Are manufacturers that hedge against risks more risky ?

Posted on April 14, 2011 by aviyer2010

A Wall Street Journal article (April 13, 2011) describes the worries of manufacturers, such as Caterpillar, Ford, Boeing etc that use hedging instruments to decrease risk. Their concern is whether their banks could now require them to back up any additional risk with cash or assets, thus potentially decreasing their working capital. The manufacturers claim that such requirements will decrease the cash available for capital investments or job creation.  Do manufacturers who buy hedging instruments face greater risks ? Given that most derivatives do not require any collateral, why should manufacturers worry about the behavior of their banks ? Will the government requirement from banks permit signals in advance of any increased manufacturer risk ?

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Price fixing of detergents by manufacturers seeking green solutions

Posted on April 14, 2011 by aviyer2010

A New York Times article (April 13, 2011) describes fines levied on Proctor & Gamble ($ 306 million) and Unilever ($ 104 million euros) for price-fixing to maintain market shares as they worked together in an industry association to implement green initiatives. These included reducing the weight of powdered detergents and reducing waste from the containers – boxes of bags.  The companies were accused of agreements not to decrease prices when the package sizes decreased and agreements to increase prices thereafter.  These details were revealed by Henkel, another competitor in the industry, that reported it to the authorities when they discovered the cartel.  Given this report, should governments more carefully monitor industry efforts to implement green initiatives ? Should any lack of price decreases following packaging reductions be assumed to be the result of illegal coordination or would that be too drastic an assumption ?

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Hospital Penalties for preventable patient infections ?

Posted on April 14, 2011 by aviyer2010

A New York Times article (April 13,2011) describes a study doe by the VA hospital to screen patients for MRSA, require use gloves and gowns and hand washing by care providers.   The study reported a 62 % drop in infections and 45 % drop in MRSA.  The study reports annual infection cost of $ 28 to $ 34 billion.  In short, attention to hygiene detail can significantly decrease costs.  This realization has the potential to cause government agencies to levy penalties for patient infections and refuse payment for re-admissions.  How should hospitals be incented to take steps that decrease costs ? Will a “stick” based policy result in the required procedural changes or could it cause the intended impact of less competition for care for more fragile patients  ? What other approaches align the interests of hospitals and patients ?

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Nissan’s Recovery from the Japan Earthquake

Posted on April 9, 2011 by aviyer2010

A Wall Street Journal article (April 8,2011) describes how Nissan rallied after the Japan earthquake to restore its supply chain. Immediately after the quake, the disaster team took stock of the supply chain and, in one hour, got a read of parts supply.  The key discovery was that the smallest firms, third or fourth tier, were the choke points.  The port of Yokohama had stored inbound and outbound parts and products – this port was back in action in 48 hours.  Balancing part requirements across world wide plants then became the key – with limited email and cell phone access.  One month later, Nissan’s Japanese plants are working, while other plants worldwide are idled.  How should a company balance its global supply chain impact of part disruptions ? Should global backup supplies for the fragile smaller suppliers be part of a supply chain strategy ?  Given the importance of data and communications, and the correlated disruptions of this part of a supply chain during a disaster, should physical co-location be a strategy to gather information to restore a supply chain ?

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Profitability and Sustainable Supply Chains

Posted on April 8, 2011 by aviyer2010

An article in Bloomberg Businessweek (April 4,2011, pg 25) describes efforts at Pepsico’s Walker potato chip plant in England to condense the 80 % of water that escapes as steam, reuse it to wash potatoes and water herbs, and save over $ 1 million per year. It also lists WalMart’s Seiyu chain in Japan as using corn based packaging that cut weight by 25 %, costs by 13 % and saved around $ 200 K per year.  Such efforts suggest that sustainability initiatives could be justified as profitability enhancing, even while reducing the environmental footprint.  Should engineers and designers be required to evaluate “green” design alternatives ? How should supply chain participants be incentivized to generate such solutions when ownership of the chain is fragmented ? How important is the “decision impact horizon” to justify the mix of capital investments vs cost reductions to evaluate sustainability analysis ?

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Oil Soaked booms recycled to make air baffles for the Chevy Volt

Posted on April 7, 2011 by aviyer2010

An article in Fortune (April 11, 2011, page 25) tracks the movement and transformation of oil soaked booms from the BP Gulf oil spill.  The reverse supply chain involves use of centrifuges in trucks to remove the saltwater and oil, then movement of the product in trash bags to Evansville, IN where it is melted and chopped, then movement to Lucent Polymers in Goshen, IN where it is extruded (and forms 25 % of the overall content) to form air baffles, then movement to the Chevy Volt assembly plant in Detroit.  The supply chain flows permit the entire year’s production of the Chevy Volt to be satisfied.  Given the amount of on the road movement of product, is this supply chain an example of sustainability ? While the article does not mention it, would subsidies from BP be necessary to make this reverse supply chain economically viable ? Should such tracking and use be demanded for future disasters ?

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The Food vs Fuel tradeoff,biofuel regulation and global impact

Posted on April 7, 2011 by aviyer2010

An article in the New York Times (April 7,2011) describes the impact of rules regarding biofuel use (36 billion gallons by 2022 in the US, similar goals in China, India, Indonesia and Thailand).  The article focuses on cassava, a root now exported as chips from Thailand to China, after China banned the use of grains to make biofuel.  Price increases cause farmers to divert their crop to biofuels, thus decreasing food availability and raising food prices.  World Bank officials suggest that biofuel targets should be coordinated with overall crop availability so as to prevent a conflict between food and fuel. But shifting biofuel targets would in turn reduce the incentives for the biofuel industry and perhaps maintain a reliance on petroleum.  How should government level goals and industry production be coordinated with food availability ? Should targets be adjusted to global conditions such a weather conditions (in Russia and China recently) droughts or bug infestation (in Thailand recently) and if so, how can the biofuel industry’s incentives be protected ?

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Navistar and Engine Redesign

Posted on April 6, 2011 by aviyer2010

A New York Times article (April 4, 2011) describes a radical engine design by Navistar to decrease nitrous oxide emissions and comply with the new EPA guidelines. This redesign and consequent launch delays hurt Navistar’s market share. But competitors used a “band aid” solution, using an add-on system with a fluid cocktail that neutralizes the nitrous oxide from the exhaust.  The article cites an effort by Navistar to demand that competitors too generate new compliant designs that take the nitrous oxide out completely rather than just manage the emissions.  Such design arguments have been left to the market by the EPA – with no preference for the nature of the solution developed as long as the companies are compliant. The add-on solution leaves the driver responsible to keep the chemicals filled, with alarms as a reminder. If the chemicals are not filled, the engine will not be compliant. Should Federal regulators recommend design choices for environmental compliance ? Should design compliance during use be “guaranteed” by the manufacturer or should it be the responsibility of the user of the product or the OEM who uses the engine ?

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FDA and large vs small scale drug manufacturing oversight

Posted on April 6, 2011 by aviyer2010

A New York Times article (April 4, 2011) describes the impact of decisions by the FDA not to regulate “compounding pharmacies” that make versions of drugs not commonly available (for example liquid forms of tablet medications).  The expectation is that these compounding pharmacies produce small volumes, so that FDA compliance would significantly raise costs and thus prices. But, as the article describes, for a drug taken to prevent premature birth, the branded manufacturer of a drug called Makena, that is subject to FDA oversight, decided to warn compounding pharmacy producers that they were in violation of the law.  The FDA decided that such warnings were not appropriate. But the separate reports of deaths of nine patients in Alabama suggest that the balance between regulatory compliance and cost reduction requires a balance of risk vs cost.  Should all pharmaceutical manufacturers, regardless of volume, be regulated by the FDA ? Should “caveat emptor” be the approach, with demands to let the customer no that the drug has been manufactured without FDA oversight ?

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Recycled boxes, export growth and global supply chain impact

Posted on March 30, 2011 by aviyer2010

A Wall Street Journal article (March 30, 2011) describes exports of recycled cardboard boxes from the US to China.  With the increased use of online shopping – US consumers have a growing number of such boxes, with 15 % of the waste stream.  At the same time, growing demand in China for such boxes to package goods exported back to the US, generated a 25 % increase in shipments from California ports.  The benefit of this increased demand is a price increase for recyclers and thus an incentive for more recycled material pickup.  Should the growing exports of recycled boxes be treated as “export growth”? The recycled boxes also serve to decrease the “cost” to ship from China to the US and thus subsidize imports to the US – is that appropriate ? Since demand for boxes is due to requirements for recycled content in US states – thus providing the demand stimulus in China, should the “global transport cost” be considered as a regulatory cost ?

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