Chapter 9 – Page 4 – The OM Blog by Heizer, Render, & Munson

OM in the News: Kraft Foods Fixes Its Factories

Workers check the sliced ham as it is packaged at the new plant in Iowa.

“For decades, Kraft Foods produced Oscar Mayer cold cuts out of a 6-story, former slaughterhouse built in 1872,” reports The Wall Street Journal (Feb. 13, 2018). The systems seemed out of another era. Workers drove forklifts loaded with giant vats of ham, turkey and chicken parts on and off freight elevators to different processing points. A typical turkey breast required 4 rides between floors to get from raw meat to packaged slices. Breakdowns could slow production to a crawl. The inefficiency was easy to spot for 3G Capital, which took over Kraft in 2015.

3G started by moving production to a new, $225 million plant, where the first cold cuts rolled off the assembly line in June. Gone are the elevators. Instead, conveyor belts whisk “stick meat”—macerated proteins stuffed into 6-foot-long casings—through processing rooms. New machines can handle 15,000-pound batches. Robotic arms pick up trays and place them in room-size ovens. Automated slicers deliver perfect 9-ounce portions that drop into plastic containers.

Changing the open-floor plan of the old plant to one with separated work rooms means less downtime from sanitizing the lines. In the slicing room, cooked stick meat enters one end of a carving machine and emerges in identical sets of cold cuts that drop into containers, which have been folded into shape seconds before from plastic sheets. Sensors in the conveyor belt weigh each portion, automatically pushing away extra slices.

When it hits full capacity in a few weeks, the plant will be able to churn out 2.8 million pounds of sliced meat a week, about 17% more than the old factory, while employing 500 fewer people. “We look at pretty much any opportunity we have to drive efficiency,” says Kraft’s supply chain head.

In the broader overhaul of nationwide production, 3G used computer modeling to analyze where it sourced ingredients, where it needed to ship finished products, and the cost and availability of labor and other resources.

Classroom discussion questions:

How did the reorganization and move improve productivity?
What OM techniques were used to guide the changes?

OM in the News: Suppliers and Whole Foods’ Slotting Fees

Whole Foods, which cut prices last year to make it cheaper to shop there, now is making it more expensive for suppliers to get their products onto shelves, reports The Wall Street Journal (Feb.9, 2018). The supermarket chain is asking suppliers of all sizes to pay new rates for prime shelf space as it tries to boost profits and better organize the exploding number of organic products hitting the market.

Many suppliers will see an increase from the average $25,000 “slotting fee” companies were paying to be featured in the stores’ most-visible, high-traffic areas. Additionally, Whole Foods is pitching its biggest suppliers on a promotion costing up to $300,000 for several weeks of prime shelf space along with souped-up marketing. The chain also is asking suppliers to offer bigger discounts on their products to earn the space. A high-visibility nationwide promotion at Whole Foods now often requires companies to cut product prices by at least 25%. “We knew full-well that there would be discontent,” said Whole Foods’ V.P.

The firm is adopting a suite of retailing tactics meant to enhance profitability, including centralized purchasing decisions, tighter control over inventory and working with a national contractor to do in-store sampling. Grocery suppliers will pay a fee of 3% of the cost of goods delivered, and beauty suppliers will pay 5%. Whole Foods has hired an outside company to stock shelves “to provide a much more effective result.”

On the other hand, Kroger, the largest U.S. supermarket chain, has been courting niche brands over the past year with a new portal for local suppliers and a series of natural-foods trade fairs. The company doesn’t charge slotting fees for small suppliers.

(See our discussion of slotting fees in Chapter 9 on pages 374 and 392.)

Classroom discussion questions:

Discuss the ethics of charging fees to allow products to be placed on supermarket shelves.
Why is this an issue particularly in the grocery industry?

Video Tip: Robots at Alibaba, China’s Largest Online Retailer

Occupying .7 acres, Alibaba’s warehouse is situated in China’s Guangdong Province

Online retailer Alibaba has opened the largest ‘smart warehouse’ in China manned by 60 cutting-edge robots. These Wifi-equipped, self-charging machines are responsible for moving goods in the warehouse. They send the goods to human workers, who then arrange the products to be packed and posted to customers around the world.

The automated robots, similar to Amazon’s Kiva machines, started working at the warehouse in July, and have helped increase its output by threefold. Each of the machines is fitted with laser detection which prevents them from bumping into each other. Once fully charged, the robot can work 8 hours non-stop, travelling up to 5 feet per second and carry a load as heavy as 1,322 pounds.

Traditionally, a worker could sort 1,500 products during a 7.5-hour shift after taking 27,924 steps; with the help of the robots, the same worker could sort 3,000 products during the same period of time and only 2,563 steps need to be taken. The machines also lift and rotate the shelves, which makes it easier for human workers to reach the goods.

This entertaining 2 minute video can be shown when you are covering robotics in Chapter 7 or warehousing in Chapter 9.

Guest Post: An Experiential Learning Exercise for Teaching Line Balancing

Our Guest Post today comes from Brent Snider, senior instructor of Operations and Supply Chain Management at the University of Calgary’s Haskayne School of Business, and Nancy Southin, Assistant Professor at Thompson Rivers University.

Are you looking for an engaging way to teach assembly line balancing to your OM class but leery of the various games that consume significant class time and require the purchase of various materials such as Lego? We have developed a 30-minute experiential learning exercise that can help. It requires only a few minutes of photocopying, and can be done before any lecture content on line balancing is covered.

The exercise features a scenario in which a company is considering re-shoring their laptop production to improve their triple bottom line performance. Student groups are provided the required assembly tasks and then challenged to develop a task assignment that is physically feasible (i.e., satisfies precedence requirements), meets or exceeds expected daily demand, and minimizes the number of employees (stations) required. Groups must submit their solutions for review in front of the class.

Students are motivated to try their best by knowing that their design will be publicly peer reviewed, and also by a food prize for the group that develops the best design. Each submission is displayed on-screen and the class asked “how would this perform?” Through assessing the various submissions, students quickly discover potential pitfalls like exceeding cycle time, out of sequence tasks, and excessive employees. The instructor then facilitates a quick summary discussion, formalizing the “rules” for optimally balancing an assembly line.

Student surveys showed 96% of students recommended continued usage of the exercise and 92% believed the competition taught them how to determine a feasible solution for line balancing problems. Students who learned line balancing though this exercise were also found to have at least the equivalent learning as lecture based learners.

If you are looking for a low admin exercise that significantly improves student engagement when teaching line balancing, then this peer reviewed competition approach is for you. E-mail us at brent.snider@haskayne.ucalgary.ca and nsouthin@tru.ca and we will send you the full lesson plan!

OM in the News: Why Can’t Houses Be Built Like iPhones?

Katerra manufactures whole walls—including windows, insulation, wiring and plumbing—in its factory

The world’s housing crisis has many causes, but there is a stubbornly persistent one that we should have been able to solve by now: Productivity. As prices of components and materials for pretty much every other physical object—cars, cellphones, clothing—have dropped precipitously, it still costs too much to build a building. “Over the past 60 years, productivity in manufacturing has increased 8-fold while remaining basically flat in construction,” writes The Wall Street Journal (July 3, 2017).

Some companies think they have a solution. They are reviving old ideas in construction, including prefabrication and modular building. And they’re applying all the logistics and IT knowledge gained from building the global supply chains that deliver mobile devices, and all the automation pioneered by the automobile and other manufacturing industries.

Take Katerra. It has a 200,000-sq-ft factory in Phoenix where it manufactures whole walls, including all the windows, insulation, electrical wiring and plumbing. Katerra uses an integrated CAD/CAM system that tells all the factory’s automated saws and routers how to produce all the buildings’ components. The same system connects to job-site cranes that lift and place the finished panels. Katerra ships the walls to construction sites, where they’re snapped together like Lego bricks. The company’s goal is to build 7 more factories in 2 years, each intended to serve a different geographic area.

Katerra is responsible for its buildings from design to final construction, which allows it to further cut costs. In consumer electronics, “design for manufacturability”—the reconfiguring of a device’s shape and function to make it cheaper to build—is standard. Another thing Katerra borrows from that industry: buying goods in bulk, direct from suppliers.

Classroom discussion questions:
1. What is design for manufacturability? Give an example.

2. Of what type of layout is this an example (see Ch. 9)?

OM in the News: The Shopping Mall With No Stores

At Fairlane Town Center in Dearborn, Mich., Ford converted a former 240,000 sq. ft. Lord & Taylor department store into a workspace for almost 2,000 engineering and purchasing staff.

As retailers close bricks-and-mortar stores at an accelerating pace, shopping-center landlords are facing a vexing question: What to do with all this empty space? “Their solutions,” writes The Wall Street Journal (June 12, 2017), “are varied but all have a common element: reducing, or even eliminating, retail from the equation.”

Some landlords plug empty spaces with churches, for-profit schools and random enterprises while they figure out a long-term plan. Others see a future in mixed-use real estate, converting malls into streetscapes with restaurants, offices and housing. And some are razing properties altogether and turning them into entertainment or industrial parks.

A construction binge in the 1980s and ’90s left the U.S. oversaturated with malls. Growth in online sales and declining demand for full-priced goods are causing retailers to shrink their store fleets and divert resources to e-commerce platforms.

More than 8,600 stores are expected to close this year. Analysts predict that 400 or so of the 1,100 malls in the U.S. will close in the coming years.

One strategy is to convert enclosed malls into open-air properties that landlords call “lifestyle centers,” with apartments, theaters, grocery stores, medical offices and other conveniences—and much less retail.

Classroom discussion questions:

Are malls easily convertible to an office layout remodeling? Why?
Provide local examples of how malls are adapting to the changing (shrinking) retail store climate.

OM in the News: Office Layout in Silicon Valley

Throughout Silicon Valley, cash-rich technology firms are building bold, futuristic headquarters that convey their brands to employees and customers. Uber, for example, is designing an entirely see-through HQ. It is expected to have some interior areas, as well as a park, that will be open to the public. The very newest buildings, such as Apple’s, are highly innovative in their internal layout. Some of that is because of fierce competition within the tech industry for the best talent: firms are particularly keen to come up with attractive, productive environments. “But these new office spaces will also signal how work is likely to evolve,” writes The Economist (April 29, 2017).

The big idea championed by the industry is the concept of working in various spaces around an office rather than at a fixed workstation. Employees may still have an assigned desk but they are not expected to be there, and they routinely go to different places to do various tasks. There are “libraries” where they can work quietly, as well as cafés and outdoor spaces for meetings and phone calls. The top floors of Salesforce Tower, for example, will be used not as executive corner offices but as an airy lounge for employees where they can work communally.

A fluid working environment is meant to allow for more chance encounters, which could spur new ideas and spark unexpected collaborations. Facebook has the world’s largest open-plan office, designed to encourage employees to bump into one another in its common spaces and garden. Amazon aims to make communal areas into “living-room-like spaces.” The lack of fixed workstations shrinks the amount of expensive real estate given to employees without leaving them feeling too squeezed. Tech firms devote around 15 square yards to each employee, 1/4 less than other industries.

Young workers are thought to be more productive in these varied environments, which are reminiscent of the way people study and live at university. One drawback, however, is that finding colleagues can be difficult.

Classroom discussion questions:

Are these layouts likely to permeate other industries?
Will everyone be pleased with the new designs?

OM in the News: Revolutionizing Office Layout–Part 1

Today’s and tomorrow’s blogs tell the story of the new approach to office layout (Chapter 9) at several forward thinking companies: Today we note Britain’s Sky TV (outside London). Tomorrow, we look at some Silicon Valley high-tech office layouts.

“The Sky TV building’s steel staircases appear to be randomly scattered,” writes The Financial Times (May 2, 2017). But there is architectural intent in this — they encourage people to circulate and mix. It is a hot-desking environment but also offers a range of facilities for those wanting some sense of seclusion and privacy. Staff can work anywhere across the building. People type away in sofa-filled zones, in cafés and in booths.

While these ingredients are found in many modern offices, there are a couple of unusual features. One is a full-size cinema to one side of foyer, used for screenings and meetings. The other is a glass-walled studio in the middle of one of its atriums. There, a Sky News presenter is talking live. There are different clustered arrangements of desks — the idea is to break up space so attention is not solely focused on endless banks of desks receding into the distance.

Some of the innovations designed to ease the working week are less obvious. Sky’s CEO says much of the internal mail system deals with personal rather than business-related post. The reason for this is that most work communication is now done electronically and people do a lot of shopping online. “We have an Amazon collection point here. Why treat it as a problem when it can be a benefit?”

Classroom discussion questions:

How does Sky TV’s layout differ from traditional office designs?
What are the advantages and disadvantages of the layout described?

OM in the News: Robots May Build Your Next House

An electrician checks her blueprint at Baltimore’s Blueprints Robotics factory.

“The future of U.S. homebuilding may depend on robots,” writes Businessweek (April 24-30, 2017). With construction workers in short supply and demand rising, builders are turning to “fast factories” that can build houses like cars on an assembly line, using robots to fire 1,000s of nails into studs each day without missing. Other machines cut, sand, drill, and insulate. The plants enable developers to fill the labor gap by having houses and apartment buildings manufactured off-site, for less money and in a fraction of the time. Even Marriott Hotels is increasingly turning to modular construction.

Builders hire the factories to manufacture homes in sections, which are transported on trucks, then laid down on foundations by cranes, like giant Legos. Sometimes the modules are fully framed rooms, complete with tile showers and gourmet kitchens. The house is 60% complete when it arrives. The idea of transporting homes in prefabricated sections has roots in the early 1900s, when homesteaders could buy kits from a Sears Roebuck catalog for assembly on their newly acquired plots of land. In the 1980s and 1990s, it became increasingly popular to build lower-cost homes in factories.

Today’s plants are capable of producing bigger buildings with more elaborate designs. The Blueprint Robotics factory in Baltimore is one of the first in the U.S. to use robots. Taller multifamily buildings, dorms and hotels are increasingly being manufactured indoors. And so are mansions that sell for millions. Having an indoor facility means weather delays are rarely a factor. Each worker is given a narrow concentration, like tiling floors or sanding drywall, which increases production speed. People without any background in construction can become skilled laborers in 2 weeks.

Classroom discussion questions:

Provide 2 other examples of fixed position layout (see Chapter 9).
What are the disadvantages of this automated, modular approach?

Video Tip: Robots and Humans Learning to Work Together in Warehouses

It was Amazon that drove America’s warehouse operators into the robot business, writes Businessweek (April 5-12, 2017). Amazon’s acquisition of Kiva (as we discussed in several earlier blogs) set off an arms race among robot makers and shippers across the U.S. who scurried to keep up with the e-commerce giant. For decades, warehouse operators were focused on the task of loading pallets and shipping them to retailers, who broke up the shipments and routed them to retail locations. Fulfilling online orders, on the other hand, requires shippers to pack boxes with a diverse set of individual items and route them on to customers’ homes.

That shift has given way to what people in the business call collaborative robotics, in which a human warehouse worker toils alongside an autonomous machine.

At the Quiet Logistics warehouse shown in this 1.5 minute video, the robots shorten the distance a warehouse worker travels on a typical day from 14 miles to less than 5 miles. The robots, meanwhile, park themselves directly in front of the shelf that the worker is supposed to pick from, decreasing the risk the human will pick the wrong item. That makes the job easier, and is appealing to employees.

What that means for warehouse humans is an open question. There are almost 1 million people working in the industry recently, up 44% over the past 10 years. The rise of e-commerce has created a need for more hands to pick items and pack boxes. Amazon’s rapid shipping times have taught customers to expect goods on their doorstep in 2 days or less, fueling a warehouse boom as retailers scramble to amass distribution hubs closer to their shoppers.

Logistics firms can have a hard time hiring enough people, particularly during peak shopping seasons. Adding robots should ease some of the seasonal shortages, and may make the work less physically demanding.

Video Tip: Inside Amazon’s New NYC Warehouse

The shelf arrangement makes sense for many small orders that “look” random.

Inside Amazon’s New York warehouse for Prime Now, nothing is organized. Or actually it is, but its driven by a random stocking algorithm. The one-floor warehouse on 34th Street is full of everything marked as currently available on Prime Now, Amazon’s service that has couriers deliver orders within 2 hours.

The 25,000 products aren’t grouped by type. Instead, they’re stashed in cubbies and tracked in a kind of organized chaos. A copy of Hamilton by Ron Chernow, for example, sits next to a box of candy canes or a jar of mayonnaise. Yet it seems to make sense to randomly stock items of similar popularity.

Once an order is placed, warehouse staff remove the products from inventory and bag them. The paper-bagged orders are grouped by their destination — in New York, anywhere in Manhattan or Brooklyn.

Prime Now is available only to Prime members, and so far it’s in about 30 cities. Amazon chooses where to launch Prime Now based in part on which cities have a high proportion of Prime members. The service first launched in 2014 in New York.

This 1.5 minute YouTube video can be shown when you cover warehouse layout (Ch. 9), supply chains (Ch.11), or service technology (Ch.7).

OM in the News: Retailers Scramble to Ship From Stores As Web Sales Soar

A Black Friday shopper at Toys R Us in Fairfax,VA — A Black Friday shopper at Toys ‘R’ Us in Fairfax, VA

I was meandering the aisles of our local Toys ‘R’ Us store yesterday, and I noticed that not only were the shelves full, but the aisles were stacked with toys as well. Why? It turns out they are trying to avoid a repeat of last Xmas, when online promotions fueled a surge of web orders twice the company’s forecast and beyond what its e-commerce fulfillment centers could handle. Afraid that items wouldn’t arrive by Xmas, management halted some online deals to deter shoppers—a drastic measure during that peak sales period.

To address the issue this year, the company has prepared nearly its entire chain of 870 stores to help ship web orders during the holidays, reports The Wall Street Journal (Dec. 1, 2016). It started cramming its stores with as many goods as possible weeks earlier than last year, and is offering bonuses and better wages to recruit seasonal warehouse workers. Larger items also were shipped to stores earlier to free up its supply chain so it has maximum flexibility during peak times. The $11.8 billion company says it has built in capacity to ship twice as many units from its stores this holiday season, while transporting nearly 25% more from fulfillment centers.

Two decades after Amazon.com was founded, traditional retailers are still struggling to manage hundreds of brick-and-mortar stores, while trying to maximize online sales. The difficulty is amplified during the holidays because online sales spike to 4 times normal volume at peak times.

Across the industry, traditional retailers are taking similar steps. Kohl’s is raising wages and offering bonuses to ensure fulfillment-center employees stick around. Target has more than doubled the number of stores shipping online orders this year to 1,000. Target said enlisting its brick-and-mortar footprint allows inventory in stores to be used for web orders, freeing up online distribution centers to focus on shipping products that stores don’t carry.

Classroom discussion questions:

What OM issues are being addressed by Toys ‘R’ Us and others this season?
How does Amazon differ from traditional stores with regard to distribution?

OM in the News and Video Tip: The Pros and Cons of Slotting Fees

Ice cream can be one of the most expensive slotting fees areas because of the expense of freezer dispays — Ice cream can be one of the most costly slotting fees areas because of expensive freezer displays

When considering a late-night carton of ice cream, most people aren’t thinking about how it got on the shelf. But behind each freezer door is a secondary market that determines what you have the option to buy. “Slotting fees” (see Chapter 9) are fees that manufacturers pay retailers to appear on their scarce shelves. It can cost millions of dollars to launch a product in the nation’s groceries, and through that cost, these fees shape our supermarkets and diets.

“It’s easy to think that these fees show supermarkets are ‘rigged’ — against both consumers and smaller manufacturers that can’t afford the fees,” reports vox.com (Nov. 22, 2016). But as this 7 minute video shows, the debate is an intense one, with decent arguments on both sides.

Cons: Supermarkets charge significant fees before retailers see their products on shelves. A discount fee to introduce a new product might be as high as $30,000 to appear in just 350 stores. These fees exist for a wide range of products, from ice creams to chips and soda, not to mention the scarce space near the checkouts. The implication is clear: Retail power reduces competition and makes it harder for small businesses to compete against big buyers. These advantages for large companies are only compounded by their ability to buy up enough shelf space that they can effectively design a store’s layout.

Pros: Slotting fees emerged in the 1980s, as retailers began to introduce dramatically more products to shelves. Thanks to technological improvements like scanners, it became easier to create many more SKUs without a lot of extra effort. So manufacturers threw numerous extra products at retailers. That created a problem, as 80-90% of new products fail. And despite the availability of all these new products, shelf space was just as scarce. Fees helped remove some of the risk for retailers, signaled to them that a new product might be successful, and helped limit product proliferation.

Classroom discussion questions:

Why are slotting fees an important issue in retail layout?
What are the pros and cons of these fees?

OM in the News: Amazon’s Jammed Warehouses

An Amazon fulfillment facility in New York.

Amazon has a holiday message for the millions of merchants who rely on it to fill their online orders: Don’t clutter its warehouses with stuffed Easter bunnies or other out-of-season goods. Though Amazon has built more than 24 new warehouses this year, increasing its square footage by 30%, it says it needs all the space it can get to cope with the annual boom in holiday orders. That is why it is trying to discourage its 3rd-party sellers from stocking up on items that aren’t likely to sell by the end of the year.

“For the first time,” writes The Wall Street Journal (Nov. 4, 2016), “Amazon is charging its sellers a premium for storing merchandise in its warehouses during November and December.” Generally, warehouses overflow with 3rd-party sellers’ goods, especially as Christmas nears, straining its capacity and increasing costs. The company has temporarily stopped accepting shipments from new sellers, and established sellers are required to time their shipments to arrive by Nov. 9. Amazon also offered to remove sellers’ goods from its warehouses free of charge for return.

The idea is to speed the flow of goods and optimize use of space. Amazon says 1/4 of the merchandise sold on its site are part of its fulfillment program, which charges storage fees based on volume. Starting this month, storage fees are due to more than triple to $2.25 per cubic foot a month, up from 54 cents the rest of the year. A seller with 500 small Easter baskets in stock, for example, would pay storage fees of about $124 in November, up from $30 a month the rest of the year.

Amazon makes considerably more when its fulfillment customers make a sale than when their goods languish, racking up storage charges. The temporary increase in storage fees is called “surge pricing”—charging more for goods or resources when demand is highest. Other companies, including UPS have introduced peak surcharges to encourage shippers to make more accurate predictions of their package volume.

Classroom discussion questions:

Why is Amazon resorting to this pricing measure against independent merchants?
How else can its operations managers control the space issues at the warehouses?

OM in the News: Beyond Kiva–How Amazon Triggered a Robotic Arms Race

“An Amazon warehouse is a flurry of activity,” writes Industry Week (June 29, 2016). Workers jog around a man-made cavern plopping items into yellow and black crates. Towering hydraulic arms lift heavy boxes toward the rafters. And an army of stubby orange robots slide along the floor like giant hockey pucks, piled high with towers of consumer products.

Those are Kiva robots, once the marvel of warehouses everywhere. But Amazon whipped out its wallet and threw down $775 million to purchase Kiva in 2012. The acquisition effectively gave the firm command of an entire industry. And it decided to use the robots for Amazon and Amazon alone, ending the sale of Kiva’s products to competitors that had come to rely on them. As contracts expired, they had to find other options to keep up with an ever-increasing consumer need for speed. The only problem was that there were no other options. Kiva was pretty much it. The world’s biggest retailers, including Wal-Mart, Macy’s, and Target, have yet to populate their warehouses with widespread robotic systems. They rely on the old method humans: Hordes of pickers and packers who send boxes down conveyor belts.

It has taken 4 years, but a handful of startups are finally ready to compete with Kiva and equip the world’s warehouses with new robotics. Meanwhile, Amazon has about 30,000 Kiva robots at its warehouses across the globe, which has reduced operating expenses by about 20%. Adding them to one new warehouse saves $22 million in fulfillment expenses. Bringing the Kivas to the 100 or so distribution centers that still haven’t implemented them will save Amazon a further $2.5 billion.

About half the 856,000 U.S. warehouse laborers slog away on simple, arduous tasks that involve moving stuff around. It’s strenuous work, with employees often walking more than 12 miles a day. As new robots become available, particularly to e-commerce warehouses, these jobs will be at risk.

Classroom discussion questions:

1. Discuss Amazon CEO Bezos’ decision to buy Kiva.

2. Why are robots so important to warehouse operations?