UCLA Anderson Global Supply Chain Blog

What happens after you toss a recyclable plastic container in the recycle bin?

Christopher Tang

 

We do know that we should put recyclable items in the recycle bin so that these items can be recycled into new materials.  But do we know if these items will actually be recycled?   To find out the truth, a group of reporters from the Guardian (a leading newspaper in the UK) tracked down the supply chain operations of US plastic waste and presented a chilling report in https://www.theguardian.com/us-news/2019/jun/17/recycled-plastic-america-global-crisis. 

According to the Guardian, America generates 34.5 million tons of plastic waste each year.  Due to strict regulations and high recycling costs, US exports about 1.6 million tons of plastic waste to China and Hong Kong to recover valuable plastics to be sold back to the western world.  However, much of the plastic waste was not recyclable because it was contaminated with food or dirt; hence, the bulk of the waste ended up in China’s landfills.  Since China banned the import of plastic waste (except the cleanest plastics) in late 2017, America has been shipping its plastic waste to other countries including: Malaysia, Thailand, Indonesia, Philippines, Vietnam, Cambodia, Turkey, etc.  

Source: The Guardian

Because regulation is loose and law enforcement can be inconsistent in these developing countries, the waste management industry may not comply with environment health and safety regulations.  Consequently, the Guardian report shows that poor workers churn out recycled pallets amid toxic fumes and foul stench.  Long term exposure to the toxic fumes can cause long term health problems for these workers. 

Source: The Guardian

 

The impact of America’s plastic waste is severe, and the current plastic recycling process is causing harm.  The US government, business leaders, and consumers must work together to develop a better solution.  What can we do?

First, the US government should establish new policies that are intended to reduce or eliminate the use of plastic.  First, the government can impose higher taxes on virgin plastic to create incentive for manufacturers to use alternative packaging materials.  Also, supermarkets should either ban or increase the price plastic shopping bags.  Restaurants should ban plastic straws and reduce the use of plastic utensils.  California launched several initiatives.  In 2019, Berkeley required all takeout cups, straws, cartons and forks to be compostable and will charge these items in 2020.  In August 2019, San Francisco International Airport banned single-use plastic water bottles.  At the same time, California governor signed a bill that allow customers to bring their own to-go packages to restaurants as a way to reduce the demand for food containers. 

Second, to ensure our plastic waste is recyclable, the government needs to develop education programs to educate consumers about proper procedure to prepare those empty plastic bottles and containers before they toss them into the recycle bin.  More importantly, the government should educate consumers about how plastic waste has entered our food chain (especially seafood), and everyone is responsible to reduce, reuse, and recycle plastic materials.  In doing so, pleading ignorance can no longer be an excuse. 

Ultimately, the plastic problem is a man-made problem.  We are the problem, and we are the solution. 

The environmental and social value of Vertical Farming

Christopher Tang

 

We are facing an unprecedented food supply crisis.  United Nations released a report in August 2019 warning that the world’s land and water resources are being exploited at “unprecedented rates” for many reasons.  First, the world’s population is projected to grow from 7.5 billion in 2018 to over 9 billion by 2050, thanks to improved healthcare and medical services.  However, due to population growth, longevity resulting from better health care, and increasing consumption caused by economic development in developing countries, the demand for Earth’s resources is expected to continue to grow and exceed the capacity of natural resources. Second, the development of infrastructure and housing to support population growth has depleted the amount of arable land for cultivation. Based on data obtained from the World Bank, the arable land per person has declined gradually over time (Figure below).

Arable Land (Hectares per person) from 1961 to 2016.  (Data source: World Bank)

Third, the United Nations reported that more than one half of world population lives in urban areas.  As young people migrate to urban areas, it will be hard press for older farmers to manage their farms.  Fourth, climate change is putting dire pressure on the ability of humanity to feed itself.  Floods, drought, storms and other types of extreme weather threaten to disrupt the global food supply, and food shortages could lead to an increase in cross-border migration.

Facing with these challenges, we are racing against time to develop sustainable food supply to feed the growing and ageing population with depleting water and land supply in the midst of climate change. 

To address these food supply challenges, many Venture Capital firms are investing in “vertical farming” (see figure below).  Vertical farming refers to the practice of producing fruits and vegetables vertically, in stacked layers, perhaps on many floors inside a building, using artificial lights (e.g., LED lights) instead of the sun, and a whole range of technologies including sensors, climate control systems, target water dripping systems, and special robotic systems. 

A leading vertical farming firm is AeroFarms.  Based in New Jersey, AeroFarms has raised US$100 million to grow a variety of produce (rocket, watercress, and baby kale) using its own patented “areoponic” technology -- a process of growing plants in an air or mist environment using 95% less water without the use of soil or pesticides.  AreoFarms sells its produce to retailers such as Whole Foods and ShopRite under the Dream Greens brand. 

A Vertical Farm.  (Source: AreoFarms)

As vertical farming is getting some traction, vertical farms could pose a safety hazard to workers because they have to get on a “scissor lift” to get to the plants to inspect and harvest them. A Cincinnati-based firm called 80 Acres Farms has implemented a robotic system that can reach greater heights and use vision technology to identify ripeness and potential disease on the plants. By reducing human touch from farming, crops are less likely to be contaminated with bacteria such as Listeria, Salmonella, or E. coli.  Also, without using pesticides, vertical farming can produce higher quality crops that are safer to consumer.  Due to concern about food safety in China, Foxconn’s Wuhan campus has selected Skywell, a leading US water technology company, to build an indoor vertical farm to grow high-quality vegetables and fruits so as to improve the nutrition of employee meals provided at Foxconn’s on-campus cafeterias.

Because vertical farming is relatively new, the investment cost is fairly high and it is not clear if this farming business is financially viable.  If it works out, we can grow more vegetables using smaller footprint (using vertical space), less water (using indoor mist environment), higher yield (using artificial light), etc.  Also, if these vertical farms are developed in urban areas, we can get fresher produce by reducing carbon footprint because complex supply chain logistics will no longer be needed. 

 

 

Can Blockchain Technology Prevent Organic Fraud?

Bel Yousefi, Sai Prem Achuthan, and Christopher Tang

 

UCLA Anderson School

 

In 2017, the Washington Post reported that millions of pounds of “USDA Organic” soybeans and corn imported through Turkey appear to have been fraudulent.[1]  This is a common occurrence in the United States: a significant proportion of imported “organic” foods turns out to be fake.  Why does this happen?  How does this happen?   What can be done?

 

The underlying causes of Organic Fraud

 

There is a belief and some research evidence that organic foods may have higher nutritional value (vitamins and antioxidants) than conventional food because, in the absence of pesticides and chemical fertilizers, organic plants boosts their natural production of the phytochemicals (vitamins and antioxidants) to better fight against bugs and weeds. For this reason, organic foods can be sold with a 25-60% price premium. By 2017, the US organic market was valued at over US$43 billion and it is expected to reach $70 billion by 2025. 

 

Despite the demand for organic food in the U.S having grown by double digits, it is surprising to note that organic cropland remains less than 1% of all U.S. farmland. The underlying reason is due to a strict organic certification process, for which approval can take domestic farmers more than three years.  Because supply cannot meet demand of organic foods, retailers, feed companies, and packaged food manufacturers are importing organic foods from India, Ukraine, Turkey, Romania, etc.  With an exponential growth of imported foods labelled as “organic”, the US certifying agency (the Agricultural Marketing Service (AMS) National Organic Program (NOP)) that oversees all imported USDA-certified organic agricultural products is unable to thoroughly conduct inspections.^[2] The convoluted inspection process often involves intermediaries such as customs brokers and central exporting collectors.  Because the inspection is not as thorough as it should be and because imported organic foods can be sold at a higher price, these two issues create a perfect storm for exporters/importers to commit organic fraud.   

 

Preventing Organic Import Fraud via Blockchain

 

Because there is a strong incentive for exporters and/or importers to commit organic fraud, there is a need to prevent falsified records in the supply chain process associated with importing organic foods to the United States.  As shown in the figure below, the supply chain process of imported organic coffee beans involves many supply chain entities, each of which has the potential to violate certain organic certification requirements imposed by the USDA.

 

 

To prevent falsified information recorded along the supply chain, Blockchain appears to be a promising solution.   Blockchain technology is digital information (the “block”) that is stored using a public database (the “chain”). Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. By design, a blockchain is immutable (resistant to modification of the data), decentralized (uses network consensus), and transparent (each public address is open to viewing) - an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way.^[3]

 

Blockchain can help digitally trace and authenticate food products from a vast ecosystem of suppliers all the way to store shelves and ultimately to consumers. Its potential benefits to the food industry are: 1) increases transparency, 2) enforces standards and enhances security by solving the issue of source identification, 3) eliminates intermediaries and increases efficiency of the whole supply chain, and 4) opens up new markets to producers who may otherwise not have access to a wider market.^[4] Implementation of this technology has benefits across stakeholders. For farmers, blockchain can help open up new markets for their products by essentially shrinking the supply chain to the end user. For distributors, it helps to expand international sourcing and avoid risk related to changing supply or demand. For processors, it helps increase quality control by allowing growers and processors to share information. Finally, for consumers, it can help lower prices and increase brand loyalty.^[5]

 

IBM is currently leading the charge in blockchain innovation in the food industry and has announced a consortium with 10 major suppliers to help improve food safety and ingredient transparency via the IBM Food Trust.  A few examples of this technology in action can be seen in Walmart’s Mango Tracking project that used (IBM’s) blockchain technology to reduce the time it took to track a mango from 6+ days to 2.2 seconds.^[6] Another notable example of a major supplier piloting IBM’s Food Trust partnership is Albertsons who is now using the technology to track high-risk foods such as romaine lettuce to help reduce the time it takes to identify the source of potential e-coli outbreaks.^[7]

 

The challenges of adopting Blockchain technology

 

While IBM is leading its effort, widespread implementation of blockchain technology across all supply chain partners is challenging because: 1) the potential of  data inaccuracies incurred by less sophisticated users (e.g. poor rural farmers); 2) the high energy and storage costs; 3) the unknown potential for scalability; 4) the synchronized integration and adoption of blockchain with other technologies such as RFID and IOT, and most importantly, 5) the question of whose responsibility it is to initiate the project; i.e., who is responsible for bearing the cost of implementing the technology and educating stakeholders on its usage and benefits? Private-public partnerships may be one answer.

 

Public-private partnerships can help standardize the technology and increase the adoption rate. Since the food industry is heavily subsidized in many nations, it makes sense for governments to bear the cost of developing and implementing the technology, and educating stakeholders. System feasibility can be tested through strategic partnerships with a limited number of key producers and distributors similar to the pilot projects previously mentioned. Additionally, as only one government agency, the AMS, oversees all the USDA-certified organic agricultural products produced in the U.S and around the world, they would be key in helping to standardize the technology. The AMS can also help increase adoption rates as it has well-established relationships with various stakeholders.

 

Blockchain technology appears to be a promising solution for fighting organic food fraud.  If it works, brands can earn more by selling more genuine organic foods in the market. At the same time, consumers absorb more vitamins and antioxidants from eating organic foods and thrive. 

 

 

[1] https://www.washingtonpost.com/news/wonk/wp/2017/06/12/millions-of-pounds-of-apparently-fake-organic-grains-convince-the-food-industry-there-may-be-a-problem/?noredirect=on&utm_term=.e62639a8767f

^[2] Organic Trade Association Organic Regulatory Update 2017

^[3] https://www.investopedia.com/terms/b/blockchain.asp

^[4] https://www.startus-insights.com/innovators-guide/8-blockchain-startups-disrupting-the-agricultural

^[5] https://www.forbes.com/sites/themixingbowl/2017/10/23/the-blockchain-of-food

^[6] https://newfoodeconomy.org/blockchain-food-traceability-walmart-ibm/

^[7] https://www.forbes.com/sites/rachelwolfson/2019/04/11/albertsons-joins-ibm-food-trust-blockchain

Sweetgreen: Sustainable Supply Chains in Farm-to-Table Restaurants

Luiza Niemeyer, Claudia Sanchez, and Felipe Caro

Sweetgreen is a restaurant that was founded in 2007 in Washington, D.C with the aim of bringing healthy options to the fast-casual food business. Currently, they have 89 locations across the country and offer a rotating menu of salad and grain bowls that is based on the season and produce availability. The secret of their success? Ensuring freshness and quality through an extended network of local suppliers. Sweetgreen is a part of the “farm-to-table” (and more recently “seed-to-table”) movement, which promotes using locally-sourced, high quality ingredients in food preparation. Their ethos goes: “We believe the choices we make about what we eat, where it comes from and how it's prepared have a direct and powerful impact on the health of individuals, communities and the environment.” To support it, they have a network of over 500 small and mid-sized suppliers, many of whom service a specific local region of their 89 locations. This means that on any given day, each of their stores handles products that were sourced from upwards of 200 suppliers. Everything is delivered and tracked on a daily basis to ensure the freshness and quality of the products.

 

The farm-to-table movement has very specific implications for the sweetgreen supply chain. Operationally, sweetgreen embraces a number of effective supply chain practices that are key to ensuring their day-to-day operations run smoothly while also ensuring the company stays true to its social values. Some of them include: dual sourcing, distributor controls, information sharing, and forecasting.

 

From a sourcing perspective, sweetgreen leadership identifies local and organic farms that they would like to work with before deciding where to open up a new location. They begin building a partnership relationship from the start, contributing to positive top-down effects by giving business to local farmers that enables them to expand and improve their own practices. To mitigate the potential disruptions that inevitably happen in the agricultural industry, sweetgreen adopts a dual-sourcing model where larger farms in California support produce demand that cannot be met locally. This approach helps balance the company mission with customer satisfaction and operational flexibility. Strong-relationship building and management also occurs with distributors, whose role extends from simply delivering supplier produce to assisting sweetgreen in delivering transparency to customers through their in-store menu displays. Every night, the distributors must log into sweetgreen’s proprietary supplier portal and note which stores are set to receive product from one supplier over another. This information is then updated in a physical chalkboard at each sweetgreen location so that customers are able to trace their meal to the farm(s) it originated from.

 

Because sweetgreen’s menu is seasonal and highly dependent on produce availability, demand forecasting is a little tricky but extremely important. To circumvent the challenges that come with seasonality, planners use historical demand data from a selected proxy menu item, knowing that most of their offerings follow a similar sales pattern. These forecasts are updated daily to monitor specific trends and subsequently orders with their suppliers are adjusted if needed. All of the information, from the original predicted forecasts to the daily updates, are shared with suppliers to ensure everyone has access to much needed information. A challenge however is that updates to forecasts are not received in real-time, particularly because small farmers do not have access to the technology and software needed to support real-time data sharing.

 

Freshness and forecast difficulties also bring challenges in managing customer expectations, as some customers end up having inconsistent experiences depending on their location and time of the year. While this is certainly a constant concern, it is also a trade-off embedded in sweetgreen's model that customers looking for freshness can at least understand. Another consideration that might be trickier is the use of environmentally friendly packing, especially as sweetgreen transforms itself into a lifestyle brand. Rethinking the use of single use utensils, plastic straws, along with their carbon footprint should be within sweetgreen's agenda as they continue to expand.

 

Possible ways to address these issues include: deepening supplier relationships by creating or facilitating financing programs to help family owned business invest in IT. Better data management systems would not only help sweetgreen and farmers address their forecasting issue, but they would also be an important tool for the farmers themselves, allowing them to grow and potentially become exclusive sweetgreen partners, which could help reduce potential disruption. As sweetgreen builds its reputation as a lifestyle brand, it would also benefit from mimicking certain practices seen in their food sourcing to their material sourcing and packaging supply chain. Building strong relationships with partners that provide in-store packaging products will enable them to become thought partners, opening up potential for them to innovate in this space and continue to be leaders in sustainable supply chains.

 

The (Potential) Value of Labeling in the Lithium Ion Battery Supply Chain

Kevin Popper, Julia Navarro, Amelia Lanfrankie, and Felipe Caro

Demand for electric vehicles has risen dramatically alongside consumer concerns about greenhouse gas emissions. Correspondingly, demand for lithium-ion batteries has also increased and is expected to continue increasing – the lithium-ion battery market is thought to have a CAGR of 14%, with the transport sector accounting for 60% of the market by 2025.^[1] Electric vehicle driven demand for lithium-ion battery raw materials such as cobalt and copper is expected to increase 10x by 2026.^[2]

 

Image source: “Electric Vehicle Outlook 2018 | Bloomberg New Energy Finance.” Bloomberg NEF, 2018, about.bnef.com/electric-vehicle-outlook/#toc-download

Increasing demand for these raw materials is becoming a costly problem as certain materials are relatively scarce. Cobalt, a critical component in lithium ion batteries, has had prices triple since 2016.^[3] The search for more raw materials has led suppliers to source irresponsibly from unstable emerging markets. For example, over 60% of cobalt comes from the Democratic Republic of Congo, which uses the labor of tens of thousands of children as young as four years old in its mines.^[4]

 

These explicit and societal costs can be mitigated through more responsible lithium-ion battery recycling practices. Current recycling rates in the United States are remarkably low – only 5% of batteries are recycled and only 35% of the materials from these batteries can be recovered to be used.^[5] Both current most common recycling practices pyrometallurgical and hydrometallurgical are relatively inefficient, contributing to low materials recovery rates. Pyrometallurgical recycling involves incinerating whole/partially processed batteries and only several metals – cobalt, nickel, copper, and iron – are recovered for reuse.^[6] Hydrometallurgical recycling can additionally recover lithium, manganese and aluminum, but they are in lower in value.^[7] The process also produces a good deal of waste water.

 

Umicore Val’Eas Pyrometallurgical + Hydrometallurgical Process

Image source: ResearchGate. Umicore Battery Recycling Process, www.researchgate.net/figure/Simplified-flow-sheet-of-the-Umicore-Battery-Recycling-Process-With-permission-of_fig5_283523469

 

A proposed solution is to invest in a process called direct physical separation. Direct physical separation is different, because it allows metal oxides in cathodes and processed graphite materials in anodes to be directly recovered in their original battery-grade state – creating the potential for direct reuse with minimal additional processing. It is currently in the lab/demonstration phase but has the potential to offer attractive economics with scale as the process has low variable costs – it requires limited fuel and additional processing materials (like leaching acids). However, direct physical separation requires all batteries to be of the same type.

 

Direct Physical Separation Recycling Process

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Image source: ResearchGate. Toxco Recycling Process, www.researchgate.net/figure/Toxco-recycling-process_fig2_265158823

Several recycling infrastructure changes would have to be implemented to enable direct physical separation – a significant one is labeling batteries with their component parts to allow sorting by battery type.^[8] Currently lithium-ion batteries are nearly indistinguishable and blending of the component materials of different batteries can render the materials useless. This labeling would then need to be accompanied by sorting practices to direct different battery types into the proper physical separation process. These changes would allow materials that would have been irrecoverable using pyrometallurgical or hydrometallurgical processes (e.g. aluminum) to be recycled into new batteries.

 

Data was drawn from several sources to estimate the value that could be generated by direct physical separation (see below). Our estimate compared the value of potentially recovered materials for the dominant recycling process, the Umicore Val’Eas pyrometallurgical process, to direct physical recycling process. We did not model costs for these competing processes due to large uncertainties. As such, our cost savings estimate only focused on differences in recovered material value from the time period of 2026 to 2040. We estimate the cumulative cost savings from direct physical recycling (enabled via battery labeling) is $212 billion from 2026-2040, with $43 billion in savings occurring in 2040 alone. Hence, there is significant value in the supply chain for batteries waiting to be unlocked.

 

Data and assumptions used in savings calculation:

 

1. Battery consumption/availability: estimates based projected global battery consumption from BNEF through 2030
2. Battery lifetime: assumed 8 years in operation before entering recycling stream
3. Material composition estimates: estimates based on 2025 share of market for each battery chemistry based on McKinsey forecasts
4. Material recovery rates: estimates based on research of Linda Gaines and publicly available ReCell model - both by Argonne National Labs
5. Material value: estimates based on 2018 ReCell model inputs and LME pricing

 

 

^[1] “Lithium-ion batteries: Market development and the impact on raw materials,” Roskill, 2017, https://roskill.com/news/lithium-ion-batteries-market-development-impact-raw-materials/

^[2] “Electric Vehicle Outlook 2018 | Bloomberg New Energy Finance.” Bloomberg NEF, 2018, about.bnef.com/electric-vehicle-outlook/#toc-download

^[3] “LME COBALT, Historical Prices Graph,” The London Metal Exchange, Jan. 26, 2018, https://tinyurl.com/yco5v627

^[4] “The Toll of the Cobalt Mining Industry on Health and the Environment.” CBS News, CBS Interactive, 6 Mar. 2018, www.cbsnews.com/news/the-toll-of-the-cobalt-mining-industry-congo/

^[5] “IN DEPTH: Lithium Battery Recycling - The Clean Energy Clean Up.” « Landfill « Waste Management World, 27 Apr. 2018, waste-management-world.com/a/in-depth-lithium-battery-recycling-the-clean-energy-clean-up

^[6] “Lithium Ion Battery Recycling: Using Lifecycle Analysis to Avoid Roadblocks,” Argonne National Laboratory. naatbatt.org/wp-content/uploads/2016/12/Gaines_Quantifying-the-Contribution-of-Advanced-Battery-Recycling.pdf

^[7]  “Lithium Ion Battery Recycling: Using Lifecycle Analysis to Avoid Roadblocks,” Argonne National Laboratory. naatbatt.org/wp-content/uploads/2016/12/Gaines_Quantifying-the-Contribution-of-Advanced-Battery-Recycling.pdf

^[8] “The future of automotive lithium-ion battery recycling: Charting a sustainable course,” Sustainable Materials and Technologies. https://www.sciencedirect.com/science/article/pii/S2214993714000037

Will traditional restaurants become traditional taxis in the gig economy?

Christopher Tang

Local restaurants are struggling to get customers to eat in.  To capture those office workers and consumers who are too busy to eat out or take out, many restaurants are partnering with food-ordering and delivery startups such as Grubhub (US), Deliverloo (UK), and Ele.me (China).  These startups can connect local restaurants with diners by posting restaurant menus online for diners to place their orders to be picked up and delivered by independent contractors. In 2018, McDonald's partnered with Uber Eats, and Dunkin' uses DoorDash.  These startups make money by charging restaurants a commission fee based on the value of the orders placed through their platforms.  Without owning physical assets and without employing delivery workers, these platforms can expand and scale up in different cities around the world just like Uber!   No wonder Yum Brands (parent company of Pizza Hut, KFC and Taco Bell) took an ownership stake in GrubHub. 

The business model is working well for GrubHub, DoorDash, Uber Eats, Deliveroo, Ele.me, etc., but it is not clear if this business model is beneficial for those partnering restaurants.  Here is why.  First, for high-end restaurants, they demand high profit margins by offering unparalleled on-site dining experience.  Their brand image (or value proposition) will be affected negatively if they serve online customers that value convenience over experience.  Second, for those restaurants that serve the mass market, they compete on price and operate with razor-thinned margins. Their margins will be squeezed even further when these platforms charge a commission fee that is 15% to 30% for each order.  Third, these platforms may even cannibalize the dine-in sales with higher margins. 

These platforms are good for consumers, but they can be a nightmare for traditional restaurants for the following reasons.  Once customers get used to stay at home and stop eating out, many restaurants will earn a much lower margin but they still need to pay a high real estate cost.  In that case, these restaurants may end up competing with cloud kitchens that enable entrepreneurs to cook meals in a shared facility exclusively for online orders without incurring the cost of prime retail space.  In 2018, Deliveroo launched its cloud kitchen lots for entrepreneurs to rent in London and Paris. 

If these cloud kitchens become successful, these online meal ordering and delivery platforms may no longer need to partner with local restaurants in the future.  It is likely that some local restaurants will be left in the dust, while others may end up operating in the cloud. 

 

Can Elon Musk learn from Lucille Ball?

Christopher Tang

Tesla’s production of Model 3 hits a snag.  I am a fan of Elon Musk – the visionary who created Tesla and SpaceX.  At the same time, I worry about his lack of understanding of Operations Management.   As a case in point, let us consider a story reported in Wall Street Journal.[1]    Musk asked why the Tesla’s assembly line had stopped.  One of the senior engineering managers explained that it was due to a safety measure.  Musk fired this manager, but Tesla claimed that this manager was fired for other reasons. 

Regardless of the reason(s) to fire this manager, his explanation to Musk reminded me of the 1952 classic “I Love Lucy” episode in which Lucy was the “bottleneck” who could not keep with the candies rolling off the conveyor belt.  When running a factory, many bosses often want to see things moving and workers working at all times because they tend to believe that idle machines and workers are wasteful!   The boss is always right, no?

Actually, there are two good reasons for not keeping the machines and workers busy at all times.  First, in our MBA Operations Management (OM) core course, we discuss the classic novel “The Goal”[2] to illustrate that most assembly lines are “imbalanced” so that some process steps are slower than others.  When an assembly line is imbalanced, the output rate of the line is dictated by the processing rate of the bottleneck (usually the slowest stage in the assembly process).  Therefore, it is optimal to get every step to operate according to the processing rate of the bottleneck.  In doing so, it is natural to see some non-bottleneck stages will be idle some of the time.  If the boss insists to keep every stage busy at all times, then many work in process inventory will be piling up in front of Lucy!

Second, in our OM course, we discuss the classic Toyota Production System that it is a good practice to “stop the line” whenever there is a problem (processing time delay, quality issue, irregular parts, etc.).  In doing so, the “problem” will be exposed and the organization can learn and find ways to address the underlying causes to solve the problem right away.   The Toyota Production System is a proven process, and it was actually implemented at the Toyota-GM NUMMI plant before it is now known as the Telsa’s factory in Fremont, California.  Perhaps certain OM lessons can help Tesla’s production back on track!   

 

[1] Higgens, T., Mickle, T, and Winkler, R. “Musk vs. Musk,”  Wall Street Journal, September 1, 2018.

[2] Goldratt, E., and Cox, J.  The Goal. North River Press, 1984.

Eden: a new technology to reduce food waste in Walmart's supply chain

Ally Kleinman, Keely Schneider, Shane Strumwasser, Felipe Caro

Walmart is a globally recognized leader in big-box retail. Walmart is responsible for $500 billion in annual revenues, operates in 28 countries and employs 2.3 million people worldwide [1]. Everyone knows the giant superstore for its low-cost strategy and “everyday low prices.”

What people do not know is how efficient Walmart’s supply chain needs to operate to keep up with its cost strategy. For a network as large as Walmart, its distribution must be streamlined to deal with large quantities of product and SKUs going to and from suppliers to eventually end up in the retail stores. In the United States, Walmart operates with a hub-and-spoke distribution model for its grocery distribution, which accounts for an estimated 22% of the US grocery market [2]. It uses 44 distribution centers with over 35 million square feet of space [3]. On average, grocery products travel 134 miles to get from the given distribution center to a retail outlet. With such a large and complex network, managing it end-to-end is challenging and food waste becomes a major problem.

Each day, Walmart’s global network generates 3.5 million tons of food waste, which equates to $2.6 trillion in annual cost and results in a $7.4 billion loss for Walmart’s P&L [4]. To mitigate this problem, Walmart has begun actively setting targets to reduce waste using waste scorecards and other tracking mechanisms [5]. Additionally, for every new supplier there is a comprehensive set of actions that the supplier must take to make sure it adheres to Walmart’s standards [6]. Walmart has also explored using blockchain technology to better track its products and control food waste [7]. Furthermore, Walmart imposes penalties on suppliers for delivering products either too early or too late [8]. At minimum, these are some small steps that Walmart has initially taken to increase awareness of the food waste issue.

In 2018, Walmart introduced a new technology called Eden to meet the challenges of food waste. Eden is a suite of apps that employees can use at every stage of the supply chain to improve the quality and flow of produce from farm to shelf [9]. The technology includes a digital library of food standards with over a million photos from which they have created a freshness algorithm that identifies spoilage and prioritizes the flow of fresh produce. Upstream in the supply chain, Walmart’s size and buying power allows them to negotiate information sharing agreements to get valuable information about the time in the field prior to cooling, which has an impact on shelf life. From here Walmart’s chained distribution allows them to optimize the flow of produce. Finally, store employees can use this information to prioritize restocking based on freshness [10]. Eden was developed in house by Walmart employees during a company hackathon and they are continuing to work on improving the technology and adding functionalities.

To demonstrate the impact of a tool like Eden, we can use bananas to estimate the reduction in safety stock once Eden is deployed in the supply chain. Bananas are one the highest volume products sold by Walmart - with over 1.5 billion pounds sold each year [11]. As of now, about 30% of all bananas harvested are wasted [12]. It's likely that Walmart can reduce this waste by 50% by applying Eden technology. Also, by using Eden to better predict when each banana will ripen, it's possible to reduce the average lead time by 2 days -- because the technology would reduce the need to artificially ripen or “gas” bananas, which is typically part of the fulfillment process. With these improvements, a quick calculation using the standard order-up-to formula based on the newsvendor [13], we estimate that Walmart can reduce banana stock by over 23M pounds, which would save the company around $170M annually.

Looking to the future, Eden is poised to create solutions for many of the challenges of produce in retailing. Currently farmers have limited access to information. In the future, Eden can be integrated at the farm level to optimize picking time, creating value through infomediation. There is also an opportunity to upgrade Eden to track freshness at the unit level by applying more advanced analytics. Finally, Eden has the potential to eliminate the need for costly packaging by optimizing the store-to-shelf window. Overall, Eden is an exciting new technology that is sure to have a marked impact on the efficiency of fresh food supply chains.

[1] https://corporate.walmart.com/2016grr
[2] https://www.cips.org/supply-management/news/2017/march/wal-mart-to-squeeze-suppliers-to-win-discount-chain-price-war-/
[3] http://www.mwpvl.com/html/walmart.html
[4] https://corporate.walmart.com/2016grr/enhancing-sustainability/moving-toward-a-zero-waste-future
[5] https://corporate.walmart.com/2017grr
[6] https://corporate.walmart.com/media-library/document/supplier-checklist-4918/_proxyDocument?id=00000162-abb3-df49-abf2-efbb94470000
[7] https://rctom.hbs.org/submission/blockchain-technology-walmarts-holy-grail-of-food-supply-chain-management/
[8] https://www.wsj.com/articles/wal-mart-kroger-impose-more-fines-on-suppliers-for-missed-deliveries-1511784000
[9] http://prlogistics.com/walmarts-eden-and-verigos-pod-quality-technology-to-reduce-fresh-produce-waste-in-supply-chains/
[10] https://blog.walmart.com/innovation/20180301/eden-the-tech-thats-bringing-fresher-groceries-to-you
[11] https://www.businessinsider.com/walmart-sells-this-food-the-most-2016-2
[12] Personal communication with industry source
[13] Base-stock level = μ * (L+1) + zσ * sqrt(L+1)

Improving the US blood supply chain: some lessons from the UK

Chloe Kim, Catherine Gao, Amba Gujral, Willa Ni, Ashley Wright, Felipe Caro.

Blood and blood products (such as plasma and platelets) have a unique and challenging supply chain because of three major reasons. The supply of blood fully relies on human donations and is not a product that can be manufactured. Blood is a perishable product, especially platelets must be used within 5 days of donation, and red blood cells can only be stored for 42 days [1]. Lastly, inaccuracies of supply and demand can become a matter of life and death as blood is a critical input into a wide range of medical procedures and services, including surgeries, trauma care, and therapeutic intervention.

The supply chain for blood should ideally operate as a fully responsive network that can react to uncertain demand with a short lead time. However, the current blood supply chain in the US is rather fragmented including a diverse layer of stakeholders. The main stakeholders involved are: donors, blood banks such as the American Red Cross (ARC), hospitals, and patients. Figure 1 is a simplified diagram of each player’s role and the processes involved.

Figure 1. Blood supply chain in the US

Large blood banks such as the ARC have distribution centers where they can pool supply before it is shipped to hospitals. Smaller blood centers such as the UCLA Blood and Platelets Center (BPC) operate a more localized system. The UCLA BPC is one of the main blood centers in the greater Los Angeles area but it struggles to meet its daily demand. The UCLA hospitals share a weekly forecast with the UCLA BPC, which is usually able to satisfy 75% of the daily demand from its own stock and must source the remaining 25% from the ARC. The two entities (ARC and UCLA BPC) don’t have a shared IT system and communication takes place via emails and phone calls. The UCLA BPC also has a partnership with UC Irvine in order to share any excess supply or demand.

In contrast to the US, the UK's blood supply chain has transitioned to a centralized and demand-driven (i.e., pull) model. The pull approach starts with digital information that communicates real-time demand from hospitals, which is then passed on to distribution, collection, and finally supply as shown in Figure 2. The National Health Services (NHS), UK’s healthcare organization, calls it a comprehensive “vein-to vein” model [2]. The implementation relies on a vendor managed replenishment system that monitors stock levels every 30 minutes from 70+ participating hospitals. The system enables the NHS Blood and Transplant service to identify the optimal stocking levels and it automatically generates replenishment orders. Such optimization of inventory and replenishment has improved the utilization of fridges and freezers, whilst reducing the level of shipments required to rebalance stock across the network. The transition to the new supply chain has brought savings in excess of £50m per year [3].

Figure 2. The UK vein-to-vein system.

There are several lessons the blood supply chain in the US can learn from its counterpart in the UK. On the demand side, pooling inventories should be the first step to reduce donor recruiting cost, inventory holding cost, and wastage. For instance, hospitals around the greater Los Angeles area could integrate their blood supply chains to benefit from aggregation. According to the UK example, reducing the number of hospitals holding inventory can achieve a 20% reduction in delivery cost and 30% less wastage. On the supply side, a centralized supply chain would create opportunities to improve forecasting at the hospital and blood group level and would allow consolidating donor records and quality monitoring. Finally, the supply chain could be complemented with a unified mobile app to increase user acquisition and retention and dynamically incentivize registrants based on blood types needed. Donate now!

[1] https://www.redcrossblood.org/donate-blood/how-to-donate/how-blood-donations-help/blood-needs-blood-supply.html#

[2] http://www.toolsgroup.com/wp-content/uploads/2017/01/CILT-Article-201611-NHSBT-Blood-Supply-Chain.pdf

[3] https://nhsbtdbe.blob.core.windows.net/umbraco-assets-corp/1652/blood-2020.pdf

Sports Jerseys and Lifetime Returns Policy

Bobby S. Nyotta and Christopher S. Tang

With the NBA Finals and NHL Finals wrapping up and the FIFA World Cup starting, sports fans are buying jerseys to support their home team, favorite player, and country. At the same time, these jerseys are costly: they can be as much as $200 on fanatics.com -- the largest retailer of jerseys in America.

Figure 1: The cost of US Men's National Team jerseys is nearly $200[1].

This steep price can make fans think twice about purchasing. Since they are so expensive, purchasing becomes an investment in the player, team, or country. If the jersey style never changes (for example, the Minnesota Timberwolves changed their jersey design and logo before the 2017-2018 season – see Figure 2) or player never changes teams, then the investment has long-term value. However, if the logo changes or the player changes teams, then the jersey becomes “obsolete” and loses its appeal, and all of that money spent on the jersey is wasted. Wearing an outdated jersey is not necessarily a fashion faux pas, but most loyal fans want to be up-to-date with the current roster and team. So, what can jerseys sellers do to nudge fans to purchase their jerseys in the presence of obsolescence risks?

Figure 2: The Minnesota Timberwolves changed their jersey design and logo in 2017[2].

Here is an innovative initiative that NBA has just introduced.  During the NBA Finals, we saw a commercial mentioning a joint partnership between fanatics.com, American Express, and the NBA for "Jersey Assurance."[3] This program allows fans to trade in their jersey of a player if the player is traded or the player signs with another team during free agency. Of course, not all changes are covered, such as player retirement or player suspension. The best part for the fan (consumer) is that Jersey Assurance (JA) is free AND shipping on the new jersey is free!

From an operations lens, this retailing policy brings up a few interesting questions:

• With JA, the risk of owning a jersey is reduced, so how much more can the jersey manufacturer charge for jerseys?
• The NBA is automatically including JA on all jerseys, but if they made it an optional (the same way the airlines offer travel insurance like Allianz at checkout), how much should they charge?
• What happens to all of the returned jerseys?
• How does this liberal return policy change the demand for jerseys when a player switches teams? For example, prior to the implementation of JA, say the manufacturer has a demand of 50,000 jerseys of a particular jersey, which comes from two main sources: (1) fans of the team and (2) fans of the specific player. However, after the implementation of JA, there is demand from several sources:
  1. Fans of the new team
  2. Fans of the previous team who want to exchange their jersey for an up-to-date jersey
  3. Fans of the player who owned the jersey from the previous team and choose not to exercise their JA option, so they buy a new jersey on the new team
  4. Fans of the player who owned the jersey from the previous team and choose to exercise their JA option, so they exchange the jersey for a new one
  5. Fans of the player who did not own the jersey from the previous team and want to buy a jersey on the new team

Since there are so many factors that go into the demand of a jersey with JA, predicting the demand seems like it becomes a much more challenging task and depends on:

• Estimating the percentage of buyers who support the team versus the player
• Estimating the percentage of buyers who will exercise the JA option and do the exchange. Considering that $41B in gift cards were not claimed between 2005 and 2011[4], it is quite possible that people simply will forget to use their JA privileges and never do the exchange.

Now, the question is how many jerseys should the manufacturer produce? Should the make 50,000 like they were doing previously? Or less? Or more?

One possible way manufacturers can combat this aforementioned demand uncertainty is to create generic, name-less jerseys for each team and then wait until the last minute, when demand is realized, to print player names and numbers. New advances in technology, such as 3-D printing, make this possible, which is exactly what Nike and HP are doing[5].

A final thought against the participation in JA:

An obsolete jersey has re-sale value because they are never made again. At some point an obsolete jersey can become “vintage” in which case the jersey is fashionable again, but the time for this to happen can be 10 to 15 years and only happens if the player has had a fruitful, successful career. Companies like Mitchell & Ness specialize in manufacturing these vintage or “throwback” jerseys, which can sell for over $350. Fans who hold on to jerseys for nostalgia or in hopes it will become a “collector’s item” probably would not want to participate in the JA program. So the premium that is added to the jersey cost because of JA could possibly prevent this customer class from buying a jersey. This is a good case for making the JA plan an opt-in plan that customers can purchase.

Here are links to other articles that discuss “Jersey Assurance”:

• Forbes: https://www.forbes.com/sites/alikocarter/2018/01/25/obsolete-jerseys-a-fear-no-more-as-american-express-partners-with-fanatics/#5ef1d44c3663
• ESPN: http://www.espn.com/espn/story/_/id/22178100/fanatics-allows-fans-exchange-jersey-event-player-being-traded

 

[1] https://www.fanatics.com/soccer/men-jerseys-authentic
[2] https://www.nba.com/timberwolves/look-history-timberwolves-jerseys
[3] http://store.nba.com/pages/Jersey_Assurance
[4] https://blogs.wsj.com/economics/2011/12/24/number-of-the-week-billions-in-gift-cards-go-unspent
[5] https://news.nike.com/news/nike-hp-3d-printing