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OM in the News: The Changing Employee Incentive Systems

May 28, 2015
Most employees at Squaremouth, a software company in St. Petersburg, Fla., receive a small annual raise, but they're also treated to perks like the new Apple Watch Sport.

Most employees at Squaremouth, a software company in St. Petersburg, Fla., receive a small annual raise, but they’re also treated to perks like the new Apple Watch Sport.

“Yacht-size bonuses for Wall Street big shots and employee-of-the-month plaques for supermarket standouts are nothing new, but companies’ continued efforts to keep costs down have pushed employers to increasingly turn to one-off bonuses and nonmonetary rewards at the expense of annual pay raises,” writes The New York Times (May 26, 2015). The share of payroll budgets devoted to straight salary increases sank to a low of 1.8% in the depths of the recession, from a high of 10% in 1981–and has rebounded only to 2.9% in 2014. Short-term rewards and bonuses — known as variable compensation — accounted for an average of 3.9% of payrolls in 1988. Last year, it hit a record 12.7%.

The shift in compensation that favors one-shot-only rewards over incremental increases in salary that compound over time also appears to be playing a significant role in wage stagnation. It took off after the economy went into a nose-dive in 2001, but is expected to continue even as the unemployment rate drops and the labor market tightens. Employers like one-shots precisely because they are temporary. They save money over the long run because they don’t lock in raises, giving managers greater control over budgets.

“I personally love suddenly finding an unexpectedly large sum added to a month’s pay,” said one Michigan doctor.  “It probably wouldn’t seem nearly as thrilling if it were just spread out across salary payments each month.” While a few more dollars in each paycheck may lack that Christmas-morning feeling, a raise is the gift that keeps on giving. The benefits of wage increases are compounded each year, with every future raise building on the back of the one before it. In the days when bosses handed out holiday hams or turkeys, employees would often walk to the top of the building and drop them off to show their displeasure. Their message: cash preferred.

This is a topic (seen in Chapter 10 on page 403, “Motivation and Incentive Systems”) about which your students will all have opinions.

Classroom discussion questions:
1. What are the benefits and downsides to the one-off bonus from the corporate perspective?

2. From the employee perspective?

OM in the News: Weak Productivity Turns into a Problem of Global Proportions

May 26, 2015

productivityOutput per worker grew last year at its slowest rate since the millennium, with a slowdown evident in almost all regions, underscoring how the problem of lower productivity growth is now taking on global proportions,” reports The Financial Times (May 25, 2015). Globally, the rate of growth decelerated to 2.1% in 2014, compared with an annual average of 2.6% between 1999 and 2006.

As we write in Chapter 1, the problem of low global productivity as one of the greatest threats to improved living standards, in rich and poor countries alike. The fact that companies have become less efficient at converting labor, buildings and machines into goods and services is beginning to trouble policy makers around the world. Janet Yellen just cited weak US productivity as a cause of “the tepid pace of wage gains in recent years.”

Raising productivity is seen as one of the only ways to improve living standards, at a time when advanced and some emerging economies are seeing aging populations and a rapidly increasing retirement rate. Without stronger productivity growth, the world may have to get used to much lower rates of economic growth. Emerging markets are reaching the limits of easy growth based on catch-up technology while advanced economies are concentrating on services, which tend to have less scope for rapid efficiency gains.

New technology has centered on consumer products, which have made people better off and able to do more than in the past, but have not necessarily improved the quantity or efficiency of their work. There is little evidence the slowdown stems from lazy or inefficient employees. “Something is going wrong with the way firms are equipping their workforces to produce more,” says the head of the Conference Board.

Classroom discussion questions:

1. What is the definition of productivity?
2. What is the impact of technology on manufacturing productivity? On service productivity?

OM in the News: Sustainability Hits the School Bus Fleet

May 24, 2015
Blue Bird factory workers installing windows on a bus in Fort Valley, Ga. School districts are increasingly ordering propane-fueled buses.

Blue Bird factory workers installing windows on a bus in Fort Valley, Ga. School districts are increasingly ordering propane-fueled buses.

For many Americans, propane is that stuff from Home Depot that fuels backyard barbecues. But in a growing number of cities across the country, it is what gets children to school. Of the top 25 school bus markets, 19 have propane-fueled vehicles in their fleets, including New York, Chicago, Houston, Los Angeles, Miami, Philadelphia and Phoenix. Boston just bought 86 of the alternative-fuel buses for the fall, while in the Mesa County Valley district in Colorado just signed a 5-year, $30 million contract that includes 122 propane buses.

And southeast of Atlanta, Bibb County school administrators are so happy with the 33 buses they started running last year that they have ordered 20 more. “They’re healthier, they’re cleaner burning, they’re much quieter than the diesel option,” said the transportation director. “Right now, it’s projected that over time we’ll see significant savings.” Burning propane reduces greenhouse gas emissions by 22% compared to gasoline-powered buses or 6% compared to diesel.

The number of alternative fuel fleet vehicles on the road has steadily increased in the last decades, reaching nearly 1.2 million in 2011 from 247,000 in 1995, reports The New York Times (May 22, 2015). Most run on ethanol, propane, compressed natural gas and electricity. The fuel, a byproduct of oil refining and natural gas processing, is abundant and less expensive than diesel, running about $1 less per gallon equivalent. School districts using the fuel have generally been able to claim a federal alternative fuel tax credit of 50 cents per gallon. The buses, which now represent about 20% of manufacturer Blue Bird’s business, come at a premium — about $103,000, roughly $15,000 more than a diesel model — but they are cheaper to operate and maintain, requiring less oil and fewer filters than conventional vehicles.

Classroom discussion questions:

1.Have your students prepare a life cycle analysis, as we present in Supplement 5, comparing the propane vs. diesel options. Gather data from the internet on costs and mileage.

2. What are the advantages of propane over diesel or gas buses?

OM in the News: Collaboration as an Operations Tool

May 22, 2015

collaboration2We discuss the importance of collaboration in Chapters 3 (Project Management), 5 (Product Design), 10 (Human Resources), and 11 (Supply Chain Management). Is collaboration at work all it’s cracked up to be? Recent research by profs at BU, Harvard, and Northeastern concludes that collaboration sometimes hinders problem solving because individuals in big groups tend to parrot one another, resulting in a narrow set of solutions. “We just get caught up in our own gospel around collaboration,” says one author in The Wall Street Journal (May 20, 2015).

The researchers broke down problem solving into 2 parts—gathering facts about a situation and devising solutions—and divided study participants into groups of 16. Some of those groups were connected to each other in a clear team structure. Other groups were less connected, and information wasn’t shared among the entire group. The highly clustered groups were better than the loosely connected ones at gathering facts about a problem. Yet those collaborative groups came up with fewer solutions than the more isolated groups did. People tend to copy each other and agree more when they are trying to come up with solutions together. The phenomenon is similar to “group think,” although the authors said it could also be described as “cognitive laziness,” since members seem to lack the will to argue with the group.

The trick for companies is to figure out how to divide problem solving into two parts: fact gathering and generating solutions.That isn’t always intuitive or easy to do, especially under tight time constraints. Consulting firms such as McKinsey and Boston Consulting Group tend to remix team structures at various points in a project. Larger teams are good at the start of brainstorming sessions, where workers can share widely what they know. When it comes time to refine those ideas employees could do well to break into smaller groups.

Classroom discussion questions:

1. Why do the consulting firms reconfigure their teams during a project?

2. Make the case for more collaboration. Against it.

 

OM in the News: Honda’s Newest Product Flies

May 20, 2015
Mounting the engines over the top of the wings reduces the drag in flight

Mounting the engines over the top of the wings reduces the drag in flight

Honda is finally getting its wings”, writes The Wall Street Journal (May 18, 2015). Some new products, as we discuss in Chapter 5, go from inception to market in months, and some in years.  But for Honda, it involved 3 decades of planning and development to deliver one of its most unusual innovations: an ultrafast business jet that carries its engines above its wings. The $4.5 million 7-seat HondaJet is set for delivery to customers mid-2015. For Michimasa Fujino, the 54-year-old CEO of Honda Aircraft, it is the culmination of a decadeslong fight to make a Honda aircraft in the face of skeptical executives, technical delays and the global recession. His influence touches every aspect of the design, from its curves to the manufacturing process. “This airplane is my art piece,” he states.

The jet gives Honda—which also makes robots, boat motors, and lawn mowers—entree into a new market. But no modern car company has successfully made the transition to building aircraft. Honda is betting that technological advances will trigger new demand from buyers with its lightweight body made of carbon-fiber composites–providing 17% better fuel efficiency than competitors while having the highest speed in its class: 480 miles per hour.

Fujino’s first decade produced a pair of designs, but the breakthrough came in 1996 when he sketched the basics of the plane’s current design on the back of a wall calendar. Inspired by principles in a 1930s aerodynamics textbook, the design mounted jet engines atop the wings to boost cabin space and cut noise. In 1997, Fujino presented the business case to the board with the sketch in hand, receiving approval for a flying prototype. It would take 3 years of persuasion, using simulations and wind tunnels to prove his point. He and 40 employees started building the prototype in 2000 in a hangar in Greensboro, N.C. The prototype flew successfully in 2003. Today, HondaJet’s workforce has grown to 1,300 at its 133-acre N.C. campus, providing easy access to the U.S. and Europe, 80% of its estimated market.

Classroom discussion questions:

1. Why did product development take so long?

2. Provide a brief SWOT analysis of the new product.

OM in the News: Chobani Learns That Operations Management Can’t Be Ignored

May 18, 2015
Chobani's plant in New Berlin, N.Y.

Chobani’s plant in New Berlin, N.Y.

Hamdi Ulukaya used to say that no one could run his yogurt startup better than he could, proud that Chobani Inc. grew to $1 billion in annual sales without help from a “professional CEO.” Today, a professional CEO is exactly what Chobani is seeking, reports The Wall Street Journal (May 18, 2015). Ulukaya admits that Chobani has grown beyond his ability to run it. (Chobani’s share of Greek yogurt sales in the U.S. is down nearly 15 percentage points to 44% from its peak in 2012).

Chobani almost single-handedly set off a craze for Greek-style yogurt, growing explosively in the process. But it was in over its head: losing money, and building the world’s largest yogurt factory had saddled it with debt. Its operations were scattered, purchasing was inefficient and it lacked an adequate quality-control team—a deficiency that surfaced dramatically when Chobani had to recall yogurt from the new factory in 2013.

Executive offices were in the basement of the factory. Ulukaya handled most of the hiring himself, assembling a staff that suited a startup but not the large company Chobani was becoming. Ulukaya handled the books, too, using Quicken software for small businesses even after the company grew beyond such a status. “We didn’t have any corporate executive types,” said Ulukaya. “I didn’t want to hear all that marketing, supply chain, logistics stuff—most of it is BS.”

He would learn those operational systems couldn’t be ignored, even though rapid growth hid some problems. The drawbacks of the seat-of-the-pants style became clear starting in 2013. The previous December, Chobani had opened a $450 million factory in Twin Falls, Idaho, nearly 2,000 miles from its headquarters. Though it offered access to an abundant dairy supply, the plant’s remote location stretched Chobani’s management, and differences in the milk’s protein composition and in the machinery required tinkering with Chobani’s recipe.

This is a great story to share with your class, as most are familiar with the company. It appears OM is important after all!

Classroom discussion questions:

1. After the new CEO, what is Chobani’s next step?

2. What are the operations issues Chobani is facing?

 

OM in the News: And the Winner of Volvo’s New $500 Million Plant is— S. Carolina

May 14, 2015
A Volvo plant in China. The automaker is hoping to increase its American sales volume, which fell 8% last year.

A Volvo plant in China. The automaker is hoping to increase its American sales volume, which fell 8% last year.

Volvo just announced that it will build a $500 million factory near Charleston, South Carolina, making it the first time a Chinese-owned automaker will have an auto assembly plant in the U.S. The company said that the plant — its first in the U.S. since entering the market 60 years ago — would eventually employ 4,000 and will open in 2018. The factory will initially be capable of making 100,000 vehicles a year.

Volvo already operates two plants in Europe and two in China. It is hoping to increase its American sales volume. Globally, the company is growing, up 9% last year to nearly 470,000 vehicles — helped by surging demand in China.

Volvo will receive about $200 million in combined incentives, reports The New York Times (May 12, 2015). That includes $120 million in economic development bonds, $30 million in state grants and an additional $50 million of incentives from a state-owned utility company. The firm said it chose the S. Carolina site for its proximity to seaports and the quality of autoworkers and facilities in the region. “One of the main criteria for us was infrastructure,” said the CEO. “South Carolina has people who know the industry, can work in the factory, and who understand our business.” He added that the company was looking long-term at its first production on American soil. “A commitment like this you don’t make for 10 or 15 years,” he said. “It’s designed for decades.”

Volvo’s announcement is the latest in a series of production expansions by foreign automakers in the U.S. In July, VW announced it would spend $600 million to expand its plant in Chattanooga.

Classroom discussion questions:

1. How do these incentives compare to prior offers to automakers?

2. Why is Volvo opening the U.S. plant in S. Carolina?

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