Guest Post: Supply Risk Hook – Why Kenya Can’t Stand Iceland!

Like Barry and Jay, I’m a great lover of hooks! A hook can be a little story, a movie clip, or a simple exercise. The key is that they’re short and memorable! Here’s a nice one concerning global supply chain risk that I use in my supply management lecture.

I take in a nice bunch of flowers and ask my students where they come from. In the case of Europe, the most likely origin is Kenya. Horticulture is Kenya’s biggest source of income with 1000 metric tons of produce shipped daily to Europe. (See the photo In Ch.11 of the Heizer/Render text).  In fact, around 30% of all cut flowers sold in the EU are imported from Kenya.

I then discuss all the effort required to get these lovely flowers into our stores every day. Here you can mention the challenges of speed as a key performance objective, the perishability of stock, the extension of the supply chain etc. Then I ask (jokingly, of course!) why Kenya dislikes Iceland right now?! For the period earlier this year when the Icelandic volcano was grounding most flights throughout Europe, Kenya’s flower supply chain was shut down at a cost of approximately $3million per day. Flowers and other fresh produce had to be thrown away because there was no way of getting them to the market other than airfreight.  

This story can be used demonstrate the nature of global supply networks and the risks they face from disruptions that are often well beyond their control. You can then get students to think of other factors that can cause disruptions to supply networks: Natural disasters (Hurricane Katrina or Pakistan floods for example); Geo-political challenges; trade disputes; etc.

 This hook is of course particularly handy if you’re in Europe, because Kenya was so badly affected by the Icelandic volcano in a way that many flower suppliers in the USA weren’t. So, you could simply tell the story as if you were in Europe for that lecture… “So kids, imagine I’ve gone over to England to visit my Grandma and I’m taking her this bunch of flowers. Where do you think they came from?…” You get the idea! Happy teaching!

Prof. Alistair Brandon-Jones writes this guest post from the University of Bath, one of the top five business schools in the UK. Alistair has been active in developing myomlab.

Good OM Reading: The Spread of Industrial Engineering in China…By an American

Most all of us know the story about how Dr. Edwards Deming became the father of quality control in Japan. With their factories and infrastructure destroyed, Deming  helped rebuild post-war Japan into the industrial powerhouse we know. Deming’s reputation is so strong in Japan that the awarding of the annual Deming Prize for quality is broadcast live on TV.

Most of don’t know, however, the story of how China’s productivity revolution began some nine years ago. The improbable tale, written in a fascinating Wall Street Journal article (Nov.6-7,2010), describes Gavriel Salvendy, a 72 year old Hungarian-Israeli-American  professor who is the father of Industrial Engineering in China. Dividing his time  between China’s MIT (Tsinghua University in Beijing) and Purdue, Salvendy tore up the traditional Chinese academic hierarchy. Now more than 200 IE programs have sprung up around China mimicking that at Tsinghua.

I hope you can take 5 minutes to click on the link to the WSJ article and enjoy it as much as I did.

OM in the News: Where Should Starbucks Open More Stores?

Under pressure to increase sales and share prices,  Starbucks needs to add new stores in the right locations. The trouble is, the US market is saturated. So far, Starbucks has done very well in a handful of overseas markets. About 55% of its sales are in Canada, Japan, the UK, and China. But now even the UK and Canada are near capacity.  Toronto, Vancouver, and London already have more Starbucks per person than NY or Philadelphia.

So the title of The Wall Street Journal article (Nov.4,2010) on the subject tells it all: “Starbucks Must Open More Stores–Overseas“. The Journal suggests Starbucks follows the McDonald’s international expansion. Where will the growth be? Germany and France are two prime candidates, as Starbucks has relatively few locations in each.

While McDonald’s draws about half its operating profit from overseas, Starbucks gets only 15% abroad. The Journal concludes: “Whether dry or wet, tall or grande, Starbucks needs to find a  combination for similar overseas success”.

Discussion questions:

1. Why was McDonald’s so successful in its expansion abroad, and why will it be harder for Starbucks?

2. How can Starbucks increase profits without going overseas?

OM in the News: Hospitals Fear Outsourcing Records to India

Whenever I blog on the subject of outsourcing  (see Chapter 2), I find myself using the word “controversial” (as on 10/12/10). And, indeed, this week’s Wall Street Journal article (Nov.2,2010) describes the contentious issue of outsourcing digitizing of hospital medical records to India. Overseas providers, it is commonly feared,  do not have the security and privacy controls that US hospitals require. “As soon as it leaves the confines of the US, its not subject to the same rigorous laws as we are”, says the CIO of a Texas chain of 40 hospitals.

Every company in IT wants to cash in on the lucrative $50 billion US health care market fueled by a federal mandate for hospitals to convert to electronic records by 2017.  Amazingly, only 20% of US hospitals currently have electronic health records. Its a carrot and stick approach, with $6 million grants to an average sized hospital (I wonder where all this money comes from!) and penalties for missing the deadline. Its “like another Y2K opportunity” for software firms, says the head of New Delhi’s HCL Technologies.

So the real question is, who should get the contracts? Its not so simple. HCL has about 2,400 American employees in N.C. Then again, Cognizant Technology Solutions is a US firm in N.J., but has most of its staff in India. Indian tech giants Infosys, Wipro, and  Tata are all lined up with bids. But so are IBM, Xerox, and Dell in the US.

Discussion questions:

1. How do students feel about sending medical records abroad for automation?

2. Can this impact relations with India, which sees this as protectionist? (President Obama visits India in 2 days).

3. Why was Y2K such a boon to the IT industry? (Some of your students may not remember the drama that year).

Myomlab Enhancements

If you  haven’t seen many posts from me in the past few weeks, it’s because I’ve been working on enhancements for myomlab. As you know from my previous post regarding  myomlab software, I think myomlab is revolutionizing OM teaching and learning. For the instructors already using myomlab, I hope your classes are going well. We would love to hear from you with your observations and comments (you can click the Comments button below to publish them) or email me.

Some of the new features in myomlab are:

  • A greatly enhanced set of Guided Solutions to provide an improved tutorial experience for individual problems. The goal is to have a Guided Solution for each problem as well as a text reference. The Guided Solutions are being added as they are developed and evaluated for pedagogy and accuracy.  
  •  A ‘copy and paste’ option that we have been developing with  Howard Weiss of Temple University facilitates transfer of data from myomlab problems to Howard’s Excel OM and POM for Windows as well as to Excel.
  • The ability to apply a penalty (deducting points or percentage) for assignments submitted late.
  • The ability to assign  multiple prerequisites for assignments.
  • And a ‘custom question builder’ enabeling you to create and edit your own questions. 

Teaching Tip: Teaching Inventory Modeling in the Real World

Our research shows that the most frequently covered topic in OM courses is Inventory Management (Ch.12). In that chapter, we do discuss the importance of record accuracy, cycle counting, and shrinkage. But what we do not discuss is the use of the numerous inventory models if  inventory is only “partially observed”.

In today’s issue of Decision Line (Oct., 2010), an excellent article by Prof. Suresh Sethi, at U.Texas-Dallas, goes into the reasons for partial observation of inventory levels and then discusses how these impact modeling efforts. Here are 5 causes Suresh details:

1. Sales recorded wrong (eg, a clerk scans an item twice, when there were actually 2 different flavors of soup).

2. Misplaced inventory (eg, when items are stored dynamically, not in a fixed location). Suresh tells of a top retailer who discovered 16% of its items were misplaced.

3. Spoilage (eg, when customers tear open a package to look at the item inside, spill drinks on clothes, or scratch a car they test drive).

4. Product quality and yield (eg, when some items coming into the warehouse are unknowingly damaged).

5. Theft (eg, break-ins, employee pilferage, and customer shoplifting). The Limited, eg., recorded an inventory discrepancy of $142 million a few years ago—the equivalence of 21,000 ocean containers!

Suresh concludes, “By now it should be clear that the  incomplete inventory information (i3) problem is quite common in practice, that policies in current use are neither optimal nor applicable”. He finishes the article by discussing 4 ways to classify i3 problems.

The real point worth making in class is that the models we discuss in Ch.12 depend on accurate record keeping, which may be impossible in a variety of real world companies.

OM in the News: New Products Drive Profits at 3M

I love reading The Wall Street Journal from cover-to-cover every day. Where else can you find an article on the importance of sandpaper and a quote from the 3M CEO, “Why can’t abrasives be sexy?” (Nov.1,2010)

I share this with you because the real gist of the article is not just how 3M spent three years trying to improve one of basic products, sandpaper (they did it by using new technology to make every grain on the material the exact same size and shape). Rather, the article ties directly to Figure 5.2 in our chapter called Design of Goods and Services.

For any company to be successful, a substantial portion of its sales must come from products less than 5 years old.  We give examples of Disney and Cisco as industry leaders, with almost 50% of sales from new services or goods. 3M falls just under this, expecting 30% of its sales to come from products introduced in the last 5 years. This places it in what we call the “top third”.

CEO George Buckley believes his firm’s edge is due to spending 5-6% of sales on R&D, even during the recession. On average, US manufacturers spent 3.4% of sales on R&D in 2008.

What other “sexy” products is 3M pursuing? Its masking tape, an old standby, now comes with an edge lock that keeps paint from seeping under the tape, which could spoil the straight line. 3M knows it must keep those improvements coming to stay in the top third.

Discussion questions:

1. Discuss the success rate for introducing new products in the marketplace.

2. What other approach is 3M taking to boost sales?

3. Where do new product ideas come from?

Video Tip: Flowcharting at Arnold Palmer Hospital

Many of our colleagues think flowcharting is an invaluable tools we should be teaching in OM. I agree, and every semester I show the video Process Analysis at Arnold Palmer Hospital (7 min.).

APH believes that if a process takes place more than one time, it should be documented and flowcharted. There is even a staffer shown in the film, Diane Bowles, with the job title “Clinical Practice Improvement Consultant”, whose full-time work is charting scores of processes.

After I show the video in class, I assign small teams to flowchart the process of maternity patients moving through the hospital (see the video case at the end of Chapter 7). The Solutions Manual shows one possible chart. When you show the video, ask the students about the pre-registration function, how it can be used to streamline the operation, and why pregnant women benefit from it.

The key is that continuous improvement helps both patient and hospital function/efficiency.

OM in the News: Sustainability Means Emptying Your Own Trash Can?

In my 40 years working in industry, government, and academia, I can’t remember anyone ever asking me to empty my office garbage can. Not that it would have been beneath me, as I am personally in charge of all trash disposal in my own home. But yesterday’s Wall Street Journal article “Memo to all Staff: Dump the Trash”, caught my eye as it was packaged to workers as a sustainability issue (see Ch.7).

Its not just in the State of Texas, the City of Phoenix, and Brewer Science (a Missouri semiconductor company) that  employees are being asked to tote their own trash and recyclables to common bins. The idea has also caught on that professors (yes profs!) at the U. of Washington and at Dartmouth College empty their own baskets as part of an environmental initiative.

There are some savings, of course. Texas saves $825,000 annually on labor costs. Brewer’s janitorial staff is now just a quarter of its original size. But Dartmouth presented the new program as part of a broad sustainability package, whose primary goals “are to increase campus recycling and reduce waste”, according to its  VP.

Some question the college’s  rationale. Psych prof Catherine Cramer is quoted as saying: “The real goals here, however prettily wrapped in sustainability rhetoric, are rather obvious”. She wonders if  “its good use my professional time”.

Just to be clear, though. Not everyone in Texas is in the program. The governor and legislators have kept their original trash service.

Discussion questions:

1. Discuss the economics of transferring work from low-paid employees to higher-paid professionals.

2. What is your own campus doing to enable the sustainability/ recycling efforts?

OM in the News: Yield Management Turns to Sports

We discuss the subject of yield (revenue) management in detail in Chapter 13, Aggregate Planning. Examples are provided from the airlines(American), hotels (Marriott), car rental companies (Hertz), and even Disney’s theme parks. But the latest issue of Operations Management/Management Science (OR/MS) Today (Oct., 2010) turns to an interesting and relatively new application of revenue management that may interest your students, namely, major league baseball.

Ticket prices to sporting events have always been priced to depend on the seat’s location. But the San Francisco Giants have discovered that  dynamic pricing of game tickets has increased 2010 revenues 6%. Ticket costs now depend on the opposing teams,  pitching match-ups, day of the week,  and even the weather forecast.

For example, a ticket in the Field Club, behind home plate,  for the Oct. 1st game between the San Diego Padres and the host Giants cost $68 at the start of the season. It went to $92 on Aug. 1st,$121 a week later, $145 on Sept. 4th, and $175  just before the game!

Discussion questions:

1. Are other sports and teams replicating this concept of dynamic pricing ?

2. Will there be fan pushback to the idea?

3. How did the 2010 pennant race impact on the Giant’s decision to use yield management?

OM in the News: The Challenge of Forecasting Electric Car Demand

If only we had a nice time series of data to use in forecasting demand for the relatively new product like electric cars!  We could take several of the quantitative  models in Chapter 4, Forecasting, and present a report complete with error measures such as MAD.

But when the product is heavily promoted battery-powered vehicles about to appear on roads around the world, such math models do not apply. We talk about 4 qualitative methods in the chapter, and these become our toolbox. Most forecasting firms, as we see in The Wall Street Journal (Oct.28,2010), turn to consumer market surveys to predict sales through 2020.

J.D.Power, for example, thinks sales will remain low and be only a small slice of the global market even a decade down the road. That firm puts the combined forecast of hybrids (such as the Toyota Prius) and all-electric models (like the Nissan Leaf) at 5.2 million cars in 2020. This is just 7.3% of all 70.9 million passenger vehicles to be sold by then.

Boston Consulting Group, in its separate study, forecasts hybrid and electric autos making up 26% of the 2020 global market. PRTM, yet another forecasting group, estimates the total at 30% of the market. PRTM thinks battery prices will fall enough to make prices the same as standard models.

Why the huge spread? “Based on our research of consumer market attitudes towards these technologies, we don’t anticipate a mass migration to green vehicles in the coming decade”‘ says one J.D. Powers VP. “Everybody feels that everybody else should be driving environmentally friendly vehicles”, says another Powers VP. But the  CEO  of a different firm states, “I think we might be underestimating the enthusiasm of the customers”.

Discussion questions:

1. Discuss the dangers of using consumer market surveys to forecast.

2. How have firms forecast the demand for other new products, like color TVs or HDTVs?

3. What could have a major impact on buyers’  behavior?

OM in the News: Detroit Moves Up in Auto Reliability, But Asia Still Rules

People buy cars for all sorts of reasons: styling, prestige, safety, and even color. But a reputation for quality and reliability is the one constant to almost every consumer, according to The Wall Street Journal (Oct.27,2010). With this week’s  release of Consumer Reports’  rankings of new auto reliability, there is some good news for Detroit.

Ford and GM have greatly improved the reliability of their vehicles, and in some sectors are ranked better than their Asian counterparts. The Ford Fusion, for example, is now tops in the “family car” segment–bettering  the Toyota Camry, Honda Accord, and Nissan Altima. Ford is the top American company overall.

Chrysler, sadly, has still not taken off and is dead last in the rankings. Toyota’s once sterling reputation was also dinged;  its Prius hybrid fell to “average” from its once high-rating because of recalls and brake problems. BMW ranked only 24 out of 27 brands, underlining how luxury car makers face quality challenges as they insert advanced technologies (that don’t always work perfectly) into their vehicles.

Good quality, as we in OM all know, creates an upward circle: the more reliable the car, the more people are willing to pay, and then the  less discounts are needed. “It doesn’t take very long to lose a good  reputation, but it takes 5 or 10 years to gain one”, says a Consumer Reports director.

Discussion questions:

1. Give some examples of products (cars included) where it took years to rebuild a damaged quality reputation.

2. Why is the Honda family of vehicles ranked consistently high?

3. Ford is now ranked 10th out of the 27 auto makers. What will it take to move to the top of the pack?

Video Tip: Green Manufacturing and Sustainability at Frito-Lay

As a Math/Physics undergrad in the late 60s, I somehow took an elective course called FORTRAN. This turned out to be quite a break, as McDonnell Douglas hired me to design jets based on this one, well-timed class. At a time when very few people knew much about computers, this was a great edge.

I think today’s “great edge” is Sustainability.  Hundreds of college are offering courses in the subject now, but it is still in its infancy, with a huge demand building in the coming years for knowledgable grads. Johns Hopkins U. has just started the nation’s 1st B.S. in Sustainability.

With this background, I encourage you to show our newest video, “Green Manufacturing and Sustainability at Frito-Lay”, when you cover Supplement 5, Sustainability. Frito-Lay is a leader in solar, “going green”, moving off the power grid, and conservation/recycling resources. Its Sun Chips, for example,  are produced under full solar power. The firm has received the LEED (Leadership in Energy and Environmental Design) award and has “zero environmental impact” as a long- term goal. Will this help sell potato chips? Can only multi-billion dollar firms step up like Frito-Lay is doing?

Jay and I are especially proud of this video as it won the prestigious Silver Addy as best educational film in 2010. We hope you and your students enjoy the film and the case study in Supp.5.

OM in the News: Caterpillar’s New Approach to the Supply Chain

In the past, equipment giant Caterpillar did not have to focus on collaborating with suppliers. Along with Komatsu, it was dominant in its field. But Caterpillar is starting to recognize  what Honda and Toyota have long known, namely that competition is based on the supply chain, not individual companies.The company’s attitude in the past was one of servant-master with suppliers, according to Businessweek (Oct.21,2010).

So Caterpillar decided to partner with supplier Tenneco to design  new emission cutting components, rather than set specs and pick the cheapest vendor, as it had done in the past. The joint effort cut costs on the part by 20%.  The firm’s CEO expects the Tenneco relation to be the new benchmark and will work more closely with 200 companies it believes are critical to its growth.

Caterpillar was not prepared for the global growth spurt of 2006-2008 and saw flat profits even with a 24% sales increase. This was because it paid more for raw materials and faster parts deliveries.

Discussion questions:

1. Compare Caterpillar to Boeing (see Ch. 2’s Global Company Profile) in terms of partnering.

2. How did Caterpillar move to change its corporate supply chain culture?

Video Tip: Assembly Lines at Wheeled Coach Ambulance

Wheeled Coach , the world’s largest manufacturer of ambulances, is the kind of firm you would want to take your students to tour to see how factories work. The firm uses 5 parallel assembly lines, fed by work cells, in which 5 ambulances move forward to the next work station each day. The work cells feed the main assembly lines on a JIT basis and perform all the pre-assembly work, such as painting, carpentry, upholstery, electrical wiring , etc.

When I show the video (7 min.) in class,  I simultaneously draw the 5 parallel lines, and label in each day’s work station as it is described.  You can discuss how the work cells are more efficient than having the tasks they perform done as part of the line.

 Some interesting aspects are not shown. First, these are real factory jobs, often dirty, non-union,  low paying, and all hot! (There is no A/C –or heat– in most factories here in Florida). So staffing is usually difficult (this recession being an exception, of course).

When we filmed, workers did 5 standard 8-hours shifts, starting  6:30am. When hiring was really tough, Wheeled Coach switched to four 10-hour days to make the job more attractive.  That made line balancing even more difficult, since each vehicle still needed to move forward once a day.  It took  a few years before the firm realized this only made matters worse, as quality fell dramatically in the last 2-3 hours of the shift. It returned to the 5 day week recently.

How else could efficiency improve? Last time I visited, the smaller “van conversion” models were moved to a different building on their own line, with 3 or 4 flowing off every day, since they are much simpler designs.