OM in the News: The Turning of the Screw
Harley’s York PA plant
Companies’ pursuit of “big data”—collecting and crunching ever larger amounts of information—is often thought of as another way to figure out exactly what customers want. But big data is also a means of measuring millions of little things in factories, such as how many times each screw is turned. That is what Raytheon is doing at its Alabama missile plant, writes The Wall Street Journal (May 16, 2013). If a screw is supposed to be turned 13 times after it is inserted but is instead turned only 12 times, an error message flashes and production of the missile or component halts. Improvising with a defective screw or the wrong size screw isn’t an option.
Similarly, At Harley-Davidson’s plant in York, Pa., software keeps a constant record of the tiniest details of production, such as the speed of fans in the painting booth. When the software detects that fan speed, temperature, humidity or some other variable is drifting away from the prescribed setting, it automatically adjusts the machinery. In the past, says Harley’s VP, operators had leeway on paint jobs and each could do the work in a slightly different way. Harley has also used the software to find bottlenecks that could keep it from its goal of completing a motorcycle every 86 seconds. Harley managers recently determined that installation of the rear fender was taking too long. They changed a factory configuration so those fenders would flow directly to the assembly line rather than having to be put on carts and moved across an aisle.
Harley and Raytheon are just two of many manufacturers installing sophisticated, automated software systems, known as manufacturing execution systems, or MES, to gather and analyze factory-floor data. Semiconductor and other high-tech companies were early adopters of MES, but now others are catching up. Suppliers include Apriso, GE, SAP, Siemens, and Rockwell Automation.
Discussion questions:
1. Why is MES a valuable operations tool?
2. By what other names is MES known in manufacturing?
The recent tragedies at several Bangladeshi garment factories have claimed over 1,000 lives—and focused international attention on this important industry. So far, much of the discussion has focused on Bangladesh’s minimum wage law–the average garment worker gets take-home pay of $70-$80 per month. But The Wall Street Journal (May 17, 2013) raises the question of how that minimum wage is being paid.
While the worker is sewing, on another floor of the same factory building negotiations are under way between the factory owner and a retailer’s rep. The factory owner is offering a shirt to the buyer at $6.75 per piece. Of that, the owner will spend $4.75 buying the 1.9 yards of 100% cotton with a fine 50s thread count, and another $1 buying the labels, accessories and other components the retailer specifies. The remaining $1 per shirt funds the “cutting and making,” which includes wages for the workers. Part of it funds the letters of credit the manufacturer will use to ensure a steady supply of raw materials. Part of it goes toward capital expenses–and part will become the manufacturer’s profit.
An order for 400,000 shirts typically means that 400 workers produce 3,077 pieces per day. The wage cost works out to about 38 cents per shirt. Another 15 cents goes to sending the shirt for a fine washing spin. Rent and utilities for the factory floor works out to about 11 cents per shirt, and head-office and marketing costs for the factory are 11 cents.
The remaining 25 cents may cover repaying a 10-year bank loan at 18% interest, which the factory owner has used for set-up costs. All is at a delicate equilibrium, writes the Journal, until the owner feels compelled to give in to a firmly worded request from the retailer for an additional discount, or a demand to air-freight some boxes of shirts that suffered a 2-week production delay.
Discussion questions:
1. If the cost of upgrading factory safety averages $128,000, where should the money come from?
2. How do students feel about paying more for clothes to help raise the living and safety standards in the country making the product?
Our Guest Post today comes from Brent Snider, who is an award winning instructor of Operations Management at the University of Calgary’s Haskayne School of Business.
Forecasting is covered late in the term in our required undergrad course, which may contribute to student apathy towards the topic. Beat the Instructor was developed after recognizing that there were no spreadsheet-based experiential introductory exercises that have been shown to build significant student interest in learning forecasting techniques.
Most forecasting exercises tend to be highly technical and or intended to be used after forecasting techniques have already been introduced in lectures. Beat the Instructor is an in-class game that enables student groups to compete against their instructor in an introductory time-series forecasting exercise, even before any lecture content has been covered. In addition to starting the forecasting topic positively via a 30 minute hands-on experiential learning exercise, the game has proven to build strong student interest in learning the forecasting techniques that are covered later in the lecture.
Student groups are provided a spreadsheet with historical demand for 12 previous periods for 4 separate items. Each of the 4 items represents one of the classical demand patterns of trend, cycles, seasonality, and random variations. The students are then asked to predict demand for the next 6 periods for each item, and submit their forecast to the instructor. In addition to competing amongst themselves, student groups are challenged to outperform the instructor’s forecast (who also predicts demand using the techniques that will be subsequently covered). Each group’s forecast is graphed, in addition to the instructor’s, creating anticipation for the actual demand pattern. After actual demand is randomly generated (and revealed on the graph), each group’s forecast error is calculated and ranked. Typically the instructor outperforms most if not all groups, generating student interest in learning the techniques that can answer their often posed question: “How did you forecast so well?”
OM in the News: Japan’s Inability to Fire Workers
Th
e Wall Street Journal (May 11-12, 2013) provides an interesting insight into Japan’s weakening international competitiveness that will make for a good class discussion when you cover Chapter 2, ”Operations Strategy in a Global Environment.” Japanese Prime Minister Shinzo Abe has quietly put aside plans to overhaul a rigid labor system that is blamed for many of the woes facing once-dominant Japanese corporations.
A government study estimated that businesses maintained 4.6 million jobs that were actually unnecessary. And with few mid-career job changes, there is little opportunity for entrepreneurship. Japan’s corporate start-up rate is the lowest among Organization for Economic Cooperation and Development (OECD) countries. “Japan should move toward a more flexible employment and wage system that is based more on ability rather than age to encourage productive workers to remain employed,” an OECD report states. “Labor mobility would help to foster start-ups,” says one Japanese professor. ”New businesses won’t be created unless human resources are set free, but big corporations are trying to prevent their workers from being free.”
The workforce at Japan’s largest corporations is one of the most inflexible among developed nations, with a tradition of lifetime employment, a low participation rate among women and strict labor laws. These have combined to make it difficult for companies to shed excess workers, because of the legal issues it would raise and the cultural issues involved. As part of their role in society, corporations have been expected to help ensure full employment.
At least seven Japanese electronic manufacturers still produce flat-panel televisions, almost all at a loss. However, some industry executives have said privately that they don’t pull the plug on the unprofitable business because they would need to find other jobs within the company for those TV employees.
Discussion questions:
1. Compare US and Japanese labor laws.
2. What can Japan do to increase its manufacturing productivity?
Today’s Guest Post comes from Kelly Thomas, who is a supply chain management professional and executive at JDA Software.
Here is a simple question: “how much inventory is in the world?” The short answer is that no one knows for sure, and no one keeps track of it at a global level. It’s an interesting question though, because it gives us an understanding of how efficient the world is in turning inventory into economic output.
The Council of Supply Chain Management Professional’s annual report leverages data from the Bureau of Economic Affairs and other sources, and provides great detail on logistics, distribution, and inventory costs in the U.S. According to this report, there was $2.2 trillion in business inventory in the U.S. in 2012. Also last year, there was about $70T worth of economic output globally. The U.S. represented approximately 22% of overall output. Assuming the rest of the world is as efficient as the U.S., a simple pro-rata calculation based on economic output produces a global inventory level of $2.2T/22% = $10T.
This calculation does not account for the relative efficiency of economic activity across countries. China, for example, has twice the logistics costs of the U.S. as a percentage of economic activity or GDP. Given that the combined GDP of the BRIC countries is almost the size of the U.S. economy, and if you assume all of the BRIC countries have logistics costs similar to that of China, this would add almost another $2T to the overall inventory number, yielding $12T in global inventory. This likely understates the actual number since it also does not account for relative inefficiencies in other emerging markets (and does not include government-owned inventories).
This ballpark estimate gives us an understanding of the efficiency of economic output relative to inventory. Based on this information, economic output turns against inventory are about 6 (roughly the same as sales turns). This means there is approximately 2 months of global inventory sitting around at any one time (on an economic output basis). We can do better than 6 turns. If we were able to reduce inventories by just 10%, that would free up $1.2T in capital that could be deployed to growth activities that would benefit companies, countries, and ultimately people.
QueVision monitors tell how many lanes need to be open now and in 30 min.
Supermarket giant Kroger, reports The Wall Street Journal (May 2, 2013), is winning the war against lengthy checkout lines with a powerful weapon: infrared cameras long used by the military and law-enforcement to track people. These cameras, which detect body heat, sit at the entrances and above cash registers at most of Kroger’s roughly 2,400 stores. Paired with in-house software that determines the number of lanes that need to be open, the technology has reduced the customer’s average wait time to 26 seconds. That compares with an average of four minutes before Kroger began installing the cameras in 2010.
Reducing wait times is becoming a top priority for retailers, from high-end department stores to hardware chains to fast-food outlets. Battling both online rivals that offer at-home convenience and intensifying competition among fellow brick-and-mortar outlets, many companies see enhancing the shopping experience as a way to build loyalty. Kroger’s system, dubbed QueVision, is now in about 95% of its stores. The system includes software developed by Kroger’s IT department that predicts for each store how long those customers spend shopping based on the day and time. The system determines the number of lanes that need to be open in 30-minute increments, and displays the information on monitors above the lanes so supervisors can deploy cashiers accordingly.
The company says surveys show customer perception of its checkout speed has improved markedly since 2010. “The bottom line is we want our checkout experience to be the best, and it’s our goal that our customers will enjoy the experience so much that they’ll want to return,” says Kroger’s senior VP.
Discussion questions:
1. What other new technologies are being used in service industries to speed up checkout lines (see the WSJ article and Chapter 7)?
2. How can QueVision help boost orders?
OM in the News: Disney Cleanses its Supply Chain
Disney sweater found in the remains of a fire last year in Bangladesh
Ever since a building with garment factories collapsed in Bangladesh a few weeks ago, killing more than 1,000 people, Western apparel companies with ties to the country have scrambled to address public concerns about working conditions there. But one big American company, Disney, had already decided to leave the country — pushed by the devastating fire just six months ago that killed 112 people. The Walt Disney Company, the world’s largest licensor with sales of nearly $40 billion, recently ordered an end to the production of branded merchandise in Bangladesh. The New York Times (May 2, 2013) reports that on March 4, the company had sent a letter to thousands of licensees and vendors setting out new rules for overseas production.
This comes as no surprise to those of us in Orlando, where Disney, with its 60,000 “cast members” (employees in layman’s terms), is king. Its public image as a safe, clean, and wholesome company is carefully maintained. Disney’s move reflects the difficult calculus that companies with operations in countries like Bangladesh are facing as they balance profit and reputation against the backdrop of a wrenching human disaster. “We felt this was the most responsible way to manage the challenges associated with our supply chain,” says Disney’s president of consumer products.
With some labor groups urging Western companies to stay and fix problems rather than leave, Disney said that it would pursue “a responsible transition that mitigates the impact to affected workers and business.” It set out a yearlong transitional period for its contractors to phase out production in Bangladesh, Pakistan, Belarus, Ecuador and Venezuela by April, 2014. In deciding in which countries to permit production, the company relied heavily on the World Bank’s Governing Indicators, which evaluate performance on issues like government effectiveness, rule of law, accountability and control of corruption.
Discussion questions:
1. Evaluate Disney’s decision to leave these 5 countries vs. staying and trying to improve conditions.
2. How can a major company protect its reputation when global supply chains are so complex?
