Tag: Ch.2

OM in the News: Is What’s Good for GE Good for America?

Remember the famous 1953 quote before Congress–actually it was a misquote– by the president of General Motors: “What’s good for GM is good for the country”? That remark was just rephrased to GE’s CEO, Jeff Immelt, in a question by a Wall Street Journal (Sept. 30,2011) reporter under the headline “China Venture is Good for GE but Is It Good for U.S.?”  Immelt’s edgy response: “I’m done”.

The basic question is whether the U.S. can compete in China without giving away the store.  The Journal asks: “What’s to keep GE’s new avionics joint venture with China from transferring the best of U.S. technology abroad, empowering a new set of Chinese companies to challenge U.S. aircraft makers?” After all, avionics–the “brains” on an airplane–are at the pinnacle of American know-how. It’s where the U.S. is still highly competitive and it’s technology that China covets.

GE says it has built protection into the transfer of technology. But one Congressman says: “To suggest there are going to be firewalls that will stop this technology from going to the Chinese military is approaching laughable”. This is not, of course, the first case of industrial companies striking difficult bargains with Chinese state-owned  firms in exchange for access to the growing market. Siemens earlier joint venture in high-speed rail resulted in direct competition from Chinese firms that borrowed its technology.  China’s industrial strategy has been explicit about “metabolizing” foreign technology and making it China’s own.

“We’ve been passive in deciding how to deal with China’s aggressive industrial policies”, says a former Commerce Department official. Adds a China expert: “It’s unclear whether anyone in the U.S. government took a look at the GE deal in terms of U.S. competitiveness–the future of the aviation industry 10 or 20 years out”.

Discussion questions:

1. Make the case for and against GE’s joint venture.

2. Should the government play a more active role  to protect  Boeing from China’s planned passenger jet that will use GE avionics?

OM in the News: Why Amazon Can’t Make a Kindle in the US

This interesting article in  Forbes (Aug.17,2011) proposes that “decades of outsourcing have left US industry without the means to invent the next generation of high-tech products that are key to rebuilding its economy”.  Even if Amazon wanted to, says Forbes, the Kindle could not be made here because of the migration to Asia of: (1) the circuit connectors (to China); (2) the display (to Taiwan) ; (3) the case (to China), because the supplier base for toys, electronics, and computers went there; (4) the wireless card (to Korea), the center for mobile phone components; (5) the controller board (to China), when the US transferred printed boards to Asia; and (6) the battery (to China), when it migrated with the manufacture of notebook computers.

The main point, however is that the decline of manufacturing in a region sets off a chain reaction. Once manufacturing is outsourced, process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing. In the long run, say two Harvard profs, “an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate”. Already lost are 2 dozen industries ranging from flat-panel LCDs to rechargeable batteries to desktop/notebook/netbook PCs to hard drives. The list of industries “at risk” is even longer and more worrisome.

Take the story of Dell Computer and its Taiwanese electronics manufacturer as an example of an  industry lost.  The supplier started by making the simple circuit boards inside the PC. It then proposed: “Why don’t you let us make the motherboard for you? Circuit manufacturing isn’t your core competence anyways and we could do it for 20% less”. On successive occasions, the supplier took over: (1) the PC assembly, (2) the supply chain, and finally (3) the design. Dell’s revenues were unaffected and its profits increased. But the next visit from the supplier wasn’t to Dell, rather  to Best Buy, offering its own brand PC at 20% less than the Dell!

Discussion questions:

1. What are some other industries lost to Asia?

2. What can the US do to reverse this decline?

OM in the News: Making Chopsticks for China in Georgia!

The shortage of chopsticks in China has become so acute that a firm in Americus, Georgia has begun exporting millions of pairs daily to the country, reports China Daily (Aug.22,2011).  Georgia Chopsticks, founded by Korean-American Jae Lee, is operating around the clock to meet demand. It currently puts out 2 million sets per day with 60 employees, but has plans to expand to 150 workers and 10 million pairs of chopsticks a day by year’s end.

Amid a shortage of wood in China, the abundant polar and sweet gum trees in Georgia were found to be ideal for chopsticks, producing straight, pliable, and light-colored implements. Being sold in supermarkets in China, they cost less than a penny each to make. In China, manufacturers produce 63 billion sets per year. But in some areas of that country  and Japan, they have simply run out of wood.

Says Jae Lee,”When I opened this business the reaction from my family and friends was ‘Are you crazy?’ But we’ve shown you can make something happen”. One of his workers adds: “Everywhere you see in America it says ‘Made in China’ and you wonder if in China they ever see ‘Made in America’ “. Each Box shipped has Made in USA in very large print to drive the point home.

Low-tech manufactured goods being shipped from high-tech America to China? Here is a 2 minute MSNBC video link you can use in class to make the point.

Discussion questions:

1. If the US can make chopsticks for export, why can’t the Amazon Kindle be made here?

2. Why did GE recently move its HQ for x-ray and MRI devices from Wisconsin to China?

OM in the News: US Solar Jobs Falling to the Chinese

Despite a doubling in demand for solar power cells (from 12 gigawatts in 2009 to 24 gw last year) and US government support for “green” jobs as the future economic engine, The Wall Street Journal (Aug.17,2011) headline bears the bad news : “Overrun by Chinese Rivals, U.S. Solar Company Falters”. Amid bruising competition across the globe, the green manufacturing jobs in the US are losing out in the cut-throat cost battle.

The Journal reports that Evergreen Solar, once the darling of the industry, filed for bankruptcy this week. Earlier this year, the firm closed its Massachusetts factory, a $450 million facility that opened in 2007 with state and local subsidies. Its 800 employees lost their jobs. Evergreen began making solar panels in Wuhan, China in 2010. Likewise, other US-based solar companies have already moved their production overseas: Sunpower went to the Philippines and First Solar to Malaysia.

“Quite frankly, as a solar manufacturer, it is better to pay workers $1 an hour in China than workers $15 an hour in Massachusetts”, says a solar analyst.  Adds an industry exec, “Chinese solar manufacturers benefit from inexpensive capital, low-cost electricity and real estate, as well as less expensive labor”.

Another solar-products maker, California-based Solyndra, also announced plans in 2010 to shutter a plant and lay off the workers, just a year after receiving a $535 million federal loan guarantee. A big problem has been the plummeting of raw material costs (polysilicon has dropped from $400/kilo to $55 in the past 3 years). This stripped the competitive edge of firms like Evergreen and left them with a higher-cost production process.

Discussion questions:

1. Why are American manufacturers having trouble competing in the global solar energy market?

2. What are the dangers of state, local, and federal government incentive programs?

OM in the News: Trouble on the China Express

The title of the lead article in today’s Wall Street Journal (July 30-31, 2011) , “Trouble on the China Express“, ironically may answer the question my dinner companions had for me last night. They asked, “Do you think China has overtaken the US and moved us into the 2nd place among nations”? The Journal‘s use of the bullet train crash last week (plummeting off a viaduct after a lightning strike,  killing 40 people and injuring 190 more) is, as the paper writes, “an apt metaphor for the country’s hurtling economy over the past decade: a colossal investment project, born of the state, steeped in corruption, built for maximum velocity, and imposed paternalistically on a public”.

“Do not be desirous to have things done quickly”, said Confucius 25 centuries ago. It ” prevents their being done thoroughly”. But the Chinese leaders have hyped high-speed rail with abandon. Using imported technology, they have modified the designs and sold them as their own. A few weeks ago, the Railways Minister bragged that its technology was so superior to Japan’s that “they cannot be mentioned in the same breath”.

And it’s not just the technological glitches. The bullet train project (planned to stretch 10,000 miles at a $300 billion cost by 2020), appears to be riddled by corruption. One Chinese blogger (and there are 485 million Chinese using the Internet) wrote: “When a country is corrupt to the point that a single lightning strike can cause a train crash, the passing of a truck can collapse a bridge, and drinking a few bags of milk powder can cause kidney stones, none of us are exempted”.

The Journal concludes: The crash “has transformed a symbol of Beijing’s pride into an emblem of incompetence and imperious governance”. Does that answer my dinner companions’ question?

Discussion questions:

1. What impact can corruption have on efficient OM?

2. What are the concerns about such rapid expansion?

3. What other quality crises has China faced recently?

OM in the News: IBM’s Strategy Changes Bring it 100 Years of Success

Every newspaper in the country heralded IBM’s 100th anniversary this week, so we also look at this globe-spanning technology behemoth. “IBM’s global reach and broad product portfolio still make it one of the largest and most profitable IT companies in the world”, says Computerworld (June 16-23, 2011). With 427,000 employees and nearly $15 billion profit on sales of $100 billion in 2010, IBM is 2nd in sales in the computer industry only to H-P. Not that the firm has avoided ups and downs. The US  antitrust suit in 1969 (dismissed in 1982) pushed IBM to separate hardware from software. After Tom Watson, Jr., retired in 1971, its mainframe business faced strong competition from smaller, more modular systems. But under the reins of Lou Gerstner, the firm bounced back in the 1990’s focusing on software, system integration, and other services. It was the strategy change  has likely been IBM’s key to success today.

A quick history:

1911  The merger of 4 tabulating companies results in the company, which has 13,000 employees.

1914  The icon Tom Watson, Sr.,  leaves NCR to lead IBM for 40 years.

1928  The IBM punched card becomes the standard for five decades.

1953  The IBM 701 becomes the 1st production computer; it features tape drive technology.

1957  IBM introduces FORTRAN, the standard for technical programming.

1964  The firm successfully bets $5 billion on the System/360– a family of computers that share technology.

1981  The IBM PC is invented, with Microsoft providing the operating system, paving the way for PC-clones such as Dell .

2002  IBM pays $3.5 billion for PricewaterhouseCoopers to strengthen its services and technology consulting units.

2007-today  The company spends over $14 billion to acquire dozens of business analytics software firms (such as SPSS and iLog), planning on $16 billion revenue from analytics by 2015.

As OM professors, this latest move will have a major impact on the availability of free software we can use in class, a trend we need to watch carefully.

OM in the News: Japan Dispensable as a Supplier?

The article in today’s New York Times (May 30,2011) begins: “Maybe Japan is not as crucial to the global supply chain as those first few weeks after the earthquake made it seem”.  As an example, the Times describes STMicroelectronics, the $10 billion European semiconductor giant, which after the initial shock of losing  Japanese components, quickly lined up alternative suppliers outside of Japan. “It is going smoother than we had thought”, says the CEO. And it turns out this experience is widely shared. Beyond a very short list of components (like auto micro controllers), it turns out that Japan plays only a small role in the global supply chain.

There may be 2 reasons for the limited impact of the Japanese disaster. First, the resiliency of supply networks and quick action by companies helped. But a new report by SCM World finds that Japan, despite being the world’s 3rd largest economy (behind the US and China), is not the major source of manufactured parts for companies outside that country. China was the #1 source (37%), then the US (20%), then Germany (7%). Japan tied with Canada for 8th place.

“What’s remarkable is how relatively isolated Japan is”, says the report’s author. “It’s far less integrated into the world’s manufacturing supply chains than you would expect, given the size of Japan’s economy”. Japan’s manufacturing prowess and global competitiveness are focused in a few industries, like autos and consumer electronics.

Further, big Japanese firms have preferred to have essentially captive suppliers. These tight, cooperative bonds have meant shared experiences and constant communication. But they also meant that Japanese suppliers have been less likely to sell to foreign corporations.

Discussion questions:

1. Why did the earthquake have a limited effect on manufacturers outside Japan?

2. How will the close relationship among Japanese companies help the country recover more quickly?

OM in the News: Volkswagen Rediscovers Manufacturing in the US

The  Wall Street Journal’s (May 25,2011) headline “VW Evaluates US Audi Plant” is more good news for American manufacturing. With its new $1 billion plant opening  2 days ago in Chattanooga, VW aims to triple its US auto sales.The complex is designed to build 150,000 Passat sedans and can be expanded to 300,000 units.

Why the American plant and why Tennessee? VW believes it cannot compete against rivals Ford, GM, and Toyota without the cost benefits from a factory here. The firm has lost money in the US for a decade (with cars made in Germany) because of unfavorable exchange rates. The new plant makes it possible to lower the price of  the mid-sized Passat by an amazing $8,000 –down to $20,000, in line with competitive vehicles. The VW plant  is paying $14.50 an hour, half of what auto workers make at older Toyota plants and at unionized Ford, GM, and Chrysler facilities. VW can now also produce 85% of its parts locally, lowering the impact of the currency translation.

With the new plant barely open, VW is already considering building its luxury Audi line in the US for the 1st time, for the same cost reasons. The firm thinks it can double Audi sales to 200,000 units with a facility closer to its customers. (Businessweek features a similar article called “VW Rediscovers America” ,May 21-27, 2011).

Discussion questions:

1. Why is VW interested in expanding its manufacturing to the US?

2. Why did it select Tennessee for its first US site?

OM in the News: “Frugal Engineering” Helps India Challenge Chinese Manufacturing

The Financial Times (May 20,2011) just published an interesting article on India becoming the world leader in what is known as “frugal engineering”.  Always behind China as the world’s low-cost manufacturer, India  has chosen the path of producing low-cost products that are resistant to tough environments such as Indian or African roads and weather–and have robust quality standards. India,  already known as the IT back office of the world, is now creating hubs for global manufacturing of small cars, wireless telecomm equipment, and low-cost innovative products  for emerging markets ( as well as such items as small decentralized power plants for areas of the world with no electricity).

“The story of India’s rise as a key contributor to the global supply chain is very different from the one that elevated China to ‘factory of the world’ status. India is putting less emphasis on hard-core manufacturing , but it’s taking a leadership position in research and product development”, writes the Times. Products developed by “frugal engineering” for Indian markets  fit well in other developing world markets in African and Latin America.

Ford, which has invested over $1 billion in a 200,000 auto/year state-of-the-art plant in Southern India, is making cars for emerging markets, where manufacturing costs are often higher than in India. “We now recognize it as a hub for small and fuel-efficient cars”, says the head of Ford-India.

India is also becoming a more popular destination for global manufacturers who want to decouple and de-risk from China, whose wages are rising, whose markets are highly regulated, and where intellectual property rights are often infringed.

Discussion questions:

1. What is India’s strategic advantage over China and what is China’s advantage over India as a global manufacturer?

2. Why is India a world center for frugal manufacturing?

Good OM Reading: Manufacturing in a Two-Speed World

A recent article published by Knowledge@Wharton raises the fascinating  OM topic of how companies are dealing with a “two-speed”  world. This world has 2 types of markets, each with different characteristics.  High-growth economies (such as China, India, Brazil) have growth rates of 8-12% and some 2.6 billion people with low average incomes. Slow-growth economies (US, Western Europe, Japan) have growth rates of 1-4%, but higher average incomes. What are the key challenges that global manufacturers face as they try to synchronize their worldwide operations to meet the demands of these 2 markets? The article interviews a series of Wharton profs and Boston Consulting Group execs to reach these conclusions:

1. In either market, companies need to have lean products and systems. In slow-growth world, “you need low costs and the ability to respond quickly to customer needs”. In the high-growth world, “you need to be lean to customize your products and create capacity to grow”. GE, for example, is making a $750,000 version of its MRI for emerging markets, while the sticker price of  a slightly more sophisticated model in the US is $1.6 million–see The Wall Street Journal (April 26,2011)

2. Companies need to have a shared platform for production of high-end and low-end products, often at the same factory. With cars, common components can be partly completed chasses.In pharma, it can be intermediate chemicals. In mobile phones, its partially kitted parts.

3. Networks  need to be restructured to serve local markets. “The global market means more languages, more rules, and different duty, tax, and patent issues–a new level of complexity. It’s a think local, act global thing”.

4. Companies need to balance the low-cost of labor with added logistical costs and risks inherent in lengthier supply chains. Although firms in slow-growth developed markets are tempted to manufacture in high-growth, low-cost markets and sell to both markets, “customers don’t just want the lowest cost, they want their products quickly too”.

 The bottom line in the article is that companies that are thriving in this two-speed world are really good at managing both mass production and JIT production.

Teaching Tip: The World’s Most Admired Companies–2011

In reading Fortune’s new 2011 list of the “50 most admired companies” in the world, I saw some good teaching opportunities. Of the nine attributes rated by the 4,100 execs who did the rankings, I would view six of them as being under the OM purview. (The rest are financial measures). And what makes the rankings more interesting is that Fortune points out the major changes since their pre-recession survey 4 years ago.

Here are the  6 categories, along with the old and new champs for each:

1. Ability to attract/ keep talented people:  then, GE: now Goldman Sachs.

2. Global business effectiveness: then Nestle: now McDonald’s

3. Quality of management: then P&G: now McDonald’s

4. Quality of products/ services: then Anheuser-Busch: now Amazon.com

5. Sustainability: then UPS: now Statoil

6. Innovativeness: then Apple: now Apple

Two things we can discuss with our students: (1) McDonald’s is considered the world’s best-managed company on 3 attributes (the last being wise use of corporate assets). Can the class explain why? (2) Only Apple preserved its status (for innovativeness) over the 4 traumatic years. And Apple ranks no.1 in the Fortune overall most admired list.

A wonderful editorial recently in The Wall Street Journal (April 12,2011), by Vinton Cerf (an Internet pioneer now at Google), explains Apple’s success. He writes: “Americans get very excited about innovation…In Silicon Valley, and elsewhere in the US, the engine requires sources of trained professionals, sources of capital, and new and exciting companies that form a mutually enforcing ecosystem”.

Contributing factors, Cerf adds, include the freedom to pursue ideas, the freedom to fail, and freedom of access to information. “Business failure in the US is a mark of experience”. I am reminded of a recent interview of Stephen Jobs who remarked that being fired from Apple by John Scully (in 1984) was the best thing that ever happened in his career. (He came back as CEO in 1997). In other cultures, such a downfall would be a permanent scar.

OM in the News: Global Supply Chains in Turmoil…or a Painful Blip?

With the words “global supply chain” continuing to dominate business headlines around the world, OM will remain in the news until Japan is able to stabilize its economy. And that may not be for some while. Today’s Wall Street Journal (March 16,2011) lead story writes: “International companies from BMW to Boeing girded for possible disruptions to supply chains.” In these early days of assessing the quake’s damage, it is tempting for a gloomy view to carry the news.

After all, Japan is a key supplier of advanced parts used in the final assembly of products throughout the world.  Malaysia’s Eita Electronics depends on parts from Japanese factories for its circuit breakers. BMW receives  electronic components for navigation systems and digital displays. And Boeing’s 787 wings and fuselages are produced there (see our Global Company Profile in Ch.2). It truly is amazing  how dependent one nation’s manufacturers have come to depend on anothers.

The Journal adds:” Supplier logistics are severely dislocated by restrictions on using highways for freight, as well as unpredictable power cuts”. Mazda, Honda, Nissan, and Toyota have all suspended operations even though most of their plants were not heavily damaged. Toyota is even slowing US production, just in case it cannot ship parts it makes in Japan. American auto makers cannot celebrate just yet, as they in turn receive specialized parts, such as batteries, from Japan.

Just to balance the picture, financial services giant UBS  issued this  report (March.14,2011): “We believe this catastrophe is unlikely to inflict a significant blow to Japan’s growth outlook for this year…First, the major business centers suffered only limited damage as most of the destruction was concentrated in the northeast coast, which accounts for about 7% of Japan’s industrial output. Second, outside of the worst affected areas, business activity moved towards normalization over the weekend”.

Discussion questions:

1. What are some products not impacted by the damage to Japan?

2. What important issues might the UBS report be overlooking?

OM in the News: Earthquakes, Japan, and the Global Supply Chain

It is much too early to predict how soon Japan will recover from the terrible devastation of last week’s earthquakes and tsunami. Your students, though, are aware of the situation on the ground and the implications for global commerce and manufacturing, so this is a topic worth discussing in class.

Various newspapers have taken differing views on how the devastation will affect the global economy. Today’s Wall Street Journal (March 14, 2011) comes right out and asks the question: “Are global supply chains so taut that a disruption in the world’s No. 3 economy will be felt around the world?” Their answer: Japan’s factories play an out-size role in global production , ranging from a fifth of the world’s semiconductors to advanced machine tools. The result could be shortages of key components around the world. For eaxample, Reneses Electronics is the world’s largest maker of micro controllers for cars and other equipment. In suffering major damage, it places customers at risk. Its chips are key ingredients and its inventory is not stockpiled nor readily replaced,  employing the JIT concept. And most auto makers use only 1-2 suppliers for parts.

Likewise, today’s New York Times writes: “Most high-tech goods these days are produced through carefully orchestrated procurement and manufacturing networks that combine parts from around the globe, often shipped on tight daily production schedules. Even temporary shortages can drive up prices sharply.”

Forty percent of chips for smartphones and tablet computers  and most LCDs for appliances are also made in Japan. Further, Sony’s Blu-ray disc and magnetic tape factories were flooded. And with rolling blackouts twice a day to conserve power, most manufacturers are unable to operate expensive machinery that requires stable energy.  Toyota, Nissan, and Honda are not even sure the logistics are available to get their cars to ports for shipping.

Discussion questions:

1. Discuss the importance of having manufacturing facilities around the world?

2. How are Japanese automakers impacted with respect to US sales?

OM in the News: America’s Hottest Export is Weapons

If we worry about America’s loss of manufacturing, the Fortune (Feb.28,2011) cover story today will bring some comfort. The magazine cover pictures a US-made missile for sale –and the article begins thus: “This time last year, Boeing’s F-15 production line, which is housed in a beige, dreary building on the outskirts of Lambert- St. Louis Int’l Airport, was on the verge of shutting down”.

This really caught my attention as I had earlier worked in that very same dreary building on the F-4 design team!  The really good engineers were in a locked room I could never enter, as they were working on the F-15 in total secrecy. The F-15 was a true power in its heyday. But the US stopped buying the plane a decade ago and production was down to one F-15 a month and due to close. This would have cost 100’s of manufacturing  jobs during an already bad economy.

Then up stepped Saudi Arabia, with a $60 billion arms package a few months ago that included 84 F-15s. The deal means the production line stays open til at least 2018. DOD’s plan to sell $103 billion in weapons overseas this year is a staggering rise from an average of $13 billion between 1995 and 2005….and is rescuing American manufacturing and exports in a big way.

Also in the news: a $4 billion plane deal with India in 2011 (in addition to $2.1 billion in 2009) and a shot at a $10 billion sale of 126 jet fighters. Egypt bought $2 billion in weapons in 2009 and Jordan $431 million. (You might be wondering what happens to those arms when regimes are overthrown–the State Dept. certainly does). WikiLeaks just confirmed what most already know: American diplomats are pitchmen for the US-made arms industry, a major source of  high-paying, highly skilled manufacturing jobs.

Discussion questions:

1. Why is the arms industry so important  and who are our major competitors?

2. What do companies typically have to do to get major contracts abroad?

3. Is it fair to say,”As Boeing goes, so goes the country”?

Good OM Reading: Make It in America

Andrew Liveris’ new book, Make It in America (Wiley,2011) is certainly timely. The author, CEO of Dow Chemical, calls for  a national strategy to revive manufacturing, a plea repeated by President Obama in his State of the Union talk last night. Liveris wants the government to draw a  plan to encourage more manufacturing, to cut taxes, and to make regulations uniform, as in Europe and Asia.

No economy as large as the US can sustain itself without manufacturing, he writes. “Accepting such a future (as a nation of great innovations, and not as a manufacturing society), means accepting a level of joblessness that would make recent years look like a warmup”. This is a good point. If we look at a Top 10 of big time innovators (say Amazon, Apple, Dell, Facebook, GE, Google, HP, IBM, Intel, and Microsoft), we see they only employ an average of 61,000 workers. Since there are 29 people working at Wal-Mart and 2 at Disney for every one at a big time innovator, it becomes clear that we cannot count on innovators for job creation.

Being passive, as we have been for 4 decades, is not a growth strategy, Liveris adds. China has a strategy  to be more than the world’s low-cost toy manufacturer. Brazil is moving beyond its role as an agricultural leader. Some Americans imagine we can thrive by dreaming up new Kindles and iPods, while the Chinese make them. But when we move our capacity to make high-tech products overseas, we lose skill for whole sets of products.

Liveris gives the example of the Kindle. Amazon invented it, but couldn’t find the screen-making expertise and capacity to produce it in the US, so it went to Taiwan. He closes by writing: “Manufacturing is America’s future. Not just its past. Manufacturing is the foundation upon which our economic  prosperity, our growth and wealth and jobs depends.”

Click here to read excerpts of this excellent book.