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OM in the News: Eight Things Supply Chain Managers Worry About

September 3, 2014

When a group supply chain managers was recently surveyed about their concerns, Material Handling & Logistics (Aug. 27, 2014) reports that they came up with the following eight:

Talent: Having the right people in the right positions. All companies need better processes to assess, identify, recruit, develop and retain top talent, especially since supply chain talent is increasingly scarce.

The customer: The executives felt the urgency to better understand the current and future needs of their customers. They understand that their customers should lead their supply chain strategies and they know that their customers should be better educated on the cost-service tradeoffs.

Agility: Given the increasing volatility in the global environment, the group understood the urgent need to plan and prepare for increased supply chain agility. Postponement is one of many enablers of supply chain agility.

Technology: The executives know they need to stay current with technology on many fronts, from warehouse and transportation management systems to network optimization tools and inventory planning systems.

Cost: Cost reduction will always be a priority and supply chain executives know their companies expect them to take the lead in that area. They must reduce cost while simultaneously redesigning their supply chains and leveraging the global environment.

Regulations and Infrastructure: Executives know they need to find efficient ways to comply with the growing list of regulations, as well as the crumbling transportation infrastructure.

Risk: Executives understand they should have a better process to identify, prioritize and mitigate supply chain risks that can seriously damage their companies. Even weather must be considered.

Sustainability: They think it’s time to develop a serious supply chain sustainability strategy. A growing number of companies have already begun that effort.

Classroom discussion questions:

1. Which of these eight do you think is the highest priority?

2. How can supply chain managers mitigate risk?

OM in the News: America’s Car Capital Will Soon Be… Mexico

September 1, 2014


By 2020, Nissan plans to produce a million cars a year in Mexico

By 2020, Nissan plans to produce a million cars a year in Mexico

Seemingly overnight,” writes Forbes (Sept. 8, 2014), “Mexico’s automotive output has soared, bolstered by a flood of investment from foreign-based carmakers, including Nissan, Honda, VW and Mazda.” With $19 billion in new investment, production has doubled in the past 5 years to an estimated 3.2 million vehicles. The reason is simple: Mexico has some of the most liberal free trade arrangements in the world. It has agreements with 44 countries, making it an ideal export base for automakers from Europe, China, Japan and America. (The U.S. has agreements with only 20 countries.) The result: 80% of the cars built in Mexico are exported to other countries..

In recent weeks Infiniti, Mercedes and BMW have all detailed plans to build cars in Mexico, with Hyundai-Kia just around the corner. Audi is midway through construction of a $1.3 billion factory that will build luxury SUVs starting in 2016. Currently the world’s 8th-largest auto producer, Mexico is on pace to surpass Brazil this year. By 2020 Mexico should behind only China, the U.S., Japan, India and Germany, with an annual production of 4.7 million vehicles. Automakers like the young (average age: 24) and comparatively cheap (about $40 per day) Mexican workforce. But there are plenty of other reasons. European carmakers say Mexico’s dollar-dominated currency gives them a natural hedge against fluctuating exchange rates.

Nissan has led the way with its massive new 21-million-square-foot factory. It took just 19 months for the $2 billion plant, one of the largest industrial investments ever made in Mexico, to get up and running, a record for Nissan. Production of the Sentra began last November and was quickly ramped up to full capacity of 175,000 vehicles a year, operating 23 hours a day, 6 days a week. Some 3,000 jobs were created, and another 9,000 at supplier companies. The boom in Mexican production is already rattling the North American auto industry. Today 40% of all auto-sector jobs are in Mexico, up from 27% in 2000. Canada and the Midwest have taken the brunt of the job losses.

Classroom discussion questions:
1. Why Mexico?

2. What are the supply chain implications?

OM in the News: Sustainability and Natural-Gas Truck Sales

August 29, 2014

A factor limiting natural-gas-powered truck sales is the arrival of new, more fuel efficient diesel engines

A factor limiting natural-gas-powered truck sales is the arrival of new, more fuel efficient diesel engines

“In the midst of the strongest market for commercial trucks in 8 years, sales of natural-gas-powered haulers are just crawling along,” writes The Wall Street Journal (Aug.26, 2014). Higher purchase prices compared with diesel trucks, improved diesel fuel economy and continued scarcity of fueling stations are damping natural-gas-powered truck demand. Forecasters had expected sales to about double to 16,000 vehicles this year amid the trucking industry’s enthusiasm for natural gas a year ago, but only a 20% increase took place.

What happened? A big roadblock remains the premium for a heavy-duty gas truck—$50,000 more than the about $150,000 for a new diesel-powered truck. In theory, the payback for that higher price is recovered from fuel savings of $1.60-$1.70 for the gas equivalent of a gallon of diesel. Paybacks can average 4 years considering the average truck travels 125,000 miles a year. But fleet operators typically replace their vehicles every 3-4 years, leaving little time for them to benefit from the lower fuel costs of natural-gas-powered trucks. And the limited number of natural-gas refueling stations limits the switch to gas. Only about 750 natural-gas fueling stations are available in the U.S., and not all of these can accommodate large trucks.

The good news: UPS this year has ordered about 300 gas-powered heavy-duty trucks and bought 700 gas tractors last year. The trucks operate mostly in corridors in the West and South that have plenty of natural-gas stations, some of which UPS helped to finance. By the end of the year, about 2% of UPS’s 100,000 vehicles world-wide will be powered by natural gas. In addition, Wal-Mart, Office Depot, Lowe’s and P&G are among the companies requesting their trucking suppliers use natural-gas vehicles to comply with corporate policies to reduce carbon dioxide emissions and pollution caused by burning diesel fuel.

This article nicely complements our treatment of Life Cycle Ownership and Break-Even Analysis on p.195 in Supplement 5.

Classroom discussion questions:

1. What are the advantages and disadvantages of natural -gas-powered trucks?

2. Why have sales stalled?

OM in the News: Making the Decision to “Reshore”

August 27, 2014

reshoring-5_0“Recently, rising energy prices, wage inflation and customer demand for shorter lead times have led many U.S. companies to consider “reshoring” the production of goods bound for domestic markets back to America,” writes Industry Week (Aug.5, 2014). But getting it right can be tricky. A decision to reshore needs to consider the following 7 issues:

1. A focus on total costs instead of unit costs: By focusing on unit costs instead of the total cost of ownership – which includes costs such as transportation, intellectual property risks and inventory carrying costs – manufacturers are overestimating potential savings from overseas operations by 20%- 30%.

2. Invest time to understand domestic labor markets: Supply, quality, and cost of labor are critical to the success of almost all reshoring projects. Plant closures and an aging workforce have depleted the pool of skilled manufacturing workers in some parts of the country.

3. Pursue government incentives to offset costs: local, state, and federal governments have actively supported the resurgence of American manufacturing.

4. Analyze transportation cost differentials: In- and out-bound transportation costs, including the delivery of raw materials and the shipment of finished product, can comprise a major share of the cost of goods sold in the U.S., and can vary widely depending on the location.

5. Carefully assess product demand: Spurred by efforts such as Walmart’s $250 billion “Buy American” campaign, locally produced goods are in high demand. However, miscalculations can lead to lost investment and time.

6. A review of utility services and rates: Reliable, cost-competitive electric power is critical for many manufacturing operations. Power prices can vary from below 4¢ to above 12¢ per KWH.

7. Consider tax climates: State and local tax rates and structures vary greatly across the country. Carefully assess the potential impact of corporate income taxes and taxes on the purchase of production equipment, real estate, machinery, and inventory.

In short, deciding whether and/or where to reshore a manufacturing operation in the U.S. is a complex decision involving many considerations.

Classroom discussion questions:

1. Why has reshoring become an important OM issue?

2. How does reshoring differ from nearshoring?

OM in the News: Wal-Mart’s “Checkout Promise” to Speed Queues

August 25, 2014
Wal-Mart's "check-out promise" aims to alleviate chronic long lines

Wal-Mart’s “check-out promise” aims to alleviate chronic long lines

My mother-in-law recently commented that she won’t shop at Wal-Mart anymore, primarily because the checkout lines are too long. It turns out she is not alone. The Wall Street Journal (Aug.15, 2014) writes that “to lure more customers this holiday season, Wal-Mart is promising to staff each of its cash registers from the day after Thanksgiving through Christmas during peak shopping times.” The move, called the “checkout promise,” is aimed at addressing my mother-in-law’s very complaint.

“Taking the possibility of waiting in long lines off the table will attract more people into stores,” says the chief merchandising officer. The move comes as Wal-Mart has struggled to win back U.S. shoppers after 7 straight quarters of falling traffic. Many customers have ditched the chain in favor of quicker trips to smaller rivals. The company also has battled with complaints about too many out of stock items and empty shelves. Refilling shelves alone could bring back $3 billion in sales.

Wal-Mart’s supercenters typically have about 30 traditional checkout lanes—giving it more than 100,000 across the U.S.—but the number that are staffed varies throughout the day. It has made aggressive use of technology to cut back on labor costs and more precisely schedule checkout lanes based on real-time demand. But the drop in traffic and customer complaints have forced it to reassess the economics of that approach. After increasing the number of self-checkout systems across its 4,000 U.S. stores, longer lines began forming at its staffed checkouts to deal with customers with more complicated and time-consuming transactions, such as shoppers who use coupons.

The company also recently nixed “Scan & Go,” a program which allowed shoppers to use their mobile phones to scan items as they walked through stores and pay at self-service kiosks, skipping the cashiers’ lines. Wal-Mart said the process was too complicated for customers.

Classroom discussion questions:

1. How has technology complicated Wal-Mart’s queues?

2. What other approaches could the company try to speed up lines?

OM in the News: Hospital Patients May Feel Better Already in New Hospital Layout

August 23, 2014

hospital3Can good hospital layout help heal the sick, asks The New York Times (Aug. 22, 2014)? The University Medical Center of Princeton realized that it had outgrown its old home and needed a new one. So management decided to design a mock patient room–similar to the process we report in our video case study in Chapter 9 (called Laying Out Arnold Palmer Hospital’s New Facility). Medical staff members and patients were surveyed. Nurses and doctors spent months moving Post-it notes around a model room set up in the old hospital. It was for just one patient, with a big foldout sofa for guests, a view outdoors, a novel drug dispensary and a bathroom positioned just so.

Equipment was installed, possible situations rehearsed. Then real patients were moved in from the surgical unit — hip and knee replacements, mostly — to compare old and new rooms. After months of testing, patients in the model room rated food and nursing care higher than patients in the old rooms did, although the meals and care were the same. But the real eye-opener was this: Patients also asked for 30% less pain medication. Ratings of patient satisfaction are in the 99th percentile, up from the 61st percentile before the move. Infection rates and the number of accidents have never been lower.

There are also some fine points to the Princeton layout, like a sink positioned in plain sight, so nurses and doctors will be sure to wash their hands, and patients can watch them do so. It’s less antiseptic, cluttered and clinical than your average patient room, more like what you find in a Marriott hotel, anodyne and low-key, with a modern sofa under a big window; soft, soothing colors; and a flat-screen TV. “The room,” writes the Times, “is dignified, which matters to a patient’s mental health. And it works.”

This is a great classroom example of the role of layout in the service sector.

Classroom discussion questions:

1. Why is layout important in hospitals?

2. What are some of the OM benefits of this new layout?

OM in the News: Starbuck’s Controversial Scheduling Software

August 21, 2014

starbucks“Starbucks just announced revisions to the way the company schedules its 130,000 baristas, saying it wanted to improve ‘stability and consistency’ in work hours week to week,” reports The New York Times (Aug.15, 2014). The company intends to curb the much-loathed practice of “clopening,” or workers closing the store late at night and returning just a few hours later to reopen. All work hours must be posted at least one week in advance, a policy that has been only loosely followed in the past. Baristas with more than an hour’s commute will be given the option to transfer to more convenient locations, and scheduling software will be revised to allow more input from managers.

The revisions came in response to a Times article about a single mother struggling to keep up with erratic hours set by automated software. A growing push to curb scheduling practices, enabled by sophisticated software, has caused havoc in employees’ lives: giving only a few days’ notice of working hours; sending workers home early when sales are slow; and shifting hours significantly from week to week. Those practices have been common at Starbucks. And many other chains use even more severe methods, such as requiring workers to have “open availability,” or be able to work anytime they are needed, or to stay “on call,” meaning they only find out that morning if they are needed.

Starbucks prides itself on progressive labor practices, such as offering health benefits and stock. But baristas across the country say that their actual working conditions vary wildly, and that the company often fails to live up to its professed ideals, by refusing to offer any guaranteed hours to part-time workers and keeping many workers’ pay at minimum wage. Scheduling has been an issue for years. Said a former company executive: “Labor is the biggest controllable cost for front-line operators, who are under incredible pressure to hit financial targets.”

Classroom discussion questions:

1. What is the goal of the scheduling software many fast food restaurants use?

2. Why is scheduling a major operations issue at Starbucks?

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