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OM in the News: Amazon Targets the Hospital Supply Chain

February 28, 2018

Amazon is seeking to supply hospitals.

Amazon, always expanding, is pushing to turn its nascent medical-products business into a major supplier to U.S. hospitals and outpatient clinics that could compete with distributors of items ranging from gauze to hip implants. “The firm is expanding its business-to-business marketplace, Amazon Business, into one where hospitals could shop to stock outpatient locations, operating suites and ERs,” writes The Wall Street Journal (Feb.14, 2018).

The market for medical supplies is one of a growing number of businesses the online retail giant has set in its sights, from groceries to clothing, often with market-moving results. Amazon said it seeking to sell hospitals on a “marketplace concept” that differs from typical hospital purchasing, which is conducted through contracts with distributors and manufacturers.

“Our goal is to be something new,” said Amazon’s head of global health care. “We’ve been actively building out new capabilities and features to simplify purchasing.” Amazon’s comparison-shopping ethos could shake up the hospital- and clinic-supply business, where middlemen fees add costs and proprietary contracts obscure price differences. But Amazon faces challenges. Some hospitals have been reluctant to buy supplies from Amazon Business, for reasons including lack of options and lack of control over purchases and shipping.

When doctors and nurses reach for a familiar product, they know its specifications. Jumping online to look for the best deal could disrupt that continuity. Hospitals today typically sign contracts to buy supplies directly from manufacturers or from distributors, which include Owens & Minor, Medline Industries, McKesson, and Cardinal Health. Also in the chain are companies known as group-purchasing organizations that negotiate on behalf of multiple hospital buyers, seeking to leverage collective demand. Hospitals formed and own a stake in many such groups, as we note in our Video Case Study “Arnold Palmer Hospital’s Supply Chain” in Chapter 11.

Classroom discussion questions:

  1. Describe the role of the group purchasing organization (GPO) in the hospital supply business.
  2. Refer to the Arnold Palmer Hospital case study in Ch. 11. How does that organization’s supply chain work?

OM in the News: The Use of Drones Grows

February 26, 2018

A drone hovers over a home, capturing detailed images of the roof

“Building inspectors who used to rely on binoculars and ladders are turning to drones to check property exteriors for signs of damage or deterioration that could lead to injuries,” writes The Wall Street Journal (Feb. 21, 2018). But their lower cost and greater thoroughness is coming into conflict with another public safety concern: the danger drones pose to other aircraft or people on the ground. In New York City, which has thousands of old skyscrapers, drone use is prohibited for property inspection.  Yet buildings over 5 stories must be regularly inspected in NYC, forcing inspectors to go out with binoculars, field notes, a pen and paper.

Drones, which had early applications in warfare and surveillance, increasingly are being adopted by a wide range of businesses—from package delivery to underwater exploration. Business applications have grown significantly since 2016, when an FAA ruling made it easier to become a drone operator. Since that ruling, technological developments have made drones smaller, more reliable and easier to fly, causing a growing number of  building inspectors to embrace them.

Take the inspection of a cathedral in Long Island. Using a drone, inspectors could examine the chimney without having to erect scaffolds—the difference between a $1,000 inspection and a $10,000 scaffolding inspection. Using a drone also can shorten a weekslong inspection to a day. “It is realistic that a $10,000 drone inspection could cost over $100,000 of hanging scaffolding,” said one engineering consultant.

About 8% of the 21,000 certified home inspectors in the U.S. now use drones for inspections. Four years ago, there were virtually zero.

Classroom discussion questions:

  1. What are the advantages and disadvantages in drone usage for building inspection?
  2. How else might drones be used in OM?

OM in the News: Is Boeing “Partnering for Success” or “Pilfering from Suppliers”?

February 24, 2018

787s being assembled in Everett.

“So much goes into the development of a commercial aircraft—billions of dollars, millions of work hours, rivers of sweat,” writes Businessweek (Feb. 19, 2018). At Boeing’s rollout of the 777 in 1994, the phrase “working together” was an organizing principle because, said Boeing, “we realized that only by working together as a team—with our customers and suppliers, would we build a truly great airplane.” Boeing extended its embrace of globalism with its next airplane, the 787, introduced in 2011, relying on a far-flung network of suppliers that not only built but also designed many of the parts.

But togetherness goes only so far under new CEO Dennis Muilenburg. Boeing has turned hard-nosed amid the greatest sales boom in aviation history, and he’s insisting suppliers cut prices. This cost initiative is called Partnering for Success; some of its targets call it Pilfering from Suppliers. The initiative demands additional price cuts of about 10%.  Says Muilenburg, “it is making our supply chain better, and 90% of our supply chain sees that.”

The company just spent $1 billion to erect the Composite Wing Center. But the first time Boeing developed a composite wing, it hired Mitsubishi to do the engineering and manufacturing in Japan, part of an effort to spread the enormous development costs of the 787 to multiple partners. Work on the fuselage went to Italy and the passenger doors to France.

Boeing had never handed off responsibility to its suppliers on this scale—and it was a disaster. The first plane out of the factory in 2007 was an empty shell, lacking plumbing, wiring, and electronics. Early models were built and rebuilt. An engine exploded, the carbon fiber frame had to be reinforced to support the wings, and an electrical blaze knocked out pilot control panels during a flight test. Battery fires grounded the global fleet soon after the plane was finally delivered, 3 years late. Boeing lost money on the first 500 787s it delivered and vowed to control its suppliers much more closely.

Classroom discussion questions:

  1. Is the supplier cost cutting strategy a good one?
  2. Why is Boeing insourcing more parts?

OM in the News: Kraft Foods Fixes Its Factories

February 21, 2018

Workers check the sliced ham as it is packaged at the new plant in Iowa.

“For decades, Kraft Foods produced Oscar Mayer cold cuts out of a 6-story, former slaughterhouse built in 1872,” reports The Wall Street Journal (Feb. 13, 2018). The systems seemed out of another era. Workers drove forklifts loaded with giant vats of ham, turkey and chicken parts on and off freight elevators to different processing points. A typical turkey breast required 4 rides between floors to get from raw meat to packaged slices. Breakdowns could slow production to a crawl. The inefficiency was easy to spot for 3G Capital, which took over Kraft in 2015.

3G started by moving production to a new, $225 million plant, where the first cold cuts rolled off the assembly line in June. Gone are the elevators. Instead, conveyor belts whisk “stick meat”—macerated proteins stuffed into 6-foot-long casings—through processing rooms. New machines can handle 15,000-pound batches. Robotic arms pick up trays and place them in room-size ovens. Automated slicers deliver perfect 9-ounce portions that drop into plastic containers.

Changing the open-floor plan of the old plant to one with separated work rooms means less downtime from sanitizing the lines. In the slicing room, cooked stick meat enters one end of a carving machine and emerges in identical sets of cold cuts that drop into containers, which have been folded into shape seconds before from plastic sheets. Sensors in the conveyor belt weigh each portion, automatically pushing away extra slices.

When it hits full capacity in a few weeks, the plant will be able to churn out 2.8 million pounds of sliced meat a week, about 17% more than the old factory, while employing 500 fewer people. “We look at pretty much any opportunity we have to drive efficiency,” says Kraft’s supply chain head.

In the broader overhaul of nationwide production, 3G used computer modeling to analyze where it sourced ingredients, where it needed to ship finished products, and the cost and availability of labor and other resources.

Classroom discussion questions:

  1. How did the reorganization and move improve productivity?
  2. What OM techniques were used to guide the changes?



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?


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