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OM in the News: Ethical Dilemmas in U.S. Auto Parts Plants

April 11, 2017

Alabama has been trying on the nickname “New Detroit.” Its burgeoning auto parts industry employs 26,000 workers, who last year earned $1.3 billion in wages. Georgia and Mississippi have similar, though smaller, auto parts sectors. This factory growth, after the long, painful demise of the region’s textile industry, would seem to be just the kind of manufacturing renaissance the U.S. needs.

Except that it also epitomizes the global economy’s race to the bottom,” writes Businessweek’s cover story (March 27-April 2, 2017). Parts suppliers in the American South compete for low-margin orders against suppliers in Mexico and Asia. They promise delivery schedules they can’t possibly meet and face ruinous penalties if they fall short. Employees work ungodly hours, 6-7 days a week, for months on end. Pay is low, turnover is high, training is scant, and safety is an afterthought, usually after someone is badly hurt. Many of the same woes that typify work conditions at contract manufacturers across Asia now bedevil parts plants in the South. In 2015, the chances of losing a finger or limb in an Alabama parts factory was double the amputation risk nationally for the industry, 65% higher than in Michigan and 33% above the rate in Ohio–both union states.

Korean-owned plants, which make up roughly a quarter of parts suppliers in Alabama, have the most safety violations in the state, accounting for 36% of all infractions and 52% of total fines, from 2012-2016. According to OSHA, one of them, Matsu Alabama, had provided no hands-on training, routinely ordered untrained temps to operate machines, sped up presses beyond manufacturers’ specifications, and allowed oil to leak onto the floor. “Upper management knew all that. They just looked the other way,” said a staffing specialist. “They treated people like interchangeable parts.”

Classroom discussion questions:

  1. The Ethical Dilemma exercise in Chapter 10 describes Johnson Foundry. Have your students read this Businessweek article and compare the two stories.
  2. What does the article mean by “race to the bottom?”

OM in the News: Why You Shouldn’t Walk on Escalators

April 9, 2017

It’s more efficient if everyone stands on an escalator instead of some people walking on it

The train pulls into the station, the doors open and you make a beeline for the escalators. You stick to the left and walk up the stairs, figuring you can save precious seconds and get a bit of exercise. But you’re doing it wrong, seizing an advantage at the expense of other commuters. Boarding an escalator 2-by-2 and standing side by side is the better approach, says The New York Times (April 5, 2017)  and it is more efficient if nobody walks on the escalator.

The question of standing versus walking flared up recently in Washington, D.C. after the Metro said the practice of walking on the left could damage the escalator. The escalator company Otis said this is not true, but passengers should not walk on escalators, as a matter of safety.

The Metro is not the first mass transit operator to try to address this issue. Last year, the London Underground tried to change passengers’ behaviors and get them to stand side-by-side riding — not walking. The Underground had concluded that in very tall stations, much of the left side went unused, causing blockages and lines at the bottom. It campaigned to fill the available space on the escalators with people, rather than leaving the left side of each step largely empty, except for those who chose to hike up. It found that standing on both sides of an escalator reduced congestion by about 30%. Walking up the escalator took 26 seconds compared with standing, which took 40 seconds. However, the “time in system” — or how long it took to stand in line to reach an escalator then ride it — dropped sharply when everyone stood.

When 40% of the people walked, the average time for standers was 138 seconds and 46 seconds for walkers. When everyone stood, the average time fell to 59 seconds. For walkers, that meant losing 13 seconds but for standers, it was a 79-second improvement. The length of the line to reach and step onto an escalator dropped to 24 people from 73.

Classroom discussion questions:

  1. Will this happen in the U.S?
  2. Explain the concept of “time in system”?

Good OM Reading: Supply Chains and Data Analytics

April 7, 2017

The OM field will soon face a major change in the way we make decisions. Big data, data analytics, and business intelligence are all skill sets our OM students will need. The Gartner Group has just issued an interesting report on these concepts. Gartner identifies 4 core skill sets to support the successful adoption of analytics: Data engineers who make the appropriate data accessible and available for data scientists. Supply chain expert analysts who understand supply chain requirements and priorities to ensure the right tools are used. Data scientists who create predictive and prescriptive models. Citizen data scientists who are lighter versions of a data scientist who can build or choose models, but within a platform.

There is, of course, a shortage of data scientists. This is compounded for supply chain, which might not be viewed as attractive as finance, sales and marketing. But analytical platforms can alleviate this shortage. This is because within the platform environment, “citizen data scientists” can build new apps and solutions.

As the line between the physical and digital world blurs in business, the algorithmic supply chain affords companies the ability to leverage massive data from increasing connections among people, businesses and things. This allows them to respond quickly and profitably to changes in market demandIn an algorithmic supply chain, decision-making relies on the company’s intellectual property (IP) that captures data and encapsulates it into reusable, unique and optimized information assets. Embedding this IP in supply chain processes, the company can solve large-scale, dynamic problems and create competitive advantage.

UPS provides a powerful example of using analytical platforms to build On the Road Integrated Optimization and Navigation (ORION) to support its core business processes. ORION generates daily routing manifests to 55,000 UPS drivers. The platform incorporates optimization, heuristics, predictive analytics and custom mapping. It generates $300-$400 million in annual benefits, based on reducing fuel consumption by 10 million gallons, carbon emissions by 100,000 metric tons and driven miles by 100 million, annually.

OM in the News: Starbucks Tries Mobile Order/Pay Only Stores

April 4, 2017


Starbucks is opening a new coffee shop that only accepts orders placed on a mobile device, reports Geekwire (April 3, 2017). Starbucks now has more than 9 million mobile paying customers, more than a 1/3 of which use the Mobile Order & Pay (MOP) program that lets customers order with their smartphone and skip the line.

However, Starbucks has a problem. The uptick in mobile orders is creating congestion inside stores for mobile order-ahead customers trying to pick up their coffee and food at hand-off stations. This not only affects customers who are picking up items, but also potential customers who may notice the in-store traffic and end up not purchasing anything.

“We’re going to redesign new stores and existing remodels to reflect the fact that MOP is obviously going to be a significant part of the business,” said Chairman Howard Schultz. In response, Starbucks is adding dedicated stations for mobile order-ahead customers, distinct from existing in-store registers. There were 1,200 stores in the U.S. that saw more than 20% of transaction volume come from MOP during peak hours last quarter.

TheStreet’s Jim Cramer said that if Starbucks can solve “the throughput problem with mobile ordering, then its stock can go much higher. Starbucks has to become a technology company that gets your coffee to you without a throughput problem.”

Classroom discussion questions:

  1. How can Starbucks handle the throughput problem?
  2. Is it a mistake to create MOP only stores?

OM in the News: The Mexican Medical Supply Chain

April 2, 2017

Workers at the Greatbatch Medical plant in Tijuana

“Nafta has transformed Tijuana from a gritty party spot to a world capital of medical devices,” writes The New York Times (April 1, 2017). Boulevards are lined with factories bearing the names of American-run companies: Medtronic, Hill-Rom, DJO Global and Greatbatch Medical. Inside, Mexican workers churn out millions of medical devices each day, from intravenous bags to artificial respirators, for the global market. Nearly everyone in America who has a pacemaker walks around with parts from here.

A proposed border tax could fracture the industry’s sophisticated global supply chain and force American hospitals to pay more for vital necessities. Hospitals in the U.S. rely on bandages and surgical gloves from China, suturing needles and artificial joints from Ireland, and defibrillators and catheters from Mexico. Annual imports of medical devices has reached $43.9 billion, with Mexico as the leading supplier, ahead of Ireland, Germany and China. Tijuana houses the highest concentration of Mexico’s medical device firms, 70% of which are U.S.-owned.

The high-tech operations emerged after Nafta helped transform Mexican border factories, called maquiladoras, into industrial powerhouses. Now, instead of being garment sweatshops, many maquiladoras in Tijuana employ a new generation of Mexican engineers and skilled technicians to make medical devices. Technicians at these factories earn $14 an hour, compared with $25 an hour for technicians at U.S. factories.

Mexico’s medical device industry buys much of its raw materials and capital machinery from American suppliers. The American-owned Integer plant in Tijuana, for example, buys 90% of its raw materials, duty-free, from the U.S.: stainless steel to be stamped into cups used for hip replacements and plastic to be molded into catheters. Then half of the factory’s output is shipped back to the U.S. and much of the rest to American-owned companies elsewhere. The company, like many others here, is seamlessly integrated: Employees in Tijuana videoconference with R&D teams in the U.S. to fine-tune product designs.

Classroom discussion questions:

  1. What factors appear to threaten this supply chain?
  2. Why is it hard to move the medical factories to the U.S?

OM in the News: Who is Winning the Race for Jobs Between Robots and Humans?

March 30, 2017

Robot arms weld a vehicle at the GM plant in Lansing, Mich.

“Who is winning the race for jobs between robots and humans,” asks The New York Times (March 29, 2017). Two leading economists have just declared a winner: the robots. The industry most affected by automation is manufacturing. For every robot per thousand workers, 6.2 workers lost their jobs and wages fell by as much as 3/4 of a percent, according to the MIT and BU researchers. Theirs is the first study to quantify large, direct, negative effects of robots. The profs said they were surprised to see very little employment increase in other occupations to offset the job losses in manufacturing.

The study analyzed the effect of industrial robots in local labor markets in the U.S. Robots are to blame for up to 670,000 lost manufacturing jobs between 1990 and 2007, it concluded, and that number will rise because industrial robots are expected to quadruple. The findings fuel the debate about whether technology will help people do their jobs more efficiently and create new ones, as it has in the past, or eventually displace humans. The problem might be that the new jobs created by technology are not in the places that are losing jobs, like the Rust Belt.

In addition to cars, industrial robots are used most in the manufacturing of electronics, metal products, plastics and chemicals. They do not require humans to operate, and do various tasks like welding, painting and packaging. From 1993 to 2007, the U.S. added one new industrial robot for every thousand workers — mostly in the Midwest, South and East — and Western Europe added 1.6.

The next question is whether the coming wave of technologies — like machine learning, drones and driverless cars — will have similar effects, but on many more people.

Classroom discussion questions:

  1. Other research has predicted that humans will come out ahead in the job battle. Why do you think this is the case?

      2. Is the robot revolution a good OM trend?

OM in the News: Location Decisions and Incentives

March 28, 2017

When Elyria Mayor Holly Brinda learned that Riddell Inc. was looking to leave this small Ohio city, she came up with a $14 million package of tax incentives and offered to lease land to the company for $1 a year. It wasn’t enough. Riddell, which makes the football helmets used by NFL and college players, decided to move its 320 employees just over 2 miles down the road to a neighboring town, which offered its own bundle of incentives and lower corporate and individual income-tax rates.

These days, the competition often isn’t Mexico, China or some other country promising cheap wages and low taxes,” writes The Wall Street Journal (March 17, 2017). In many cases, towns like Elyria are vying with cities that aren’t very far away. The race to woo companies has intensified as state and local governments struggle with a slow economic recovery, sluggish new business formation and job losses resulting from automation. Many older industrial cities see tax incentives as one of the few levers they can pull.

Economic-development tax incentives more than tripled over the past 25 years, offsetting about 30% of the taxes the companies receiving incentives would have otherwise paid in 2015, compared with about 9% offset in 1990. By 2015, the total annual cost of these incentives was $45 billion. Incentives climbed after the financial crisis, but their growth slowed in 2016 as some state and local governments began re-examining the effectiveness of the programs. Critics say tax incentives do little to spur job creation or economic growth.

Here in Florida, the legislature just approved legislation to eliminate the state’s main provider of tax incentives and other development assistance. Florida has attractions such as a good climate and no income tax, said a politician, and would be better off focusing on other forms of economic development, such as education and infrastructure.

Classroom discussion questions:

  1. What are the pluses and minuses of tax incentives?
  2. Did Florida make a good decision?
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