In our Operations Strategy MBA class, Gad and I teach and discuss the operations and economics of Internet grocer pioneer Peapod. Two interesting e-grocer articles appeared this week:
The first, written in Forbes by Tom Ryan, is about AmazonFresh, the grocery overnight delivery service founded by Amazon in 2007, but still only serving the greater Seattle area. Why? In class we show the difficulty of this business and I praise the operational focus of Amazon. If Amazon is using this as a testbed for future expansion, it confirms our findings that this is a slow business where one must build density household by household. It simply takes a long time to arrive at profitable density: even for Amazon, it’s taking more than 6 years.
In his article, Tom proposes a second raison d’etre of AmazonFresh:
AmazonFresh isn’t about “competing with a small market with razor-thin margins and a checkered history.” It’s all about helping Amazon.com attain the scale to support its ambition to build a national same-day delivery shipping model.
I’ve been thinking over the last several days about the tragic factory collapse in Bangladesh. One question that comes up is why global apparel firms would choose to source their products from Bangladesh. CNN has a spiffy graphic that clearly shows that cost is one reason (Bangladesh vs. the U.S.: How much does it cost to make a denim shirt?, May 3).
Of course, the US ain’t exactly the right benchmark here. The real alternative is China and the Wall Street Journal reports that wages there are four times higher than those in Bangladesh (The Global Garment Trail: From Bangladesh to a Mall Near You, May 3). That kind of cost advantage together with a tariff advantage with the EU gets you growth like this.
How long is long enough? That effectively is the question asked in a recent Wall Street Journal article with regard to quick service restaurant hours of operations (Will Longer Hours Boost Sales?, Apr 29). Here is the issue:
With a lean economy squeezing their sales, thousands of restaurants are extending their hours to try to get more people through the door. But franchisees are learning that it can take a lot of work to get the most out of off-hours snackers.
The basic problem: Restaurants need to shoulder more expenses to keep the lights on longer—but the crowds usually aren’t that big at odd hours, and customers don’t end up spending very much. In fact, franchisees and industry experts say, some markets may not have enough all-night types to make the concept work at all.
The drop off in traffic in the wee hours of the morning is illustrated here.
Last week I posted on making toys in the US; this week it’s apparel — specifically, T-shirts and sweatshirts. Let starts with sweatshirts and a firm called American Giant. The story starts back in December with an article in Slate describing the company’s business model and extolling the wonders of its product (This Is the Greatest Hoodie Ever Made, Dec 4, 2012). In effect, American Giant uses technology to cut its distribution cost and rolls a good chunk of the savings into offering a superior product.
In the 1970s, when the fashion industry morphed into a mass-market business dominated by mall stores, its marketing and distribution costs began to skyrocket. To keep retail prices down, companies began to shrink the price of producing clothes. Today, when you buy a hooded sweatshirt, most of your money is going to the retailer, the brand, and the various buyers that shuttle the garment between the two. The item itself costs very little to make—a $50 hoodie at the Gap likely costs about $6 or $7 to produce at an Asian manufacturing facility.
American Giant has found a loophole in the process. The loophole allows Winthrop to spend a lot more time and money producing his clothes than his competitors do. …
American Giant doesn’t maintain a storefront, and it doesn’t deal with middlemen. By selling garments directly from its factory via the Web, American Giant can avoid the distribution costs baked into most other clothes. …
But there is really no comparison between American Giant’s hoodie and the competition. It looks better and feels substantially more durable—Winthrop says it will last a lifetime. When you wear this hoodie, you’ll wonder why all other clothes aren’t made this well. And when you hear about how American Giant produced it, it’s hard not to conclude that one day, they all may be.
OK, so what do you think happens when such glowing press hits the web a few weeks before Christmas? Right, they sell out of everything. Here is a BBC report how they got hit by a tsunami of orders (American Giant: The problems of being an overnight success, Mar 10).
Last Monday I posted about Rethink Robotics’ Baxter robot which can be easily programmed to perform a variety of manufacturing tasks. And that very day, the Wall Street Journal had a story about a firm that uses Baxter robot (A Toy Maker Comes Home to the U.S.A., Mar 11)! K’Nex Brands makes a variety of plastic building sets that snap together to make any number of things. Over the last several years, they have moved much of their production from China back to Pennsylvania. There are a number of strategic reasons for the move.
By moving production closer to U.S. retailers, K’Nex said it can react faster to the fickle shifts in toy demand and deliver hot-selling items to stores faster. It also has greater control over quality and materials, often a crucial safety issue for toys. And as wages and transport costs rise in China, the advantages of producing there for the U.S. market are waning.
Robotics play a roll in this. They use the Baxter for “simple packaging tasks,” which sounds like the kind of thing that it would be impossible to have a human do more cost effectively in the US than in Asia.
But to my mind, the most interesting part of the article discusses the design trade offs that K’Nex has made to facilitate the move. (more…)
How do you grow a service business when growing means adding locations? That’s always been one of my favorite topics in service operations. It poses interesting challenges on what must be standardized and where flexibility should be maintained. The Globe and Mail has an interesting profile of Toronto entrepreneur who has had to grapple with these issues as he has expanded his takeout restaurant from one location to four (Restaurateur creates winning recipe to manage multiple locations, Mar 8). They’ve gone the emphasize-standardization route.
Over the next seven years, Mr. Ross opened up three more Veda locations, two in buildings on the main University of Toronto campus, in 2007 and 2009, and one this past summer at University and Dundas, close to a group of hospitals. To manage across these locations, he pays close attention to as much standardizing as possible.
Since Mr. Ross believes food consistency to be critical, all the cooking is done in a central location. This means not only that food in all of Veda restaurants is cooked using the same recipes, but that it all comes from the same batch. The cooking takes place in the original, flagship Yorkville location and is distributed to the other locations each morning.
To ensure that the right food is at the right place at the right time, Mr. Ross needs to be able to estimate demand at each location on each day of the week. He has systems in place that allow him to predict that, and to tweak the prediction if there are events, such as large conferences, in the area. As well, he has a driver on call at all times who can deliver food to a location within 10 minutes if there is unexpected demand and something is running out.
The robot being demoed is Baxter, which is a new industrial robot and the brainchild of Rodney Brooks, the guy who brought you the Roomba. Here is how NPR describes the technology (Could This Robot Save Your Job?, Mar 9).
Rethink Robotics, describes Baxter as a collaborative manufacturing robot. Brooks showed how Baxter, which costs $22,000 per model, can work alongside humans — not replace them — to do simple, repetitive tasks. …
Baxter has eyes for feedback. Though its eyes don’t see you as a person, they serve as a signal as to what it’ll do next.
Normally robots need to be programmed, but this one learns by physical training. Move Baxter’s arm and it learns that’s how it should move its arm. In just a few minutes, the robot can be taught, for example, to take something out of a box and place it on a conveyor belt, then, after it’s assembled, put it back in a box.
So this is seriously a pretty gee whiz bit of technology but does it live up to the hype of working with humans and saving jobs? (more…)
While the initial reaction to Boeing’s 787 electrical problems was to blame outsourcing, there is more and more understanding that outsourcing itself is not the issue. Boeing has always outsourced the production of batteries. There are several explanation that emerged since.
(1) It’s not outsourcing. It is the trend of modularization: We know that more modular designs allow for lower cost, but come at the expense of quality and performance. One should say that this is a very valid argument, since modularization is clearly the enabler of the excessive outsourcing trend.
(2) An alternative explanation is that It’s not outsourcing itself, but rather the specific method of outsourcing where Boeing outsources the design and control over sub tiers. This is the main focus of The Seattle Times’s article (“Boeing 787’s problems blamed on outsourcing, lack of oversight“).
For toymaker The Bridge Direct, Easter now begins in August.
That is when the Boca Raton, Fla., producer of Inkoos stuffed monsters and Justin Bieber dolls has to file orders with its Chinese suppliers to ensure delivery by the spring holiday. It used to place orders closer to the key selling period, which allowed it to get a sharper sense of demand and better manage its cash. But now the greater concern is making sure it doesn’t get left shorthanded because of China’s New Year holiday.
The company is one of many from the U.S. and other countries that are closely watching China as factory workers slowly return this week from the country’s long Lunar New Year holiday. Every year, millions of China’s 250 million migrant workers leave their factories and travel across the country to visit their families at home. The problem for toy and apparel makers in particular is that fewer and fewer workers are returning to the factories when the break is over.
My colleague Sunil pointed me a neat article on Domino’s Pizza’s Indian operations. While the chain long ago gave up on an explicit delivery time guarantee, their Indian franchisee Jubilant Foodworks still promises 30 minutes or the pie is free. That is not an easy promise to keep in, for example, an old neighborhood with streets running every which way and no really good maps. Still they manage to hit the thirty minute target remarkably often despite not having a whole of lot time for the actual delivery part of the process (Domino’s deadline to deliver, Financial Times, Jan 17).
With preparation, baking and boxing of pizzas taking 12-13 minutes, Indian deliverymen have 8-10 minutes to ferry their piping hot cargo to its destination – leaving a margin of just a few minutes. Riders cannot race to their destinations either: their motorbikes are modified to restrict their maximum speed to 45kph. That means riders must know every street, pothole, traffic light, choke point, construction site and police roadblock in their sectors of fast-changing, densely populated cities. …
Of all Domino’s deliveries in India, less than 0.5 per cent take more than 30 minutes to reach the consumer. Top managers monitor every store’s late rate closely. Rising pizza giveaways are seen as an indicator that a store is being overwhelmed by rapidly growing business – and that the area may be ripe for an additional outlet – or that local congestion is worsening considerably. “We watch that number like hawks,” Mr Kaul says.
Now there are obviously several steps in making these deliveries happen — from making sure that the kitchen staff is well-trained to scheduling enough delivery drivers. The most interesting part to my mind is the last thing hinted at in the quote above: How does Domino’s think about locating stores — and defining their service areas — so they can hit their delivery window?
