How to quake proof a supply chain

September 7, 2011

After a long hiatus, we return with a post. This one on Toyota’s plan to quake proof its supply chain over the next five years. (Baltimore Sun, 9/6/11).  They have three ideas:

a) standardize parts across suppliers

b) hold more inventory of critical parts

c) each region should become independent in its parts procurement.

All three will indeed make the supply chain more earthquake proof. The first allows the company to switch production to non-affected suppliers. The second allows them to draw down the reserve of parts. This does rely on the transportation network recovering relatively quickly. And hopefully the inventory is stored in a quake proof facility – imagine you produce a six month supply of microchips only to have the roof cave in and crush them all (or they melt in the subsequent fire). The third will help too (create independent regions) but it may be overkill. If a part is manufactured in a low-quake risk zone, and it is a specialized part that should most cost effectively be produced in a single facility, then why insist that it be made in 5-6 plants? This initiative may have more to do with managing exchange rate risk.

So, these are surely worthwhile initiatives and they apply beyond automobile production. The real challenge will be the implementation details – how will the company decide between part A that costs 5% more but is standard and can be produced in a number of facilities and part B that costs less but is specialized and made by only one supplier in an earthquake prone area? There could be some interesting research done on this challenge.


Supply chain lessons from Japan

March 18, 2011

The devastating earthquake and tsunami in Japan have again raised the issue of supply chain robustness to disruption risk, and in particular, are they too fragile? FT.com (3/15/2011) asserts that  “Strategies that look rational for individual manufacturing companies… can create big macro-level vulnerabilities…”

The reality is that it is too costly to source every component from multiple locations throughout the world just to hedge natural disaster risks. But that doesn’t mean that companies should turn their back to the problem. The best companies follow a few intuitive steps to make their supply chains more robust. I’ll offer two.

First, map your supply chain. If you know your Tier 1, Tier 2 and Tier 3 suppliers, then you won’t have to spend one week figuring out whether you will run out of a part. Most companies know their Tier 1 supply chain, but do they know the other tiers? Do they keep track of changes to the supply chain? This information is crucial because the company that is first to work the phone to find alternative  supplies is most likely to be able to secure those supplies.  This information also gives you information that you can use to make downstream adjustments to your production. For example, should you eliminate an overtime shift or not? Should you redirect scare parts from one plant to another? Those are difficult decisions to make and are made much more complicated if you don’t even know if you have a problem – why shut down a plant for a potential part shortage that may not materialize?

Second, before disaster strikes, map out vulnerabilities. Some components can be sourced in many locations. Some components have several months of buffer inventory. You don’t need to worry about those. But if the amount of buffer inventory is limited and it is sourced in a few locations, especially a few locations that happen to be close to each other, then you need to consider finding alternative sources or alternative parts. Maybe the conclusion is that the company needs to bear the risk – there are no effective alternatives. But maybe the conclusion is that a substitution to a less risky part is actually feasible.  Finding this substitute is less costly before the disaster. There have been reports of companies that are scrambling to qualify additional suppliers, but that could have been done before disaster struck.

Finally, one risk that will hit many companies, even if they don’t have a shortage of parts, is the risk of exchange rate fluctuations – the Yen has just hit a post WWII high against the US dollar.


McDonald’s medicine

February 5, 2011

Americans want instant gratification – that is true for fast food as much as it is for healthcare. Consequently, the traditional model of general practitioner in which you make appointments and then (a week later – if you are lucky) see a doctor is getting increasingly challenged. Patients have found the McDonald’s of healthcare. It is called the ER. You go there when you want and they will get you what you want. One stop shopping for all your healthcare needs.
In the following article, two ER doctors describe their view of the problem – and make us think if we have to invent the way we deliver care: http://www.time.com/time/nation/article/0,8599,2044392,00.html


Why China – cheap capital?

January 15, 2011

In 2008 Evergreen Solar opened up a solar panel factory in Devens,  Massachusetts, but they just announced that they will layoff their 800 workers and move production to China (NY Times 1/14/11). Why? Well, of course, it is too expensive to manufacturer in the U.S. And low cost production is critical – the price of solar panels has fallen from $3.39 per watt in 2008 to $1.90 per watt now. Evergreen Solar has reduced its cost to $2.00 per watt, but Chinese manufacturers are producing at $1.00 per watt.

But labor is NOT the reason for the high cost of production in the U.S. – labor is a small portion of the cost to make solar panels. Nor does it seem a lack of technical skills. Instead, the issue is the cost of capital – a solar panel plant can cost $400 million and Chinese manufacturers have access to low cost bank loans.

It it is likely that there will be more movement to China for reasons other than the cost of labor.


How to bump passengers from flights?

January 14, 2011

Overbooking a flight enables airlines to ensure that they fly with as much capacity as possible – given that 8-10% of passengers do not show up for a flight, you want to make sure that there are not too many empty seats on the plane.  But if you overbook, you must be ready to find yourself in a situation in which you have more paid passengers than seats. Since sitting in the aisle is probably against FAA regulation, that means the airline might need to bump one or more passengers off of the flight. How should this be done?

The standard method is to offer a fixed benefit – say a $400 flight voucher – and hope that enough people take the deal. If that doesn’t work, the airline sweetens the deal. As a last resort they have to involuntarily bump a passenger (which costs them more).

According this WSJ 1/14/11 article, Delta has another idea – when passengers check-in, ask them how much they are willing to accept to be bumped from a flight (a $ amount) and choose the lowest bidding passengers if necessary.  They have apparently be trying it out for one month.

This is an interesting idea.  There are two obvious advantages: (i) it reduces the time and effort to solicit passengers off of a flight when you discover that you need to bump some people and (ii) it is hard to imagine that they would end up paying more to bump passengers. I suspect that passengers are willing to accept less cash to be bumped when they check in than when they are about to walk onto a plane – the cost of getting bumped is more tangible when you are watching the plane pull away from the gate. Furthermore, I think some passengers will bid less than the $200 or $400 that the airline would normally pay.  (There are many ways to run this auction, but it seems that passengers receive their bids, rather than the highest clearing bid or the bid of the lowest non-bumped passenger.)

However, as an airline, do you want to ask every passenger to report how much they want to be paid if you fail to serve them? Imagine booking a vacation at a Four Seasons Resort and receiving an email like this: “We are excited that you will be staying with us and we look forward to catering to your every needs so that you will have a relaxing an memorable visit with us. On occasion, we are unable to accommodate all guests with reservations. If that were to occur, could you please let us know what the minimum cash you would accept to be booked into a partner hotel nearby to our facility?” It doesn’t scream customer service. But “customer service” may not be the first thought when people think of airlines these days. Air travel is a commodity and efficiency matters. I wonder if this experiment – like charging passengers for bags – will stick.

 

 


Taxi capacity in NYC – the 4 O’Clock Blip

January 12, 2011

Apparently it is hard to find a taxi between 4 and 5pm in Manhattan. Why? Because that is the time when many taxis switch drivers. This turns out to be a fascinating capacity management issue.

The first surprise is that a substantial number of taxis are used around the clock in two 12-hour shifts. I guess NYC really does never sleep.

So, given that you have two 12-hour shifts, and clearly one driver can do only one of those shifts, you need to decide a time and place to switch drivers. The place turns out to be, in all likelihood, a garage in Queens. (The use to do it in Manhattan, but real estate became too expensive, so they moved to Queens.) The time, you would think, would be chosen at a relatively light period. Or, it would be chosen so that earning potential of the two shifts are equated in some sense (accounting for the fact, I would assume, that the day shift is more pleasant than the night shift).  Take those factors into account and apparently 4 pm is a good time to swap drivers – one person gets the morning rush hour, one the evening rush hour. The result, according to NY Times 1/11/11 is a 4 O’Clock Blip of empty taxis:

What is really interesting about this is that the spike is so pronounced. If 20% of the taxis are taken out of service 4-5pm, then you would think that there would be a noticeable drop in competition. Wouldn’t more taxis want to make the switch at 3pm or 6pm to take advantage of this? In other words, why isn’t the blip smoother? Given that it is spiky, it must be that it is too costly to switch at the other times relative to the 4-5 pm slot.

One explanation has to do with coordination. If some cab drivers make the switch at 3, others at 4, others at 5 and yet others at 6, a cab driver needs to know when he will make his switch – when to drive the taxi back if he is doing the day shift and when to show up at the garage if he is doing the night shift. Keeping track of those times might lead to the inevitable late cabby, which will lead to idle taxis. Having everyone show up at 4-5 is a simple rule that is easy to remember – you show up at 4-5. When do you show up? 4-5.  But this seems like it could be fixable with technology. A computer keeps track of the schedule and sends reminders to cabbys as to when they will show up. Or, it could be fixed with some consistent scheduling – for a given month a given cabby will have the same drop off/pick up time but the times are staggered to smooth the spike.

An alternative explanation could be due to demand. Maybe demand drops significantly at 4-5, so being a taxi at that time is not as advantageous as the lower supply would make it seem. This strikes me as unlikely, but what do I know about taxi demand in Manhattan between 4 and 5pm?

The Bloomberg administration is looking into this issue, being a data-driven type of administration. To their credit, they don’t plan to do anything until they identify the root causes. And even then, they say they are hesitant to tell businesses how to do their business – maybe the taxis know something that we don’t know. “Fixing” this issue (if it should be fixed) will not change the world much, but it is a fun capacity management exercise.

 

 


What Disney does to reduce wait times

January 5, 2011

Understanding (and reducing) waiting lines (Queues) is central to Operations Management. Waiting in line is often one of the most memorable experiences when visiting theme parks such as Disneyland. The long wait times limit the number of rides a visitor can experience per day. Disney research shows that the average visitor only can enjoy nine rides per day. From a “value-add” perspective, this is a rather poor performance.  A ride might take five minutes. So we are looking at 45 minutes of value add (ride) time relative to an eight hour day. What can be done to improve this? Improvement actions in this environment can be categorized into three groups: (a) Increase capacity: in some cases, it is possible to increase capacities at the attraction. In the Pirates of the Caribbean attraction, Disney is able to increase the launch frequency of boats as demand increases. (b) Make the waiting more pleasant: Disney dispatches greeters and entertainers to reduce the perceived waiting times when it is not possible to reduce the actual waiting time. Simple video games are now added to Space Mountain as a way to turn unproductive (and not amusing) wait time into something fun. (c) Divert demand to less crowded areas: if you can’t increase capacity, try to reduce demand. There are 40 rides / attractions in a typical park. But demand tends to focus on some high visibility attractions as those are perceived as being the most fun. When wait times in those areas grow long, Disney tries to create some “buzz” in other areas of the park, trying to divert demand and thus balance capacity utilization.

For a more detailed story, see: http://www.nytimes.com/2010/12/28/business/media/28disney.html?scp=1&sq=disney%20lines&st=cse