OM in the News: The New Industrial Revolution
The upper for Nike’s Flyknit shoe
“Welcome to the New Industrial Revolution,” writes The Wall Street Journal (June 11, 2013)—a wave of technologies and ideas that are creating a computer-driven manufacturing environment that bears little resemblance to the gritty and grimy shop floors of the past. The revolution threatens to shatter long-standing business models, upend global trade patterns and revive American industry.
“Manufacturing is undergoing a change that is every bit as significant as the introduction of interchangeable parts or the production line,” says the head of GE’s global research lab. “The future is not going to be about stretched-out global supply chains connected to a web of distant giant factories. It’s about small, nimble manufacturing operations using highly sophisticated new tools and new materials.” The upheaval is accelerating thanks to the convergence of a number of trends: the low cost and accessibility of Big Data associated with cloud computing; the plummeting cost of electronic sensors and microprocessors that can be used to make machines more adept; and software advances that allow a whole new level of manufacturing precision.
To get an up-close look at how the new technologies are already disrupting the old ways of doing things, consider Nike’s Flyknit shoe. As high-tech as some sneakers may be in materials and appearance, almost all of them are still made on assembly lines that put heavy emphasis on human labor. Workers sit side by side in enormous facilities, cutting material and stitching and gluing shoe components together. But with new technology, Nike has begun to make a shoe with just a few parts instead of dozens– and with up to 80% less waste. Out of the blue, the reason for making shoes in low-wage countries begins to evaporate and the advantages of locating the machine closer to the customer—in part for faster delivery—begin to loom much larger.
Boston Consulting Group just published a report predicting that as much as 30% of America’s exports from China could be domestically produced by 2020.
Discussion questions:
1. What is the “new industrial revolution”?
2. Will the number of manufacturing jobs in the US increase dramatically? Why?
OM in the News: Jumping the Queue at Universal Studios
Since I live in Orlando, the theme park capital of the world, the recent New York Times article (June 10, 2013) “At Theme Parks, A VIP Ticket to Ride”, caught my eye. Theme parks have traditionally been the ultimate melting pots. Tourists, retirees, rowdy teenagers, families and fathers who would rather be golfing are all thrown together in an egalitarian experience in which the queue for one is the queue for all, and cotton candy is the food of the masses. Not anymore.
As stratification becomes more pronounced in all corners of America, from air travel to Broadway shows to health care, theme parks in recent years have been adopting a similarly tiered model, with special access and perks for those willing to pay. Now Universal Studios has pushed the practice to a new level. It has introduced a $299 V.I.P. ticket (the regular admission is about $85), just in time for the summer high season, that comes with valet parking, breakfast in a luxury lounge, special access to Universal’s back lot, unlimited line-skipping and a fancy lunch.
Fearful of puncturing its utopian image, Disney has stuck to a single class of ticket. V.I.P. tour guides are available, but Disney charges an exorbitant price — $380 an hour, with a minimum of six hours — to limit demand. Business is good at both companies. Universal’s 3 theme parks in the U.S. attracted 20 million people last year, a 19% increase from 2010. The Magic Kingdom at Walt Disney World recently recorded the busiest day in its 41-year history.
The amusement park industry urgently wants to expand profits without introducing costly new rides every summer. Universal, which recorded $953 million in profit from its parks in 2012, has no major new attractions planned until next year; the V.I.P. Experience, in the meantime, is a relatively low-cost way to generate revenue and send a message of bigger and better into the marketplace.
Discussion questions:
1. What are the ethical implications in the new VIP system?
2. Explain how Universal’s model relates to Figure D.5, “The Trade-off Between Waiting Costs and Service Costs”.
Ford forges ahead with 3-D printing of this engine cover
Companies such as GE, Ford and Mattel are pushing 3-D printing further into the mainstream than most people realize, writes The Wall Street Journal (June 6, 2013). Unlike traditional techniques, where objects are cut or drilled from molds, resulting in some wasted materials, 3-D printing lets workers model an object on a computer and print it out with plastic, metal or composite materials.
Ford Motor The auto maker sees a future where customers will be able to print their own replacement parts. A customer could log onto the Web, scan a bar code or print up an order, take it to a local 3-D printer, and have the part in hours or minutes. Ford is currently using 3-D printing to prototype automobile parts for test vehicles. Ford engineers use industrial-grade machines that cost as much as $1 million to produce prototypes of cylinder heads, brake rotors, and rear axles in less time than traditional manufacturing methods. Using 3-D printing, Ford saves an average of one month of production time to create a casting for a prototype cylinder head for its EcoBoost engines. The traditional casting method, which requires designing both a sand mold as well as the tool to cut the mold, can take 5 months.
General Electric GE’s Aviation unit prints fuel injectors and other components within the combustion system of jet engines. Building engine airflow castings by melting metal powders layer by layer is more precise than making and cutting the parts from a ceramic mold.
Mattel The toy maker used to sculpt prototypes of toys from wax and clay before building the production models out of plastic. Today, Mattel engineers use any of 30 3-D printers to create parts of virtually every type of toy that it manufactures, including popular brands such as Barbie, Max Steel, Hot Wheels cars and Monster High dolls.
Discussion questions:
1. Can Mattel ever let its customers print their own toys from software files?
2. Why are 3-D printers such an important OM tool?
OM in the News: Walgreen’s “Net Zero Energy” Stores
Roof of new Walgreen store in Evanston, IL contains 800 solar panels
As the Walgreen Company expands its sales items to fresh salads, Redbox DVD rentals and digital photo scanners, among other products, its consumption of power keeps inching up. While the drugstore chain cannot significantly reduce its electricity use in all stores immediately, it is building its first “net zero energy” store in Evanston, IL, that it hopes will produce more energy than it consumes. Alternative energy equipment at the store includes more than 800 solar panels on the roof, two 35-foot wind turbines and a geothermal energy system dug hundreds of feet beneath the store’s foundation.
The net zero concept is part of the retail giant’s overall sustainability plan to reduce energy use by 20% by 2020 across all of its more than 8,000 stores, reports The New York Times (June 5, 2013). The cost of building the new store will be about twice that of a typical new store. Over time, however, executives expect to recoup the extra costs from reductions in the store’s energy use, tax credits and rebates from utility companies.
Walgreen is also incorporating several conservation and energy producing strategies in existing stores, including LED lighting, energy-efficient building materials and carbon dioxide refrigerant for heating, cooling and refrigeration.
The new store, on the site of an old store that had been razed, is being built by recycling more than 85% of the demolished store’s material like bricks, concrete and metal. In addition, Walgreen has drilled eight 550-foot holes for pipes — about as deep as the landmark Chicago Board of Trade building is tall — to create a geothermal energy system that will use the constant temperature of earth to heat and cool the building.
Discussion questions:
1. Why is Walgreen developing the “net zero energy” store?
2. What is the chain’s sustainability strategy?
OM in the News: Unilever’s Green Thumb
Unilever CEO Polman and his products
“Our purpose is to have a sustainable business model that is put at the service of the greater good,” says the CEO of consumer products giant Unilever in Fortune (June 10, 2013). This sounds like the boilerplate that fills corporate-responsibility reports, but Unilever has gone beyond companies like GE, IBM, and Wal-Mart by putting sustainability at the core of its business. In a 2010 manifesto, Unilever promised to double its sales even as it cuts its environmental footprint in half and sources all its agricultural products in ways that don’t degrade the earth. The company also promised to improve the well-being of 1 billion people by, for example, persuading them to wash their hands or brush their teeth, or by selling them foods with less salt or fat.
Whether Unilever’s do-good agenda has driven its financial success is hard to know. The firm’s global hand-washing campaign, for instance, lifts sales of Lifebuoy soap, while a “brush day and night” campaign helps Pepsodent. Socially responsible marketing around self-esteem for women helped Dove become Unilever’s bestselling brand in the U.S.
The model drives innovation too. Unilever researchers are working to develop a laundry detergent that can clean clothes in a few minutes at any water temperature. The company wants to reduce the sugar in its ready-to-drink teas and remove calories from ice cream. It’s telling the farmers who supply it with palm oil, soybeans, tea, cocoa, and tomatoes to get their crops certified as sustainable. The chickens that lay the eggs that go into Hellmann’s mayonnaise or Ben & Jerry’s ice cream must be cage free. No other company has a sustainability program as wide and deep. Unilever’s plan includes 60 targets, with timetables, such as sourcing “75% of the paper and board for our packaging from certified sustainably managed forests or recycled material.”
Discussion questions:
1. Is sustainability helping to grow Unilever?
2. What is the role of operations in this model?
OM in the News: Can Outsourcing Be Improved?
TAL factory in China. TAL makes 1 of every 6 shirts sold in the US
The day after the Rana Plaza factory crumbled in Bangladesh, the death toll numbered 225. “We were lucky: It could have been worse”’ wrote the LA Times. But when recovery halted, the final toll was not lucky at all: 1,127 bodies. You’d be hard-pressed to pick a lower point for outsourcing or a better example of the high cost of cheap labor when you discuss outsourcing in Chapter 2.
The past two decades have provided plenty of reasons to believe that relying on low-wage workers overseas has made multinationals complacent about their safety. Some of the companies manufacturing in Bangladesh have rushed forward with promised improvements — H&M and Zara signed an accord to improve laborers’ safety and pay in the country. “Costs are rising everywhere we go. There’s no running away from that,” says the CEO of TAL Group, the manufacturing giant that has factories in China, Vietnam, Thailand, and Indonesia.
A decade ago, Nike took a different tack to improve its manufacturing. The company was plagued by stories of poor working conditions and underpaid labor in sweatshops, so in 2004 it began to publicly reveal online all of Nike’s factories. Still, such fixes can’t grapple with the fact that most workers’ fates remain tied to the laws (or lack thereof ) in their home countries. An MIT outsourcing expert concludes that private oversight isn’t enough. “We need to bring government back in,” he says, offering the example of Cambodia, a country reliant on the apparel industry after years of genocide and civil war. The U.S. allowed the country to expand its exports on the condition that labor standards show steady improvement. The Cambodian government has since replaced U.S. oversight, and it now licenses for export only factories that have met the standards of the International Labor Organization. “Bangladesh, take note,” writes Fortune (June 10, 2013).
Discussion questions:
1. What responsibility do global companies have in improving working conditions in Bangladesh and other developing countries?
2. How has TAL worked to lower costs as wages increase?
Pegatron began making iPad minis (left) recently, while Foxconn still assembles the larger iPads (right)
For years, nearly all of the world’s iPhones and iPads rolled off the assembly lines of a single company: Foxconn. It was a famous partnership between two outsize personalities— Steve Jobs, Apple’s intense and mercurial co-founder, and Terry Gou, the Taiwanese manufacturer’s equally demanding chairman. But under current CEO Tim Cook, reports The Wall Street Journal (May 30, 2013), Apple is dividing its weight more equally with a relatively unknown supplier, giving the technology giant a greater supply-chain balance. Pegatron will be the primary assembler of a low-cost iPhone expected to be offered later this year. Foxconn’s smaller rival across town became a minor producer of iPhones in 2011 and began making iPad Mini tablet computers last year.
Pegatron’s rise means an end to the monopoly that Foxconn, the world’s largest electronics contract manufacturer—has held over the production of Apple’s mobile products. There are strategic reasons for the shift: risk diversification after Foxconn’s manufacturing glitches last year with the iPhone 5 that resulted in scratches on the metal casings, and Apple’s decision to expand its product lines amid growing competition from Samsung and others. Pegatron also has been willing to accept thinner profits as it courts Apple’s business.
Ironically, Foxconn’s cost advantages from scale have waned as it works to improve factory conditions after a spate of high-profile worker suicides and accidents in recent years. Foxconn, in its growing heft as the world’s largest electronics contract company, was also getting more difficult for Apple to control, with incidents such as changing component sourcing without notifying Apple.
Pegatron, which has about 100,000 employees in Taiwan and China, expects to increase its China workforce in the second half of the year by around 40%. The staffing increase is largely due to expected production of low-cost iPhones.
Discussion questions:
1. Why is Apple diversifying suppliers?
2. What are the disadvantages of this move?
