Lean thinking comes to a Starbucks near you
The benefits of lean production has been documented by many academic articles, case studies and success stories from all sectors of the economy including manufacturing, services and healthcare organizations. Chapter 12 of our textbook describes lean principles and also discusses several examples and case studies (e.g. Toyota, Zara, Bose Corporation).
A couple of years ago we started hearing the news that once fact-growing company Starbucks was starting to experience some financial difficulties. Clearly its net income took a sharp decline during late 2008.
However more recently Starbuck has again started showing growth in its net income and stock valuations. So what may be the cause of this reversal of trends? How about a careful and successful implementation of lean thinking as one of the possible causes? A recent article in The Wall Street Journal explains how Starbucks was able to apply lean thinking to reduce waste and improve the performance of its store operations.
To view an interactive display of Starbuck’s application of lean principles click on the image below.
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
Advances in Medicine: The Checklist
OM Blog 6: January 5, 2010
By Ken Boyer, Fisher College of Business, Ohio State University and Rohit Verma, Cornell University
Authors: Operations and Supply Chain Management for the 21st Century, 2009, Southwestern Cengage Publishing
Magnetic Resonance Imaging (MRI), Image-guided Radiofrequency Ablation (RFA), Computed Tomography Angiography (CT) and Checklists. In this list of the “latest and greatest” in medical treatments, which one would seem not to belong? Checklists? Really? In 2009 with all the DNA mapping, computer assisted and imaging technologies that have contributed to improved medicine (and often substantially increased costs), simple checklists are being proffered as a critical tool for improving medical care and outcomes.
In a new book released in mid-December (The Checklist Manifesto: How to Get Things Right, Metropolitan Books, 2009), Dr. Atul Gawande, explores the nature of complexity in our lives and in medicine in particular. Gawande, bestselling author of Better and Complications, MacArthur Fellow, general and endocrine surgeon at Boston’s Brigham and Women’s Hospital and an associate professor at the Harvard Medical School offers his observations, experiences and research on the use of checklists. His central argument: medicine has advanced to a point where there is tremendous know how an ability to effectively treat many medical conditions, yet there are over 150,000 deaths from surgery every year – at least half of which are attributable to preventable error. Why so many errors? Because medicine is complicated and with many complex pressures it is common for doctors, nurses or other medical professionals to either forget a step or perform a critical step out of order. A powerful illustration of this can be drawn from Gawande’s writing:
Central Line Infections:
In 2001, Dr. Peter Pronovost, a critical care specialist at Johns Hopkins Hospital decided to tackle the challenge of reducing (preventing) infections when patients received a central line. He wrote the following steps on a piece of paper:
- Wash hands with soap
- Clean patient’s skin with Chlorhexidene Antiseptic
- Place sterile drapes over the entire patient
- Wear a mask, hat, sterile gown and gloves
- Put a sterile dressing over the insertion site once the line is in.
As Gawande writes, “These steps are no brainers: they have been known and taught for years”. And yet, when Pronovost recruited nurses in the ICU to observe doctors for one month, he found that in more than one third of the patients, AT LEAST ONE STEP WAS SKIPPED!
Dr. Patchen “Patch” Dellinger reads off of a checklist for surgery at the University of Washington Medical Center
The next step involved Pronovost and his team persuading administrators at Johns Hopkins to authorize nurses to stop nurses if they saw doctors skipping a step. Nurses were also encouraged to ask doctors each day whether any lines should be removed – thus not leaving them in any longer than necessary. Now, Gawande being a surgeon has better authority regarding medical practices than any non-medical professional has, but essentially he writes that nurses have always had ways of nudging physicians and reminding them to perform critical steps. Yet, this approach was revolutionary – encouraging nurses to intervene and “checklist” the doctors. The results were amazing – the ten day infection rate dropped from 11 percent to zero. Pronovost and colleagues calculated that in just one hospital, the new checklist had prevented forty-three infections and eight (8) deaths and saved $2 million in costs.
I will not reveal more of Gawande’s writing here – I highly encourage you to buy or borrow a copy of the book and read it yourself. The point is – technology does not have to be complicated to be effective. Operations management professionals in a variety of service and manufacturing industries have been employing checklists for years. Other basic, yet effective tools covered in most textbooks include:
- Pareto Analysis
- Bar charts
- Histograms
- Scatter Diagrams
- Run charts
- The Five S: sort, straighten, shine, standardize, sustain
- Poka-yoke
While people often fall for the fancy and impressive technologies and medical treatments, often getting the simple stuff right can be more important. So, think of ways that you use checklists in your daily life – both for personal use and for business use. Maybe you should have one for your doctor the next time you see him or her?
Discussion Questions:
Sources:
Dr. Atul Gawande, The Checklist Manifesto: How to Get Things Right, Metropolitan Books, 2009)
Pronovost, P.J., et al., 2003, “Improving Communication in the ICU Using Daily Goals” Journal of Critical Care, V. 18, pp. 71-75.
“UW Medical Center Using Surgical Checklist to Improve Safety”, Carol M. Ostrom, Seattle Times, June 26, 2008
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)
