Chapter 11 – Page 25 – The OM Blog by Heizer, Render, & Munson

Guest Post: Supply Chain Risk Management and ISO

Our Guest Post today comes from John Bowler, who is Visiting Professor at DeVry University’ s College of Business, and Chris Bowler, who is Principal, Porter Keadle Moore, where he specializes in Enterprise Risk Management.

We find it interesting that the foundation of the relatively new Supply Chain Risk Management (SCRM) ISO standard is based on theories first advanced quite some time ago – PDCA (Deming, circa 1950) and Competitive Strategy and Competitive Advantage (Porter, circa 1980 and 1985). Along the same lines, Jay and Barry’s OM text states in Chapter 2 that competitive advantage is achieved through one of these three strategies: (1) differentiation, (2) cost-leadership or (3) response. We note that the Accenture 2011 Global Risk Management Study found 47% of the companies surveyed listed “reducing costs” as their highest risk management challenge.

While many firms today are focused on “lean” cost reducing practices, some companies and many experts are finding that these lean approaches can create unanticipated events, which can quickly escalate into crisis and perhaps even system failures. Is it reasonable then to suggest that a company is better served by refocusing its SCRM efforts on its specific competitive strategy’s strengths, weaknesses, opportunities, and threats? Along those lines, ISO 28002 (2011) brings these following new insights to the table:

SCRM is really about effectively capturing profitable business opportunities compatible with a firm’s (competitive) strategy.
SCRM effectiveness depends on the resiliency of the firm’s processes, people and technology to both stress and breaks along the supply chain.
When an organization incorporates and aligns its SCRM with its strategic goals, the resultant degree of resiliency ensures the firm’s long-term profitability and survivability.

This new way of thinking about SCRM as Supply CHANGE Management reflects transformational thinking not only for finance and operations but for the C-suite as well.

Guest Post: Trends and Strategies in Logistics and Supply Chain Management

Our Guest Post today comes from Andreas Wieland (http://scmresearch.org/) and Robert Handfield (http://scm.ncsu.edu/blog/). Andreas heads the Kühne Foundation Center for International Logistics Networks at the TU Berlin. Rob is director of the Supply Chain Resource Cooperative at North Carolina State University.

Some months ago, BVL International engaged us to find the most important trends that are currently going on in logistics and supply chain management and also the most powerful strategies to cope with these trends.

Our general observation, derived from both over 60 interviews and the analysis of over 1,700 international survey responses, is that complexity in the form of consumer demands for customized solutions, increased product variations, and fragmented channels has increased. We found that high customer expectations, an increasingly networked economy, intense cost pressure, as well as ongoing globalization, shortage of talents, and pronounced volatility are dominating trends in logistics and supply chain management. Other important trends are sustainability, risks and disruptions, and new technologies.

How should organizations prepare themselves to deal with these emerging trends? The top performing companies are not only preparing themselves for these trends; they are even seeking to exploit them for advantage. First, people are the core of any organization, and strategies to find and keep talented logistics managers and warehouse/transportation workers are crucial. Second, a strong core set of processes is needed, and these processes should be adaptive and flexible to accommodate different local and regulatory conditions. Third, technology must be leveraged to provide insights, visibility, and promote an action-oriented culture. Fourth, end-to-end integration will become an increasingly important logistics and supply chain strategy in the next five years. Finally, to pursue ethical, social and ecological standards, organizations will increasingly need to work both vertically and horizontally with suppliers, service providers, local agencies, and governments.

Our report, coauthored by Drs. Frank Straube and Hans-Christian Pfohl, “Trends and Strategies in Logistics and Supply Chain Management,” is available on BVL’s website.

OM in the News: Wal-Mart vs. Amazon Logistics

This Wal-Mart hub sends supplies out to physical stores

Few have done better than Wal-Mart when it comes to retail logistics—the art of ordering, transporting, stocking and tracking merchandise, writes The Wall Street Journal (June 19, 2013). Wal-Mart pioneered a sophisticated hub-and-spoke distribution network which uses warehouses to service stores less than a day’s truck drive away so it could remove middlemen, quickly replenish shelves and reduce costs. At its distribution centers, scanning technology tracks merchandise as it flows at 6 miles per hour on 12 miles of conveyor belts onto trucks. Some items spend less than 45 minutes in warehouses.

Supply trucks crisscross the country and arrive daily at Wal-Mart’s more than 4,000 U.S. stores. Shipments are based on real-time data of shopper purchases, transmitted by the second as employees scan items at store checkouts. But with its e-commerce operations, which began in the late 1990s, Wal-Mart has been less exacting, instead relying on makeshift spaces carved out of store-serving warehouses and third-party operators to handle the load. Electronics ordered from Walmart.com are often delivered by companies like Ingram Micro which transport Apple tablets or Samsung phones to shoppers without ever going through Wal-Mart’s warehouses.

By contrast, Amazon has spent 15 years building its e-commerce network, with more than 40 U.S. warehouses within 35 miles of major cities. “As Amazon’s bets on infrastructure pay off, it can sell products at lower costs and puts even more pressure on other retailers,” says one industry expert. Wal-Mart now plans to spend roughly $430 million this year on e-commerce investments, including a logistics system tailored for Web orders. It is building distribution centers, but also will use stores as mini distribution centers. While logistics costs account for 3% of the price of an average “shopping basket” in stores, they make up 15% of the price of online orders.

Discussion questions:

1. What is Amazon’s logistics advantage?

2. How did Wal-Mart stumble in the move to electronic shopping?

OM in the News: Apple Decides That Two Suppliers Are Better Than One

Pegatron began making iPad minis (left) recently, while Foxconn still assembles the larger iPads (right)

For years, nearly all of the world’s iPhones and iPads rolled off the assembly lines of a single company: Foxconn. It was a famous partnership between two outsize personalities— Steve Jobs, Apple’s intense and mercurial co-founder, and Terry Gou, the Taiwanese manufacturer’s equally demanding chairman. But under current CEO Tim Cook, reports The Wall Street Journal (May 30, 2013), Apple is dividing its weight more equally with a relatively unknown supplier, giving the technology giant a greater supply-chain balance. Pegatron will be the primary assembler of a low-cost iPhone expected to be offered later this year. Foxconn’s smaller rival across town became a minor producer of iPhones in 2011 and began making iPad Mini tablet computers last year.

Pegatron’s rise means an end to the monopoly that Foxconn, the world’s largest electronics contract manufacturer—has held over the production of Apple’s mobile products. There are strategic reasons for the shift: risk diversification after Foxconn’s manufacturing glitches last year with the iPhone 5 that resulted in scratches on the metal casings, and Apple’s decision to expand its product lines amid growing competition from Samsung and others. Pegatron also has been willing to accept thinner profits as it courts Apple’s business.

Ironically, Foxconn’s cost advantages from scale have waned as it works to improve factory conditions after a spate of high-profile worker suicides and accidents in recent years. Foxconn, in its growing heft as the world’s largest electronics contract company, was also getting more difficult for Apple to control, with incidents such as changing component sourcing without notifying Apple.

Pegatron, which has about 100,000 employees in Taiwan and China, expects to increase its China workforce in the second half of the year by around 40%. The staffing increase is largely due to expected production of low-cost iPhones.

Discussion questions:

1. Why is Apple diversifying suppliers?

2. What are the disadvantages of this move?

OM in the News: Disney Cleanses its Supply Chain

Disney sweater found in the remains of a fire last year in Bangladesh

Ever since a building with garment factories collapsed in Bangladesh a few weeks ago, killing more than 1,000 people, Western apparel companies with ties to the country have scrambled to address public concerns about working conditions there. But one big American company, Disney, had already decided to leave the country — pushed by the devastating fire just six months ago that killed 112 people. The Walt Disney Company, the world’s largest licensor with sales of nearly $40 billion, recently ordered an end to the production of branded merchandise in Bangladesh. The New York Times (May 2, 2013) reports that on March 4, the company had sent a letter to thousands of licensees and vendors setting out new rules for overseas production.

This comes as no surprise to those of us in Orlando, where Disney, with its 60,000 “cast members” (employees in layman’s terms), is king. Its public image as a safe, clean, and wholesome company is carefully maintained. Disney’s move reflects the difficult calculus that companies with operations in countries like Bangladesh are facing as they balance profit and reputation against the backdrop of a wrenching human disaster. “We felt this was the most responsible way to manage the challenges associated with our supply chain,” says Disney’s president of consumer products.

With some labor groups urging Western companies to stay and fix problems rather than leave, Disney said that it would pursue “a responsible transition that mitigates the impact to affected workers and business.” It set out a yearlong transitional period for its contractors to phase out production in Bangladesh, Pakistan, Belarus, Ecuador and Venezuela by April, 2014. In deciding in which countries to permit production, the company relied heavily on the World Bank’s Governing Indicators, which evaluate performance on issues like government effectiveness, rule of law, accountability and control of corruption.

Discussion questions:

1. Evaluate Disney’s decision to leave these 5 countries vs. staying and trying to improve conditions.

2. How can a major company protect its reputation when global supply chains are so complex?

OM in the News: Bangladesh and the Clothing Supply Chain

Global apparel companies often depict their international supply chains as tightly scrutinized systems to ensure that clothing sold to American buyers is produced in safe, monitored factories. Yet their inspectors usually check safety factors and working conditions, not the soundness of the buildings themselves, and the companies often have little control over the subcontractors who do much of the work. This was the case in Bangladesh’s chaotic industrial center. The building collapse last week that caused at least 1000 deaths, reports The New York Times (May 1, 2013), has produced some jarringly different responses from Western apparel retailers that obtained goods from factories inside the building. Several American and European retailers have sought to minimize any ties they had to factories in the Rana Plaza building, while some other companies have been quick to acknowledge their ties to those garment suppliers — and have pledged to contribute to a fund to help families of the victims.

The Children’s Place, a NJ retail chain that operates 1,100 stores, said that although a garment factory inside Rana Plaza had produced apparel for it, “none of our apparel was in production there at the time of this terrible tragedy.” But customs documents show that over the past 8 months, Rana Plaza had made more than 120,000 pounds of clothing sent in 21 shipments to the Children’s Place.

After labor groups said they had found labels of Benetton clothing in the rubble, Benetton initially denied using any factories in the building. But as more labels and documents showing Benetton orders were found and publicized, the company revised its response, saying it had placed only a one-time order there and had severed ties with that factory. The head of one anti-sweatshop group criticizing Western companies stated: “It is high time for Benetton to stop this senseless game of always trying to pretend they’re not there.”

Discussion questions:

1. What is Benetton’s responsibility in a case such as this?

2. What options do operations managers have to deal with fires, collapses, and other tragedies in countries like Bangladesh and Pakistan?

OM in the News: Japan’s Keiretsu Scandal

The Wall Street Journal (Feb. 16-17, 2013) provides an interesting analysis of problems with keiretsu networks, a topic we discuss in Chapter 11, Supply Chain Management. The Journal writes: “For decades, Japan’s auto industry keiretsu—networks of parts suppliers closely allied with companies including Toyota and Honda appeared as a black box to outsiders. But there was a lot going on behind the scenes and some of it wasn’t legal.” In fact, some areas of the Japanese auto-parts business were rife with bid rigging and collusion, and have produced multimillion-dollar fines and a dozen prison sentences. A U.S. official calls the probe the “largest price-fixing investigation ever.” Prosecutors claim the Japanese firms conspired to boost the costs of some of the best-selling vehicles on the road.

Japanese auto makers have long seen keiretsu as a way to ensure quality over the long term by building trusted relationships with suppliers. The brand-name companies often own significant stakes in keiretsu parts makers and enjoy the right of first refusal for newly developed technology. Typically, they work closely from the design stage onward, sharing proprietary technology.

Those relationships began to change more than a decade ago when France’s Renault took a controlling stake in struggling Nissan and sent a Brazilian executive known as “Le Cost Killer,” Carlos Ghosn, to run it. Nissan disbanded its keiretsu and shifted to open-source bidding among suppliers, many based outside Japan. There has been some quiet pushback from industry officials in Japan who assert that any collusion was more of a bid for survival than for outsize profits. “Different suppliers work hand-in-hand and divide up large lot orders in a way that assures a steady flow of parts,” says one Japanese auto exec. Adds Toyota’s VP, “We feel a duty to protect our keiretsu. We are trying to incorporate more outside suppliers, but won’t give up on our own way of doing business in Japan.”

Discussion questions:

1. Why do the Japanese believe in the use of keiretsu?

2. Is a keiretsu “collusion,” or “a bid for survival?”

OM in the News: Walmart Toughens Supplier Policies

The Wall Street Journal (Jan.22, 2013) reports that Walmart is warning suppliers that it is adopting a “zero tolerance policy” for violations of its global sourcing standards, and plans to immediately sever ties with anyone who subcontracts work to factories without the retailer’s knowledge. The changes come after Walmart clothing was found at a Bangladesh factory where a fire killed 112 people in November—a factory the company said was no longer supposed to be making its clothes. “Obviously our three-strike policy wasn’t working as well as it could have,” says Walmart’s VP of ethical sourcing.

Here is a summary of the changes:

Starting March 1, Walmart will employ a “zero tolerance” policy to sever ties with suppliers that subcontract work to factories without the retailer’s knowledge; Its previous “three-strike” policy gave suppliers three chances to comply with Walmart’s safety requirements
All facilities in Bangladesh must undergo a mandatory electrical and building safety review
Factories found to have fire-safety related violations have 30 days to take corrective action before being terminated, instead of the previous requirement of six months to a year; all floors and buildings must have a secondary exit, preferably an external fire escape route
New factories must undergo a pre-approval audit before suppliers can do business with them
Suppliers must ensure one of its employees, and not a separate agent, is stationed locally to monitor factory facilities
Walmart will publish a list of factories suppliers are no longer authorized to use on the retailer’s corporate website

“Walmart’s factories are dangerous because they don’t pay adequate prices to suppliers, and because there is no transparency in their monitoring programs,” says the director at Worker Rights Consortium, a nonprofit group. “There is nothing here that changes any of that.”

Discussion questions:

1. Is Walmart doing everything feasible to be “ethically sourcing.”

2. Why has Walmart become a global leader in sustainability?

OM in the News: The Last 60 Minutes of On-line Holiday Shopping

Time is money. And in the fierce holiday-season battle between online and offline sales, a single hour can be worth millions of dollars, says The Wall Street Journal (Dec.19,2012).

GSI Commerce, a division of e-Bay that handles online shipping for 70 brands including Godiva, Aéropostale, and Estée Lauder, has been counting workers’ steps and even tweaking the way it prints labels with a single goal: Push back the cutoff time for Christmas delivery by 60 minutes. This year, GSI’s customers let shoppers order as late as 11 p.m. on Dec. 22 and still get their orders by Christmas Eve. That’s 8 more hours than shoppers get on Amazon.com, and an hour later than GSI’s deadline last year. “It’s beyond critical,” says the COO of one on-line retailer. “Having a few hours over a competitor could be a seven-figure event.”

As soon as last Christmas ended, GSI’s OM execs began huddling with customers and UPS to figure out how to speed up the time it takes for an order to be processed. GSI spent more than $25 million to improve its operations and speed since then. One of the OM changes: saving steps for employees–who can walk nine miles a day–by putting the most popular goods closest to the people who pick them. This cut employees’ walking time by 60%.

The company then placed 7,000 big box storage containers closer to the front of the warehouse. To figure out what to put in the boxes, GSI’s OM team tracked order patterns and worked with retailers to know what is being promoted heavily. Those calculations were rerun every hour.

To further cut down walking time, GSI moved smaller storage boxes on their shelves closer together. Fire insurers required the warehouses to maintain a few inches of space between the boxes so that water from overhead sprinklers can drain down between them. Across miles of shelves, those gaps add up. So GSI decided to drill holes into the boxes, proving that could accomplish the same firefighting goal as the spaces.

Discussion questions:

1. Why was it important for GSI to improve its warehousing operations?

2. How did GSI decide what processes to change?

OM in the News: Darden’s Lobster Supply Chain Heads to Asia

In a bold move towards vertical integration, restaurant giant Darden (Olive Garden, Red Lobster, Longhorn) has just opened up a $653 million lobster farm on the Malaysian island of Borneo, according to The Wall Street Journal Southeast Asia (Nov.16, 2012). The lobster farm serves two purposes: (1) for restaurants facing weak growth prospects in Western markets, the fast-growing economies of Asia are attractive as millions more people eat out and desire to try Western food; and (2) it guarantees an unlimited supply of the seafood for Darden’s 2,000 U.S. stores. A long-term investment, the 9,300-hectare aquaculture park will produce 40 million pounds of lobsters and generate $1 billion in annual revenue when it reaches maximum capacity.

“We plan to establish our Asia-Pacific restaurant development hub in Kuala Lumpur,” says the CEO. “Asia is an attractive market and Malaysia represents a strategic and central location for us to begin to explore the possibilities in this part of the world.”

The Darden project dovetails with the Malaysian government’s program to lift that nation into developed nation status by 2020 by creating high-income jobs in agriculture and other areas. Two local firms will assist Darden in the project. These companies say they plan to hire more than 14,000 people to work on the project over the next decade, including scientists, engineers, aquaculture specialists and skilled technicians.

Production is set to begin by 2015 and reach full production in 2029. Globally, the market for lobsters is estimated to be worth over $4 billion a year, with the Asia Pacific region accounting for about 75% of the total market. Borneo was chosen because it has “suitable” geography and available sea space for an efficient operation; it is also free from catastrophic weather that could threaten the project’s long-term viability.

This is a story that dovetails nicely with our two video case studies on Darden supply chains in Chapter 11 and Supplement 11.

Discussion questions:

1. Why is Darden entering the seafood production business?

2. What are the plusses and minuses of this vertical integration?

OM in the News: The Rise and Fall of Rare Earths

Manufacturers of high-tech products rely on a steady stream of metals–some of them scarce–to make their goods. These “rare earths” are light-weight, malleable metals that are essential to hybrid cars, cell phones, and hard disk drives. (Toyota Prius batteries use neodymium to power the car.) Rare earth metals, a collective name for 17 minerals used in products like these, had skyrocketed in price in the past 2 years as China (which controls 90% of global production) slashed exports to tighten control over the sector. Lanthanum, for example, jumped from $10/kg in 2009 to $160/kg last year. Neodymium surged from $20/kg to $455/kg. Prices of many other rare earth elements rose more than 10-fold in a little more than a year.

But The Wall Street Journal (Nov.13, 2012) reports that companies– like Australia’s Kimberly Rare Earths, Black Fire Minerals, and Sable Minerals– that bet on rare earths as a hot commodity play are canceling investments after being caught by a sharp fall in prices this year. Fears of overinvestment and a supply glut are the driving forces. Lanthanum—used in oil refining and hybrid vehicles—now fetches just $13/kg. Cerium, which is used in catalytic converters and plasma televisions, is now down to $16 a kilo, from $102 a kilo last year. Neodymium, used in wind turbines and music players as well as in batteries, has fallen to $85 a kilo from $234 a kilo.

Sentiment in the wider mining industry is souring on concerns over the slow pace of the global economic recovery. “All of a sudden we have 400 years of rare earths being drilled out,” said Kimberly’s director. “Smaller projects just aren’t viable anymore.” Although demand for rare earths will more than double to nearly 250,000 tons over the next decade, the growth in supply will outstrip demand between 2014 and 2019 as new mines start operations.

Discussion questions:

1. Why are rare earths so important in manufacturing?

2. What lessons do OM managers learn from these price fluctuations?

OM in the News: Union Pacific R.R. in a High-Tech Economy

“Can a 150-year-old company be part of the modern economy,” asks Fortune (Oct.29, 2012). Apparently so. Union Pacific, America’s largest railroad, touches all parts of the economy, even globally — 30% to 40% of its shipments originate or terminate outside the U.S. In its intermodal business, where it takes containers off trucks and put them on the railroad, it had a record year– a bellwether measure for what’s happening in the economy.

Union Pacific has also started moving shale oil by rail– 2 or 3 times faster than a pipeline (and able to come out wherever companies want it). In 2010 it moved 4,400 carloads of crude oil. In 2011 it was 25,000, and 2012 will be 140,000. CEO Jack Koraleski’s take is: “If the United States can convince manufacturers that low energy prices are here to stay, then all of a sudden the U.S. starts to look a lot more attractive as a place to build that next plant. We’ve already seen manufacturers announce that they’re bringing some manufacturing back to the U.S.”

With 8,000 locomotives pulling hundreds of thousands of cars over 32,000 miles of track, Union Pacific is also an infotech company. Technology controls the movement and safety of the trains. There are 4,000 pieces of detection equipment throughout the network. As trains go over, they’re measuring the temperature of the bearings, the impact of the car as it rides on the rail and whether there’s a bump to it, the sound of the wheels on the rail for anomalies and patterns–all part of predictive maintenance on when to pull that car out and have it inspected.

Union Pacific has also tried to move up in its customer supply chain. With Shipment Vision, Chrysler assigns a car a VIN on a manufacturing line, then Union Pacific tracks and controls that vehicle all the way to the showroom. The railroad takes technology it uses to control trains and gives it to customers to help them control their supply chain more effectively.

Discussion questions:

1. Why are railroads critical to the OM function in many firms?

2. Why has Union Pacific moved into the infotech sector?

Good OM Reading: The Power of Logistics Clusters

Everyone understands the concept of industrial clusters that have developed around the world: Silicon Valley (for information technology), Hollywood (for entertainment), and Boston (for life sciences). Strong clusters are ecosystems of venture capital resources, universities, research centers, employers, highly skilled workers and institutions for collaborations.

The MIT Sloan Management Review (Fall, 2012), however, introduces the concept of logistics clusters— local networks of businesses that provide a wide array of logistics services, including transportation carriers, warehousing companies, freight forwarders and third-party logistics service providers. They also include the distribution operations of retailers, manufacturers and distributors. These clusters attract companies for whom logistics is a critical element of their service offering or a large part of their overall costs.

Logistics clusters are located strategically to enable efficient transportation and delivery services to large populations. They are positioned in mode-changing locations such as busy seaports (Rotterdam, Shanghai, Los Angeles), airport hubs (Hong Kong, Seoul, Memphis) and major intermodal yards where freight shipments transfer from railcars to trucks (such as Chicago, Dallas and Kansas City). Some of the world’s largest logistics hubs, including Singapore, São Paulo and Memphis, bring together multiple elements at once. The economics of transportation means that cargo has to travel long distances in bulk, while demand from retailers and JIT manufacturers means that final distribution must be handled locally in small quantities in response to the ups and downs of customer demand.

The Sloan article notes 3 major advantages of logistics clusters:

1. Value additions. For example, UPS repairs Toshiba laptops at its facility in Louisville, next to the UPS Worldport air hub, reducing service turnaround times from 2 weeks to 4 days.

2. Facilitating returns. Miami’s Neptune Lines specializes in refurbishing secondhand pieces of heavy equipment for Caterpillar and Komatsu. It handles about 5,000 pieces of equipment per year.

3. Attracting other industries and jobs. Indianapolis has some 1,500 logistics and related services companies, including distribution centers for Amazon.com, Hewlett-Packard, and CVS Caremark.

This is a nice article to ask your students to read before you discuss the topic of logistics in Chapter 11.

OM in the News: Apple vs. Samsung Is Really About Supply Chains

By now, everyone has heard the results of the law suit out of San Jose in which Apple was awarded $1.05 billion for damages incurred by Samsung’s infringement on Apple patents (The Wall Street Journal , Aug.25-26, 2012). The sweeping victory for Apple provides ammunition for more legal attacks on its rivals in the $250 billion smartphone market–in which Samsung and Apple are #1 and #2. The jury found that Samsung infringed all but one of the seven patents at issue, and also decided Apple didn’t violate any of the five patents Samsung asserted in the case. “Today’s verdict should not be viewed as a win for Apple, but as a loss for the American consumer,” Samsung said. “It will lead to fewer choices, less innovation, and potentially higher prices.”

Apple, which prides itself on the style of its products, broke new ground by heavily relying on patents covering the physical design of its iPhones and iPads. (This is called “trade dress,” the overall look and feel of a device.) Tech companies have more commonly relied on utility patents, which cover the way products work rather than how they look.

The bigger story from an OM perspective, though, may be in the fact that the rival companies have a $5 billion supply chain relationship. Apple is Samsung’s biggest customer for microprocessors. The current case in many ways resembles the 1996 lawsuit by GM against rival VW. GM’s VP for Supply Chains, Jose Lopez, was accused of stealing GM’s plans for a new type of factory, dubbed “Plant X”, when he defected to VW. The settlement, in GM’s favor, recognized the role of each company as a supplier to the other. VW paid GM $100 million and was required to buy $1 billion in parts from GM.

In today’s world, competition–as we say in Chapter 11–is often between supply chains, not between companies.

Discussion questions:

1. Ask students to research details of the GM-VW lawsuit and discuss them in class.

2. The Samsung-Apple lawsuit in Korea played out differently. Why?

OM in the News: Outsourcing Leads to Delays For The Airbus 350

Just as aggressive outsourcing a decade ago on its 787 Dreamliner caused Boeing to stumble, Airbus now faces exactly the same issues as it prepares its direct competitor, the A350. The Wall Street Journal (July 11, 2012) writes that both companies have lurched through a string of expensive and embarrassing crises while developing their new airplanes. To recover, the competitors are rethinking how they build jetliners. What is emerging is a middle path between outsourcing, which has reshaped the aeronautical industry over recent years, and the highly centralized production systems that preceded it. In a major retreat, Boeing has since bought up suppliers, brought work back in-house and integrated more closely with its remaining contractors. Manufacturing problems on the 787 have left Boeing with more than 40 almost-completed Dreamliners awaiting fixes. Customers are getting their planes 4 years late. For a second, larger version of the Dreamliner, Boeing opted to design many outsourced components itself.

Airbus found internal coordination was equally daunting. The A350 team pressed plants to agree on common standards and buy identical equipment. Some “partners” balked at spending hundreds of thousands of dollars for the digital “tool set” of software to access A350 blueprints. By 2010, A350 blueprints were running late and the project was delayed 6 months. Last spring, bad news again surfaced. Lower-tier contractors were struggling to deliver parts on time. Preparations to manufacture composite parts took longer than the setup for metal parts had. As parts arrived late, delays rippled upstream. Large sections of the first test airplanes weren’t ready for assembly. Airbus could rush the unfinished fuselage parts together and appear on schedule (as Boeing had done), even though it would be harder to complete tasks later, out of sequence. It chose to delay yet another 6 months.

Airbus now monitors 450 suppliers world-wide. “We don’t know everything, but we know all about the risky ones,” says the A350 VP.

Discussion questions:

1. What are the advantages and disadvantages of outsourcing in this industry?

2. What is the impact of a plane delayed by 2-3 years?