OM in the News – Page 115 – The OM Blog by Heizer, Render, & Munson

OM in the News: Japan’s Offshoring is Restructuring Its Economy

If you think outsourcing (transferring in-house processes to another company) and offshoring (which we define in Chapter 2 as moving business processes to another country, but retaining control) are a problem only in the US, think twice. Today’s Wall Street Journal (Oct.25,2010) reports that more and more Japanese companies are transferring their manufacturing abroad, creating a major restructuring of that country’s economy.

The reasons: too strong a yen and high wages, both of which make their goods more costly and less competitive in the global economy.

Toyota, for example, will make 57% of its cars abroad this year, including its flagship hybrid, the Prius, which it starts producing at a Bangkok plant. Nissan will hit 71% offshoring this year. And Sony is skyrocketing from 20% abroad in 2010 to 50% in the next fiscal year.

As Nissan CEO Carlos Ghosn recently stated: “sourcing more and more products outside Japan–there is no other way to compete”. Only 10.3 million Japanese now work in manufacturing, down from over 12 million in 2002.

Discussion questions:

1. Although controversial, why is Japan not fighting outsourcing/offshoring as much as the US does? (See our blog of Oct. 12th for some background on the battle against outsourcing in the US).

2. Why is Japan finding it necessary to go abroad?

3. Japanese are consumers are reluctant to spend. Why?

OM in the News: The (Gentler) Chicken-Killing Assembly Line

I was 7 years old when my Dad proudly took me to the Dubuque (Iowa) Packing Co. to show me what he did as a supervisor in the cow butchering department. I won’t go into graphic detail as to how the animals were queued up to have their throats slit. They were stunned first to make the process as pain free as possible.

Maybe you can see why yesterday’s New York Times (Oct.22,2010) front page headline, “New Way to Help Chickens Cross to the Other Side”, caught my attention. It turns out that chicken producers, egged on by animal rights groups, are also switching to a system of killing their birds more humanely. The new process uses gas to render the chickens unconscious before they are hung by their feet to have their throats slit.

“When you grab a chicken, turn it upside down and put it on the line, its stress, stress, stress”, says one chicken producer. The new system is not only meant to be kinder to the animals, but to plant workers as well. Dealing with struggling, flapping chickens–like dealing with bellowing cows who sense impending doom– makes meat processing plant jobs among the worst in the country.

This topic can fit in your OM course in 3 ways: (1) students have strong opinions about the issue of how we slaughter animals (see the Ethical Dilemma box on pig production in Ch.7, Process Strategy); (2) when you discuss job satisfaction/motivation in Ch.10, it makes the point that not all jobs are easy to staff/manage; and (3) this is a classic case of an assembly line, in Ch.9’s photo, at the end of the chapter.

Discussion questions:

1. Does killing chickens this way make you more comfortable with the production process?

2. How are most chickens raised in preparation for slaughter?

3. Will it be easier to market a chicken as “killed stress-free”?

OM in the News: Waiting Lines in the Doctor’s Office

My internist of many years, Dr. Gulden, never ceased to amaze me before he retired. For every scheduled appointment, I was seen within 5 minutes of my arrival! This led to research I did in 1994, when I found that the average wait time in doctors’ offices in the US was 20.6 minutes, costing about $15 billion per year in lost productivity.

I guess this topic was of interest since the finding made the front page of papers around the country, from the Boston Globe to the Miami Herald. Yesterday, The Wall Street Journal (Oct.19,2010), with the headline “The Doctor Will See You Eventually“, announced that the “average time patients spend waiting to see a health care professional is now 22 minutes, and some waits stretch for hours”. Are any of us who teach OM shocked?

This is a great article to discuss when you cover waiting line models in Module D. But it may also be useful in Supp.7, Capacity and Constraint Management, because the Journal talks about cutting cycle time. In one doctor’s office, patients helped measure their times from arrival until departure. By identifying bottlenecks, the doctor was able to cut 12 minutes from the typical 40 minute stay.

So why was Dr. Gulden so successful in keeping on-schedule? I think there was one main reason: he made all his staff understand that each patient’s time was as valuable as his was.

Discussion questions:

1. Ask your students to rank the seven methods the article discusses in terms of what they think are the best for time savings payoff.

2. Many hospitals now advertise their ER wait times. What have they done to improve their process flows?

3.What kind of queuing models can be used in a doctor’s office?

OM in the News: Solar–Will the U.S. Lose Out to China?

A few days ago, our blog gave the good news that BMW and Mercedes were expanding their manufacturing in the US. For our nation’s standard of living to rise, we indeed need to make things. And such jobs pay well and provide a path for middle class success.

But the New York Times headline (Oct.13,2010), “In the Future, Already Behind” brought me back to reality with a thud. The story is about Silicon Valley and its commitment to transforming the economics of solar panel production. Firms like Solyndra, Nanasolar, and MiaSole bet the farm that their “thin film” technology would make them the Intels and Apples of the exploding global solar industry.

But just as Solyndra flipped the switch on its new $733 million California factory last month, everything changed. The Chinese, using vast economies of scale and government subsidies, sent the price of panels plunging 40% and grabbed 40% of the vast California market. They also took the bulk of the European market. What looked like a chance for US manufacturing to dominate a critical growing market has crumbled to the realities of globalization.

“How do you fight against enormous subsidies, low-interest loans, cheap labor and scale, and a government strategy to make you no.1 in solar?”, asks an American CEO.

New technologies (see Ch.7), meant to be cheaper, must get there faster is one lesson we learn here.

Discussion questions:

1. What are the dangers of ceding this industry to the Chinese?

2. How can the US firms counter this threat (see Ch.2 for a strategy discussion)?

3. Should the US provide the same benefits that China does to new companies?

OM in the News: BMW Loves Making Cars in the U.S.

As the Big 3 auto makers still struggle to reclaim markets and manufacturing leadership, BMW announces that employment will hit 7,600 workers in its South Carolina plant next year. Its $750 million expansion means the plant will be the largest car factory in the U.S., dwarfing any Detroit operation.

Of course, with the economy so bad, this is good news, even if some profits end up in the company’s German headquarters. And because of high-tech firms like BMW, South Carolina is the 4th largest net importer of college-educated adults.

Why did BMW decide to make its luxury SUVs here, when it exports 70% of these vehicles to the rest of the world? The Wall Street Journal (Oct.14,2010) reports that US production helps BMW hedge against currency fluctuations around the globe. Another reason…according to U.S.-BMW President Josef Kerscher (in Fortune, Oct.15,2010): This U.S. group has absenteeism of “less than 3%, better than in Germany”.

Similar good news is that Mercedes plans to shift some production of its best-seller, the C-class sedan, from Germany to the US in 2014. Its not only a currency issue for Mercedes, but the strategy reduces labor and other costs. As we note in Ch.8 (Location), Mercedes already makes SUVs in it Vance , Alabama plant.

Discussion questions:

1. What others reasons are there for foreign car makers to be attracted to the US?

2.Why is South Carolina a primary destination for auto manufacturers?

3. What brought Mercedes to Alabama (see Ch.8’s OM in Action box)?

OM in the News: Starbucks’ Lean Teams Slowing Down

I always like to use Starbucks examples in class. Its the kind of “hip” company that students can relate to. Over the past few years , Starbucks has been applying lean manufacturing techniques to study every move its baristas make in order to shave seconds off each order. Chapter 1 in our text has an OM in Action box describing these productivity improvements.

But The Wall Street Journal (Oct.13, 2010) just reported that Starbucks now wants to reign in its baristas, an act that will result in longer lines and waits. Baristas are being told to stop making multiple drinks at one time, to steam milk one drink at a time instead of a pitcher at a time, to rinse pitchers after each use, and to use 1 espresso machine instead of 2.

Why would the company do this? The new methods have “doubled the amount of time it takes to make some drinks” says one employee. But the company is concerned about quality, with customers indicating that Starbucks espresso drinks are just “average”.

It is definitely an interesting class topic to see the lean techniques being reversed and I am sure many students will have a comment about such changes.

Discussion questions:

1. Why would baristas be opposed to slowing down the process?

2. What are some of the lean techniques the company has introduced over the years?

3. What other changes has Starbucks made recently in product and process?

OM in the News: The Outsourcing Controversy

Outsourcing has been a controversial topic and a political football for well over a decade now. We have tried to maintain a balanced view of the pros and cons. But with the elections nearing in a month, many Congressional candidates and the AFL-CIO have been unveiling an anti-outsourcing campaign. And the Senate fell just 7 votes shy of passing the “Creating American Jobs and Ending Offshoring Act”.

If you teach this topic and plan to cover Chapter 2, today’s Wall Street Journal (Oct.12, 2010)carries an interesting editorial piece by William Cohen, former Defense Secretary. He states, “Most people treat outsourcing as a zero-sum game–one foreign worker replaces one American worker. But this is not how the dynamic global economy works…The fact is that that for every job outsourced to Bangalore, nearly two jobs are created in …American cities”.

Discussion questions:

1. If anyone in your class has seen the new NBC comedy “Outsourced”, ask them to comment on this issue.

2. Should the government raise taxes on companies that move operations abroad (the Senate voted 53-45 last month to do so)?

3. Should we discourage skilled workers from India and other countries from coming to the U.S. to work?

OM in the News: Wal-Mart’s Drive to Squeeze the Supply Chain

Wal-Mart trying to squeeze more out of its supply chain? Not exactly shocking news, but here is a new twist in BusinessWeek (Oct. 7, 2010). With the title VP for International Purchase Leverage (I don’t think I have heard that one before), Hernan Muntaner is convinced he can get even better deals from suppliers by consolidating Wal-Mart’s purchases with its current partners. For example, Muntaner wants to buy potatoes jointly with Pepsi’s Frito-Lay, so that both can get lower prices.

Although Pepsi doesn’t seem interested so far, and may indeed be more sophisticated than Wal-Mart in procuring raw materials like potatoes, Muntaner has already signed on a sugar supplier in England and a paper supplier in Chile. “We can do this with anything that is sold”, he says.

Collaborative sourcing, as Wal-Mart calls it, is detailed in a book by that title by Michael Philippart, Christian Verstraete, and Serge Wynen.

Discussion questions:

1. Why might suppliers be wary of the new Wal-Mart push?

2. Look at the Ethical Dilemma in Ch.11 that compares Wal-Mart to Sears. Does this purchasing concept tie in to the ethical issue?

OM in the News: Airlines and the Capacity Issue

Because of my early career experience in the aerospace industry (design team for McDonnell Douglas’ DC-10, then the engine for that jet at GE), I have always followed the airline industry closely. Capacity issues have haunted airlines for 6 decades now, going back all the way to 1942, when demand plummeted during that recession. Buying planes is a long term decision, but difficulties after 9-11 and during our current trying times created dramatic drops in demand for seats. This is a great classroom example when you are teaching Capacity in Supp.7.

How do airlines respond? As today’s New York Times reports, airlines trim capacity by grounding planes, reducing the number of flights between cities, and flying smaller planes. At the nation’s largest parking lot near the California Mojave Desert, some 200 aircraft of all sizes (from A320s to 747s) sit tip to wing tip. The dry air keeps the planes from rust and corrosion. Students will enjoy the photo in Supp. 7 showing this image.

The cost, up to $60,000 per month per plane. But the 7% cut in capacity last year helped raise ticket prices modestly. Airlines now fly at 80% of seat capacity, a full 10% higher than their traditional measure.

With the mergers of Delta with Northwest, United with Continental, Midwest with Frontier, and Southwest with AirTran, there is little growth in demand for more jets forecast in the US. Only 38 wide body planes are on order for delivery in this country by 2015. By contrast, 627 are going to be delivered to foreign carriers during that same 5 year period.

Discussion questions:

1. Why are airlines willing to spend enormous sums to park their planes in the desert?

2. Who can benefit from airline overcapacity?

3. The new Boeing 787 Dreamliner has run into such bad supply chain problems (Ch.11) that it is now 2 years late. How does this impact the airlines that ordered them?

OM in the News(and Video): Ford’s Lean Auto Plant in Brazil

Ford’s most progressive plant in the world may well be in northeast Brazil, where it uses lean manufacturing, sophisticated supply chains, and a vast array of robotics to produce the EcoSport SUV and Fiesta. A colleague in that country, who is using the Portuguese edition of our text, just emailed me the link to a video about which he is justifiably proud. This 3.5 minute video illustrates all 3 concepts: lean, SCM, and automation and makes a nice presentation in Ch11 or Ch.16. (I do need to warn you that the last few seconds are a bit anti-union).

In 2009, the Ford plant produced over 207,000 vehicles. This South American operation brings so much profit to the parent company in Dearborn,Michigan,that the firm was able to turn down federal loans in 2009 that both GM and Chrysler accepted.

Brazil is becoming a leader in lean auto making, with another plant churning out VWs with a similar layout in which suppliers produce, on-site, with their own employees, the parts that are installed in the final vehicle. If you look at the Global Company Profile that opens Ch.16 in our text, you will see a layout at the Toyota Tundra plant in San Antonio, Texas that also resembles what we see in the video.

Discussion Questions:

1. Why is it doubtful that this Ford plant will be replicated in the US?

2. How does the supply chain differ from most US plants?

3. Why is this an example of lean manufaturing?

OM in the News: Toyota’s Quality Problems

Toyota’s sterling reputation for quality took a major hit in 2009-2010 with the recall of 5 million vehicles for unintended acceleration and braking issues. The auto maker was also slow to tell federal regulators about sticky accelerator pedals and was fined a record $16.4 million…not exactly the quality image the firm had built up over the past 4 decades! These quality problems led to a temporary shutdown of all US plants and a halt in the sales of 8 popular models.

The Wall Street Journal (Oct.5,2010) has just reported that all 2011 Toyota, Lexus, and Scion models are equipped with “black boxes” to help identify the cause of accidents.

Toyota’s situation would likely cause my mentor Phil Crosby to turn over in his grave. “There is absolutely no reason for having errors or defects in any product or service”, he wrote in his 1979 book Quality is Free.

Quality, it turns out, is not to be taken for granted, even when one is the leader in the field. Mercedes faced this same recall issue in 2004-2005, when its suppliers cut corners on quality in response to Mercedes’ desire to pump up corporate profits. Its recall was 1.3 million cars, costing $600 million. You may recall seeing a photo in Ch.6 of our book’s 9th ed. of an E -Class Mercedes setting itself on fire in Tokyo.

Companies that take their eye off the quality ball find that “quality is not free”, and that it may take several years to rebuild a reputation.

Discussion questions:

1.What was Toyota’s initial response to the “floor mat problem” (which it claimed caused the accelerator to stick)?

2.What is Toyota doing today to deal with customer complaints?

3. Name some other recent major recalls of cunsumer items. How were they handled?

OM in the News: China’s Massive Foxconn Facing Wage Increases

Foxconn, the giant Chinese manufacturer employing 920,000 workers,may not have been a household name a year ago. But that is rapidly changing. Business Week’s cover story recently highlighted Foxconn (see our Blog dated 9/21/10) where we learned that the firm’s products include iPads, Nokia phones, Dell computers, and HP printers.

The thrust of this WSJ article, though, is wages. Foxconn’s chairman Terry Gou is rapidly moving manufacturing inland, to 2nd tier cities where wages are only 2/3 of the more -developed coastal areas. Gou intends to expand to 1.5 million workers, with the majority inland, in the next 5 years.

And Gou plans to keep plowing billions into China. “I think in the next 20 years China won’t have a competitor” as the world’s manufacturing center, he states.

As the BusinessWeek article detailed, 11 employee suicides have caused Gou to accelerate his plans to move jobs closer to inland towns where he recruits employees.The long hours of overtime in the coastal factories, living in Gou’s dorms, and eating at his cafeterias, may have contributed to the bleak lifestyle.

Gou also raised the minimum pay for assembly line workers to about $295, more than double, starting this month.

Discussion Questions:

1. Will China still dominate the world manufacturing scene in 20 years? Where will the US lie?

2. Why isn’t Gou afraid of Vietnam, India, Brazil, or Russia?

3. How does managing wages by moving inland affect Apple, Nokia, and HP?

OM in the News:WSJ Gives Innovative Products Awards

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

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

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

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

Discussion questions:

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

2.Name several recent products that became immediate successes.

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

OM in the News: Mass Customization at BMW

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

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

Discussion questions:

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

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

OM in the News: Location Incentives

As reported in the WSJ (Sept.22, 2010 p.C8) Navistar International Corp. has just accepted a location incentive package from Illinois. The package equate to over $22,000 per job. The journal reports that about $15,000 for each new job is the national average, but some equate to more than $200,000 per job.

In addition to jobs Navistar is expected to also spend about $205 million including an upgrade of it’s headquarter and a new parts facility.Some research suggests that in the long run a city/county/state is better off investing in honest government, good worker’s comp. practices, education, and other quality of life issues. And as the text notes, some of these incentive deals do not always work out for the company or the state.

Location incentives, potential job creation, and expense to tax payers vs other uses for tax money, can generate a lively class discussion.

Discussion Question:

1. How do location incentives relate to the location criteria discussed in Chapter 8?

2. Can you identify some ‘not so good’ results from location incentives?

3. Is there any consensus regarding how tax payer should be spent vis-a-vis incentives or quality of life issues that benefit all taxpayers?