posts related to Chapter 1
Will millions of individuals be thrown out of work by the rapid advance of automation and artificial intelligence? This idea is certainly chilling, but is also misguided. “Robots aren’t destroying enough jobs,” writes The Wall Street Journal (May 11, 2017). “Too many sectors, such as health care or personal services, are so resistant to automation that they are holding back the entire country’s standard of living.”
BMW’s plant in Spartanburg, S.C., is its biggest production facility in the world. It produces 1,400 cars a day and sends 70% of them overseas, making BMW the biggest car exporter in the U.S. By employing 9,000 people and training 100 apprentices at any one time, the BMW plant contributes to a skilled American workforce.
As high-wage countries, Germany and the U.S. face similar challenges in protecting existing production facilities and creating new manufacturing jobs. One of the most decisive factors for companies is whether they can find skilled and motivated workers, which is what apprenticeship programs provide. It’s also important to prepare for the industries of the future. In the era of New Manufacturing (what Europe has dubbed “Industry 4.0”), artificial intelligence and other digital technologies will transform factories and the workplace.
We all know that there is a tendency toward higher education in the U.S. Nevertheless, the success of the German apprenticeship model builds on the conviction that it is an equivalent alternative to college education. That approach in Germany has provided a solid return on companies’ investment, helped them to innovate, and contributed to warm relations between employers and employees.
Classroom discussion questions:
Many instructors like to start the semester with a bit of OM history (see Figure 1.4). Your students will enjoy this 5 minute video featuring the Ford Model T, which changed the way Americans live, work and travel. Ford’s revolutionary advancements in assembly line automobile manufacturing made the Model T the first car to be affordable for a majority of Americans. More than 15 million Model Ts were built in Michigan, and the automobile was also assembled at a Ford plant in Manchester, England, and at plants in continental Europe.
The Model T was built from 1908 until 1927. It quickly became prized for its low-cost, durability, versatility, and ease of maintenance. Assembly line production allowed the price of the car to be lowered from $850 in 1908 to less than $300 in 1925.
The Model T was offered in several body styles. All bodies were mounted on a uniform 100-inch-wheelbase chassis. The car was mass-produced in only one color—black. The engine was simple and efficient, with all four cylinders cast in a single block and the cylinder head detachable for easy access and repair. The engine generated 20 horsepower and propelled the car to top speeds of 40–45 miles per hour. The engine was started by a hand crank. The transmission, consisting of two forward gears and one reverse, was controlled by foot pedals. Throttle was controlled by a hand lever on the steering column. The 10-gallon fuel tank was located under the front seat. Because gasoline was fed to the engine only by gravity, and also because the reverse gear offered more power than the forward gears, the Model T frequently had to be driven up a steep hill backward.
As we point out in Chapter 1, growth in productivity—the goods and services a worker produces in an hour, a key determinant of wages and living standards—has petered out along with a slowdown in technological advances, which typically reduce the time spent to build a laptop or car. “It has been even more stubborn, though, on the services front,” writes The Wall Street Journal (Oct. 31, 2016). People want their hairdresser, therapists, accountants and lawyers, to take their time, often the definition of good service.
The New York Times (Oct. 30, 2016), tells the story of the unlikely survival of Baltimore’s Marlin Steel, a rare breed: the urban industrial manufacturer. Marlin, a 50-year old company that makes steel baskets, is a thriving factory in a place that factories have fled — first to the South, and later to Asia.
How did Marlin survive? Over the course of a decade, it invested in robots that churned out baskets 100 times as fast as human beings. Marlin trained its workers to operate the robots, which cost several $100,000 each, and hired engineers to help design ever-more-sophisticated products to win customers and stay ahead of overseas rivals. Automation did not mean the elimination of jobs– in fact, it saved the company– by producing many more baskets, with only a few more workers, each paid well over $50,000.
Factories will never employ the masses of Americans they once did. Automation and foreign competition will not abate. Over the last 20 years, industrial employment has dropped by 1/3. Only 12.3 million Americans work in the sector today, millions fewer than in leisure and hospitality. But small manufacturers like Marlin are vital if the U.S. is to build a society that offers greater opportunities for everyone.
Today, smaller plants are particularly important to job creation in factory work. As megafactories are the exception, small manufacturing is holding its own. Out of 252,000 manufacturing companies in the U.S., only 3,700 had more than 500 workers. The vast majority employ fewer than 20.
While they may not rival the scale of 1950s assembly lines, these smaller craft-type producers hold out hope for cities, particularly as some companies look to move jobs back from overseas to be closer to customers and more nimble to supply customized, small-batch orders. And, these jobs pay more. Manufacturing workers typically earn over $26 an hour.
Classroom discussion questions:
1. What was Marlin’s OM strategy?
2. Why will millions of manufacturing jobs never return?
What better way to start the fall semester but with a discussion of the importance of productivity (see Chapter 1, pages 13-18). There we write: “only through increases in productivity can the standard of living improve.” For well over a century, the U.S. has been able to increase productivity at about 2.5% per year, meaning U.S. wealth doubled every 30 years. But in the past decade, the news is not good. As The Wall Street Journal’s (Aug. 10, 2016) front page headline declares: “Productivity Fall Imperils Growth.”
The U.S. shed 5.7 million manufacturing jobs from 2000 to 2010—more than 1/3 of the manufacturing workforce—as companies abandoned plants and workers in favor of low-cost foreign countries. But in recent years, manufacturing employment has grown slightly as the auto industry rebounded and domestic plants became more cost-competitive with those of other countries where manufacturing expenses have escalated because of higher wages.
“Reviving the manufacturing sector won’t be easy—but it’s crucial,” writes The Wall Street Journal (June 8, 2016). Manufacturing is one of the best generators of wealth for an economy, requiring processes, materials and work skills that create employment and profits at each step in an assembly. Countries that don’t make anything eventually start to lose their edge in research and product development. “Manufacturing and design drive each other,” says a U. of Notre Dame prof. “If you lose one, you’ll lose the other, too.”
Here are just 3 possible strategies discussed in the article:
(1) Look at the true cost of offshoring. When companies decide to offshore production, they often simply seek the lowest initial price per unit. If they were required to take into account the hidden costs of foreign production, U.S.-made goods would become more cost-competitive. Manufacturing overseas carries dozens of uncounted expenses and consequences. Companies often don’t weigh costs for transportation, as well as expenses for dealing with reduced product reliability, undependable supply chains and the need to hold more inventory in case overseas deliveries are delayed.
(2) Turn community colleges into career factories. Despite low manufacturing payrolls in the past decade, companies continue to have difficulty finding welders, machinists and other skilled craft workers to replace retiring employees. Community colleges need to offer programs for skilled trades that are specialized to suit companies’ needs.
(3) Spend more on manufacturing R&D. Training workers isn’t enough. The government also needs to spend more on applied research to solve specific problems in manufacturing and bringing new products to market.
Classroom discussion questions:
For several years, operations managers and economists have asked why all that technical wizardry seems to be having so little impact on their firms and the overall economy. The issue surfaced again recently, when the government reported disappointingly slow growth and continuing stagnation in productivity. The rate of productivity growth from 2011 to 2015 was the slowest since the 5-year period ending in 1982, reports The New York Times (June 6, 2016).
The most prominent pessimist is Northwestern U. Prof Robert J. Gordon, whose new book, The Rise and Fall of American Growth, contends that the current crop of digital innovations does not yield the big economic gains of breakthrough inventions of the past, like electricity, cars, planes and antibiotics. Optimists, however, say the gains from current tech trends like big-data analysis, artificial intelligence and robotics, will come. Just wait.
Technology spending has been robust, rising 54% over a decade to $727 billion last year. Despite all the smartphone sales to consumers, most of the spending is by companies investing in technology to increase growth and productivity. But a new report by McKinsey & Company found that the march of digital technology across the economy has a long way to go. Only 18% of the American economy is living up to its “digital potential,” the report concluded. And if lagging industries (like health care and hospitality) do not catch up, we will not see much of a change in national economic statistics.
Classroom discussion questions:
“The higher that U.S. productivity is, the better off Americans will be,” writes The Wall Street Journal (May 5, 2016). But despite constant advances in software, equipment and management practices to try to make America more efficient, economic output is merely moving in lock step with the number of hours people put in, rather than rising as it has throughout modern history. From 2011-2015, the labor productivity measure shows only 0.4% annual growth in output per hour of work. That’s the lowest for a 5-year span since 1977-1982, and far below the 2.3% average since the 1950s.
Productivity, our topic in Chapter 1, is one of the most important yet least understood areas of OM. Over long periods, the reason an American worker makes much more today than a century ago is that each hour of labor produces much more in goods and services. If current productivity rates persist, our grandchildren will be no richer than we are. Here are 3 possible scenarios:
(1) Sad Scenario: The productivity slowdown is real, and it’s not going away. Earlier waves of innovation in technology (a computer on every desk) and management strategies (outsourcing) have been fully put into place, and so are no longer increasing productivity.
(2) Neutral Scenario: There is measurement error in how we count. Entire industries are being transformed in ways hard to account for in data on GDP, particularly in technology and services.
(3) Happy Scenario: Businesses are adding workers in preparation for the future, but it will take time for their investments to pay off. For example, engineers are hard at work trying to perfect driverless cars. At present, they are a sap on productivity — they put in thousands of hours of work with no economic output to show for it. But if successful, they could radically increase productivity in the decades ahead.
Classroom discussion questions:
Half a century ago, harvesting California’s 2.2 million tons of tomatoes required 45,000 workers. In the 1960s, though, scientists at U. California-Davis developed an oblong tomato that lent itself to being machine-picked. César Chavez’s United Farm Workers union was furious and made stopping mechanization its No. 1 priority. In 1980, the Carter administration declared that the federal government would no longer finance research that could lead to the “replacing of an adequate and willing work force with machines.” The freeze on research may have slowed the mechanization of California’s harvests, but 20 years later, only 5,000 workers were employed to pick a 12-million-ton crop of tomatoes.
In America’s factories, jobs are disappearing, too. Despite political rhetoric, though, the problem is not mainly globalization. Manufacturing jobs are on the decline in factories around the world, reports The New York Times (April 27, 2016). “Global employment in manufacturing is going down because productivity increases are exceeding increases in demand for manufactured products by a significant amount,” says Joseph Stiglitz, Columbia U.’s Nobel economist.
Will America be able to produce a manufacturing renaissance at home? “The likelihood that we will get a manufacturing recovery is close to nil,” says Stiglitz. Over the course of the 20th century, farm employment in the U.S. dropped to 2% of the work force from 41%, even as output soared. Since 1950, manufacturing’s share has shrunk from 24% to 8.5% of jobs–and is still in decline. But the shrinking of manufacturing employment is global–and a worldwide zero-sum game. Japan’s long stagnation is a consequence of a decades-long development strategy that left it overly dependent on manufacturing. What options does the U.S have? Health care, education and clean energy, to name a few.
I highly recommend you read this thoughtful article. It is a great piece to share with students as you cover Chapter 1.
Classroom discussion questions:
American middle class wages haven’t been rising as rapidly as they once were, and a slowdown in productivity growth is probably an important cause, reports The New York Times (March 6, 2016). In mature economies, higher productivity typically is required for sustained increases in living standards, but the productivity numbers in the U.S. have been mediocre. Labor productivity has been growing at an average of only 1.3% annually since 2005, compared with 2.8% annually in the preceding 10 years. As we point out in Chapter 1, without improving productivity growth, living standards will continue to lag.
Not everyone views the situation this way. Marc Andreessen, the Silicon Valley entrepreneur, says information technology is providing significant benefits that just don’t show up in the standard measurements of productivity. (Consider that consumers have access to services like Facebook, Google and Wikipedia free of charge, and those benefits aren’t fully accounted for in the official numbers). This notion — that life is getting better, often in ways we are barely measuring — is common in tech circles.
Until recently, this debate was inconclusive. It consisted mainly of anecdotes, with individuals describing how important advances like the Internet were — or were not — to them personally. But a new U. of Chicago study has looked more scientifically at the evidence and concluded that the productivity slowdown is all too real. Basically, the productivity slowdown has led to a cumulative loss of $2.7 trillion in gross domestic product since 2004; that is how much more output would have been produced had the earlier rate of productivity growth been maintained. Arguably the Internet brought its biggest gains in the 1990s, and in those years measured economic productivity was in fact very high. But America’s productivity crisis is real. While information technology remains the most likely source of future breakthroughs, Silicon Valley has not saved us just yet.
Classroom discussion questions:
Starting about 20 years ago, with our 6th edition, Jay and I began developing a series of company video and cases. They have ranged from manufacturers of potato chips, boats, and ambulances, to service firms like a hospital, an NBA team, Red Lobster, and Hard Rock. The videos are brief (5 – 12 minutes) and tie directly to the content of a specific text chapter. There may be as many as seven videos on one company (such as Arnold Palmer Hospital or Hard Rock Café) and students seem to like following one or two organizations throughout the text/semester. We are very pleased, that over the years, our 35 videos have won many awards, including 2 Silver Addy’s for the best short video, selected from 10,000’s of entries each year. We are even up for an Emmy award for one of our Orlando Magic videos!
I have always started the first week of the semester with one or both of the following: Hard Rock Café: OM in Services (8 minutes) and Frito-Lay: OM in Manufacturing (7 minutes). The first shows how a service firm that is known throughout the world approaches some of the 10 OM decisions around which we structure the text. This firm is especially interesting because it is a lot more than a restaurant. We show that Hard Rock makes almost the same revenue from its small retail shops as it does from the food side of the house.
The second video provides a perfect contrast to Hard Rock and makes for a great class discussion on how manufacturers
differ from service firms. Frito-Lay is also a product everyone knows. But this company does not let outsiders in to tour, and has proprietary processes that even we were not allowed to film. This video reviews how Frito-Lay deals with all 10 of the decisions that OM managers have to make.
I hope our video series helps get your Fall, 2015 semester off to a successful start. And there is more to come, as we introduce five new videos featuring OM at Alaska Airlines in January, 2016!
I always start my OM course with a discussion of why productivity is so important. As The Wall Street Journal (July 17, 2015) writes: “Productivity matters, because at a 2% annual growth rate, it takes 35 years to double the standard of living; at 1%, it takes 70. Low productivity growth slows the economy and holds down wages.” For well over a century, we have been able to increase productivity at about 2.5% per year. But for a decade, economic output per hour worked—the federal government’s formula for productivity—has barely budged. Over the past two quarters, in fact, it has fallen. Sluggish productivity is raising alarms all the way to Federal Reserve Chairwoman.
Silicon Valley economists, though, say productivity means giving people and companies tools to do things better and faster. By that measure, there is an explosion under way, thanks to the gadgets, apps and digital geegaws spewing out. Consider the efficiency of hailing a taxi with an app on your mobile phone, or finding someone who will meet you at the airport and rent your car while you’re away (a new service in San Francisco). Add in online tools that instantly translate conversations or help locate organ donors. They also make the U.S. more productive, don’t they?
In 1987, during the last period of productivity hand-wringing, Nobel economist Robert Solow quipped: “You can see the computer age everywhere but in the productivity statistics.” From 1995 to 2004, it finally looked like the digital age was paying off: Productivity growth rates closed in on 3%; since 2010, they have dipped below 1%. Yet in Silicon Valley, the idea of a productivity slowdown seems ridiculous to technologists. At the heart of their argument is the free and invaluable Internet search, cutting short the time to, say, learn how to grow geraniums or find the best Mexican restaurant. Many economists question why productivity measures can’t capture the full benefit of improved products and services, such as a refrigerator that signals when the milk is getting low.
Classroom discussion questions:
1. Why is productivity so important to citizens and to nations?
2. How can productivity be increased at, say, the Post Office?
Prof. Marco Iansiti’s new article in Harvard Business Review (July, 2015), declares: “It’s time to rethink what we mean when talk about operations. Operations is and has always been what gives an organization the power to act: to create value for its customers; to capture value for its shareholders; and to share value with its ecosystem. In the era of ubiquitous digital technologies, operations empowers an increasing variety of organizations.”
Growing out of the industrial revolution of the late 1800s, OM field took off as the modern economy emerged from the new phenomenon of volume manufacturing. Popular notions of “interchangeable parts” were first applied to the design of muskets and enabled a new breed of industrialists to invent a modular system of production, in which individual components could be manufactured independently and at scale. This gradually led to the concepts of logistics, supply chains, and assembly lines, and formed the foundations of the “American System of Manufacturing,” which grew during the first half of the 20th century and peaked during the 1950s. (In fact, at one time Harvard Business School offered practical classroom demonstrations on the use of lathes and milling machines). The 1960s saw the development of a broad variety of analytical methods to analyze and optimize the flow of goods and information not only in manufacturing systems, but in a wide variety of service contexts.
What is different now? Digital technology and its exploding range of applications in web services, mobile, and now the internet of things means that the development and delivery of software services is transforming the fabric of operating environments. If the essence of OM is providing economic agents with “the power to act,” digital technology is transforming the nature by which that power is defined and delivered, with new operating models that are increasingly open, distributed, and shared across thousands of organizations and contributors. These new models have enabled close to 9 million independent developers to contribute apps to mobile platforms. And they’ve enabled WhatsApp to grow to over 450,000 users with fewer than 30 employees. As such, the design of development tools, operating system APIs, and the user onboarding process for apps have become as crucial to OM excellence as production planning or inventory theory.
“At this unionized U.S. Steel World War I-era mill near Birmingham, the construction of a new furnace signals a major shift for American steelmaking, as the country’s major steel producers face mounting pressure from a flood of low-priced imports,” reports The Wall Street Journal (June 19, 2015). U. S. Steel’s first electric arc furnace in decades is a step toward replacing the iconic steelmaker’s stable of iron-ore-reliant blast furnaces with a more flexible scrap-based process that allows for stopping and starting production when there isn’t enough demand to keep churning out steel.
Just over an hour’s drive away, in Decatur, Nucor, the other big American steelmaker, has been turning old cars and refrigerators into fresh batches of steel for more than a decade, with 2 electric arc furnaces and a flexible, nonunion workforce. The 2 companies are the only U.S.-based steelmakers left in the top 50 global steel producers, a list now dominated by Chinese companies. But they represent starkly different approaches to the same business. U.S. Steel has 2,500 workers currently laid off. Nucor has an unofficial nonlayoff policy. U.S. Steel has lost money in 5 of the last 6 years, while Nucor has been consistently profitable.
The Nucor plant in Alabama produces roughly the same amount of steel as U.S. Steel, 2.4 million tons, but employs 1/3 the workers. Managers and workers emphasize their unique brand of steelmaking. Nucor employees call each other “teammates” and talk up their competitiveness. The company’s incentive-based salary structure means worker salary can range from over $100,000 to less than half that. Workers get a scorecard assessing their performance each time that they make a batch of steel. “A high percentage of our teammates are athletes or military,” said Nucor’s plant manager. “We hire can-do innovative guys who want to bust their butts every day.”
Classroom discussion questions:
1. Outline the human resource differences between the companies.
2. Why are there only 2 American steel producers?