operations strategy – The OM Blog by Heizer, Render, & Munson

Guest Post: Campbell Soup’s Supply Chains of the Future

Temple U. Professor Misty Blessley looks at an interesting supply chain issue.

Supply and demand markets are always evolving, requiring firms to regularly assess and adjust their operations and supply chains to maintain efficiency. Food manufacturers like Campbell Soup Company are adapting by closing some facilities, opening new ones, and expanding existing plants to optimize production.

Campbell, known for its iconic canned soup, is investing $230 million to enhance its operations and supply chains. This investment aims to drive growth while fostering agility, flexibility, and cost-effectiveness. Campbell Soup Company also includes brands such as Pepperidge Farm, V8, and Swanson and has grown to be one of the largest processed food companies in the U.S. In a recent Supply Chain Dive article, Campbell highlighted the company’s ongoing efforts evaluate optimization opportunities to build its supply chain of the future.

Supply chains can be complex and non-linear, as illustrated in your Heizer/Render/Munson text in Figure 11.1. Due to Campbell’s diverse product range, it manages multiple supply chains.

Campbell is closing its Pacific brand organic soup plant due to aging leased buildings that are unsuitable to meet future demand. Consequently, soup and broth production will be relocated, and plant-based beverage production will be transferred to co-manufacturers. Additional changes to the supply chain network aimed at increasing plant efficiency at select U.S. plants include increasing aseptic (sterile canning process) soup production, adding potato chip kettles, and expanding tortilla chip capacity.

Beyond enhancing plant efficiency, Campbell plans to boost capacity for some of its most popular brands. The production of Late July brand tortilla chips will be expanded, and the company will offer new Goldfish varieties, leveraging Goldfish as the fastest-growing cracker brand in the category.

Classroom discussion questions:
1. Why is a SWOT analysis integral for Campbell to build its “supply chain of the future”?
2. Campbell emphasizes competitiveness (“We are growth-minded, take bold actions, move fast, and play to win”) and creativity (“We innovate and find solutions to continuously improve”) as two of its five core values. How do these values manifest in their redesigned operational footprint?

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:

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

OM in the News: Let Restaurants Deliver Their Own Food!

In its $7 billion deal to buy Grubhub, Just Eat Takeaway, a Dutch food-delivery giant is betting on a strategy it has relied on for years in Europe– belief that the future of its business lies in having restaurants handle the delivery part themselves, avoiding the costs of building fleets of drivers and cyclists to transport meals to customers. For years, European consumers have contacted Just Eat to choose a restaurant for their evening meal and place their delivery order.

More than 3/4 of Just Eat’s deliveries globally are done by the restaurants themselves, writes The Wall Street Journal (June 28, 2020). That has allowed it to sidestep both the costs of building a fleet and the logistical and legal headache of managing workforces across national borders. It is a tack similar to that taken by Grubhub, which does about half of the deliveries it processes. U.S. rivals like Uber Eats, DoorDash and Postmates use their own drivers for almost all deliveries.

Delivery can be the largest expense in an online food order, amounting to 25% of an order’s overall cost. Independent restaurants, meanwhile, have criticized the delivery companies for taking cuts of up to 30% to handle their orders. Many restaurants—especially those only now exploring delivery—don’t want to hire delivery workers for the same reason Just Eat and Grubhub try to avoid them. Drivers can be costly, challenging to manage, and churn is high.

Just Eat’s strategy faces big challenges in the U.S. DoorDash and Uber Eats have grown much faster than Grubhub. They can more easily coordinate orders across multiple restaurants and customers as they have a greater percentage of deliveries done by their own networks. DoorDash and Uber Eats, in particular, have established themselves in many American suburbs, building delivery fleets from scratch through on-demand networks of workers.

Classroom discussion questions:

In Ch. 2, we discuss 3 ways to achieve competitive advantage through OM. Which applies to Just Eat Takeaway?
How do the Just Eat vs. Uber Eats strategies differ?

OM in the News: Walmart’s Secret Weapon Against Amazon–the Supercenter

A robot scans for product levels at a Walmart

“After years of internal debate about how to compete with Amazon, Walmart recently revealed the centerpiece of its plan to thrive in an e-commerce era: giant stores,” writes The Wall Street Journal (Dec. 21, 2019).

Walmart said it wasn’t going to win by building an unprofitable e-commerce operation or other stand-alone ventures. Instead, its supercenters will be the heart of a web of businesses all working together to attract shoppers and drive profits. The supercenters are sprawling stores of around 180,000 square feet offering 100,000 products, bathed under LED lights. Groceries, clothes, camping gear and TVs are for sale; customers can fill medical prescriptions, transfer money or get their hair done. They’re often open 24 hours and are community gathering spots, or a place for senior citizens to take a walk in cold weather–a re-emphasis on the giant outlets Walmart started building in the 1980s.

Walmart poured investment into e-commerce operations by lowering prices online, spending more on marketing and prioritizing faster shipping to better integrate its store and online activities for shoppers. The company took “Stores” out of its corporate name as “a symbol of how customers are shopping us today and how they’ll increasingly shop us in the future,” said its CEO. The company plans to add e-commerce warehouse capacity to have more of its products available for next day delivery. Like Amazon, Walmart also plans to invest in more capacity to offer fulfillment services and warehousing for third-party merchants—the outside companies that list their goods on Walmart.com.

The retailer has largely weathered the shift to online shopping and the rise of Amazon. Sales from U.S. stores and websites have risen for 20 straight quarters, as Walmart added online grocery pickup in store parking lots, cleaned up stores and lowered prices. As other traditional retailers lose customers and fail to compete, Walmart has increased its market share.

Classroom discussion questions:

What is Walmart’s operations strategy, using the three competing approaches in Chapter 2 of your Heizer/Render/Munson text?
How does it differ from Amazon?

Happy New Years to all our readers–from Jay, Barry and Chuck!

OM in the News: GM’s Risky OM Strategy

“It becomes pretty clear that to win in the future, you’ve got to win with electric and driverless vehicles. This is the future of transportation,” says Mary Barra, CEO of GM, in the Businessweek (Sept. 23, 2019) cover story.

Taking vast resources from businesses that make money and moving them toward businesses that (so far) lose mountains of it is a very risky bet. But the real gamble is timing. GM, which is pushing hard into electrics and autonomy faster than any other carmaker, could be blowing cash for years before there’s any payoff. Already, its Cruise Automation unit has postponed plans to deploy autonomous cars this year. If driverless and EVs take off more slowly, then GM will have prematurely jettisoned thousands of skilled veterans and killed off its smaller gasoline models. Worse, it could cede a chunk of profits from the remaining decades of the internal combustion era.

Barra is adamant that GM will sell a million EVs a year in the very near future, while lowering costs and gaining an economy-of-scale edge that Tesla would envy. But Cruise Automation (which GM bought in 2016 for $1.5 billion), was losing money then and continues to do so. Some rivals, like Toyota, which thinks autonomous driving could be decades away, are moving with greater caution. But how could any CEO simply turn her back on a windfall in ride-hailing that McKinsey sees generating $1.3 trillion by 2030? And how could Barra discount the possibility that a too-timid GM could become the next Kodak or BlackBerry?

GM designers have come up with 18 different prototypes using the carmaker’s next-generation battery pack, including sedans, SUVs, sports cars, and autonomous vehicles. As GM lays off old-line engineers, it is hiring coders, software and AI engineers, and battery experts. While it’s a given that GM’s EVs need to get better fast (Chevy Bolts lose $9,000 apiece), Barra at the same time has to keep money flowing even as U.S. and China vehicle sales slide.

Classroom discussion questions:

Conduct a brief SWOT analysis on GM’s strategy.
What are student impressions about the timing of EV’s acceptance?

OM in the News: Is Amazon a Clone of Sears?

A pneumatic-tube station in the Sears mail-order plant in Chicago

A century ago, a retail giant that shipped millions of products by mail moved swiftly into the brick-and-mortar business, changing it forever. Is that happening again? “The history of Sears predicts nearly everything Amazon is doing,” writes The Atlantic (Sept. 25, 2107).

In the last 2 years, Amazon has opened 11 physical bookstores. It just bought Whole Foods and its 400 grocery locations, and announced a partnership with Kohl’s to allow returns at the physical retailer’s stores. The company’s corporate strategy adheres to a familiar playbook—that of Sears. Sears might seem like a zombie today, but it’s easy to forget how transformative the company was 100 years ago. To understand Amazon’s evolution, strategy, and future, can we look to Sears?

Mail was an internet before the internet. After the Civil War, the telegraph, rail, and parcel delivery made it possible to shop at home and have items delivered to your door. Americans browsed catalogues for jewelry, food, and books. Merchants sent the parcels by rail. Then Sears made the successful transition to a brick-and-mortar giant. Like Amazon among its online rivals, Sears was not the country’s first mail-order retailer, but it became the largest. Like Amazon, it started with a single product category—watches, rather than books. Like Amazon, the company grew to include a range of products, including guns, gramophones, cars, and groceries.

By building a large base of fiercely loyal consumers, Sears was able to buy more cheaply from manufacturers. It managed its deluge of orders with massive warehouses. But the company’s brick-and-mortar transformation was astonishing. At the start of 1925, there were no Sears stores. By 1929, there were 300. Like Amazon today, the company used its position to enter adjacent businesses. To supplement its huge auto-parts business, Sears started selling car insurance under the Allstate brand. Perhaps the shift from selling products to services is analogous to the creation of Amazon Web Services—or Amazon’s TV shows. The growth of both companies was the result of a focus on operations efficiency, low prices, and an eye on the future of U.S. demographics.

Classroom discussion questions:

What did Sears do right that Amazon can learn from?
What has Sears done wrong that Amazon should avoid?

OM in the News: Chobani Learns That Operations Management Can’t Be Ignored

Chobani's plant in New Berlin, N.Y. — Chobani’s plant in New Berlin, N.Y.

Hamdi Ulukaya used to say that no one could run his yogurt startup better than he could, proud that Chobani Inc. grew to $1 billion in annual sales without help from a “professional CEO.” Today, a professional CEO is exactly what Chobani is seeking, reports The Wall Street Journal (May 18, 2015). Ulukaya admits that Chobani has grown beyond his ability to run it. (Chobani’s share of Greek yogurt sales in the U.S. is down nearly 15 percentage points to 44% from its peak in 2012).

Chobani almost single-handedly set off a craze for Greek-style yogurt, growing explosively in the process. But it was in over its head: losing money, and building the world’s largest yogurt factory had saddled it with debt. Its operations were scattered, purchasing was inefficient and it lacked an adequate quality-control team—a deficiency that surfaced dramatically when Chobani had to recall yogurt from the new factory in 2013.

Executive offices were in the basement of the factory. Ulukaya handled most of the hiring himself, assembling a staff that suited a startup but not the large company Chobani was becoming. Ulukaya handled the books, too, using Quicken software for small businesses even after the company grew beyond such a status. “We didn’t have any corporate executive types,” said Ulukaya. “I didn’t want to hear all that marketing, supply chain, logistics stuff—most of it is BS.”

He would learn those operational systems couldn’t be ignored, even though rapid growth hid some problems. The drawbacks of the seat-of-the-pants style became clear starting in 2013. The previous December, Chobani had opened a $450 million factory in Twin Falls, Idaho, nearly 2,000 miles from its headquarters. Though it offered access to an abundant dairy supply, the plant’s remote location stretched Chobani’s management, and differences in the milk’s protein composition and in the machinery required tinkering with Chobani’s recipe.

This is a great story to share with your class, as most are familiar with the company. It appears OM is important after all!

Classroom discussion questions:

1. After the new CEO, what is Chobani’s next step?

2. What are the operations issues Chobani is facing?

OM in the News: Chipotle’s Operations Strategy for Faster Service

Lines snaking out the door at lunchtime have long been a bottleneck to growth at Chipotle, the burrito chain, writes Quartz.com (Jan. 31, 2014).But the fast-food firm managed to speed up service by 6 transactions per hour at peak times this past quarter by implementing what it calls the “four pillars of great throughput.” Here they are:

+“Expediters.” That would be the extra person between the one who rolls your burrito and the one who rings up your order. Her job? Getting your drink, asking whether your order is for here or to go, and bagging your food.

+“Linebackers.” The people who patrol the countertops, serving-ware, and bins of food, so the ones who are actually serving customers never turn their backs on them.

+“Mise en place.” What in a regular restaurant means setting out ingredients and utensils ready for use means, in Chipotle’s case, zero tolerance for not having absolutely everything in place ahead of lunch and dinner rush hours.

+“Aces in their places.” A commitment to having what each branch considers its top servers in the most important positions at peak times, so there are no trainees working at burrito rush hour.

Chipotle is also mulling incorporating a Starbucks-style mobile payment system (the chain already accepts online orders for pick-up), which the company is hopeful will help funnel customers in and out of its lines a bit faster. But the company is open to a number of other options, too, so long as they help speed up service.

Classroom discussion questions:

1. Which of the techniques for improving service productivity in Chapter 7’s Table 7.3 is Chipotle using?

2. Which Process-Chain-Network (PCN) Analysis domain (see Figure 5.12 in Chapter 5) best describes Chipotle?

Good OM Reading: Embracing Digital Technology

Companies routinely invest in technology, and too often feel they get routine results. But a new MIT Sloan Management Review (Oct., 2013) study makes it clear that companies that are aggressively engaged in “digital transformation” tend to perform better. Why? According to the authors, “the current wave of digital innovation is about connecting companies to customers, and companies can’t afford to miss out on opportunities to improve efficiency, service, sales and performance. Companies must succeed in creating transformation through technology, or they’ll face destruction at the hands of their competitors that do.”

Researchers divided companies into 4 categories in terms of their commitment to digital transformation, then tracked the companies’ performance over time. “Digital transformation” refers to overall intensity of the effort to align a company’s operations with its business model through successful uses of digital technologies as a replacement for older processes. The 4 categories of enterprise were:

Digirati: Those companies that have gone all-in on digital transformation. This relatively small percentage of companies outperformed all others across the board.

Conservatives: Companies that have been slower than average to move toward digital transformation. Conservatives performed worst in revenue creation at -10%.

Fashionistas: Companies that publicly say transformation is important to them and may even throw a lot of money at transformation efforts, but whose efforts don’t match their rhetoric. Fashionistas scored worst in profitability at -11%.

Beginners: These performed worst among all the companies in terms of profitability (-24%) and 2nd worst in revenue creation and market valuation.

Results mean, for example, that automating an e-procurement system doesn’t just reduce the amount of paper being shuffled; it also gives a firm more accurate data that can help negotiate lower prices from vendors. Transforming warehouse management doesn’t just reduce headaches for shipping managers; it also can lower the amount of money tied up in inventory. And digital transformation of fleet management not only saves fuel and improve drivers’ efficiency; it also can help a company quickly and cost effectively serve customers and earn more and bigger orders. The bottom line: companies aggressively committed to digital transformation excel.

OM in the News: Still Outsourcing to China?–A User’s Guide

We have blogged many times about the trends towards nearshoring and homeshoring– topics in Chapter 2. Yet thousands of US companies continue, of necessity, to outsource to China. The Wall Street Journal’s (Aug.19, 2013) interesting article, “Outsourcing to China?”, provides these class discussion points:

1. Start the process of finding the right manufacturer, using a site like Globalsources.com.

2. When you find factories that might meet your needs, ask for references and find out if the manufacturers have a history of respecting intellectual property and doing solid work. But don’t offer those factories complete specifications or samples of the product you want created, since your idea might get filched. Instead, send or show them a similar product for comparison.

3. Have your product made in several different places if possible. It also makes it less likely a manufacturer will impose a last-minute price increase, which is a common practice in China.

4. When you’re ready to commit to a supplier, bargaining is essential. “You need to haggle, or you’d be considered naive and taken for a ride,” says one consultant.

5. Watch out for “quality fade” over time. Sometimes the first few batches of a product are made according to specifications, but then manufacturers start to cut corners—say, by using cheaper material.

6. Structure payments according to performance. Make sure your contract allows you to reserve the right to pay less or impose a penalty if a batch doesn’t meet your expectations.

7. Don’t put much stock in patents. A U.S. patent can’t be enforced in China. You can apply for a domestic patent, but the enforcement of Chinese patents in China is far behind the rest of the modern world.

Discussion questions:

1. With all of these caveats, why do US firms still choose to manufacture in China?

2. What other steps can an operations manager take to insure a quality product at a fair price?

Guest Post: Operations Management on Vacation

Our Guest Post today comes from Prof. Howard Weiss, at Temple University. Howard is the developer of the POM for Windows and Excel OM problem solving software that we provide free with our OM texts.

I went on vacation last week to Florida. I enjoyed seeing Barry in Orlando for dinner and loved taking my grandson to the theme parks. But as an Operations Management professor, I can’t help but to be alert to possible system improvements.

Layout: I stayed at a hotel that had a buffet breakfast that was arranged in a straight line. The first process was a milk dispenser followed by the cereal followed by the bowls. You do not need to be an operations expert to realize that this will cause problems. And it did!

Aggregate Planning: The hotel’s breakfast capacity was based on a normal day where demand was spread out from 6:30-9:30. However, on this rainy day, guests were in no rush to visit the amusement parks and there was a large demand for breakfast from 9:00-9:30. The hotel could have prepared more food in the previous production period of 8:30-9:00 and held it until 9:00 to lessen the backlog.

Reliability: At another hotel the extension cord that was used for the waffle irons became defective. The kitchen had no backup extension cord.

Process Design: At the Miami Airport the moving walkways have signs that say “Stand on right, walk on left.” This made the process much more efficient than other moving walkways or the DC Metro that do not have the signage. For an interesting read see http://www.welovedc.com/2010/07/20/dc-mythbusting-stand-to-the-right/

Operating Costs: We saw an escalator that was not functioning. This reminded me that many escalators in Europe run only when someone approaches them. This saves energy. If an escalator is not running in the US it is because it is broken.

Safety: When we exited the plane we saw that a passenger who had been sitting in the emergency row, now on a wheelchair by the plane’s exit, waiting to be wheeled away. You would think that the airline’s information system would flag a passenger who needs a wheelchair from sitting in the exit row.

OM in the News: How Southwest’s Operations Strategy Gives Low-Cost Competitive Advantage

In an airline industry that is notoriously brutal, writes Slate.com (June 6, 2012), Southwest Airlines just recorded its 39^th consecutive year of profitability. How does Southwest do it? It’s all about keeping operations simple. Simpler operations mean fewer things that can go awry and botch up the whole process, as we show in Figure 2.8.

First, while other airline fleets can employ 10 or more types of aircraft, Southwest uses just one, the Boeing 737. The airline’s VP explains: “We only need to train our mechanics on one type of airplane. We only need extra parts inventory for that one type of airplane. If we have to swap a plane out at the last minute for maintenance, the fleet is totally interchangeable.”

Second, Southwest doesn’t assign seat numbers. Which means that if a plane is swapped out, and a new one’s brought in with a slightly different seat configuration, there’s no need to adjust the entire seating arrangement and issue new boarding passes.

Third, while most other airlines charge to check bags these days, Southwest has resisted the trend. Its “bags fly free” policy has operations benefits: “When you charge people to check bags they try to carry more on, sometimes more than can fit in the overhead bins,” says the VP. “That results in more bags being checked at the gate, right before departure. And that wastes time.”

Finally, other carriers use a hub-and-spoke system. But hubs lead to backups as planes queue up awaiting turnaround—cleaning, refueling. Southwest’s flights are generally point-to-point. The plane lands, goes through turnaround, and often heads right back where it came from. With less interdependence, the network can survive a problem at a single airport. Southwest can turn around planes in about 25 minutes. A simpler network also means less luggage getting lost in the shuffle.

Discussion questions:

1.Compare Southwest’s operations strategy to that of other airlines.

2. How will adding international flights impact Southwest’s strategy?