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OM in the News: Ford Moves Its Small Car Production to Mexico

October 19, 2016
Ford’s factory in Wayne, Mich., will focus on making trucks and S.U.V.s, while production of smaller cars will be moved to a plant in Mexico

Ford’s factory in Wayne, Mich., will focus on making trucks and S.U.V.s, while production of smaller cars will be moved to a plant in Mexico

There is no doubt that Nafta played a role in the migration of many American manufacturing jobs to Mexico in the last 22 years, writes The New York Times (Oct. 19, 2016). Before the trade agreement, U.S. automakers barely had a presence in Mexico. Now, Mexico’s car-making work force is about 675,000 strong. And in a move that has drawn fire from critics of the Nafta, Ford is giving up on making small cars in the U.S. and plans to move production of its Focus compact cars from its Wayne, Michigan factory to a new plant under construction in Mexico.

Ford’s retooling of its Wayne factory, though, is a reflection of the industry’s desire to keep pace with growing demand for high-profit trucks and S.U.V.s, while continuing to produce less expensive models at lower costs with the cheaper wages paid in Mexico. Detroit simply cannot make money producing small cars in the U.S., where a UAW union worker earns about $29 an hour, more than triple the wages of a Mexican employee.

Detroit’s Big-3 auto companies are loath to close any existing facilities, both to keep peace with the UAW and to protect their billions of dollars of assets in factories in the U.S. that are already up and running. What’s more, plants like the one in Wayne are staffed by experienced workers and able to deliver high-quality products. .

It is unlikely, though, that any Detroit automakers will invest in new manufacturing plants in the U.S.. Mexico is simply too attractive an option for carmakers looking to add to their overall production capacity. “Nine of the last 11 auto factories built in North America have been in Mexico,” said one expert. “The fact is Mexico offers high productivity and low wages, and that is a hard combination to beat.” Ford is hardly alone. G.M. is investing $5 billion to upgrade its plants in Mexico. Toyota, Volkswagen, Kia, Honda and BMW are all adding jobs and new products there.

Classroom discussion questions:

  1. Is Ford cutting U.S. jobs?
  2. What factors impact major location decisions such as this?

OM in the News: Walmart’s New Approach to Increasing Productivity–Pay Employees More

October 16, 2016
A Walmart trainee perfecting a cereal display in Fayetteville, Ark.

A Walmart trainee perfecting a cereal display.

“WalMart is discovering that, sometimes it is in an employer’s best interest to pay more than necessary to get a worker into a job,” reports The New York Times (Oct.16, 2016). The 18th-century economist, Adam Smith, described the need to pay a goldsmith particularly well to dissuade him from stealing from you. More recently, economists have found evidence that people are more productive when they are paid above the market rate. An employee making more than the market rate, after all, is likely to work harder and show greater loyalty. Workers who see opportunities to get promoted have an incentive not to mess up.

There is evidence of this in practice. Higher pay at New Jersey police departments, for example, led to better rates of clearing cases. At the San Francisco airport, higher pay led to shorter lines for passengers. Among British home care providers, higher pay meant less oversight was needed.

Why a change of heart at Walmart? Because just a few years ago, shoppers were fed up. They complained of dirty bathrooms, empty shelves, endless checkout lines and impossible-to-find employees. Only 16% of stores were meeting the company’s customer service goals. Sales fell for 5 straight quarters, and shareholders were screaming.  As an efficient, multinational selling machine, the company had a reputation for treating employee pay as a cost to be minimized. So Walmart turned to the idea of “efficiency wages,” namely, pay workers more than the going rate will get more loyal, harder-working, more productive employees in return.

First Walmart planned 200 training centers to offer a clearer path for hourly employees who want to get on the higher-paying management track. Then it raised its hourly pay to a minimum of $10 for workers, and to $15 an hour (from $12) for department managers. Third, it offered more flexible and predictable schedules to workers. Average pay for a nonmanagerial employee is now $13.69 an hour, up 16% since 2014. The results: this year, the proportion of stores hitting their targeted customer-service ratings has rebounded to 75%. Sales are rising again.

Classroom discussion questions:

  1. Discuss the pros and cons of efficiency wages.
  2. What impact will Walmart’s changes have on the entire retail industry?

Video Tip and OM in the News: Why the Other Line Always Moves Faster

October 13, 2016

wsj-queueQueuing (see Business Analytics Module D) is always a popular topic with students–and evidently with readers of the Wall Street Journal (Oct. 7, 2016) as well. This Journal article is a very basic tutorial on the history (Erlang discussion) and logic of waiting line modeling.

The piece writes: “You’ve probably participated in this familiar dance: Given a choice of checkout lines, you’ve somehow picked the slowest. You could wait it out. You could chassé to another queue. Or you could bail out altogether. After all, no one likes to wait. But are the other lines really faster? When parallel lines feed multiple cashiers, you may not be in the slowest one, but chances are, you also are not in the fastest.”

 Prof. Bill Hammack, at the U. of Illinois (YouTube’s “Engineer Guy”), explains it like this in his 4-minute video: “Imagine three lines feeding three cash registers. Some shoppers will have more items than others, or there may be a delay for something like a price check. The rate of service in the different lines will tend to vary. If the delays are random, there are six ways three lines could be ordered from fastest to slowest—1-2-3, 1-3-2, 2-1-3, 2-3-1, 3-1-2 or 3-2-1. Any one of the three (including the one you picked) is quickest in only two of the permutations, or one-third of the time.”
Classroom discussion questions:
1. Why doesn’t every service provider use the multiple-server, single line approach?
2. Explain Erlang’s theory.

OM in the News: The Chicago Cubs and Inventory Control

October 10, 2016
Checks on a Cubs-themed postseason T-shirt Oct. 5, 2016, ahead of the Cubs' first playoff game against the San Francisco Giants

Checking on a Cubs-themed postseason T-shirt, ahead of their first playoff game against the San Francisco Giants

Even though I grew up a few blocks from Wrigley Field, home of the Chicago Cubs baseball team, I was a loyal White Sox fan and never set foot in Wrigley Field! Today, however, I am proud of the Cubs’ success. They won over 100 regular season games and may pull off the real feat of winning the World Series. But what does this have to do with Inventory Management, Chapter 12 of our text? The postseason run can bring big business for local team merchandise companies — if they understand the single-period inventory model.

“Nobody alive has ever seen the Cubs win the World Series, and there were no licensed goods the last time they were there,” said one sports paraphernalia maker. “No one has seen Cubs World Series merchandise in their lifetime, so I believe that every Cubs fan will want something. We can’t not have enough to supply the fans. But what makes me nervous is if there’s a number where you overbuy? The postseason is no automatic moneymaker.” In Chicago, where World Series experience is thin, there’s no precedent to say how much is enough, but not too much, writes The Chicago Tribune (Oct.6, 2016).

By the time a manufacturer is ready to produce T-shirts and hats, the playoff picture may have changed. Then there’s the problem of getting access to retailers. Manufacturers have to worry that the season might end before the products ever make it to stores. So they need to be ready to drop everything and crank up the presses to produce the tens of thousands of products on short notice. And that is where the single-period model comes to play. Companies need to compute the cost of underestimating (shortages) versus the cost of overestimating. This a great example of the real world inventory management.

Classroom discussion questions:

  1. How does the single-period model differ from the EOQ model?
  2. What are the factors that complicate the decision manufacturers must make immediately?

Teaching Tip: Our New Inventory Management Simulation

October 8, 2016

Inventory Simulation is the 4th of our four new classroom gaming exercises. It accompanies Chapter 12, Inventory Management and is free within our MyOMLab learning system.

Goal: Manage stock of electronics device to minimize costs and maximize profits.

You are the store manager at a local branch of DigiLife, a large electronics retail chain. A new version of a popular consumer electronics device called the Amulet is coming out this year. It is your job to sell as many Amulets as you can while minimizing your costs in order to maximize your store’s profits.

Learning Objectives

Primary Objectives:

  • Understanding how EOQ is calculated
  • Understanding the limits of EOQ

Ancillary Objectives:

  • Use EOQ formula = sqrt(2ds/h)
  • Where d = qty demanded, s = ordering/setup cost, h=holding cost
  • Understand what the answer means and what the inputs mean.
  • Knowing how EOQ can help guide you towards better decisions about order size and time between orders.
  • Understand that demand is variable (Sales/marketing give you their best forecast but no one can predict the future. Also, you may be given an average demand where actual demand will fluctuate from day to day.)
  • Understand that h has fixed and variable components (if you already have a fridge you might as well fill it. But if you’re paying for storage by the square foot, that’s going to vary).
  • Understand ordering costs aren’t always obvious (going to the gas station every day to top off your tank doesn’t mean you may more for your gas, but it’s a huge waste of time).
  • Understanding the economic impacts of defects and damage, stockouts and rush orders.
  • Understanding the limitations of using EOQ to guide your decisions–that EOQ doesn’t give you an exact answer, but it gets you close.
  • inventory simulation

Teaching Tip: How Microsoft Sells Supply Chain Management and ERP

October 6, 2016

ms scm graphicHere is proof that SCM has turned into a field that every student needs to understand. The following is from Microsoft’s web site called the Dynamics of SCM, which promotes its product, called Microsoft Dynamics ERP :

Supply chain management is the oversight of the entire lifecycle of a product or service: from its infancy as a raw material or idea, to the manufacturing of the product, to its distribution, to the retailer, and then ultimately, to the consumer. Each of these stages of the product or service is a link in a chain. Each step is fastened to the next, interconnecting to facilitate the creation of a product.

Maintaining a holistic view of your supply chain activities is essential for efficiency. You need to be able to examine your business—every inch of it—in real time. To have supply chain control, you need to know what’s going on at every stage, at all times.

An enterprise resource planning (ERP) solution will provide you the control of your supply chain you need for more efficient people and processes, better costs, happier customers and greater profits.  This automation helps reduce redundant tasks and can increase accuracy, all the way to your customer’s receiving dock. That can eliminate bottlenecks, improve order processes, and minimize both handling time and overhead.

ERP gives you the ability to find exactly the information you’re looking for so you can make smarter decisions more quickly.

  • Simplify critical purchasing and receiving processes.
  • Know what your customers want.
  • Keep inventory lean and still address demand.
  • Tools to make smarter buying decisions and to negotiate better terms.
  • Help improve customer service and improve customer relationships.

Teaching Tip: Our New Quality Management Classroom Simulation

October 4, 2016

Quality Management Simulation is the 3rd of our four new classroom gaming exercises. It accompanies Chapter 6, Total Quality Management, and is free within our MyOMLab learning system.

Goal: Make quality investments with good ROI in terms of profits and customer ratings.

You are the manager of Cibare, one of the hottest Italian restaurants in town. You manage a full service staff and work closely with the Chef and the restaurant owner to ensure Cibare is providing a high-quality experience for customers. It is your job to make sure daily operations are running smoothly and that the investments you make to improve or maintain quality provides a return that exceeds the cost.

Learning Objectives

  • Understand that quality is an investment. There is a cost to investment and often a return. When managers allocate resources appropriately, the return on an investment should exceed the cost.
  • Understand that quality is a continuous pattern of activities and not a one-time event.
  • Develop a more complete understanding of total cost concepts.
  • Help the student realize that exact numbers and are not always available as on an exam and acknowledge that outcomes have uncertainty associated with them and that decisions must be made with imperfect information.

    Industry: Food service/ Hospitalityquality simulation

Supply Chain Management Research

Andreas Wieland’s supply chain management blog for academics and managers

better operations

Thoughts on continuous improvement: from TPS to XPS