Chapter 8 – Page 2 – The OM Blog by Heizer, Render, & Munson

Guest Post: Vertical Farming

Prof. Howard Weiss, who developed the Excel OM and POM software that accompanies our text for free, shares an interesting thought.

One of the location factors displayed in Figure 8.1 of your Heizer/Render/Munson textbook is the size of the potential location. One way to increase the size available for operations is to build vertically. This is why there are skyscrapers in so many cities. As the populations in cities grew there was a need for more room for both housing and business and skyscrapers create more room on the same building footprint.

The concept of expanding operations vertically has now reached the farming industry. Vertical farming is a technique where crops are grown on top of each other, typically indoors inside a facility that may be a skyscraper, warehouse or shipping container.

There are several advantages to vertical farming. First, of course, is that more crops can be raised on a smaller facility footprint. These farms operate in a highly controlled environment. Weather has minimal or no effect on these farms because the temperature, humidity, light and water are completely controlled. Also, different crops can be developed simultaneously whereas on a traditional farm different crops are planted and harvested in succession. Because the farms are indoors there is year- round crop production. Water can be recycled and reused. The farms can be located closer to urban centers reducing transportation costs. Less labor is required.

However, there are several downsides to vertical farming. While fewer employees are required than on a typical farm, these employees need to learn new skills. The startup costs for a vertical farm are higher than the startup costs for a traditional farm. While the environment is controlled, the energy costs to do so are higher than energy costs on a typical farm. In addition, energy costs have been rising both in the U.S. (8.4% higher) and Great Britain (58% higher) over the past few years and the carbon footprint of a vertical farm is larger than that of a typical farm. The cost to the consumer of the food that is grown is higher than food from typical farms. The types of crops that can be grown is not as large as that of a typical farm.

Classroom Discussion Questions
1. How could an individual take advantage of vertical farming when growing vegetables?
2. Are there any vertical farms located near your university location?

OM in the News: Orlando’s Theme Park Cluster

When organizations make location decisions (see Chapter 8), being near competitors (“clustering”) is often seen as a plus. Here in Orlando, the capital of theme parks, we take our cluster very seriously. After all, the parks are the main economic drivers and top employers. Disney’s 5 parks employ some 77,000 “cast members.” Universal Studios parks another 28,000, and SeaWorld has 22,100. Then there is Legoland, Gator Land, and others.

Riders on the Expedition Everest roller coaster at Walt Disney World’s Animal Kingdom park.

When the Universal Epic Universe theme park opens next year, it will add 750 acres populated by Harry Potter, Donkey Kong and dragons to the company’s Central Florida resort, which now includes 3 theme parks: Universal Studios, Islands of Adventure, and Volcano Bay Water Park.

Less than 10 miles down the road is Walt Disney World, the biggest part of Disney’s most important profit engine, and the stuff of dreams for tens of millions of visitors a year. Its 5 parks include: Magic Kingdom, Animal Kingdom, Epcot, Hollywood Studios, and Typhoon Lagoon Water Park.

The competition is intense, writes The Wall Street Journal (April 13-14, 2024). To understand the stakes for both companies, consider this: A common vacation itinerary includes 3-4 days at Disney World and 1-2 days at Universal. If Universal can now persuade families to spend one more day at its parks instead of at Disney, it could nab hundreds of millions of dollars in annual revenue. A family of four visiting Disney World for a 5-day, 4-night stay with Park Hopper tickets, a quick-service dining plan and a room in a moderate-tier hotel would spend upward of $5,000, not counting the cost of souvenirs or add-ons such as the Genie+ line-skipping service. Shortening the Disney leg by even a day would trim hundreds of dollars from their spending at the company’s parks and resorts.

When Walt Disney World opened in 1971, about 5 years after the death of the company’s namesake founder, adult admission cost $3.50. Visitors could roam Magic Kingdom—the only theme park on the property at the time—and take in dozens of free attractions and performances.

Attendance has since snowballed. Universal’s first theme park first opened in 1990. Islands of Adventure now attracts more than 11 million visitors a year, while Universal Studios has about 10.8 million guests. Disney’s Magic Kingdom, which has more than 17 million annual visitors, has long been the world’s most-visited theme park.

Classroom discussion questions:

Why is clustering important in theme parks?
Describe a different cluster, one close to your college or home.

Guest Post: Girl Scout Cookies and Operations Management

Prof. Howard Weiss always has an interesting view of OM to share with our readers

We are currently in the middle of the Girl Scout cookie season. Several operations issues discussed in your Heizer/Render/Munson textbook face the Girl Scouts.

Location Only two manufacturers bake Girl Scout cookies. ABC Bakers is in South Dakota and supplies 25% of the cookies while Little Brownie Bakers is in Kentucky and supplies 75%. Six of the nine types of cookies are baked at both bakeries but each bakery also bakes three flavors that the other does not bake. (See the map).

Transportation If the types of cookies baked at the two bakeries were identical then this would lead to a transportation model as explained in Module C of your textbook. The model would include 2 sources (bakeries) and over 100 destinations (Girl Scout Councils). However, each Council can select whichever bakery they want to use which means that there is no attempt to minimize shipping costs.

Forecasting Recently, the Girls Scouts put out a new cookie, Adventurefuls. Forecasting demand for Adventurefuls was difficult because there were no past sales available to help create the forecast, so the quantitative methods in the forecasting chapter (Ch. 4) could not be used. The forecast for the new cookies was considerably lower than the actual demand and meeting demand was compounded by a labor shortage due to COVID. The Aggregate Planning chapter (Ch. 13) lists five methods for handling differences between supply and demand. There was no inventory that could be used; increasing the workforce, using part-timers or subcontractors was not feasible– so the only method left was to influence the demand. The Scouts placed a cap on the amount of these cookies that each troop could order.

Supply Chain In 2023, another new cookie, Raspberry Rally, was introduced and, again, demand was underforecast. This time a major reason for the poor forecasting was that customers could order the cookies exclusively online rather than through a girl scout. The production could not be increased because the manufacturer needed a long lead-time to produce the cookies and there were power outages at the Kentucky plant. A new distribution channel opened as some people were offering up their Raspberry Rally cookies on eBay for $20, $50 or even $200 a box instead of the usual $6 per box.

Classroom Discussion Questions:
1. Suggest a method for forecasting the sale of new Girl Scout cookies.
2. If the Girl Scouts wanted to minimize costs would each council receive their cookies from the nearer of the two bakeries? Why or why not?

Guest Post: Repurposing Military Bases

Prof. Howard Weiss developed the Excel OM and POM software that we provide free with our text.

In previous blogs for your Heizer/Render/Munson text, I have written about both failures and successes in repurposing facilities. The US has been successful in repurposing many of the more than 350 bases that the military has closed since 1988, saving over $500 million dollars due to these closures. But it is not a simple matter.

Safety Concerns While no two bases are alike, several are contaminated with toxic solvents, lead, radioactive materials, asbestos, and explosives residue. The US has spent over $1 billion dollars to address these issues and has been successful with remediation of the problems at some, but not all, of the installations. Remediating is not always a quick and easy process. For example, the groundwater at Lowry Air Force Base in Denver is not expected to be cleaned up until 2084. Another safety issue is that of unexploded ammunition.

Remediation It is challenging to remediate any facility. Environmental standards are stricter today, such as the use of asbestos in buildings, than when these bases were built. And there has been an increase over time in the number of local, state and the federal government environmental regulations. Some of the current laws apply specifically to base remediation while others refer to any organization. Another challenge is that remediation plans may need to be approved by several different government offices.

Uses There have been many different uses of closed installations. Several are still used for some military purpose such as training for the National Guard or veteran services. Other uses include office space, homes, apartments, schools, businesses, parks, golf courses, arts and fitness centers, movie sets, production studios, training centers, a university, an international airport, corporate headquarters and a prison. Military Shipyards are different from normal installations, so private companies have taken them over in Charleston and Philadelphia. Shipyards can also be used as a container port.

Leasing Companies do not need to wait for a base to close in order to repurpose a facility because they may be able to lease space. For example, a manufacturer leased space at Chanute Air Force Base in Illinois, in 1992, even though the base was not yet closed.

Classroom Discussion Questions:

Has a military installation closed near you and how has it been repurposed?
What good and bad effects does base closing have on the community?

Guest Post: Health Care and Location

Prof. Howard Weiss, who developed the Excel OM and POM software that comes free with our text, shares his insights monthly.

Figure 8.1 in the Location Chapter in your Heizer/Render/Munson textbook explains that two of the factors that affect site location decisions are proximity of services and customer density. Consider doctor visits.

House Calls
At the turn of the 20th century, family doctors would come to a patient’s house to give medical attention. For the patient, visits could not be more proximate than at home. House calls peaked in the 1930s but the life cycle of house calls is essentially at the end today. One reason is that there are fewer family doctors now. Another reason has to do with insurance company reimbursement requirements. There are, however, more visiting nurses, physical therapists and other medical care personnel making house calls.

Urgent Care
In the 1970s, doctors began to open urgent care centers to serve patients who do not have emergency needs. There are over 10,000 urgent care centers in the U.S. The advantages of urgent care centers are
 Centers typically do not require an appointment
 Centers are open for more hours than doctors’ offices.
 In most cases, patients are within a 10-minute drive of a center.
 Centers generally post fees and these fees are typically less than the fee at a doctor’s office or emergency room.

Mobile Health Clinics
Also, in the 1970s, health care organizations began using mobile health clinics to serve rural and underrepresented areas that have less patient density. There are over 2,000 mobile clinics in the U.S. each providing an average of 3,500 visits annually.

Medical clinics in retail outlets
Around the turn of the 21 st century, pharmacies, supermarkets and other retail outlets began to place medical clinics in their facilities. These clinics are more plentiful than mobile clinics and create a win-win situation for the patient and the retail outlet. Advantages to the patient are the same as those for urgent care centers. The advantage to the retail outlet is that the clinic increases foot traffic to the store and yields a new revenue stream.

Telehealth visits
The most recent location change has been telehealth. This brings us back full-circle to care in the home as the patient is home and communicates with a doctor via internet or telephone. Telehealth also includes using devices, such as heart monitors, that send information to the doctor’s office. There are. however, still some legal issues surrounding telehealth.

Classroom Discussion Questions:
1. Where was your last visit to a physician?
2. What might some of the legal issues of telehealth be?

OM in the News: Shrinkage, Pilferage, and Store Closures

Target’s CEO said that theft was trending ‘in the wrong direction.’

Chapter 8 in our text discusses the key success factors that affect location decisions. But what about decisions relating to closing those locations?

The Wall Street Journal (Sep. 27, 2023) notes that Target plans to close nine locations across four states, citing elevated levels of theft and safety concerns for its shoppers and employees. The retailer announced that stores in the New York City, Seattle, San Francisco and Portland markets would close next month. The decision is the latest sign of actions executives are taking to protect their businesses.

Retailers have said they have faced a growing wave of theft in recent years that has led to responses such as locking up more merchandise on shelves (see the photo), hiring off-duty police officers, and closing hard-hit stores. The average inventory “shrink rate” (see Chapter 12, page 496) reported by retailers increased to 1.6% of sales.

Walmart recently closed a number of stores in urban areas, including Chicago, Washington, D.C., and Portland. Nike temporarily closed one of its Portland stores last year amid issues with theft, but just announced the location would close permanently. Three of the stores that Target said it would close are in the San Francisco, a place that has had a number of high-profile retail defections of late. Department-store chain Nordstrom closed two stores near San Francisco’s downtown this year, including one in a shopping mall.

For the closing stores, Target said theft was “threatening the safety of our team and guests, and contributing to unsustainable business performance.” It also said investments made to prevent theft, such as adding security guards and using theft-deterrent tools, have been ineffective in curbing retail crime. Target has seen a 120% increase in theft incidents which involve violence or threats in the first five months of this year, leading to a $500 million loss from shrink.

Target’s announcement follows a string of violent incidents at other retailers. A CVS store manager in Mesa, Ariz. was fatally shot earlier this month after suspecting a man was stealing from the store. This week, mobs hit Apple, Lululemon and Foot Locker stores in Philadelphia. Retail theft in that city increased by 30%, to 13,330 this past year.

Classroom discussion questions:

1. What can store managers do in this situation?

2. How might Figure 8.1’s (page 337) site decision factors change given this dangerous urban trend?

Guest Post: Curbside–The New Greyhound Location

Prof. Howard Weiss has developed the Excel OM, POM, and Active Model software that comes free with our text.

The Location chapter (Ch. 8) of your Heizer/Render/Munson textbook discusses the location of a new facility but a related question is the closing of a current facility. Figure 8.1 lists as its first factor for determining the site as : “size and cost”.

Recently, Greyhound has decided that one way to reduce costs is to close its bus terminals. It has closed terminals in Philadelphia, Knoxville, Louisville and Houston, where riders are dropped off and picked up at the curb; in Tampa where riders are dropped off in a parking lot; and in Columbus which now uses a public bus terminal.

Of course, curbside or parking lot usage leads to a number of difficulties for passengers. In many cases there is no shade, no heat or air conditioning, no food, no place to sit, nor any restrooms. In addition, buses idling at the curb takes away a lane for cars or bikes. There are several reasons that bus terminals are being closed.

Relocation Often times a facility will be closed because it is being relocated to another location. This is true in some cases for Greyhound which recently moved its downtown Cincinnati station to the suburbs. This relocation did hurt riders who needed a more central location.

Condition of Terminal In midtown Houston the Greyhound bus station is an old, dilapidated station and for sale. However, the area around the station is improving, as new apartment buildings, restaurants, bars and grocers open.

Property value One main reason for leaving the bus terminals is to sell the properties which have become very valuable. In addition to Houston, the Louisville site will be turned into a 256 unit apartment complex. In Chicago, which serves 500,000 passengers each year and 55 busses per day, the station is for sale, with no replacement in the plans.

One stated reason for closure of terminals is because there will be a new bus terminal. But in Louisville construction has not started on the new terminal, even though the old terminal is closed. Greyhound is not alone. In Minneapolis, the Uptown Transit Station closed months ago and a facility will not reopen until Spring 2024. The station has been beset with vandalism, drug use and other activities which make it unsafe.

Classroom Discussion Questions:
1. How can bus terminals be made safer?
2. What other facilities have been sold due to the value of the land?

OM in the News: A Soap Maker Cracks the Code to ‘Made in America’

A $7.95 bottle of Bath & Body Works (BBW) foaming hand soap used to take 3 months to put together. The pieces had to travel more than 13,000 miles from China, Canada and Virginia to the company’s Ohio distribution center.

Bath & Body Works decided it needed to get new products to market more quickly. The result was a production initiative with little parallel in corporate America, writes The Wall Street Journal (July 26, 2023). The new campus includes 10 manufacturers and millions of square feet of production and warehouse spaces, with 5,000 employees working there.

Now every step of production occurs at plants just feet from each other on the company’s dedicated “beauty park” near Columbus, Ohio. One factory makes the foaming pump and mechanism. Another makes the bottle itself, a third makes the label, a fourth makes the soap, fills the bottle, attaches the label and screws on the top. A fifth packages it. Getting a bottle to distribution is down to 21 days and a few miles. A majority of Bath & Body Works products, which are sold in its own stores, are made on site.

BBW persuaded companies throughout its supply chain to move to an Ohio city near its HQ

Bringing production closer to home, often called “reshoring,” has become a priority for many companies. Disruptions from Covid-19, severe weather, trade wars, geopolitical tensions and stuck ships left consumers without the couches and hot tubs they wanted. While competitors struggled with shortages, BBW’s suppliers on location shared raw materials and even employees. (Persistent supply-chain issues are leading to a factory building boom, with spending at its highest level in at least 20 years).

But moving production to Ohio wasn’t easy. Factories had to contend with planning officials, high labor and construction costs and even endangered bats. And BBW had to persuade its best suppliers to move. The plus for suppliers was continuing to do business with volume guarantees from BBW for a set number of years. The minus: spending millions to relocate production and buy new equipment. There was a lot of supplier resistance to overcome.

The BBW campus can be a model for other companies and communities. It has attracted an Amgen pharmaceutical plant. Intel just chose the area as the site of a $20 billion semiconductor facility. Intel said the plant would attract dozens of new local suppliers, including semiconductor equipment makers and other materials providers.

Classroom discussion questions:

1. What makes reshoring so difficult?

2. What are the advantages BBW gained in this major move?

OM in the News: New York State Built Elon Musk a $1 Billion Factory

The new Tesla facility in Buffalo was supposed to house a huge solar-panel operation, the largest one in the Western Hemisphere, but the project hasn’t turned out as planned. “It was a bad deal.” writes The Wall Street Journal (July 7, 2023).

But we have written about government incentives many times in this blog and discuss them in detail in Chapter 8 of our text, Location Strategies. When NY’s then-Gov. Andrew Cuomo, cut the ribbon in 2015, he proudly stated: “This is too good to be true.” It seems he was right.

New York paid to build a quarter-mile-long facility with 1.2 million square feet of industrial space, which it now owns and leases to Tesla for $1 a year. It also bought $240 million worth of solar-panel manufacturing equipment. Tesla said that by 2020 the Buffalo plant each week would churn out enough solar-panel shingles to cover 1,000 roofs. It is, however, averaging just 21 installations a week. The suppliers that Cuomo predicted would flock to a modern manufacturing hub never showed up. Auditors have written down nearly all of New York’s investment.

The state has agreed to amend the terms of its subsidy 12 times over the years, including by reducing the number of jobs to be created in manufacturing and shifting deadlines to accommodate the company. “In terms of sheer direct cost to taxpayers, this may rank as the single biggest economic development boondoggle in American history,” says a think tank founder.

Buffalo, once an engine of manufacturing, has stagnated for generations as industrial companies headed south. Previous efforts at renewal largely fell flat. In 2012, Cuomo said he wanted to spend $1 billion in state taxpayer money to turn Buffalo around.

America’s governors are swept up in an arms race of awarding packages of taxpayer money to attract industrial megaprojects. Last year, states gave each of eight company facilities more than $1 billion in tax breaks and other aid. In Wisconsin, a factory by Taiwan’s Foxconn that was to employ 13,000 workers in exchange for some $3 billion in state subsidies sits mostly empty. Suburban Virginia offered tax breaks to win a competition for Amazon’s “second headquarters,” but much of that project is on hold.

Classroom discussion questions:

What incentives do governments often offer companies to entice relocation?
What are the major factors that companies consider when making location decisions? (Hint: see Chapter 8 in your Heizer/Render/Munson text).

OM in the News: China Finally Has a Rival as the World’s Factory Floor

Western companies are desperately looking for a backup to China as the world’s factory floor, a strategy widely termed “China plus one.” India is making a concerted push to be the plus one, writes The Wall Street Journal (May 10, 2023).

Employees test mobile phones at a Foxconn plant in Sriperumbudur, India

Only India has a labor force and an internal market (population) comparable in size to China’s. Western governments see democratic India as a natural partner, and the Indian government has pushed to make the business environment more friendly than in the past.

It scored a coup with the decision by Apple to significantly expand iPhone production in India. Now it will boost iPhone production to around 20 million units annually in India and triple the number of workers to 100,000. Apple had previously built up a state-of-the-art supply chain almost entirely in China to make its laptops, iPhones and accessories. Its presence helped the entire manufacturing sector in China.

China still towers over every other country in global manufacturing, a position it cemented when multinationals flooded in after it joined the World Trade Organization in 2001. But a growing list of factors has prompted companies to search for a backup. First, there were rising labor costs in China and pressure from the Chinese government to transfer technology to Chinese competitors. Then there were President Trump’s tariffs on Chinese imports in 2018, Covid lockdowns from 2020 through last year, and now a push by Western governments to decouple their economies from China.

Many countries are competing to be the “plus one,” with Vietnam, Mexico, Thailand and Malaysia in particular contention.

India must still overcome entrenched problems that have kept it a bit player in global supply chains. Its labor force remains mostly poor and unskilled, infrastructure is underdeveloped and the business climate, including regulations, can be burdensome. Manufacturing remains small relative to the size of India’s economy. It can take longer to get land and approvals to set up a factory in India and getting visas for expatriate technicians, managers and engineers is time consuming.

Nonetheless, it is making progress. Its manufactured exports were barely a tenth of China’s in 2021, but they exceeded all other emerging markets except Mexico’s and Vietnam’s. The biggest gains have been in electronics, where exports have tripled since 2018.

Classroom discussion questions:

Why are companies now looking to India and away from China?
Compare India to Mexico as an alternative location for a U.S. manufacturer.

OM in the News: China or Mexico?

“We needed to have a near-source option to complement our supply chains out of Asia,” said one U.S. manufacturer. “The supply-chain crisis taught us that it’s crucial to have critical components close to home.”

More and more companies seek to navigate a world of mounting geopolitical and business uncertainty that has exposed weaknesses in far-flung supply chains. For many manufacturers, that has meant returning production closer to home, a push toward nearshoring that is chipping away at the offshoring drive over the past few decades that moved a swath of production from Western countries to low-cost centers in Asia, and most of all to China.

Mexico appears to be ideal for some companies seeking sites outside Asia to make goods more cheaply than in the U.S., reports The Wall Street Journal (April 25, 2023). It has a relatively cheap labor force compared with other North American workers and is a member of a free-trade agreement with the U.S. and Canada, saving the cost of tariffs that are imposed on a raft of imports from Asia. Although the cost of manufacturing in Mexico may be higher than in some parts of Asia, the country also delivers cost savings from shorter shipping distances to U.S. consumers that reduce the need to carry so much inventory. This also offsets the risk of production disruptions and lost sales because of freight delays.

But Mexico also has drawbacks that make factory decisions far from certain. The electrical grid can be unreliable and the lack of locally produced parts and raw materials mean manufacturers still must source components from Asian suppliers. Building up similar ecosystems in Mexico will take years. And physical security is a concern in a country notorious for drug cartels and violent crime.

Although China is losing its share as an exporter to the U.S. of goods such as electronics and apparel to countries like Mexico and Vietnam, it remains the global manufacturing leader. “China’s losing out, but it’s not lost,“ said an industry expert.

China’s advantages go beyond the low-cost production that initially lured manufacturers to the nation. A vast network of suppliers has sprung up since then—companies providing everything from refining commodities for factory production to makers of the inner components of manufactured goods—offering a sprawling ecosystem of businesses for a variety of sectors.

Classroom discussion questions:

Summarize the Mexico vs. China tradeoffs facing American manufacturers.
Figure 8.1 (page 357) lists six KSFs for country location decisions. Compare Mexico and China on each.

OM in the News: ‘War of the States’ and Lavish EV and Chip Maker Subsidies

States have long competed for big employers, writes The Business Journal (April 2, 2023). But now they are floating more billion-dollar offers and offering record-high subsidies, lavishing companies with grants and low-interest loans, municipal road improvements, and breaks on taxes, real estate, power and water.

“We’re in the second war of the states,” said one site selection consultant. “It is kind of a Wild West moment. It’s wild money and every state seems to be in on it,” added a U. of Texas professor. Georgia, Kansas, Michigan, New York, North Carolina, Ohio and Texas have made billion-dollar pledges for a microchip or EV plant, with more state-subsidized plant announcements by profitable automakers and semiconductor giants surely to come.

2022 set a record for the number of billion-dollar-plus incentive deals. At least eight were finalized, though that figure might be higher since such deals can be cloaked in secrecy and take time to come to light. More than $20 billion in public money was committed to subsidizing those known megadeals.

The subsidy offers are generally embraced by politicians from both major parties and the business elite, who point to promises of hundreds or thousands of jobs, massive investments in construction and equipment, and what they contend are immeasurable trickle-down benefits.

Still, academics who study such subsidies find them to be a waste of money and rarely decisive in a company’s choice of location. Studies conclude “they do little, if anything, to promote meaningful improvements in economic outcomes.”

The mounting cost of competing for the projects hasn’t dissuaded states from trying. On the contrary, they’re clambering to outdo each other. Michigan was stung by hometown Ford’s $11 billion commitment in 2021 to build EV and battery plants in Tennessee and Kentucky. It responded by pledging more than $2.5 billion for EV projects by Ford and GM and plants by makers of EV batteries and battery components. Pennsylvania has yet to lure a microchip or EV factory, and the state is sounding the alarm after watching neighboring Ohio land a $20 billion Intel plant. Texas promised to win passage of “economic development tools,” saying the state lost out on a massive Micron semiconductor plant because it couldn’t match the $5.5 billion in tax credits offered by New York.

Classroom discussion questions:

Financial incentives are just one aspect of location decisions. What other factors (a topic in Chapter 8 in your text) do firms consider?
What is driving the massive incentives states are offering?

OM in the News: The New American Battery Plants

South Korea’s LG Energy Solution just said it would invest $5.6 billion in a battery-manufacturing complex in Arizona, the latest in a string of new plants by foreign companies as the U.S. transitions toward cleaner fuels. LG Energy’s new battery complex will mainly serve electric-vehicle makers in North America. The amount is four times larger than what the firm had initially pledged when it first revealed plans last year to manufacture the batteries in Arizona. LG Energy reassessed its investment options due to unprecedented economic conditions. Inflation has been driving up the costs of raw materials and other expenses for manufacturers worldwide.

The complex will consist of two battery plants and mark the largest investment ever for a stand-alone battery-manufacturing facility in North America. Battery makers have been pushing to build up a bigger production base in the U.S., which is looking to strengthen its local supply chains and reduce reliance on China while speeding up shifts to green technologies, writes The Wall Street Journal (March 27, 2023)

13 battery gigafactories coming to the US by 2025 – ushering new era of US battery production

The U.S. has offered billions of dollars in tax credits for EVs sold in the U.S., but it only applies if they have a certain value of their battery components assembled in North America. (The Arizona plant will meet the eligibility requirements of the EV tax-credits program.) The program has stoked complaints from foreign car makers, but has opened business opportunities for non-Chinese battery players including South Korea’s LG Energy, Samsung, and SK On, as well as Japan’s Panasonic, which have all announced plans for new manufacturing plants in the U.S., including many via joint partnership with auto makers.

When excluding China’s CATL, LG Energy is the top battery maker globally, accounting for 21% of the combined EV and energy-storage-system battery market by units sold. In addition to the Arizona complex, LG Energy is working to expand its battery-manufacturing base across North America. It has three plants it has built or is building across the U.S. with General Motors as well as one planned plant with Honda in Ohio and one with Stellantis in Canada.

Classroom discussion questions:

What factors discussed in Chapter 8 (Location Strategies) are chip manufacturers using in making location decisions?
Why are so many plants under construction?

OM in the News: The EV Supply Chain and Canada

International giants are investing billions of dollars in Canada’s EV and mining sectors

Multinational companies are pumping billions of dollars into Canada’s electric-vehicle manufacturing sector, lured by government incentives, access to raw materials and cheap renewable energy. VW just announced that it had chosen a site in Ontario to build its first battery-cell plant outside Europe, citing Canada’s natural resources as one of the reasons. VW’s plan follows recent EV and battery-making project investments by GM, Stellantis, Michelin Tires, Brazilian miner Vale, U.K. mining company Rio Tinto, and German chemicals company BASF, among others.

According to The Wall Street Journal (March 23, 2023), Canada is benefiting from a push by the U.S. and its allies to reduce their dependence on China for the critical minerals used in EV batteries and military equipment. In one example, Stellantis and South Korea’s LG are building a $4.1 billion battery plant in Windsor, Ontario, with 2,400 workers starting next year. As we discuss in Chapter 8 (Location Strategies), incentives are common and Canada has had to pay up to win the investments, scrambling to keep up with the U.S., which has unveiled a raft of subsidies meant to draw investment in its EV industry. Canada gave $732 million to land the Stellantis/LG venture.

Canada is among the most expensive countries in the world to build cars and the highest-cost market for car assembly in the North American free-trade zone. To save money, auto makers in recent decades moved thousands of manufacturing jobs and motor-vehicle assembly capacity to Mexico, dropping auto employment in Canada from 175,000 to 110,000.

The Canadian government is pitching itself as a counterweight to China in the race to develop EV technology. China leads the world in processing metals and minerals like nickel, copper, lithium and cobalt. It also is home to 78% of the world’s cell-manufacturing capacity for EV batteries. Helping Canada’s pitch: It is one of the few places in the Western Hemisphere with the raw materials companies need to make their EVs. Electra Battery Minerals Corp. is the only facility available in North America for processing battery-grade cobalt, a metal used in batteries. Rio Tinto is upgrading an iron-ore and titanium refining facility in Quebec with a $500 million investment.

Access to hydroelectricity was a key reason GM and others chose Quebec. The renewable power helps lower GM’s greenhouse-gas emissions. Quebec also offers the lowest industrial rates for power in North America.

Classroom discussion questions:

Summarize the reasons more companies in this field are looking to Canada.
What is China’s strength in the EV supply chain industry?

OM in the News: Corruption and Global Operations Management

In Chapter 8 (Location Strategies), we write: “One of the greatest challenges in a global operations decision is dealing with another country’s culture. Bribery and corruption create substantial economic inefficiency.” Table 8.2 (page 339) ranks corruption based on Transparency International’s annual survey, which has just been updated for 2022. The news is not encouraging.

The 2022 Corruption Perceptions Index (CPI) shows that most of the world continues to fail to fight corruption: 95% of countries have made little to no progress since 2017. According to the Global Peace Index, the world continues to become a less peaceful place. There is a clear connection between this violence and corruption, with countries that score lowest in this index also scoring very low on the CPI. Governments hampered by corruption lack the capacity to protect the people, while public discontent is more likely to turn into violence. This vicious cycle is impacting countries everywhere from South Sudan (with a score of 13 (on a 0-100 scale, with 0 being highly corrupt and 100 being very clean) to Brazil (score of 38).

The head of Transparency International adds: “Corruption has made our world a more dangerous place. As governments have collectively failed to make progress against it, they fuel the current rise in violence and conflict – and endanger people everywhere. The only way out is for states to do the hard work, rooting out corruption at all levels to ensure governments work for all people.”

The CPI ranks 180 countries and territories by their perceived levels of public corruption. The CPI global average remains unchanged at 43 for the eleventh year in a row, and more than 2/3 of countries have a serious problem with corruption, scoring below 50.

Denmark (90) tops the index this year, with Finland and New Zealand following closely, both at 87. Strong democratic institutions and regard for human rights also make these countries some of the most peaceful in the world.
South Sudan (13), Syria (13) and Somalia (12), all of which are embroiled in protracted conflict, remain at the bottom of the CPI.
26 countries – among them the United Kingdom (73), Qatar (58) and Guatemala (24) – are all at historic lows this year.

Corruption, conflict and security are profoundly intertwined. The misuse, embezzlement or theft of public funds can deprive the very institutions in charge of protecting citizens, enforcing the law, and guarding the peace of the resources they need.

Classroom discussion questions:

Why is this a Chapter 8 topic?
What world events have impacted corruption levels this past year?