Supplement 11 – Page 2 – The OM Blog by Heizer, Render, & Munson

OM in the News: Transforming Supply Chains into Supply “Webs”

“A new world order is emerging for the vital supply chains that deliver most of the goods we rely on for our daily existence,” writes The Wall Street Journal (March 26-27, 2022).

Companies are questioning the past 50 years of globalization. This includes always seeking out the lowest-cost manufacturer (see Chapter 11), no matter how distant, and never carrying surplus inventory or parts (see Chapter 12). The results of the shift currently underway includes the movement of jobs and manufacturing representing hundreds of billions of dollars.

As companies build more factories, in more locations, and buy parts and materials from a greater diversity of suppliers, the world’s supply chains are becoming more like supply webs.

Taiwan’s chip giant TSMC has a new fabrication plant under construction in Arizona.

Modern supply chains were designed to be cost-effective, but not necessarily resilient. Ever since the adoption of the shipping container in the 1960s, supply chains have grown ever longer. Making oceanic shipping cheap and reliable meant manufacturing could move to wherever wages were lowest. This, in turn, meant most factories moved to the opposite side of the world, principally to China. But it also meant, especially for complicated tech like smartphones and computers, that as materials were synthesized into parts, and then subcomponents and finally finished products, they might crisscross the world multiple times.

Gadgets, which tend to have more parts sourced from more places than almost anything save autos and industrial equipment, have turned out to be especially dependent on three features of global trade that were taken for granted: (1) that raw materials would always be cheap and widely available; (2) that shipping would always cost a fraction of the value of the goods being moved; and (3) that this shipping would always be reliable.

In the current global situation, countries are lining up in geopolitical alliances separated by trade wars and actual wars. In the event of escalated tensions between the U.S. (and its allies) and Russia and China, the U.S. cannot afford to lose access to advanced microchips and the other parts and manufacturing required to build everything from weapons systems to smartphones and 5G networks.

Currently, almost all of the world’s advanced microchip manufacturing is concentrated in Taiwan, which China has long claimed. And even if we wanted to, trying to reproduce the whole of electronics supply chains in the U.S., from raw materials to finished goods, would be nearly impossible.

Classroom discussion questions:

Why would it be so hard to bring the electronic supply chain back to the U.S.?
How have the 3 features of global trade changed?

OM in the News: Russia, Ukraine, and Commodity Supply Chains

40-50% of all exports of neon come from Russia and Ukraine. Neon is a critical raw material for chip manufacturing.

Russia and Ukraine are both important grain exporters, accounting for 1/3 of the world’s traded wheat. The invasion of Ukraine has cast a pall over the commodities sector because it has also made it impossible to ignore the geopolitical faultlines for key raw materials.

The conflict itself and sanctions on Russia are causing disruption in a number of markets, reports Financial Times (March 3, 2022). The rising cost of energy has important ripple effects in other commodity markets, including for the cost of fertilizer. On top of that, firms are growing increasingly worried about the way that many raw materials have the potential to be used as weapons of foreign policy — especially in a new cold war.

For the past 3 decades, commodities have been one of the most striking examples of globalization. And markets themselves have been built around the expectation of open global supply. But two events have changed the world. The pandemic highlighted the perils of relying on a handful of countries or companies, which had led to severe supply chain disruptions. Now from grains to energy to metals, Russia’s invasion of Ukraine has served as a reminder of how some countries wield considerable influence over raw material supplies thanks to their large market share of vital commodities. As well as being Europe’s main supplier of gas (it accounts for 40% of the EU’s consumption), Russia is also dominant in the markets for neon, oil, wheat, aluminium, and palladium.

The short-term response to the war has been to increase stockpiles of important raw materials. In the long-run, it is forcing industry to consider alternative supply chains that can bypass the conflict that is building between Russia and the west.

As businesses and governments cut costs in their supply chains and made them more efficient, they became more reliant on certain producers, leaving them vulnerable to sudden disruption in product flows. But perhaps one of the more worrying effects of the war in Ukraine has been the impact on grains and food prices. The conflict comes at a time when food prices are already high, the result of poor harvests around the world.

Classroom discussion questions:

What could the U.S. do to alleviate stresses on oil and gas supply chains?
What is the U.S. position on supply chains from China?

OM in the News: Ukraine and Supply Chains

Russia’s invasion of Ukraine is piling new troubles onto the world’s already battered supply chains, reports The Wall Street Journal (Feb. 28, 2022). The fighting has shut down car factories in Germany that rely on made-in-Ukraine components and hit supplies for the steel industry as far as Japan. It has severed airways and land routes that had become crucial since the pandemic began gumming up sea trade.

Trucks are waiting six hours to enter Poland from Ukraine.

The conflict is also bottling up Ukraine and Russia’s vast commodity exports, sending the price of oil, natural gas, and wheat rocketing. Shipping from Ukrainian ports, an important corridor for grain, metal and Russian oil shipments to the rest of the world, has all but ceased. The decision by European nations to close their airspace to Russia will increase the cost of flying cargo from Europe to Asia, potentially making some routes commercially unviable.

If Russia cuts off supply of its products, it will hit supply chains that rely on components and little-known commodities from Russia such as neon gas and palladium, important ingredients to make semiconductors.

The car industry, which has long relied on extended cross-border supply chains, was among the first to feel the blow of the fresh economic dislocations. Leoni, which makes wire systems in Ukraine that it ships to European auto makers, last week shut its factories in Ukraine and sent 7,000 employees home. VW, no longer getting wiring systems produced in Ukraine, stopped production at factories that are most critical in its push into EVs..

Countries including the U.K., Poland and Bulgaria have banned Russian airlines from their airspace, and several freight forwarders have suspended services to and from Ukraine. Further airspace closures or airline-specific restrictions could cause delays, reductions in capacity and rate increases. Shipping giants FedEx and UPS suspended shipments into Russia, having earlier stopped doing so into Ukraine.

The disruption to transportation is worsening by the day. At least 22 tankers are clogging the Kerch Strait, a key Russian-controlled waterway, because ports are closed. Greece, which operates up to a quarter of the global tanker fleet, is urging shipowners to pull their vessels from Russian and Ukrainian waters in the Black Sea.

Classroom discussion questions:

What are the main OM issues arising from this conflict?
Can the decision tree illustrated in Supp. 11’s Example S1 be applied here?

OM in the News: Rethinking the Vietnam Supply Chain

Manufacturers looking to shift production out of China during the U.S.-China trade war piled into Vietnam, attracted by its low wages and the government’s business-friendly reputation. But strict lockdowns to contain a Covid-19 wave in the largely unvaccinated country have crippled manufacturing since July, forcing companies such as Nike and Lululemon to shift production to other countries. That is prompting some businesses to rethink their heavy reliance on factories in Vietnam, reports The Wall Street Journal ( Oct. 1, 2021).

Nike, which makes around half of its footwear in Vietnam, lost 10 weeks of production there

Factory shutdowns in Vietnam translated to 100 million pairs of Nike shoes not made. Nike anticipates demand for its products will exceed available supply for the next 8 months.

“Our experience with Covid-related factory closures suggests that reopening and ramping back to full production scale will take time,” said Nike’s CFO. Nike is maximizing footwear production capacity in other countries and shifting apparel production out of Vietnam back to China of all places. It is estimated that 1/5 of manufacturers have already moved some production elsewhere.

“What people are realizing is, whether it be China or Vietnam, you can’t have all your eggs in one basket, you can’t be vulnerable to one country from a supply-chain standpoint,” said an industry exec in Vietnam. Businesses have been left guessing about when Vietnam will lift its manufacturing curbs, which have included requiring factories to have their workers live inside their gates, or in some cases, outright factory closures.

Factories that wish to keep running are required to implement elaborate protocols, such as the “3-in-1-place” program, in which laborers eat, sleep, and work at their workplace. Large shoe and apparel factories with thousands of workers have found it impossible to house so many people on site. Many are shut down, or operating with skeleton crews.

The CEO of Crocs said it is moving some production to other parts of the world. Crocs was already planning to migrate some production out of Vietnam, and is adding facilities in Indonesia and India. “Ongoing diversification is essentially the name of the game,” he said. “When you think about the amount of effort everyone was putting in to getting out of China and now one of the places where you can get goods is China, I mean it really is crazy the roller coaster that everybody’s been on,” added the CEO of footware retailer, Designer Brands.

Classroom discussion questions:

Why the return to China?
What supply chain lessons are to be learned here?

OM in the News: The Chip Famine Persists

The chip famine is starving the global auto industry and putting car buyers on a strict diet, writes The Wall Street Journal (Sept. 23, 2021). So far this year, 7 million cars that were supposed to be produced haven’t been. Auto companies are shutting down production lines for weeks at a time and furloughing employees as a result of the chip shortage. Toyota has slashed its production 40% this month. But the chip famine won’t be solved quickly, as supply won’t catch up with demand until late 2022 and into 2023.

The inventory of new cars in the U.S. is only about 30% of pre-pandemic levels, and buyers snap up used cars as soon as they find them. Rental companies reduced their inventories during the pandemic and now don’t have enough cars to meet demand.

Cars need more than 1,000 computer chips for functions like raising windows, adjusting AC, and cruise control. They don’t need advanced chips like those in smartphones. Instead, they use mass-produced microcontrollers. Over the past decade, fewer companies have produced these chips. But an adequate supply of chips is going to become even more important for the auto industry’s future. Electric and self-driving vehicles require both leading-edge and traditional chip technology, and an EV powertrain has 3 times as many semiconductors as a traditional engine. The average vehicle currently contains about $450 worth of semiconductors–a number expected to double by 2030.

The auto industry’s reliance on a shrinking supply base to produce semiconductors was risky. The pandemic has turned that risk into a serious shortage. Beginning in 2020, auto makers had to compete for chips against electronics manufacturers producing goods for locked-down consumers and 5G mobile networks.

Covid outbreaks also shut down factories, breaking links in the supply chain. The Vietnamese plants that fabricate chips for Asian manufacturers stopped working in August. A drought in Taiwan disrupted water-intensive chip production; a fire at a Japanese semiconductor factory restricted supply; and a winter storm hit semiconductor plants in Texas. Some auto companies are paying premiums to secure chips.

The obvious answer to the chip famine is to increase manufacturing capacity. But that is expensive and takes time. Semiconductor companies may not want to invest in traditional chip technology when future demand likely will come from higher-value chips for applications like AI. While the chip industry has announced nearly $400 billion in new investment as the chip famine unfolded, only a small portion of this investment will be used to address the chip shortage afflicting auto makers.

Classroom discussion questions:

Why can’t chip makers increase capacity quickly to handle the high demand?
Which analytic model in Supp. 11 of your Heizer/Render/Munson text can be used to address supply chain difficulties?

OM in the News: Shipping Woes Snarl Global Supply Chains

Congestion at Ningbo is spreading as big operators divert ships away from Ningbo.

A major container terminal at China’s Ningbo Port remained shut a week after operations were suspended from a single Covid-19 case, with dozens of ships lining up to load cargo for western markets ahead of the year-end shopping season. The congestion is spreading to other ports like Shanghai and Hong Kong as big operators divert ships away from Ningbo.

The cascading effect will lead to crowding at ports along the Asia-to-Europe and trans-Pacific routes that could further slow the flow of goods. writes The Wall Street Journal (Aug. 21-22, 2021). It will also hit cargo owners from giant retailers like Walmart and Amazon to mom-and-pop shops, which will have to deal with late deliveries and higher transport costs as they work to restock ahead of the holidays.

Ningbo is the world’s third-largest container port and a big gateway for Chinese exports like furniture, home goods, toys and auto parts headed to markets in the U.S. and Europe. A growing number of Chinese warehouses are filled with finished goods they can’t ship out as containers and shipping costs keep surging.

About 10% of the global container capacity is stacked on ships stuck outside congested ports. The backlog has stretched across the Pacific Ocean to the ports of Los Angeles and Long Beach, which together handle 1/3 of all containers coming into the U.S. Thirty-seven container ships were anchored outside those two ports this week. Other congested ports include NYC and Savannah, the Netherlands’ Rotterdam, and Antwerp in Belgium.

The lack of capacity is pushing big American retailers to charter their own ships rather than pay freight rates that have quadrupled since the start of the year. Daily freight rates for sailings from China to the U.S. West Coast are now at $16,425 per container compared with $3,886 at the start of the year. Rates from Asia to Europe are at $14,038 up from $5,662 in January.

Classroom discussion questions:

What techniques in Supp. 11 of your Heizer/Render/Munson OM text can be used to address this problem?
What other global factors have impacted ports and created logjams?

OM in the News: The Bullwhip Flares Again

Even though global supply chains are regaining their footing as the Covid-19 pandemic begins to ease, many businesses are about to be knocked off their feet again, reports The Wall Street Journal (June 14, 2021). Uncertainty surrounding the demand predictions needed to drive supply-chain decisions increased markedly during the past 15 months as the ripple effects of the pandemic disrupted supply-and-demand patterns. Toilet paper shelves were empty in most stores as demand spiked 700%, and the construction and travel industries ground to a halt.

Now, pent-up demand, relief checks and vaccinations are spurring spikes in consumer spending, triggering shortages of many products that were overabundant a year ago. From lumber to semiconductors, markets are experiencing price run-ups and stockouts, stoking inflation fears.

bullwhip

The result is that many companies want to kick manufacturing into high gear, replenishing inventory on expectations that today’s surging demand will continue. Firms should follow a “make more” strategy with caution, however, lest they become victims of the bullwhip effect, our topic in Supplement 11 (p. 473-75).

Bullwhip describes how companies typically respond to a spike in demand by ordering more products than required to hedge against potential continued growing demand and to avoid stockouts. This demand distortion is then passed along and amplified at each stage of the supply chain, with orders to suppliers furthest away from the point of sale far removed from the realistic views of consumer demand.

Bullwhip can lead to the rapid expansion of manufacturing capacity, including accelerated procurement of supplies, labor, warehouse space and transportation for finished goods, often at a cost premium. But just as the initial information reporting demand spikes takes time to reach upstream suppliers and manufacturers, so too does information about stabilizing demand. By the time companies reach peak capacity, demand may have stabilized at lower levels, leaving firms with excessive inventory.

The risk of overbuilding is highest in industries that may see demand surge as society reopens, such as tourism, dining and entertainment. Data indicate that consumer spending is already shifting away from “lockdown” spending on things such as home entertainment, workout and home-office equipment, and food-delivery services.

Classroom discussion questions:

Explain the bullwhip effect in layman’s terms.
Name several items that were impacted by bullwhip during or after the pandemic.

OM in the News: Food Supply Chain Problems

Americans are returning to restaurants and bars as Covid-19 restrictions come down, adding new strains in food supply chains, reports The Wall Street Journal (May 22-23, 2021).

Distributors are facing shortages of everyday products like chicken parts, as well as difficulty in finding workers and surging transportation costs as companies effectively try to reverse the big changes in food services that came as coronavirus lockdowns spread across the U.S. last year.

restaurant

“The start up has been, in many ways, as difficult as the shutdown…Everybody is trying to turn it on immediately and the capacity might not be there,” says an industry CEO. Shortages of raw materials are leading to erratic deliveries of items that usually arrive on predictable schedules. That disrupts entire supply chains.

The food sector is seeing a version of the bullwhip effect (as discussed in Supp. 11 of your Heizer/Render/Munson OM text), where companies that have pulled back their operations seek to rapidly scale up on signs of improving demand, leaving suppliers scrambling to keep up. Food suppliers allocated more capacity to retail customers like grocery chains during the pandemic leaving distributors short of some products as restaurants and institutional food-service operations open back up.

Demand has changed too. Restaurants that remained open slimmed down their menus during the pandemic and shifted from fresh ingredients for salad bars and buffets to using more prepackaged foods for takeout and delivery operations. Restaurants, hotels and institutional food-service operations are coping with big price swings on staple ingredients and erratic availability. The cost of pepperoni jumped 60% over the past five weeks while flour and tofu are out of stock about half the time for some restaurants.

The lack of available workers may be the biggest strain on the sector since the impact cascades from the production facilities to trucking to distribution centers.

Classroom discussion questions:

Explain the impact of the bullwhip effect on the food supply chain.
What can restaurants do overcome the shortages?

OM in the News: Too Much Toilet Paper

After a year in which toilet-tissue shortages left consumers scrambling for squares, sales are plummeting to below pre-pandemic levels. writes The Wall Street Journal (April 14, 2021). Recent sales fell more than 4% from the same period a year earlier, before the spread of Covid-19. The decline, which comes even though legions of Americans continue to work and attend school from home, indicates last year’s stockpiling is starting to have an effect on sales.

toilet paper

“You never knew when you weren’t going to be able to get it, so every time we went out we got some,” said one New Rochelle, N.Y. woman. “They just kept amassing.” She still has 54 rolls, stored in various places throughout her home: in a guest room, the back of a linen closet, the laundry room in the basement. (This is embarrassing–I just counted that my wife and I have 66 rolls in our closet and laundry room!)

Demand for toilet paper shot up in the outbreak’s initial weeks, doubling in the second week of March, and remained elevated throughout most of 2020. Americans spent more than $11 billion on toilet paper last year, up from $9 billion in a typical year.

A rush on other household staples, from disinfecting wipes to paper towels, led to equally or more-severe shortages of those products. But none triggered consumers’ anxieties as much as toilet paper. Walmart’s CEO, on a “Today Show” appearance in April 2020, urged consumers to stop buying so much toilet paper.

Tissue used in office bathrooms is generally built at different plants, and funneled through a different supply chain, than toilet paper sold to consumers at stores. So the sudden drop in demand for public-restroom quality tissue didn’t lead to a supply surplus of the higher-end stuff. Meantime, whereas companies were able to more quickly increase capacity for cleaning products, hand sanitizer and other in-demand items, doing so for toilet paper was less feasible given that making toilet paper in bulk requires 4-story-tall machinery that costs billions of dollars.

Classroom discussion questions:

Relate this article’s topic to our discussion of the “bullwhip effect” in Supp. 11 of your text.
How many of you also hoarded toilet paper last year?

OM in the News: A Ship, A Canal, and More Supply Chain Woes

It has been a string of disruptions for global supply chains. A Texas freeze that closed the world’s largest petrochemical plants. A worldwide shortage of semiconductors. A fire in Japan at one of the world’s largest auto chip makers. And now a ship grounding in the Suez Canal, closing off traffic in both directions.

Meanwhile, the U.S. economy is recovering rapidly and seeing its fastest expansion in over 30 years, writes The Wall Street Journal (March 26, 2021). This is increasing pressure on the globe-spanning supply chains that multinationals rely on to make everything from bikes to furniture. (It has been months since my local Wal-Mart has been able to stock adult-sized bicycles, by the way).

The Suez Canal is a vital trade route for tankers carrying oil and natural gas, along with container ships moving manufactured goods such as clothing, electronics and heavy machinery from Asia to Europe and the other way around. Around 19,000 vessels crossed the Suez in 2020, with some 39 large cargo ships transiting daily. There are currently 70 northbound ships stuck, outside the canal, along with 79 southbound ships.

evergiven

Operators occasionally divert ships from the canal to the Cape of Good Hope around the southern tip of Africa to avoid bottlenecks, but such sailings take 2 weeks longer and add $450,000 in costs per voyage.

The Ever Given, sailing from China to Rotterdam with 20,000 containers on board, got stuck in the narrow 120 mile canal earlier this week. Facing high winds, the bow of the ship became wedged deep into one side of the canal, requiring dredging. The ship needs to be lightened by taking off fuel, ballast water and, possibly, a portion of its container cargo. With no cranes high enough along this stretch of canal, helicopters are the only option.

About 55,000 containers are shipped daily from Asia to Europe, meaning massive port congestions when the canal is finally cleared.

Classroom discussion questions:

What technique in Supplement 11 of your Heizer/Render/Munson text can be used to deal with such supply chain risks?
Table 11.3 lists 10 risks to supply chains. which apply to today’s shortages?

OM in the News: COVID-19 and the Bullwhip Effect

Supply chains typically get beaten up during recessions. As sales decline, companies draw down inventories to conserve cash instead of purchasing more parts and materials. Entire pipelines of supplies get cleaned out.

When demand improves, even modestly, suppliers respond with an outsize increase in production to restock empty warehouses and assembly plants. The bullwhip effect, which is discussed in Supplement 11 of your Heizer/Render/Munson text, ripples all along supply chains, generating unusually large orders for suppliers that are far from end customers. This time, writes The Wall Street Journal (Feb. 23, 2021), the bullwhip effect is even more pronounced because demand for consumer products has been extraordinarily high. At the same time, companies are placing supersize orders to compensate for the extra time it takes to procure supplies from factories and freight operators constrained by global efforts to contain the coronavirus. That’s exacerbating the strain on supply chains.

Malibu Boats of Loudon, Tenn., has struggled with supply shortages as it tries to meet soaring demand

A decadeslong devotion to making factories smaller, cheaper and more efficient made companies more vulnerable to the distortions of the bullwhip effect. To cut costs and boost profits, U.S. companies outsourced operations and whittled inventories. Many of their suppliers did the same. When demand increased unexpectedly last year, the same companies all placed orders at once into increasingly diffuse networks of far-flung suppliers. The result was a bullwhip crack more dramatic than usual that could eventually cause an oversupply in some industries. Everybody is saying, “I need to order a lot more.”

Malibu Boats, for example, was preparing for a pandemic downturn as it stopped production. To the company’s surprise, within weeks its dealers started reporting many new customers. When Malibu reopened last spring, it ramped up production, but some suppliers were slow to respond. This lead to shortages of components for engines, windshields, and wiring harnesses. “The global supply chain is not as strong as people thought,” said one CEO. And companies have figured out that putting all their eggs in China’s basket is risky.

Classroom discussion questions:

Explain the bullwhip effect in simple terms.
What industries have been most effected by the pandemic in terms of the bullwhip?

Teaching Tip: Teaching Covid and OM

We think that when you review your lecture outlines on supply chains and OM this semester and in Spring, you may find the need for some reworking. As a matter of fact, “the disruption of the pandemic in 2020, coming on top of the uncertainties surrounding trade wars, has helped turn OM/SCM into a theme of growing concern for businesses, business schools and wider society,” reports Financial Times (Oct. 8, 2020).

Shortage of bikes at Walmart during the pandemic

Cross-border trade comprised just 5% of GDP in the mid-20th century but today it is closer to 50%. That has been accompanied by a rapid extension of global supply chains with products and their components often manufactured in numerous countries, driven by cheap labor and easier transport and communication.

London Business School Prof. Jeremie Gallien states: “supply chain management used to be perceived as a ‘somewhat niche component’ of the business education curriculum. In the aftermath of the first Covid wave, many firms found themselves either fighting for survival or realizing the importance of increasing their resilience to reduce the costs they will incur during the next disruption It is harder to get student interest if one teaches supply chain concepts without being able to relate to Covid-19.”

Jay, Chuck, and I agree. And as authors of the top selling OM text in U.S. and global markets, we are here to help make your lectures more timely and relevant. We hope you will incorporate Table 11.3 (“Supply Chain Risks and Tactics”) in Ch. 11 (p. 450) and the section called “Evaluating Disaster Risk in the Supply Chain” in Supp. 11 (p.472-3) into your syllabus.

And to bring more currency into case discussions, we have just written a new case called Premier Bicycle’s COVID Problem. This case will appear in MyOMLab’s Spring edition, but here is the link should you want to preview the case or teach it this term.

Good OM Reading: McKinsey’s Report on Global Value Chains–Part 1

In recent decades, value chains have grown in length and complexity as companies expanded around the world in pursuit of profits. Since 2000, the value of intermediate goods traded globally has tripled to more than $10 trillion annually. Businesses that successfully implemented a lean, global model of manufacturing achieved improvements in inventory levels, on-time-in-full deliveries, and shorter lead times.

However, these OM choices sometimes led to unintended consequences.. Intricate production networks were designed for efficiency, cost, and proximity to markets but not necessarily for risk. Now they are operating in a world where disruptions are regular occurrences. “Companies can now expect supply chain disruptions lasting a month or longer to occur every 3.7 years, and the most severe events take a major financial toll,” reports the McKinsey Global Institute. This new research study, which we summarize in a two-blog series, explores the profound shocks facing value chains from financial crises, terrorism, extreme weather, and, yes, pandemics.

Some manufacturers will use technology and devise other strategies to come out on the other side of the pandemic more agile and innovative. McKinsey reminds us that the COVID pandemic is only the latest in a series of disruptions. In 2011, a major earthquake and tsunami in Japan shut down factories that produce auto components, halting assembly lines worldwide. It also knocked out production of silicon wafers, on which semiconductor companies rely.

Forty weather disasters in 2019 caused damages exceeding $1 billion each. And the number of ransomware attacks doubled from 2018 to 2019. Interconnected supply chains and global flows of data, finance, and people offer more “surface area” for risk to penetrate, and ripple effects can travel across these network structures rapidly. Companies tend to focus much of their attention on managing the types of shocks (like trade disputes, product recalls, data breaches, or logistics disruptions) they encounter most often. COVID is a reminder that outliers may be rare—but they are real possibilities that companies need to consider in their decision making.

Classroom discussion questions:
1. Relate each of the major headings in Supp. 11 (Supply Chain Management Analytics) to the COVID pandemic.

2. What changes might an operations manager make in response to this report?

OM in the News: Where is All the Toilet Paper?

“What does toilet paper have to do with a global pandemic? Nothing,” writes The Orlando Sentinel (April 9, 2020).

Yet millions of people have been panicking about their household supply. Stores shelves have been emptied. Amazon is often out of stock. And social media is bursting with jokes and pleas for a roll or two. Some were stockpiling last month in advance of government lockdown orders.

It’s a common reaction in times of a crisis, when consumers feel a need for control and security. Online and in-store U.S. toilet paper sales rose 51% between Feb. 24 and March 10, as buyers started getting uneasy about the growing number of virus cases. But sales rocketed a whopping 845% on March 11 and 12 as states announced lockdowns.

Toilet paper flows from paper mills to retail stores through a tight, efficient supply chain. It is bulky and not very profitable, so retailers don’t keep a lot of inventory on hand; they just get frequent shipments and restock their shelves. The amount of toilet paper the average American uses hasn’t changed; it’s around 141 rolls per year (compared to 134 rolls in Germany and just 49 rolls in China). But even small changes in buying habits can throw everything into disarray, as we see with the bullwhip effect discussed in Supplement 11 of your OM text.

With a regional disruption like a hurricane, stores can redirect some inventory to the affected area. But a global pandemic doesn’t leave a lot of wiggle room. The big three U.S. toilet paper companies — Georgia-Pacific, P&G, and Kimberly-Clark — were already running their toilet paper plants 24 hours a day before coronavirus hit. That’s the only way they can make a profit on such a low-margin product. But now the companies are trying to increase output by making fewer varieties of toilet paper.

Classroom discussion questions:

Explain the bullwhip effect.
What supply chain options are available?

Guest Post: Building A Robust Supply Chain During A Pandemic

Today’s Guest Post comes from Prof. Jonathan Opata, who teaches Operations & Supply Chain Management at George Mason University, Southern New Hampshire University and Northern Virginia Community College

China is critical to the supply chains of many companies because it is the world’s leading manufacturer and its 2nd-largest economy. Government directives on strict quarantine measures have led to economic and supply chain disruptions globally. Companies must ensure risk management in the face of the pandemic. This requires integrated supply chain visibility, better forecasting and intelligent capacity building to meet demand.

Currently, many companies have limited access to employees and logistics, and face the closure of factories because of the ongoing measures to control the spread. This has resulted in a bullwhip effect and high product costs. Here are 6 critical areas for organizations to focus on that you can discuss with your students:

1. Develop Alternative Supply Sources: Developing and looking for new sources of supply is the premier strategy.
2. Create Business Continuity Plans: These plans should pinpoint contingencies in critical areas and include backup plans for transportation, communications, supply, and cash flow. Suppliers and customers need be involved in developing these plans.
3. Create a Comprehensive Emergency Operations Center: This operations center will require integration of company-wide data sources to allow visibility into daily operations.
4. Develop a Collaborative Approach to deal with transportation suppliers to increase visibility of shipments in the supply chain pipeline. This means conducting risk analysis and teaming up with all suppliers to act on supply issues.
5. Redesign to Source from Local Content: Companies need to have production facilities with local sources of supply in each of their major markets, to spread the risk.
6. Align the procurement strategy with Supplier Relationships: Companies should rely on small groups of critical suppliers and maintain a mutually win-win relationship with each. Also, companies need to adjust for higher than normal demand and proactively design robustness into the network to minimize the impact of the bullwhip effect.

These strategies are critical for both short-term recovery and longer-term contingency planning. When companies work together, they can withstand this pandemic and come out more reliable than ever.