-work” state?

OM in the News: Amazon’s Forecasting System Misfires

Amazon expanded operations and staff during the pandemic, but demand hasn’t kept pace.

As Covid-19 spread in 2020, homebound customers turned to Amazon at an unprecedented clip. Orders neared that of the holiday season and the company was short-staffed and often out of stock on key items, pushing delivery windows from 2 days to weeks on some items. Founder Jeff Bezos greenlighted a strategy, guided by a revered internal forecasting tool, that overshot the long-term projections for demand. Instead of a permanent shift in consumer behavior, the pandemic-fueled growth in online shopping has slowed as in-person shopping has bounced back.

Early in the pandemic, Amazon opened hundreds of new warehouses, sorting centers and other logistics facilities, and doubled its workforce from 2020 to 2022, to more than 1.6 million people. But demand hasn’t kept pace with that planned capacity. Now new CEO Andy Jassy is cutting back the excesses. He is subleasing at least 10 million square feet of warehouse space, deferring construction of new facilities, and finding ways to end leases with outside warehouse owners. Jassy has also abruptly closed down the company’s bricks-and-mortar retail operation—68 stores—and is paring back its bloated head count.

Part of Amazon’s e-commerce challenges today, writes The Wall Street Journal (June 17, 2022), stem from a piece of technology long prized as a secret weapon, an internal forecasting system called Supply Chain Optimization Technologies, or SCOT. It was designed to incorporate a multitude of factors and spit out projections for product demand and the growth in logistics needed to fulfill it.

SCOT forecasts produced low, medium and high estimates. Because of unprecedented volume in the early days of the pandemic, Amazon repeatedly chose the higher end of SCOT’s estimates. Those estimates meant that the company needed many more fulfillment centers and other infrastructure to keep up. So Amazon aggressively built out new warehouses and transportation hubs, and went on a hiring spree to get customers their packages. But the forecasting technology wasn’t equipped to process an unforeseeable event like the pandemic and caused the company to commit to building infrastructure early in the pandemic that take 18 months to 2 years to come online. When the virus receded, Amazon was left with more planned capacity than orders. After being understaffed for 2 years, the company was suddenly overstaffed.

Classroom discussion questions:

Using Chapter 4 terminology, what type of forecasting system did Amazon employ?
What could the company have done differently, in hindsight?

OM in the News: The High Cost of Operating in California

In Chapter 8, Location Strategies, we talk about the Key Success Factors (KSFs) that firms need to achieve competitive advantage in selecting a location for their plants. It turns out that these KSFs are also the reason why some manufacturers are leaving California.

The Wall Street Journal (June 13, 2022) article, “Smithfield Foods, Citing High Costs of Operating in California, to Close Pork Plant,” explains why the largest pork processor in the U.S., is closing an 1,800-person plant in California and shrinking the size of its hog herd in the region. Smithfield says “the cost of doing business in the state wasn’t worth it,” citing higher taxes, utility costs and labor costs in the state compared with other areas where it operates.

The decision to close the plant comes as food suppliers are dealing with increased costs on items like livestock feed, transportation and packaging. Russia’s invasion of Ukraine, one of the world’s top grain-producing regions, has recently sent the price of livestock feed higher.

In California, the cost of utilities is 3.5 times higher per head to produce pork compared with the 45 other U.S. plants Smithfield operates. “It’s increasingly challenging to operate efficiently there,” said the company. “We’re striving to keep costs down and keep food affordable.”

Smithfield also said part of the reason it closed the facility was the regulatory environment in the state. Specifically, a state law passed by voters in 2018 and backed by the Humane Society, called Proposition 12. It requires breeding pigs to be able to lie down and turn around in spaces in which they are housed, essentially outlawing pork produced using small gestation stalls in most circumstances.

Pork producers and suppliers have resisted, saying such moves would raise meat prices by causing farmers to spend millions of dollars changing their operations, create supply-chain chaos and risk their pigs’ health.

The supply of hogs in the U.S. also isn’t expected to grow soon as higher feed, labor and material costs have weighed on pig farmers, making it too expensive for them to expand. For processors, if the supply of hogs isn’t increasing, it makes sense to cut high-cost plants that might not even be running at capacity.

Classroom discussion questions:

On the issue of hog comfort and safety (see the Ethical Dilemma in Chapter 7), what position do your students take?
What KSFs in Chapter 8 (see Figure 8.1) are driving Smithfield to leave California?

Guest Post: Process Design–Drug Dispensing Machines

Prof. Howard Weiss, developer of our POM and Excel OM software, provides his insights monthly.

Table 7.4 of your Heizer/Render/Munson textbook lists examples of the use of technology in health care and other service industries. One technology in health care that is often used in hospitals is the computerized medication cabinet also known as the automated dispensing cabinet. (See page 215 for an example). These drug cabinets offer a number of advantages over the former non-powered old-school medication carts, but can lead to serious problems when the wrong drug is selected. Unfortunately, hospitals are not required to report when wrong drugs are administered so we do not know the depth of the problem. (A nurse in Tennessee was recently prosecuted for wrongful death when she selected the wrong drug).

The current process requires the nurse to enter the first 3 letters of the drug that they want. Safety advocates want at least 5 letters to be entered to reduce or avoid confusion and the cabinet makers are currently in the process of making the change to require 5 letters. While a 5 letter requirement seems better than 3 letters from a safety standpoint, requiring more letters leads to problems other than safety. This will require that nurses can correctly spell names of difficult pharmaceuticals. Sometimes these drugs are needed in chaotic emergency situations and using 5 letters instead of 3, while intended to improve safety, will slow the process down. Of course, three letter names can cause spelling problems, for example, if the nurse is unsure whether the drug begins with “ph” or “f”.

The general goal when dealing with dispensing drugs is to have as many layers of safety as possible. This is sometimes called the Swiss cheese model. The holes in Swiss cheese do not generally align so having enough pieces of Swiss cheese will prevent a mistake from going through all of the holes. The 5 letter requirement is a better slice of cheese than the 3 letter requirement.

This Swiss cheese approach of adding layers for safety is similar to web sites requiring a code sent by text to be entered in addition to entering your name and password. The CDC has essentially been using a Swiss cheese model for COVID protection, as seen in the figure.

As a final note on reliability, many hospitals still maintain the old-school carts as a backup in case of a power failure.

Classroom discussion questions :

What industries, other than healthcare, use a Swiss cheese approach?
If requiring 5 letters is better than requiring 3 letters, wouldn’t requiring 6 letters be better than 5 letters?

OM in the News: “Too Much Supply, Not Enough Demand.”

“It’s classic supply and demand,” says Macey’s CEO in The Wall Street Journal (June 6, 2022). “Too much supply, not enough demand.”

American Eagle Outfitters is trying to clear out excess inventory

Shoppers have shifted their spending from the casual clothes and home items that had been in demand during the height of the pandemic, catching retailers off guard and leaving them with excess goods that need to be marked down.

The scenario playing out at Gap, Macy’s and other chains is a reversal from the past two years, when soaring consumer demand and supply-chain delays created a scarcity of goods that allowed retailers to scale back discounts. Macy’s has too many casual clothes, activewear, home textiles and tableware, as shoppers are instead buying dressier clothes to wear to the office or socially. The shift was quick and dramatic.

Inflation is prompting consumers to spend fewer dollars for discretionary items like apparel and home goods, just as the supply chain is loosening and merchandise is becoming more plentiful. “There was a lot of misforecasting in terms of how fast that shift would go back the other way,” said a Citi analyst.

Walmart’s inventories rose 33% as it misjudged that shift. The increase also reflected the higher cost of goods due to inflation, along with a sudden improvement of moving goods through U.S. ports after the company had decided to buy products aggressively amid supply-chain snarls and out-of-stocks in past quarters.

The problem is acute among apparel retailers. Gap, American Eagle, and Urban Outfitters said they were sitting on too much inventory and would have to increase discounts to clear out the excess. Gap has 34% more inventory than last year. At American Eagle, inventory jumped 46%, and at Urban Outfitters it was up 32%. Some of the bloat is due to inventory that arrived late as a result of factory closures and other supply-chain delays.

Rather than try to sell through all the excess goods at lower prices right away, some retailers are packing away items for sale at a later date. The strategy had been used for years by discounters like T.J. Maxx. Now, it is going mainstream.

Classroom discussion questions:

What are the OM issues retailers are facing here?
What has caused the overstocking?

OM in the News: Robots Pick Up More Work at Busy Factories

“Robots are turning up on more factory floors and assembly lines as companies struggle to hire enough workers to fill rising orders,” writes The Wall Street Journal (June 2, 2022). Orders for workplace robots in the U.S. climbed 22% last year to $1.6 billion.

Rising wages and worker shortages, compounded by increases in Covid-19-related absenteeism, are changing some manufacturers’ attitudes about robotics. “Before, you could throw people at a problem instead of finding a more elegant solution,” said the CEO of Delphon Industries. Delphon lost 40% of its production days during January when the coronavirus spread through its workforce. The disruption accelerated the company’s purchase of 3 additional robots earlier this year.

Athena Manufacturing purchased seven robots in the past 18 months.

Manufacturers in the U.S., where workers typically have been abundant and wages stable, have been slower to embrace robotics than those in some other industrialized countries. The number of robots deployed in the U.S. per 10,000 workers has traditionally trailed countries such as South Korea, Japan and Germany. (The use of industrial robots in North America for years had been concentrated in the automotive industry, where robots took on repetitive tasks such as welding on assembly lines.)

Now, robots are making inroads into other sectors including food production, consumer products and pharmaceuticals. Improved capabilities are allowing robots to be programmed for more-complex tasks requiring a mixture of strength and nimbleness.

At Athena Manufacturing, a fabricating and machining company for metal equipment, customers have been ramping up orders, but Athena has struggled to find enough workers to staff a second weekday shift and a weekend shift. So it recently spent more than $800,000 on robots, including $225,000 alone for the grinding robot shown in the photo. The investments aimed to increase Athena’s capacity to handle orders, more than lowering costs.

“The robots are becoming easier to use,” said the CEO of Fanuc America, a major supplier of industrial robots. “Companies used to think that automation was too hard or too expensive to implement.” But one MIT prof said factories’ increasing reliance on automation will lead to an oversupply of human labor that will drive down wages in the years ahead, unless other U.S. industries can absorb displaced manufacturing workers.

Classroom discussion questions:

Will automation destroy a lot of manufacturing jobs in the U.S?
Why are robots becoming more popular in recent years?