Tag: supply chains

OM in the News: UPS Forecasting Project Will Improve Logistics Planning

Packages at the new UPS hub in Paris

United Parcel Service is working on an ambitious analytics and machine learning project to gather and consolidate data from various applications within the company’s logistics network to better predict package flow, volume and delivery status, writes The Wall Street Journal (July 17, 2018). The predictive analytics tool will gather and analyze more than 1 billion data points per day at full-scale, including data about package weight, shape and size, as well as forecast, capacity and customer data. This allows UPS to know exactly what’s going where, and when it’s going to arrive, much more accurately than before.

The project is an example of how UPS is upgrading technology systems as it faces heavy competition from rivals including FedEx and Amazon as well as ever-growing e-commerce shopping demands. The company still relies on some outdated equipment and manual processes, but it’s opening new automated facilities and working on technology upgrades, such as this one, as part of a $20 billion capital spending plan.

It will give staff more accurate forecasts about the package volume that needs to be processed at UPS facilities on any given day. That will give employees enough lead time to determine whether they need more resources at package and sorting facilities in the event of a higher-volume day. Predictive analytics also could help eliminate bottlenecks in the supply chain because of unforeseen weather or emergency situations. Knowing how upcoming inclement weather will impact the supply chain days in advance will result in better planning.

Developing the tool was an ambitious feat because of how many hundreds of millions of data points needed to be consolidated into one single platform. Until now, forecast, capacity, customer and package data was housed in different applications. The tool is expected to be available to UPS employees by the end of the year via a smartphone, desktop and tablet application.

Classroom discussion questions:

  1. Why is this project so important to UPS?
  2. Why is the forecasting system so complex?

OM in the News: Best Buy’s New Supply Chain Strategy

Best Buy is changing its supply chain, adding more automation and more distribution centers closer to population centers

Best Buy believes it needs to stock more inventory if it wants to sell more electronics, reports The Wall Street Journal (May 25, 2018). The electronics giant reported its inventories rose ahead of even its fast-surging sales in its most recent quarter, as the company sought to drive more sales by having goods in place both online and in its physical stores even at the expense of higher supply-chain costs. Inventories on a per-square-foot basis—an important measure of supply-chain efficiency for retailers—were up 9% from a year ago.

Best Buy says the figures show the company is getting its inventories lined up with an “improved customer experience,” which means having goods available wherever consumers are shopping, even if that increases short-term supply-chain costs. Getting the right amount of goods in the right place has become a growing concern for retailers as online sales have exploded, undercutting longstanding strategies aimed at keeping supply chain costs down by keeping stocks lean.

Many store owners are wrestling with the need to have inventory on hand in stores and at warehouses for online fulfillment, and retailers including Target and Walmart have turned to having their stores do double duty by shipping online orders from the sites or having customers pick up their orders at the sites. Best Buy is undertaking what the company calls a “multiyear transformation” of its supply chain, which will include more automation and more distribution centers closer to population centers.

Classroom discussion questions:
1. What are the advantages of Best Buy’s new inventory strategy?

2. Why are other chains increasing store inventory levels?

OM in the News: E.Coli and the Lettuce Supply Chain

Romaine lettuce is the source of a growing E.coli outbreak.

A growing nationwide E.coli outbreak linked to romaine lettuce has revived concerns over a leafy green industry that has long grappled with how to produce safe food. And questions remain over the origins of the more than 98 illnesses across 22 states. The U.S. Food and Drug Administration said that it is still looking for the lettuce source.

The outbreak from romaine lettuce grows to the largest multistate E. coli outbreak since one in 2006 tied to spinach that killed 3 people and sickened more than 200. The strain of E. coli making people sick is particularly virulent, leading to a high hospitalization rate. The FDA said it isn’t clear at what point in the supply chain the whole-head lettuce was contaminated. “In this case you’re looking at a more of a web trying to figure out where it came from,” said one exec.

Much of the difficulty in pinpointing an outbreak’s origin, writes The Wall Street Journal (April 28-29, 2018), stems from the complexity of the U.S. supply chain, in which food is grown, packed, processed and shipped by multiple companies before it reaches grocery store shelves. Produce from different farms can be combined into a single shipment to buyers. Product labels often don’t indicate where lettuce was grown. “Tracking a product from the farm through to the point of sale isn’t easy,” said a food-safety expert. “It’s not a new problem and it’s obviously not fixed.”

Blockchain, which we have discussed in several recent posts, may be one answer.

Classroom discussion questions:

  1. Why is this supply chain so complex?
  2. Why is lettuce a particular health risk?

OM in the News: Apple’s Sustainability Move

Apple’s new HQ features rooftop solar panels.

“Apple has just announced,” writes The Wall Street Journal (April 10, 2018), “that it has achieved a decade-old goal of having its facilities world-wide powered exclusively by renewable energy, an achievement that will shift the company’s sustainability efforts to its supply chain, where about 10% of suppliers have made a similar commitment”.

The tech giant said it has improved to be 100% reliant on clean energy from 96% last year in part by contracting renewable energy for the first time in India, Turkey, Brazil and Mexico. The figure covers all of its retail stores, offices, data centers, as well as its new California headquarters, Apple Park, the spaceshiplike structure that is one of the largest on-site solar installations in the world.

Apple is just one of many global corporations trying to cut energy consumption and shift to renewable power including wind and solar, both to cut costs and slow climate change. More than 100 companies world-wide, including Apple, IKEA, Anheuser-Busch and Starbucks, pledged in 2014 to shift to 100% renewable energy. Many of these companies are now trying to accelerate efforts to convince their suppliers to join them.

Environmental experts said the bigger challenge will be making the manufacturers of the more than 200 million iPhones and 43 million iPads it sells annually wholly dependent on renewable energy. “We’re not going to stop until our supply chain is 100% renewable,” said Apple’s VP. Apple, which set that goal two years ago, said 9 more of its suppliers have committed to powering all production with 100% clean energy, bringing the total to 23 out of more than 200 suppliers. Apple also will be challenged to keep its own facilities at the 100% level in the years ahead, especially as it looks to add a new campus in the U.S. and $10 billion in data centers.

Classroom discussion questions:

  1. Why is Apple’s drive an OM issue?
  2. Why is the firm’s movement so important to industry?

OM in the News: Warehousing Adapts to the E-Commerce Boom

Prologis, the largest provider of logistics real estate in the U.S., is building the first multi-story warehouse in the U.S. in Seattle

The e-commerce boom is reshaping the entire supply chain, creating both demand for warehouse space and changing the way businesses store goods, reports Supply & Demand Chain Executive (March 13, 2018). In the past, warehouses have generally been on the outskirts of cities, isolated from high population density, partially so that goods could be moved without hindrance. But now warehouse space is at a premium, especially closer to population centers to facilitate next-, or even same-day shipments. “In the previous model you didn’t need to move things all that quickly,” said one industry expert. “In this compressed dynamic, you’ve got to push into cities and places where people live.”

Warehouse design also is changing. The average new warehouse built in the U.S. from 2012- 2017 is 143% larger and 3.7 feet higher than the last construction peak. Multi-story warehouses, popular in Asia and Europe, have joined the U.S. warehouse landscape to maximize space. Mega-warehouse markets have also just gotten bigger.

There has also been an increase in facilities called inland ports that are used to get freight closer to population-dense areas faster and cheaper. Inland ports are inland intermodal rail terminals that allow for less-expensive over-land rail transit from seaports before a container moves to a truck. Storage rates inland are also cheaper.

Some warehouses are physically changing as well. Fulfillment operations take up more space than traditional pallet and bulk storage and often require new equipment like conveyor belts and sorting or packaging machinery. It also requires additional labor resources working throughout the day to pick, pack and ship orders.

Classroom discussion questions:
1. Why is there interest in multi-story warehouses now?

2. Why have they been popular in Europe?

OM in the News: At KFC, a Bucketful of Supply Chain Trouble

Changes in the KFC distribution system left 600 KFCs in England without chicken.

Diners don’t care about supply chains, distribution centers, or logistics. All they want is their meal. But 2/3 of the 900 British KFC restaurants were closed for 4 days a few weeks ago. The reason: There was no chicken.

“Reliable supply chains that can make—or break—a business’s ability to operate smoothly,” writes Businessweek (March 5, 2018). And it’s the case not only for manufacturers, but also for the restaurant chain that serves up a 14-piece “bargain bucket” of  chicken for $24 to British patrons.

When the supply chain goes awry, it can wreak havoc on products that are particularly time-sensitive. That’s what happened at KFC, which pared back its logistics network to cut expenses. The epicenter of the so-called #KFCCrisis was in Central England at a KFC distribution center, which suffered a breakdown in its first week as the hub of the chain’s new strategy. Tons of chicken spoiled there or in the backs of trucks as drivers awaited instructions that never came. Lost sales tallied in millions of dollars.

Just prior to the shutdown, KFC dropped its longtime food-delivery partner, Bidvest, and switched to a pair of German outfits, DHL and QSL. KFC promised “a new benchmark” in food supply, consolidating from 5 regional distribution sites to just the one. But changing long-standing supply practices can be risky, especially true with fresh meat, which is prone to contamination and must be shipped in refrigerated trucks.

KFC’s U.K. restaurants get most of their chicken from two huge suppliers. From those suppliers, the meat is sent via truck to the distribution center, and that’s where things went awry. DHL provides trucks and warehousing, while QSL is responsible for stock management. Under the previous deal with Bidvest, chicken was sent from the regional distribution sites to KFC stores. With the new system, all meat is dispatched from the Central England hub to satellite depots, then moved to smaller vehicles for the last leg. That’s a tried-and-true model for auto parts and parcels, but chicken and car parts are not the same.

Classroom discussion questions:

  1. What went wrong at KFC’s supply chain?
  2. Why should KFC be concerned (and a few dozen stores are still closed)?

 

 

OM in the News: Amazon Targets the Hospital Supply Chain

Amazon is seeking to supply hospitals.

Amazon, always expanding, is pushing to turn its nascent medical-products business into a major supplier to U.S. hospitals and outpatient clinics that could compete with distributors of items ranging from gauze to hip implants. “The firm is expanding its business-to-business marketplace, Amazon Business, into one where hospitals could shop to stock outpatient locations, operating suites and ERs,” writes The Wall Street Journal (Feb.14, 2018).

The market for medical supplies is one of a growing number of businesses the online retail giant has set in its sights, from groceries to clothing, often with market-moving results. Amazon said it seeking to sell hospitals on a “marketplace concept” that differs from typical hospital purchasing, which is conducted through contracts with distributors and manufacturers.

“Our goal is to be something new,” said Amazon’s head of global health care. “We’ve been actively building out new capabilities and features to simplify purchasing.” Amazon’s comparison-shopping ethos could shake up the hospital- and clinic-supply business, where middlemen fees add costs and proprietary contracts obscure price differences. But Amazon faces challenges. Some hospitals have been reluctant to buy supplies from Amazon Business, for reasons including lack of options and lack of control over purchases and shipping.

When doctors and nurses reach for a familiar product, they know its specifications. Jumping online to look for the best deal could disrupt that continuity. Hospitals today typically sign contracts to buy supplies directly from manufacturers or from distributors, which include Owens & Minor, Medline Industries, McKesson, and Cardinal Health. Also in the chain are companies known as group-purchasing organizations that negotiate on behalf of multiple hospital buyers, seeking to leverage collective demand. Hospitals formed and own a stake in many such groups, as we note in our Video Case Study “Arnold Palmer Hospital’s Supply Chain” in Chapter 11.

Classroom discussion questions:

  1. Describe the role of the group purchasing organization (GPO) in the hospital supply business.
  2. Refer to the Arnold Palmer Hospital case study in Ch. 11. How does that organization’s supply chain work?

OM in the News: The Global Supply Chain for China’s New C919 Jet

More than 1,000 flights took off or landed at Shanghai’s vast airport on May 5, 2017, but one marked the beginning of a new era in the aviation business. After years of delays, the nation’s first modern large jet, the 174 passenger C919, made its maiden flight. The C919 brings its manufacturer, Comac, in head-to-head competition with Boeing’s ubiquitous 737 and Airbus’s A320. China is making its boldest attempt yet to break the stranglehold that these two giants have on the market for big commercial airliners.

“Behind the celebrations of a Made-in-China jet is the reality that Comac was able to build its new plane using a string of Western suppliers,” writes Businessweek (May 8, 2107). At least 15 foreign partners such as GE, Safran, and Honeywell worked on components and systems of the C919. Tapping into the supply chains of Airbus and Boeing allowed Comac to bypass many of the technical challenges of making a modern commercial jet from scratch and built up the company’s expertise for future designs. Companies based outside China supply C919 systems for flight control, power, lighting, cockpit control and much more. The engines and landing gear are also from overseas manufacturers.

China will need over 6,800 aircraft valued at more than $1 trillion through 2035, and 3/4 of them will be single-aisle planes. The country’s largest carrier, China Southern Airlines, had ordered more than $15 billion of new aircraft from Airbus and Boeing since 2015. So the C919 should be a game-changer for China’s aerospace industry.

Classroom discussion questions:

1.What is Boeing doing to respond to the C919 threat?

2.Describe the new jet’s supply chain.

 

Good OM Reading: Supply Chains and Data Analytics

The OM field will soon face a major change in the way we make decisions. Big data, data analytics, and business intelligence are all skill sets our OM students will need. The Gartner Group has just issued an interesting report on these concepts. Gartner identifies 4 core skill sets to support the successful adoption of analytics: Data engineers who make the appropriate data accessible and available for data scientists. Supply chain expert analysts who understand supply chain requirements and priorities to ensure the right tools are used. Data scientists who create predictive and prescriptive models. Citizen data scientists who are lighter versions of a data scientist who can build or choose models, but within a platform.

There is, of course, a shortage of data scientists. This is compounded for supply chain, which might not be viewed as attractive as finance, sales and marketing. But analytical platforms can alleviate this shortage. This is because within the platform environment, “citizen data scientists” can build new apps and solutions.

As the line between the physical and digital world blurs in business, the algorithmic supply chain affords companies the ability to leverage massive data from increasing connections among people, businesses and things. This allows them to respond quickly and profitably to changes in market demand. In an algorithmic supply chain, decision-making relies on the company’s intellectual property (IP) that captures data and encapsulates it into reusable, unique and optimized information assets. Embedding this IP in supply chain processes, the company can solve large-scale, dynamic problems and create competitive advantage.

UPS provides a powerful example of using analytical platforms to build On the Road Integrated Optimization and Navigation (ORION) to support its core business processes. ORION generates daily routing manifests to 55,000 UPS drivers. The platform incorporates optimization, heuristics, predictive analytics and custom mapping. It generates $300-$400 million in annual benefits, based on reducing fuel consumption by 10 million gallons, carbon emissions by 100,000 metric tons and driven miles by 100 million, annually.

OM in the News: Understanding South Korea’s Chaebol System

The heads of South Korea’s most powerful chaebol companies at a recent parliamentary hearing in Seoul as part of a corruption inquiry.
The heads of South Korea’s most powerful chaebol companies at a recent parliamentary hearing in Seoul as part of a corruption inquiry.

I was just chatting with my coauthors, Jay and Chuck, about our coverage of keiretsu networks in Chapter 11, Supply Chain Management. We don’t mention the somewhat similar system of interconnected companies in S. Korea in that chapter, but the New York Times (Feb. 18, 2017) just published an article called “Inside the Chaebol of S. Korea” that is worth sharing. Chaebols, a handful of family-controlled companies dominate economic life in South Korea. Some, like Hyundai, LG and Samsung, are well-known outside their home country. But domestically, they all wield immense power — and are coming under increasing scrutiny. The word comes from the combination of the characters for “rich” and “clan.”

Chaebol are generally conglomerates of affiliated companies. LG, for example, makes smartphones, televisions, electronic components, chemicals and fertilizer. It also owns Korean baseball and basketball teams. Hyundai, which makes the Hyundai and Kia cars, also makes elevators, provides logistics services, and runs hotels and department stores.

Chaebol rose from the ashes of the Korean War. After the conflict ended, officials steered relief funds and cheap loans to businessmen who promised to rebuild the country. The government also protected homegrown industries from foreign competition to help them develop. The recipe proved to be potent: Chaebol played a major role in South Korea’s rise as an industrial giant in the following decades.

But the recipe also created imbalances. Money meant for the common people often ended up in the hands of the wealthy families, creating resentment that lingers to this day. Chaebol became sprawling businesses that held a nearly 2/3 market share in S. Korean manufacturing by the end of the 1990s. The Asian financial crisis at that time stirred worries that the cozy relationship between chaebol member companies could lead to severe damage across multiple businesses and supply chains if one failed.

Classroom discussion questions:

  1. What is the difference between Japan’s keiretsu networks and S. Korea’s chaebol?
  2. Why is chaebol a potential supply chain issue?

Video Tip: Inside Amazon’s New NYC Warehouse

The shelf arrangement makes sense for many small orders that “look” random.
The shelf arrangement makes sense for many small orders that “look” random.

Inside Amazon’s New York warehouse for Prime Now, nothing is organized. Or actually it is, but its driven by a random stocking algorithm. The one-floor warehouse on 34th Street is full of everything marked as currently available on Prime Now, Amazon’s service that has couriers deliver orders within 2 hours.

The 25,000 products aren’t grouped by type. Instead, they’re stashed in cubbies and tracked in a kind of organized chaos. A copy of Hamilton by Ron Chernow, for example, sits next to a box of candy canes or a jar of mayonnaise. Yet it seems to make sense to randomly stock items of similar popularity.

Once an order is placed, warehouse staff remove the products from inventory and bag them. The paper-bagged orders are grouped by their destination — in New York, anywhere in Manhattan or Brooklyn.

Prime Now is available only to Prime members, and so far it’s in about 30 cities. Amazon chooses where to launch Prime Now based in part on which cities have a high proportion of Prime members. The service first launched in 2014 in New York.
This 1.5 minute YouTube video can be shown when you cover warehouse layout (Ch. 9), supply chains (Ch.11), or service technology (Ch.7).

Good OM Reading: Picking the Right Forecasting Technique

forecasting“Companies routinely rank demand planning immaturity as a major obstacle in meeting their supply chain goals,” suggests a new white paper called Eight Methods that Improve Forecasting Accuracy. But accurate forecasts are the foundation for profitable business growth. Optimal demand planning and forecasting requires comprehensive modeling capabilities plus the flexibility and ease-of-use to shift methods as life cycles progress and market conditions change.
Attribute-based methods that use demand profiles are often suited to new product introduction and end of product life cycles, at times when reliable historical demand data is lacking or the available data is less relevant.
At the more mature stages of the product life cycle, 5 different time-series statistical models come into play, including modified Holt, Holt-Winters, moving average, and intermittent or low demand. These models are used to create retrospective forecasts that cover prior periods (typically 3 years) of documented demand. The forecasts are then matched to actual demand history to determine which one best fits the real-world data. The best-fit winner is used to create an objective base forecast.
Causal methods are used throughout the life cycle to adjust forecasts in anticipation of promotional events. Causal methods allow planners to predict how discounting and other promotional factors will affect volume, and layer the impact of these events on top of the underlying base forecast.
Finally, derived models can be used to create a Parent-Child relationship in which forecasts for closely related products are driven as a percentage of the forecast for a ‘leader’ product. This ensures that when the forecast is modified for the ‘parent’ all the ‘child’ forecasts would be updated accordingly.
To prevail in a business economy shaped by uncertain demand and rapid market changes, all of these forecasting methods must be harnessed. Forecasting software can automate much of the selection and switching of methods as a product moves through its life cycle. A best-in-class forecasting system is one that provides flexibility for users to weight elements and override key parameters in the forecast calculation based on their intuitive knowledge and market expertise.

Good OM Reading: What Makes a Supply Chain Sustainable?

A growing number of companies are looking to build sustainability into their supply chains. This is due, in part, to mounting pressures to disclose supply chain information. The growing emphasis on supply chain sustainability is commendable, but there is a problem: Most sustainable supply chain initiatives do not actually address sustainability at all. This new article in MIT/Sloan Management Review (Nov. 15, 2016) proposes 4 broad and hierarchical strategies for supply chain management: legal, ethical, responsible, and sustainable.

A responsible supply chain, for example, must also be legal and ethical. However, a responsible supply chain is not necessarily sustainable. First, there are supply chains that operate within legal limits and comply with agreed-upon contractual requirements. All partners in these supply chains must follow, for example, established legal, building, and environmental standards.

Third, there are supply chains that operate responsibly. Partners in these supply chains are committed to continual improvement, considering stakeholder interests, and making positive contributions in their communities. Responsible supply chains focus on making things better.
Last are sustainable supply chains. These require that all partners behave legally, ethically, and responsibly. However, they must also consider how their actions are situated in the broader sustainability context. A supply chain is sustainable only if its activities can be supported by nature and society over the long term. This is what the other strategies miss.
What makes a supply chain sustainable? Sustainable SCM requires setting science-based targets, developing metrics that take sustainability context into account, and building relationships with players across the chain.

OM in the News: The Cost of Cheap Labor

“When companies consider making changes in their supply chains, the mantra of question everything can’t be overstated—even when the topic becomes cheap labor for consumer product manufacturing,” writes Material Handling & Logistics (Nov. 8, 2016). The article suggests that: 

  1. The source of the raw ingredient and its impact on cost is critical. A majority of a finished good product cost is often thought to be in labor and manufacturing overhead. But cost is largely tied to the ability to find local production of the raw materials and components. If a firm has to import “raws” and components, it is likely going to lose the economic edge that cheaper labor might otherwise provide. Focusing on raw material sourcing as the most important aspect of a supply chain shifts the firm away from chasing cheap labor. Companies are better off centering their manufacturing plant around material supply and proximity to their customer base.
  2. Understand customer preferences. Consumer demand for goods produced in certain countries is increasing. The value of the country of origin varies, of course, by the product category. “Made in the USA” carries premium positioning globally for nutrition products. For beauty and skin care, sourcing from the U.S., Korea, Japan or France carries a premium influence. For home care or durable goods, such as TVs, there is far less emphasis on the country of origin.
  3. Labor is just one of the non-material costs. Free trade agreements allow for significant savings when a company meets certain local sourcing minimums. Also, depending on the variability of the demand, shorter lead times and more supply chain agility (the ability to accommodate surge in demand) can make a big difference in sales.

In the end, simply chasing low labor costs is seldom the best way for a company to think about its supply chain. Consumer preferences, material supply and other considerations such as free trade and demand variability are more important.

Classroom discussion questions:

  1. Why are raw materials such an important part of sourcing?
  2. When might low labor costs be the most important factor in the supply chain?

OM in the News: Nafta and the Global Car Industry

auto-parts“Ending the 1994 Nafta trade pact is relatively easy,” writes The Wall Street Journal (Nov. 11, 2016). The U.S. legally can pull out of Nafta 6 months after notifying Mexico and Canada. But for the auto industry, such a change would be substantially more complicated because of the multilayered connections between U.S. and foreign suppliers and assembly points. The tens of thousands of parts that make up any vehicle often come from multiple producers in different countries and travel back and forth across borders several times.

This is a tenet of modern manufacturing: Where a product is ultimately assembled increasingly has little bearing on where its component parts are made. More than half the parts in the Ford Focus, for example, are made outside the U.S. and Canada, including 20% in Mexico. Ford also ships in some of the car’s engines from Spain and transmissions from Germany.

Similarly, only 10% of the parts that go into the 200,000 BMW luxury crossovers built each year in Spartanburg, S.C. come from U.S. and Canadian plants. The rest are imported from Europe and elsewhere. BMW in turn exports most of the crossovers around the world. By contrast, 70% of the components in the Honda CR-Vs assembled in Guadalajara, Mexico are currently made by U.S. and Canada-based factories. The parts that make up a car or truck, from bolts to motor blocks, window lifts to oil filters, account for 2/3 of its value.

“This industry, particularly in North America, has integrated a lot,” said a Federal Reserve economist. “You can’t buy an American-made car anymore. You can buy an American-assembled car,” adds a Ford veteran.

U.S. and Canada-based factories shipped $29 billion worth of parts to Mexico in 2015, while Mexican plants in turn sent more than $61 billion worth of parts to the 2 Nafta partners. About 1/3 of Mexico’s 1,300 suppliers, which employ some 720,000 people, are U.S. owned. Mexican, Asian and European parts suppliers provide jobs for nearly 600,000 Americans.

Classroom discussion questions:

  1. Explain the purpose of Nafta.
  2. Identify the 1st, 2nd, 3rd, and 4th tier suppliers in the attached seat graphic.