How to quake proof a supply chain

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.

McDonald’s medicine

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

Taxi capacity in NYC – the 4 O’Clock Blip

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.

 

 

Robots or people?

Maybe the biggest challenge for e-commerce retailers is dealing with the huge surge in sales in the fourth quarter.  How can you build enough capacity cheaply enough to satisfy the rapid growth in demand during October, November and December, only to have most of that demand disappear by January? The traditional approach is to hire lots of seasonal workers. The trick with this is to be able to train them quickly enough for them to be productive in time for when they are actually needed. The Wall Street Journal reports that one company, Kiva Systems, has a different idea – instead of hiring workers, install robots (Dec 19, 2010).  To see these robots in action, check out the video (click here).

You might assume that these robots would “walk” around a warehouse picking products, putting them into a basket and bringing them to a place to be packaged. That is what humans do. Instead, these robots move shelves of inventory around. (See the photo – the robot is the orange contraption at the bottom of the shelf.) One advantage of this system is that you don’t need permanent aisles between the inventory – the shelves can be packed in tightly with the computer controlling the sequence (so that the one pink doll you need isn’t buried deep within a sea of shelves).

The next thing you may notice is that these robots are not particularly fast. It is not like the robots move product through the warehouse at twice the speed a human can walk. However, assuming these things are reliable (e.g., treads don’t need replacing every couple of days) they don’t need to take breaks, and they are instantly trained. One downside of this system is that the robot must move the entire shelf and not everything on the shelf may be needed at one time. Humans pushing a cart around a warehouse only put into their cart what is needed at the time.

But the point of the article is how to deal with the holiday surge in demand. While a robot might replace a human, it doesn’t eliminate the problem – the company simply needs a lot more capacity in the 4th quarter. If it buys these robots, then they are likely to be idle most of the rest of the year. Seasonal employees are just that – seasonal – that is, they go into the deal with the expectation that their work will be temporary.

The article ends with an idea for making the robots more cost effective for the retailer – Kiva Systems will rent the robots to the company for just the peak demand period. But I don’t see why this solves the problem – now Kiva Systems is sitting on expensive and idle capacity for most of the year (even in the Southern Hemisphere, Christmas falls in December).  Rental systems work well when potential customers need the product at different times. Given that the 4th quarter is the same for all retailers, I am not seeing this as an idea that works. Interestingly, the founders of Kiva Systems worked previously at Webvan. If there was ever a company that invested too much in replacing human workers with technology, it was Webvan – they may have survived if they didn’t blow all of their capital on hugely expensive warehouses. That said, I suspect there are surely applications of the Kiva Systems for some retailers. But as a solution to the 4th quarter demand surge, I am skeptical.

Blockbuster – doomed by its own medicine

Blockbuster filed for bankruptcy protection this week, which was expected for quite some time (NY Times, 9/23/10).  Blockbuster surely had a good run, but ultimately was doomed by its own medicine.

Blockbuster grew to dominate the video tape/DVD rental business by providing convenience to its customers – many well-located stores and many copies of the movies/shows customers wanted to see. If you took the time to go to a Blockbuster, you knew you would find something worth watching.  This convenience was provided in large part by negotiating revenue sharing contracts with the movie studies, thereby allowing Blockbuster to stock a large inventory even when at item was first released.

Fast forward to today. I live two blocks/200 yards from a Blockbuster but I was surprised to discover a couple of weeks ago that it was gone.  My 15-year old son explained it to me – “why would I walk to Blockbuster to pay $5 for a movie when I can download the same movie to my PS3?” I had no idea that a PS3 could do that (isn’t it a game machine?) – clear evidence that the generation gap I swore I would avoid is right there in front of me. But I digress. The point is that Blockbuster is no longer as convenient as the alternatives – RedBox, Netflix, etc. It is no longer as important to have many copies of new releases in a store because customers don’t feel the need to leave their home. It is true that Blockbuster makes content available sooner to customers, but that doesn’t seem to have the value that it use to have – my kids troll around for movies of all ages and don’t  rush to see the latest thing.

It is unlikely that Blockbuster will ever regain the dominance it once had. Surely, it will not do it via its 3000 stores, a number that will have to decline. The fall of movie rentals has been predicted for at least a decade – the technology has finally advanced to the point to make it happen.

After Toyota, now Dell

Things calmed down for car maker Toyota over the last couple of months following the problem of unintended acceleration in some of its vehicles that we commented on previously in this blog. Now, computer giant Dell is under attack. While its computers are certainly not suffering from an unintended acceleration problem, quality has become a rapidly growing problem. As the below cited NYT article describes, Dell’s recent quality problems are driven largely by component problems (faulty capacitors). Remarkably though, Dell took a similar approach to dealing with its quality crisis as did Toyota. Instead of creating transparency, the company created confusion.
Both tales of defects and poor quality (Dell and Toyota) show that increased product complexity paired with growing cost pressure is an explosive cocktail. Since both of these forces are unlikely to go away in the coming years, the next quality crisis is only a matter of time.
Source: http://www.nytimes.com/2010/06/29/technology/29dell.html?_r=1&src=me&ref=homepage

Sayonara to “stack ’em high, watch ’em fly”

Inventory management has been changing at Polaris (WSJ 5/24/10) – they have been dropping their dealers’ inventories for the last four years.  With the old system dealers orders twice per year and were given generous incentives to stock up, in short, trade promotions. The article doesn’t mention some key details, like while dealers  ordered twice per year, dealers probably took deliveries throughout the year.  And, dealers probably ordered at the same time, rather than staggered throughout the year.

The new system has dealers ordering once every two weeks. The match between supply and demand with this new system should be much better. With the old system, each dealer had to guess what they would need over the next six months (assuming Polaris didn’t build in anticipation of the next set of dealer orders). Invariably, they would make some mistakes – ordering too much of some products, not enough of other products. To correct errors, dealers probably swapped inventory during the six month cycle, but that isn’t the most efficient way to move inventory around.

Enter the new system. Now dealers order every two weeks and so their orders will far better reflect what they actually need and what is actually selling. In short, the system should be able to reduce dealer inventories *and* better meet demand, unless demand is picking up across all dealers faster than Polaris can produce.

According to the article, this is a trend in the industry – all firms are moving to shorter order cycles. Why? It may reflect competition among suppliers – this is a great deal for the dealers and so to keep a dealer you need to be more attractive. It also may reflect a calculus that the sales incentive of the channel stuffing strategy is not worth the better supply-to-demand matching of the current system. One thing is for sure, Polaris has certainly made some big changes in how it trades with dealers:

The Golden Hour

Sirens and speeding ambulances are the symbols of emergency care. The basic idea is that the sooner we get seriously injured trauma patients to the hospital, the bigger the chance of their survival. The first 60 minutes after an accident are known as the “golden hour”. Getting the patient to the hospital in this golden hour is claimed to be critical. This is intuitive. But, unfortunately, this claim is not really supported by a whole lot of empirical data. In fact, the authors (who are ER physicians) of a recent Slate story discuss the statistical evidence supporting the myth of the golden hour. They discuss a recent study published in the Annals of Emergency Medicine that finds no support for the importance of extra speed (http://www.slate.com/id/2253638/).

But why then, are the ambulances driving so fast? From an operations management perspective, two explanations come to mind. First, the fact that an extra couple of minutes do not matter much in predicting patient survival rate does, of course, not imply that the driver can stop at the next Starbucks… Second, there might be an alternative explanation for the speeding ambulance. Let’s call it the NY cab driver syndrome: The faster you drive, the sooner you will be available for the next trip. After all, it is all about productivity.

Fixing health care – payment schemes and standardization

There is a lot of talk, as there should be, about fixing health care. Two articles in the NY Times this week discuss this – one describes a bad idea and the other a good one.

The first, (NY Times 4/29/2010) reports on a article just published in the New England Journal of Medicine on the work primary care physicians do.  First, they describe their pay …

Family doctors are paid mainly for each visit by patients to their offices, typically about $70 a visit. In the practice in Philadelphia covered by the study, each full-time doctor had an average of 18 patient visits a day.

Next they describe the work they do…

But each doctor also made 24 telephone calls a day to patients, specialists and others. And every day, each doctor wrote 12 drug prescriptions, read 20 laboratory reports, examined 14 consultation reports from specialists, reviewed 11 X-ray and other imaging reports, and wrote and sent 17 e-mail messages interpreting test results, consulting with other doctors or advising patients.

And now the interesting part…

The study, medical experts say, also suggests the direction of changes needed if family practices are to flourish and more effectively improve the health of patients and contain costs. It starts, they say, with compensating doctors for work other than patient visits.

Along those lines, from the article itself …

… our internal compensation system now recognizes telephone calls and e-mails as part of our productivity metric.

In other words, the argument is (i) to care for patients physicians must do much more than just visit with them, (ii) these non-compensated tasks are providing a burden and so (iii) we should consider paying them for those tasks …

At a time when the primary care system is collapsing and U.S. medical-school graduates are avoiding the field, it is urgent that we understand the actual work of primary care and find ways to support it. Our snapshot reveals both the magnitude of the challenge and the need for radical change in practice design and payment structure.

I realize that we need many ideas to fix health care, but this one doesn’t hold water. It may be unfair to characterize the idea as “payment for emails” but that is the spirit of their pitch. As an educator I can sympathize with their woes  – nobody pays me extra to email with students! What a wonderful world that would be… If I were paid to email students, then I could figure out how to write a macro so that my computer sends out emails every five minutes to every student. Cha-Ching! But that is my point – if you can’t monitor quality, you shouldn’t pay for a tasks.  Unless we have people checking that the physicians are sending out legit emails and phone calls, it  doesn’t work to pay them for those tasks. So in the end, if the goal is to make primary care more attractive to medical students, then paying more than $70 per visit may be the better approach. But that just looks like paying physicians more, and so nobody will write that up in the NY Times.

The second article (NY Times 4/30/2010) discusses the aggravation physicians deal with when trying to figure out how to get paid for the care they provide their patients. The problem is that patients have different health care insurers and each insurer has its own complicated policies for what will and what won’t be covered. This leads to lots of confusion and frustration:

With each plan permutation, it becomes more and more difficult for a doctor to know how to provide care that will work with a patient’s particular coverage. One of the doctors who was surveyed in the Health Affairs study wrote: “It’s like going to the gas station to gas up your car and having to change the nozzle on the gas pump because you have a Toyota and the pump was made to fit Fords.”

So why don’t we have gas pumps dedicated to specific vehicles? Because no vehicle manufacturer could gain a competitive advantage by doing so. Whatever benefit of exclusivity would be small compared to the inconvenience it would impose on consumers. But health insurance companies seem to think differently. They appear to view their tangled mess of quasi-infinitely varying coverage plans as a source of competitive advantage. Nevertheless, it seems substantial value would be created by forming a standardized delivery means for these plans. McDonald’s and many other firms understand the value of process standardization and it would be interesting to explore whether this idea could benefit health care. It is disappointing that this idea seems to be absent from the national debate on health care reform

What is wrong with Toyota

What is wrong with Toyota? Isn’t the Toyota Production System flawed, after everything the news has written in about the accidents resulting from unintended acceleration?

If one wants to make sense from the current crisis (or, even better, learn for the future), it is important to separate the hype from the facts. First, one should not confuse Toyota with the Toyota Production System. Toyota might have failed, but this says nothing about the Toyota Production System itself. If you see your doctor smoke, does this mean what he told you about lung cancer was not true?

Second, as operations experts, we have to look at the numbers. True, every life lost is tragic, and so the 50+ fatalities currently associated with unintended acceleration are not to be taken lightly. But, let’s keep in mind that:
(a) in the US 30,000 people die in car accidents every year (of which 5 to 10 per year were a result of unintended acceleration). This is less than 0.1%.
(b) the number of reported incidents has sky rocketed after the story was in the news, and many of the stories that now appear on television are highly questionable
(c) Experts estimate that every year, >50,000 people die in the US because of infections they acquired in the hospital (nosocomial infections). The main reason: doctors and nurses don’t wash their hands often enough.
Thus, it appears that if you are concerned about your life or the life of others, there might be better opportunities of making this country safer. And, as we explained in this blog before, hospitals are turning to the Toyota Production System as a way to improve patient safety.

Finally, it is helpful to contemplate the question “Why did Toyota not react to all of this?”. There are two reasons for this:
(a) Cars have become increasingly complex and the number of failure opportunities has grown dramatically, especially at the interface between electronics (modern gas pedals basically are like a computer mouse that translate mechanical movements into electronic signals)
(b) There are about 20 Million Toyotas on the road in the US. Everyone is correctly
accelerating some 10,000 times per year. We have about 2,000 defects (a conservative estimate).
So the probability of a defect is 2,000 : 10,000 * 20,000,000, which is a 1:100,000,000
Thus, one is more likely to win the lottery jack-pot than to observe a failure in a Toyota gas pedal, which makes it very hard for the Toyota employees to fix this type of problems.

So, is everything good? No. Toyota has been growing too quickly and their ratings in many of the global consumer satisfaction reports / defect reports have decreased (well before the current crisis).

For more insider details on the causes of the Toyota problems:

http://knowledge.wharton.upenn.edu/article.cfm?articleid=2462