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

September 16, 2014

uosIn 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: American Airlines Returns to “Peak” Scheduling

September 13, 2014
Shorter connecting times mean runs of up to 1.1 miles in Miami's airport

Shorter connecting times mean runs of up to 1.1 miles in Miami’s airport

“American Airlines is making its Miami hub more hectic—on purpose,” writes The Wall Street Journal (Sept. 11, 2014). Instead of spacing flights evenly throughout the day, the airline just started bunching them together. The change restores an old format of “peak” scheduling, grouping flights into busy flying times followed by lulls when gates are nearly empty. American next year will “re-peak” schedules at its largest hubs in Chicago and Dallas-Fort Worth.

Airlines shunned peak schedules at hubs more than a decade ago because they meant higher costs such as more people and equipment, created too many delays and forced passengers to sprint through terminals to make connecting flights. Recently though, the industry has gravitated back to peaks and valleys as a way to fill seats and generate more revenue. “An additional person per flight will make a difference,” said American’s CEO. The company will gain $200 million more a year from re-peaking its schedules at hubs.

But travelers may have even less time to make flight connections or to eat. And airlines, airports and federal agencies are re-evaluating how they manage baggage, cleaning crews and security checkpoints with the new highs and lows in foot traffic. Peak scheduling packs planes better because it creates more possible itineraries, with shorter connection times. In Miami, 42 flights depart between 9 and 10 a.m. Then between 10 and 11 a.m., only a handful are scheduled to take off. The process repeats during the day with 10 “banks” of flights that fill about 45 gates at a time.

There are added costs to re-peaking. American hired 67 more gate agents and 150 baggage handlers and other ground workers. It had to purchase more belt-loaders, dollies and tugs that push planes out from gates. There are other pitfalls to airlines’ clumped schedules. If bad weather hits at the wrong time, diverted flights and missed connections can cause widespread delays.

Classroom discussion questions:

1. What are the advantages and disadvantages of this approach?

2. What other OM ideas could American use to increase efficiency?

OM in the News: Apple Again Faces Supplier Labor Violations

September 12, 2014

apple workerApple has once again been accused of poor and unsafe working conditions at one of its factories in China,” writes The Christian Science Monitor (Sept. 4, 2014). A  report compiled by China Labor Watch, which has previously targeted Apple for labor violations, says that a factory in Suqian has violated Chinese laws in addition to violating policies put in place by Apple and its supplier, Catcher Technology. Labor violations at the factory included “excessive overtime work, long work shifts while standing, a lack of occupational safety training and heavy dust in the workplace.” Subsequent investigations, 16 months after the initial investigations, found that working conditions had not improved and, in some cases, had worsened.

The 22 labor violations documented include discriminatory hiring practices, insufficient safety training, and a lack of protective equipment provided to workers handling toxic chemicals. Fire exits were blocked, while flammable alloy dust and shavings filled the air. Working overtime was mandatory for all workers, who were forced to work up to 100 hours of overtime per month, almost 3 times the 36-hour limit prescribed by Chinese law. Apple replies it has sent a team to investigate operations at the factory.

China continues to be Apple’s largest source of suppliers, in addition to being the place where nearly all Apple products are assembled. But factory safety for workers assembling Apple products has come under close scrutiny in recent years. About 150 Chinese workers at Foxconn threatened to commit suicide 2 years ago unless their working conditions were improved. Earlier this year, an Apple audit uncovered human rights violations at different levels of its supply chain, including abuses of migrant laborers and the use of underage workers. In response, Apple has increased supplier audits from 173 in 2012 to 451 last year.

On a separate note, the release of the iPhone 6 this week is expected to add 1% a month to China’s export growth for the rest of 2014.

Classroom discussion questions:

1. Why do these supplier problems persist?

2. What more can Apple do?

OM in the News: Designing the Perfect Airline Seat–To Maximize Revenue

September 10, 2014

airplane seatYesterday’s New York Times (Sept. 9, 2014) featured not 1, not 2, but 3 articles on how airlines are addressing the issue of cramped seats! In the 1st, we find that the European budget carrier Ryanair just announced an agreement to purchase up to 200 new Boeing 737s (a $22 billion deal), each of which will allow that airline to squeeze an additional 8 seats into the single-aisle airframe. Ryanair will fit the planes with a whopping 197 seats, stripping out the front and rear galleys to help the redesign.

The 2nd article, titled “In Flight Rage,” confirms that cramped conditions in the back of a plane can severely test passenger equanimity. We have seen this in recent episodes in which pilots have made emergency landings when a few passengers have fought over seat-reclining. One prof, comparing people to livestock, finds that international regulations on flying animals specify the “need space to travel comfortably and on a long journey, the animal must be able to stretch, turn round, drink and groom itself.” Sounds better than a coach seat!

airline seatingThe 3rd piece gets to the heart of the matter–ergonomics, and ties in perfectly to Chapter 10. The real issue, says Prof. Kathleen Robinette at Oklahoma State U., is that airline seats are not designed to fully accommodate the human body in its various shapes and sizes. “We are fighting each other, but the seats are not designed right,” she says. Her study of 4,431 people found that seats are designed for a man in the 95th percentile of measurements.  This means 1 in 20 men will be using seats that are too small for them. “That’s about 10 people on every plane, as well as all the people sitting next to them,” she adds. A big flaw in seat design, however, is that men in the 95th percentile are not necessarily larger than women. For about 1 in 4 women, the seat will be too small at the hips. Of even greater concern is the risk of blood clots, including a potentially deadly condition called deep vein thrombosis, which can occur when sitting in a way so you can’t move for about a 1/2 hour.

Classroom discussion questions:

1. What are the OM tradeoffs here?

2. Why is ergonomics an important issue on planes?

OM in the News: Tesla and the Mother of All Factory Chases

September 8, 2014

Tesla NevadaAfter pitting five potential host states against one another in a quest for hundreds of millions of dollars in incentives, Tesla Motors reports in The New York Times (Sept. 5, 2014) that it has struck a deal with Nevada for construction of a sprawling factory to build batteries for electric cars and the power grid. To secure the deal, Nevada paid dearly. The package of tax breaks totals about $1.25 billion over 20 years. Gov. Brian Sandoval acknowledged that there were concerns over the deal’s cost, but said that the agreement would “change Nevada forever” and that he expected the enormous tax breaks to pay dividends down the road.

Whether it will work that way is not clear. But the prospect of having such a large plant nevertheless set off “the mother of all factory chases,” according to an industry expert. The deal goes beyond tax breaks. It means Tesla would pay no sales tax for 20 years, no property tax and payroll tax for 10 years, and it would receive other tax credits tied to job creation and development. Nevada will also grant Tesla discount electricity rates for 8 years and make millions of dollars in road improvements around the factory site.

An important element for Tesla is the anticipated cost reduction is moving the fabrication of various components to a single spot, making the factory more of a campus than a single operation. Today, bringing the main components of the battery together is expensive. CEO Elon Musk describes the current system as “being put in a box, and then on a truck and then on a boat, and going through customs and stuff like that.” Still, analysts question whether the plant’s vast size will result in the huge price cut, an essential element of making the factory useful. At the heart of the strategy is to build a kind of battery that resembles the ones used for years in laptops and hand-held electronics.

Classroom discussion questions:

1. Referring to the incentive issue in Chapter 8, discuss Nevada’s decision.

2. Who is taking the most risk in this location decision?

OM in the News: Why Los Angeles Should Read Chapter 17

September 6, 2014

A recent water main rupture in Los Angeles

A recent water main rupture in Los Angeles

We know that not every OM instructor covers Chapter 17, Maintenance and Reliability. It is after all, the last chapter in a long text. But if Jay has told me once, he has lectured me a 1,000 times: “Maintenance is one of the most critical of the 10 OM decisions that managers make!”  And so it appears that the city of Los Angeles should have been reading Chapter 17 for the past 3 decades.

As The New York Times (Sept. 2, 2014) reports: “The scene was apocalyptic: a torrent of water from a ruptured pipe valve bursting through Sunset Boulevard, hurling chunks of asphalt 40 feet into the air as it closed down the celebrated thoroughfare and inundated the campus of UCLA. By the time emergency crews patched the pipe, 20 million gallons of water had cascaded across the college grounds.”

It was just the latest sign of a continuing breakdown of the public works skeleton of the U.S.’s 2nd-largest city: its roads, sidewalks and water system. With each day, another accident illustrates the cost of deferred maintenance on public works, with an estimated $8.1 billion it would take to do the necessary repairs. The city’s annual budget is $26 billion. LA’s problems reflect the challenges many American cities face after years of recession-era belt-tightening prompted them to delay basic maintenance. “It’s part of a pattern of failing to provide for the future,” said one UCLA prof.

The average LA car owner spends $832 a year for repairs related to the bad roads, the highest in the nation. Families here routinely spring for expensive strollers to handle treacherous sidewalks. Close to 40% of the region’s 6,500 miles of roads and highways are graded D or F. More than 4,000 of the 10,750 miles of sidewalks are in severe disrepair. More than 10% of the 7,200 miles of water pipes were built 90 years ago. At the current level of funding, it would take the city 315 years to replace them.

Classroom discussion questions:

1. Why is maintenance such an important part of OM?

2. What strategy might LA take at this point?

Good OM Reading: The Pitfalls of Project Management Reporting

September 5, 2014

mit sloan  coverWill every corporate project be on time and deliver what was promised? Maybe — but maybe not, write four profs in MIT Sloan Management Review (Spring, 2014). Accepting 5 inconvenient truths about project status reporting can greatly reduce the chance of  unpleasant surprises.

 INCONVENIENT TRUTH 1: Executives can’t rely on project staff and other employees to accurately report project status information and to speak up when they see problems. Most executives expect and assume that employees will report when they see problems that might adversely impact a project. In negotiations between the U.S. and the Soviet Union, President Reagan’s signature phrase was “trust, but verify.”

INCONVENIENT TRUTH 2: A variety of reasons can cause people to misreport about project status; individual personality traits, work climate and cultural norms can all play a role. Executives tend to attribute misreporting to poor ethical behavior on the employee’s part. But one of the best remedies is building diverse teams, which can help balance out culturally specific behavior that might inhibit accurate project reporting.

INCONVENIENT TRUTH 3: An aggressive audit team can’t counter the effects of project status misreporting and withholding of information by project staff. The importance of promoting trust between those who report project status and those who receive the reports is the solution.

INCONVENIENT TRUTH 4: Putting a senior executive in charge of a project may increase misreporting. Research actually suggests that the stronger the perceived power of the sponsor or the project leader, the less inclined subordinates are to report accurately.

INCONVENIENT TRUTH 5: Executives often ignore bad news if they receive it. Executives should not only listen to a variety of stakeholders but should also take the warnings they receive seriously. If they do not, they may unwittingly contribute to a climate of silence in which employees grow even more reluctant to report bad news.

This research study nicely complements our treatment of Project Controlling in Chapter 3.


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