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OM in the News: Airbus Outgrows its European Supply Chain

February 19, 2018

Since it was cobbled together from a passel of national aerospace groups a half-century ago, Airbus has spread its operations across Europe in a delicate effort aimed at maximizing political expediency without sacrificing too much economic efficiency. There’s little industrial logic, after all, in shuttling airplane parts among 14 factories in a half-dozen countries, with some wing components crossing the English Channel 9 times before being mounted on planes.

The company’s airliner business employs more than 53,000 people across Europe, reports Businessweek (Feb. 12, 2018). And of the 11,000 passenger jets Airbus has built since it was founded in 1970, all but 400 have come out of the region’s factories. Europe, however, accounts for fewer than 1 in 5 planes in Airbus’s order book, and China, the U.S., and other countries are clamoring for a bigger share of production. A decade ago Airbus opened a plant in China, that’s expected to make 6 planes monthly by 2020, up from 4 now. Production is also ramping up at a factory in Alabama that’s been building Airbus single-aisle planes since 2015.

Airbus already has a global network of suppliers, ranging from Kansas-based Spirit AeroSystems, which produces the central fuselage of the A350, to a Korean Air Group that makes wingtip devices for the A330 widebody, to China’s Xi’an Aircraft, which manufactures wings for planes assembled at the Chinese plant. All told, Airbus has some 12,000 subcontractors in more than 40 countries from Finland to Sri Lanka.

As we note in the Global Company Profile that opens Chapter 2, Boeing also relies on vendors around the globe. The 787 Dreamliner, the first all-composite aircraft, uses components from such far-flung places as Japan and Italy, part of a plan to spread the manufacturing risk among partners.

Classroom discussion questions:

  1. Why is the aerospace supply chain so complex?
  2. What are the advantages and disadvantages of this approach?

OM in the News: Bitcoin Goes to Where the Power is Cheap

February 16, 2018

Power cords connect to hundreds of computers inside Giga Watt’s Washington mining facility. Giga Watt employs 45 people here.

“Home to hydroelectric dams that harness the flow of the Columbia River, north central Washington has some of the cheapest power in the U.S.,” writes The Wall Street Journal (Feb.12, 2018). That has made the largely rural area best known for its apple orchards a magnet for bitcoin miners, who use powerful specialized computers to generate new units of cryptocurrencies—a process that requires vast amounts of electricity to run and cool thousands of machines. “If you ask the guys at UPS or FedEx what they’re delivering to Wenatchee, I think they’d tell you it’s a whole bunch of bitcoin mining machines,” says that town’s mayor.

Mining operations can squeeze into small spaces. Shoebox-size computer servers that suck up as much power as 1,000 homes can be packed into a 25-by-25-foot room. Miners have popped up in unexpected places in the area: an old laundromat, a former warehouse, apartments. There are already at least 30 known cryptocurrency-mining operations in north central Washington.

These aren’t the first businesses to come to the region for its cheap power. Aluminum smelters once flocked here. In more recent years, companies including Microsoft and Dell have built data-storage centers. Electricity in the region costs 2 to 4 cents per kwh compared with more than 10 cents nationwide. Some residents and officials hope that mining will be the first step toward transforming the area into a business hub for blockchain technology, bringing new jobs.

Others worry these miners will drain the area of the surplus power that helps keep rates low. Here is why: Comparative power usage rates (per sq. ft. per year): school-10; home-12; hotel-18; hospital-32; grocery store-40; computer data center-2,100!

Classroom discussion questions:

  1. Why are some towns not welcoming the new miners?
  2. What is the primary location factor for cryptocurrency miners?


OM in the News: Walmart Tries Out Blockchain

February 14, 2018

Walmart found blockchain can improve the speed and accuracy of product recalls

Blockchain isn’t only about bitcoin. The technology best known as the record-keeping system behind cryptocurrencies seems poised to play a broader role in business, where it could change how supply chains work.
Walmart is using the blockchain technology to manage supply chain data for mangoes, berries and dozens other products. “The system, built with IBM, will help Walmart figure out where bad food came from during product recalls,” writes The Wall Street Journal (Feb. 7, 2018). 

Here is how it works: A blockchain ledger allows participants to add blocks of information after each party runs algorithms to evaluate a proposed transaction. If the parties agree that the transaction looks valid — identifying information matches the blockchain’s history and follows the rules created by the participants — then it will be approved, time-stamped and added to the chain.

For example, after a mango is picked from a tree, it makes many stops before getting to a store shelf. Farmers, packing-house workers, and others along the way use a mobile app from Walmart to send details such as harvest dates, locations and images of their fruit to the retailer’s blockchain. The process is simpler and more secure than the array of barcodes, scanners, paper forms and individual databases Walmart usually uses.

In a simulated recall under the blockchain system, Walmart traced the origin of a bag of sliced mangoes in 2.2 seconds. With Walmart’s other systems, the same exercise took 6 days, 18 hours and 26 minutes. This speed and accuracy could save sales that otherwise would be lost as stores pull all mangoes off shelves while waiting for trace-back results. It could also prevent illness and death. “We’re all after trust in the supply chain, especially in a crisis,” says Walmart’s head of food safety.

Classroom  discussion questions:

  1. Explain what a blockchain is.
  2. Why is the concept so potentially valuable as a supply chain tool?


OM in the News: Suppliers and Whole Foods’ Slotting Fees

February 12, 2018

Whole Foods, which cut prices last year to make it cheaper to shop there, now is making it more expensive for suppliers to get their products onto shelves, reports The Wall Street Journal (Feb.9, 2018). The supermarket chain is asking suppliers of all sizes to pay new rates for prime shelf space as it tries to boost profits and better organize the exploding number of organic products hitting the market.

Many suppliers will see an increase from the average $25,000 “slotting fee” companies were paying to be featured in the stores’ most-visible, high-traffic areas. Additionally, Whole Foods is pitching its biggest suppliers on a promotion costing up to $300,000 for several weeks of prime shelf space along with souped-up marketing. The chain also is asking suppliers to offer bigger discounts on their products to earn the space. A high-visibility nationwide promotion at Whole Foods now often requires companies to cut product prices by at least 25%.  “We knew full-well that there would be discontent,” said Whole Foods’ V.P.

The firm is adopting a suite of retailing tactics meant to enhance profitability, including centralized purchasing decisions, tighter control over inventory and working with a national contractor to do in-store sampling. Grocery suppliers will pay a fee of 3% of the cost of goods delivered, and beauty suppliers will pay 5%. Whole Foods has hired an outside company to stock shelves “to provide a much more effective result.”

On the other hand, Kroger, the largest U.S. supermarket chain, has been courting niche brands over the past year with a new portal for local suppliers and a series of natural-foods trade fairs. The company doesn’t charge slotting fees for small suppliers.

(See our discussion of slotting fees in Chapter 9 on pages 374 and 392.)

Classroom discussion questions:

  1. Discuss the ethics of charging fees to allow products to be placed on supermarket shelves.
  2. Why is this an issue particularly in the grocery industry?

OM in the News: Read this Blog Before You Fly!

February 9, 2018

Last month, 2 people with measles flew into O’Hare Airport

Is there anything air travelers despise more than a flight delay? Perhaps sitting in a dirty airplane or next to someone who is coughing, sneezing or worse. Passengers have experienced all kinds of affronts to personal health and hygiene in the tight quarters of an airline cabin.

Now, imagine the complex choreography involved in cleaning a Boeing 737 with more than 160 seats in just the few minutes between the plane’s arrival at the gate and its departure, writes The New York Times (Feb. 6, 2018). It’s a grueling task, and the stakes are high.

A passenger’s greatest health risk on an airplane may come from exposure to fellow travelers. And the risk of spreading diseases increases if surfaces in cabins and bathrooms are not adequately cleaned. Airlines typically hire outside companies to perform “quick turns” (the cleaning between flights) and overnight cleaning, as well as deep cleaning, which occurs about once a month.

But cabin cleaners describe a work environment where pay is at or near the minimum wage, morale is low and turnover is high. “To clean, we need 10 to 15 minutes, but they give us 6 or 7, or even less time for quick turns,” says one crew chief. A 2015 GAO report states:  “the U.S. lacks a comprehensive plan aimed at preventing and containing the spread of diseases through air travel.” Part of the problem is that airlines have created an incredible disincentive for travelers to alter their travel plans when they are sick by charging high change fees, so people who are sick fly. The CDC says “the greatest risk for the spread of infectious disease on airplanes was from passengers.”

What can you do? Take cleaning matters into your own hands. Buy medical-grade hand sanitizers and carry a travel package of disinfectant wipes to wipe down the seat and surfaces that you touch.

Classroom discussion questions:
1. How is this an OM issue?

2. What suggestions do you have for improving the quick turn process?

OM in the News: Japan’s Manufacturing Crisis

February 7, 2018

Hiroya Kawasaki, CEO of Kobe Steel, bowed as he left a news conference in Tokyo

Japan’s reputation for flawless manufacturing quality and efficiency transformed the country’s postwar economy, changed business practices world-wide and spawned a library’s worth of management manuals and business advice books. “Now, the model is cracking,” writes The Wall Street Journal (Feb. 5, 2018).

Kobe Steel, Mitsubishi Materials, and Subaru have all just admitted to manipulating quality inspections. Takata declared bankruptcy last year after supplying 50 million defective vehicle air bags in the U.S. Mitsubishi Motors has admitted covering up vehicle faults and falsifying fuel-economy data. Nissan says its Japanese factories let unqualified employees perform final quality inspections. Indeed, Japanese brands have been bested by U.S. car makers in the past 2 years.

The scandals call into question one of the world’s most influential theories of management and manufacturing. Japan’s model, celebrated in publications such as HBR, hinges largely on the concept of kaizen, or “continuous improvement.” Kaizen means eliminating unnecessary activity, reducing excess inventory and using teamwork to fix problems when they arise. It also places enormous responsibility on the line workers (called genba) at the factory-floor level to manage daily operations and generate innovation. The genba have traditionally been guaranteed jobs for life in return for dedication. But many Japanese companies can no longer afford the luxury of  lifetime employment for factory craftsmen.

At Kobe Steel, quality-checking staffers became the first targets of layoffs because they didn’t appear as busy as production-line workers. Line workers were told to make quality checks themselves, and some checks were outsourced after the company suspended hiring. Workers involved in data falsification felt they had no choice because they needed to keep production moving.

(Japan, nonetheless, remains a manufacturing powerhouse, ranking 3rd in manufacturing output, behind China and the U.S. and just ahead of Germany).

Classroom discussion questions:

  1. Explain the concept of kaizen.
  2. Why is the Japanese system facing a crisis?


OM in the News: The Financial Secrecy Index

February 5, 2018

The latest Financial Secrecy Index (published by Transparency International on Jan. 30, 2018) ranks countries according to their secrecy and the scale of their offshore financial activities. Politically neutral, it is a potential location analysis tool for understanding global financial secrecy, secrecy jurisdictions, and illicit financial flows or capital flight.

From $21 to $32 trillion of private financial wealth is located, untaxed or lightly taxed, in secrecy jurisdictions (better known as “tax havens”) around the world. These countries use secrecy to attract illegitimate financial flows. Illicit cross-border financial flows are estimated at $1-1.6 trillion per year: dwarfing the $135 billion in global foreign aid.

Since the 1970s African countries alone have lost over $1 trillion in capital flight, while combined external debts are less than $200 billion. So Africa is a major net creditor to the world – but its assets are in the hands of a wealthy élite, protected by offshore secrecy. Yet all rich countries suffer too. For example, Greece, Italy and Portugal have been brought to their knees partly by decades of tax evasion and state looting via offshore secrecy.

In identifying the most important providers of international financial secrecy, the Financial Secrecy Index (FSI) reveals that traditional stereotypes of tax havens are misconceived. The most important providers of financial secrecy harboring looted assets are mostly not small, palm-fringed islands as many suppose, but some of the world’s biggest and wealthiest OECD countries. The top 7 FSI offenders ranked are: Switzerland, U.S., Cayman Islands, Hong Kong, Singapore, Luxembourg, and Germany. Click here for the full 2018 rankings of 112 countries.

The only realistic way to address these problems is by directly confronting offshore secrecy and the global infrastructure that creates it. A first step is to identify as accurately as possible the countries that make it their business to provide offshore secrecy. This is what the FSI does.

Classroom discussion questions:

  1. How does FSI differ from the two location analysis index tools in Tables 8.1 and 8.2?
  2. Explain the meaning and purpose of FSI.
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