Category: Chapter 1

posts related to Chapter 1

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?

Good OM Reading: The Spread of Industrial Engineering in China…By an American

Most all of us know the story about how Dr. Edwards Deming became the father of quality control in Japan. With their factories and infrastructure destroyed, Deming  helped rebuild post-war Japan into the industrial powerhouse we know. Deming’s reputation is so strong in Japan that the awarding of the annual Deming Prize for quality is broadcast live on TV.

Most of don’t know, however, the story of how China’s productivity revolution began some nine years ago. The improbable tale, written in a fascinating Wall Street Journal article (Nov.6-7,2010), describes Gavriel Salvendy, a 72 year old Hungarian-Israeli-American  professor who is the father of Industrial Engineering in China. Dividing his time  between China’s MIT (Tsinghua University in Beijing) and Purdue, Salvendy tore up the traditional Chinese academic hierarchy. Now more than 200 IE programs have sprung up around China mimicking that at Tsinghua.

I hope you can take 5 minutes to click on the link to the WSJ article and enjoy it as much as I did.

OM in the News: Starbucks’ Lean Teams Slowing Down

I always like to use Starbucks examples in class. Its the kind of “hip” company that students can relate to. Over the past few years , Starbucks has been applying lean manufacturing techniques to study every move its baristas make in order to shave seconds off each order. Chapter 1 in our text has an OM in Action box describing these productivity improvements.

But The Wall Street Journal (Oct.13, 2010)  just reported that Starbucks now wants to reign in its baristas, an act that will result in longer lines and waits.   Baristas are being told to stop making multiple drinks at one time, to steam milk one drink at a time instead of a pitcher at a time, to rinse pitchers after each use, and to use 1 espresso machine instead of 2.

Why would the company do this?  The new methods have “doubled the amount of time it  takes to make some drinks” says one employee. But the company  is concerned  about quality, with customers indicating that Starbucks espresso drinks are just “average”.

It is definitely an interesting class topic to see the lean techniques being reversed and I am sure many students will have a comment about such changes.

Discussion questions:

1. Why would baristas be opposed to slowing down the process?

2. What are some of the lean techniques the company has introduced over the years?

3. What other changes has Starbucks made recently in product and process?