Category: Chapter 5

Posts relating to Chapter 5

OM in the News: Boeing Goes Long with New 747-8 Jet

Eighteen feet. That may not sound like much, but it’s the length added to Boeing’s new version of the 747, called the 747-8 Intercontinental commercial jet. This added length makes the 747-8 the longest jetliner in the world, says USA Today (Feb.14,2011), trumping Airbus’ A380 superjumbo by 12 feet.

The 747-8 is a great example of  what we call “product enhancement” in Chapter 5. Rather than develop an all new plane, as Boeing did with the 787 Dreamliner and Airbus did with the A380,  Boeing chose the less risky and cheaper  path of  enhancing a successful, trusted plane that has been selling since 1969. As you probably know, both the 787 and the A380 have run into multi-year delays. Boeing’s strategy had worked well in the past, taking the world’s best-selling plane, the 737 (first introduced in 1967) and adding numerous enhancements over the decades.

The 747-8 actually took advantage of some of the new technology the firm created for the 787. The new wing design, engines, larger windows and storage bins all came from 787 innovations. The range, now 8,000 miles and more fuel-efficient engines make the updated plane a match for airlines with long, intercontinental flights. Lufthansa and Korean Air have ordered 25 planes so far.

The A380 is still the biggest plane by seating capacity (525 vs. 467 for the 747-8), height (79 ft. vs. 63 ft.), and range (300 miles more). But Boeing calls its enhanced jet  “that sweet spot in the market”.

Discussion questions:

1.  What is the difference between product enhancement and product migration?

2. Why was it important for Boeing to introduce the 747-8 model?

3. What were the major problems with the 787? (see our earlier blogs)

OM in the News: Product Life-Cycle and the Death of the Station Wagon

“Products are born. They live and they die.”  This we write in Chapter 5, Design of Goods and Services. And  so we sadly announce that the station wagon is dead.  At least this is the headline in today’s Fortune (Feb.15,2011). Volvo, the company most associated with station wagons for the past 20 years, will stop selling them in the US after moving just 450 in all of 2010 (an average of 2 per dealer).

The Ford Country Squire, pictured here, has been gone for some time now. It was the quintessential suburban family vehicle since World War II. If you had 3 kids and a dog, the wagon was almost standard equipment.

Product innovation, the gas crisis, and  the boxy look all took their toll on station wagons. In the 1980’s the minivan came along and stole the people-mover business. Then the SUV took over in the 1990’s with more cargo space, better seating, and 4-wheel drive. And in the 2000’s the crossover combined the best features of the minivan and the SUV.

Volvo, with annual sales overall of only 400,000 cars, never enjoyed the scale to support R&D on the new models or frequent style changes. The company was also slow to move production out of high-cost Sweden, and it never built cars in the US, its largest market.

Although BMW, Audi, and Mercedes still offer wagons in the US, they don’t call them that. The new terms are “touring”, ‘avant”, and “estate”, respectively.

Can the station wagon ever come back to life?  The 1976 Cadillac Eldorado was lionized as the last American convertible–until Lee Iacocca brought out the 1982 Chrysler LeBaron ragtop.  Researcher Kevin Kelly, on NPR last week, has made the claim that “no human  invention, no tool has totally vanished”.

Discussion questions:

1. Can you name any product that no longer is made anywhere in the world that was once popular in the US?

2. What did Volvo do to help doom its own vehicle sales?

OM in the News: GE’s Dangerous Game in China

It was just 2 months ago that our blog  Planes, Trains, and Drones–China’s Reverse Engineering Controversy  pointed out the costs and dangers of  sharing technology and trade secrets with China.  American, European, and Israeli firms have all learned that the short-term profits from chasing the lucrative markets in China have longer-term negative implications when Chinese companies beat them at their own game by making the same products cheaper, if not better. But as one who has served on the board of a publicly- traded (NASDAQ) manufacturer, I am well aware of the quarterly and annual pressures from shareholders who want immediate returns and profits. What US firm takes a 20- or 50-year view of  global strategy?

With the Chinese President touring the US this week, the risk and reward strategy has no better example than GEs decision to share its  airplane electronics and engines with a state-owned Chinese partner, Avic, for the new C919 jetliner. (See Ch.5’s discussion of  joint ventures and alliances).  The New York Times (Jan.18,2011) reports, “As China strives for leadership in the world’s most advanced technologies, it sees commercial jetliners…as a top prize. The Times adds, “GE will be sharing its most sophisticated airplane electronics, including some of the same technology  used in Boeing’s new state-of-the-art 787 Dreamliner”.

Neither Boeing nor Airbus are thrilled to see GE, one of their major suppliers, helping the Chinese so much. But both firms have already opened their own joint plane and parts factories in China. “Boeing has opted to accept the reality of both partnering and competing with China”, says the firm’s CEO.

 The VP of another aviation firm, Rockwell Collins, adds, “his employees often ask whether the company is trading its future for immediate sales in China… It comes down to who can innovate faster”.

Discussion questions:

1.What are the benefits and dangers of joint technology ventures with Chinese firms?

2. Where does China view itself  in 20 years in terms of manufacturing?

Teaching Tip: Product Development Needs Revolution As Well As Evolution

Which is better?  To create dramatic new products that wow the market–or to incrementally improve an existing product that performs well. Boeing, of course,  has done both. It took its 737 and has gradually upgraded it dozens of times over the past 3 decades, making it the best selling plane of all times. But the firm also decided to bet the farm on its all new 787, the 1st large jet to have a structure made of high-tech lightweight composites. The headline in Tribune newspapers around the country yesterday pretty much sums up how that company’s operations managers feel these days: “Dreamliner Still in a Tailspin: Delay Plagued 787 a Huge Headache for Boeing and Suppliers”. Now 3 years late, about 100 orders have been cancelled by frustrated customers, and Boeing has spent close to $10 billion in cost overruns and penalties.

So when you teach this topic in Ch.5, I have two examples to share, both from recent TED talks. These short lectures, often by famous  people, present some pretty amazing ideas. Let me start with the evolutionary example . My friend Allen Kupetz just gave a TED talk on how the pencil has changed over the past 445 years.  He makes a good case for why small, incremental changes in product design are as important as revolutionary new products. (Allen traces from the start of the pencil in 1565, to the change to 6-sided in 1839, to the addition of an eraser in 1858, and so on). Try to show the last 5 minutes to your class.

How about revolutionary change? Perhaps the most inspiring talk you will ever hear is from Frank Reynolds, paralyzed with a permanent spinal cord injury while in grad school at St. Josephs U. Frank layed in bed for 5 years and taught himself everything he could about medicine. In the end, this amazing man has developed a cure for such injuries and has started a firm called InVivo Technologies. I was so impressed that I invested in his company!  This video is worth your time.

OM in the News: China’s Drive to Innovate

We have  blogged several times about China’s success at reverse engineering such products as bullet trains, solar technology, drones, jet fighters, wind turbines, and computers. And, indeed, one of our strengths in the US has been the ability to stay ahead of  competition through innovation (See Ch.5 and Figure 5.2).  But The New York Times (Jan.2, 2011) has just reported that China has issued a new government policy aimed at increasing the number of inventions in that country. China’s goal is to have 2 million patent filings/year by 2015. (In 2009, there were 300,000 in China and 480,000 in the US).

So can China become a prodigious inventor?  The answer will play out over decades–but also shape the global economy. “The leadership in China knows that innovation is its future, the key to higher living standards and long-term growth”‘, says the Director of US Patents. But the Chinese approach is an innovation by-the-numbers mentality, says one consultant. It is “emphasizing the quantity of innovation assets more than the quality.”

China’s strategy is guided and sponsored by the state. Should this be  a source of concern  for the US? Despite China’s inevitable rise, the US has a comparative advantage because it is the country most open to innovation. Our culture  forgives failures, tolerates risk, and embraces uncertainty.

Discussion questions:

1. In the 1980’s, Japan was considered a similar threat to American industry. What happened?

2. Will China overtake the US one day as the world’s leader in innovation?

3. Comment on China’s use of metrics to meet the goal. What incentives are they using?

OM in the News: Product and Layout Changes Drive McDonald’s

We open Chapter 9 (Layout Strategies) with the story of  the 7 strategic changes at McDonald’s since 1950. All  but one have been major layout redesigns (eg., indoor seating, drive thru, play areas, self-service kiosks, etc.). Adding breakfast foods to the menu (in the 80’s) was the one product change–until now. The front page article in The Wall Street Journal (Dec.27,2010) details two brand new strategies–the 1st a product decision and the 2nd yet another layout change.

Under pressure from market-share competitors of all types–from 7-Eleven and Starbucks to smoothie outlets and gas stations– the 14,000 US McDonald’s have broadened their fare. As of now, there are  fruit smoothies, oatmeal, carmel-mocha drinks, flatbread sandwiches, and “garden” snack wraps. This new product development strategy (Ch.5) has created so many choices that the company has been running ads reminding us it still sells Big Macs.

Using manufacturing technology, McDonald’s has made many new items from existing items’ ingredients. Chicken wraps use Chicken Selects’ meat and breakfast burrito tortillas. This simplifies preparation and lowers costs.

But new layout costs have  blunted franchisee enthusiasm. The food assembly line (see Figure 9.12 in the text) had to be changed to make wraps. And an even bigger modification was the addition of the $100,000 McCafe drink stations– one of the most expensive changes in years. (The corporation picks up $30,000 of that cost). Stores had to be redesigned to make room for space next to the pick-up window to accommodate the 4 pieces of drink equipment. Some franchisees balked at the price tag and low drink sales volumes, claiming “we are not even paying for the electricity to run the machines”.

Discussion questions:

1. Why did McDonald’s make these two strategic changes?

2. Ask your students to rank the importance of the  9 changes, referring to the Global Profile in Ch.9.

3. How has the average McDonald’s  changed in the past decades? Are all of the layout strategies still in place?

OM in the News: Terrorism Spurs New Product Development

One of the biggest generators of new product development (Ch.5) has been global terrorism. And one of the biggest exporters of domestic security technology has been Israel. The Orlando Sentinel just reported (Dec.5,2010) that more than 400 Israeli companies export $1.5 billion annually ( a number predicted to grow exponentially), with such products as biometric devices, anti-intrusion systems, airport screening machines, explosive detectors, and remote-controlled vehicles.

Israel is focusing on Brazil, which plans to spend $3 billion on security for the 2014 World Cup and 2016 Summer Olympics, and on India whose internal security budget tops $1 billion a year.

Here are just a few of the products you may not have heard of:

Magal Security Systems’ perimeter-intrusion systems at 11 airports in China.

Nice Systems’ data analysis and surveillance systems at the Eiffel Tower, Statue of Liberty, Bank of America, and NYC Police Dept.

MagShoe, a machine operated in airports in Europe and Australia to detect weapons in shoes without passengers having to remove their footware.

IntuView’s document-scanning software that not only translates Arabic text, but searches for key words, including names, dates and Quranic verses commonly cited by extremists. One customer is the US Army.

WeCU Technologies’ camera-monitored airport kiosks, which are designed to detect “malicious intent” of users by tracking facial expressions, stress levels, breath/heart rate, and sweating.

As I mentioned in my blog on Sept. 21st about the book A Start Up Nation, Israel cannot compete with mass-production countries such as the US and China, so Israeli firms need to be creative in new product development.

Discussion questions:

1. Why is new product development so important to every company?

2. Why does Israel have more  high-tech firms listed on Nasdaq than any other country?

3. How will terrorism continue to provide the need for OM solutions?

OM in the News: What Should Boeing and Airbus Do?

If you used just one industry and product line to illustrate every aspect of OM in your course, it could easily be Boeing’s 737  and  Airbus’ A320. From supply chain to outsourcing to quality/reliability to assembly lines, these competitors provide a plethora of OM examples.

Yesterday’s New York Times  raises the  topics of time -based competition and product enhancements (see Ch. 5).  Boeing’s enhancements of the 737,  introduced in 1967, have made the plane the largest selling commercial aircraft in history. Together with the A320, another narrow-body plane, the pair make up 3/4 of the fleets at the major airlines. There are more than 10,000 in service in the US and abroad.

Now the problem: airlines, facing $80/ barrel oil, want better fuel economy—and this hasn’t happened in the 737 and A320 in well over a decade. Airbus leans towards investing $1.5-$2 billion in new fuel-efficient engines–product enhancement. Boeing has announced it will hold off on new engines and instead create a new plane by 2020–product migration.

While dominating the market for commercial planes over the past 20 years, the 2 companies have loved leapfrogging each other with bold advances. But as demand for new planes bounces back from the recession, Boeing and Airbus are hamstrung by OM problems.

Boeing is 3 years late on its most important plane, the 787, made of lightweight carbon composites to slash fuel use. (And a fire on its test flight last week did nothing to help). Airbus is being hammered with the need to fix its superjumbo A380 after an engine blew up on a Qantas flight (see our blog on 11/10/10). And now new competitors from China, Russia, and Canada are entering the narrow body market. The newcomers will soon find that making quality planes is much harder than it might look.

Discussion questions:

1. What are the advantages and disadvantages of enhancement vs. migration for these 2 firms?

2. Why doesn’t Boeing  jump right in the make a new jet to replace the 737?

3. What is China’s goal vis-a-vis the commercial jet industry?

OM in the News: The Shrinking Roll of Toilet Paper

As Fortune points out in its latest issue (Nov.15,2010, p.21), in an article called “When Less is….Less?”, everything shrinks during a recession: GDP, your stock portfolio, and most definitely, products on a store shelf.

In Chapters 5 and 7 we allude to the  choices the OM manager has to help increase profits when price increases are a bad option. Here are three: (1) cut your raw material costs, if possible; (2) cut the quantity—did you notice that OJ and ice cream containers are smaller?;  (3) enhance the product –maybe a richer ice cream, or a stronger rake, or more miles between oil changes?

As one example, here is Fortune’s sad tale of your shrinking roll of  Scott 1000 toilet paper over the past 15 years:

1995 –size of a sheet is 4.5 x 4.5″ when Kimberly Clark buys Scott Paper.

1999–size now 4.5 x 4.1″–called a “softness enhancer”.

2006–size drops to 4.5 x 3.7″–a nice pattern is added.

2010 –size reduced to 4.1 x 3.7″–“a 10% stronger tissue”.

The OM implications: not only less raw material usage, but smaller packages mean 12-17% more units fit on a truck. With fewer trucks, fuel use drops by 345,000 gallons per year.

Discussion questions:

1. Ask your students to name some other products that have “been enhanced” to increase profits or save money.

2. Besides smaller sheet size, what else can be done to reduce costs? (This was an alternative strategy chosen by Georgia-Pacific and P&G’s toilet paper changes).

3. How does sustainability enter the picture as an OM tool?

OM in the News: New Products Drive Profits at 3M

I love reading The Wall Street Journal from cover-to-cover every day. Where else can you find an article on the importance of sandpaper and a quote from the 3M CEO, “Why can’t abrasives be sexy?” (Nov.1,2010)

I share this with you because the real gist of the article is not just how 3M spent three years trying to improve one of basic products, sandpaper (they did it by using new technology to make every grain on the material the exact same size and shape). Rather, the article ties directly to Figure 5.2 in our chapter called Design of Goods and Services.

For any company to be successful, a substantial portion of its sales must come from products less than 5 years old.  We give examples of Disney and Cisco as industry leaders, with almost 50% of sales from new services or goods. 3M falls just under this, expecting 30% of its sales to come from products introduced in the last 5 years. This places it in what we call the “top third”.

CEO George Buckley believes his firm’s edge is due to spending 5-6% of sales on R&D, even during the recession. On average, US manufacturers spent 3.4% of sales on R&D in 2008.

What other “sexy” products is 3M pursuing? Its masking tape, an old standby, now comes with an edge lock that keeps paint from seeping under the tape, which could spoil the straight line. 3M knows it must keep those improvements coming to stay in the top third.

Discussion questions:

1. Discuss the success rate for introducing new products in the marketplace.

2. What other approach is 3M taking to boost sales?

3. Where do new product ideas come from?

OM in the News:WSJ Gives Innovative Products Awards

We all know the importance of new product development (see Ch.5 and Fig.5.2). Companies live or die by the success of their new products…and the strength of the US as an economic power depends on our ability to continually innovate.

Each year the Journal names its Technology Innovation Award winners. This article details this year’s winners, looks at what happened to last year’s , and projects what advances will win in the future. Its an exciting classroom topic.

My two favorite winners in 2010 are: (1) TruFocals, eyeglasses the wearer can adjust manually to give clearer vision for reading, computer work, or gazing into the distance: and (2) a paper-thin, flexible computer screen that can be bent or rolled.

The odds against successfully creating and selling a new product are about 500-to-1. But a gardener friend of mine who worked for 10 years to develop a new garbage can (the world needs a new garbage can?!) just got his 1st royalty check–close to $1 million!

Discussion questions:

1.Check out last year’s WSJ winners. How did they do?

2.Name several recent products that became immediate successes.

3. What firms are the leaders in innovation with new products?

OM in the News: Mass Customization at BMW

BMW at its Spartanburg S.C. plant along with 170 suppliers wants to build a custom  X5 sport utility vehicle for you. The Spartanburg plant thinks they can do it for you as they already export 70% of the vehicles it makes to more than 130 countries; each with its own specifications. And they do it with 18 owner’s manual languages.   The number of custom options includes 500 side-mirrow combinations, 1300 front-bumper combinations, 2,500 possible wiring harnesses, 5,000 seat and 9,000 center-console combinations. 

BMW wants 4 to 6 weeks to make the custom ordered SUV, but orders are locked in with a lead time of only 5 days. Dealer software is closely tied to BMW’s manufacturing and supply chain, with workers getting the word on what car they are building via overhead screens. The frequent changes required by variations in custom orders complicates  every thing from entering the order, to procurement, to moving parts to the line, and balancing the assembly line. Customization is not cheap. But BMW is betting that mass customization for a premium priced car will pay off.

Discussion questions:

Why don’t more auto purchasers request custom-made cars (the car they really want)?

How do we balance an assembly line with many different products coming down the assembly line (the article says the standard time is 106 seconds)?