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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?

OM in the News: The Bellhop Robot

August 19, 2014

 

A touch screen on Botlr allows guests to give the robot a review

A touch screen on Botlr allows guests to give the robot a review

“Think of it as the Terminator’s human-friendly sibling,” writes The New York Times (Aug.12, 2014). In the Aloft  hotel lobby in Cupertino CA, a desk clerk places a razor in the bin of a 3-foot-high robot and taps in a room number on a display. The robot, “Botlr,” chirps an R2-D2-style acknowledgment and rolls off to an elevator and its final destination. On the move, it can reach speeds of up to 4 miles per hour, adequate for Botlr to hustle razors, toothbrushes, smartphone chargers, snacks and the morning paper to any of the hotel’s 150 rooms in 2-3 minutes.

When the robot reaches the guest’s door, the system calls the room, alerting the guest to the delivery. The robot, which has a camera and other sensors, can recognize that the room door has been opened and then lift the lid on the storage bin that holds the delivery. A flat panel display at the top of the robot is used for the guest to enter a “review” rather than giving a tip. In return for a positive review, the robot will do a small dance before it departs.

Perhaps the most impressive capability of the new robot is its ability to independently make its way to upper floors. When it reaches the elevator, it wirelessly sends a command for the door to open and then maneuvers into the elevator car, taking care to stay out of the way of any human passengers. When it returns to the lobby, Botlr can plug itself into a recharging station while it awaits its next errand. As a hotel application, the robot can free up the hotel desk clerk from having to run up to the room, giving the staff more time with the guests.

Classroom discussion questions:

1. How else can service robots be used in hotels?

2. What are the advantages and disadvantages of Botlr, from an OM perspective?

OM in the News: Ford’s Epic Gamble on Aluminum

August 16, 2014
Alcoa's Iowa plant has expanded to meet the growing need for aluminum in the auto industry

Alcoa’s Iowa plant has expanded to meet the growing need for aluminum in the auto industry

Ford has a long-term plan to unify its global manufacturing, writes Fortune (July 24, 2014). But profits depend largely on a beefy truck that is sold only in N. America and will never find a market in Asia or Europe. Not that it needs to. The F-series has outsold every other car and truck in the U.S. for 3 decades, with some 33 million out the door. So when Ford decided in 2009 to fundamentally change the product it advertises as “Built Ford tough” by making it with a lightweight aluminum body, it was messing with a uniquely valuable franchise. Ford figured the change could reduce the weight of the F-series by 700 pounds, significantly improving its fuel economy (US standards require a fleetwide average of 54.5 mpg by 2025).

But aluminum is more expensive than steel, more complicated to assemble, and more difficult to repair. The changeover from steel would mean alterations to nearly every phase of the business. Aluminum can’t be easily welded and must be riveted and bonded with adhesives. New suppliers would have to be found and validated, plants refitted, production techniques changed, repair technicians hired and trained. Importantly, the changeover to the 2015 models would have to be extended, slowing production and denting profits. “It will be magic or tragic,” says the CEO of AutoNation.

Adds Ford’s CEO, “We had three alternatives: make incremental changes to the existing truck, add more aluminum parts, or make it all aluminum.” Ford created 4 work teams to investigate what it saw as the big unknowns surrounding aluminum: availability, manufacturability, serviceability, and likability. At the Dearborn Truck Plant, one of 2 plants where the F-150 will be built, the company is spending hundreds of millions of dollars to build and install new stamping presses and dies to produce the aluminum panels and replace today’s spot welders with rivet guns, advanced welders, and adhesive machinery in the body shop. With both plants currently producing the 2014 F-150, they will have to be taken down one at a time for a total of 13 weeks for refitting, depriving Ford of $2 billion in revenue.

Classroom discussion questions:

1. How is Ford’s production process changing?

2. What are the risks the company faces?

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