Supplement 7 – Page 3 – The OM Blog by Heizer, Render, & Munson

OM in the News: GM, Capacity, and the UAW Strike

GM is pouring billions into electric cars and autonomous vehicles, and needs maximum flexibility to minimize the risk. Automobile design is headed for big changes, and a preference for shipping production out of the country threatens its ranks. Electric vehicles, which are less complex than gasoline counterparts, are expected to require 30% fewer workers—bad news for a UAW union that now only represents about 150,000 people at Big Three auto plants—a minority of American auto workers. The recent strike cost GM $3 billion and UAW members $8,700 per worker. The industry’s most profitable vehicles, meanwhile, are increasingly coming from Mexico.

Hence the factory-utilization rate. Long an indicator of a company’s underlying health, it measures the percentage of a plant’s capacity to churn out cars used during a 16-hour workday. Auto executives hate it when the lights are off on a plant. Every minute of those 16 hours that the assembly line isn’t running represents piles of wasted cash.

GM is responsible for 1/3 of the auto industry’s unused production capacity, reports The Wall Street Journal (Nov. 2-3, 2019). That’s a disproportionate burden for a company with just 17% market share. It’s also why the company announced a plan last year to close several factories, including a facility in Lordstown, Ohio, and stuck to that plan even as government and union leaders criticized the move.

GM builds the electric Chevy Bolt and small cars, for instance, at a factory in Orion Township, Mich. The sprawling facility employs about 750 people and is capable of building tens of thousands of cars a month. It currently builds 170 a day, or less than 10% of what it is capable of building during a 2-shift workday. The industry average for capacity utilization? 88%. GM is keeping Orion open because it sees the factory as a test bed for electric vehicles, which currently are money losers because of the high cost of batteries.

Classroom discussion questions:

What issues concern the UAW?
What OM issues concern auto manufacturers?

OM in the News: Toyota Remakes Its Biggest Plant

Toyota’s largest plant in the world sits on 1,300 acres in rural Kentucky. With floor space equal to 170 football fields, the Georgetown factory houses more than 2,000 industrial robots, 6 cafeterias, and 2 paint shops. Its newest order of business has been to add the gas-electric hybrid version of the popular RAV-4 SUV to one of the plant’s three assembly lines, writes Businessweek (Oct. 7, 2019).

Georgetown is fighting to hold on to its status as Toyota’s biggest plant as demand for its sedans has plummeted and the 3-decade-old factory deals with high fixed costs, falling productivity, and the rise of a network of sibling plants in North America churning out more popular crossovers, SUVs, and trucks. When the factory opened, it was designed to assemble hundreds of thousands of mass-market vehicles, such as the midsize Camry. For 27 years that was Toyota’s bestselling car in America.

An AGV rolls down the Camry assembly line.

The Georgetown plant’s output peaked at 514,590 vehicles in 2007, just before the Great Recession. Americans’ appetite for sedans didn’t keep pace with a recovery in auto demand over the past decade. In 2018, Georgetown’s production totaled 430,224 cars, a sign of rapidly changing auto tastes. That meant investing $238 million more in Kentucky to add the RAV4 hybrid, bringing Toyota’s total investment in the plant to $7 billion.

Georgetown’s ebbing fortunes have increased pressure to cut costs and boost efficiency: it is now less expensive to build a Camry in Japan and ship it to Kentucky than to manufacture one locally. Kentucky is installing advanced flaw-detecting cameras, self-driving supply carts, and systems for sequencing component delivery so fewer parts need to be stored on the factory floor. That will require fewer workers doing manual tasks and will boost efficiency in line with newer factories. Toyota also is reconfiguring equipment to match its most flexible factories in Japan, which make a half-dozen different models on the same assembly line. So one of the big things that is changing is the plant layout.

Classroom discussion questions:

Why is plant capacity a vital issue here?
What changes have negatively impacted the plant’s success?

OM in the News: Capacity Planning Issues at Disney

Disney makes billions of dollars by persuading people to watch its movies and TV shows, play with its toys and games, and visit its theme parks. Yet the entertainment titan did its best to discourage fans from visiting the new Star Wars area in Disneyland, California last quarter, pushing attendance at its domestic parks down 3%. (Disney had been expecting a surge in guests to visit the new attraction).

A second Star Wars themed land opened Aug. 29th at the Disney park here in Orlando. But this time, Disney hopes it learned from the May opening at its California version, reports the Orlando Sentinel (Aug. 30, 2019). There, guests had to be staying at one of the company’s hotels or sign up for online reservations that quickly filled up. Fans in California may also have stayed away because they thought Disneyland would be too crowded. Local hotels raised prices. (Both new lands are opening with only one of the two main rides finished, something that may have further discouraged guests).

Restrictions that limit access for many annual-pass holders are ending this week, allowing more guests to enter the Florida attraction without paying extra. That wasn’t the case in California, which opened at the start of the peak summer season when many annual-pass holders couldn’t use them. Fans in Florida were able to come inside the park as early as 4:45 a.m., 3 1/4 hours earlier than the regular opening time. Crowds were at capacity, with some Star War loyalists lined up at 3:30am, only to face lines that reached 5 hours for new rides. Discounted ticket prices were offered for guests to wait until noon to enter. Orlando-area hotels are also offering discounts timed to the Star wars opening.

Disney took a big bet on Star Wars this year, whose expansions cost $1 billion at each of the two parks. But for theme park devotees, Thursday was the equivalent of Black Friday shopping — a controlled chaos that was enjoyable nonetheless.“I’m still on the high,” said a New Jersey guest who hadn’t slept in 24 hours.

Classroom discussion questions:

What tactics discussed in Supplement 7 did Disney employ to impact capacity in California?
In Orlando?

OM in the News: How Many Hogs Can Be Safely Slaughtered Per Hour?

Headlines this past week have touted the benefits to global sustainability of eating more vegetables and less meat. But the demand for pork seems to keep increasing. “The federal government is poised this month to adopt a rule that would essentially turn the largest pork processing lines in the U.S.into the autobahn: no speed limit”‘ writes The New York Times (Aug. 9, 2019).

Currently, plants are allowed to slaughter a maximum of 1,106 hogs per hour. As hogs move down the slaughter lines, U.S. inspectors stationed at each plant examine them and remove any part potentially harmful to consumers. But pork producers have pushed for a change to inspection regulations that would do away with the speed limit and reduce the number of federal inspectors. For those in favor of the change, the advantages are clear. Plants would be able to slaughter more pigs and, therefore, make more money. The government would save money because it would not employ as many inspectors.

The U.S. currently assigns 7 inspectors at various points along the slaughter lines at pork plants, who look at, examine and sniff carcasses for signs of disease and contamination. In the new model, 2-3 federal inspectors per shift would be on the lines, overseeing plant employees who would take over time-consuming labor like removing lymph nodes to test for disease. Two others would perform other tasks like sanitation checks.

As for whether faster lines are more dangerous for workers, the Food Safety and Inspection Service said that was not in its jurisdiction. Line speeds, it said, were historically determined by the ability of federal inspectors to examine and evaluate the meat. The issue of worker safety, it said, falls to the OSHA. There is no national database where all packing houses report injuries and accidents. (There have been five amputations or other severe injuries at a pork processing facility in Beardstown, Ill. since 2015).C

Classroom discussion questions:

What are the operations issues involved in this case?
Discuss the worker safety tradeoffs.

OM in the News: Capacity Planning and the 737 Max Grounding

Grounded Boeing 737 Max airplanes are stored in an area adjacent to Boeing Field in Seattle

The extended grounding of Boeing Co.’s 737 Max planes forced airlines across the globe to scale back growth plans for next summer, putting the airline industry on notice that the crisis is starting to affect longer-term plans. With a return date for the Max still uncertain after two fatal crashes, one airline, the Irish carrier Ryanair, will receive barely half of the 58 planes it was expecting for the 2020 peak schedule. Ryanair estimates that the reduction will wipe 5 million passengers from its full-year tally.

Although U.S. operators of the Max haven’t yet talked about changing their growth plans beyond this year or readjusted deliveries, it will probably take 15 to 18 months for the carriers to catch up to their original schedules, writes The Los Angeles Times (July 16, 2019). (The timing depends on Boeing resuming its original delivery schedule, after slowing Max production rates to 42 from 57 aircraft a month). American Airlines and United Airlines just pulled the Max off their schedules through early November, in the latest sign the jet may not resume commercial service this year. Carriers will probably limit the expansion of the seat supply until late next year. Capacity growth will likely remain muted until the end of 2020 so that the first ‘normal’ year for capacity growth will be 2021.

Aviation regulators grounded the newest 737 after two crashes killed 346 people. In June, the FAA disclosed a separate software glitch it had found during simulator testing. That issue requires additional work by Boeing and is further delaying the Max’s return to service.

Classroom discussion questions:

How can airlines forecast available capacity in a unique situation like this?
What options do airlines have when planes are not delivered as planned or taken out of service?

OM in the News: UPS, Capacity, and a Busy Holiday Shipping Season

UPS is counting on a big boost in shipping capacity to avoid logjams in its network during the peak holiday shipping season, and the delivery giant is raising prices to help offset those investments. The company is planning to deliver 800 million packages in the U.S. between Thanksgiving and Christmas, up from 750 million last year, reports The Wall Street Journal (Oct. 25, 2018). Nearly every delivery day during that stretch will see volume of more than 30 million packages!

To handle the surge in packages driven by online shoppers, UPS is building more automated sortation hubs, including its 3rd-largest U.S. facility that just opened in Atlanta. UPS says it has added 7 times more processing and sorting capacity this year than it did in 2017. To offset those costs, it is pushing up prices on domestic deliveries and adding surcharges on oversize packages. In the U.S. business, revenue per piece rose 4.8% in the 3rd quarter, the fastest growth since 2011.

UPS also working closely with more of its largest shipping customers, like Amazon, on better forecasting demand during the period, including predicting volume based on where it’s shipped from and coordinating with shippers when they have promotions. The company hopes to avoid unexpected volume surges that caused delivery delays in the past. “The last couple (years) we’ve been constructively dissatisfied,” UPS’s COO said. “Our goal is to have this peak be the peak we all want it to be through the eyes of our customers.”

UPS is addressing its recent declining profit by trying to woo more higher-quality businesses—including small- and medium-size customers and health care companies—to offset predominantly lower-margin shipments tied to e-commerce.

Classroom discussion questions:

What tactics for matching capacity to demand that we discuss in Supplement 7 is UPS employing?
How might UPS’s moves impact profit and revenue?

OM in the News: Disneyland’s Dynamic Pricing Model

Disney’s theme parks in the U.S. can fill to capacity during certain times of year.

After raising some ticket prices for its theme parks by more than 20% over the past 5 years, Walt Disney will set a new benchmark when it offers die-hard fans the chance to attend a 6-hour preview of a new attraction at Disneyland — for $299. Even for fans used to high prices, the sneak peek at Pixar Pier breaks new ground.

The steep price stems in part from a perennial tension Disney faces at its theme parks, where public demand is so strong, reports The Wall Street Journal (June 19, 2018). Raising prices — currently around $100 on average days and more than $120 during “peak” times around holidays — could mitigate tourist appetite and increase profits. The company, however, is wary of appearing to gouge customers. Disney is working on adopting a dynamic pricing model similar to airlines, in which prices fluctuate depending on when a ticket is purchased. Disney already has introduced a limited version of dynamic pricing to its parks, charging a range of prices based on 3 categories of dates: “value,” “regular” and “peak.” Prices range from $97 to $135 for Disneyland.

Under the new changes, a ticket to Disneyland for Christmas Day, for example, may cost less if purchased on July 1 than on Dec. 24. This would encourage visitors to commit to a day to visit the park farther in advance, which allows parks to plan better. Disney parks often reach their limit during the summer tourism season and over Christmas break, when the parks sometimes have to turn away would-be customers for several hours.

New attractions at the parks help Disney to handle crowds, but they also draw more visitors. Disney’s “Avatar”-themed experience has drawn crowds that can cause waiting times for some rides to average 1-2 hours—and in some cases, stretch to 4 hours.

Classroom discussion questions:
1. How does Disney’s use of yield management differ from that of airlines?

2. How does Disney deal with capacity issues (see the 6 points on page 313)?

OM in the News: Tesla Suspends Production (Again)

Tesla is temporarily suspending production of the Model 3 sedan for at least the second time in 2 months, just after Elon Musk admitted to mistakes that hindered his most important car. The company informed employees that the pause will last 4-5 days. The hiatus is another setback for the first model Musk has tried to mass manufacture, writes New Equipment Digest (April 17, 2018). In addition to trying to bring electric vehicles to the mainstream, Tesla had sought to build a competitive advantage over established automakers by installing more robots to quickly produce vehicles. Last week, Musk acknowledged “excessive” automation at Tesla was a mistake.

“Traditional automakers adjust bottlenecks on the fly during a launch,” said an industry analyst. “This is totally out of the ordinary.” The shutdown is taking place a week after Musk gave CBS This Morning a tour of Tesla’s assembly plant and said the company should be able to sustain producing 2,000 Model 3 sedans a week. He said manufacturing issues that had been crimping output were being resolved and that Tesla probably will make three or four times as many of the cars in the second quarter.

Tesla built 9,766 Model 3 sedans in the first quarter. The company said in an April 3 statement that the process of boosting production and addressing bottlenecks during the first three months of the year included “several short factory shutdowns to upgrade equipment.” But shutting down for days on end during ramp is far from normal.

Getting Model 3 output up to speed is crucial to generating revenue after the billions of dollars Tesla has spent to manufacture, recharge, service and repair more cars.

Classroom discussion questions:

What is the problem with shutting the factory for 4-5 days?
How does Tesla differ from a traditional auto manufacturer?

OM in the News: Tesla’s Sloooow Rollout

Tesla charging stations wait to be unwrapped.

When Elon Musk first unveiled the Tesla Model 3 sedan in March 2016, consumers stood in long lines at showrooms to place $1,000 deposits, giving Musk an iPhone moment unprecedented in the auto industry. When people stand in line at an Apple Store, they typically walk away with a new phone; the all-electric Model 3 had yet to be built. Overwhelming demand inspired Musk to announce in May 2016 that he was advancing Tesla’s production plans by 2 years. It would build 500,000 total cars annually by the end of 2018, rather than 2020—a fivefold production boost in just 2 years. For Tesla, which had no experience manufacturing cars in high volume, it has been a steep production learning curve, writes Businessweek (Jan. 15, 2018).

Tesla delivered only 1,770 Model 3 sedans to buyers in 2017’s second half. In August, Tesla said it expected to achieve a manufacturing rate of 5,000 Model 3 vehicles a week by the end of the year. In November the company back pedaled, saying it would hit 5,000 units a week in late March 2018, citing “production bottlenecks.” Musk stated he was on the “front lines” of production hell.

“They vastly underestimated how challenging it is to mass-produce vehicles, and quality should be their focus,” said one industry exec. On Jan. 3, Tesla delayed the production goal by yet another quarter, saying that it now expects to hit 5,000 units a week by the end of June, with a “focus on quality and efficiency rather than simply pushing for the highest possible volume in the shortest period of time.” Concentrating on quality makes sense for the carmaker. A mass-recall would probably be far more damaging.

(Tesla’s stock, by the way, surged 43% in 2017, despite the factory setbacks).

Classroom discussion questions:

What are the OM issues that Tesla is facing?
Do a quick SWOT analysis on Tesla.

OM in the News: Tesla’s Model 3 “Production Hell”

When Elon Musk talks about the future of factory automation at Tesla, he envisions new breeds of robots and smart machines compressed in dense factories with little room for human operators, guided by self-learning software. “But so far, the manufacturing of Tesla’s new all-electric compact sedan, the Model 3, at its Fremont, Calif., factory is moving at a more earthbound pace,” reports The Los Angeles Times (Oct. 20, 2017).

Tesla was anticipating a production rate of 20,000 Model 3s a month by the end of December. Over 3 months through September, though, Tesla had produced only 260 — about 3 cars a day. That’s well behind a normal auto-industry production pace of 1 car per minute. The company blamed unnamed manufacturing “bottlenecks,” and promised a quick fix. But the assembly line remained incomplete by early September with some body parts normally installed by robots being employee-assembled by hand.

The “production hell” that Musk acknowledged raises questions about whether the Silicon Valley model he has followed — beta testing with early adopters and launching updates via software — can be adapted for Tesla’s first mass-market product. “Automobile manufacturing is very hard,” said an OM prof at UCLA. “It’s amazing that Tesla has been able to build cars at all.” He meant it as a compliment.

Tesla took the Model S from design to full production faster than traditional manufacturers would consider. Tesla’s breakthrough over-the-air technology made software fixes a snap. Code to fix battery issues, add self-drive features, or simply tweak the music system can be downloaded via the car’s Wi-Fi system. Still, many owners complained that there were more quality problems than they expected in a $90,000 car. In July, Tesla turned the first 30 Model 3s over to paying customers — all Tesla employees. Some of those first 30 cars were returned to Tesla with battery problems.

Classroom discussion questions:

How does Tesla’s approach differ from traditional automakers?
Are such delays to be expected?

OM in the News: GM Wrestles With Excess Capacity

Despite its drastic downsizing a decade ago under a federally funded bailout and bankruptcy restructuring, General Motors again finds itself with too many U.S. factories that can turn out too many vehicles. GM’s factory-utilization rate in North America averaged 95.1% over the past two years, below Ford’s 111.9% and Toyota ’s 101.4%. (Rates can exceed 100% when factories work a 3rd shift or schedule overtime work on weekends.) The auto industry often runs its factories dawn-till-dusk or even around the clock to boost their efficiency, writes The Wall Street Journal (Oct.10. 2017).

Factory-utilization rates typically measure how much production capacity a plant uses based on a 16-hour workday. GM says its utilization rate is 100% on average when its round-the-clock truck and SUV lines are figured in with the relatively sleepy factories making cars. GM said it is working to “drive further improvements” in its plant utilization, including adding crossover SUVs to more factory lines. A plant in the Kansas City area that now makes only the Malibu is scheduled to begin assembling a small Cadillac SUV by late 2018. But such a switch-over typically takes car makers several years of lead time, to order and install new assembly-line equipment and tooling.

GM operates 17 vehicle-assembly plants in North America, after closing several during its bankruptcy. Most, except for 5 that operate around the clock to build trucks and SUVs, have ample unused capacity.

Classroom discussion questions:

How is capacity computed in the auto industry?
What can GM do to bring capacity in line with demand?

Guest Post: A Breakeven Analysis Using Real Data

Our Guest Post today comes from Howard Weiss, who is Professor of Operations Management at Temple University. Howard has developed both POM for Windows and Excel OM for our text.

I like to direct my students to real data whenever possible in my Operations Management course. The Philadelphia Inquirer (http://www.philly.com/philly/blogs/inq-phillydeals/grateford-phoenix-prison-400-million-new-20170915.html) has an article about a new prison, Phoenix, that is being built in Pennsylvania to replace the old prison, Graterford. Phoenix is expected to open in July, 2018. The article gives data that makes it very easy to formulate a break-even example for the students.

According to the article, Phoenix cost $400 million to build, will cost $90 per day to house an inmate and will have 4055 beds. Currently at Graterford it costs $123 per day per inmate.

I have asked my students to determine the following:
1. What is the total savings per year assuming the prison operates at 100% capacity?
2. Why is this different from the $48 million dollars reported in the article? Assume the costs given above are correct.
3. How many years will it take until the Phoenix project breaks even based on the $48 million reported in the article?

I expect my students to:
1. compute the savings per inmate per day ($33); the savings per inmate per year ($12,045); the total savings per year? $48,842,475
2. realize that the prison does not operate at full capacity and hopefully to report that the effective capacity is 98%.
3. compute the break-even point in years (8.33 years).

Guest Post: Break-even Analysis: Excel Makes Algebra Obsolete

Our Guest Post today comes from Howard Weiss, who is Professor of Operations Management at Temple University. Howard has developed both POM for Windows and Excel OM for our text.

When I began to use Excel in my classes, my main objective was to make the computations easier for the students so that we could focus on the models, inputs and outputs. At this point though, I have changed my priorities and I think it is important for us as OM (or Finance or Stat) professors to help the students develop their Excel skills as best as we can in our courses. To that end, I have taken a different approach to teaching Breakeven Analysis.

In the past, I used to develop the Break-even point algebraically just as is done in Heizer/Render/Munson and just about every other OM or business textbook. At the computer lab I would have my students enter into Excel the Fixed cost, Variable cost, Price and then the formula for the break-even point F/(P-V).

Recently, I have instead used Goal Seek, rather than the formula, to have the students find the break-even point. Instead of entering the break-even formula, I have them create a cell for the number of units, a cell for the total revenue and a cell for the total cost based on the number of units. I think expressing the total cost and total revenue in Excel helps the student to better understand these two admittedly simply concepts. I then tell the students that instead of finding the number of units where TC = TR we will create a cell for the difference between the two and use Goal Seek to search for a difference of 0 between TC and TR. The spreadsheet for Example S5 (Supp. 7) in the textbook appears as follows, along with a capture of the Goal Seek window.

I think this approach gives the student a better understanding of both break-even analysis and Goal seek.

OM in the News: Starbucks Tries Mobile Order/Pay Only Stores

Starbucks is opening a new coffee shop that only accepts orders placed on a mobile device, reports Geekwire (April 3, 2017). Starbucks now has more than 9 million mobile paying customers, more than a 1/3 of which use the Mobile Order & Pay (MOP) program that lets customers order with their smartphone and skip the line.

However, Starbucks has a problem. The uptick in mobile orders is creating congestion inside stores for mobile order-ahead customers trying to pick up their coffee and food at hand-off stations. This not only affects customers who are picking up items, but also potential customers who may notice the in-store traffic and end up not purchasing anything.

“We’re going to redesign new stores and existing remodels to reflect the fact that MOP is obviously going to be a significant part of the business,” said Chairman Howard Schultz. In response, Starbucks is adding dedicated stations for mobile order-ahead customers, distinct from existing in-store registers. There were 1,200 stores in the U.S. that saw more than 20% of transaction volume come from MOP during peak hours last quarter.

TheStreet’s Jim Cramer said that if Starbucks can solve “the throughput problem with mobile ordering, then its stock can go much higher. Starbucks has to become a technology company that gets your coffee to you without a throughput problem.”

Classroom discussion questions:

How can Starbucks handle the throughput problem?
Is it a mistake to create MOP only stores?

OM in the News: Johns Hopkins’ Capacity Command Center

Johns Hopkins Hospital’s state-of-the-art, advanced hospital control center

Johns Hopkins Hospital, reports Analytics Magazine (Jan.-Feb., 2017), recently launched an advanced control center to better manage patient safety, experience, volume, and the movement of patients in and out of the hospital. The Capacity Command Center incorporates systems engineering principles, which are commonly seen in aerospace, aviation and power industries, but are rare in hospitals.

In the one room center, 24 staff members work together, equipped with real-time and predictive information, and empowered to take action to prevent or resolve bottlenecks, reduce patient wait time, coordinate services, and reduce risk. The command center also houses a sophisticated system with a wall of computer monitors that provides situational awareness and triggers the center team to take immediate action. During a typical afternoon, the system receives about 500 messages/minute from 14 different hospital IT systems generating real-time data. “In the past, like most hospitals, we were dependent on traditional technology – phones, email and IT systems – to manage the hospital, assign beds, etc.,” says a hospital exec.

The technology in the command center keeps staff members informed 24/7 about when there is an influx of patients coming into the hospital, which hospital units need additional staff members, the status of how many patients are being treated, the need for and availability of beds across the hospital, the highest-priority admissions and discharges, and other essential information.

Early results demonstrate improved patient experience and operational outcomes such as: (1) 60% improvement in the ability to accept patients with complex medical conditions from other hospitals; (2) critical care team is now dispatched 63 minutes sooner to pick up patients arriving in ambulances from other hospitals; (3) patients are assigned a bed 30% faster from the ER; (4) transfer delays from the OR after a procedure have been reduced by 70%; and (5) 21% more patients are now discharged before noon.

Classroom discussion questions:

Why have hospitals been slow to adopt these process control procedures used in other industries?
What hospital functions could benefit from the command center concept?