Archive for the ‘Operations’ Category

India’s blackout

India's power grid

Last week’s massive blackout in India put the spotlight on one of the country’s open secrets—its infrastructure is antiquated and crumbling. Over 600 million people in India were without power for days—that’s nearly 1 in 10 people on the planet.

“The fundamental cause is a supply-demand problem. Too much demand, not enough supply, and an inefficient and creaky distribution system,” said Lakshman Krishnamurthi, a professor of marketing.

Rolling blackouts are unfortunately common throughout India. Power grids are built with giant circuit breakers that can be thrown to isolate sections where surging demand could drag down the rest of the grid. The problem in India was, those breakers weren’t thrown. Many people suspect corruption caused this blackout—captured regulators and bureaucrats didn’t intervene when they should have, allowing various constituencies to draw too much power. Apparently this happens all the time in India, just not on this scale. But the ailing grid is ultimately to blame because without its underlying problems, such unscrupulous behavior wouldn’t have had as big of an impact.

The massive blackout has underlined concerns about India’s grid and its ability to effectively manage it. The grid’s unreliability has created massive headaches for businesses. “Most companies operate with backup power supply from diesel generators” not just to deal with blackouts, but frequent power shortages, said Sunil Chopra, a professor of managerial economics and decision science. While that means many companies were relatively unaffected by the blackout (save for employees unable to get to work because of the gridlock), it doesn’t mean electricity shortages haven’t taken their toll. Having to invest in expensive infrastructure like generators “often raises the cost of doing business,” Chopra pointed out.

Though Indian companies have long had to contend with electricity shortages, this blackout will undoubtedly pose new challenges. Investors may shy away from the country, fearing the unreliability of its grid. “In the short-term it will definitely be a negative,” Chopra said. “The long-term impact will depend on the response of the government, which currently controls most of the generation capacity.”

But, he added, “If this event serves as a wakeup call, it could be good in the long-term.”

India’s grid may ultimately become a bottleneck for growth. “To achieve sustained growth rates of 8% over the next 10 years, the country’s infrastructure problems have to be addressed,” Krishnamurthi said. “Energy is the prime driver of economic growth.”

What’s driving the supply shortage is multifarious. Transmission and distribution losses in India are over 20 percent, Krishnamurthi said. For reference, losses in the U.S. grid are about 7 percent. India’s estimated losses might be on the conservative side, too. Electricity theft by households and business is not uncommon, he added. Plus, India is heavily reliant on hydroelectric power, and the north has not received much rain this year. Coal-fired plants haven’t been able to make up the difference because of coal production shortages, Chopra and Krishnamurthi both pointed out.

“In the long-term, the solution is to increase supply,” Chopra said. “In the short-term, demand has to be managed with supply being rationed.”

Photo by daviddumas.

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Natalia Echeverri, writing at Polis:

Coca-Cola’s strategy in Kenya (and Africa in general) is contextually effective. It works in developing economies and uses lessons learned in Latin America. Distribution is centered on independently owned shops in cities, villages and remote locations. The soda is most often consumed in the store, so the glass bottle can be returned. The dominantly painted storefront appeals to this on-the-go reality.

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Nurses station

On Monday, the New York Times covered a study that claims electronic medical records may not cut health costs. The paper was written by a collection of doctors and public health experts. Steve Lohr, reporting for the Times:

The study showed, however, that doctors with computerized access to a patient’s previous image results ordered tests on 18 percent of the visits, while those without the tracking technology ordered tests on 12.9 percent of visits. That is a 40 percent higher rate of image testing by doctors using electronic technology instead of paper records.

That’s seemingly bad news for electronic medical records, which have been touted as one way to drive efficiency and cost savings in health care. The New York Times is apparently taking this study quite seriously, going so far as to publish an editorial the day after the article ran.

Still, something about this study didn’t seem right to me, so I asked around. Some professors were willing to give me a bit of background, but not openly, citing research in progress.

First, electronic medical records (EMR) are typically deployed in hospitals and clinic networks that have money to spare. The up-front costs of switching from paper to digital are not insignificant. Second, not all providers have deployed EMR to the same degree. Hospitals and clinics that use EMR can be split into roughly two camps—those still early in the transition and those that have been using EMR for years.

The study covered in the Times did not account for this bifurcation. If it had, it’s most likely that it would have reported a different result. Hospitals and clinics early in their use of EMR have higher costs for the first two years. After that, if the hospital is in a well-networked location with access to talented information technology professionals, costs will likely drop. Many hospitals further along with the transition have seen their costs drop after the initial spike.

Finally, during the time covered by the EMR study, imaging technologies have become more widespread. It’s possible that doctors are ordering more imaging tests because they now have access to more imaging machines, and that this merely coincided with the adoption of EMR.

There’s certain to be more research on this topic, so stay tuned.

Photo by Dave Q.

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Amflora potatoes

BASF announced last week that it was moving its genetically modified plant-science headquarters from Germany to the United States. The chemical firm said widespread resistance to GM crops in Europe prompted the move, one which mirrors a decision the company made two decades ago when it opened a biotech research lab in Boston.

The company said it will relocate 123 jobs from Limburgerhof, Germany, and other European facilities to Raleigh, North Carolina. BASF was the last company still pursuing regulatory approval for GM crops in Europe, according to a Nature News Blog article. Though it won approval for its Amflora potato, it was the first time in a decade that a new GM plant was allowed to be grown in the European Union.

That BASF has elected to shift research and development in both transgenic plants and biotech to the United States should come as no surprise. There are strong sentiments in Germany against both technologies. “The anti-GM movement is in large part an offspring of the broader anti-biotech movement in the 1980s,” said Klaus Weber, an associate professor of management and organizations who has studied BASF and other German chemical and pharma firms.

While the German anti-biotech movement is still skeptical about the safety and benefits of medical biotechnology, it is more strongly opposed to applications in the agricultural sector, Weber said. Medical—or “red”—biotech had “undeniable medical and health benefits,” he noted, which made it harder to contest. Plus, the industry became highly regulated. Agricultural—or “green”—biotech, on the other hand, hasn’t had the benefit of perceived indispensability. Many early GM crops showed only incremental improvements over non-GM versions, and “industrial agriculture as a whole became suspect in the wake of major scandals, such as mad cow disease,” Weber said.

BASF’s pharmaceutical division stumbled when it moved from Germany to the U.S. in the early 1990s, but Weber doesn’t think the same problems will repeat themselves with the GM crop division. In the short term, the move will be expensive and disruptive, but the current global reach of the company’s R&D efforts, coupled with its partnerships with other firms like Monsanto, will insulate it from long-term problems. “I see this move as less problematic for BASF,” Weber said. “It is more of a problem for German research institutes that worked with them.”

Other firms have been closely watching the BASF case, Weber said, especially Bayer CropScience. While Bayer conducts much of its R&D on GM crops outside of Europe, it retains the division’s headquarters there much like BASF had. “As long as it is hard to get approval for outdoor tests and commercial scale permits in the EU, companies won’t invest a lot there,” he said. “The bigger question is whether BASF, Bayer, and others will keep their crop science units or sell them at some point.”

“My impression is also that BASF was acting not only on its own interest with the potato case, but also was trying to set a regulatory precedence for the industry as a whole. A lot of other companies were closely watching this case and there was certainly industry lobbying going on in support of the larger issue.”

That BASF decided to move its GM crop headquarters to the U.S. is a win for the anti-biotech movement in Europe, Weber said, “not just because of BASF, but because of the signal it sends to the entire industry.”

Further reading:

The Fall of German Biotech” on Kellogg Insight

Photo from BASF.

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Steve Jobs introducing the MacBook Air

Steve Jobs’s resignation has dominated technology and business news since it was announced last night, and there has been a lot of speculation about how Apple will navigate the coming years without their charismatic CEO. It’s not an unfair thing to do—Jobs has left his mark on the industry like no other chief executive in recent memory. But he has also left an indelible impression on the company he founded over 30 years ago. It will take a long time for Apple to lose that religion, if ever.

Tim Cook has taken over as CEO after essentially performing that role for the past seven months. In that time—and during two previous stints while Jobs was also out on medical leave—he has proven himself up to the task. Apple owes much of its current profitability to Cook’s operational genius— when he was first hired, he slashed Apple’s enormous inventories and since then has secured supplies of important parts in such high quantities and at such low prices that competitors can’t hope to beat Apple on price.

No one doubts Cook’s abilities as a day-to-day manager. What they fear is that Cook lacks Jobs’s vision. Really, we have no proof of that, and we’ll likely never know. Here’s why: Jonathan Ive, Apple’s senior vice president of industrial design and a large part of the genius behind the company’s most important products, including the iMac, iPod, iPhone, and iPad.

Ive was lured to Apple shortly after Jobs returned as interim CEO in 1997 and has followed Jobs lead ever since. Ive and Jobs have worked closely on product design, so closely that I would argue Ive can conceptualize a product as well as Jobs. Jobs has been tutoring Ive in the skill of product prognostication for years.

The design process of the original iMac G4—the “desk lamp” design—is a great example of Jobs’s tutelage. Ive had proposed a design not unlike the current iMac, with the computing guts hanging behind a flat panel LCD. At the time, LCDs were relatively small, and in my estimation would not have elegantly hidden all the necessary drives and circuit boards. Jobs probably saw this limitation, too. After Ive pitched the design, Jobs invited the designer over to his house for a more informal chat. The design wasn’t bad, Jobs said, but it wasn’t great. As the two were walking through Jobs garden discussing the design, they had this exchange, recounted in a Time Magazine article about the new computer:

“Each element has to be true to itself,” Jobs told Ive. “Why have a flat display if you’re going to glom all this stuff on its back? Why stand a computer on its side when it really wants to be horizontal and on the ground? Let each element be what it is, be true to itself.” Instead of looking like the old iMac, the thing should look more like the flowers in the garden. Jobs said, “It should look like a sunflower.”

Lessons like these are not easily learned but neither are they easily forgotten. Ive has not only proven himself a creative genius, but also an astute student.

Ive’s designs are successful not only for their artistic appeal, but also for the way they they take manufacturing and engineering into account. Witness the unibody MacBook Pro. Without the design team understanding the engineering opportunities and challenges of carving a laptop from a single piece of aluminum, the design would have flopped. Because of that attention to detail, their designs are both easy and profitable to manufacture. Anyone can design a stunning design, but not everyone can translate it into a shipping product.

Jonathan Ive is Apple’s right brain to Tim Cook’s left. That’s not to say Apple will adopt RIM’s co-CEO approach (nor should they—that’s turned out to be a complete disaster). Rather, the two seem to understand each other in ways many other designers, engineers, and managers do not. That synergy will prove invaluable in Jobs’s absence. Plus, they’re steeped in the Jobs way. Cook and Ive understand enough of what it takes to make an Apple product that I can see little reason for the company to stumble.

Photo by dotmotion.

Related posts:

Steve Jobs’ medical leave raises the issue of CEO succession

What will Apple do with its billions?

Apple: The world’s largest startup?

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Southwest 737 and AirTrain 717

Southwest Airlines’ now completed purchase of AirTran Airways represents, in many ways, a dramatic shift for the two airlines. Southwest has been the darling of the industry, and the buyout will change the the company operates. Its point-to-point model has been praised as an alternative to traditional hub-and-spoke operations, and its use of a single type of aircraft has been adopted by other airlines hoping to keep costs down. In purchasing AirTran, the prominence of those two fundamentals may wane.

But there are two aspects of the buyout that tilt the scales in Southwest’s favor. The real prize of the deal is AirTran’s 31 gates at Atlanta’s Hartsfield-Jackson Airport, the busiest airport in the world. “Southwest has been trying to get into Atlanta and AirTran is their ticket,” said Marty Lariviere, a professor of managerial economics and decision sciences.

Hartsfield-Jackson is AirTran’s main hub, which raises a question: Why is Southwest embracing an airline that uses the “old” hub-and-spoke model. The answer may be that Southwest has been heading in that direction anyway. A majority of Southwest passengers at Chicago’s Midway Airport change planes, Lariviere pointed out. “It looks a lot like a regular hub.”

On the surface, adding AirTran’s 717s looks like the least appealing part of the deal. By exclusively flying 737s, Southwest has been able to streamline maintenance and scheduling, both of which help keep costs down. But even this part of the purchase has its advantages. As Southwest adds more destinations, there will inevitably be some routes that fail consistently fill a 737 to capacity. Southwest’s planes typically seat 137 passengers, while AirTran’s 717s will seat 117 when they are reconfigured to Southwest’s one-class seating. Airlines make no money on empty seats, and on routes with razor-thin margins, every little bit counts.

Photo by Ben Wang and airliners.net.

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Southwest Airlines 737-300

The five foot hole that abruptly interrupted beverage service onboard Southwest flight 812 did more than put a dent in the airline’s safety record—it also threw the company into a frenzy over how to handle its scheduled flights while nearly one third of their fleet was grounded. The Federal Aviation Administration ordered 81 of Southwest’s 737-300s grounded until each had undergone an extensive inspection, or about 15 percent of it’s fleet. It’s an operational nightmare.

Southwest has famously flown the 737 as its exclusive aircraft for at least the last 20 years. It would seem that such reliance on one type of aircraft would make Southwest more vulnerable than other carriers to problems like the one that has befallen the 737-300. But the reality is the airline’s reliance on the 737 may be an asset in these circumstances.

“Southwest does have some advantages over other firms,” said Martin Lariviere, a professor of managerial economics and decision sciences. “Because its fleet is uniform and they don’t give out assigned seats, they have more flexibility in managing cancellations.” For example, say a flight between Chicago Midway and Kansas City was scheduled to use one of the grounded 737-300s. If that flight had more passengers than another one in the system, Southwest could easily reroute the plane from the other, emptier flight. Other airlines with mixed fleets wouldn’t have the same option. “They will not fly an oversized 777 on a route that a 737 serves, and even if they are willing to do that, the 737 pilots may not be approved for flying bigger jets,” he said.

Airlines have a large incentive to operate a limited fleet of aircraft. Pilots need to be certified on each aircraft they are to fly, so the fewer types, the more flexibility the company has in scheduling. Maintenance costs are also reduced. Perhaps most importantly, airlines purchase aircraft that suit the routes they fly. Southwest is a short haul carrier, which is exactly the market for which Boeing created the 737. The airline would have no reason to purchase a wide-body 777 which is geared toward longer routes.

The 737-300 makes up just over 30 percent of Southwest’s fleet. By comparison, United Airlines’ fleet is dominated by the Airbus A320 and its closely related cousin, the A319. Combined, they comprise just over 40 percent of their total fleet. American Airlines is in a similar situation where almost 40 percent of its fleet are MD-82s and MD-83s, two variants of the same basic aircraft. “Clearly if there is ever any systematic problems with that model, AA is up a creek,” Lariviere said.

Another part of the problem is one that all airlines share—nearly every flight is full and every plane in service. “Recovering from any canceled flight—let alone the 300 or so that Southwest canceled over the weekend—is harder than it has been in past years,” he said.

Photo by kmanohar.

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