Chapter 11 – Page 28 – The OM Blog by Heizer, Render, & Munson

OM in the News: Japan Dispensable as a Supplier?

The article in today’s New York Times (May 30,2011) begins: “Maybe Japan is not as crucial to the global supply chain as those first few weeks after the earthquake made it seem”. As an example, the Times describes STMicroelectronics, the $10 billion European semiconductor giant, which after the initial shock of losing Japanese components, quickly lined up alternative suppliers outside of Japan. “It is going smoother than we had thought”, says the CEO. And it turns out this experience is widely shared. Beyond a very short list of components (like auto micro controllers), it turns out that Japan plays only a small role in the global supply chain.

There may be 2 reasons for the limited impact of the Japanese disaster. First, the resiliency of supply networks and quick action by companies helped. But a new report by SCM World finds that Japan, despite being the world’s 3rd largest economy (behind the US and China), is not the major source of manufactured parts for companies outside that country. China was the #1 source (37%), then the US (20%), then Germany (7%). Japan tied with Canada for 8th place.

“What’s remarkable is how relatively isolated Japan is”, says the report’s author. “It’s far less integrated into the world’s manufacturing supply chains than you would expect, given the size of Japan’s economy”. Japan’s manufacturing prowess and global competitiveness are focused in a few industries, like autos and consumer electronics.

Further, big Japanese firms have preferred to have essentially captive suppliers. These tight, cooperative bonds have meant shared experiences and constant communication. But they also meant that Japanese suppliers have been less likely to sell to foreign corporations.

Discussion questions:

1. Why did the earthquake have a limited effect on manufacturers outside Japan?

2. How will the close relationship among Japanese companies help the country recover more quickly?

OM in the News: The Foxconn Explosion and the iPad

We last blogged about Foxconn– one of China’s and the world’s largest manufacturers–when Businessweek featured the company as its cover story last September. Known as the “consumer electronics assembler of the world, this giant firm makes products for nearly every major electronics company. Its customers include Apple (iPads and iPhones), Acer (PCs), Amazon (Kindles), Cisco (networking gear), H-P (printers and PCs), Dell (PCs), Motorola (phones), Microsoft (Xbox systems), and Sony (Playstations). The headlines at that time centered about working conditions at Foxconn, where almost a dozen employees committed suicide last year.

So yesterday’s headline in The Wall Street Journal (May 24, 2011), “Factory Blast Roils Tech Supply Chain” raised a number of concerns, especially at Apple, whose iPads are reportedly made at the same Hon Hai plant in southwestern China. (Apple, concerned about even rumors of supply chain disruptions for the popular iPad2, would not acknowledge that the product is manufactured there. The original report came in a leak to the Washington Post 2 days ago).

In the blast at the relatively new Hon Hai plant, 3 workers were killed and 15 injured, and the safety practices at Foxconnn are being raised anew. Labor rights groups had already warned the factory about hazardous working conditions , including aluminum dust floating in the air because of a process that workers use to polish iPad cases. The combustible dust, a recognized risk in electronics manufacturing, appears to be the cause of the explosion. Apple had earlier complained to Foxconn about factory conditions, but did not move its contracts elsewhere.

Discussion questions:

1. Why do so many electronics firms contract out their manufacturing?

2. Why is Apple unwilling to confirm where its iPads are made?

OM in the News: How GM Survived the Japanese Supply Chain Break

Two months after Japan’s devastating earthquake, Japanese automakers in the US are still struggling with significant supply disruptions. Toyota, for example, which gets 15% of its parts needed for North American factories from Japan, is operating at only 30% of capacity.

G.M., which spends about 2% of its part’s budget in Japan, identified 118 products that created shortage problems at the start of the crisis. Yesterday’s New York Times (May 13, 2011) documents the dramatic story of how G.M. went through a “white knuckle time” when numerous plants came close to closing. The story ends with the company announcing it is winding down its disaster response operations–the crisis averted. But it did not appear to be anything short of a catastrophe in early March.

Four days after the earthquake, G.M. assembled 100’s of employees into a 24-hour-a-day team, in what it called “Project J”. The company idled 2 plants to conserve supplies and found as many alternative sources as possible . Coordinating efforts from 3 “crisis rooms” in Warren, Michigan, the Vice-Chairman realized that existing contingency plans prepared for “nothing on this kind of scale or scope”. Issues with 33 problematic parts did not even become known for 2 more weeks, when G.M. discovered disruptions from sub-suppliers it barely knew of.

One G.M. consultant added: “It’s not just the assembly plant that needs to run, it’s not just the direct supplier. I’ve got to understand every piece at a second tier, a third tier, and a fourth tier below that. We’ve never had to do that before”. With only sparse information available from many suppliers, G.M. sent over 40 employees to Japan to size up the situation–and to offer help getting vital plants reopened. The Japanese culture did not always welcome the offers from outsiders, but in the end, the company resolved all but 5 shortage problems.

Discussion questions:

1. Why is G.M. in much better shape with regard to parts than Toyota?

2. What major lesson did G.M. learn from the disaster?

OM in the News: Complexity of the African Supply Chain

While the aftermath of the Japanese earthquake is causing many companies to worry about the auto and electronics supply chains, a different pall is hanging over a supply chain in the Democratic Republic of the Congo. The substance in question is a rare earth metal called tantalum, and the Congo is the world’s 3rd largest producer of this ingredient key to smartphones, tablets, and computers. The Wall Street Journal (April 27,2011) reports that Intel, AT&T, H-P, and other big technology companies are caught in a new SEC rule that requires them to report if their supply chain includes tantalum coming from war-torn regions of Africa. Key minerals, according to the law, cannot come from the Congo’s rebel-controlled mines.

I have to admit that I did not know much about such “rare earths” until we blogged about neodymium . At that time China cut its exports of that metal by 3/4 to save supplies for its own electronics manufacturers. China makes 97% of the world’s neodymium, dysprosium, and didymium.

The complex African supply chain means that US companies don’t really know who they are buying from. They purchase finished products through suppliers that source from smelters,which in turn buy from traders on the ground. Intel, Dell, TriQuint, AT&T, and Microsoft are all scrambling to work with suppliers to track the minerals. AT&T, hoping for an exemption, estimates it would have to wade through 35 manufacturers, 60-80 parts suppliers, 1,060 commodity-part suppliers, and an unknown number of brokers and distributors to get to the mine that is the source of its tantalum.

Just as Ford recently discovered that a 3rd tier supplier in Japan was the sole source for 3 paint pigments for its autos, manufacturers around the world are finding that complex supply chains are an OM function that needs to be monitored and managed.

Discussion questions:

1. Why is it so difficult to manage global supply chains such as this one in the Congo?

2. What alternatives do manufacturers have in replacing rare earth suppliers?

OM in the News: Hitachi’s Airflow Sensor Shuts Auto Plants Worldwide

The Wall Street Journal (March 24,2011) reports today that a small electronic part that measures airflow to car engines (and retails for $90) is shutting or cutting auto production at plants around the world. The impact of the Hitachi sensor is, of course, tied to the earthquake in Japan 2 weeks ago. Hitachi makes 60% of the world’s market for airflow sensors, but its plant in northern Tokyo remains shut down.

Here is the ripple effect from the one part you probably never heard of before:

GM Shreveport, assembly halted March 21.

GM Buffalo engine plant, 10% of workers laid off.

Peugeot-Citreon and Vigo in Spain, and Peugeot in France, production cut in half.

Opel in Germany, Zaragoza in Spain, and Trnava in Slovakia, output slowed.

Hitachi also supplies Ford, Renault, Nissan, Toyota, and VW. “Ford is monitoring availability of sensor supplies ‘hourly’ as it runs low on the same part”, says The Journal. But this may be just the tip of the iceberg. Auto makers keep different supply levels (say 10 days for this part), and since the sensor arrives by ship, it may take another few weeks for the full impact to be felt. The last shipments made before the quake should arrive in the US next week.

On a more positive note, an accompanying article in The Journal announces that Japanese chip makers are gradually resuming operations in northeastern Japan. The problem for Fujitsu, Renesas, and Toshiba is that power supplies are still inconsistent. Designed to operate 24/7, when systems are shut down, it takes up to a week to reboot all the machines in the plant.

Discussion questions:

1. What can auto makers do to prevent this situation from happening in the future?

2. How can the restart process be speeded up?

OM in the News: “Thin Strands” Supply Chains

Today’s New York Times (March 20,2011) article opens: “Tony Prophet, a senior VP for operations at H-P, was awakened at 3:30am in California and told an earthquake and tsunami had struck Japan. Soon after, Mr. Prophet had set up a virtual ‘situation room’, so managers in Japan, Taiwan, and America could instantly share information. Mr. Prophet oversees all hardware purchasing for H-P’s $65 billion-a-year global supply chain, which feeds its huge manufacturing engine. The company’s factories churn out 2 PCs a second, 2 printers a second and one data-center computer every 15 seconds. ‘It’s like being in an emergency room, doing triage’ “, he says.

Today’s global supply chains indeed mirror complex biological systems like the human body. At times they can be quite vulnerable to a seemingly small weakness; it’s like a tiny tear in a crucial artery causing a heart attack. But the disaster in Japan (see our blogs on March 14 and 16) presents a first-of-a-kind challenge. Plants around the world, some not even knowing their 3rd tier suppliers were in Japan, are starting to close (eg., the GM truck plant in Louisiana).

The buying and shipping of supplies has been transformed in the past 20 years. Manufacturing is outsourced around the world, with each component made in locations chosen for expertise and low costs. That means supply lines are longer and more complex—called the thin strands phenomenon— or the difficulty and cost of seeing deeper into the supply chain. “Major companies have constant communications and deep knowledge of primary suppliers”, says Harvard Prof. David Joffe. “It’s the secondary layer of suppliers where the greater risk is”.

“Lacking some part (and the new Apple iPad2 has 5 from Japanese suppliers), even if it costs just dimes, can mean shutting a factory,”‘ says a former Apple exec. Will the Japan quake prompt companies to re-evaluate risk in their supply chains? Will there be a shift from JIT to a “just-in-case” mentality? This is a great article to share with your class.

Discussion questions:

1. How has the production of electronic components evolved in the past decades?

2. Why does Apple treat its supply chain as a trade secret?

3. What is the role of “smart technology” in solving the “thin strand” problem?

OM in the News: Global Supply Chains in Turmoil…or a Painful Blip?

With the words “global supply chain” continuing to dominate business headlines around the world, OM will remain in the news until Japan is able to stabilize its economy. And that may not be for some while. Today’s Wall Street Journal (March 16,2011) lead story writes: “International companies from BMW to Boeing girded for possible disruptions to supply chains.” In these early days of assessing the quake’s damage, it is tempting for a gloomy view to carry the news.

After all, Japan is a key supplier of advanced parts used in the final assembly of products throughout the world. Malaysia’s Eita Electronics depends on parts from Japanese factories for its circuit breakers. BMW receives electronic components for navigation systems and digital displays. And Boeing’s 787 wings and fuselages are produced there (see our Global Company Profile in Ch.2). It truly is amazing how dependent one nation’s manufacturers have come to depend on anothers.

The Journal adds:” Supplier logistics are severely dislocated by restrictions on using highways for freight, as well as unpredictable power cuts”. Mazda, Honda, Nissan, and Toyota have all suspended operations even though most of their plants were not heavily damaged. Toyota is even slowing US production, just in case it cannot ship parts it makes in Japan. American auto makers cannot celebrate just yet, as they in turn receive specialized parts, such as batteries, from Japan.

Just to balance the picture, financial services giant UBS issued this report (March.14,2011): “We believe this catastrophe is unlikely to inflict a significant blow to Japan’s growth outlook for this year…First, the major business centers suffered only limited damage as most of the destruction was concentrated in the northeast coast, which accounts for about 7% of Japan’s industrial output. Second, outside of the worst affected areas, business activity moved towards normalization over the weekend”.

Discussion questions:

1. What are some products not impacted by the damage to Japan?

2. What important issues might the UBS report be overlooking?

OM in the News: Earthquakes, Japan, and the Global Supply Chain

It is much too early to predict how soon Japan will recover from the terrible devastation of last week’s earthquakes and tsunami. Your students, though, are aware of the situation on the ground and the implications for global commerce and manufacturing, so this is a topic worth discussing in class.

Various newspapers have taken differing views on how the devastation will affect the global economy. Today’s Wall Street Journal (March 14, 2011) comes right out and asks the question: “Are global supply chains so taut that a disruption in the world’s No. 3 economy will be felt around the world?” Their answer: Japan’s factories play an out-size role in global production , ranging from a fifth of the world’s semiconductors to advanced machine tools. The result could be shortages of key components around the world. For eaxample, Reneses Electronics is the world’s largest maker of micro controllers for cars and other equipment. In suffering major damage, it places customers at risk. Its chips are key ingredients and its inventory is not stockpiled nor readily replaced, employing the JIT concept. And most auto makers use only 1-2 suppliers for parts.

Likewise, today’s New York Times writes: “Most high-tech goods these days are produced through carefully orchestrated procurement and manufacturing networks that combine parts from around the globe, often shipped on tight daily production schedules. Even temporary shortages can drive up prices sharply.”

Forty percent of chips for smartphones and tablet computers and most LCDs for appliances are also made in Japan. Further, Sony’s Blu-ray disc and magnetic tape factories were flooded. And with rolling blackouts twice a day to conserve power, most manufacturers are unable to operate expensive machinery that requires stable energy. Toyota, Nissan, and Honda are not even sure the logistics are available to get their cars to ports for shipping.

Discussion questions:

1. Discuss the importance of having manufacturing facilities around the world?

2. How are Japanese automakers impacted with respect to US sales?

Teaching Tip: Using Real Data for Inventory

For lots of varied reasons many of us spend substantial class time on inventory. The Heizer / Render text covers inventory in Chapter 12 (managing inventory and inventory models), Chapter 14 (lot sizing), and Chapter 11 (measuring assets committed to inventory and inventory turnover).

One way to engage students in discussions of inventory, and perhaps understand its significance better, is to have them use real turnover data for companies or industries they know. We show how to do this in Chapter 11, Examples 5 and 6, where we use Home Depot and Pepsi data. Assignments where students compute and compare these ratios can be facilitated by the use of annual reports as most annual reports provide enough data for the calculations. Alternatively, data on an aggregate basis are available and down loadable from the U.S. Census Bureau.

Additionally, Quarterman Lee has just published some Wholesale Inventory Turn Data that you and your students might find interesting for developing industry comparisons. His raw data are from the U.S. Census Bureau, but he has organized it into 18 broad categories and more than 260 subcategories. He has a modest fee of $6 or $8 to access the down loadable data.

Teaching Tip: Examining Supply Chains

In Chapter 11, Figure 11.1, we present a Supply Chain with costs for beer. This figure provides an opportunity to discuss both the value added and the risks associated with each step in the supply chain. And, because students can often relate to the product, beer, the presentation encourages a discussion of not only the multiple tiers, but also the processing delays, logistics, storage, cooling, and where and how costs might be reduced in the supply chain. Finding other examples of Supply / Value Chains can be a challenge, but we found very timely and good examples (and perhaps almost as interesting as beer), by PetroStrategies, Inc. — supply chains of the oil and gas industries.

PetroStrategies shows both the Crude Oil Value Chain and the Natural Gas Value Chain. The great thing about their presentation is that in addition to the ‘chains’ being shown, so are estimates of Costs, Value (selling price at each stage), Gross Margins, Net Margins, and Percent of selling price for each component in the chain.

Given the current interest in oil and gasoline prices, a lively discussion of costs and values in the supply chain from wellhead to gasoline pump should ensue. You might note that although the data is relatively recent (2007), gasoline costs are shown at $2.00 per gallon.

Discussion Questions:

1. Where are the risks in these supply chains?

2. What can be done to enhance supply and / or reduce the risks?

3. Have you any suggestions about what could be done to reduce costs in these supply chains?

OM in the News: Sustainability in the Global Clothing Supply Chain

Some day in the not too distant future, the clothes and shoes you buy will not only have a label sewn in with the brand name/size/fabric content, but with a sustainability score as well. Yesterday’s New York Times (Mar. 1, 2011) reports that the Sustainable Apparel Coalition is developing a comprehensive database of the environmental impact of every manufacturer, component, and process in apparel and shoe production. The coalition includes such names as Wal-Mart, JC Penney, Hanes, Patagonia, and Timberland.

Americans spent $340 billion last year on clothes and shoes, which is about a quarter of the global market. Amazingly, virtually all of it purchased here—99% of footwear and 98% of clothes–came from other countries. And the various parts of any one garment often come from a diverse multinational chain of fabric mills, dye operations, and assembly plants.

This obscure nature of the global supply chain has long been a concern to environmental groups. Greenpeace, for example, using Google Maps, revealed that a blue jean factory in Xintang, China, was washing blue chemicals downriver from its textile mill. But the company whose name appears on the designer label– and surely the end customer–are often unaware of the environmental connection. “The apparel supply chain is long and quite complicated”, states a University of Delaware prof.

The coalition’s tool is a database of scores assigned to all players in the garment life cycle–cotton growers, fabric makers, dyers, mill owners, and distributors–based on measures such as water use, energy efficiency, waste, chemical use, greenhouse gases, and labor practices. “The government has standards for miles per gallon on a car, but we have no real standards for clothing”, adds the CEO of Timberland.

Discussion questions:

1. Are students interested in such a “green score”?

2. What changes will such a database bring about?

3. Why are the biggest retailers signing on?

Video Tip: Darden’s Global Supply Chains

Because supply chains (Ch.11) are such an important topic in OM, we have produced 3 video cases on the topic: Arnold Palmer Hospital’s Supply Chain, SCM at Regal Marine, and Darden’s Global Supply Chain. Since I am a regular at Olive Garden (one of Darden’s main brands), filming this 8-min. video was of personal interest.

How is it that I can order fresh fish–not frozen–here in Winter Park, FL, and be eating seafood that was caught off the coast of Thailand less than 48 hours ago? And the same for you at any of the 1,500 restaurants in the Darden family. That’s some supply chain!

Actually Darden has 4 independent supply chains it runs, of which its Seafood Network is one. There is also: the Central Distribution SC for non-food items (housed in Orlando); its Independent SC for locally purchased items such as produce and dairy products; and its Direct Distribution System, which uses 3rd party logistics, for other items.

Interviews with Darden’s Senior VP for Supply Management and Purchasing illustrate how critical this function is to every aspect of running a restaurant chain. It also raises the question about the complexity of maintaining 4 distinct supply chains. Should local managers be allowed to make their own purchases? How does a major chain deal with seafood shortages (“overfishing”) that occur more regularly?

More details about the seafood aspects of the supply chain are in our Supp.11 video case, “Outsourcing Offshore at Darden”.

OM in the News: Terrorism and The Global Supply Chain

It’s not every day that The Wall Street Journal publishes an editorial by the US Secretary of Homeland Security, Janet Napolitano, entitled “How to Secure the Global Supply Chain” (Jan.6,2011). In it, Napolitano writes, “The complex supply chain that consumers and businesses in the US rely on every day is a target for those who seek to disrupt global commerce”. This is certainly a topic we need to consider adding to our discussions of global OM issues in Ch.2 and Ch.11.

Regardless of where a terrorist event takes place, a significant disruption of our supply chain may follow. An example was the Oct., 2010 plot to put explosives on a UPS cargo flight bound for the US from Yemen. Following that act, the Dept. of Homeland Security required all cargo on passenger planes within the US to be screened. It also screens all US-bound air cargo that is considered high risk (most likely from terror-sponsoring countries, I would surmise).

Napolitano names 3 elements to the US plan:

1. “Preventing terrorists from exploiting the supply chain to plan and execute attacks”. This means working with customs groups and shippers to keep chemicals out of the hands of terrorists.

2.”We must protect the most critical elements of the supply chain, like central transportation hubs, from attack or disruption”.

3.”We must make the global supply chain more resilient, so that in case of disruption it can recover quickly”.

Incidentally, 2 days after this article, the Journal reported that Secretary Napolitano received a small bomb in a package that exploded in her mailroom (WSJ, Jan.8-9,2011).

Discussion questions:

1. In what ways can a disruption of the global supply chain impact a business in the US, such as IBM, GE, or Boeing?

2. What other events, beside a terrorist strike, can effect the supply chain? How?

OM in the News: UPS’ Supply Chain and the No-Left-Turn Rule

For the longest title award, we turn to this week’s Fortune (Dec. 27,2010, pp.44-51) and find Bob Stoffel at UPS. Stoffel is the Senior VP for Supply Chain, Strategy, Engineering, and Sustainability.

With the word Strategy in his title, Stoffel points out that UPS is a lot more than a transportation company. It now has 1,000 engineers who are there just to help customers with their supply chains. Zappos built its whole e-commerce strategy around UPS’ Louisville Worldport. Zappos can take an order for shoes at 10pm and have them in the customer’s hands at 10am the next day.

When a Toshiba laptop comes in for repairs, it is UPS that actually fixes it and has it back to the customer in 24 hours. “It’s a triple win”, says Stoffel. “You’ve saved transportation links, you’ve reduced inventory,… and you’ve reduced your carbon footprint”.

Regarding sustainability, UPS has improved its fuel efficiency by 10% with a fleet of all-electric trucks, hybrids, and natural-gas vehicles. And thanks to telematics, GPS, and other technologies, UPS delivered 350,000 more packages a day over last year, but drove 53,000 miles less a day. Finally, the firm’s famous “no-left-turn” policy is part of another 20 million miles a year saved through technology by avoiding costly delays from left turns and poor routings. “It drives my wife nuts”, Stossel says. “I won’t turn left (when looking for a gas station).We’ve got to find one on the right”.

My favorite improvement is the new “Eco Responsible Packaging” program to advise shippers how to waste less space in packaging. Just think of all the small items you have received in a big box. “Our vehicles run out of space before they run out of weight capacity”, says Stossel.

Discussion questions:

1. What is UPS’ sustainability strategy?

2. How is UPS part of other firms’ supply chain?

OM in the News: Megaships as Part of the Supply Chain

There may be a (post) recession here in the US, but as Asian trade swells, the demand for massive container ships is booming. “Megavessels–ships longer than the 1,063 foot-high Eiffel Tower”, writes today’s Businessweek , “are in demand again”. Shipping lines are preparing for the 2014 completion of the $5.25 billion expansion of the Panama Canal, plus the recovery of global trade. It takes about 3 years to build a new “big” ship–one that can move more than 8,000 20-foot containers. The Canal can only handle ships with up to 5,000 containers now, but will accomodate vessels with up to 12,600 containers in 3 years.

Global trade is expected to expand 11% percent this year and 7% next year, recovering from an 11% drop in 2009. Currently there are 61 ships in operation that can carry more than 6,000 boxes, with 144 more on order to begin service starting in 2014. All except 12 come from South Korean shipyards, especially leader Daewoo Shipbuilding, in Seoul. Daewoo is even taking calls for ships that can carry 20,000 containers, double the current capacity of most megaships.

Manufacturers who ship from several continents–think consumer electronics or appliances–like the massive ships because they can lower transportation costs. One 20-foot container can hold 1,000 42″ LCD TVs. LG Electronics’ Logistics head states: “Although sea transportation is already the most energy-efficient mode of transportation, we are constantly studying…efficiencies…that save money”. Adds an industry analyst: “The trend is big ships. Its not a choice but a must. Its going to be a fight of who can carry more at lower costs”‘.

Discussion questions:

1. Why do the Koreans dominate this industry? Who are US competitors?

2. Why are megaships supply chain and OM issues?

3. Are government policies a part of this industry?