Supply chain lessons from Japan

By Gerard Cachon, The Wharton School at the University of Pennsylvania. Source: Matching Supply with Demand.

Gérard Cachon

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 scarce 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.

 

Southwest Airlines: Do free bags create problems?

Martin Lariviere

By Martin Lariviere, The Kellogg School of Management at Northwestern University. Source: The Operations Room.

Southwest along with Walmart and Toyota have long been stock examples in Operations Management classes. They have always been reliable go to examples of firms whose success has depended in non-trivial ways on how they manage their operations. Of course, the problem with relying on a stock example is that little things like, I dunno, recalling millions of cars can dampen the persuasiveness of the example. It’s not just Toyota. Walmart too has add some issues and missteps. Now comes word that Southwest is having operational difficulties (As Southwest Airlines tries to cope with its success, problems at Midway will get team’s attention, Mar 3, Chicago Tribune).

Bags still fly for free on Southwest Airlines, but travelers are paying a price in other ways. They’re encountering more lapses in Southwest’s hallmark on-time performance as the carrier departs from what once was its core principles of avoiding congested airports and shunning hub-and-spoke complexity in favor of getting passengers to their destinations on a single aircraft.

Revenue soared as Southwest added business destinations such as New York’s LaGuardia Airport and connecting flights at Chicago’s Midway Airport. But as it struggles to cope with increasing numbers of passengers and bags, Southwest risks tarnishing the reliability it has touted since the 1970s. …

While its rivals shrank their U.S. operations following 2008′s Great Recession, Southwest added 13 million more passengers per year. The carrier also took a scalpel to its schedule, canceling flights that didn’t attract great numbers of passengers and adding more flights to peak periods.

With little room to make up for delays, Southwest’s on-time arrivals in 2010 dipped below the carrier’s historic 80 percent rate. The lapse was magnified as rivals like United Airlines posted the best on-time numbers in their history.

Part of the issue is that Southwest has tweaked its traditional business model (something we have written about before), flying to more congested airports and operating more of a hub-and-spoke system. Part of this is related to growth. At some point, Southwest was bound to run out of secondary airports in relatively populous areas. That would leave a choice of going into smaller cities (where reliably filling a 737 would be hard) or sucking it up and going to busier airports that pose operational challenges but at least have lots of traffic. That seems a pretty obvious choice. As does a hub-and-spoke system. Once Southwest began flying to cities on both coasts, it was inevitable that passengers would look to book long trips. Having five-hour layovers then costs you business and you start to have more peaked flight schedules. The next thing you know, half of Southwest’s Midway traffic is connecting passengers.

Of course, peaked schedules with tight connection times makes for challenging operations. The proof is in the data. Not only has Southwest’s on-time performance suffered, Midway’s has. It is now last in on-time departures .

And Southwest’s bags fly free policy doesn’t help.

It’s not unusual for bags and passengers on a flight landing at Midway to connect to 12 departing flights, sending workers scurrying to sort and deliver the luggage to 12 points around the airport.

“The planes are coming in with more bags, period, because people check more bags,” [Charles] Cerf[ president of TWU Local 555, which represents ground workers at Southwest] said. “They’re having to hold some of those departures because normal connecting time isn’t enough to get the bags over there. We feel we don’t have enough agents.”

This too makes sense. Ryanair claims to emphasize baggage fees in order to keep costs down. If Southwest is going to welcome check bags, they have to expect higher costs. The question is what can they do? The article says they are loathe to increase the scheduled time for flights or scheduled layover since that would dramatically decrease their productivity. That leaves adding resources (for example, they are renting more gates at Midway and adding workers) or revising the work. The latter is obviously the most desirable outcome. It will be interesting to see if they can pull it off.