Capacity shortages of H1N1 vaccine

Have you been able to get your H1N1 vaccine? Probably not – it has been widely reported that there are delays in the distribution of this vaccine. The interesting question is why? Reading a bunch of articles on this topic doesn’t shed a whole lot of light. But one figure jumps out at you – as reported in WSJ (10/19/09 – Delay Undercuts H1N1 Vaccine Campaign), the U.S. government has ordered 251 doses from 5 manufacturers. The current U.S. population is just over 300 million, so they have ordered enough to vaccinate over 80% of us. To put this in perspective, the U.S. normally vaccinates about 100 million. In fact, 114 million dose of seasonal flu was ordered in addition to the 251 million does of H1N1. The two types of vaccines are made with nearly identical manufacturing processes. So that adds up to about 365 million doses of vaccines, which is at least 3 times the typical production volume.

Given that manufacturers had to more than triple their capacity, it is not surprising at all that they are behind schedule in production.  Making matters worse, the quick ramp up may have contributed to the their lower-than-hoped-for yields. 

So instead of complaining that you can’t get an H1N1 shot, maybe you should be thankful that they have been able to produce as much as they have. Given the number of deaths among children, let’s hope better news will come soon.

Volatility in autos – and the demise of brand loyalty

Any casual observer to the auto industry can sense that brand loyalty has been declining. But the following graphic, posted in today’s NY Times (http://www.nytimes.com/2009/10/21/business/21auto.html) illustrates how dramatic the decline has been:

So what does this mean for strategy? Clearly, this has interesting implications for marketing (does it mean you have to do more advertising or less?).  But it also has interesting implications for operations. Logic suggests that if brand loyalty decreases, market shares should be more volatile – customers will move quickly to products they like and then just as fast they will move away to another brand’s products. It would seem that this places an extra premium on flexibility – it should become (or has become) harder to predict a model’s market share, and so flexible capacity is needed to manage the unavoidable demand-supply mismatches.  Throw in uncertainty in the economy, fuel prices, and the diffusion rate of green transportation and you have a very challenging environment ahead – as if we didn’t know that.

Production smoothing on a grand scale

It was just reported that the US GDP fell at an annual rate of 3.8% in the fourth quarter of 2008 but it would have fallen 5.1% had it not been for the inventory adjustment – demand “fell off the cliff” but firms kept producing, thereby causing inventories to rise.  One might interpret this as a nice demonstration of the production smoothing strategy on a grand scale – it is costly to shut down production, so keep producing and build inventory with the assumption that eventually demand will exceed your production and you can then draw down your inventory.  Production smoothing is particularly effective for coping with seasonal demand because then the firm has a good sense that demand will indeed return during the high season.  Now it is a little bit different. The drop in demand is not seasonal but systematic and it is not clear when demand will level off or at what level it will converge to. In particular, if the economy is still producing above the new long term rate of demand, then further adjustments to production will be needed.

The depth of the downturn may hinge on firms’ willingness to hold inventory. If they want to reduce their current inventories to their levels over the past five years, then they will need to really slam on the break (in effect, we have already produced for future demand and to return to equilibrium requires stopping production so that demand can catch up).  However, if firms are willing to hold on to their additional inventories, then the adjustment need not be so severe – in that case all that is necessary is that the firms align their current production with their current demand rate.

These issues are exhibited on a more “micro” scale at Chrysler. They stopped production in December 2008 because their inventories were higher than they could manage (or wanted) and continuing to produce would have only increased them further. They only just resumed production. If their current production rate equals their current demand rate, then their inventory level will remain unchanged. If they want to reduce their inventories, then they will have to produce at a rate that is lower than demand for some time.

So this raises the question of whether inventories are stabilizing or destabilizing to an economy.  You can tell a story for either one, and some additional data collection is needed to resolve the conflict.

Wall Street Journal, Jan 31, 2009, Economy Dives as Goods Pile Up

Little’s Law everywhere – even in the “body of Christ”

Little’s Law dictates the relationship between three performance metrics in a process, Inventory, Flow Rate and Flow Time:

Inventory = Flow Rate x Flow Time

If you know two of them, then you can calculate the third. It is hard to not be a Little’s Law junkie – seeing the application of Little’s Law everywhere.  Here is an application that you might not expect – the production of communion wafers. The New York Times published an article about a company in Rhode Island that makes a lot of communion wafers – about 1 billion per year. It comes with a short audio slide show which is reasonably interesting.

So what is the Little’s Law question from the article? Wafers are produced at the rate of 100 per second. They spend 15 minutes in a cooling tube. How many wafers does the cooling tube hold on average? Use Little’s Law! Inventory = 100 x 15 x 60 = 90,000, or enough for 360 Sundays at a medium sized church that serves 250 per service. (360 Sundays is almost 7 years.)

If Little’s Law isn’t your thing, then you can calculate out their process utilization. At 100 wafers per second, that is 100 x 60 x 60 x 24 x 365 = 3.2 billion wafers per year.  They only sell about 1 billion per year, so their process utilization is about 1 b / 3.2 b  = 31%

New York Times, December 24, 2008: http://www.nytimes.com/2008/12/25/business/smallbusiness/25sbiz.html?pagewanted=2&partner=rss

Is JIT dragging us down?

We all know these are tough economic times, but do we know why the economy is struggling so mightily? One theory is that JIT (and other lean manufacturing practices) are to blame. See, for example,

http://jamesfallows.theatlantic.com/archives/2008/12/pensee_dept_followup_on_the_no.php

The metaphor is simple, animals with stored fat are more likely to survive in times of scarcity than thin animals.  Alternatively, think of a group of hikers on a glacier. JIT means they all tied together with very short ropes so when one falls, they all fall in quick succession.  Are these metaphors correct? Is lean manufacturing the cause of our woes? There is reason to believe it is in fact the scapegoat.

Consider the auto industry and GM in particular.  Their demand is now much lower than their capacity.  (Actually, it has been for a long time, just now there is a very large discrepancy.) If they maintain production at their capacity, then their inventory continues to build, converting cash into inventory. This can work for a little while but eventually you run out of cash, risking bankruptcy.  This is the problem they currently have.  The alternative is to stop production, but then you pay your workers to do nothing, so you still burn through cash but then have no product to show for it. This is very costly – in theory, inventory can eventually be converted into some revenue.  

Now consider the role of lean production in this mess. If you turn back time to one year ago, had GM been less lean, then they would have had less cash and more inventory.  Consequently, they would have had less of a buffer to weather the current storm, so their problems would have hit earlier or would have been more severe.  If they had been even leaner, then they would have had less inventory at that time and more cash, thereby giving them a bigger cushion to survive the downturn.  Based on this reasoning, their current problems are as bad as they are because they weren’t lean enough, not the other way around. 

It is possible to defend JIT in another way – if JIT were the problem, then we would expect the leanest of the auto manufacturers to be suffering the most.  Toyota and Honda are among the leanest, and they are suffering, but not by as much, which is again consistent with the notion that during this crisis, being lean is a help and not a hindrance. Maybe the better metaphor is the following.  Two people are thrown overboard a cruise ship and nobody notices, so they need to fend for themselves. They see an island in the distance and start to swim for safety.  Who is more likely to make it, the fit and lean person or the “master of the buffet” person?

Honda’s Flexible Plants Provide Edge

This has been a tough year for most auto makes :  so far this year sales are down 24% at Chrysler, 18% at GM, 15% at Ford and 7.8% at Toyota.  But U.S. sales at Honda are up 1.7%.  There are two reasons for Honda’s success. (1) Honda’s product mix depends less on SUVs and pickups than the others (i.e., fuel efficient models make up a larger portion of their portfolio). (2) Honda has some of the most flexible plants in the U.S. To illustrate that flexibility, Honda is able to switch from producing  Civics to CR-Vs with only 5 minutes of downtime!  Honda has achieved this flexibility through many different decisions.  For example, the Civic and CR-Vs were designed to be manufacturered in the same sequence of steps, so the same step (such as a door installation) can occur at the same location on the assembly line.  Honda did have to invest $400m several years ago to improve its flexibility.  That looks like a good investment in the current climate.  

Wall Street Journal, Sep 23, 2008 – Honda’s Flexible Plants Provide Edge

Supply chain coordination snags Airbus and Boeing

Although airlines in general are having a hard time turning a profit now, there remains brisk demand for new aircraft from Airbus and Boeing. (Possibly because new aircraft are more fuel efficient.)

With a full backlog and a price tag around $200 million per aircraft, these companies do not want to delay delivery of any new aircraft.  But apparently they have had to park nearly finished aircraft due to some missing parts. For example, Boeing couldn’t deliver several 777s to Emirates because they didn’t received customized galleys from Snell, a German producer. 

The problem is that Snell didn’t anticipate the increase in volume and consequently didn’t build enough capacity. This is a good example of how a supplier’s capacity decision can have significant financial consequences for a buyer.

Wall Street Journal, Aug 8, 2008 – Lack of Seats, Galleys Delays Boeing, Airbus

Women need more capacity – potty parity laws

When it comes to potties, “separate but equal” may not be equal enough – NY’s City Council decided that public venues like arenas, nightclubs and theaters must provide a female-to-male restroom ratio of two to one. This provides an entertaining context to discuss queuing theory.

We all know that women often have to queue to use the restroom while men usually do not. To devise the appropriate solution, it is important to know why. Queuing theory provides useful guidance.

In short, a queue will form when the load on the system exceeds its capacity, where the load is the arrival rate multiplied by the time to process each request. Think of load as the desired number of flushes per minute and the capacity as the feasible number of flushes per minute. This raises several possibilities for why the queue in the women’s room is longer:

(1) The arrival rate of women is higher, either because there are more women than men at a particular venue (doubtful at Madison Square Garden’s Monster Truck Smash) or because women need to use the restroom more often (absolutely true in some families);
(2) The arrival rate of women is more variable. Hard to imagine this is so unless the women’s basketball team bus arrives or women have a greater tendency to use the restroom in packs.
(3) Women have a longer processing time. Data could in theory be collected on this, though discretion would be appropriate;
(4) Women have a more variable processing time. Again, many theories, little hard evidence;
(5) Less capacity per restroom – How many people can flush simulataneously in a restroom? On a per square meter basis, urinals are very efficient.

When it comes to restrooms we probably do not want to consider options that would either strive to (i) decrease the mean or variance of their arrival rate or (ii) change their restroom behavior to decrease the mean or variance of their “processing times”. That leaves cause (5) above as the solution – increase capacity. 

A simple solution to increase capacity is to pool capacity - unisex restrooms.  This, of course, is a non-starter in some cultures. The obvious alternative is to add more women’s restrooms (i.e., more possible flushes per unit time),  which is exactly what NY City has legislated.

This leaves open two questions – why do we need legislation to fix this? (i.e., why doesn’t the market work here) and how do we get men to leave the seat down?

NY Times, July 18, 2008
A ‘Women Only’ Restroom Renovation Tips the Balance at Grand Central
http://www.nytimes.com/2008/07/18/nyregion/18bathrooms.html

Allocation and production when demand is hot

Although most of the news in the U.S. auto industry is bad, Honda is selling more of its small car – Fits and Civics – than it can make.  So this creates two problems - (1) how do you allocate vehicles when dealers are scrambling for more and (2) how can you make more of the hot selling vehicles?

Honda uses turn-and-earn allocation – if a dealer sells a vehicle, they earn the right to another one. Seems fair but more importantly, it makes sure that dealers don’t charge too much or else risk slowing their sales, thereby jeopardizing future allocations (our conjecture, not in the article).  In other words, its a legal way to discpline dealership pricing and sales effort.

But Honda still wants more of those Fits and Civics, so it is making plans to move truck capacity around and free up capacity for its smaller vehicles. Toyota and the other makes are doing the same thing.  The winner from all of this will be the firm that has the most flexible production – who can turn a truck assembly line into a small vehicle assembly line the quickest and at the lowest cost?  Flexibility is like insurance – its seems a waste when you don’t need it and critical when you do!

Automotive News, June 17, 2008, Honda dealers scramble amid stampede to small cars

24h wait in the ER / video of a patient collapsing while waiting

Long waiting times and crowded ERs have unfortunately become rather common in the US – sadly enough, the country has gotten so much used to this fact that a crowded ER or a diverted ambulance is not news any more. The tragic story of a NY woman collapsing in the ER of a psychiatric ward, however, made it into the national news. Her collapse and subsequent death were captured by the video system installed in the waiting room and the video made it onto YouTube. When the patient collapsed (after having waited for 24h), nobody (neither patients nor hospital employees) noticed or cared. A sad reminder about the importance of service operations management (including the management of waiting times) and quality management. For more details, see:

NYT July 2, 2008: Video of Dying Mental Patient Being Ignored Spurs Changes at Brooklyn Hospital 
http://www.nytimes.com/2008/07/02/nyregion/02hosp.html