Chapter 11 – Page 27 – The OM Blog by Heizer, Render, & Munson

OM in the News: Boeing Wants Production Faster, Faster, Faster

There are not many businesses in which the next 6 years’ worth of customers form an orderly queue, put down fat deposits, and make futher installments as they wait for delivery. But Boeing, reports The Economist (Jan.28,2012), has such a backlog (and 2011 profits of $4 billion). The key to continued success, though, is ramping up production to meet the soaring demand–an operations issue if there ever was one.

At its Renton factory (near Seattle), 737s are being churned out at a record rate of 35/month after a recent speeding up of the 2 assembly lines. The plan is to increase to 42/month by 2014, squeezing a 3rd line into the giant hangar. Likewise, at Boeing’s nearby Everett factory and at a 2nd plant in South Carolina, plans are to turn out 10 giant 787 Dreamliners/month by the end of 2013.

These assembly plants are the final stage in a long and hugely complex global supply chain that we describe in the Global Company Profile in Chapter 2. Boeing has about 1,200 tier one suppliers, providing parts coming in from 5,400 factories in 40 countries. These in turn are fed by thousnads more tier 2 suppliers, which themselves receive parts from countless others.

Boeing is the first to admit that it outsourced too much work on the 787, leading to 2 years of delays and 40 unfinished jets parked on runways in several states awaiting final parts. Some work has been brought back in-house, and a “war room” has been set up to constantly monitor the world’s supply of parts and raw materials. Boeing just signed a long term contract with the Russians to ensure a steady stream of titanium. It has also hired 100’s of “examiners” to visit suppliers to check that they are building production to meet Boeing’s rush to expansion.

Discussion questions:

1. Why is Boeing working more closely with suppliers now?

2.What is the danger in ramping up production dramatically?

OM in the News: Apple Releases Names of Suppliers and Their Compliance

Apple Inc. just released an audit of its major suppliers, saying it found a number of violations including breaches in pay, benefits, and environmental conditions, especially in China. It conducted 229 audits last year, an increase of 80% over 2010. The company, notorious for keeping its supply chain under wraps, also for the 1st time named its major suppliers. Under pressure from activists in the US and abroad, Apple’s 27 page Social Responsibility Report is the most comprehensive in the firm’s history. It also reflects new CEO Tim Cook’s departure from the culture of secrecy maintained under Steve Jobs.

Asking your students to read this report and evaluate the firm’s strength and weaknesses may make for a good discussion when you cover Chapters 7 and 11.

The Wall Street Journal (Jan.14, 2012) reports that nearly a third of Apple’s suppliers do not abide by the company’s standards. Five facilities employed underage workers; 112 were not properly dealing with hazardous chemicals (137 workers were seriously injured cleaning iPad screens with n-hexane); 108 firms did not pay properly for overtime; and 93 had workers exceeding the 60 hour per week corporate cap. Apple did add that all suppliers have stopped discriminatory screenings for medical conditions or pregnancy. Several references are made to one of Apple’s biggest manufacturing partners, Foxconn, and the spate of employee suicides (jumping off the roof) at its Shenzen, China facility.

While Apple has occasionally divulged the names of selected suppliers, the rest have been a secret, long-studied and sought out by industry analysts. The new list of 156 companies represents 97% of the first tier of Apple’s supply chain. It includes such well-known firms as Sony and Intel, along with less-known names like Tianjin Lishen Battery, Zenya Aluminum, and Unisteel Technologies.

Discussion questions:

1. Why did Apple release this report and name its suppliers?

2. What more can Apple do to increase its social responsibility?

OM in the News: Boeing Checks Out its Supply Chain for Weak Links

Boeing’s production problems with its 787 Dreamliner have taught it to stress-test suppliers as it tackles a mountain of orders for its best-selling 737 jets. In the past, “We had much more of an attitude of: We’ll set the requirements and you have to go do your job”, says Boeing’s VP for the 737 in The Wall Street Journal (Dec.30,2011). Now, it is using “a fundamentally different approach”, by regularly verifying that suppliers have the right skills.

This is part of a critical effort to boost production by about 60% (or 300 jets a year) to work down a backlog of 3,500 orders worth $270 billion. To do so, Boeing has added 200 supply chain specialists in the last 18 months. They visit vendors frequently as part of the strategy to remove bottlenecks and delays that have hobbled previous ramp-ups. Take Vaupell Holdings, for example– one of 1,000 suppliers subject to exhaustive reviews of production tools, materials and schedules. A Boeing employee visits almost daily now, as compared to once a week in the past.

Airplanes are one of the most complex industrial products. Jets at Boeing contain several million parts, coming from 1,200 direct suppliers and many more 2nd and 3rd tier suppliers. Problems down the supply chain, such as shortages of machines used to mold certain components, can cause delays that ripple not just across Boeing, but through the whole commercial airplane industry. Boeing execs say their heightened sensitivity to the supply chain stems from the troubles it had in producing the first 787s, which depend heavily on parts made outside Boeing.

Discussion questions:

1. Why is Boeing so concerned about its suppliers?

2. What happens when the supply chain suffers severe disruptions?

OM in the News: When Supply Chains Break

The new Fortune (Dec.26,2011) article “When Supply Chains Break” (pp.29-32) ends with the following line: “The real cost advantage may not go to the manufacturer with the nimblest supply chain but to the company with the most robust one”. The opening line is: “Manufacturers have spent years building low-cost global supply chains. Natural disasters are showing just how fragile those networks really are”. Sure enough, with hundreds of Hondas in the flooded plant in Thailand just floating in 15 feet of water, it is surreal to think of how we teach the lean supply chain concept.

Invented by Toyota, and perfected in the era of globalization, lean supply chains completely decentralized manufacturing. Manufacturers developed a network of suppliers whose components arrived at assembly plants at the moment they were needed. There was no pesky inventory to manage, suppliers kept costs down by locating near cheap labor, and consumers enjoyed lower prices.

But the tsunami, earthquake, and flooding in the past year (costing a total of $240 billion in Japan and Thailand) have resulted in economic disruptions felt well beyond Asia. Seagate’s CEO predicts its shipments of hard drives (it has 2 plants in Thailand) won’t be normal until 2013. While the computer industry needs 175 million hard drives a year, suppliers can now put out only 125 million, a shortfall of 29%. Apple and HP have already told investors that their earnings will suffer from the floods.

It is not surprising then that manufacturers are starting to rethink their global infrastructures. “The question is”, says one industry expert, ” has the quest for lowest-cost production and hyper-lean supply chains overridden and exposed vulnerability to significant business risk?” For Seagate and many others, the answer is a resounding “yes”. Carlos Ghosn, Nissan’s CEO, said just last month: “”There is going to be another crisis”.

Discussion questions:

1. What should manufacturers do to prepare for the next crisis?

2. What other firms have been impacted, and how, by these disasters?

OM in the News: A Sea of Disk Drive Shortages

It was just a few days ago in Boston, at the DSI conference, that Jay and I were discussing supply chain disruptions with three York College colleagues–Professors Sumutka, Lam, and Palmer. We all agreed that manufacturers need to protect their supply chains from the mega-disasters we have witnessed recently. As if to confirm, the latest Businessweek (Nov.28, 2011) featured an article called “After the Floods, A Sea of Disk Drive Shortages”, which discussed the impact of 6 weeks of flooding on the disk drive industry in Thailand.

Compared to the scores of disk drive companies whose factories there have been swamped, Seagate Technology is lucky. Its Thai factories fell outside the flood zone and are high and dry. Unfortunately, each of the 100,000’s of drives Seagate ships every day contain parts from 130 suppliers, many of whom are still under 3 feet of water. Seagate’s CEO says that pre-flood production levels (which supplied 40% of the world’s drives) will not be reached for at least a year. The impact: anyone who needs a hard drive–from laptop and DVR makers to data centers that host websites–will feel the pinch of 20-40% price hikes and shortages. Some Seagate customers have offered $250 million up front, hoping to lock in capacity.

Disk drives, by the way, are incredibly complex, despite their cheapness. Inside each one, a suspension arm hovers above a disk spinning 7,200 revolutions per minute. Each drive has 200 parts, most of them designed for specific models.

Seagate competitor Nidec has decided not to wait for water to subside at its seven flooded Thai factories. Nidec cut a hole in the roof of one plant, sent divers into toxic waters to unbolt heavy equipment, lifted it unto boats, and then shipped it to their plants in China and the Philippines. Seagate thinks it will take a year to replace gear at suppliers and wants many to relocate to higher ground.

Discussion questions:

1. Can Seagate benefit from the flooding?

2. What is the solution to this supply chain dilemma?

OM in the News: The Panama Canal’s “Fat Lane” and US Supply Chains

What do Warren Buffet, the Panama Canal, and products from Asia to Wal-Mart have in common?The Wall Street Journal (Nov.11, 2011) writes that they are all part of the complex calculus of changing global supply chains. Right now, about 70% of US imports from Asia arrive by ship to the West Coast, with much of those goods transferred to Buffet’s Burlington Northern RR for transit to the rest of the nation.

But in 2014, Panama will rock the world of logistics with the opening of its new “fat lane”– a game changer that creates a threat to western ports and railroads. It takes about 18 days to make the ship and train journey from Asia to West Coast and then across the country. The all-water route through the canal takes 22 days. But the ship-to-rail route costs 10-25% more.

With the expanded Panama Canal, the Wal-Marts and Targets of the world are planning to ship more product to East Coast ports on huge ships that can carry 12,000 standard 20-foot containers–3 times the current capacity. This avoids labor strife in the past decade that clogged West Coast ports, and helps diversify logistics systems. It has also triggered a raft of upgrades at East Coast ports to accommodate the bigger vessels.

The reaction from western ports: Our speed of delivery and superior facilities will stem any loss of business. Many customers don’t want time-sensitive inventory sitting on ships traversing all-water routes. If your goods are stuck in the supply chain, they’re not passing the cash register. Besides, future ships (already being ordered) will carry 18,000 containers, which will not fit through the expanded canal.

But the Journal concludes that the expansion will be good for all ports. It will facilitate rising trade with Latin American for commodities, create round-the-world service by larger ships, and make the US logistics system more competitive globally.

Discussion questions:

1. How does the expansion impact East Coast retailers?

2. What are the OM advantages of the wider canal?

OM in the News: Apple’s Supply-Chain Secret?

Businessweek (Nov.4-10, 2011) describes the “world of manufacturing, procurement, and logistics ” in which Apple excels. “Apple has built a closed ecosystem where it exerts control over nearly every piece of the supply chain, from design to retail store”, writes the magazine. “The iPhone maker spends lavishly on all stages of the manufacturing process, giving it a huge operations advantage”.

This is a great article to ask students to read, as it describes the critical role of OM in one of their favorite companies. “Operations expertise is as big an asset for Apple as product innovation or marketing”, says the former head of SCM at HP. With its volume –and ruthlessness–Apple gets big discounts on parts, manufacturing, capacity, and air freight. This enables the company to handle massive product launches without maintaining huge inventories, all the while earning 25% profit margins.

As one example of details in the supply chain, Apple bought up all the available holiday air freight space to ensure its new translucent blue iMacs would be widely available before Christmas–paying $50 million to do so. The move handicapped Compaq when it later wanted to book air transport. Apple also decided to fly iPods directly from Chinese factories to consumers homes, allowing the buyer to track the phone’s progress around the world on its web site.

The company recently announced it plans to double capital expenditures on its supply chain to $7.1 billion next year, while committing $2.4 billion in prepayments to key suppliers. The tactic ensures availability and low prices. Because it locked up all available screens to use in its iPhone4 debut last year, competitors like HTC couldn’t buy the screens it needed.

While life as an Apple supplier may be lucrative because of volumes, Apple does squeeze prices to the bone, and may require suppliers to keep 2 weeks of inventory within a mile of Asian assembly plants.

Discussion questions:

1. In what ways do Apple’s retail stores provide an OM advantage?

2. How does Apple use SCM as a strategic weapon?

OM in the News: “Thin Supply Chains” and Thai Flooding

Workers at Japanese hard-drive maker Nidec Corp.’s plant in Thailand have a remedy for the flooding that has shut 1,000’s of factories there. They use narrow wooden boats to ferry boxes of delicate motors across a flooded plain to a truck that will haul them to Bangkok. But The Wall Street Journal (Nov.3, 2011) asks: “Are the companies to blame for some of the economic costs of the disaster”? Some experts say, yes, that flooding in Thailand should serve as a warning to companies world-wide: thin supply chains for critical components are vulnerable to disasters.

“Companies never see the big picture, and see where the potential problems in their supply chains might be; and this is especially true as these supply chains become more geographically dispersed”, says a McKinsey & Co. partner. Thailand’s flooding (as did Japan’s earthquake) has ricocheted around the world in ways few businesses expected. For example, about 1/4 of the world’s hard-drive output is under water. And Honda’s main Thai plant is semi-submerged, choking off the supply of key components to factories around the world. (The Honda factory in Brazil is cutting production by 1/3). In all, 7 of Thailand’s industrial parks are flooded.

Supply chain experts say much of the disaster “could have been averted if companies themselves hadn’t been so focused on saving money by using lean supply chains”. In a country prone to major flooding, insurers may now be reluctant to offer coverage, forcing manufacturers to move out. Nidec has already announced plans to transfer some output to the Philippines and China, even as its workers in Thailand paddle out to salvage what they can from the plant.

Discussion questions:

1. Discuss the danger in “thin” (lean) supply chains.

2. What is the solution for the OM manager?

OM in the News: What Do China, Mexico, and South Carolina Have in Common?

The answer to this question about Mexico, China, and S. Carolina is good news re American jobs. But specifically, it’s that The Wall Street Journal (Oct.6,2011) just ran three articles in the same issue that are all tied to the theme of globalization coming full circle.

In the 1st, we find that Otis Elevator is moving production from its plant in Nogales, Mexico (which it opened in 1998) to Florence, S. Carolina. Otis says the move will save money. The cost of producing abroad has risen and Otis has devised more efficient ways to make the product closer to where it sells it. Since designers and engineers had stayed in the US, it meant a lot of cross-border travel. “We needed to rationalize our supply chain”, says the CEO. Net to US: 360 jobs. (Also see the 5 min.video link in the article).

Second, the Journal reports that German tire maker Continental AG is building a new $500 million plant in S. Carolina, bolstering a major turnaround in the US tire industry. Eventually, 8 million tires will roll out annually, creating 1,600 jobs. The strategic shift comes amid reduced labor costs (partly from new 2-tiered wage plans) and a supply of highly-skilled workers, making the US competitive globally. As a bonus, Japan’s Bridgestone Corp, also announced a $1.1 billion expansion of its existing tire plant. Where? Why S. Carolina, of course!

“China is Getting Too Expensive”, talks about a S. Carolina furniture maker who moved production to China a few years back, only to be bumped aside by his Chinese partners who started selling directly to the US market. The Journal writes: “But with labor, materials and shipping costs rising, the advantage will tip (back) to the US in 4 years” in 7 major industries. Among the forces: rising costs in China, more flexible American unions, state subsidies, higher productivity here, and shorter turnaround times, meaning shorter supply chains. Automation, however, means a furniture maker can accomplish with 135 employees what took 250 to do in the past.

Discussion questions:

1. Why are some US companies abandoning Mexican production?

2. What factors are working against China?

OM in the News: Logistics and The Port of Savannah

Although logistics is one of many topics in Chapter 11 (Supply Chain Management), USA Today (Oct.3, 2011) details its critical role in an article about the Port of Savannah, the nation’s fastest growing shipping port. The bustling 1,200 acre site touches the lives of 44% of the US population, serving as a supply line to 15 states, and is one of the few ports handling more exports than imports (only the Port of LA is bigger). But Savannah is at an important crossroads, as the Panama Canal completes (in 2014) its first major expansion in 100 years. When that project is done, the canal’s locks will be able to hold cargo ships 3 times the current capacity. This means that cargo currently unloaded at West Coast ports, and shipped by rail across the US, will be able to dock directly at East Coast ports like Savannah.

The only problem is that Savannah (and most other Eastern ports) do not have channels deep enough to handle these larger vessels (called “post-Panamax” ships). A long sought channel-deepening project would result in 15-20% cheaper shipping costs. For example, Home Depot, which imports about 20% of its goods through Savannah, says: “The deepening of the port creates efficiency and lowers the cost of doing business. We can pass the savings on to our customers”.

The holdup: the federal government. The Port asked for permission to start the harbor project in 1996. Congress authorized a study in 1999. But approval for the $569 million expansion requires the signoff of the Secretary of Commerce, Secretary of Army, Secretary of Interior, and the EPA. Port officials complain that this ” is one of the longest studied projects in history”.

Discussion questions:

1. Why is the dredging of the Eastern ports an important topic in OM?

2. Why is Savannah a major port for product exports? (Other Eastern ports include Miami, Jacksonville, Ft. Lauderdale, Charleston, Baltimore, Wilmington, Philadelphia, NY, and Boston).

Video Tip: Supply Chain Management at Arnold Palmer Hospital

We think our video case studies on the Arnold Palmer Hospital for Children and Women have been very popular for 2 reasons. First, they cover seven different OM topics–from quality to layout to process design to JIT to capacity to project management to SCM–which means you can follow one organization from start to finish during the semester. And second, hospitals are a great example of a service application of OM that students can relate to. So if you are looking for a video to spice up your supply chain (Chapter 11) lecture, this is a good choice.

Arnold Palmer Hospital (APH) used to belong to a 900 member national group purchasing organization (GPO), through which it saved money on virtually every staple it needed. But not everyone was pleased. Doctors, for example, were given only limited brand choices of certain surgical implants, like pacemakers, through the GPO. And it was difficult to take advantage of local vendors who might provide better service and prices. By creating its own, much smaller GPO, with only 7 local hospital members, APH realized it could save 7%, around $7 million annually, on its $100 million in purchases. This savings came despite the increased overhead of starting one’s own purchasing department.

In this 8-minute video, you will see the power of an interesting group, a Medical Economics Evaluation Committee. The committee allowed hospital staff to have input into the approved products list, picking the medical tools they preferred, but only after agreeing to stick with a few choices at the best prices–truly a combination of medicine and economics.

The video also shows the 3 tiers of suppliers and how they are effectively integrated into the supply chain to drive down costs, reduce inventory, and improve quality.

OM in the News: Toyota’s Quake-Proof Supply Chain

Still impacted by the massive earthquake 6 months ago, Toyota has just announced that it is creating a robust supply chain that would recover within 2 weeks in the event of another disruption. Toyota and other Japanese automakers were forced to halt a large portion of their production both inside and outside Japan for months after the quake and tsunami cut off supplies of 100’s of parts from the devastated northeast region.The Baltimore Sun (Sept.6, 2011) reports that Toyota is taking 3 steps to fight supply chain risks, a process that will take 5 years to implement.

The 1st is to further standardize parts across Japanese automakers, so they could share common components that could be made in several locations.

The 2nd step is to ask suppliers down the chain to hold enough inventory–perhaps a few months’ worth–for components that can’t be built in more than one location. This is to prevent a repeat of what happened with microchip supplier Renesas, which has yet to complete recovery.

The 3rd step is to make each manufacturing region (such as North America or Europe) independent in parts procurement so a disaster in Japan does not impact production overseas. This would also offset losses from the strong yen by lowering costs and creating a natural hedge. Last year, Toyota built 43% of its 7.6 million vehicles in Japan and exported more than half of them. Currently, the company provides engines and transmissions for cars built here and in Europe from Japan– at a cost that is high due to the strength of the yen. Toyota will also begin importing more components to cut cost of cars made in that country.

Discussion questions:

1. Is the plan overkill? If a part is made in a low-risk zone, does it need to be made in a half-dozen plants?

2. Do these initiatives apply beyond the auto industry?

OM in the News: Dutch Auctioning Spooks Lawyers

In the world of supply chain management (Ch.11), dutch (or reverse) auctions are an effective way of finding the lowest price supplier of services or goods. This form of competitive bidding has suppliers bidding on-line: they start high, anonymously observe all the competing bidders in real-time, and keep lowering their quotes until they either win the job or drop out. Ariba, in Sunnyvale, CA, is the biggest provider of reverse auction software tools.

An article in today’s Wall Street Journal (Aug.2, 2011) describes how more and more big firms are using dutch auctions to negotiate contracts with law firms. This trend will reduce the revenues attorneys can expect to reap from clients. Already GlaxoSmithKline, eBay, Toyota, and Sun Microsystems have used the tactic, especially on high-volume work such as tax filings and intellectual-property transactions. Many lawyers are worrying that these auction-based pricing strategies will spread to more complex projects. “Is it making all of us uncomfortable? Yes.” says the director of one large firm.

Legal expenses for Fortune 500 companies range from $20 million to $200 million/year, and many firms are beginning to use the auctions to drive down fees. Lawyers say that trying to prepare standardized bids– specifying time and labor standards– for big jobs are hard to do because of their variability. Glaxo disagrees and responds that standardized proposals and reverse auctions make it easier to more fairly evaluate firms’ cost-effectiveness on a uniform basis.

Costco Wholesale still pays for legal work on a traditional hourly basis. “There is loyalty from us and loyalty from them”, says the firm’s general counsel. But FMC Technologies’ legal head says: “Every lawyer will tell you that every piece of work they do is incredibly important and risky because it has to be custom-made, and that’s just nonsense”.

Discussion questions:

1. Why do manufacturers like to use dutch auctions?

2. Are providing legal services different from providing parts?

OM in the News: Vertical Integration at Brazil’s Petrobras

One of the most promising petroleum producers in the world, Petroleo Brasileiro SA (or Petrobras), controls huge new oil deposits off Brazil’s southeastern coast. For years, pumping oil has been its only business and the key to its profitability as the world’s third-biggest energy company. But The Wall Street Journal (July 27,2011) reports that Petrobras has decided to embrace vertical integration, a topic we discuss in Ch. 11, Supply Chain Management (see Figure 11.2). In an effort to boost its “downstream” business, the giant firm is now in the shipbuilding, petroleum refining, and petrochemical businesses.

Petrobras is in the process of building 4 refineries across Brazil to make the country self-sufficient in refined fuels. (Its fast-growing consumer base is buying cars and fuel at a faster rate than the nation can refine without importing). It is also adding a $2 billion petrochemical plant in an effort to squeeze more revenue out of every drop of oil. Like other big energy firms that have moved into plastics and other derivatives, Petrobras will be adding plastic bottles and polyester fibre to its product list. “We see opportunity for profits in many other businesses beside crude”, says a Petrobras director.

Is vertical integration always a good idea? Private investors in the firm say the $18 billion being put into building ships (at a cost higher than they would pay to have them built in Korean shipyards), the refineries, and the plastics factory, are a waste of money. “The company has enough to do just to get that oil”, says a BlackRock fund manager. “Everything else is a distraction”.

Petrobras responds that the new ventures are creating jobs and helping to develop the towns in which the new facilities are being built.

Discussion questions:

1. What are the advantages of this “forward integration”?

2. Why is vertical integration a danger to firms like Petrobras?

OM in the News: Mexican Truck Drivers and the Supply Chain

July 6, 2011 marked the resolution of a long-simmering NAFTA dispute between the US and Mexico over long-haul, cross-border trucking. Although NAFTA came into effect 17 years ago, the trucking deal was still bogged down over two legitimate issues: (1) border security and (2) union and independent trucker opposition to the loss of high-paying jobs to lower-priced Mexican drivers (who earn about 1/2 of their US counterparts).

Businessweek (July 20-27, 2011) reports that transporting goods across the Mexican border is a complicated business, involving customs brokers, warehouses, and lengthy inspections for drugs and illegal immigrants. Under the current system, Mexican trucks haul their merchandise to the border, where a transfer truck takes it across. A US truck picks it up on our side. In time, a Mexican driver will be able to haul goods from any Mexican city straight through to Chicago or New York. To qualify for service on US roads, Mexican drivers will have to learn rudimentary English and US highway laws.

Is it a good trade-off? Businessweek strongly endorses the idea. With trade among Canada, Mexico, and the US at$1 trillion (triple since the start of NAFTA), the magazine writes: “US potato farmers, along with producers of pork, cheese, and other goods, can look forward to reduced Mexican tariffs with the resolution of the trucking deal. Higher wages and wider prosperity in Mexico are very much in the US national interest”.

US truckers will strongly disagree. While Mexican drivers will surely benefit, American drivers are loath to travel into Mexico. The country lacks the smooth roads, fuel stations, and accommodations available in the US–and has violent drug gangs to boot. In effect, the trade-off balances a more efficient supply chain with the disruption of workers in this industry. It’s no wonder the Obama administration announced the agreement with little fanfare.

Discussion questions:

1. Is the lower transportation cost good, or bad, for OM?

2. How does this change impact the supply chains served by the truckers?