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Good OM Reading: Reducing the Risk of Supply Chain Disruptions

April 20, 2014

MIT SloanFor supply chain executives, recent years have been notable for major supply chain disruptions that have highlighted vulnerabilities for individual companies and for entire industries globally. (The Japanese tsunami in 2011 left the world auto industry reeling for months. Thailand’s 2011 floods affected the supply chains of computer manufacturers dependent on hard disks. The 2010 eruption of a volcano in Iceland disrupted millions of air travelers and affected time-sensitive air shipments.) This excellent article in the MIT Sloan Management Review (Spring, 2014), by Professors Sunil Chopra and ManMohan Sodhi, is worth the 23 minutes it will take you to read it–especially if you teach Chapter 11 and Supp.11 in our text.

Today’s managers, they write, know that they need to protect their supply chains from serious and costly disruptions, but the most obvious solutions — increasing inventory, adding capacity at different locations and having multiple suppliers — undermine efforts to improve supply chain cost efficiency. While managers appreciate the impact of supply chain disruptions, they have done very little to prevent such incidents or mitigate their impacts.This is because solutions to reduce risk mean little unless they are weighed against supply chain cost efficiency. Financial performance is, we know, what pays the bills.

Supply chain efficiency, which is directed at improving a company’s financial performance, is different from supply chain resilience, whose goal is risk reduction. Although both require dealing with risks, recurrent risks (such as demand fluctuations) require companies to focus on efficiency in improving the way they match supply and demand, while disruptive risks require companies to build resilience despite additional cost.

The authors suggest two strategies for reducing supply chain fragility through containment while simultaneously improving financial performance: (1) segmenting the supply chain or (2) regionalizing the supply chain. In many instances, though, reducing disruption risk involves higher costs. The reason executives are reluctant to deal with supply chain risk comes from the perception that risk reduction will reduce cost efficiency significantly. Managers can do much to ensure that loss of cost efficiency is minimal while the risk reduction is substantial by avoiding excessive concentration of resources like suppliers or capacity. And nudging trade-offs in favor of less concentration by overestimating the probability of disruptions can be much better in the long run compared to underestimating or ignoring the likelihood of disruptions.

OM in the News: Queuing Up For TSA’s Fast Security Line

April 18, 2014
The TSA wants to speed up this line. Really.

The TSA wants to speed up this line. Really.

Fliers gripe that getting through airport security lines can be too slow. Now, it may be fliers who are slow to sign up for a program to speed them through the lines. The Transportation Security Administration is aggressively trying to encourage more people to sign up for TSA Precheck, reports The Wall Street Journal (April 17, 2014). 

Precheck, launched in 2011, is much-loved among travelers because they don’t have to take off their shoes and jackets, don’t have to pull liquids and laptops out of baggage, and can walk through metal detectors without a full-body scan. By doing background checks on Precheck enrollees and scanning law-enforcement databases, TSA offers what is essentially pre-9/11 screening to “trusted travelers.”

TSA wants lots more people enrolled in Precheck to make better use of its designated security lanes, which currently number 590 at 118 U.S. airports. “It’s one of the last great bargains the U.S. government is offering,” TSA Administrator John Pistole has joked. To entice travelers into Precheck and test TSA’s ability to handle more people, the agency has been selecting regular passengers to go through Precheck security lanes and get it printed on their boarding passes. Selection is based on criteria like passengers’ travel history and the route being flown. TSA officers trained in behavior detection also can move passengers they deem low risk from regular queues into Precheck lanes.

Pistole said he has heard the complaints about Precheck lanes getting clogged, and TSA has already decided to stop moving travelers 75 years of age and older into Precheck service, unless they are enrolled, because they sometimes can take 10 minutes to move through. “It used to be great, but recently the Precheck lines have been the slowest of all the lines,” said Northeastern University OM Professor Fred Van Bennekom, who has timed TSA lines. “Sometimes there’s almost no one in regular lines and we’re all backed up at Precheck.”

Classroom discussion questions:
1. Why is the TSA using the Precheck program?

2. What else can operations managers do to speed up the security screening process?

OM in the News: The Customized Bicycle Industry

April 16, 2014

bike custom

The vast majority of bikes sold in the US are made in Asia and a handful of companies dominate the market, writes The Atlantic (April 3, 2014).  Custom-made bikes are a very small slice of the industry. “But right now is the Golden Age in custom frame building,” says one industry expert. “There have never been more builders producing, and the quality has never been higher.” Though thriving, the 100 or so builders in the hand-built bicycle scene make up about 3.3% of the overall U.S. bike industry, valued at $6.1 billion and is sourced almost completely overseas. Almost 99% of bicycles sold in the U.S.are assembled in Asia—93% in China and 6% in Taiwan.

Additionally, just four companies—Dorel, Accell, Trek Bicycle, and Specialized Bicycle—own about half of the 140 bicycle brands available in this country. Technology, though, is very accessible to a one-person or two-person shop or frame builder. A lot of the innovation and creativity comes from the thinking that smaller companies can produce. Technology has made the production side more important by lowering the cost of reaching customers. The internet opens up selling opportunities–and more competition. So production and design capabilities are critical.

Unlike production bicycles that come off the rack in standard shapes and sizes, custom bikes are designed specifically for their owners’ bodies, riding styles, and aesthetic preferences. In determining the angles, rigidity, and flex of the frames they construct, hand builders take into account dozens of measurements and factors—everything from customers’ inseams, arm length and hip flexibility to whether they prefer a stiff ride for efficiency or a softer ride for comfort. The customer also has a say in the bike’s finish, color scheme and design. Ranging in price from $3,000 to more than $15,000, the primary market for custom bikes is affluent people in their 40s or 50s—more men than women—who are steeped in the cycling lifestyle and already own one bike, if not 10.

Classroom discussion questions:

1. Which of the production processes described in Chapter 7 applies here?

2. Why is the industry surviving–and succeeding?

OM in the News: The Environmentally Friendly Paper Cup

April 14, 2014
Starbucks has been serving in paper cups for years

Starbucks has been serving in paper cups for years

Jamba Juice, McDonald’s, and several other food chains are starting to serve their drinks in paper cups. Drinks stay just as hot and cold in  new doubled-walled paper cup as in the old non-biodegradeable foam variety. The paper industry likes it a lot too. Demand for paper cups is growing 5% a year. Environmental concerns from consumers and new bans on plastic foam in more U.S. cities are prompting food chains to make a switch, reports The Wall Street Journal (April 11, 2014).

Jamba Juice said last year it would adopt paper cups for its smoothies and other cold drinks “to improve our environmental footprint.” McDonald’s is replacing plastic-foam cups with double-walled McCafe paper cups at all 14,000 McCafes across the country. The company says it is trying to be more environmentally conscious and cut costs on trash. Dunkin’ Brands Group Inc. has said it is testing paper cups. These companies join Starbucks, which has been using paper for years.

Environmental advocates say paper is easier on the environment than plastic foam because the latter tends to break up in landfills and then is mistaken by animals for food. Plastic foam is difficult to recycle unless it is kept clean and separated from other types of plastics—so many plants in the U.S. don’t take it. It isn’t biodegradable.

Paper cups are slightly more expensive than foam. Extras like double walls for insulation or plant-based lining to make it compostable add to the price. While the paper cups cost a few cents more, McDonald’s says it will make up the difference in the trash. Most of the chain’s waste is paper-based– wraps, fry cartons and Big Mac boxes—so paper cups can go into the same trash bin, and eventually into recycling bins.

Classroom discussion questions:

1. Why is McDonald’s switching from foam to paper cups?

2. Why are plastic foam cups a concern to society?

OM in the News : Wal-Mart’s Green Initiative

April 13, 2014

wal mart greenIn our new chapter, called Sustainability in the Supply Chain, we note Wal-Mart’s role in developing a sustainable product index. A leader in making its operations more environmentally sound, Wal-Mart’s impact on global supply chains is the topic of an interview in The Wall Street Journal (April 9, 2014). Here is what CEO Michael Duke has to say:

It’s not about a corporate team.  It’s about getting 2 million people who work for Wal-Mart excited all over the world about sustainability. But also our partners that we work together with. How do we create a company that has zero waste? But we’ve established a goal to reduce energy consumption. We want to have a reduction of 20% of energy consumption, kilowatt-hours per square foot.

This past year, we established something for our merchandising. It relates to the sustainability index, which lets us measure the products that we sell related to sustainability, from the footprint all the way through to the consumption and the full life cycle of the product. It causes the merchants then to look at everything that we sell and say, “How do we improve the index? 

Working with our suppliers, we went to more concentrated, taking water out of liquid laundry detergent. So the liquid detergent that was this big of a bottle became [a smaller] bottle, but did just as many laundry loads. Recently, we’ve worked with Clorox, and now bleach is that way.

We’ve had a big initiative in other countries to try to raise the bar with factories on how product is manufactured. We kicked off with several hundred suppliers in China to increase energy efficiency, create more sustainable production practices throughout China. We kicked off this past year a big initiative on product made in the U.S. With rising cost of energy and moving product all over the world, it makes more sense in the long-term for more product to be made closer to the consumer.

Classroom discussion questions:

1. Why has the firm made this “green initiative”?

2. What is the sustainability index?


OM in the News: Delta’s Unorthodox Scheduling System

April 11, 2014
Delta's Control Room

Delta’s Control Room

“The crew of Delta Air Lines  Flight 55 last Thursday couldn’t legally fly from Lagos, Nigeria, to Atlanta unless they waited a day due to new limits on how much pilots can fly in a rolling 28-day period,” writes The Wall Street Journal (April 3, 2014). The trip would have to be canceled. Instead, Delta headquarters told the captain to fly to San Juan, which they could reach within their duty limits. There, two new pilots would be waiting to take the Boeing 767 on to Atlanta. The plane arrived in San Juan at 2:44 a.m., quickly took on fuel and pilots, and landed in Atlanta only 40 minutes late.

The episode, unorthodox in the airline industry, illustrates the fanaticism Delta now has for avoiding cancellations. Last year, Delta canceled just 0.3% of its flights. That was twice as good as the next-best airlines, Southwest and Alaska, and five times better than the industry average of 1.7%.

As it cut cancellations with a more-reliable operation, overall on-time arrivals improved and Delta has fewer delays. Managers in Delta operations center (featured in our Global Company Profile  in Chapter 15) move planes, crews and parts around hourly trying to avoid canceling flights. How well an airline maintains its fleet and how smartly it stashes spare parts and planes at airports affect whether a flight goes or not. Delta’s new analytical software and instruments that can help monitor the health of airplanes and predict which parts will soon fail. Empty planes are ferried to replace crippled jets rather than waiting for overnight repairs. Typically the airline has about 20 spare airplanes of different sizes each day. About half are stationed in Atlanta and the rest spread around other domestic hubs and two in Tokyo.

Classroom discussion questions:

1. Why have Delta’s operations managers focused on cancelling fewer flights?

2. How does Delta’s fleet age (one of the oldest in the industry) impact this strategy?

OM in the News: The Danger of Workplace Noise

April 9, 2014
A study links hearing and work-related injuries

A study links hearing and work-related injuries

Extremely loud noise on the job, as well as hearing loss from noise exposure, may cause workers to miss danger warnings, reports Newsmax Health (April 3, 2014). Workers regularly exposed to noise levels of 100 decibels – about the volume standing next to a lawnmower – have more than doubled risk of being hospitalized for a workplace injury. Workers with hearing loss were also more likely to be seriously hurt.

“Noise induced hearing loss is a public health issue – in the US, up to 30 million workers are exposed to noise,” said a Canadian researcher. “From an occupational safety perspective, work-related injuries remain an important issue that generates significant costs for businesses, workers and compensation organizations.” Exposure to high noise levels increases fatigue, decreases the ability to concentrate and impairs the quality of communication between workers.
Both noise and noise-induced hearing loss could be involved in the occurrence of accidents. For every decibel of hearing loss, the risk of hospitalization due to work-related injury increased by 1 percent. Workers exposed to noise levels above 100 decibels had 2.4 times the risk of being hospitalized for work-related injuries compared to workers not exposed to loud noise. Workers with the combination of severe hearing loss and working in an environment where noise exposure is overly intense the risk of being hospitalized with a work-related injury is 3.6 times that of workers with neither factor.
Workers who can’t hear properly, either because of hearing loss or wearing hearing protection that’s too strong, might miss important communications and signals on the job. One thing that might help is if workers and supervisors devise special safety signals that don’t rely as much on hearing.
Classroom discussion questions:
1. What levels of noise are students exposed to daily? Refer to Figure 10.4b in Chapter 10.
2. How can an operations manager protect employees?

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