Ch.11 – The OM Blog by Heizer, Render, & Munson

OM in the News: Disney Cleanses its Supply Chain

Disney sweater found in the remains of a fire last year in Bangladesh

Ever since a building with garment factories collapsed in Bangladesh a few weeks ago, killing more than 1,000 people, Western apparel companies with ties to the country have scrambled to address public concerns about working conditions there. But one big American company, Disney, had already decided to leave the country — pushed by the devastating fire just six months ago that killed 112 people. The Walt Disney Company, the world’s largest licensor with sales of nearly $40 billion, recently ordered an end to the production of branded merchandise in Bangladesh. The New York Times (May 2, 2013) reports that on March 4, the company had sent a letter to thousands of licensees and vendors setting out new rules for overseas production.

This comes as no surprise to those of us in Orlando, where Disney, with its 60,000 “cast members” (employees in layman’s terms), is king. Its public image as a safe, clean, and wholesome company is carefully maintained. Disney’s move reflects the difficult calculus that companies with operations in countries like Bangladesh are facing as they balance profit and reputation against the backdrop of a wrenching human disaster. “We felt this was the most responsible way to manage the challenges associated with our supply chain,” says Disney’s president of consumer products.

With some labor groups urging Western companies to stay and fix problems rather than leave, Disney said that it would pursue “a responsible transition that mitigates the impact to affected workers and business.” It set out a yearlong transitional period for its contractors to phase out production in Bangladesh, Pakistan, Belarus, Ecuador and Venezuela by April, 2014. In deciding in which countries to permit production, the company relied heavily on the World Bank’s Governing Indicators, which evaluate performance on issues like government effectiveness, rule of law, accountability and control of corruption.

Discussion questions:

1. Evaluate Disney’s decision to leave these 5 countries vs. staying and trying to improve conditions.

2. How can a major company protect its reputation when global supply chains are so complex?

OM in the News: Bangladesh and the Clothing Supply Chain

Global apparel companies often depict their international supply chains as tightly scrutinized systems to ensure that clothing sold to American buyers is produced in safe, monitored factories. Yet their inspectors usually check safety factors and working conditions, not the soundness of the buildings themselves, and the companies often have little control over the subcontractors who do much of the work. This was the case in Bangladesh’s chaotic industrial center. The building collapse last week that caused at least 1000 deaths, reports The New York Times (May 1, 2013), has produced some jarringly different responses from Western apparel retailers that obtained goods from factories inside the building. Several American and European retailers have sought to minimize any ties they had to factories in the Rana Plaza building, while some other companies have been quick to acknowledge their ties to those garment suppliers — and have pledged to contribute to a fund to help families of the victims.

The Children’s Place, a NJ retail chain that operates 1,100 stores, said that although a garment factory inside Rana Plaza had produced apparel for it, “none of our apparel was in production there at the time of this terrible tragedy.” But customs documents show that over the past 8 months, Rana Plaza had made more than 120,000 pounds of clothing sent in 21 shipments to the Children’s Place.

After labor groups said they had found labels of Benetton clothing in the rubble, Benetton initially denied using any factories in the building. But as more labels and documents showing Benetton orders were found and publicized, the company revised its response, saying it had placed only a one-time order there and had severed ties with that factory. The head of one anti-sweatshop group criticizing Western companies stated: “It is high time for Benetton to stop this senseless game of always trying to pretend they’re not there.”

Discussion questions:

1. What is Benetton’s responsibility in a case such as this?

2. What options do operations managers have to deal with fires, collapses, and other tragedies in countries like Bangladesh and Pakistan?

OM in the News: Japan’s Keiretsu Scandal

The Wall Street Journal (Feb. 16-17, 2013) provides an interesting analysis of problems with keiretsu networks, a topic we discuss in Chapter 11, Supply Chain Management. The Journal writes: “For decades, Japan’s auto industry keiretsu—networks of parts suppliers closely allied with companies including Toyota and Honda appeared as a black box to outsiders. But there was a lot going on behind the scenes and some of it wasn’t legal.” In fact, some areas of the Japanese auto-parts business were rife with bid rigging and collusion, and have produced multimillion-dollar fines and a dozen prison sentences. A U.S. official calls the probe the “largest price-fixing investigation ever.” Prosecutors claim the Japanese firms conspired to boost the costs of some of the best-selling vehicles on the road.

Japanese auto makers have long seen keiretsu as a way to ensure quality over the long term by building trusted relationships with suppliers. The brand-name companies often own significant stakes in keiretsu parts makers and enjoy the right of first refusal for newly developed technology. Typically, they work closely from the design stage onward, sharing proprietary technology.

Those relationships began to change more than a decade ago when France’s Renault took a controlling stake in struggling Nissan and sent a Brazilian executive known as “Le Cost Killer,” Carlos Ghosn, to run it. Nissan disbanded its keiretsu and shifted to open-source bidding among suppliers, many based outside Japan. There has been some quiet pushback from industry officials in Japan who assert that any collusion was more of a bid for survival than for outsize profits. “Different suppliers work hand-in-hand and divide up large lot orders in a way that assures a steady flow of parts,” says one Japanese auto exec. Adds Toyota’s VP, “We feel a duty to protect our keiretsu. We are trying to incorporate more outside suppliers, but won’t give up on our own way of doing business in Japan.”

Discussion questions:

1. Why do the Japanese believe in the use of keiretsu?

2. Is a keiretsu “collusion,” or “a bid for survival?”

OM in the News: Walmart Toughens Supplier Policies

The Wall Street Journal (Jan.22, 2013) reports that Walmart is warning suppliers that it is adopting a “zero tolerance policy” for violations of its global sourcing standards, and plans to immediately sever ties with anyone who subcontracts work to factories without the retailer’s knowledge. The changes come after Walmart clothing was found at a Bangladesh factory where a fire killed 112 people in November—a factory the company said was no longer supposed to be making its clothes. “Obviously our three-strike policy wasn’t working as well as it could have,” says Walmart’s VP of ethical sourcing.

Here is a summary of the changes:

Starting March 1, Walmart will employ a “zero tolerance” policy to sever ties with suppliers that subcontract work to factories without the retailer’s knowledge; Its previous “three-strike” policy gave suppliers three chances to comply with Walmart’s safety requirements
All facilities in Bangladesh must undergo a mandatory electrical and building safety review
Factories found to have fire-safety related violations have 30 days to take corrective action before being terminated, instead of the previous requirement of six months to a year; all floors and buildings must have a secondary exit, preferably an external fire escape route
New factories must undergo a pre-approval audit before suppliers can do business with them
Suppliers must ensure one of its employees, and not a separate agent, is stationed locally to monitor factory facilities
Walmart will publish a list of factories suppliers are no longer authorized to use on the retailer’s corporate website

“Walmart’s factories are dangerous because they don’t pay adequate prices to suppliers, and because there is no transparency in their monitoring programs,” says the director at Worker Rights Consortium, a nonprofit group. “There is nothing here that changes any of that.”

Discussion questions:

1. Is Walmart doing everything feasible to be “ethically sourcing.”

2. Why has Walmart become a global leader in sustainability?

OM in the News: Walmart’s Supply Chain Passage to India

Unrefrigerated truck goes 140 miles in 7 hrs.

Last fall, following a relaxation in India’s foreign-investment rules, Walmart announced it was planning to open its first stores in the country, tapping into a prized $490 billion retail sector. But to cash in, writes The Wall Street Journal (Jan.,12-13, 2013), Walmart will have to solve a fundamental supply chain problem: how to move goods into stores efficiently in a country that offers big retailers little in the way of modern logistics and is plagued by dilapidated infrastructure.

The hurdles are particularly daunting in the food sector. In the world of perishable goods perishing, India has few rivals. Lacking proper storage facilities, enough refrigerated trucks and adequate highways, the world’s second-largest fruit-and-vegetable producer loses about one-third of its produce ($10 billion) each year to spoilage. India also is bogged down by an entrenched system of government-imposed middlemen that can increase costs by 500%.

After passing through the agents and traders in the Chhutmalpur market, for example, produce moves in trucks on a 140-mile journey to New Delhi, often on a 2-lane road so pot-holed and bumpy that top speeds are 15 miles per hour. The trip may include a visit from local thugs demanding bribes for safe passage. It is just one of many human road hazards in India, such as farmer protests.

With a U.S. fleet of 55,000 tractor-trailer trucks, third-party shippers and its own massive distribution centers, Walmart is accustomed to fine-tooth tracking and direct sourcing. In the face of all this it is unlikely Walmart will try to replicate its U.S. supply chain operations, which are focused primarily around massive distribution centers supporting up to 100 stores.”It’s the least mature market they’ve ever had to enter,” says one expert. “They have to create a new playbook.'”

Discussion questions:

1. Compare Walmart’s efforts to those of Hard Rock (noted in Ch.8) when it entered the Russian market.

2. What will be Walmart’s biggest OM challenge in India?

OM in the News: The Last 60 Minutes of On-line Holiday Shopping

Time is money. And in the fierce holiday-season battle between online and offline sales, a single hour can be worth millions of dollars, says The Wall Street Journal (Dec.19,2012).

GSI Commerce, a division of e-Bay that handles online shipping for 70 brands including Godiva, Aéropostale, and Estée Lauder, has been counting workers’ steps and even tweaking the way it prints labels with a single goal: Push back the cutoff time for Christmas delivery by 60 minutes. This year, GSI’s customers let shoppers order as late as 11 p.m. on Dec. 22 and still get their orders by Christmas Eve. That’s 8 more hours than shoppers get on Amazon.com, and an hour later than GSI’s deadline last year. “It’s beyond critical,” says the COO of one on-line retailer. “Having a few hours over a competitor could be a seven-figure event.”

As soon as last Christmas ended, GSI’s OM execs began huddling with customers and UPS to figure out how to speed up the time it takes for an order to be processed. GSI spent more than $25 million to improve its operations and speed since then. One of the OM changes: saving steps for employees–who can walk nine miles a day–by putting the most popular goods closest to the people who pick them. This cut employees’ walking time by 60%.

The company then placed 7,000 big box storage containers closer to the front of the warehouse. To figure out what to put in the boxes, GSI’s OM team tracked order patterns and worked with retailers to know what is being promoted heavily. Those calculations were rerun every hour.

To further cut down walking time, GSI moved smaller storage boxes on their shelves closer together. Fire insurers required the warehouses to maintain a few inches of space between the boxes so that water from overhead sprinklers can drain down between them. Across miles of shelves, those gaps add up. So GSI decided to drill holes into the boxes, proving that could accomplish the same firefighting goal as the spaces.

Discussion questions:

1. Why was it important for GSI to improve its warehousing operations?

2. How did GSI decide what processes to change?

OM in the News: Darden’s Lobster Supply Chain Heads to Asia

In a bold move towards vertical integration, restaurant giant Darden (Olive Garden, Red Lobster, Longhorn) has just opened up a $653 million lobster farm on the Malaysian island of Borneo, according to The Wall Street Journal Southeast Asia (Nov.16, 2012). The lobster farm serves two purposes: (1) for restaurants facing weak growth prospects in Western markets, the fast-growing economies of Asia are attractive as millions more people eat out and desire to try Western food; and (2) it guarantees an unlimited supply of the seafood for Darden’s 2,000 U.S. stores. A long-term investment, the 9,300-hectare aquaculture park will produce 40 million pounds of lobsters and generate $1 billion in annual revenue when it reaches maximum capacity.

“We plan to establish our Asia-Pacific restaurant development hub in Kuala Lumpur,” says the CEO. “Asia is an attractive market and Malaysia represents a strategic and central location for us to begin to explore the possibilities in this part of the world.”

The Darden project dovetails with the Malaysian government’s program to lift that nation into developed nation status by 2020 by creating high-income jobs in agriculture and other areas. Two local firms will assist Darden in the project. These companies say they plan to hire more than 14,000 people to work on the project over the next decade, including scientists, engineers, aquaculture specialists and skilled technicians.

Production is set to begin by 2015 and reach full production in 2029. Globally, the market for lobsters is estimated to be worth over $4 billion a year, with the Asia Pacific region accounting for about 75% of the total market. Borneo was chosen because it has “suitable” geography and available sea space for an efficient operation; it is also free from catastrophic weather that could threaten the project’s long-term viability.

This is a story that dovetails nicely with our two video case studies on Darden supply chains in Chapter 11 and Supplement 11.

Discussion questions:

1. Why is Darden entering the seafood production business?

2. What are the plusses and minuses of this vertical integration?

OM in the News: The Rise and Fall of Rare Earths

Manufacturers of high-tech products rely on a steady stream of metals–some of them scarce–to make their goods. These “rare earths” are light-weight, malleable metals that are essential to hybrid cars, cell phones, and hard disk drives. (Toyota Prius batteries use neodymium to power the car.) Rare earth metals, a collective name for 17 minerals used in products like these, had skyrocketed in price in the past 2 years as China (which controls 90% of global production) slashed exports to tighten control over the sector. Lanthanum, for example, jumped from $10/kg in 2009 to $160/kg last year. Neodymium surged from $20/kg to $455/kg. Prices of many other rare earth elements rose more than 10-fold in a little more than a year.

But The Wall Street Journal (Nov.13, 2012) reports that companies– like Australia’s Kimberly Rare Earths, Black Fire Minerals, and Sable Minerals– that bet on rare earths as a hot commodity play are canceling investments after being caught by a sharp fall in prices this year. Fears of overinvestment and a supply glut are the driving forces. Lanthanum—used in oil refining and hybrid vehicles—now fetches just $13/kg. Cerium, which is used in catalytic converters and plasma televisions, is now down to $16 a kilo, from $102 a kilo last year. Neodymium, used in wind turbines and music players as well as in batteries, has fallen to $85 a kilo from $234 a kilo.

Sentiment in the wider mining industry is souring on concerns over the slow pace of the global economic recovery. “All of a sudden we have 400 years of rare earths being drilled out,” said Kimberly’s director. “Smaller projects just aren’t viable anymore.” Although demand for rare earths will more than double to nearly 250,000 tons over the next decade, the growth in supply will outstrip demand between 2014 and 2019 as new mines start operations.

Discussion questions:

1. Why are rare earths so important in manufacturing?

2. What lessons do OM managers learn from these price fluctuations?

OM in the News: Union Pacific R.R. in a High-Tech Economy

“Can a 150-year-old company be part of the modern economy,” asks Fortune (Oct.29, 2012). Apparently so. Union Pacific, America’s largest railroad, touches all parts of the economy, even globally — 30% to 40% of its shipments originate or terminate outside the U.S. In its intermodal business, where it takes containers off trucks and put them on the railroad, it had a record year– a bellwether measure for what’s happening in the economy.

Union Pacific has also started moving shale oil by rail– 2 or 3 times faster than a pipeline (and able to come out wherever companies want it). In 2010 it moved 4,400 carloads of crude oil. In 2011 it was 25,000, and 2012 will be 140,000. CEO Jack Koraleski’s take is: “If the United States can convince manufacturers that low energy prices are here to stay, then all of a sudden the U.S. starts to look a lot more attractive as a place to build that next plant. We’ve already seen manufacturers announce that they’re bringing some manufacturing back to the U.S.”

With 8,000 locomotives pulling hundreds of thousands of cars over 32,000 miles of track, Union Pacific is also an infotech company. Technology controls the movement and safety of the trains. There are 4,000 pieces of detection equipment throughout the network. As trains go over, they’re measuring the temperature of the bearings, the impact of the car as it rides on the rail and whether there’s a bump to it, the sound of the wheels on the rail for anomalies and patterns–all part of predictive maintenance on when to pull that car out and have it inspected.

Union Pacific has also tried to move up in its customer supply chain. With Shipment Vision, Chrysler assigns a car a VIN on a manufacturing line, then Union Pacific tracks and controls that vehicle all the way to the showroom. The railroad takes technology it uses to control trains and gives it to customers to help them control their supply chain more effectively.

Discussion questions:

1. Why are railroads critical to the OM function in many firms?

2. Why has Union Pacific moved into the infotech sector?

Good OM Reading: The Power of Logistics Clusters

Everyone understands the concept of industrial clusters that have developed around the world: Silicon Valley (for information technology), Hollywood (for entertainment), and Boston (for life sciences). Strong clusters are ecosystems of venture capital resources, universities, research centers, employers, highly skilled workers and institutions for collaborations.

The MIT Sloan Management Review (Fall, 2012), however, introduces the concept of logistics clusters— local networks of businesses that provide a wide array of logistics services, including transportation carriers, warehousing companies, freight forwarders and third-party logistics service providers. They also include the distribution operations of retailers, manufacturers and distributors. These clusters attract companies for whom logistics is a critical element of their service offering or a large part of their overall costs.

Logistics clusters are located strategically to enable efficient transportation and delivery services to large populations. They are positioned in mode-changing locations such as busy seaports (Rotterdam, Shanghai, Los Angeles), airport hubs (Hong Kong, Seoul, Memphis) and major intermodal yards where freight shipments transfer from railcars to trucks (such as Chicago, Dallas and Kansas City). Some of the world’s largest logistics hubs, including Singapore, São Paulo and Memphis, bring together multiple elements at once. The economics of transportation means that cargo has to travel long distances in bulk, while demand from retailers and JIT manufacturers means that final distribution must be handled locally in small quantities in response to the ups and downs of customer demand.

The Sloan article notes 3 major advantages of logistics clusters:

1. Value additions. For example, UPS repairs Toshiba laptops at its facility in Louisville, next to the UPS Worldport air hub, reducing service turnaround times from 2 weeks to 4 days.

2. Facilitating returns. Miami’s Neptune Lines specializes in refurbishing secondhand pieces of heavy equipment for Caterpillar and Komatsu. It handles about 5,000 pieces of equipment per year.

3. Attracting other industries and jobs. Indianapolis has some 1,500 logistics and related services companies, including distribution centers for Amazon.com, Hewlett-Packard, and CVS Caremark.

This is a nice article to ask your students to read before you discuss the topic of logistics in Chapter 11.

OM in the News: Apple vs. Samsung Is Really About Supply Chains

By now, everyone has heard the results of the law suit out of San Jose in which Apple was awarded $1.05 billion for damages incurred by Samsung’s infringement on Apple patents (The Wall Street Journal , Aug.25-26, 2012). The sweeping victory for Apple provides ammunition for more legal attacks on its rivals in the $250 billion smartphone market–in which Samsung and Apple are #1 and #2. The jury found that Samsung infringed all but one of the seven patents at issue, and also decided Apple didn’t violate any of the five patents Samsung asserted in the case. “Today’s verdict should not be viewed as a win for Apple, but as a loss for the American consumer,” Samsung said. “It will lead to fewer choices, less innovation, and potentially higher prices.”

Apple, which prides itself on the style of its products, broke new ground by heavily relying on patents covering the physical design of its iPhones and iPads. (This is called “trade dress,” the overall look and feel of a device.) Tech companies have more commonly relied on utility patents, which cover the way products work rather than how they look.

The bigger story from an OM perspective, though, may be in the fact that the rival companies have a $5 billion supply chain relationship. Apple is Samsung’s biggest customer for microprocessors. The current case in many ways resembles the 1996 lawsuit by GM against rival VW. GM’s VP for Supply Chains, Jose Lopez, was accused of stealing GM’s plans for a new type of factory, dubbed “Plant X”, when he defected to VW. The settlement, in GM’s favor, recognized the role of each company as a supplier to the other. VW paid GM $100 million and was required to buy $1 billion in parts from GM.

In today’s world, competition–as we say in Chapter 11–is often between supply chains, not between companies.

Discussion questions:

1. Ask students to research details of the GM-VW lawsuit and discuss them in class.

2. The Samsung-Apple lawsuit in Korea played out differently. Why?

Guest Post: Certifying Supply Chain Resiliency

Our guest post today comes from Prof. Matt Liotine in the Dept. of Information and Decision Sciences, University of Illinois-Chicago. Jay and I had the privilege of lecturing in his MBA classes during the POMS Meeting in Chicago in April.

Supply chain resilience has taken center stage in recent years amidst the many adverse events that are taking place across the globe. We have seen first hand how tsunami, earthquakes, hurricanes, tornadoes, wildfires, volcanoes and other natural disasters can not only cause loss of life and asset damage, but can also disrupt business operations. While is it incumbent upon companies to establish business continuity and disaster recovery plans to continue their operations in light of such events, it is also necessary for them to evaluate or even audit such plans pertaining to their key suppliers.

Several standards have been issued across the globe that businesses can use in this regard, such as ISO 22301, BS 25999 (U.K.), and NFPA 1600 (U.S.), and ASIS SPC.1. Most recently, the U.S. Congress has mandated a voluntary program of accreditation and certification of private entities for business continuity. Called the Voluntary Private Sector Preparedness Accreditation and Certification Program (PS‑Prep), this initiative was an outgrowth of the 9/11 Commission Act of 2007. Companies can use any of the last three standards cited above as a compliance benchmark since these share many similar principles and characteristics. Compliance is evaluated by auditors representing a PS-Prep certifying body. The U.S. Department of Homeland Security has authorized that these bodies be accredited by the ANSI-ASQ National Accreditation Board. While totally voluntary, PS-Prep can provide a mechanism for companies to evaluate and certify their own business continuance as well as that of their suppliers. (AT&T has been the first company to become PS-Prep certified.)

It is important to note that such compliance is not only targeted towards large corporations, but also for small-to-mid size businesses, which in fact constitute a significant portion of the global supply chain. While it may be infeasible for smaller suppliers to acquire a certification, buyers can still encourage or even enforce good business continuance practices by their suppliers through either contract stipulations and/or business processes.

OM in the News: UPS and its Team of Pharmacists

UPS is well-known for its army of brown-uniformed delivery drivers. Less known is that the package-delivery giant has its own team of pharmacists. At UPS’s Louisville headquarters, company pharmacists fill 4,000 orders a day for insulin pumps and other supplies from customers of medical-device company Medtronics. UPS pharmacists log into Medtronic’s system, fill the orders with devices stocked on site, and ship them to patients, via UPS.

It is one part of the growing reach, writes The Wall Street Journal (June 28, 2012) by UPS—along with rivals FedEx and DHL—into the business of running supply chains for pharmaceutical and medical-device companies. Medtronic and other health-care companies are increasingly outsourcing logistics as they look for ways to cut costs from backroom operations and focus on product development instead (see Chapter 11). UPS’s service has allowed Medtronic to close its own distribution warehouse and see a significant reduction in the costs of processing each order. “If you’re a medical company, logistics isn’t your core expertise,” says an industry analyst.

The parcel-delivery companies are investing in megawarehouses that service multiple pharmaceutical companies at once, with freezers for medicines and high-security vaults for controlled substances. UPS got into health-care logistics in 2006 and the business has grown rapidly, with 33 health-care logistics facilities around the world, including a plant in Brazil opened last year specifically to handle the supply chain in that country for Merck.

Walgreen chose UPS to transport $9 million of donated flu vaccine—375,000 doses, to Laos in March. Fifty UPS “health care logisticians” coordinated the complicated journey. The 8,500-mile flight took five days and included four stops, ending in Bangkok, where the containers were loaded onto a truck for Vientiane, Laos.

Discussion questions:

1. What are the risks to UPS in entering the medical supply chain business?

2. Why would medical companies outsource their order systems to parcel companies?

Guest Post: Supply Chain Resilience–a Visualized Introduction

Ben Benjabutr, at http://www.SCM-Operations.com, in Thailand, provides an interesting guest post in his Powerpoint explanation of supply chain resilience.

Supply chain resilience is a relatively new subject in supply chain management. During the 1970s, corporate decision making used traditional risk management techniques which have strong roots in financial models. Risks are usually quantified using assumptions based on historical data. In 1982, the term “Supply Chain Management” was coined by a management consultant in the UK. The primary goal of supply chain management was to reduce lead-time in distribution channel.

Risks in supply chains come in different terms– like variation, uncertainty, non-conformance, vulnerability and disruption. In the late 1990s, supply chain risk management emerged in academic literature. In 2000, research on the subject was conducted in the UK after transportation disruptions from fuel protests. Another research stream about resilience came in the United States after the 9-11 attacks in 2001. Then, in 2004, Martin Christopher and Helen Peck published their paper “Building the Resilient Supply Chain.” They defined resilience as “the ability of a system to return to its original state or move to a new, more desirable state after being disturbed“.

The most interesting year turned out to be 2011, with the tsunami in Japan followed by massive flooding in Thailand. The automotive and electronic industries were hit very hard by the disruptions. Since then, supply chain resilience has gain extraordinary attention from both academia and business professionals. The purpose of the Powerpoints I have created (click below) is to familiarize readers with the concept of supply chain resilience. I hope this is something useful for instructors teaching from the Heizer-Render OM text.

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Source: SCM-Operations.com

Good OM Reading: Apple Doubles Down on Manufacturing in China

Fortune‘s (June 11, 2012) lead article features Apple’s new CEO, Tim Cook, whom the magazine calls “the master of operational efficiency”. The article is a good one for your students to read at the start of a semester or when you treat the topic of supply chains (Ch.11).

Cook joined Apple in 1998 to revamp its badly broken system of factories, warehouses, and suppliers. He quickly strengthened Apple’s cooperation with its contract manufacturers in China. But it was a personal blow to Cook when the New York Times ran a prominent article in January critical of the working condition at Foxconn, the company that assembles most of Apple’s products. Though the criticism wasn’t new, the exposé painted a bleak portrait of the lives of workers in the factories. Cook’s response marked a distinct change in tone from Steve Jobs, who had been dismissive of the severity of the problem. The new CEO not only visited Foxconn personally, but Apple joined the Fair Labor Association, a third-party monitoring group.

The news this week, though, is that Apple is doubling down on its manufacturing in China. Apple disclosed for the 1st time the dollar value of its assets there: $2.6 billion, meaning a massive value of material and equipment Apple has bought on behalf of its suppliers. The firm is risking its own capital, another $7 billion, as a way of financing massive upgrades in its manufacturing capabilities in Asia, even though its partners will operate the equipment.

Apple generally is mum on what the investments are for, but “that’s got to be for volume,” says a portfolio manager at T. Rowe Price. He notes that Apple suppliers like Pegatron and Jabil have been buying sophisticated machine tools and that Japanese drill-bit manufacturers say they are moving into consumer electronics on Apple’s behalf. “The Apple supply chain is doing things no one else can,” given its abundance of cash and manufacturing know-how. Such operational efficiencies have been an underappreciated factor in Apple’s success for the past decade; all the attention has been on its beautiful designs and snazzy marketing overseen by Jobs.