Question I
Read the following case carefully and answer the questions:
MedCSU is a company which produces a number of medical appliances for hospital and home use. It has experienced a stable demand for its products that are highly regarded in the health care field. Recently the company has undertaken a review of its inventory ordering procedures to reduce costs.
One of MedCSU’s products is a blood pressure testing kit. It manufactures all of the components for the kit in-house except for digital display unit. Display units are ordered at six-week intervals from the supplier. This ordering system began about six year ago, as the supplier insisted on it. Though, that supplier was bought out by another supplier about a year ago, and six-week ordering requirement is no longer in place. Nevertheless, MedCSU has continued to use the six-week ordering policy.
According to purchasing manager Jeremy Chandler, “Unless somebody can give me a reason for changing, I’m going to stick with what we’ve been doing. I do not have time to reinvent the wheel.”
Additional discussions with Jeremy revealed a cost of $30 to order and receive a shipment of display units from the supplier. Company assembles 90 kits a week. Also information from Tyson Lin, in accounting, indicated a weekly carrying cost of $.1 for each display unit.
The supplier has been quite reliable with deliveries; order lead time is six days. Jeremy indicated that as far as he was concerned, lead-time variability is virtually nonexistent.
(a) Would using an order interval other than every six weeks reduce costs? If so, what order interval will be best, and what order size will that involve?
(b) Would you recommend changing to the optimal order interval? Describe.
Question II
Read the following case carefully and answer the questions:
Pitting Costs Against Control
Ocean Shipping Is Cheaper for Retailers, but Voyages Can Ratchet Up 'Fashion Risk'
Retailers like the teen-apparel chain Abercrombie & Fitch Co. are shifting away from air delivery to keep their shelves stocked in favour of bringing more goods to the U.S. by slower but cheaper ocean freight.
Choice involves a trade-off. It cuts shipping costs drastically. But it can take weeks, rather than days, to transport clothing or other merchandise from manufacturing centers in China or elsewhere in Asia. That leaves retailers with less control of their inventory, making them potentially more vulnerable to the whims of consumers and the fickle dictates of fashion. The move to ocean delivery "clearly exposes retailers to more fashion risk," says KeyBanc Capital Markets retail analyst Edward Yruma.
Even if a retailer correctly identifies a trend, the additional time the product spends at sea can mean missing out, says Todd Soller, a partner at retail consulting firm Kurt Salmon. Wringing costs out of a company's supply chain could be an attractive way to fatten its margins and bottom line. Over the past four years, A&F, which is based in New Albany, Ohio, has slashed the percentage of its inventory flown into the U.S. to 12%, from 60%, a level John Singleton, its senior vice president of supply- chain, says was "crazy."
Last year, A&F reduced its air shipments, which cost the company five to six times as much as ocean freight, by roughly half. But financial chiefs are require to weigh such opportunities against potential drawbacks. They include the chance which excess or poorly chosen inventory can need clearance sales which cancel out any margin gains from changing shipping methods.
Furthermore, while the switch to ocean freight lowers average unit costs, retailers typically take possession of finished goods when they leave the factory. That means the goods spend more time on a company's balance sheet and tie up cash.
Somewhat to reduce those risks, U.S. retailers which outsource production to China are thinking about moving operations closer to home—to Central America, for example. Though, the apparel quality and fabric supply chains which run throughout Southeast Asia aren't easily duplicated.
Mr. Singleton says he targets shipping between 10% and 20% of products by air. This way, A&F stays nimble enough to chase trends. Air shipping "gets you back in the game quickly" with hot products that can be sold "at or near full price," he says.
Companies like Hampshire Group Ltd. have tried to reduce shipping costs further, while regaining some inventory flexibility, by moving the source of their goods to Central and South America from China and other parts of Asia. Last summer Hampshire, which manufactures apparel for such brands as Geoffrey Beene and Levi Strauss & Co.'s Dockers, bought Rio Garment and its Honduras factory.
Chief Executive Heath Golden says Hampshire now can get products like graphic T-shirts to distribution centres within six days through the Panama Canal, compared with the 27 days it takes to get sweaters to the U.S. from China.
A recent study by consulting firm Hackett Group found that manufacturing-cost savings in China are ebbing to the point it might make sense for some companies to move operations out of the country or reconsider moving them there. Average manufacturing costs in China are on pace to slip to 16% less than in developed markets like the U.S. by the end of next year, the study found, below the roughly 18% average savings expected in other emerging markets.
Hackett says the companies it surveyed typically need to expect 20% cost savings or more before moving supply-chain links to emerging markets, and when the projected savings are near 15% or less they begin considering moving to another emerging market or back to a developed one.
Mr. Singleton of A&F says certain trade agreements and faster shipping can make sourcing goods from Central and South America competitive with Asia, but those countries "don't have the fabric-mill infrastructure in volume like China, or potentially India." Plus, those same trade pacts that lower the cost often have "onerous requirements…like buying U.S. fabrics," which can drive up the cost even when the goods enter the U.S. tariff free.
Hampshire's Mr. Golden says the ability to produce higher-end garments like wool sweaters simply doesn't exist yet in Central and South America, and Kurt Salmon's Mr. Soller says it can take five to 10 years to build the essential infrastructure in the region.
Still, the continued high price of fuel has some clients of Kurt Salmon plotting the next step in the progression to ocean shipping, Mr. Soller says. With a project to expand the Panama Canal set to boost the waterway's capacity by 2014, Mr. Soller says, clients are considering the merits of an "all-water strategy," eliminating more expensive, cross-country trucking of products by sending the cargo ships on to the East Coast after a stop on the West Coast.
(a) Companies often use large batch sizes to achieve “economies of scale”. List the expenses that are reduced or removed by using large ships. What are the expenses throughout the supply chain that are increased by using a ship? Include expenses mentioned in the article, as well as other expenses that you suspect will be increased?
(b) Explain the trade-off between the size of a shipment and operations flexibility. Why is this significant? Could this trade-off be quantified? How?
Question III
Read the following article and answer the questions .
Airlines Lose the Winter Blahs
Cold Months Are Crummy for Carriers; Here's How They Squeeze Every Penny Airlines have at last started to crack a costly operational problem: how to manage seasonality.
For decades, carriers have struggled to adapt their capital-intensive businesses to the fact that many fewer people fly in the winter than during school breaks, major holidays and summer vacations. In January 2011, U.S. airlines filled 77% of their seats, compared with 87% last July when their collective capacity was 17% higher.
Seasonal swing in demand often means that airlines, that have hired staff and invested in assets to handle the peaks, earn a lot of money in the summer and then lose it in the winter, when they have too many planes, gates and employees.
"In Nirvana, demand will be the same every day," says Glen Hauenstein, executive vice president of networking planning and revenue management for Delta Air Lines Inc. "January is the worst," adds Andrew Harrison, vice president of planning and revenue management for Alaska Air Group Inc.'s Alaska Airlines, "Nobody has any money after Christmas. The kids are back in school. Business travellers are just getting back to work." But airlines are starting to focus much more on filling as many of the seats they fly year round.
To better manage seasonal miniboom and minibust cycle, they're scheduling more aircraft for maintenance and cabin renovations during the slower winter months. They're also offering workers voluntary leaves, flying their planes fewer hours a day and trimming the number of daily flights to many destinations. Trans-Atlantic schedules, which swell in the summer months, are throttled back the rest of the time. These initiatives come as U.S. carriers are already working harder to match capacity to demand and have cut overall domestic seats and flights. Offering fewer seats makes it easier to raise fares at a time when oil prices are hitting highs. With fuel now accounting for more than a third of carriers' operating expenses, "it becomes more and more important not to fly that airplane if there's no demand," says Alaska's Mr. Harrison.
The airlines' fine-tuning by season is aided by improved forecasting tools. "We are no longer using an ax to adjust the schedule," says Andrew Nocella, senior vice president of marketing and planning at US Airways Group Inc. "We're using a scalpel. We want to tilt the capacity toward better [demand] days."
Delta, the No. 2 U.S. airline by traffic, has made a goal of providing 20% to 25% less capacity in the winter than the summer—a big oscillation by industry standards—while maintaining its core network and not letting its unit costs creep up. This year, its July capacity will be 20% higher than in January, it says. But downsizing in winter is tricky. Airlines can't afford to park their planes in the low season, and union contracts don't allow them to impose staff reductions. Cutting capacity effectively raises unit costs because the airlines' large fixed expenses are distributed over fewer seats. The calculus is: "What assets do I have to carry throughout the year to justify serving a market for six months at the peak?" says Delta's Mr. Hauenstein.
Ten years ago, airlines couldn't shrink their way to profitability, says John Heimlich, an economist for the Airlines for America trade group of leading U.S. carriers. That's less true now, he says, because airlines' fixed costs have fallen to 50% to 60% of their total costs from up to 75% a decade ago. The shift occurred as airlines restructured in and out of bankruptcy court, achieved savings through mergers, and outsourced maintenance, catering and ground-handling jobs.
In addition, airlines are "moving to forgo some of the peak volume in order to...realize a more favorable mix of traffic," Mr. Heimlich says.
Carriers have long looked for routes that are counterseasonal. Alaska Airlines was bedeviled by seasonality when it was primarily a north-south airline flying along the West Coast. But now it has added many flights from its Seattle hub to cities in the eastern U.S., and more recently it began flying to Hawaii, a big winter draw for customers in the Northwest, Mr. Harrison says.
Although Alaska Airlines' capacity swings by about 15%, one metric shows that it is succeeding in smoothing out the peaks and valleys. Last year, for the first time ever, airline achieved a load factor north of 80% for every single month, bucking the industry's 10-percentage-point gap between January and July.
JetBlue Airways Corp., which found that its leisure-oriented flights from Boston weren't performing well in the winter, decided to build an array of routes that were more business-travel friendly. As a result, JetBlue says, the Boston operation is now profitable and growing.
Airlines also look for opportunities in both high and low seasons. Delta says 80% of its sports-charter revenue, which amounts to about $300 million a year, is booked between September and April. It lards its winter schedule with more flights to the Caribbean, Mexico and Australia. US Airways offers red-eye flights from its Phoenix hub in the summer, squeezing more usage out of its planes, but discontinues those flights in winter.
Ryanair Holdings PLC, Europe's largest discount airline, takes an entirely different approach. The Dublin-based carrier routinely grounds some of its planes between November and March. In the current period, according to Chief Executive Michael O'Leary, it has parked 80 of its 280 planes because "we didn't have a very good fuel-hedging position." He figures Ryanair should still bear the ownership costs, but it doesn't have to buy the fuel and it can put some of its staffers on leave.
And, in what Mr. O'Leary calls an instance of "the luck of the Irish," Ryanair also had plenty of planes available when it swooped into Hungary and Spain to start filling some of the vacuum created by the recent failures of airlines Malev and Spanair, respectively.
As described in the article, the airline industry should contend with seasonal demand.
(a) Name two other industries which are seasonal.
(b) What operational strategies do these industries utilize?
(c) What extra capabilities are needed to execute such strategies?
Question IV
Read the following article and answer the questions
Boeing Examines Supply Chain for Weak Links
As It Prepares to Boost Product, Jet Maker Steps Up Scrutiny of Vendors' Materials, Finances and Even Tools
SEATTLE—Boeing Co.'s production struggles with its 787 Dreamliner taught it to regularly stress-test suppliers, a skill that is coming to the forefront as it tackles a mountain of orders for its best-selling 737 jets.
The company's comprehensive reviews are critical to its effort to mount one of its biggest production increases in years. Chicago-based Boeing aims to boost output by about 60% in the next three years—or nearly 300 more jets a year. After winning a series of big contracts, it is sitting on a staggering backlog of 3,500 commercial jets, valued at more than $270 billion.
At Vaupell Holdings Inc., one of about 1,000 suppliers subject to exhaustive reviews of its production materials, schedules, finances and even tools, Boeing's test regimen prompted the 60-year vendor this year to make such changes as replacing shop-floor management software.
Boeing has bolstered its ranks of supplier examiners with about 200 engineers and other supply-chain specialists in the past 18 months. Its teams visit vendors more frequently and conduct evaluations that can take days to complete.
"Boeing has become much more pro-active," said Joe Jahn, chief executive of Seattle-based Vaupell. "They've got someone here almost every day."
The intensified scrutiny is a key component of Boeing's strategy to speed up production of nearly all of its commercial jets without the kinds of costly bottlenecks and delays that hobbled it in previous major ramp-ups.
Looming over the company isn't just its backlog. Its archrival, Airbus, also is aiming for record output, as airlines increasingly demand more fuel-efficient jets and air travel expands in Asia and the Middle East. Airbus has capitalized on some Boeing production delays. Airlines including Qantas Airways Ltd. and Virgin Atlantic Airways Ltd. decided to buy Airbus 330 jets in recent years because of Boeing's delays in delivering the 787 Dreamliner.
Quality issues are on the rise as suppliers scramble to meet the growing demand for aircraft. Tom Williams, Airbus executive vice president for programs, said: "It's happening fairly frequently that a process that has never given problems is suddenly causing problems." The unit of European Aeronautic Defence & Space Co. is in the process of hiring a total of 70 specialists who are "trying to get a smell of what's going on in the suppliers," Mr. Williams said.
Some smaller aerospace vendors face trouble financing their expansion due to the economy's woes, according to Mr. Williams and other industry officials.
"We're definitely seeing tension in the supply chain," including longer lead times for ordering parts, Marc Ventre, deputy chief executive of French jet engine supplier Safran SA, told analysts recently.
At Vaupell in Seattle, Mr. Jahn said his company has been working with Boeing to find a replacement for a material used in some Boeing window shades that Dupont Co. has decided to stop manufacturing.Boeing's intensified reviews are helping Vaupell stay on top of its game, Mr. Jahn said one morning as he walked across the Seattle plant's shop floor, where some workers wear dust masks as they polish luggage-bin trim, air nozzles and other airplane components.
Boeing has been conducting roughly four-hour-long monthly and quarterly assessments of Vaupell's ability to speed up production, along with annual reviews that can take two to three days. A Boeing employee is at Vaupell's factory almost daily, compared with about once a week in the past, Mr. Jahn said. Airplanes are one of the biggest and most complex industrial products. Jets like the Boeing 777 contain several million parts. Problems far down in the supply chain, such as shortages of machines used to mold certain components, can cause delays that ripple across the industry.
Boeing is trying to heed lessons from its past that some executives commonly refer to as "scars" on their backs. In the late 1990s, Boeing had to temporarily shut some of its assembly lines, and took billions of dollars in charges, when bottlenecks and quality issues arose after it tried to expand production too quickly. More recently, in 2008, inadequate training of new mechanics and supply-chain glitches led to quality problems at its 737 plant.
In the past, "We had much more of an attitude [with suppliers] of: We'll set the requirements and you have to go do your job," said Beverly Wyse, vice president and general manager for the Boeing 737, the company's top-selling jet. Now Boeing is using "a fundamentally different approach" by regularly verifying that suppliers have the right skills.
Boeing, that relies on more than 1,200 direct suppliers for its commercial jetliners, points to some specific benefits already. For example, the number of parts shortages at its 737 plant is the lowest in five years, according to company officials.
Boeing is close to being able to increase the output of 737 planes at its Renton, Wash., plant to about 35 a month from 31.5. It plans to boost the volume to 38 planes in 2013 and to 42 in 2014. The seven extra jets can mean an extra $6 billion a year at list prices.
By comparison Airbus has made its competing A320s at a rate of 38 a month since August, with plans to reach 42 a month a year from now.
In the meantime, Boeing faces its toughest test at its wide-body jet factory in Everett, north of Seattle. That's where company aims by late 2013 to produce 10 of its new 787 Dreamliner jets a month, up from just 2½ a month today.
Boeing executives say their heightened sensitivity to the supply chain stems partially from the many troubles Boeing had in producing its first 787 Dreamliners that depend more heavily on parts made outside of Boeing than other jets. Boeing delivered first of the new jets more than three years late, partially as of its failure to carefully manage its supply chain early on.
Under its more alert approach, Boeing is communicating more often with suppliers and sharing more information about its own forecasts and production plans, according to executives at a company and several of its suppliers. Boeing says it also has increased its scrutiny of how its suppliers are evaluating their own vendors.
That's the big shift for Exacta Aerospace Inc., a Wichita, Kan., firm which makes metal brackets and other components for Boeing jets, said Casey Voegeli, Exacta's director of business operations.
"It's a culture change," he said. "They want us to prove to them that [our suppliers] have the capacity to keep up."
(a) Explain the difficulties faced by Boeing in developing the 787. What appears to be the cause of problem? What is Boeing doing to prevent similar problems in the production ramp-up?
(b) Explain the role of Boeing’s suppliers in this crisis. What can have been done to avoid these problems? Enlarge your response to comment on the significance of supplier selection.