Tag: COVID

OM in the News: Losing Patience with China

China’s strict anti-Covid-19 policies have left most of Shanghai in lockdown for much of the past two months

Are foreign companies giving up on manufacturing in China? Covid-19 policies and Beijing’s increasingly ideological approach to business are making many companies reassess growth plans, reports The Wall Street Journal (May 26, 2022). A new  survey by the European Union, of companies in China, found that 23% of respondents were considering shifting current or planned investments to other markets, the highest total in the past decade.

Apple, whose suppliers in China constitute the country’s largest source of private-sector employment, is pushing its contractors to do more manufacturing elsewhere. Even before the latest Omicron wave hit Shanghai, over a third of American companies told the American Chamber of Commerce this spring that they would reduce investment in the country due to the policy environment there. The stars are aligning for a much more concerted effort, long predicted but slow in arriving, by large manufacturers to diversify away from the country.

China’s export growth has taken a steep dive thanks to a combination of Covid-19 lockdowns, weakening overseas demand and, most likely, tougher competition from other low-cost manufacturers that were closed last year. There will inevitably be more disruptive lockdowns in China given the very low probability of a significant move away from the “zero-Covid” policy until early 2023 at the earliest. And while alternative production locations such as Southeast Asia and India all present their own difficulties, they also have some distinct advantages, including growing, youthful labor forces—and governments that aren’t positioning themselves as ideological and, potentially, military opponents of developed democracies.

Classroom discussion questions:

  1. What are the tradeoffs of leaving or staying in China?
  2. What Southeast Asian countries would most benefit from an exit of western manufacturers from China?

OM in the News: Peleton’s Downhill Ride

In a northwest Ohio industrial park, Peloton Interactive is building a million-square-foot factory that it will never use. The once-hot stationary bike maker is now selling the facility, which cost $100 million and to be completed this fall, as it races to downsize a manufacturing operation expanded by leaders who believed Covid-driven demand would outlive the pandemic.

Their miscalculation about demand and the shift in the market have been so costly that Peloton—a company worth nearly $50 billion about a year ago (and now $5 billion)—has laid off thousands of people, had to borrow $750 million to head off a cash crunch and is exploring a sale. It is a reminder, writes The Wall Street Journal (May 21-22, 2022), that strategic choices—not just pandemic forces—determine how businesses emerge from the crisis. 

In late 2020—with homebound consumers clamoring for its bikes—Peloton’s CEO dismissed the idea that the company was growing too much based on a demand spike that could prove temporary. “Overbuilding supply-chain capacity—that’s a term that has never come up in the Peloton senior leadership rooms or boardrooms,” said the CEO in 2020. “We feel like there’s such a massive opportunity that we need to invest heavily in the supply chain for years and years to maintain it.”

But the good times were short-lived. As demand soared throughout the year and a second Covid wave derailed Americans’ hopes of a quick return to normalcy, Peloton became overwhelmed by a crush of orders, which was exacerbated by massive port delays in Asia, where Peloton built its machines.

Many companies faced the same question during the pandemic: How best to handle a surge in demand? P&G decided not to permanently expand toilet-paper factories that would have taken years to come online. Clorox added capacity through contract manufacturers. To fill government orders for masks, Honeywell and 3M added shifts or retrofitted facilities. Most of the leaders of those businesses realized that the sudden demand could be short-lived, or hedged their manufacturing investments.

Peloton’s bikes and treadmills are equipped with a tabletlike screen that connects users to online workout classes. An instructor leading a spin class from a Peloton studio can remotely adjust the resistance on bikes connected to the class. Peloton’s original bike, which initially sold for $2,245, now costs $1,445.

Classroom discussion questions:

  1. What strategies could Peloton have taken to address capacity issues?
  2. Why did the firm decide to build the U.S. factory?

OM in the News: The Logistics Disarray in China

For decades, the world has depended on China as a massive factory floor and market. As the country’s economic growth crumbles, the pain is spreading globally. Lockdowns aimed at stamping out Covid-19 are throttling activity in the world’s second-largest economy. Overseas demand for China’s exports is fading as economies wrestle with surging prices and rising interest rates.

Workers lined up to get tested for Covid-19 at the Foxconn factory in Wuhan, China

The effects of China’s slowdown are showing up everywhere from German factories to Australian tourist spots. Car sales in China have collapsed, hitting auto makers including BMW, VW, and Tesla. Tesla sold just 1,512 cars made at its Shanghai plant in April, down 98% from the more than 65,000 it sold in March.

Foxconn, the world’s biggest iPhone assembler, faces logistics disruptions and other challenges in China stemming from the country’s stringent Covid measures, reports The Wall Street Journal (May 13, 2022). Most of Foxconn’s factories in China have been running under a bubble-like system. The manufacturer has relied on its supply-chain management expertise to keep production going even during Covid outbreaks.

Apple, Foxconn’s biggest customer, said that the Covid outbreaks in China threaten to hinder this quarter’s sales by as much as $8 billion.  Apple’s supply constraints mainly stemmed from Shanghai, much of which has been under a lockdown for more than a month, and the nearby regions, where logistics have been disrupted.

Foxconn has been following a closed-loop system to keep tens of thousands of workers in or around the factory, a system that has become the standard among manufacturers in China to continue manufacturing during Covid outbreaks.

In March, Foxconn had to suspend operations at its factories in Shenzhen, another site where it produces Apple products, after a virus outbreak there. Hit harder than Foxconn is rival Pegatron, the second-largest assembler of iPhones, which suspended production at its factories in Shanghai and nearby Jiangsu province last month.

Others in the electronics sector also face fallout from China’s anti-Covid policies. Sony faces delays in procuring parts from Shanghai and nearby areas. Panasonic warned that the impact from the lockdowns in China would start to manifest in its performance over the coming months.

Classroom discussion questions:

  1. What are the advantages and disadvantages of Foxconn’s “closed loop” system?
  2. What can Apple and other manufacturers do to mitigate the shutdown damages?

OM in the News: Mexican Factories Gain in Supply-Chain Revamps

Workers on an assembly line at the MGA Entertainment toy factory in Ciudad Juarez, Mexico

New data suggests Mexican suppliers are gaining ground as manufacturers reset their supply chains amid growing global disruptions, reports The Wall Street Journal (April 1, 2022). Last year, large American manufacturers solicited chemicals, produce and construction materials and other goods from six times as many suppliers based in Mexico as they did in 2020. At the same time, the number of suppliers in China that received procurement bids declined by 9% in 2021.

The push for suppliers in Mexico comes as more companies say they are resetting their supply chains by adding suppliers and bringing some production closer to end users. The effort is aimed at bolstering resilience, redundancy, and reliability following a series of shocks to supply networks brought on by Covid-19 outbreaks, port bottlenecks, extreme weather and geopolitical conflicts.

“If you’re a manufacturer and you used to have strategic relationships with one or two suppliers that produce the same good or a similar good, we’re now seeing that same manufacturer have relationships with three or four different suppliers,” said one industry expert.

The added suppliers tend to be closer to the buyer and its customers. There was a 514% increase from 2020 to 2021 in Mexican suppliers receiving bids from U.S. buyers and a 155% increase in Latin American suppliers. At the same time, manufacturers sought goods from 26% fewer suppliers in the Asia-Pacific region.

A separate survey of 2,000 U.S. and U.K. CEOs by a London-based group found that 15% had moved production closer to their home countries or sourced from suppliers in nearby regions, and 26% were looking into doing so.

Classroom discussion questions:

  1. What is “nearshoring” and what are its advantages?
  2. What are the OM implications of these two studies?

 

 

 

OM in the News: A Logistics Manager Tries to Save Christmas

MGA toys awaiting shipment fill up a rented warehouse in Shenzhen, China.

A toy traffic jam is threatening to ruin Christmas. John Baker’s job is to save the day. Baker is the logistics boss at MGA Entertainment, the company behind L.O.L. Surprise dolls, Little Tikes cars and other popular toys. His job: Retrieve the items in time for the holidays by overcoming a jammed-up global supply chain that is holding them hostage. In June, when new toys typically exit factories for cargo ships and stores world-wide, hundreds of thousands of MGA dolls, play sets and accessories were piling up in factories and rented warehouse space in and around China’s port city of Shenzhen. The waiting toys would require 1,400 40-foot containers and cargo space aboard vessels.

Baker had already faced warnings that Chinese factory owners were running out of storage space. If he couldn’t get the toys shipped out of Shenzhen soon, they would stop making any more. His supply-chain problem is testing leaders across America, from the makers of Nike sneakers to Ford pickup trucks to Whirlpool washing machines. “It’s more dramatic than what I can remember,” says Walmart’s CEO.

Since the Covid-19 pandemic, the once finely tuned world-wide assembly line has limped along, writes The Wall Street Journal (Oct. 13, 2021). Worker illnesses are shutting factories and ports in Asia, a once reliable source of inexpensive manufacturing. Floods and hurricanes are disrupting the orderly flow of raw materials. The shortage of semiconductors has limited availability of everything from cars to computers to videogame consoles. There is a shortage of cargo containers to ferry goods across seas and truck drivers to deliver them. Freight rates have hit record levels.

In a dessert town outside Los Angeles, the 62-year-old Baker tries to unravel the most complex knot of a career that began 4 decades ago, as a forklift driver moving pallets of Smurf dolls. He has been working in toy logistics his entire career and is now a VP for one of the world’s largest toy makers, which tallies more than $2 billion in annual sales.

The stakes are high this season, and the clock is ticking. Half of all retail toy sales come in the weeks leading up to Christmas. Toys that arrive too late won’t sell until they are heavily discounted after the holidays. Baker has to get MGA toys out of China and onto retail shelves with enough time for parents to buy them and put them under the tree.

This is a great story of the importance of one particular topic in Chapter 11 in your Heizer/Render/Munson text–logistics. Baker has used ships, trucks, and trains to try to get the toys to shelves. Will he succeed?

Classroom discussion questions:

  1. Why has the global supply chain weakened?
  2. What can Baker do to move toys from China to MGA’s European customers?

OM in the News: Rethinking the Vietnam Supply Chain

Manufacturers looking to shift production out of China during the U.S.-China trade war piled into Vietnam, attracted by its low wages and the government’s business-friendly reputation. But strict lockdowns to contain a Covid-19 wave in the largely unvaccinated country have crippled manufacturing since July, forcing companies such as Nike and Lululemon  to shift production to other countries. That is prompting some businesses to rethink their heavy reliance on factories in Vietnam, reports The Wall Street Journal ( Oct. 1, 2021).

Nike, which makes around half of its footwear in Vietnam, lost 10 weeks of production there

Factory shutdowns in Vietnam translated to 100 million pairs of Nike shoes not made. Nike anticipates demand for its products will exceed available supply for the next 8 months.

“Our experience with Covid-related factory closures suggests that reopening and ramping back to full production scale will take time,” said Nike’s CFO. Nike is maximizing footwear production capacity in other countries and shifting apparel production out of Vietnam back to China of all places. It is estimated that 1/5 of manufacturers have already moved some production elsewhere.

“What people are realizing is, whether it be China or Vietnam, you can’t have all your eggs in one basket, you can’t be vulnerable to one country from a supply-chain standpoint,” said an industry exec in Vietnam. Businesses have been left guessing about when Vietnam will lift its manufacturing curbs, which have included requiring factories to have their workers live inside their gates, or in some cases, outright factory closures.

Factories that wish to keep running are required to implement elaborate protocols, such as the “3-in-1-place” program, in which laborers eat, sleep, and work at their workplace. Large shoe and apparel factories with thousands of workers have found it impossible to house so many people on site. Many are shut down, or operating with skeleton crews.

The CEO of Crocs said it is moving some production to other parts of the world. Crocs was already planning to migrate some production out of Vietnam, and is adding facilities in Indonesia and India. “Ongoing diversification is essentially the name of the game,” he said. “When you think about the amount of effort everyone was putting in to getting out of China and now one of the places where you can get goods is China, I mean it really is crazy the roller coaster that everybody’s been on,” added the CEO of footware retailer, Designer Brands.

Classroom discussion questions:

  1. Why the return to China?
  2. What supply chain lessons are to be learned here?

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.

  1. Use inventory.
  2. Vary the size of the workforce
  3. Use part-timers or overtime
  4. Use subcontractors
  5. 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:

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

 

OM in the News: The Chip Famine Persists

The chip famine is starving the global auto industry and putting car buyers on a strict diet, writes The Wall Street Journal (Sept. 23, 2021). So far this year, 7 million cars that were supposed to be produced haven’t been. Auto companies are shutting down production lines for weeks at a time and furloughing employees as a result of the chip shortage. Toyota has slashed its production 40% this month. But the chip famine won’t be solved quickly, as supply won’t catch up with demand until late 2022 and into 2023.

The inventory of new cars in the U.S. is only about 30% of pre-pandemic levels, and buyers snap up used cars as soon as they find them. Rental companies reduced their inventories during the pandemic and now don’t have enough cars to meet demand.

Cars need more than 1,000 computer chips for functions like raising windows, adjusting AC, and cruise control. They don’t need advanced chips like those in smartphones. Instead, they use mass-produced microcontrollers. Over the past decade, fewer companies have produced these chips. But an adequate supply of chips is going to become even more important for the auto industry’s future. Electric and self-driving vehicles require both leading-edge and traditional chip technology, and an EV powertrain has 3 times as many semiconductors as a traditional engine. The average vehicle currently contains about $450 worth of semiconductors–a number expected  to double by 2030.

The auto industry’s reliance on a shrinking supply base to produce semiconductors was risky. The pandemic has turned that risk into a serious shortage. Beginning in 2020, auto makers had to compete for chips against electronics manufacturers producing goods for locked-down consumers and 5G mobile networks.

Covid outbreaks also shut down factories, breaking links in the supply chain. The Vietnamese plants that fabricate chips for Asian manufacturers stopped working in August. A drought in Taiwan disrupted water-intensive chip production; a fire at a Japanese semiconductor factory restricted supply; and a winter storm hit semiconductor plants in Texas. Some auto companies are paying premiums to secure chips.

The obvious answer to the chip famine is to increase manufacturing capacity. But that is expensive and takes time. Semiconductor companies may not want to invest in traditional chip technology when future demand likely will come from higher-value chips for applications like AI. While the chip industry has announced nearly $400 billion in new investment as the chip famine unfolded, only a small portion of this investment will be used to address the chip shortage afflicting auto makers.

Classroom discussion questions:

  1. Why can’t chip makers increase capacity quickly to handle the high demand?
  2. Which analytic model in Supp. 11 of your Heizer/Render/Munson text can be used to address supply chain difficulties?

Teaching Tip: The Vaccination Assembly Line

The Orange County Convention Center, here in Orlando, is a massive and magnificent building.  At 7 million square feet (something like 146 football fields over 22 acres), it is the second largest facility of its kind in the U.S. The main exhibit hall alone seats 139, 857 people, enough to easily handle conventions such as MegaCon (68,940 in attendance), NCAA Volleyball Championships (72,000), and Design Week (85,000). But during COVID, the Center has largely sat empty, as tourism and its 125,000 related jobs in Orlando have declined dramatically.

But alas. The Convention Center has a new purpose. Its underground unloading area has been turned into a COVID-19 vaccination drive-thru assembly line! Here is an interesting example of a service assembly line (Ch.9) and a multichannel, multiphase queuing system (Module D) that you can share with your students. I just went through the system this week and was impressed by the operations planning and execution.

Work Station 1: Outside the building, a single channel queue greets you, with the server checking the bar code on your cell phone to be sure you are eligible to enter.

Work Station 2: Inside the building, the medical team scans your barcode again, takes your temperature, and attaches a barcode sticker to your arm. You drive forward 10 yards.

Work Station 3: Your arm barcode sticker is scanned and you are asked a series of medical questions. The brand of shot you will receive is announced (no choice) and you are provided informational material. You drive forward 10 yards to parallel Bays A, B, or C as directed.

Work Station 4: Your arm barcode is scanned again, you get the shot, with band aid applied. You are told to exit the building and wait in your car in the adjacent lot to see if there is a negative side effect. You are to honk your horn if you are ill.

Work Station 5: You sit in the lot for 15 minutes.

Work Station 6: You are scanned again as you exit the property and asked if you had any side effects. You never leave your car.

Total time in system, including 15 minutes in parking lot, is 25 minutes.

Classroom discussion questions:

  1. Clearly the system is efficient, but can it be made more so?

2. Can it be easily replicated in every city?