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OM in the News: It’s Raining Cars in China

February 28, 2015

china overcapacityThree years ago, China’s Chery Automobile announced plans to expand its factories to make as many as 1 million vehicles a year. But demand didn’t grow as planned. So Chery today has the capacity to make 900,000 vehicles annually—twice the number of cars it sold last year. Sales have slumped by 1/3 since their 2010 peak. “Chery is a classic case” of overcapacity, says a Shanghai-based consultant.

Domestic and foreign-based carmakers are building more factories in China than anywhere else, a construction binge that risks hurting margins, writes BusinessWeek (Feb.16-22, 2015). By 2017, there will be 140 car production plants in China, vs. 123 at the end of 2014. Factories across the mainland in 2015 will be able to build 10.8 million more vehicles than will be sold in Greater China. In North America, however, plants will churn out about 3.2 million more cars this year than the factories were intended to produce when they were built.

Overcapacity is only expected to get worse for Chinese carmakers. China will have about 11.4 million vehicles’ worth of idle capacity by 2017, more than double that of European automakers. Some carmakers already are regretting plans for Chinese plants that will open in the next few years. But that decision has been made and they cannot backtrack.

Foreign carmakers have been among the most enthusiastic factory builders in China, with Hyundai, Renault, and Fiat Chrysler among those that have announced plans or are already building in China. GM will soon sell Buicks made at a plant that opened last month, with plans to open a Cadillac factory later this year. GM has 22 factories on the mainland. Volkswagen, which is vying with Toyota and GM for the global auto sales crown, has 28 plants in China and will open 3 more within the next few years.

Classroom discussion questions:
1. What are some tactics for matching capacity to demand (see Supp.7)?

2. Why are auto makers flocking to China?

OM in the News: Safer Surgery Through Operations Management

February 26, 2015

hospital data“Hospitals are trying to make it safer for patients to go under the knife,” writes The Wall Street Journal (Feb. 17, 2015). Surgery can be risky by its very nature, and 46% to 65% of adverse events in hospitals are related to surgery. Despite years of prevention efforts, procedures are still performed on the wrong body part and surgical tools are sewn up in patients. The consequences of surgical error are huge, both for patient health and hospital finances. Johns Hopkins estimates that there are 4,082 malpractice claims each year for “never events”—the type of shocking mistakes that should never occur. There are also 600 reported operating-room fires in the U.S. each year, though there may be many more that aren’t reported.

Many hospitals don’t collect reliable data on their own adverse events, and as industry experts say, “you can’t improve a hospital’s surgical quality if you can’t measure it.” In Tennessee, 10 hospitals participating in a data analysis program from 2009 to 2012 reported that they reduced complications by nearly 20% since 2009, saving at least 533 lives and $75.2 million in costs. Data analysis can also help prevent foreign bodies from being left in patients when they do undergo surgery. With new OM processes in place, if a count at the end of a procedure indicates sponges or instruments are missing, hospital policy requires an X-ray before the patient leaves the OR, which can’t be overruled by a surgeon.

Surgeons are also expected to follow strict infection-prevention processes, such as sterile procedures that include fully draping patients on the operating table and wearing caps and masks before putting in a central line, a tube inserted in the chest to administer IV fluids, drugs and blood. As briefings and checklists become part of the hospital culture, new doctors coming out of training know this is the expectation. Older doctors are often hard to convert.

Classroom discussion questions:

1. Why is it important to measure hospital quality?

2. What do checklists do in this setting?

OM in the News: At UPS, the Algorithm is the Truck Driver

February 24, 2015

ups trucks“Here’s a math problem for you,” writes The Wall Street Journal (Feb.17, 2015). Each United Parcel Service driver makes an average of 120 stops per day. There are 6,689 times 10 to the 195th power alternatives for ordering those stops! Which option is the most efficient, after considering variables such as special delivery times, road regulations, and the existence of roads that don’t appear on a map?

Even if an optimal answer exists, the human mind will never figure it out. And while experts at UPS have been giving the problem their best shot for more than a century, the company is shifting that work over to a computer platform, with 1,000 pages of coding, called Orion, which is 10 years in the making. Considered the largest operations research project in history, the $200-300 million algorithm was written by a team of 50 UPS engineers.

Orion consists of many components, including a “traveling salesman” algorithm, a tool that calculates the most efficient path between a variety of points, and geographic mapping. None of the solutions that Orion spews out are big or dramatic. It is all about saving $1-2 here and there. But in a network with 55,000 routes in the U.S. alone, that adds up. E-commerce has shifted more and more of UPS’s delivery stops to residences, and those packages are expected to make up 1/2 of all deliveries. It is a radical routing change from 15 years ago, when drivers would drop off several packages at a retailer.

Orion is expected to save the company $300-$400 million a year once it is fully implemented in 2017. (UPS saves $50 million a year by reducing by 1 mile the average daily travel of its drivers.) But reaction to Orion is mixed. For example, some drivers don’t understand why it makes sense to deliver a package in one neighborhood in the morning, and come back to the same area later in the day for another delivery. But Orion often can see a payoff, measured in small amounts of time and money that the average person might not see.

Classroom discussion questions:
1. Why is Orion so important to UPS?

2. Why is the software so complex?

Good OM Reading: Sustaining Sustainability

February 22, 2015

three laws book2Steve Zaffron, CEO of the Vanto Group and co-author of the best-selling business book, The Three Laws of Performance, believes that sustainability nirvana occurs when social responsibility moves from being expressed in one-off initiatives, siloed in the corporate CSR office, to a way of being and acting that is embedded in the company culture and work habits of employees. Achieving this kind of breakthrough in an established company, with its legacy systems and time-honored practices, is proving to be a tough nut to crack for many sustainability executives, according to a new MIT Sloan Management Review (Feb. 2015) article.

Zaffron, interviewed for the article, has worked with a diverse group of organizations — from rocket-scientist NASA to labor-intensive mining — to achieve this kind of deep organizational renovation. His experience shows that leaps in human performance come less from tangible investments in things like automation, equipment or compensation schemes, and more through intangible transformations in the way people in organizations see themselves and others.

“It’s not an easy thing to change the way in which people see the world and themselves. It takes time to develop,”says Zaffron. And time is an underappreciated variable in sustainability. “It’s obvious when you say it, that sustainability means through time,” states Zaffron, but while perhaps obvious, managing time is a recurring sustainability challenge. If it interjects itself in business sustainability, time usually appears as a constraint imposed by market short-termism. “We’re talking about long-term engagements that are substantial investments,” says Zaffron. “Managers have to know they’re in for the long haul.” Unfortunately, today’s sustainability management is dominated by the search for “quick wins,” which account for over two-thirds of corporate sustainability initiatives.

As opposed to the tangible “quick wins” mindset, the intangible benefits arising from embedded sustainability behaviors take sustained effort to produce. But over time, they create differentiated capabilities that can set an organization apart in the marketplace.

Teaching Tip: Class Preparation Assignments (CPAs) in OM

February 20, 2015

classImagine a world where your students came to your operations management class prepared! Class time would be so much more productive and enjoyable for you and students alike. We would have informed class discussions and focus on students applying, analyzing, and evaluating the material under our expert guidance. Prepared students are not a mirage. Students will come to class prepared, but it requires a different course design. “Consider a course,” writes Faculty Focus (Feb. 16, 2015), “that uses class preparation assignments (CPAs) to inform and stimulate class discussion and a grading system that makes being prepared for class easier.”

The CPAs are assignments whose questions serve as a guide to the students in their reading, prepare them for class, and serve as a basis for class discussion. If you adopt this course design, students will come to class prepared. Therefore, you won’t have to lecture as if the students are seeing the material for the first time. Instead, you can engage the students with active learning strategies that go after higher-level learning and skill development.

How can you do this? There are any number of pre-class assignments you can make. But Jay and I think the easiest approach is to use MyOMLab. We usually assign 10 questions, taken at random from the Test Bank in MyOMLab, that correspond to the chapter(s) being covered this week. And we randomize them so each student has a different set. We also like assigning some of the OM Readings (articles like you would find in this blog). Each reading has 4 multiple choice discussion questions for students to answer. These “pre-tests” need not be worth more than 10% of the total course grade. Students are generally happy to do such open-book assignments for which they can score 100%. The tenet of this course design is that students with such assignments can acquire a basic understanding of the material themselves before coming to class.

OM in the News: West Coast Port Disputes and Global Supply Chains

February 18, 2015
Some ships are anchored offshore because of West Coast port delays

Some ships are anchored offshore because of West Coast port delays

Shipping companies say West Coast ports could shut down if a new contract isn’t reached with dock workers,” writes the Los Angeles Times (Feb. 14, 2015). A flotilla of ships — filled with cars, electronics and clothes from Asia — have anchored off the coast waiting for the docks to clear. Both sides blame each other for the severe traffic jam. A shutdown promises to delay numerous products from Asia including furniture, cars, toys, clothes and electronics. About 12.5% of U.S. gross domestic product is tied to goods that flow through the 29 West Coast ports. The ports of Los Angeles and Long Beach together handle 40% of the nation’s incoming container cargo. The dispute centers on a new contract for roughly 20,000 dock workers at the ports.

Businesses that rely on the ports for their goods are likely to face rising costs from delays and possibly lost sales. The last time the ports closed, in 2002, some manufacturing plants were idled because they relied on timely shipment of parts. Businesses can re-route some products by air or to East Coast ports. But that’s costly.  If customers ordered Asian-made electronics or other goods, they probably won’t receive them as quickly if they have not already arrived in the country. If the products did arrive, however, but are stuck on the docks, customers may have to wait even longer.

The impact on supply chains is massive. Honda and Toyota are cutting back production at several North American plants. Honda reduced production at plants in Ohio, Indiana and Ontario as the labor tension has slowed delivery of critical parts to keep the production lines running smoothly and efficiently. Parts such as electronics and transmissions are in low supply. Honda has been working to maintain the flow of parts to North American plants utilizing alternative means of transportation.

Classroom discussion questions:

1. What are the impacts on supply chains?

2. Why are the shipping alternatives limited?

 

OM in the News: It’s No Fun Making Toys in the USA

February 17, 2015
Raymond Beaver, Marshmallow's CEO, has not been able to move manufacturing from China to the U.S.

Raymond Beaver, Marshmallow’s CEO, has not been able to move manufacturing from China to the U.S.

Marshmallow Fun Co. designs and markets toy guns that shoot sweet, spongy projectiles 30 feet or more. So far, though, the Dallas-based company has been unable to hit one of its targets: Making at least some of its “blasters” in the U.S. rather than relying exclusively on contract manufacturers in China. “I salute anybody who’s making goods in the U.S.A.,” says the firm’s CEO in The Wall Street Journal (Feb. 10, 2015), “but it isn’t so easy.”   

American entrepreneurs eager to bring manufacturing back to the U.S. often run up against an obstacle: Unlike China, the U.S. has few contract manufacturers geared up to make consumer products on a large scale. Contract manufacturers make products for other companies that prefer to focus on product design and marketing. “In China, you can find a specialist in any product. You want a toaster oven? There are a dozen contract manufacturers that make toaster ovens. That kind of contract manufacturing just doesn’t exist anyplace else,” adds a China-based consultant.

A search for contract manufacturing services on the Chinese website Alibaba.com brings up more than 2,000 entries. China and Taiwan have huge contract manufacturers like Hon Hai Precision Industry, known as Foxconn, which makes iPhones for Apple Inc. China also has thousands of smaller ones bidding to make products for the likes of Mr. Raymond. In the U.S., contract manufacturers generally make parts, as opposed to finished products. Some make expensive items sold in fairly small volumes to industrial or military customers. In terms of expertise and production capacity, “we let so much leave the country that you can’t find what you need,” says a Rhode Island product designer.

Classroom discussion questions:

1. What are contract manufacturers and what do they do?

2. Why is it hard for many firms to “reshore” manufacturing?

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