Unintended Consequences … of Airline Baggage Charges
Those days are long gone when an economy class passenger could check-in two pieces of luggage for free when flying a commercial airline in the United States. Almost all major airlines now charge $25 or more for each check-in piece of baggage (for example — see baggage rules for United Airlines here: http://www.united.com/page/article/0,6867,52481,00.html). By the way, one notable exception to this policy is Southwest Airlines – they love baggage (see: http://www.youtube.com/watch?v=Pl16hPa1qkQ)!
So why have all major airlines started charging for checked-in baggage? Clearly one motivation behind the new baggage policy is cost reduction due to reduced handing of luggage by the ground staff. Furthermore, if passengers start carrying less baggage then the net weight of an airplane will be reduced leading to lower fuel costs. On the other hand, if passengers continue to carry the same amount of baggage as before then the airline gets additional revenue due to checked-in baggage charges (see: http://blogs.wsj.com/middleseat/2010/05/06/ticket-change-fees-surpass-baggage-charges-at-some-airlines/) for additional details. Win, win both ways for the airlines – or maybe not.
Well, no action goes without reaction, and sometimes they cause many unintended consequences. So let’s discuss some consequences of checked-in baggage fee policy:
Marketplace Effects:
By charging a specific price for every component of a service, the airlines may be converting their market offerings from a “service” to more like a “commodity” and less like an “experience” (see Figure 3.9, page 81 from the textbook inserted below). Past research suggests that such a move will make it harder for airlines to differentiate themselves from each other ultimately leading them to charge only market prices and not premium prices.
Operational Effects:
Since checked-in baggage is not free, passengers are more likely to carry the maximum-size permitted baggage with them as a carry-on luggage. However the storage space in a passenger cabin typically does not have enough capacity to store high volume of luggage carried by majority of passengers. Therefore, during the busy periods and in nearly full-flights, this shortage of capacity requires that the airline check-in the excess baggage (for free!) during the last phase of the passenger boarding process. Such last-min onboard baggage checking means a lot of manual handing of luggage by airline personal in a short amount of time. It is quite possible that during the busy period such last-min loading of luggage may lead to flight delays. Furthermore, some of the last minute luggage may not get loaded on the airplane on time — leading to additional headaches for the passenger and additional costs for the airlines (see http://online.wsj.com/article/SB10001424052748704423504575211960765813420.html?KEYWORDS=airline+baggage+#articleTabs%3Darticle) for a related discussion.
What Next?
Some recent news reports had suggested that now airlines will start charging for carry-on luggage too! Well, this new policy will solve some of the operational problems associated with passengers carrying too much carry-on luggage! At the same time, it will make airlines even more-so like a commodity product. Thankfully, many airlines have decided not to implement such policy (see — http://www.nytimes.com/2010/04/19/business/19bags.html?src=busln).
iPad – Lessons in Operations Strategy, Quality Management and New Product Introduction @ Apple
Even several months before the introduction of iPad by Apple CEO Steve Jobs on January 27th, 2010 the media was humming with the anticipation of this new revolutionary product. The 9.7 inches touch-screen mobile computing devise is supposed to let users play games, check emails, watch videos and read books on an attractive product with a vibrant color screen. This device can either take advantage of the existing wireless internet networks or access information via AT&T’s 3G networks around the United States. The iPad (some say a big brother of iPhone) is priced between $499 – $829. Additional specs about this product are outlined below in Figure 1 (source: Wall Street Journal: January 28, 2010).
Figure 1: Some features of iPad
The ultimate success of this product will be determined on a number of factors including pricing, product features, quality, competition, and apple’s ability to consistently enhance the future generation of products. Nevertheless regardless of its success or failure, iPad is destined to encourage the development of a series of products that will be introduced by companies in the upcoming months that have the potential to revolutionize the mobile computing and the telecommunications industry.
Apple’s introduction of iPad and other innovative products since its inception provide many lessons for effective operations strategy (Chapter 1) and quality management (Chapter 2) and new product development (chapter 3). An example of major products launches of Apple are summarized below in Figure 2 (source: Wall Street Journal: January 28, 2010).
Figure 2: Major Product Launches by Apple
Clearly some products such as Macintosh (1984), iMac (1998), iPod (2001) and iPhone (2007) have been highly successful; while some other products (e.g. Lisa (1983), Newton (1992), Apple TV (2007)) have been equally big failures. Furthermore, while several apple products were designed to appeal to new markets and consumers, many similarities can be seen across its product offerings. In addition, there is a common perception that apple products are generally more expensive than its competitors. They’re also supposed to be astatically more pleasing than other products the marketplace.
Finally, the launch of iPad and its uncertain market potential creates an interesting production planning problem for the company. For example, if Apple forecasts sales of 2 million units the first year, what happens if the actual sales are 1 million? or 4 million? How do they or should they build a responsive supply chain to facilitate the uncertain demand for a new product?
Discussion Questions
- Based on the information provided above, what can you infer about apple’s dominant competitive priority? Is it cost, quality, delivery, or flexibility, or some combination of the four? (Chapter 1).
- Which of the eight determinants on product quality does apple emphasize In its products? (Chapter 2)
- Explain how Apple can use the newsvendor analysis and related concepts to build a responsive supply chain for their new products such as iPad (Chapter 6).
- Explain which of the following new product development concepts are applicable to the development and launch of iPad? Explain, why? (Chapter 3)
- Time based competition
- Continuous or disruptive innovation
- Mass customization
- Modular design
- Concurrent engineering
- Product platforms
- Reverse engineering
Additional Information:
Watch iPad Launch Video: http://www.apple.com/ipad/#video
Wall Street Journal Articles about iPad: http://topics.wsj.com/subject/A/apple-ipad/5857
OM Blog 5: November 25, 2009
By Ken Boyer, Fisher College of Business and Rohit Verma, Cornell University
Authors: Operations and Supply Chain Management for the 21st Century, 2009, Southwestern Cengage Publishing
Retailers spend a large part of the year planning for the Christmas sales season. The key event in this busy season is Black Friday – the day after Thanksgiving. Stores offer fantastic deals and open early in the morning in order to entice/lure/pull people into shopping and spending their hard earned dollars. In 2009, with the economy down, there is more pressure than ever for retailers to get shoppers into their stores. Scores of websites offer listings of the best deals – both for physical stores and for online stores. Wal-Mart, the world’s largest retailer, opens at 5 AM on Nov 27 and is offering a Sony Bravia 46” LCD 1080p HDTV! Wow, that crushes our tv at home – I wonder if Santa has my list yet? Oh yeah, where was I? Among the offerings:
So, clearly this is a bonanza for customers will to venture into the whirlwind of shopping, but operationally this also imposes substantial challenges on running the stores. Among the key challenges:
- Workforce Staffing: While shoppers may be excited to get up at 3 or 4 AM to shop, workers are generally far less excited to get up even earlier in order to open the store and deal with hundreds or thousands of excited – and sometimes difficult – customers.
- The Ultimate Newsvendor Problem – the hot deals are loss leaders for the stores, but the managers must make decisions on how many of these items to stock. Too many and there will be excess inventory and costs after the sales ends. Too few and customers will leave disappointed – or worse. There have been scores of examples of angry customers stampeding or yelling at store employees.
- Crowd Management – While it is a marketing dream to have hundreds of customers lined up to get into your store, it is also a manager’s nightmare. This violates one of the key principles of good operations management – minimize variability. Instead, retailers encourage it by trying to whip customers into a frenzy and then opening the doors. Occasionally, this leads to disasters – it seems like every year there is a story of someone getting trampled and even killed during the mad rush. Even if there are not major problems, there are usually very long lines and very overworked employees. Of course, stores can bring in extra staff to make things go more smoothly – but this costs money.
- Production Planning: WalMart has an interesting new feature – customers can get a detailed map of their local store. This map shows exact locations of each and every deal – no wasted time sprinting to the wrong location. To the fastest and best planned go the spoils! What efficiency!
Retailers (and customers) clearly believe the benefits outweigh the challenges – so we are unlikely to see Black Friday fading in the near future. This can be an extremely fun event for shoppers and retailers alike. If you plan to participate, I recommend a good pair of sturdy shoes and an outfit that allows easy movement and cushions you from bumps and bruises. Me? I’ll be sleeping off the turkey – I don’t begin thinking about my holiday shopping until at least December 22.
Discussion questions:
- How should stores approach inventory planning for Black Friday, in particular the newsvendor problem (Chapters 5: Forecasting and 6: Independent Demand Inventory, pp. 222-223? How should retailers plan the process of opening the doors and getting excited customers through checkout (Chapter 4: Process Design and Analysis)? What capacity planning approaches should retailers use for Black Friday (Chapter 10: Capacity Planning)
- What are your favorite or least favorite memories of this shopping day? How did the operations of the store contribute to this experience?
Sources:
- The Chicago Tribune offers a handy photo gallery of tips on how to survive Black Friday at the following: http://www.chicagotribune.com/features/holidaily/sns-holiday-black-friday-survival-pg,0,748950.photogallery
Have you gotten your Flu shot yet?
OM Blog 4: November 2, 2009
By Ken Boyer, Fisher College of Business and Rohit Verma, Cornell University
Authors: Operations and Supply Chain Management for the 21st Century, 2009, Southwestern Cengage Publishing
Amidst the public debate these days about whether or not individuals should get shots for either the regular, seasonal flu or for H1N1, there is another challenge. That is, if you do want to get a shot, where and how can you get one? This is not a trivial question as there have been numerous delays and canceled clinics around the U.S. in the past two weeks.
What does this have to do with operations and supply chain management? Several things.
First, manufacturing and distribution of vaccine dosages is a substantial supply chain challenge. The U.S. Centers for Disease Control and Prevention (CDC) had hoped to have 40 million doses of the H1N1 vaccine ready by the end of October, but there were numerous manufacturing delays. As of October 30, Dr. Thomas R. Friedan of the CDC stated that there were 26.6 million doses available, up from only 10 million a week prior to that.
Manufacturing flu vaccine is a challenge – each dose must be grown in a chicken egg and carefully handled and harvested to avoid any contamination. The yield of antigen is unpredictable, making it difficult to forecast how much to produce. In addition, production must start several months before doses can be administered. Another challenge is that the revenue is relatively small for a complicated product. In short, vaccine production is a complicated process, that must be started months ahead of need and the revenue and yield is very unpredictable.
Once the vaccine is produced, then there is the distribution challenge. The CDC must ship the vaccine to numerous hospitals, clinics, doctor’s offices and pharmacies. In the current situation, many if not most of these organizations want more doses than are available. Thus, doses must be allocated and some potential patients will be left without. Once vaccine is actually delivered to a clinic, it must be administered as efficiently as possible. In short, the distribution of vaccine is one giant application of the newsvendor problem (see pages 222-223 of textbook). In the current case, there seem to be more stockouts than excesses.
Discussion questions:
- How does vaccine distribution relate to key operations and supply chain management questions including: quality management (Chapter 2), new product development (Chapter 3), forecasting (Chapter 5) and project management (Chapter 8)?
- Could more vaccine be made available if the government or patients simply paid more money for it? What are the pluses and minuses of producing extra at an increased cost?
- How should the government and producers balance safety – i.e. carefully assessing the vaccine so that few unintended consequences occur – versus speed of getting the vaccine to patients?
Sources:
- The following article from CNN has some interesting data on flu vaccine production: http://www.cnn.com/2009/HEALTH/10/30/h1n1.vaccine.available/index.html
- The CBS TV show 60 Minutes has a good video on flu vaccine production: http://www.youtube.com/watch?v=ABYrGSCn4M0
Food Factories
OM Blog 3: October 30, 2009
By Ken Boyer, Fisher College of Business and Rohit Verma, Cornell University
Authors: Operations and Supply Chain Management for the 21st Century, 2009, Southwestern Cengage Publishing
Food Factories
What is involved in running a grocery store? A lot. Every day, managers must make thousands of decisions regarding inventory (what to buy and how much), job scheduling and assignment (i.e. how many employees in which departments and what jobs should be done and in what order), and quality (how to ensure good products are sold and good service is provided). Pretty daunting eh? And this is for just one store. Consider Kroger Co., headquartered in Cincinnati, Ohio, it operates over 2,400 supermarkets, with revenues of more than $70 billion and has over 300,000 employees. It is the second largest grocery retailer in the U.S. after Wal-Mart. Efficient and effective operations are one of its keys to excellence.
Yet, when we think of groceries it is usually in terms of services – after all, stores don’t make anything do they? Actually, they do. Kroger owns 40 different manufacturing plants (a competitor, Safeway, owns 32). These manufacturing plants make roughly 14,400 in-house (also known as generic) products, including 38,000 “party pails” of ice cream per day – which sell for $2.99 each, or approximately 30% of the cost for name brand ice cream such as Dreyer’s, Ben & Jerry’s or Graeter’s. Stores like making their own because they often can get a higher profit margin on in-house products than for name brand products – because they are controlling more of the process, hence are providing more value.
Kroger is selling 15% more in-house products by volume this year due to the down economy. Consumers often will trade a lower cost for that name brand. In fact, industry wide, sales of store-branded items increased nearly 10% over the past year. In-house products account for 35% of Kroger’s sales, up from 31 percent five years ago. In a down economy, this growth is resulting in increased hiring – Kroger created 400 new manufacturing jobs in the last year for a total of 7,400.
So, the next time you shop for groceries, give a thought to where those groceries came from – it might not be where you think.
Discussion questions:
- How do the practices described above relate to operations and supply chain strategy (chapter 1), process design and analysis (Chapter 4)? Capacity planning (chapter 10) and technology and integrated supply management (Chapter 13)?
- Describe the main challenges of running a food manufacturing plant. How are these similar to or different from running a grocery chain or store?
- Do you think that Kroger ships directly from the factories to its individual stores? Or does it ship products to an intermediate distribution center and from there to its stores?
- How should Kroger treat these facilities? Should they be exclusive to Kroger, or should they provide sales to other retailers? How does this effect capacity planning and forecasting? What are the advantages and disadvantages if Kroger uses the factories to produce products for other retailers?
Sources:
- Information for this story comes from the article “Food Factories”, by Dan Sewell, Columbus Dispatch, October 21, 2009 – to see the full story click here (http://www.dispatch.com/live/content/business/stories/2009/10/21/kroger_food.ART_ART_10-21-09_A12_H1FE63G.html?sid=101)
