Tag: Supp.11

OM in the News: Supply Chains and Thailand–A Year After the Flood

Disruptions in global chains have moved from an academic subject to a daily topic in the past two years. The Wall Street Journal (Oct.6-7, 2012) headline “After Floods, Businesses Still Wary of Thailand” provides a good classroom topic when you are covering Supplement 11. A year after massive floods in Thailand that disrupted the global supply chain for cars and electronics, most factories are at work again, but not always like before.

Some foreign companies—having learned hard lessons about concentrating too much of their production in one country—are shifting to other parts of Southeast Asia. Thailand’s worst floods in 50 years, coming just seven months after Japan’s earthquake and tsunami, exposed the danger of relying on narrow, concentrated supply chains. So foreign companies are hedging their bets by building facilities and finding suppliers in other regions so they can quickly resume operations if disaster hits.

Western Digital, one of Thailand’s largest foreign employers, moved some manufacturing of hard-disk drive components from Thailand to Malaysia. The company, based in Calif., also asked some suppliers to take similar steps, hoping to avoid a components shortage like last year. Western Digital now employs 25,000 people in Thailand, compared with 37,000 before the floods.

Japan’s Omron Corp. shifted some production of relays—electromagnetic switches for automobiles and motorcycles—to Japan and China. Nidec Corp., also based in Japan, moved part of its production of hard-disk-drive motors to China and the Philippines. This production “will not be coming back to Thailand,” said its president. Yet he added that Thailand has “skill and technology that overcomes other issues.”  Nidec, which suffered damage to eight of its Thai factories last year, has cut production of disk drive motors in the country to protect against another disaster.

Discussion questions:

1. How can firms avoid supply chain disruptions?

2. What can Thailand do to regain manufacturing jobs lost due to the fear of future flooding?

OM in the News: Delta Wants to Pump Its Own Fuel

When we discuss vertical integration in Chapter 11 and core competencies in Supplement 11, we never considered an airline buying an oil refinery to slash its fuel bills. But as The Wall Street Journal (April 6, 2012) reports, that is exactly what Delta Air Lines is trying to do. Delta’s unconventional proposal to acquire a Pennsylvania refinery is a bet that world’s second-largest airline can save $20-$25 a barrel on jet fuel, a big advantage as industry costs now approach $140 a barrel, up 11% so far this year.

Delta’s plan is being dismissed by aviation and energy industry experts, who said owning a refinery is a risky and potentially costly undertaking for an airline. “We are a little uncomfortable about the company going outside its core expertise,” says an analyst who follows Delta. “I can’t recall any other airline buying a refinery.”

The estimated $100 million to $150 million price tag for the refinery is about the cost of a new, wide-bodied aircraft. Delta’s plan would involve using an energy company partner that would handle day-to-day operation of the midsize refinery.  Its deliberations are the boldest step yet in an airline industry struggling to mitigate rising fuel prices that are expected to continue long term. Delta, which paid more than $11 billion for fuel last year–about 36% of its operating cost– has ongoing cost-saving efforts and is investing heavily in more fuel-efficient planes.

Other carriers, of course, also work hard to control their largest cost. Air Canada scours the globe for vessel shipments of jet fuel that it brings to its home airports in an elaborate supply chain of fuel-storage depots, pipelines and docks, leased rail cars, barges, and trucks. Fuel costs are up about 25% over last year.

Discussion questions:

1. What is Delta’s core competency and what are the chances this approach will be successful?

2. What are some other examples of vertical integration in major businesses?

OM in the News: Increased Efficiency From JIT Comes at a Price

Just as the recovery in US auto sales begins to accelerate, a fire last week at Magna International, a major auto parts manufacturer near Detroit, put a huge scare into  five automakers. Two of them, GM and Mazda, had to close plants and stop making some models. Three others, Ford, Chrysler, and Nissan,  faced the prospect of having to do without critical parts from their only supplier of ceilings, consoles, and other parts.

Yesterday’s Portland Press Herald (March 7,2011) writes: “The impact of the blaze shows how years of work to make auto plants more efficient can fall apart when something interrupts the flow of parts in an intricate supply chain”.  As we discuss in Chapter 16, JIT has proven a wonderful system for 3 decades in the auto industry. Auto companies have cut costs and become more efficient by going to a JIT parts delivery system to avoid paying for huge stockpiles of parts.

But to avoid buying costly machinery, parts firms often make a particular part at only one site. As a result, plants have few parts in storage and are so dependent on every link in the supply chain that the whole system falls apart, as it did in this case, if production is interrupted at a single factory. These days most auto parts are “single-sourced”.

The story for Magna and its customers fortunately (and luckily) had a happy ending today. The company was able to work with its customers to get enough of the equipment up and running to allow auto plants to receive  at least a portion of their needed parts. Our Ch.16 case study, “JIT After a Catastrophe” deals with how Caterpillar faced a very similar disaster when a tornado destroyed its Mississippi couplings plant in 2008.

Discussion questions:

1. How should the auto makers react at this point?

2. What should Magna do in planning for the future?