efficiency – The OM Blog by Heizer, Render, & Munson

Guest Post: Electronic Shelf Labels, Dynamic Pricing and OM

Prof. Howard Weiss shares his insights with us monthly.

Disney, sports arenas, hotels and airlines have been using dynamic pricing (see Chapter 13) to increase revenue for years. Now it has come to supermarkets and is being implemented using Electronic Shelf Labels (ESLs).

ESLs allow retailers to use a computer or other electronic device to change the displayed price of an item rather than having to go to the shelf, remove the old price display and put up the new display. They have been widely used in Europe and now are being installed and experimented with in U.S stores including Kroger, Schnucks, Walmart and Whole Foods. But supermarkets are not the only stores that could benefit from digital pricing. Each Best Buy store devotes an estimated 40 labor hours per week to change price tags. With over 1,000 Best Buys, this could save 2 million labor hours per year.

While for Disney and airlines the major advantage is to increase revenue, for supermarkets the major advantage is operational. Rather than having employees go up and down aisles to manually change prices, the prices can be changed much more quickly from a console. In theory, the price of an item could change while you are shopping, although most changes are more prone to be weekly.

Some stores stock over 100,000 items (called stock keeping units, or SKUs), so having to change prices on even 10% of the items would take a great deal of time if done manually. The reduction in time with ESLs obviously leads to more efficiency and productivity. Another savings is on the cost of the printed price tags themselves. Digital price tags can include information in addition to the price itself. For example, it can show the current inventory level of the item or shoppers could use an app to easily find products in a store.

There are downsides to ESLs. They cost money and a store would need to purchase one ESL for each SKU. Also, an error in the listed price this could have repercussions at checkout lines. Another concern is how long the battery in an ESL will last. Still, within the next few years, millions of customers will be seeing digital pricing.

Classroom discussion questions:
1. List the items you would want for a financial analysis of implementing ESLs. Would breakeven be appropriate?
2. Have you been in any stores with digital pricing?

OM in the News: How Many Hogs Can Be Safely Slaughtered Per Hour?

Headlines this past week have touted the benefits to global sustainability of eating more vegetables and less meat. But the demand for pork seems to keep increasing. “The federal government is poised this month to adopt a rule that would essentially turn the largest pork processing lines in the U.S.into the autobahn: no speed limit”‘ writes The New York Times (Aug. 9, 2019).

Currently, plants are allowed to slaughter a maximum of 1,106 hogs per hour. As hogs move down the slaughter lines, U.S. inspectors stationed at each plant examine them and remove any part potentially harmful to consumers. But pork producers have pushed for a change to inspection regulations that would do away with the speed limit and reduce the number of federal inspectors. For those in favor of the change, the advantages are clear. Plants would be able to slaughter more pigs and, therefore, make more money. The government would save money because it would not employ as many inspectors.

The U.S. currently assigns 7 inspectors at various points along the slaughter lines at pork plants, who look at, examine and sniff carcasses for signs of disease and contamination. In the new model, 2-3 federal inspectors per shift would be on the lines, overseeing plant employees who would take over time-consuming labor like removing lymph nodes to test for disease. Two others would perform other tasks like sanitation checks.

As for whether faster lines are more dangerous for workers, the Food Safety and Inspection Service said that was not in its jurisdiction. Line speeds, it said, were historically determined by the ability of federal inspectors to examine and evaluate the meat. The issue of worker safety, it said, falls to the OSHA. There is no national database where all packing houses report injuries and accidents. (There have been five amputations or other severe injuries at a pork processing facility in Beardstown, Ill. since 2015).C

Classroom discussion questions:

What are the operations issues involved in this case?
Discuss the worker safety tradeoffs.

OM in the News: A Stopwatch in the Operating Room?

Most businesses know the cost of everything that goes into producing what they sell — essential information for setting prices. “Medicine is different. Hospitals know what they are paid by insurers, but it bears little relationship to their costs”, writes The New York Times (Sept. 8, 2015). Now, thanks to a University of Utah project, its hospital is getting answers, information that is not only saving money but also improving care. The cost issue has taken on new urgency as the U.S. accelerates the move away from fee-for-service medicine and toward a system where hospitals will get one payment for the entire course of a treatment, like hospitalization for pneumonia.

The linchpin of Utah effort is a computer program with 200 million rows of costs for items like drugs, medical devices, a doctor’s time in the operating room and each member of the staff’s time. The hospital has been able to calculate, for instance, the cost per minute in the emergency room (82 cents), the surgical intensive care unit ($1.43), and the operating room for an orthopedic surgery case ($12). With such information, as well as data on the cost of labor, supplies and labs, the hospital has pared excess expenses and revised numerous practices for more efficient care. Harvard’s Michael Porter called the accomplishments “epic progress.”

The hospital began by looking at how much supplies cost — bandages, sutures, medications. Then it started tracing use of those items to individual patients. It added in labor costs, a more complicated question. Porter told the hospital to go into rooms with a stopwatch and time how long each staff member spends on each procedure and with each patient.

With its software, the hospital is also finding simple ways to improve outcomes and reduce costs. When doctors looked at their costs per day, they were stunned to see how much they were spending on lab tests. Each was cheap, $10-$20, but the total bill came to about $2 million a year. It turned out that 20-50% of lab tests were completely unnecessary, ordered by residents with no questions asked.

Classroom discussion questions:

How can stopwatch studies be used in hospitals?
Why is it so difficult to control costs in hospitals?

OM in the News: Netflix Streamlines its Old Business

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“It was just past sunrise at Netflix’s Fremont, CA., DVD operations hub, where metallic arms whirred in a giant glass box and rolling carts holding millions of DVDs lined the walls”, writes The New York Times (July 27, 2015). The company’s iconic red envelopes buzzed through an assembly line at the other end of the warehouse. The machine sucked a returned Netflix mailer into the system and then proceeded to slice open the envelope, identify and clean the disc inside, check that the DVD worked and reinsert it into the original sleeve. That disc was then returned to the storage carts or shipped out to another customer who had requested the title.

About 3,400 discs zip through the rental return machine each hour, 5 times as many as when teams of Netflix employees used to process the discs by hand. The machine symbolizes the way Netflix has managed to maintain a profitable physical DVD operation even as it transforms itself into a global streaming service. Netflix has 5.3 million DVD subscribers, a significant falloff from its peak of about 20 million in 2010; still, the division continues to churn out hundreds of millions of dollars in profit each year. And behind the scenes, OM analysts are trying to improve customer service and streamline the labor-intensive process of returning, sorting and shipping millions of DVDs each week.

Netflix has kept a core base of DVD customers, particularly in rural zones with lackluster Internet service and among people who want access to the breadth of its selection. To hold on to those profitable customers, Netflix continues to deploy state-of-the-art technologies that help trim costs as well as improve customer service. In Fremont, Netflix used to employ about 100 people to handle the returning, sorting and shipping of the DVDs. Today, about 25 employees work through the night, largely assisting the machines. “Embrace change — that’s what I’ve learned here at Netflix,” says the general manager.

Classroom discussion questions:

1. Why does Netflix continue to invest in warehouse technology?

2. What OM tools discussed in Chapter 7 would be useful to Netflix?

OM in the News: The Battle to Manufacture Planes More Efficiently

The interior of the A350. Airbus used a faster and more ergonomic way to build overhead bins, among other tweaks to ease production

Production mistakes at a giant Airbus factory a decade ago almost crippled the European plane maker, writes The Wall Street Journal (June 12, 2015). Today, the factory is a model of efficiency and a nexus for the company’s efforts to produce jetliners at an unprecedented clip. After years of racing to develop and market new models, both Airbus and Boeing have clear product lines and backlogs for the next decade. Now, each aims to grab market share by building its planes faster and more efficiently than the other—a gambit both have struggled with in the past.

For Airbus, the lessons being showered on its new A350 (its largest twin-engine jet, designed to compete with Boeing’s 787 and 777), come from the A380. That project caused havoc inside Airbus when wiring problems led to multibillion-dollar cost overruns, furious customers and years of management turmoil. On the new A350, lasers guide computerized clamps that push together giant fuselage sections in a process that is 30% faster and 40% cheaper than on the superjumbo. Thanks partly to such improvements, the A350 project has stayed on schedule and on budget.

Efforts to accelerate production have ranged from reducing vacation days to high-tech innovation. Airbus is introducing a giant inkjet printer to paint the tail fins of its planes. The new printer could slash by almost 90% the 170 hours that workers now need to prepare and paint an ornate airline logo. Airbus says that in a few years the printer could double painting capacity and cut related labor costs by half. Another step to hit the target rollout date was tapping veterans. Managers on the A350 line insisted that at least 70% of workers come from other Airbus programs. Efficiency gains like these are vital because building jetliners is so complex.

Classroom discussion questions:

1. How would you define efficiency (see Chapter 1)?

2. Why is efficiency so important to Boeing and Airbus?

OM in the News: UPS Tries to Increase its E-Commerce Efficiency

In 1998, as much as 85% of e-commerce purchases were shipped between businesses. But along came Amazon, which helped convince a generation of Americans to buy even humdrum household items like diapers and toiler paper online rather than at the store. UPS drivers who used to drop off a bunch of heavy packages each day at one retailer, now make several stops scattered across a neighborhood, delivering one lightweight package per household. The shift required more fuel and more time, increasing the cost to deliver each package.

Last Christmas season, nearly 60% of all U.S. deliveries by UPS were e-commerce packages to consumers, compared with about 40% for all of 2012. Today, UPS’s haul includes much of Amazon’s 2-day-delivery Prime business. On residential routes, as much as 1/3 of trucks are filled each day with Amazon packages. And last Christmas, when UPS was overwhelmed by a pileup of online shipments at its massive Louisville facility, there were hundreds of trailers stacked up filled with Amazon orders.

UPS’s responses, reports The Wall Street Journal (Sept. 12, 2014): (1) Increase spending on new technology and extra manpower by 21% to $2.5 billion in 2014; (2) A pricing change that will encourage UPS customers to use boxes that fit the items being shipped, freeing up space in trucks for additional deliveries, or else pay extra; (3) Major savings from its route-optimization system, Orion. (Orion analyzes millions of pieces of data to predict the most efficient way to deliver and pick up packages along each driver’s route. Every mile cut saves the company $50 million a year, with half of UPS’s delivery routes in the U.S. using Orion by 2015.); and (4) My Choice, a service that alerts customers the day before a home delivery is set to arrive, provides an estimated delivery time and lets customers tell the driver where to leave the package. (Already 10 million customers have signed up for the $40/year service).

Classroom discussion questions:

1. How has OM helped UPS’s efficiency?

2. What new threats does UPS face in its shipping business?

OM in the News: Southwest Air’s Operations Problems

At Chicago’s Midway Airport on Jan. 2, Southwest Airlines canceled a third of its flights, lost 7,500 bags and, at one point, had 66 aircraft on the ground—about twice as many as the carrier has gates. Passengers were stuck on the tarmac late into the night. A severe snowstorm was the main culprit, but Southwest managers also blamed ramp workers, suggesting that 1/3 of them called in sick to protest slow contract talks. The workers say they are chronically understaffed and are being blamed for executives’ mismanagement.

Maybe Southwest is showing its age–43, writes The Wall Street Journal (April 2, 2014). Once the industry’s brassy upstart, the airline has begun to resemble the rivals it once rebelled against: carriers that were slow-growing, complex and costly to run. As we point out in Figure 2.8 on page 42, to help keep things simple and cost-effective, the airline flies one model of plane— 737—with lean, highly productive employees. Southwest employees do have a more demanding workload compared with others. The airline carries about 3,000 passengers per full-time employee, compared with 1,350 passengers per employee at its bigger rivals. But the average Southwest worker earned nearly $100,000 in 2012– compared with $89,000 at a traditional airlines.

The OM challenges are many. Southwest is flying fuller planes, connecting more passengers and serving bigger airports that are prone to delays. As a result, some of its operational ratings have plummeted. Last year, it lost more bags per passenger than any other carrier. And after years as one of the most punctual airlines, just 72% of Southwest’s flights were on time in the 4th quarter—dead last in the industry. Further, from 2007 through 2012, Southwest’s cost to fly a seat one mile rose 42%—more than any other major U.S. airline. Southwest also faces costly upgrades to its outdated computer systems—a holdover from its simpler days—to bring them in line with industry standards. After snowstorms forced airlines to cancel thousands of flights this winter, other carriers’ computers automatically rebooked many customers. But at Southwest, employees had to manually reschedule each disrupted passenger.

Classroom discussion questions:

1. Referring to Figure 2.8, what is Southwest’s OM strategy?

2. What can Southwest do to improve operational efficiency?

Good OM Reading: The State Of Operations Management in the Military

Seventy-five years ago, near the beginning of World War II, the field of operations research was born in Britain. Today, as the U.S. emerges from the longest sustained war in its history, the military faces a post-war drawdown. During the mid-1990s, much of the conventional wisdom was that the U.S. was in the midst of a so-called “Revolution in Military Affairs.” Technology would provide a global precision strike capability that would give us “an ability to bomb any target on the planet with impunity, dominate any ocean, and move forces anywhere to defeat just about any army.”

In an excellent article just published in OR/MS Today (Feb., 2014), we read of a “vigorous military science” in the 1990’s, resulting in an excessive focus on modeling and simulation technology. For example, medical “planning factors” were derived from attrition-based, theater-level campaign model casualty projections, vastly over predicting casualties, thereby creating unnecessary and unaffordable requirements for medical force and supply support. More recent analyses of casualties have yielded major improvements in forecast accuracy and an ability to better design more responsive, lower cost medical support requirements. Research efforts have expanded to other areas, identifying spare part consumption patterns and readiness “drivers.” Using empirically derived usage patterns, profiles, and trends, the operational planning, demand forecasting and budget requirements have been significantly improved.

Persisting supply chain problems that existed 10 years ago are now also becoming increasingly more apparent. With mounting pressures to generate savings and find efficiencies, these issues include the inability to relate resources to readiness due to poor inventory management and fragmented supply chain operations across the materiel enterprise. The promise for improved performance attributed to large investments in enterprise resource planning (ERP) systems has not been realized, continuing to plague the services. But a recent study suggests major OM improvements can be achieved using decision-support systems empowered with advanced analytics, including dramatically improved demand forecast methods, sensor-based technologies for part replacement, and integrated supply chain optimization methods. These effects are likely to be in the range of many billions of dollars, resulting in a ROI of several orders of magnitude.

OM in the News: Speeding Up the Airline Boarding Process

Jay and I just returned from a visit to Alaska Airlines headquarters, where we studied the intricacies of operations management at the top-rated U.S. carrier. One of the many issues we discussed was the speed of boarding passengers onto their flights.

In the past 3 decades, the airplane boarding process has become an increasingly important industry-wide issue for airlines and passengers. Prior to 1970, the average boarding speed of passengers nationwide was 20 passengers per minute. By 1998, this rate had decreased to 9 per minute. The increased costs of checking luggage will continue to play an important role in the time to board, as passengers are going to respond to increasing fees by carrying more bags onto the plane. As a result, the boarding speed may continue to decrease.

When using an average boarding strategy, the difference in boarding times when passengers have 2 carry-on bags compared to zero is almost 60%. Long boarding times impact costs. The total cost of airline delays in 2007 was estimated to be $29 billion in the U.S. alone, with the cost to airlines ($8 billion), the cost to passengers ($17 billion), and the cost from lost demand ($4 billion). This indicates the possibility for large savings for the airlines and passengers with more efficient boarding methods.

So a recent article by Clarkson University researchers to develop a strategy for boarding flights caught our eyes. The new method, published in the Journal of Air Transport Management (Jan., 2014), assigns airline passengers to a specific seat based on the number of bags they carry, causing luggage to be evenly distributed through the plane. Each row of seats would tend to have a passenger with 2 bags, a passenger with 1 bag and a passenger with no bags. “The new method would save at least several seconds in boarding time and prevent any one area of the plane from becoming overloaded with bags,” says author Prof. John Milne. “Airlines could provide a smoother boarding experience for passengers by utilizing the research.”

Classroom discussion questions:

1. Why is boarding an OM issue and what control do managers have over the process?

2. What other boarding procedures are in place across the industry?

OM in the News: Queuing Theory at Goldman Sachs?

Goldman Sachs’ cafeteria has been described as something out of Gattaca, the 1997 science fiction film, reports The Washington Post (Oct.18, 2013). It’s a wide-open space full of furniture that looks like it was smuggled from a utopian future in which nothing is ever dirty, broken or unintentionally asymmetrical. It isn’t just the physical design of the 11th-floor space that creates this impression. It’s the way Goldman administers it with a clever policy designed to economically engineer efficient eating.

The most crowded time of the day to eat lunch is, naturally, during lunch time. For most people, this falls around noon. This creates the phenomenon of the lunchtime rush hour. Goldman didn’t like the idea of its people waiting on long lines to get their lunch. People are capital to Goldman. It wants to use its capital efficiently. Standing on line waiting for a burger is not an efficient use of Goldman’s capital. So the cafeteria has a set of timed discounts. If you show up before 11:30 or after 1:30, you get a 25% discount on your food.

As it turns out, Goldman folks are both especially attuned to economic incentives and ruthless about capital efficiency. Some take pride that they’ve never eaten lunch inside the “cost penalty window,” as one trader referred to the 2 hours when the discount isn’t in effect. In the cafeteria around 1:20 pm, the lines at the pay registers are empty. So are many of the tables. But the area between where the food is collected and where you pay is quite crowded. The Goldman lunchers are chatting with each other, waiting for the final minutes to tick down until they can save a dollar or two. When its spokesman was called about Goldman’s lunch market manipulation, neither he nor anyone else in his office was available around 1:30. “Goldman approves of employees using their capital efficiently,” he said later.

Classroom discussion questions:

1. What other restaurants incentivize diners like this cafeteria does?

2. Why is this system not as effective as it could be from the firm’s perspective?

OM in the News: Alaska Airlines’ Operations Success

Alaska Airlines is puny compared to the major carriers, says The New York Times (March 3, 2013): it has 124 planes, while United has more than 700 and four times as many passengers. But because of the state’s topography and extreme weather, it was the first to develop satellite guidance, a navigation technique that has transformed landing at Alaska’s tricky airports. The technique is now at the heart of the FAA’s plan to modernize the nation’s air traffic system. The technology works much as GPS does in cars: it allows pilots to chart a precise course in the air and safely navigate hazardous terrain, weaving through valleys and around mountains with perfect accuracy right up to the edge of the runway. It opened a new landing approach for Juneau in 1996, allowing flights to come through the thickest fog. Jet wingtips practically graze the trees on the final stretch to the airport.

Largely because of that technology, flying in Alaska is now remarkably reliable — even in the dead of winter, when it is snowing, when there are just two hours of daylight, when runways are icy, when winds blow at more than 50 mph, and pilots can barely see out the windshield. Alaska Airlines, in fact, had the industry’s best on-time performance for the third consecutive year in 2012, with 87% of flights landing on time. And unlike carriers that have faced bankruptcy or acquisition, Alaska has turned a profit for 33 of the last 39 years.

The airline can keep costs down in part because it measures obsessively. It has established 50,000 points of data to improve its on-time performance, from the time bags are loaded and passengers board to when the pilot pushes back from the gate. Alaska also figured out that if it could shave just a minute of taxi time from each flight, it could save 500 minutes, or over 8 hours, a day — the equivalent of flying an extra plane daily, said COO Ben Minicucci. If such small efforts allowed the carrier to free up a plane, it could generate $25- $30 million in revenue a year.

Discussion questions:

1. How has technology helped drive Alaska Airlines’ success?

2. Why is productivity an important OM factor at Alaska?

OM in the News: UPS Drivers Pick Up the Pace

In Chapter 10’s discussion of work measurement, we describe UPS as “one of the most efficient companies anywhere in applying effective labor standards”. And in Chapter 6, Managing Quality, we provide a photo of a UPS driver and talk about the 340 precise methods he is taught to correctly deliver a package. So I guess it shouldn’t come as a surprise that the company which designs its routes so drivers avoid left turns (so as not to waste time waiting for a break in oncoming traffic), has added yet a 341st time saver!

The Wall Street Journal (Sept.16, 2011) describes how UPS ‘ newest cost-savings strategy–taking away the drivers’ keys–will save $70 million a year. Currently, drivers are required to carry key rings on their ring finger to avoid wasting time searching for them. Still, wrangling with keys can waste valuable seconds. Once a driver stops, he or she has to take the keys out of the ignition, then turn around to use them to unlock the bulkhead door that leads to the packages. Soon, drivers will wear a digital-remote fob on their belts and will be able to turn the engine off with a button that will unlock the bulkhead door at the same time.

That will save 1.75 seconds per stop, or 6.5 minutes a day per driver–and also reduce motion and fatigue. UPS’s COO acknowledged that the company is “obsessive about efficiency”. Each night, when drivers return from deliveries, UPS industrial engineers study data from computers aboard each truck. The data show details such as how much drivers idle, how often they back up, whether they are wearing seatbelts, or whether they are going out of their way to get lunch. All this helps shape new procedures such as the surrendering of keys.

Discussion questions:

1. Name some of the (many) other UPS efficiency techniques.

2. Ask students to identify efficiency improvements they could make at places they worked.

OM in the News: Making Airplanes More Efficient

With airlines hemorrhaging billions of dollars a year, largely because of soaring oil prices and environmental regulations, building more efficient jets has become Boeing and Airbus’s biggest OM challenge. Pressured by airline execs, manufacturers have already begun making lighter planes to reduce fuel consumption. In 1980, for example, it took 46 gallons of fuel to fly a passenger 1,000 miles. Today it is down to 22 gallons–and could drop to 18 within a decade. Still, a decade ago, fuel accounted for 15% of an airline’s budget. Today, it’s 35%. And airlines worldwide may have to spend an extra $3.3 billion a year to meet new E.U. carbon dioxide restrictions on planes flying into Europe.

So when we talk about product design and sustainability considerations in Ch.5, airline OM managers are desperate for any improvements that can reduce weight and emissions. The Miami Herald (July 4, 2011) reports on some the efficiency gains that were dreams just a few years ago. Both the Boeing 787 and Airbus A350 are new long-range jets with 1/2 their bodies made of carbon-fiber composites (which weigh 20% less than traditional aluminum alloys). Engine manufacturers are unveiling brand new engines for single-aisle planes (which are 75% of the 22,000 jets worldwide) that promise to cut fuel use by 15% (or $1 million per plane per year).

The Herald also lists more ways to save on fuel: (1) a satellite-based air traffic control system (several years away) that could cut fuel use by 12%; (2) “winglets” added to the tip of each wing to prevent drag; (3) carrying less weight in the plane– (American is replacing 19,000 catering carts with ones that weigh 16 lbs. less. Southwest is looking at lighter weight seat covers, while Jet Blue is using thinner seats. Every pound saves 30 gallons of fuel/year); and (4), replacing older jets faster (American is replacing aging MD80s with 737 that use 35% less fuel).

Discussion questions:

1. Why is efficiency a product design issue?

2. What other changes can be made to improve operational efficiency?

OM in the News: The Pressure on Hospitals to Improve Efficiency and Curb Waste

As the White House and Congress debate how to contain runaway medical costs, equipment maker GE is embarking on its own quest to help hospitals reduce wasteful spending and treatment errors. As much as $500 billion out of the $2.2 trillion spent on health care is wasted on duplicate processes, bad coordination, and out-of-date scheduling, says GE, in the latest Businessweek (April 18-24, 2011). “It’s generally accepted that for every $100 spent on health care, $20 or more is waste”, adds the CEO of GE’s health-care/IT unit.

GE’s plan takes two approaches. The first is to cut costs of medical imaging, with 80 new products coming on-line in the next 2 years, including an MRI that scans only extremities. This frees up whole-body machines for more complex scans, which both cuts a hospital’s costs and raises its revenues.

Although improving molecular imaging , which helps catch diseases earlier, is the most glamorous way to save money, the US health-care overhaul is also looking at a second source. For GE, that means branching into information technology and consulting. The 2010 law signed by Obama requires hospitals to use more IT to reduce costs and medical errors. As a result, hospitals are looking for outside expertise. GE Healthcare plans to do $1 billion annually with its new consulting unit, analyzing patient data and digitizing medical records.

OM is again at the center of these changes, leading the way with new technology (Ch.7), process improvements, and quality tools. Many profs have asked us to keep an eye out for health-related examples such as this one.

Discussion questions:

1.Why are so many expensive devices used in hospitals?

2. How can OM help make hospitals more efficient?

3. How can medical records increase the quality of healthcare?