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

Guest Post: Meeting the School Bus Driver Shortage During COVID

Prof. Howard Weiss shares his OM insights with us monthly.

Massachusetts has just announced that the Massachusetts National Guard has been activated to help with the state’s shortage of school bus drivers. Up to 250 members will be available to cities and towns.

The COVID crisis has left many school districts short of employees, including bus drivers. Obviously, getting students to their schools is critical. Chapter 13, the Aggregate Planning chapter in your Heizer/Render/Munson textbook, suggests 5 ways that capacity issues might be addressed.

Use inventory.
Vary the size of the workforce
Use part-timers or overtime
Use subcontractors
Change prices to influence demand.

Massachusetts has come up with an ingenious combination of increasing the size of the work force and using subcontractors by using the National Guard. The major stumbling block is that the national guard members must be trained and licensed to drive school busses. Currently, 90 members have the proper license and the rest will be trained. For Massachusetts, the best part of this implementation is that the cost will be reimbursed by the federal government since it is a COVID-related issue.

Philadelphia has taken a different approach of reducing demand by using parents as part-timers. The school district will now pay families $300 a month ($3,000 for the school year) if they opt-out of transportation services.

Classroom discussion questions:

What school districts or states currently have school bus driver shortages? Does your home school district have a shortage?
What other option does a school have if it is short of drivers?

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: Where Airplanes Go To Die

What happens when an aircraft is no longer needed and its engines are turned off and allowed to cool down for the final time? What comes after that?

Airlines may put retired aircraft in open-air aviation museums, such as the renowned Concorde SST, but the majority of such aircraft end up in “boneyards” after they retire. Thousands of aircraft, for example, are kept in vast boneyards, dotting the deserts of the southwest U.S., reports Interesting Engineering (Aug. 16, 2021)

On the outskirts of Tucson, Arizona sit rows of aircraft, ranging in size from massive cargo lifters to heavy bombers, stretched out in the blazing desert sun. This is the world’s largest aircraft storage and preservation facility, known as the Boneyard, which resides within the Davis-Monthan Air Force Base. Arranged over 2,600 acres, this place is home to almost 4,000 aircraft from the U.S. Air Force, Army, Coast Guard, Navy, Marine Corps, and NASA.

While some seem to be brand new, others are shrouded in protective covers to keep sand and dust away. Not all jets are fortunate enough to survive retirement in one piece, and some have been reduced to boxes of spare parts, ready to be sent out to different locations around the globe to give a hand to other aircraft take to the skies again.

Why Tucson? First, the climatic conditions in Arizona, with its dry heat and low humidity, mean aircraft take longer to rust and degrade, making them less susceptible to corrosion and making it easier to keep them in proper working condition. Also, deserts offer a large amount of space for an affordable price, which means those interested in their service save a lot of money. The geology of the desert with its alkaline soil is also hard enough to prevent aircraft from sinking into the ground. This way, planes can be parked in the desert without costly new parking ramps.

Although the desert is kind of like an aviation retirement home, some of the planes’ flying days are still ahead of them. If a plane is due to fly again, it’s looked after by facility technicians who make sure all entrances to the aircraft are sealed to keep out dirt, dust, and wildlife. They regularly operate motors and other equipment to ensure that everything is working smoothly.

Classroom discussion questions:

What events have caused commercial airlines to park planes in the “boneyard”?
What are the OM issues that managers face in these facilities?

OM in the News: Boeing’s Operations Management Problems

Some 787s are even being stored in the desert.

How would you like to be in charge of operations at Boeing? There are forecasting problems, capacity issues, quality failures, and supply chain snarls. The result: Boeing’s commercial airplanes unit delivered an operating loss of $472 million in the quarter, says The Wall Street Journal (July 28, 2021).

This follows two all-consuming crises. Its MAX jets had been grounded for nearly two years after two fatal crashes that took 346 lives, and the pandemic had sapped demand for new airplanes as passengers stayed home and airlines retrenched. The company has also grappled with production-quality problems on its 787 Dreamliner. Global airline capacity remains 30% below pre-pandemic levels and industry executives expect it to take until 2024 to catch up.

U.S. aerospace companies last year announced plans to shed more than 100,000 jobs, including many at Boeing’s 12,000 suppliers. Boeing itself has plans to cut its own workforce by almost 1/5 to around 140,000 by the end of this year. While the return of the 737 MAX has bolstered sales and cash, Boeing has recently slowed Dreamliner production while it addresses new issues with the planes. The company has delayed deliveries to fix defects that emerged about a year ago and is awaiting regulatory approval for a plan to inspect aircraft. With customers unwilling or unable to receive deliveries of their new 787s, Boeing has 50 undelivered widebodies scattered around its facilities and is running out of space to park them.

The new 787 problem surfaced on the forward pressure bulkhead at the front of the plane. It involves the skin of the aircraft and is similar to a previously disclosed Dreamliner issue found elsewhere on the planes. Engineers at Boeing and the FAA are trying to understand the defect’s potential to cause premature fatigue on a key part of the aircraft’s structure.

Further, the firm needs orders from China to participate fully in a stronger-than-expected recovery in air travel. Boeing hasn’t secured a direct new jetliner order from China in almost 4 years, and has been pushing for improved trade relations with the U.S. Boeing’s payroll depends on U.S.-China trade relations, says its CEO.

Classroom discussion questions:

How can Boeing forecast jet sales in the coming years? What techniques in Chapter 4 of your Heizer/Render/Munson text are applicable?
Why is Boeing facing continuing quality problems?

Guest Post: Safety and Government Oversight

Prof. Howard Weiss presents his monthly Guest Post today. Howard recently retired from Temple U.

Recently, we have seen three articles about the lack of safety, in different industries – food processing, shipping, and manufacturing/product design.

Fooddive.com reported that line speeds at U.S. pork plants will be slowing down after a federal judge ruled the U.S. Department of Agriculture’s removal of processing speed limits did not adequately take worker safety into consideration. The USDA is rolling back the capacity to what it had formerly been – 1,106 hogs per hour. Your Heizer/Render/Munson Capacity Management chapter (Supplement 7) notes that organizations “have found that they can operate more efficiently when their resources are not stretched to the limit.” In this case, when the capacity was increased, additional workers were not hired and the existing workers had to work faster increasing the chance of injury or pain from repetitive motions.

An earlier blog this year identified Supply Chain Risks on the High Seas. Container ships are not the only means of transportation with risks. According to Vice.com, in 2019, railroads reported 341 derailments on main line track. Of those 341 derailments, 24 were freight trains carrying 159 cars of hazardous material. While cargo loss is a concern, in the case of trains, another frightening possibility is hazardous materials leaking. Similar to hog plants, “workers have to inspect many more rail cars in a fraction of the time” than previously. Rail regulation is set by the Federal Railroad Administration.

And then, The Wall Street Journal reported that “Peloton Interactive Inc. has agreed to recall its treadmills, and its chief executive apologized for the company’s initial refusal to comply with federal safety regulators who pushed for the action weeks ago.” The Consumer Products Safety Commission has to negotiate with companies in order to release warnings about potential hazards.

Classroom discussion questions:

How has COVID affected capacity at your university or school?
What is the major advantage of shipping by rail?

OM in the News: Awash in Hand Sanitizer

In Supplement 7, Capacity and Constraint Management, we ask “What are the strategies for when demand exceeds capacity? When capacity exceeds demand?” The past year saw the hand sanitizer industry whipsawed from desperate shortages to massive excesses.

Now Piggly Wiggly stores in Alabama and Georgia, are offering 4-for-1 specials on sanitizers after sales nearly halted. They tried selling the disinfectants for half-price and discounted them at 75% to no avail. Lucky Supermarket in Millbrae, Calif., is offering free bottles of hand sanitizer with any $10 purchase. Supermarkets are on a mission to get rid of hand sanitizers. Once nearly impossible to find, America is awash in it.

sanitizer

Consumers rushed to buy sanitizers when the pandemic took hold, writes The Wall Street Journal (May 21, 2021). The surging demand resulted in shortages and purchase limits at retailers. Hoping to fill their shelves, supermarkets bought inventory from overseas and turned to other businesses—including distilleries—that switched their production to make sanitizers for the first time. Manufacturers expanded capacity, at times overpaying for components like pumps.

Now, supermarkets are sitting on pallets of them. Covid-19 cases are declining. Health officials now say that the virus is airborne and that the disinfectants aren’t as effective as masks and distancing. Sales of hand sanitizers are down 80% from a year ago. Weekly sales hit as high as $52 million in July. Average unit prices are $2.10, about 40% lower than a year ago. Prices on the Liquidation.com marketplace have fallen to 2 to 3 cents on the dollar, a 90% decline in resale prices over 6 months

Among those struggling with the current glut: distilleries that jumped into the sanitizer business when brands couldn’t keep up with demand last year. Adirondack Distilling, which makes whiskey, vodka and gin, still has between 10,000 and 20,000 sanitizers that the company made in stock. In Oregon, Crater Lake Spirits is giving away leftover sanitizers after it produced roughly 60,000 gallons of disinfectants for hospitals and hotels last summer.

Classroom discussion questions:

What are the OM choices when demand exceeded capacity?
What are the options now that capacity exceeds demand for sanitizers?

OM in the News: Scramble to Produce Covid Vaccine Derails Supply of other Drugs

The unprecedented effort to manufacture Covid-19 vaccines is disrupting supplies of other critical medicines in the U.S., including treatments for infectious diseases and injectable drugs that prevent blindness. Pfizer has told U.S. hospitals to expect interruptions to supplies of four of its products — an antibiotic, a steroid and two types of testosterone — according to The Financial Times (March 19, 2021). The drugs require some of the same ingredients and manufacturing capacity as the Covid-19 vaccine that Pfizer has co-developed.

covid

Pfizer warned of “short-term supply interruptions to medicines due to increased vaccine production” and stated that hospitals should “anticipate some disruptions” in the second half of the year. The company said that it aimed to deliver approximately 2 billion doses of its Covid vaccine globally by the end of 2021.

This comes as the U.S. tries to boost vaccine supplies in order to fully reopen its economy. The government has invoked the Defense Production Act to ensure that vaccine makers get the drugs and production capacity they need. But the use of that Korean war-era powers has left a third of pharmaceutical firms scrambling for ingredients, equipment or space on production lines.

Other groups involved in medicine production and distribution are also struggling. Schott, one of the world’s largest glassmakers, warned that there was a wait of 12- 18 months for new orders of glass vials. That shortage is affecting almost every type of injectable drug in the U.S., including chemotherapy, insulin and other medicines that are found in crash carts in ERs, ICUs, and surgical suites in hospitals.

Catalent, a contract manufacturer working for the vaccine makers Moderna and Johnson & Johnson, is also prioritizing large orders of injections over other treatments, meaning thousands of patients have had to do without Tepezza, a treatment for thyroid eye disease.

Classroom discussion questions:

Chapter 13 of your Heizer/Render/Munson text lists 5 capacity options used as aggregate planning strategies. Which could Pfizer and others employ today?
What are the advantages and disadvantages of each option you named?

OM in the News: ZIM Shipping’s Competitive Advantage

Israeli container ship operator ZIM Shipping is turning its small size into an advantage in a business dominated by outsize carriers running megaships in global supply chains, writes The Wall Street Journal (Jan. 7, 2021). The company is touting its “flexibility and agility” to capitalize on the surging demand from retailers looking to circumvent shipping logjams by using premium-priced, point-to-point services.

ZIM controls just 1.5% of global container capacity. The company competes against ship operators 10 times its size and that have grouped into 3 global operating alliances. Those 3 groups, including giants such as A.P. Moller-Maersk of Denmark, CMA CGM of France and China’s Cosco, collectively handled 83% of all seaborne imports into the U.S. last year.

“Our small size is now an advantage,” said ZIM’s CEO. “Our competitors use big vessels and operate on volumes and quantities. We are offering custom services to loyal customers that are willing to pay a premium for speed and reliability.”

ZIM’s biggest ships can move a maximum of 12,000 containers, roughly half of what is stacked on the ultralarge vessels operated by the sector’s leaders. Backups at ports have been keeping many of those behemoths waiting for days outside major ports, pushing back deliveries and saddling cargo owners with delay charges on top of record-high freight rates. ZIM’s smaller ships present higher charter-market flexibility and agility to redeploy across different routes, a significant benefit in times of volatile or uncertain market dynamics.

Airfreight services typically cost far more than ocean freight but offer rapid transport in exchange. The gap in delivery times, which can amount to several weeks in normal times, has narrowed because the grounding of passenger jets has left shippers waiting for space in capacity-strained aviation markets. “The regular air service is 5-6 days,” ZIM’s CEO said. “A number of clients wait for 5 more days and use our ships. They save 80% of the airfreight cost.”

Classroom discussion questions:

What are the 3 ways firms can gain competitive advantage? (Hint: see Ch. 2 in your Heizer/Render/Munson OM text).
What is ZIM’s strategy and why is it working?

OM in the News: UPS Says No!

“No exceptions,” said the message from UPS to its drivers. As we enter a holiday season when retailers are increasingly dependent on delivery companies to move online orders, we see a dynamic that has shifted power significantly. United Parcel Service, reports The Wall Street Journal (Dec. 3, 2020), imposed shipping restrictions on some large retailers this week, an early sign that the pandemic-fueled online shopping season is stretching delivery networks to their limits.

The company on Cyber Monday notified drivers across the U.S. to stop picking up packages at Gap, Nike, L.L. Bean, Hot Topic, Newegg, and Macy’s. The move comes as UPS and rival FedEx have raised prices and promised to hold merchants to volume agreements. It is a sign that UPS is metering the flow of packages into its network to preserve its performance during one of the busiest shipping weeks of the year.

FedEx and UPS both prepared their customers for tight capacity for this holiday season, as consumers, fearful of venturing out to stores due to the virus, are stocking up on household essentials from online merchants at the same time the holiday shopping season kicks off. The combination is expected to create a surplus of as many as 7 million daily packages between Thanksgiving and Christmas.

FedEx and UPS for months have been processing packages at levels more common during the Christmas season and were preparing to layer another surge of orders on top of that. They have responded with restrictions on capacity and surcharges to offset higher costs from hiring tens of thousands of workers and renting extra equipment. UPS picked up 81% of packages on the day they were ready between Nov. 15 and Nov. 21, compared with 95% for FedEx.

Abercrombie & Fitch tells online shoppers to place their orders by Dec. 4 if they want items to arrive by Christmas using its standard shipping option.

Classroom discussion questions:

What techniques can UPS apply to handle this capacity issue? (Hint: see p. 312 in your Heizer/Render/Munson OM text).
Compare this capacity problem to that facing airlines today.

OM in the News: Shipping Capacity Sold Out for the Holidays

One holiday item is already sold out: shipping capacity. Both FedEx and UPS have told shippers that most of their capacity is already spoken for, and that any extra trailers with holiday orders will have to wait to be picked up.

“There will be days within the holiday season where the industry will be over capacity,” said one FedEx exec. The outlook has sent retailers on the hunt for alternatives with little luck. Smaller carriers also booked up their capacity for the holidays months earlier than usual and aren’t taking new customers.

The capacity shortfall could average 7 million packages a day between Thanksgiving and Christmas, reports The Wall Street Journal (Oct.19, 2020). Total shipping capacity for the industry will be 79.1 million parcels a day during that period, with 86.3 million packages looking for space.

Carriers and their shippers spend months planning for the holiday season and hone their forecasts for the number of packages they expect to ship. The two sides decide items like weekly shipping forecasts and how many trailers the carriers may need to pick up from their loading docks each day. Any deviation from the estimate can result in higher rates per package or penalties to compensate the carrier for needing to marshal more resources.

In previous years, shippers could usually find space to ship if online sales blew through expectations, though it would come at a premium to rates that had been negotiated. Now that doesn’t exist. The primary reason for this year’s capacity shortage is that carriers already have been operating near maximum capacity for months as consumers stayed home, avoided stores and shopped online. Carriers can’t quickly boost capacity with new facilities as it often requires a multiyear planning process.

Classroom discussion questions:

What might carriers do to “manufacture” some extra capacity? (Hint: see the section called Capacity on pages 308-313 in Supp. 7 of your Heizer/Render/Munson text).
What can retailers do?

OM in the News: And Now a Can Shortage?

Aluminum drinking cans have been taking market share from glass and plastic bottles.

Demand for cans is booming during the coronavirus pandemic, writes The Wall Street Journal (Aug.26, 2020), propelling can makers to boost manufacturing capacity to prevent shortages and capitalize on a trend they bet will stick. As bars and restaurants closed across the U.S., consumers rushed to buy large packs of drinks—typically sold in cans—in supermarkets. Sales of canned food also jumped.

That is accelerating a continuing shift in favor of aluminum drinking cans, which were already taking share from glass and plastic bottles. Aluminum cans are lighter and more robust than glass, and have higher recycling rates than glass and plastic. The growing popularity of hard seltzers, usually packaged in cans, has been another factor. Coca-Cola said products like Minute Maid Lemonade, Cherry Coke Zero and Pibb Extra may be difficult to find in cans because of tight supplies.

U.S. retail sales of aluminum drink cans (which make up nearly all cans for drinks), rocketed since the pandemic. Ball Corp., the world’s largest maker of these cans, plans to begin running two new production lines in the coming weeks in Fort Worth, Texas, and Rome, Ga., both of which have capacity to make a billion cans a year. Despite this, the company estimates it will still import two billion cans this year to meet N. American demand, from places like Europe, India and Brazil. Ball also plans to open two new plants in the U.S. next year.

Some companies are betting higher demand is here to stay, for canned drinks but also canned food. Previously falling out of favor, canned food sales soared over 23% in the past 6 months.

Classroom discussion questions:

Identify a half-dozen OM issues that are topics in your Heizer/Render/Munson text that can manufacturers face..
What options do can makers have for adjusting capacity (see Supp. 7)?

OM in the News: Why Are There Still Not Enough Paper Towels?

A shopper finds paper-products shelves mostly bare at this Costco in Teterboro, N.J.

An average of 21% of household paper products were out of stock in U.S. stores this month, reports The Wall Street Journal (Aug. 22-23, 2020). Why? Because of lean manufacturing and the efficiency of the industry. The competitiveness of the paper industry is such that firms must run near capacity with extremely high effective capacity (see Table S7.1 in your Heizer/Render/Munson OM text). The result is very little slack in the system. And the situation isn’t likely to abate soon, because producers have no plans to build new manufacturing capacity. The central piece of the machinery needed to make paper towels takes years to assemble.

The paper product scarcity is rooted in a decadeslong quest (known as lean manufacturing or JIT inventory) by businesses to eke out more profit by operating with almost no slack. Make only what you can sell quickly. Order only enough materials to keep production lines going. Have only enough railcars for a day’s worth of output. Stock only enough items on a shelf to last till the next batch arrives.

But mammoth paper machines require substantial support facilities on both the incoming side– where expensive digesters grind and mix the pulp to the proper consistency and on the outgoing side where huge machinery is required to move the 6,000 lbs. rolls for further processing. We discuss the options for adjusting capacity in Figure S7.1 on page 308. The paper industry has increased capacity by 25% using the options noted in that figure for short range increases. But the industry is also obviously reluctant to move to the more expensive intermediate and long-term options for what we all hope is a short-term problem.

Classroom discussion questions:
1. As manager of a paper company would you be willing to invest your company’s money on the long-term increased in the demand for paper towels?
2. In addition to added capacity, what other option can you suggest?

OM in the News: Why Do the Empty Planes Keep Flying?

An Atlanta-to- Baltimore Delta flight on April 20

Many of us are wondering why airlines continue to fly nearly empty airplanes. It seems like they are burning cash, fuel and goodwill. Don’t they know what they’re doing? They do, says The Wall Street Journal (May 7, 2020).

Airlines scrambled in March and April to ground as many trips as they could. But they still found themselves locked into flying many trips with hardly any passengers for a number of OM reasons that show just how complex airline schedules are and how hard the choices are that OM executives must make.

Airlines have grounded 3/4 of their capacity, and it still hasn’t been enough. More than 90% of traffic has disappeared. For American, 99% of flights have been less than 20% full. Besides critical travel for funerals, medical reasons, etc., there are often operational reasons that they need to fly with 2-3 people on board.

A flight might have to go with 2 fliers because a later flight in that plane’s schedule had 60 waiting. Sometimes it isn’t the aircraft that had to get there, but the crew needed somewhere else for later flights. Some aircraft need to get to a maintenance base for overnight routine work. Overnight parking is in short supply at many airports housing grounded planes. So a jet may need to make the last trip of the day with 1-2 passengers just to get to its assigned parking space. And a few passengers might luck out because the plane has a large cargo payload–often medical supplies.

Now a growing concern is that there will be heavier loads on flights where passengers won’t be able to socially distance. Adding to the complexity is a requirement in the federal airline bailout (Cares Act) that requires airlines to maintain service to all the cities they currently serve. Finally, because of the complexity of schedules, airlines need to figure out which aircraft to put in storage while facing uncertainty over travel patterns in the pandemic.

Classroom discussion questions:

List some of the operations issues airlines are now facing.
What percent of your class is willing to fly in the next 4 weeks?

OM in the News: Companies Retool Operations to Assist in Coronavirus Fight

From a Kentucky distillery to a French bluejeans maker, companies are retooling to produce medical equipment for overloaded hospitals and slow the spread of coronavirus, writes The Wall Street Journal (March 19, 2020). Christian Dior perfumes has started making hand sanitizer. A car-parts company is producing hygienic masks. Luxury hotels are becoming makeshift quarantine shelters. An earthmoving-equipment maker and other manufacturers are examining whether they can help make ventilators, the key life-support machines.

As the pandemic grips the West, global demand for a range of goods and services has faltered—from handbags and tourism to cars. That has freed capacity for industries to produce medical equipment in short supply. World leaders have framed the crisis as a wartime struggle, and hark back to World War II, when nations on a much larger scale repurposed factories to make weapons and supplies. “We are at war,” says the French President.

Both GM and Ford are examining whether they could put their idled factories to work making medical equipment. Tesla’s Elon Musk stated: “We will make ventilators if there is a shortage.” The German government is considering redeploying unemployed workers such as waiters to harvest its fields. French whiskey giant Pernod Ricard is making sanitizer at plants in Kentucky, W. Virginia, and Texas.

The French bluejeans producer, 1083, saw demand plummet when stores across the country were forced to shut last week. Within hours of the government proclaiming a shortage of sanitary masks, 1083’s sewing machines were stitching together masks. “It’s much easier to make masks than jeans,” says the CEO. With tourism drying up, Israel has repurposed two luxury hotels to serve as quarantine shelters, the oceanfront Dan Panorama in Tel Aviv, and the Dan Hotel overlooking Jerusalem’s ancient skyline.

Classroom discussion questions:

How can companies that specialize in logistics redeploy their workforces to help fight the epidemic?
Why is it hard to shift manufacturers to produce the needed medical equipment?

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?