Chapter 1 – Page 7 – The OM Blog by Heizer, Render, & Munson

OM in the News: What is the Future of American Manufacturing?

A lead article in today’s The New York Times (Sept.11,2011) questions whether the US can recover from its decline in manufacturing. Was the tipping point reached in 2009 when China ousted America’s century long lead by generating $1.7 trillion of “value added” vs. the $1.6 trillion here? Or was it when manufacturing’s contribution to GDP declined to 11.7% last year, down from 28% in the 1950s? (Countries over the 20% threshold are in Asia and Europe now, with China at 25%).

“We’re going to make sure the next generation of manufacturing takes root not in China or Europe, but right here, in the US”, President Obama told a joint session of Congress this week. An MIT prof counters: “The US today is alone among industrial powers in not having a strategy for thinking through what must be done in manufacturing”. “An advanced manufacturing policy is what this country must have”, adds Dow Chemical’s CEO Andrew Liveris. Liveris believes manufacturing needs government support to expand its dwindling share of the nation’s economy. He even advises the President to “pick winners” and “not let free markets rule”.

And although GE’s Jeff Immelt (co-chair of the President’s Council on Jobs, with Liveris) also expresses concern over the decline in jobs, multinationals like theirs have contributed mightily to the problem by shifting jobs abroad. Half of Dow’s $58 billion in revenue comes from overseas operations and GE has just moved its Medical Imaging HQ from Wisconsin to China. The damage doesn’t end with factories overseas. With 40% of our engineers working in manufacturing, such jobs also decline. Innovation often originates in research centers near factories and “this trend”, writes The Times, “challenges the view that the US has the best scientists and research centers”.

Discussion questions:

1. Do Congress, the White House, and students see making an engine or scissors as important as investment banking or retailing ?

2. Can the trend be reversed, and how?

Guest Post: Build It and They Will Learn–Introducing OM at DePaul U.

Dr. Lori Cook is Associate Professor of Management at DePaul University’s School of Business. In her Guest Blog, she describes how important experiential learning is to her Operations Management classes. You can see her syllabus by clicking here.

I absolutely love the first day of my OM class! As my students enter the classroom, sometimes dreading the start of a new term, I can feel the nervous energy in the air. After teaching thousands of students, I know with certainty that from day one I need to grab my students’ attention and immediately get them to understand why OM is key to understanding business environments.

On the first day, I use the Paper Puppet activity (see Games and Exercises for Operations Management, by Heineke and Meile, Prentice Hall) to help set the stage. Upon completion of this exercise, students have an experience they can directly relate to the challenges operations managers are forced to struggle with everyday. It can also be directly linked to the 10 critical decisions of operations introduced in the Heizer and Render OM text. Without the use of the Paper Puppet activity, the majority of the lecture would cover only the basic levels of knowledge.

Throughout the term, I use a variety of experiential learning activities to simulate “real world” applications of OM. Research has shown that actively involving students in demonstrations enhances their fundamental understanding of the concepts. My activities tend to level the playing field by providing students with a common understanding of the subject matter. Each exercise is designed to either introduce or reinforce the lecture topic with the goal of enhancing overall student learning. If you are looking for experiential activities, I would encourage you to explore the teaching briefs in the Decision Sciences Journal of Innovative Education.

The classroom environment is a fundamental building block in the learning process. It is critical to create a classroom experience which is both engaging and enjoyable. It must be an environment that provides motivation to assist the students in grasping the real world relevance of the material. To see fundamental change in your classroom environment, you will often have to change your process. While most of us are fearful of change, the long-term rewards far outweigh the short-term costs.

OM in the News: How Operations Management is Helping United and Continental Merge

The “productivity challenge” that we discuss in Chapter 1 comes to the forefront in the merger last October of two mega air carriers, United and Continental. Now the world’s largest airline (with more frequent flyer members than France has citizens), United Continental has turned to OM to lead the integration efforts. Shaving a half-cent off per-mile operating costs can boost profits by $260 million per quarter–something Wall Street was promised with the merger.

Businessweek (July 4-11, 2011) reports how “33 integration teams are making thousands of decisions, ranging from the fastest way to clean 1,260 airplanes and board passengers to which perks to offer in the frequent-flier program“. Most of the decisions are OM-related and team members come from technology, labor, fleet management, and network planning. In technology alone, the carriers have 1,400 separate systems, programs, and protocols. (Continental had 600 programs for tasks such as crew scheduling, dispatching planes, and managing cargo, while United had 800).

Economies of scale favor big airlines, but mismatches complicate every detail. Workers, for example, come from different labor unions with dissimilar work rules. United has 1st class cabins, while Continental has just business and coach. And history has not been kind. Pilots and flight attendants at US Airways (the merger of US Air and America West) are still operating under separate contracts with different pay, schedules, and work rules–6 years after their marriage! Delta has been bogged down in a labor dispute over pay and work rules since its merger with Northwest in 2008.

That’s why United Continental execs are so focused on the minutiae of the operations integration. “It’s not important how many things come from United and how many from Continental”, says the VP-Integration Management. “Keep the emotions out of it and don’t keep score”.

Discussion questions:

1. Why does OM drive a successful airline merger?

2. Why have other mergers run into problems?

OM in the News: Obama vs. ATMs and Technology vs. Jobs

In headlines last week, President Obama linked technology to job losses when he stated: “There are some structural issues with our economy where a lot of businesses have learned to become more efficient with a lot fewer workers. You see it when you go to a bank and you use an ATM, you don’t go to a bank teller”. The Wall Street Journal (June 22,2100), however, says: “We usually call it progress. It isn’t exactly a new phenomenon. Businesses relentlessly look for ways to replace workers with machines”.

It’s true that telephone operators lost jobs to automated switching, toll collectors are being replaced by E-Z Pass, and that auto workers lose jobs to robots. The Journal gives 2 great examples of productivity increases that benefit society with lower priced goods. The 1st is the textile industry where 50 years ago, one N. Carolina worker operated 5 machines at once, each running a thread through a loom 100 times a minute. Now machines run 6 times as fast, and one worker overseas 100 of them. That’s a 120 fold increase in productivity!

The 2nd example is how 2 workers can now manage an egg laying operation of 1 million chickens laying 240 million eggs a year. The two keep an eye on the highly-mechanized, computerized process that no one could even imagine 50 years ago.

The result of such productivity gains is a higher standard of living for all of us, in which we work fewer hours to afford enough money to buy a dozen eggs, a flat-screen TV, or new shoes. Our blog a few months ago discusses why productivity increases are such a plus to society.

Discussion questions:

1. How do new jobs get created to replace the old ones?

2. Why do productivity increase help our society?

Video Tip: Why the US Needs Innovation and High Tech Manufacturing

If you want to show a 6 minute video that will set your semester on fire, try this interview with Henry Nothhaft, author of Great Again and former CEO of Tessera. Nothhaft starts by saying the only way the US can recover from the recession is to deal with the 5 million manufacturing jobs lost in the past decade. He believes we can bring back high-tech manufacturing with some basic tax and policy changes.

The US has the world’s 2nd highest corporate tax rate in the world (and California is the 48th worst in the US). Good tax policies are the reason Israel and Germany have had a revitalization of their manufacturing bases. And offshoring in high-tech is unnecessary when labor costs are only 3% of total product cost. Nothhaft points out that 70% of high-tech innovation goes on during production on the factory floor. Give up the factory and in 10-15 years “you have sown your own seeds of destruction”.

Nothhaft also takes on the US Patent Office and its 3.7 year average approval wait time. He points out that in Silicon Valley this is two or three product life cycles—an immeasurable delay. And finally, he asks for a new green card policy for foreign grads in technology areas. “We need to hang out a sign by the Statue of Liberty that says Geniuses Welcome“, he says, noting that the founders of Intel, Google, ebay, and Yahoo! were all immigrants.

OM in the News: Is the Pentagon Harming US Manufacturing?

It was easy to miss the announcement in The Federal Register (the US’s little read journal of record) that the US Air Force was asking for a waiver on the “Buy American” requirement for 37 items it needed at its Eielson Base in Alaska. The products included screws, ceiling fans, light fixtures, towel rods, shower rods, and handrail brackets. The Air Force got its exemption on buying American with this statement: “Extensive market research and thorough investigation of the domestic manufacturing landscape” showed these items were made almost exclusively in China.

Is this shocking? We know that over 57,000 factories disappeared in this country between 1999 and 2009 (see Businessweek, May 9,2011). But the Pentagon may have actually accelerated this trend. According to Businessweek, flat-panel displays, machine tools, and advanced electronics and IT goods are now also obtained from non-US suppliers. Further, armor-plate steel, defense-specific integrated circuits, and night vision goggles are among the items the DOD says it must obtain overseas. The goal of cost-cutting has ended up increasing the military’s reliance on overseas suppliers. It may also mean the US may be opening itself to the danger that an overseas manufacturer could place a “Trojan horse” component in to critical equipment. (Does this sound like what happened to Iran’s nuclear reactors)?

Of 16 manufacturing sectors that underpin America’s military, 13 suffered erosion between 2001-2008, as measured by decreased employment, output, and number of factories. These industries, which include foundries, forging and machine shops, have wide applications in civilian industry as well.

We all know that some decline in America’s low-end manufacturing is to be expected. Imports, for example, make up more than 95% of sales of silverware, men’s clothes, and woman’s shoes. But according to the National Research Council, “the movement of manufacturing offshore is weakening American R&D capability” in some areas.

Discussion questions:

1. How has the military affected US manufacturing, according to this article?

2. Should we be making towel bars in the US?

Good OM Reading: Taco Bell and the Golden Age of Drive-Thru

If there was one article you could ask your students to read at the beginning of the OM semester, it would be this lead piece in Businessweek (May 9,2011). The theme is that OM innovations at fast food restaurants like Taco Bell rival those at any factory in the world. Written from the view of the drive-thru window (which generates about 70% of fast food sales), the article lets you overview your course with issues of productivity (Ch.1), technology and process design in services (Ch.7), layout (Ch.9), and time & motion studies (Ch.10). The story also comes with a 1-1/2 minute video which the students will enjoy as well.

Here is a quote from the 5-page reading: “Go into the kitchen of a Taco Bell today, and you’ll find a strong counter argument to any notion that the US has lost its manufacturing edge. Every Taco Bell, McDonald’s, Wendy’s, and Burger King is a little factory, with a manager who overseas 3 dozen workers, devices schedules and shifts, keeps track of inventory and the supply chain, supervises an assembly line churning out a quality-controlled, high-volume product, and takes in revenue of $1 million to $3 million a year, all with customers who show up at the front end of the factory at all hours of the day to buy the product”.

The firm’s CEO concludes, “At Taco Bell today I’ve got 6,000 factories, many of them running 24 hours a day”.
Adds a former Wendy’s VP for OM, “The most advanced operational thinking in the world is going on in the back” of a fast food restaurant. Wendy’s is rated as the fastest brand (an amazing 134 seconds per drive-thru vehicle), but Taco Bell comes out 1st ranked overall with an average time of 164 seconds and a 93.1% accuracy rate.

This article describes the restaurant layout (the topic of our Global Company Profile in Ch.9), new technologies in the industry, bottlenecks, staffing issues, and much more. It is a perfect lead-in to the exciting topic we teach.

OM in the News: A Shortage of Factory Workers in the US?

Would your undergrad or MBA students be interested in a manufacturing job if they knew it paid $50,000-$80,000 a year? Maybe not, but such jobs are available and often unfilled. The Wall Street Journal (May 6,2011) reports that manufacturers , despite 9% unemployment rates, are struggling to find skilled workers. Large and small manufacturers of everything from machine tools to chemicals are scouring for potential hires and poaching each other’s employees. Some are even hiring former prisoners who learned machinists skills behind bars.

Its a confluence of 3 trends, says the Journal. First, after falling for a decade, manufacturing jobs are now growing, albeit modestly. Second, baby-boomer retirements are sapping the most experienced workers (1/4 of all factory workers are 55 or older). Third, the US educational system isn’t turning out enough people with the math and science skills needed to deal with sophisticated computer-controlled factory equipment.

“We get people coming in here all the time who say ‘I can weld’. Well, my grandmother could weld”, says the Lehigh Heavy Forge Corp HR director in Bethlehem, PA. We need “people who understand the intricacies of $1 million lathes”. Likewise, technicians at Houston’s Bayer AG’s plant need math/science skills for such tasks as calculating the rate at which dyes need to be added for special batches of plastics. After screening, Bayer finds that few people are qualified. Some jobs at Bayer have been open 6-9 months, laments the CEO.

Manufacturers say it’s the educational system. Only about 5% of bachelors degrees in the US are in engineering, compared to 20% in Asia. In the most recent comparison of math and science test scores of 15-year olds by the OECD, American students trailed far behind those in China, Japan,South Korea, Canada, and Germany.

Discussion questions:

1. Do your students have any interest in high paid jobs running sophisticated equipment?

2. What system does Germany use (see Ch.1) that works better to fill this demand?

OM in the News: Chip Makers Bet the Farm on Future Demand

The New York Times (May 3, 2011) has just reported some good news for US manufacturing, namely, the massive expansion of chip makers who are counting on continuing heavy demand for chips in smartphones, tablet computers, refrigerators, cameras, and GPSs. Samsung, the huge Korean chip maker, is betting $3.6 billion in expanding its US factory to make logic chips for iPhones and iPads. The plant in Austin, scheduled to be completed next month, will be 2.3 million sq.ft., about the size of 40 football fields and one of the biggest factories in the country. Samsung chose Austin because of “the infrastructure and support system here–you can’t get that from anywhere else”.

Intel, the world’s largest chip maker, is spending $13 billion to build 2 new factories and upgrade 4 others in Oregon and Arizona, with the work to be complete in 2013. “When you make an investment in a factory, you’re essentially placing a bet on a manufacturing process that’s not yet done, for products that are not yet designed, to sell in market that is not yet there”, says Intel.

Global Foundries, a contract maker (also called a foundry) of chips, is investing $4.6 billion in a new plant near Albany, NY, that will build 28-nanometer chips for customers. (Small companies cannot afford the $ multibillion investment in making their own). Its 1.5 million sq. ft. plant will also open in 2013. “The appetite for tablet computers is a huge part of this move” to become the biggest contract chip producer in the world, says the Milpitas, CA, company.

The chip industry “is a risky business that’s not for the faint at heart. Its like putting down $1 billion on the craps table”, adds an industry analyst.

Discussion questions:

1. The NYT article focuses on new chip plants in the US. But chip makers are also expanding this year in China, Germany, Japan, S. Korea, and Taiwan. Why the global move?

2. What happens to plants that are out-of-date?

OM in the News: Intel Brings Good News to US Manufacturing

In these troubled times, Intel’s announcement (Computerworld, Feb.18,2011) that it would start construction this year on a new $5 billion microprocessor plant in Chandler, Arizona is indeed good news. The company, which also does manufacturing in Oregon and New Mexico in the US, and in Israel, Ireland, and China overseas, will open the Arizona plant in 2013 with 1,000 highly paid permanent workers. When complete, the factory will be the most advanced, high-volume semiconductor facility in the world. Fab 42, as it will be called, will produce 14-nanometer chips. (Nanometers, billionths of a meter, measure the width of chip circuits. Shrinking them makes chips more powerful or cheaper to make). The chips will be used in PCs, electronics, and mobile phones.

Intel has already committed another $6-8 billion this year to make upgraded chips at its other plants and to build a new plant in Oregon. This will provide those facilities the ability to produce 22-nanometer chips, which are in turn faster than the company’s current 32-nanometer chip-making process. The upgrades budgeted by this money will create yet another 1,000 high-skilled jobs, along with 6,000+ construction jobs. Intel will further hire 4,000 new R&D workers this year to round out the positive news. Revenue is expected to rise 14% to $49.5 billion, according to Bloomberg (Feb.18,2011).

The company, which makes 3/4 of its chips in the US, was praised last week by President Obama, who stated: “By and large, Intel has placed its bets on America”. Intel execs, meanwhile, have called on the US government for tax breaks to make it cheaper to build facilities in the US.

Discussion questions:

1.Why is the Intel announcement such good news?

2. Why does Intel have plants abroad?

3. What makes chip manufacturing such a difficult business?

OM in the News: US Productivity and Some Misconceptions

President Obama recently stated that the US can out-compete any other nation on Earth if only we “unlock the productivity of American workers”. Indeed, getting more or better value for each hour worked may be the key to competitiveness, according to two McKinsey execs in today’s Wall Street Journal (Feb.16,2011). Here are 4 of their main points in addressing common misconceptions about the importance of productivity growth:

1.The US now relies more than ever on productivity gains to drive GDP growth. Productivity generated 80% of GDP growth in recent years compared to 35% in the 1970’s. “If productivity increases at an average of 1.7% annual rate posted since 1960, annual GDP growth will fall to 2.2%, from its historic average of 3.3%. Americans on average would experience slower gains in living standards than did their parents and grandparents”, the authors write.

2. Productivity does not destroy jobs in a dynamic economy. “More than 2/3 of the years since 1929 have seen gains in both”.

3. Productivity is not just for laggard sectors and companies. “Even the best-performing companies can boost productivity by emulating the best practices of others and developing new innovations of their own”. Hospitals have just started to embrace efficient practices and lean techniques in supply chains. And boosting public-sector productivity is critical in reducing the budget deficit without slashing services.

4. Our productivity engine is not running out of steam. “By applying best practices across the economy and tapping into the next wave of innovation”, we can match historic growth rates, they conclude.

This is an important topic covered in Ch.1, but it is timely enough to discuss throughout the semester.

Discussion questions:

1. Why do some argue that productivity is a “job-killer”?

2. How did retail contribute to productivity gains in the 1990’s?

3. What happens when productivity gains fall?

OM in the News: The Startling Loss of US Manufacturing Capacity

The Sunday New York Times headline (Feb.13,2011) reads, “When Factories Vanish, So Can Innovators”. With the closing of the last spoon and fork (“metal flatware”) factory, in Sherrill, N.Y., the US lost an industry that traces its roots to Paul Revere. Just as Sherrill Manufacturing succumbed to less expensive Chinese imports, so have the sardine cannery, stainless steel rebar, vending machine, incandescent light bulb, cellphone, and laptop computer industries.

Less noticeably, says The Times, the imported portion of components that go into American-made products has risen from 17% to 25% over the past 13 years. For example, the wings of many Boeing jets are now made in Japan. With the inclusion of these imported components, manufacturing’s share of the GDP is actually 10.5%, not the government-reported 11.2%. (This, of course, is down sharply from 14.2% a decade ago and 30% in 1950). Moody’s chief economist states: “I think there is a growing recognition that a diminished manufacturing sector will undermine our economy”.

The US has long appreciated that low-wage workers abroad would cut consumer costs on a wide array of manufactured products. But the theory was that US producers would be the world’s best innovators, developing (and at least initially, producing) sophisticated new products here at home. Somehow, though, Apple’s spectacularly designed iPad and iPhone are being made in Asia, not here. Likewise, Maglev (high-speed rail) was invented here, but the technology and production has transferred to Japan.

Many experts believe that the engineers and factory workers in Asia may become the next innovators. One economist is quoted as saying: “The big debate today is whether we can continue to be competitive in R&D when we are not making the stuff that we innovate. I think not”.

Discussion questions:

1. Do we need to worry that “young people stop thinking about making things” in the US?

2.If consumers have benefited from unrestricted lower-priced imports, what is the negative of the equation?

3. Is innovation falling in the US? Rising in Asia?

OM in the News: Some Good News for American Manufacturing

Desperate for good news on the economic front, The Wall Street Journal’s lead story (Jan.19,2011) reports that last year, manufacturing created more jobs than it lost for the 1st time in a decade. As our semesters begin, this is an important topic to address in class (and in Ch.1). Indeed, this is good news as we stress how important manufacturing is for any country that expects to maintain a high standard of living for its citizens.

But before we get too carried away with projections of 300,000 new manufacturing jobs next year, let’s remember that we lost 6 million factory jobs in the past 13 years. This puts manufacturing jobs at about 12 million, or about 9% of all US non-farm jobs. We also don’t forget that manufacturing accounts for 11% of US economic output, down from 27% in 1950. After the steep recession slump, however, we need the growth. Manufacturing jobs pay about $22/hour, twice the average of service jobs.

The other good news is that companies are becoming more efficient, increasing productivity 7.1% from a year earlier while hours worked grew just 3%.

And yet more good news: Whirlpool just decided to spend $120 million to open a new appliance plant in Cleveland, instead of lower-cost Mexico. (The reasons include a better trained workforce, lower freight costs, and $30 million in incentives). And Caterpillar is building a $120 million plant in Texas to produce machines currently being shipped from its plant in Japan to N. American customers. Finally, The Journal states that Dow is building a massive new plant in Michigan to make batteries for hybrids and electric cars. Dow claims that every new job there will have a multiplier effect of 5 jobs at suppliers.

Discussion questions:

1. Why are companies starting to create new manufacturing jobs?

2. What will affect long-term growth in such jobs in the US?

3. What are the risks facing these jobs?

OM in the News: GE Decides Making Stuff is the Future

An interesting way to end this semester–or start next semester– is through a series of quotes from GE CEO Jeffrey Immelt in a major story in the New York Times (Dec.5,2010). GE, as you probably know, lost 3/4 of its market value with the recent financial crisis–hit harder than any company not in the banking sector, because of its finance arm called GE Capital. With a heritage of industrial innovation going back to Edison’s light bulb, GE lost its way to GE Capital’s cash machine that bolstered the bottom line for over a decade.

GE, according to Immelt, “must rely more on making physical products and less on financial engineering–a path that …is also necessary for the American economy as a whole.…Many bought into the idea that America could go from a technology-based, export-oriented powerhouse to a services-led consumption-based economy–and still expect to prosper. That idea was flat wrong”.

“Technology-based manufacturing of all sorts has to be the central part of reinvigorating the economy”, he adds. A White House advisory board has called for doubling US manufacturing employment, to 20% of the workforce. (Refer to Figure 1.4 and Table 1.3 in the text). GE, by the way, is the 2nd largest US exporter, after Boeing.

The products where GE has competitive advantage and a strong manufacturing presence are: next generation jet engines, power turbines, locomotives, nuclear plants, water-treatment systems, medical-imaging equipment, solar panels, and windmills. GE plans to add 4,000 manufacturing jobs in the US.

GE is stating what is becoming increasingly obvious. We must get back to basics in this country, creating not just services, but goods as well. Nations that do not produce goods sought by others will not be able to compete in the competitive global economy.

Discussion questions:

1. What if we do continue to become a service driven-economy, with fewer and fewer jobs in manufacturing?

2. Why the change in GE’s attitude?

3. Can we ever revert to making most of the goods we consume, or will China be our biggest supplier for decades to come?

OM in the News: Cooking Up Productivity During the Recession at Campbell Soup

The recession slashed 8.5 million jobs in the US and slowed companies investment plans–but it also pushed up productivity growth (see Ch.1). This is good news for corporate profits , and bad news for people waiting for recession-casuality jobs to come back. Annual growth in productivity, or how much output is produced in an hour of work, averaged 3.4% in the last 5 quarters…all while sales dropped another 9% during that period.

The latest Businessweek (Nov.29-Dec.5, 2010) highlights the drive at Campbell Soup to ask “employees to help them save cash by working smarter with existing technology.” “The reward for increased efficiency is a stable job and more business”, says Campbell’s VP-Supply Chain. His team is working to reinvent how the company makes soup.

Like carmakers who use a common chassis for multiple cars and then differentiate, Campbell is now doing the same instead of using a unique recipe for each soup. With a common chicken broth base, the firm differentiates with seasonings, meat, and vegetables.

Daily worker-manager meetings also raise productivity, with nitpicky efforts to save time, money, and effort. Operators and mechanics started numbering each gasket to speed repairs, cut windows into machine covers so they could watch for signs of wear, color-coded handles to lower confusion in settings. All these small changes added up to an increase to 85% operating efficiency, up from 75% three years ago. Each 1% gain means $3 million more in operating profits.

Businessweek also notes that UPS trucks now carry devices that track how many left turns its drivers have to make. The new system helps drivers optimize routes and will save 1.4 million gallons of fuel per year.

Discussion questions:

1. How does productivity improvement impact the re-creation of jobs?

2. Why are employees so important in productivity gains?