How the US Can Compete and Win in Global Supply Chains

I was delighted to read Thomas L. Friedman's Op-Ed column Made in the World in yesterday's New York Times that quoted Yossi Sheffi of MIT.

Sheffi was my host at MIT when I held an NSF Visiting Professorship for Women.

Yossi Sheffi is the author of Urban Transportation Networks in which many of the papers of my dissertation advisor, Stella Dafermos, are cited, and one of my papers as well, although it was published just shortly after I received my PhD from Brown. He has graciously made this book available for download.

Of course, he is also the author of The Resilient Enterprise, which focuses on supply chains and how to minimize and respond to disruptions. I refer to his books in various courses that I teach at the Isenberg School from my Transportation & Logistics course to the new Humanitarian Logistics and Healthcare course that I am presently teaching.

According to Friedman's column: But America can thrive in this world, explained Yossi Sheffi, the M.I.T. logistics expert, if it empowers “as many of our workers as possible to participate” in different links of these global supply chains — either imagining products, designing products, marketing products, orchestrating the supply chain for products, manufacturing high-end products and retailing products. If we get our share, we’ll do fine.

And here’s the good news: We have a huge natural advantage to compete in this kind of world, if we just get our act together.

One of my primary areas of research is supply chain networks, and I fully concur with Friedman's ending paragraph:

If only — if only — we could come together on a national strategy to enhance and expand all of our natural advantages: more immigration, most post-secondary education, better infrastructure, more government research, smart incentives for spurring millions of start-ups — and a long-term plan to really fix our long-term debt problems — nobody could touch us. We’re that close.

Our approach to supply chains focuses on the network system as described in my Supply Chain Network Economics: Dynamics of Prices, Flows, and Profits book.

Information on some of our latest research on supply chains, from medical nuclear ones to pharmaceutical and even fashion ones, can be accessed on the Virtual Center for Supernetworks website.

The Meet the Executive Lecture with Photos

Today we were truly informed by Mr. Dan Viederman, the CEO of Verite', as to corporate social responsibility and global supply chains especially in the context of labor practices.

The problem is that many consumers are completely unaware as to some of the business practices in the countries from which their products have originated.

His talk, "Sweatshops and Slavery in the 21st Century: What Business Can Do," focused on labor practices around the world, which people in the US (as well as other consumers) may not be aware of.

He spoke of what his organization, Verite', is doing to promote a civil society.

He emphasized its work in social auditing, training, and how multinatinal corporations can make decisions that empower consumers.

He noted how people may be working and not be getting paid, be working in horrific conditions in certain countries, and noted that, in the US, it is not illegal for children to work on farms.

He noted that bad labor practices can be improved through both formal and informal regulation.

Companies that were embarrassed when news about how their products were produced changed their processes (think Nike as an example). He noted that Gap had a tremendous leader and that corporate social responsibility was big in San Francisco so the company learned.

The pressure to reduce the price of products is resulting in corners being cut and, oftentimes, at the expense of the workers.

Procurement and purchasing are essential to the supply chain and socially responsible practices in this dimension can make a huge difference. If there are multiple tiers of suppliers and even subcontractors how can the contracting firm know exactly under what conditions the product is being produced by the various workers in the factories?

He emphasized that one needs to talk to the workers and some of the major problems lie in the conditions that migrant laborers are exposed to. They may have to pay a lot of money to obtain jobs in other countries and then may not be paid for weeks at a time or be consistently underpaid. The laborers who have a lot of debt are especially in dire straits.

Verite engages in supply chain interventions and provides a toolkit for companies.

He talked about outsourcing risk (and we have written several papers on this topic but not specifically from the CSR perspective).

I very much appreciated hearing Mr. Viederman speak about the importance of having a systems perspective and to understand the various linkages in a supply chain (this reminded me of the network models that we have been working on).

The UMass Amherst INFORMS Student Chapter did the hosting today and did a terrific job.

The magna cum laude award that the chapter had recently received from INFORMS was displayed along with various treats at a reception before.

The audience was terrific and had really good questions and it was great to see undergrads and grad students in attendance as well as faculty and even staff.

Above are some photos from Mr. Viederman's wonderful presentation today.

The Vulnerability and Complexity of Our Global Supply Chains -- What the Disasters are Revealing

Last week, while I was in Canada to give a seminar on perishable supply chains in health care at McGill University, I picked up a copy of The Globe and Mail, which is the national Canadian newspaper.

I love Canada, and not only because I was born there, but also because of its people, its landscape, history, excellent schools, and health care. Since April I have been invited to give three talks there (two at McGill University and one at the University of Waterloo) and whenever I am back I always feel very welcome and at peace there.

I was very impressed by the coverage of the disruptions to global supply chains due to the horrific floods in Thailand by The Globe and Mail, a week ahead of coverage in The New York Times, I might add.

The article, Why the mad migration of parts to your iPhone matters, was especially interesting and highlighted that it may take a crisis (and we certainly have had our share of disasters this past year) for the complexity of global supply chains to be noted.

The Thai floods are now having major disruptive effects. According to the article, Honda Motor stopped production in Malaysia due to a lack of parts from Thailand. The computer industry is now bracing for a shortage of hard-disk drives after Thai factories were flooded.

Indeed, it is expected that the Thai floods may disrupt global electronic supply chains for several quarters.

The number of deaths from the floods in Thailand has now surpassed 500 so the toll on the loss of lives and human suffering is also huge.

I managed to reach one of our former students from Thailand, who, just this past August, successfully defended his PhD in Management Science at the Isenberg School of Management and was awarded the doctorate officially in September from UMass Amherst.

Part of his response, sent last week:

Dear Prof. Nagurney,

Thank you very much for your concerns.

The flood situation in Thailand is indeed very bad. Some say it is the worst ever in the past 50 years of Thai history.

As I am sure you have seen the news. Lots of agricultural areas have been affected and will be under water for at least 3 weeks, same as half of industrial area of Thailand. In brief, it affects more than 3 million people, they either have to evacuate or else live in an upstair-level of their homes, surrounded by water and disconnected from the outside world. There are now lots of logistic and supply-chain problems, e.g. to get food and other consumer products to people who insist to live there underwater in their homes, or to move people from affected villages to evacuation zones. Worse than that, in my opinion, the government has no experience in dealing with this kind of situation ... Now the water is at the doors of BKK (Bangkok), some have entered! So we now totally freak out and are afraid that BKK will be under water soon. The government even declared a special public holiday last week to clear people out of BKK. Most schools delayed the start of the new semester to 11/15 or even later than that (normally schools start on 11/01). Now BKK is totally paralyzed, people do nothing except wait for the water to come.

In my case, I've already fled BKK to my family hometown (which is still safe from the water). So my family and I are now safe and sound. However, my home in the suburb of BKK is now under water (not totally submerged, but half of it). Fortunately we have moved important stuff out before the water reached.

I think it will take a month or more before everything turns better, but truly hope it is sooner than that. Again, thanks for your kind concerns. I will update you as soon as there is any major news about this catastrophe.

Photos from the Integrated Risk Management in Operations and Global Supply Chains Conference in Montreal

Above are some photos taken at the INTRIM (Integrated Risk Management in Operations and Global Supply Chains) Conference that took place at lovely McGill University in Montreal, Canada recently.

I had the pleasure of speaking on our research on Medical Nuclear Supply Chain Design at this conference.

Many thanks to the organizers for putting together such an interesting set of presentations, all delivered in a single track, along with delicious coffee breaks, lunches, etc.

I especially enjoyed the originality of the problems that are being tackled and the challenges faced by industries in capturing system-wide risk.

As for photos of Montreal taken while I was there, click here.

Looking Forward to the Integrated Risk Management Conference in Operations and Global Supply Chains

I am very much looking forward to the Integrated Risk Management Conference in Operations and Global Supply Chains that begins this weekend at McGill University in Montreal, Canada.

This conference is being organized by Professors Mehmet Gumus and Saibal Ray and is co-hosted by the Desautels Faculty of Management, McGill University, and the Olin School of Business, Washington University in St. Louis.

According to the conference announcement, this two-day conference features a single track of fourteen talks and six poster presentations that combines technical presentations, industry practices, and discussions on relevant challenges and approaches in the topic area. Detailed information about the conference can be found here with the conference program located here. Those who would like to attend the conference can register before July 30, 2011 (at no registration fee since it is covered by the conference sponsors).

I will be speaking on Medical Nuclear Supply Chain Design: A Tractable Network Model and Computational Approach, co-authored with Professor Ladimer S. Nagurney (my husband, who has a PhD in physics). Our presentation is based on the paper that we recently wrote. This health care topic was also the subject of our published Op-Ed piece.

Looking Forward to the Integrated Risk Management in Operations and Global Supply Chains Conference

Information about the Integrated Risk Management in Operations and Global Supply Chains (INTRIM) Conference that will take place at McGill University in Montreal, Canada is now online.

This conference has no parallel sessions so the audience hears all of the talks together, which is a plus, and there is ample time for discussion.

I am very much looking forward to this focused conference at which I will be presenting our latest paper, Medical Nuclear Supply Chain Design: A Tractable Network Model and Computational Approach, co-authored with the "other" Professor Nagurney.

Recently, we also co-authored an Op-Ed piece, Viewpoint: Passage of American Medical Isotope Production Act of 2011 will help ensure U.S. nuclear medicine supply chain, which focused on the vulnerability of our medical nuclear supply chains.

Another Female Full Professor!

Attaining the rank of Full Professor in academia is quite the achievement and, typically, to reach this rank, one, after receiving a PhD, becomes an Assistant Professor, then gets promoted with tenure (if all goes well) to Associate Professor, and, after a few more years (and, hopefully, no politics to interfere), attains the rank of Full Professor.

There are also chaired/named professorships, which are honorific-type of appointments that usually come with expanded resources and are, most often, given to Full Professors that merit special recognition.

As a named professor, who has graduated 15 PhD students, I follow the careers of my former students closely and am thrilled by their professional successes.

One of my former doctoral students, Tina Wakolbinger, who received her PhD from UMass Amherst in 2007, with a concentration in Management Science, and who was until recently an Assistant Professor at the Fogelman College of Economics and Business at the University of Memphis, has, as of May 15, assumed her new faculty appointment.

Dr. Wakolbinger is now a Full Professor of Supply Chain Services and Networks at the Institute for Transport and Logistics Management at the Vienna University of Economics and Business in Vienna, Austria! She began teaching a course on Global Supply Chain Management there in English this past week.

Tina, along with Professor Dietrich Braess, and me, translated the famous Braess (1968) article, which included the paradox named after him, from German to English. Together, we also wrote several research articles that have appeared in such journals as Naval Research Logistics and Computational Economics. Her doctoral dissertation title was: A Dynamic Theory for the Integration of Social and Economic Networks with Application to Supply Chain and Financial Networks.

To achieve the rank of Full Professor in only a few years after attaining a PhD is quite the achievement and to get such a position in one of the most glorious cities in the world and in the largest public business university in Europe deserves accolades!

Dr. Wakolbinger actually received the offer last summer shortly after we were at the Computational Management Science conference in Vienna.

For more information on Dr. Wakolbinger's dissertation, and that of my other students, click here. The official announcement of her Professorship is here.

Congratulations to another female Full Professor!

Would Proper Risk Assessment and Management Have Minimized the Damage to Japan?

The New York Times in a provocative article is raising the question of whether attention to risk assessment for nuclear power plants in Japan might have reduced the scale of the damage from the triple earthquake-tsunami-nuclear disaster. The article even highlights that Japanese engineers focused on deterministic as opposed to probabilistic approaches in determining the safety of the associated engineering structures. According to the article, over the decades, preparedness against tsunamis never became a priority for Japan’s power companies or nuclear regulators. They were perhaps lulled, experts said, by the fact that no tsunami (itself a Japanese word) had struck a nuclear plant until two weeks ago. Even though tsunami simulations offered new ways to assess the risks of tsunamis, plant operators made few changes at their aging facilities, and nuclear regulators did not press them.

Also, engineers took a similar approach with earthquakes. According to Masaru Kobayashi, an expert on quake resistance at the Nuclear and Industrial Safety Agency, Japan’s nuclear regulator, "When it came to designing the Fukushima plant, official records dating from 1600 showed that the strongest earthquakes off the coast of present-day Fukushima Prefecture had registered between magnitude 7.0 and 8.0." We all know that the earthquake that struck Japan on March 11, 2011, has now been upgraded from an 8.9 earthquake to a 9.0 one.

The Times article stated: For whatever reasons — whether cultural, historical or simply financial — Japanese engineers working on nuclear plants continued to predict what they believed were maximum earthquakes based on records. Those methods, however, did not take into account serious uncertainties such as faults that had not been discovered or earthquakes that were gigantic but rare, said Greg Hardy, a US-based structural engineer.

Indeed, in the West, risk management and assessment has become a focus not only of engineering studies and analyses but also a critical component of business decision-making. Drawn from techniques in finance, probability, and, I would add, optimization and decision-making under uncertainty, risk management has been integrated with design and analysis with a notable body of literature now in existence especially in the area of global supply chains (clearly also impacted by the Japanese set of disasters).

As a faculty member in the Department of Finance and Operations Management at the Isenberg School at UMass Amherst, I have been researching, along with my students and associated colleagues, risk management in different network systems from transportation and logistic ones to economic and financial ones. Our research on the integration of risk management and decision-making under uncertainty with complex networks began over half a decade ago and has yielded publications such as:

Supply Chain Networks, Electronic Commerce, and Supply Side and Demand Side Risk
Anna Nagurney, Jose Cruz, June Dong, and Ding Zhang, European Journal of Operational Research 26: (2005) pp 120-142.

Multitiered Supply Chain Networks: Multicriteria Decision–Making under Uncertainty
June Dong, Ding Zhang, Hong Yan, and Anna Nagurney, Annals of Operations Research 135: (2005) pp 155-178.

Global Supply Chain Network Dynamics with Multicriteria Decision-Making Under Risk and Uncertainty
Anna Nagurney and Dmytro Matsypura, Transportation Research E 41: (2005) pp 585-612.

Financial Networks with Intermediation: Risk Management with Variable Weights
Anna Nagurney and Ke Ke, European Journal of Operational Research 172: (2006) pp 40-63.

Modeling of Supply Chain Risk Under Disruptions with Performance Measurement and Robustness Analysis
Qiang Qiang, Anna Nagurney, and June Dong, in Managing Supply Chain Risk and Vulnerability: Tools and Methods for Supply Chain Decision Makers, T. Wu and J. Blackhurst, Editors, Springer, Berlin, Germany (2009) pp 91-111.

Supply Chain Outsourcing Under Exchange Rate Risk and Competition
Zugang Liu and Anna Nagurney, Omega 39: (2011) pp 539-549.

Risk Reduction and Cost Synergy in Mergers and Acquisitions via Supply Chain Network Integration
Zugang Liu and Anna Nagurney, to appear in the Journal of Financial Decision Making.

Supply Chain Network Design for Critical Needs with Outsourcing
Anna Nagurney, Min Yu, and Qiang Qiang, Papers in Regional Science 90: (2011) pp 123-142.

Only with the right methodological and analytical tools can we assess risk and prepare appropriately for emergencies and disasters!

The Robustness of Global Supply Chains and the Disasters in Japan

The New York Times has some very timely coverage of the immediate and more speculative impact on global supply chains post the earthquake-tsunami-nuclear set of disasters in Japan. The article, "Stress Test for the Global Supply Chain," begins with a very vivid account of an H.P. VP of Operations, Tony Prophet, being awaken at 3:30AM and then proceeding to triage, as in an emergency room, the potential impacts of this triple disaster on H.P.'s global supply chain. Mr. Prophet oversees all hardware purchasing for H.P.’s $65-billion-a-year global supply chain, which feeds its huge manufacturing engine. Its factories produce two personal computers a second, two printers a second and one data-center computer every 15 seconds.

Japan, as the world's third largest economy, is a key supplier of automobile components (as well as automobiles), high tech products, including integrated chips, and even raw materials such as resins that are used in integrated circuit packaging. Factories that were affected by the triple disaster are shut down in Japan creating cascading failures across the globe with GM even closing one of its manufacturing plants in Louisiana. Not only has manufacturing been disrupted but with so many of the roads impassable, not to mention ports being damaged, the transportation of goods has come to a standstill in parts of Japan. Areas where there is radiation danger with radii of 20 miles to as far as 50 miles have taken on a moon landscape of inactivity since those who have not evacuated have been told to stay indoors.

In 2009, we contributed the chapter, Modeling of Supply Chain Risk Under Disruptions with Performance Measurement and Robustness Analysis, co-authored with Professors Qiang Qiang and June Dong, to the book, Managing Supply Chain Risk and Vulnerability: Tools and Methods for Supply Chain Decision Makers, T. Wu and J. Blackhurst, Editors, Springer, Berlin, Germany (2009) pp 91-111. This study shows how to assess, a priori, a supply chain's vulnerability from a system and robustness perspective.The model formulation captures supply-side risk as well as demand-side risk, along with uncertainty in transportation and other costs. The model also incorporates the individual attitudes towards disruption risks among the manufacturers and the retailers, with the demands for the product associated with the retailers being random. We also proposed a weighted supply chain performance and robustness measure based on our recently derived network performance / efficiency measure and provide supply chain examples along with the robustness analyses. This work extends previous supply chain research by capturing supply-side disruption risks, transportation and other cost risks, and demand-side uncertainty within an integrated modeling and robustness analysis framework.

Of course, it is not only complex corporate supply chains that are now being impacted but humanitarian ones have also been deeply affected since the radiation from the Fukushima nuclear power plant has limited the arrival of necessary supplies to those in need who have not been able to evacuate. Japan has a large elderly population and their suffering is horrific. Humanitarian supply chains are different from corporate ones, since the underlying objectives in managing each of them are clearly distinct. One cannot engage in profit-maximization in the case of humanitarian operations and time is often of the essence. Hence, to assess the performance of humanitarian supply chains, Professor Qiang and I have constructed, A Bi-Criteria Measure to Assess Supply Chain Network Performance for Critical Needs Under Capacity and Demand Disruptions.

As researchers and scholars, we hope that we can assist, in a small but concrete way, through our work.

Meet the Executive Event a Big Success -- What a Day!

Today, we hosted Mr. Marc Schneider, the Group President of Dress Furnishings at Phillips Van Heusen (PVH), as part of our "Meet the Executive" initiative. The announcement even made the UMass Amherst homepage.

Mr. Schneider, who is an alum of our School of Management, was simply fantastic.

Some tips from Mr. Schneider's lecture and a fabulous Q&A that followed are below:

You should go for a career and not for a "job." He spoke about how he began his career at Macy's and benefited from its outstanding training program.

What creates success? -- preparation, clarity of objectives, and putting the work in! Do not be outworked!

Those who succeed aren't necessarily smarter -- whatever profession you select, you must be good at it. The successful ones are the ones who have worked the hardest. Make sure that you do your homework.

In business, you must know finance, marketing, logistics, and organizational behavior.

You need a toolbox of capabilities. I create value, he said -- I set the strategy and create the roadmap. I set the structure and populate it with great people. I give them the space to succeed and encourage them to execute with distinction.

One needs to focus on the end results and to build a good team and to collaborate.

I want my employees to be charged up and to love coming to work. Employees must be engaged. (Now, wouldn't the world be a better place if all bosses were like this?!)

Mr. Schneider also emphasized the importance of mentoring and looking at the longer view.

He regaled us with his travels as part of his work and he always combines work and pleasure when he travels.

He was asked about the greatest obstacles that he has faced, about the relative importance of face time vs. electronic communication (he is on 24/7 and loves it that way), and about whether he is always learning (indeed, he is, and sometimes will go to the library for a couple of hours to just reflect and think).

And, yes, he was even at the Super Bowl game last weekend in Dallas (PVH works with the NFL) and was also there at various festivities since his company had corporate seats. He highlighted how football players have to work really hard to make it to the NFL and those who make it to the Hall of Fame are those who have worked the hardest.

His near-term travels will take him to LA, where he regularly checks out a manufacturing plant, to Reno, to Milan, and then to China. He was in Istanbul last summer.

It was fascinating to hear him speak on the global supply chain of his fashion products and to hear about the role of information technology (he even reworked this aspect of the business). His decisions as to where to outsource and the associated risk in the world that we live in today he analyzes very thoroughly because they will affect many. He even mentioned how the events in Egypt are affecting the delivery of some of his company's products! And we all know what happened in Egypt today!

What came through is his energy, his love of his career, his curiosity about the world around him, and his willingness to advise and mentor our students.

The lunch at the University Club at UMass Amherst was not only delicious but the conversations continued and were so warm and entertaining.

Thank you, Mr. Marc Schneider, for a visit we will all remember and, think, he could have just stayed in Manhattan with this being Fashion Week!

Thank you also for noting the great education that you received in our school -- and he is now responsible for a business valued at an amount with a 1 followed by a lot of zeros!

You can find more photos from this and our UMass Amherst INFORMS Student Chapter activities on the chapter homepage, which also has links to Facebook and Twitter.

Outsourcing in Supply Chains Under Exchange Rate Risk and Competition

Offshore outsourcing refers to the practice of procuring goods or services from outside foreign suppliers rather than producing them in-house. Since outsourcing manufacturing to lower-wage countries generally reduces production costs it has been growing rapidly in the past decade. From 2000 to 2007, 70 percent of U.S. non-oil import growth was driven by imports from developing countries with imports from China alone accounting for 39 percent of the growth.

However, although offshore outsourcing can provide significant cost reduction opportunities, it also exposes supply chain firms to various risks including: foreign exchange risk, production disruption risk, quality risk, supplier default risk, etc.

Among these risks, foreign exchange risk is consistently considered to be on the list of top concerns of supply chain executives! A study by The Economist, which surveyed 500 global company executives with responsibility for risk management, showed that, in 2009, exchange rate uncertainty was ranked as the second most important risk factor next to demand uncertainty due to the economic recession. In addition, the executives ranked foreign exchange risk as their number one concern for the subsequent twelve months. In 2010, the high volatility of the euro and possible appreciation of the Chinese yuan have posed significant risks to many companies involved in offshore outsourcing and global trades.

In a recent study, completed with Professor Zugang Liu, we quantified the impact of foreign exchange rate uncertainty and competition intensity on supply chain firms who are involved in
offshore outsourcing activities. In particular, the computer-based, analytical model that we developed considers firms' decision-making regarding pricing, material procurement, offshore-outsourcing, transportation, and in-house production under competition and foreign exchange rate uncertainty. Our model allows firms to have different attitudes toward risk. Through a series of simulation examples, we were able to answer imortant questions regarding supply chain firms' pricing and outsourcing decisions, and the associated profits and risks.

The simulation results indicate that, in general, the risk-averse firm has lower profitability and lower risk than the risk-neutral firm. When the competition intensity increases, the exchange rate risks of both risk-neutral and risk-averse firms will increase, which is consistent with recent empirical findings; the profit of the risk-averse firm will always decrease; and the profits of the risk-neutral firm will decrease if exchange rate uncertainty is relatively low and will increase if exchange rate uncertainty is high.

On the other hand, when exchange rate volatility increases, the average profit of the risk-neutral firm will first increase and then become stable while the profits of risk-averse firms will always decrease. As exchange rate variability increases, the risk of the risk-neutral firm will always increase, and the risk of the risk-averse firm will increase when the firm increase prices to compensate the risks, and will decrease if the firm switches from outsourcing to in-house production.

Moreover, as the exchange rate variability becomes higher the risk-averse firm will reduce its outsourcing activities while the risk-neutral firm may increase its outsourcing activities. These results explain the phenomenon regarding how exchange rate uncertainty affects imports of developed countries.

The results in our study provide timely managerial insights for supply chain decision-makers involved in offshore outsourcing and in this highly competitive economic climate:

1. Supply chain managers should first evaluate the risk tolerance level of the firm. If the firm is more concerned about risk, it should try to differentiate its products from that of its competitors since intense competition will both reduce profitability and increase the risk.

2. They should also maintain certain in-house production capacity for operational hedging purposes when the exchange rate uncertainty is high.

3. For the firms that are not sensitive to risk, high exchange rate uncertainty may provide an opportunity for them to get an edge on the competition with more risk-averse firms. For example, when the exchange rate variability is relatively high they should expand their outsourcing operations in order to gain more market share from more risk-sensitive competitors which may help them increase average profits. However, the firms that exploit these opportunities should understand that such strategies can also cause significant risk and loss.

More background, information, and data, along with the model and computational procedure, which was utilized for the simulation examples, can be found in our paper, "Supply Chain Outsourcing Under Exchange Rate Risk and Competition," by Zugang Liu and Anna Nagurney.

iPhone 4 Supply Chain, Operational Efficiency, and China

Do you know the value of the parts in your iPhone and what it took to put them all together?

The way to calculate the various costs of the components plus the labor that is needed to manufacturer and assemble them so that consumers can acquire the latest hot product from Apple is to deconstruct the iPhone supply chain.

At a cost of about $600, the iPhone 4, can be deconstructed by tracking its components from the dozen integrated chips and flash memory to the casings to the embedded GPS system. The hardware we can all see and these physical components contribute just under $200 to the price of the iPhone 4.

According to an article in The New York Times, the smallest part of Apple’s costs are those in manufacturing and assembly, which takes place in China, right now in Shenzhen. The Chinese assembly-line workers put together the microchips, which come from Germany and Korea, a touch-screen module from Taiwan, even American-made chips that pull in Wi-Fi or cellphone signals, and more than 100 other components! This is truly a global supply chain with the greatest value to the product coming at the front-end and the back-end. In the iPhone 4, more than a dozen integrated circuit chips account for about two-thirds of the cost of producing a single device, according to iSuppli.

However, soaring labor costs caused by worker shortages and unrest, a strengthening Chinese currency that makes exports more expensive, and other issues such as inflation and rising housing costs are all threatening to sharply increase the cost of making devices such as notebook computers, digital cameras and smartphones.

Desperate factory owners in China are already shifting production away from this country’s dominant electronics manufacturing center in Shenzhen toward lower-cost regions, even in China’s mountainous interior.

The world of contract manufacturers is invisible to consumers. According to The New York Times, it is a $250 billion industry, with only a few companies like Foxconn (which has been much in the news lately because of the worker strikes), Flextronics, and Jabil Circuit manufacturing and assembling for all the global electronics brands.

These companies compete on price to earn small profit margins, analysts say. As we who work and conduct research in operations and supply chains know, such firms try to benefit from even minute operational changes to attain competitive advantage. For example, the Chinese companies have very low profit margins and increasingly the Chinese are not favoring low-end assembly work. At the same time, Foxconn is spending heavily on manufacturing many of the parts, molds and metals that are used in computers and handsets, even trying to find larger and cheaper sources of raw material and locating plants closer to mines with sources of necessary raw materials.

So when you look at your smartphone, think about what went into your latest hightech gadget and favorite product, from the knowledge resources that helped to create its design, from the natural resources that enabled the construction of its components to the human resources that put the components together to the transportation services that delivered it to the stores.

And remember, as you hold the product in your hands, which was made possible by the complex global supply chain that enabled its design, its manufacture, assembly, and distribution, the long journey that the product took to you.

Dr. Helander on Food Safety, Social Networks, and IBM to Receive National Medal of Technology and Innovation

Yesterday, Dr. Mary Helander of IBM, spoke in our Speaker Series. Since she arrived the evening before and overnighted at the Black Walnut Inn in Amherst, we had a chance to host a reception for her in the Supernetworks Lab at the Isenberg School prior to her presentation on food safety in a global supply chain. The audience for her presentation was standing room only since who does not care about food and staying healthy?! I was so pleased that even several of my undergraduate students in my transportation & logistics class showed up for her talk.

We learned about the initiatives that she is involved in at IBM and such critical issues as visibility and traceability in food supply chains. We also learned about the low margins in terms of returns in food supply chains and what kinds of investments would be needed to ensure a high degree of safety in food supply chains. She discussed concepts of risk and asked whether outbreaks of food adulteration are (or are not) rare events. She also noted how (powerful) companies such as Walmart can raise the stakes for suppliers to provide safe ingredients and products (a member of the audience then added, Walmart is NOT going to be the next FDA). In addition, she spoke on how consumer product companies are rebranding themselves as nutrition companies and how not only analytics are essential in quality control, traceability, and visibility but also food science knowledge. Even RFID technology was mentioned and issues of data analysis and information sharing plus noncompliance brought up.

I was especially intrigued by her statement that perhaps economics could help to identify potential food safety crises (such as the melamine crises, which actually cost, after the fact, millions of dollars) due to different demands for certain supplies. The most valuable asset of a company is its reputation -- something, which it cannot afford to lose!

Dr. Helander even interwove social networks and their importance in the context of supply chains and, speaking of social networks, her first paper based on her doctoral dissertation, supervised by Professor Rajan Batta at the University of Buffalo, appeared in a book edited by Professor Ed Kaplan of Yale; Professor Batta's advisor at MIT had been Professor Dick Larson, and the Head of Dr. Helander's Mathematical Sciences Division at IBM is Dr. Brenda Dietrich. Drs. Larson, Kaplan, and Dietrich had all spoken in our Speaker Series! We had also hosted Dr. Grace Lin and Dr. Robin Lougee-Heimer of IBM in our Speaker Series and their talks were also outstanding.

Dr. Helander gave the kind of talk that will stimulate discussions for a long time to come!

And, as for the "icing on the cake," and we very much enjoyed the lunch and dessert at the University Club after Helander's talk, President Obama yesterday announced that IBM is the recipient of the National Medal of Technology and Innovation. You can read the press release here. There was clear serendipity in our scheduling of Dr. Helander's presentation on the same day as the announcement of this truly prestigious award for IBM!

We thank Dr. Helander for the time that she took to come and speak at the Isenberg School of Management at UMass Amherst. It was also the perfect first lecture for the Fall 2009 Series since the Department of Resource Economics has now joined the Isenberg School of Management and the Chair of the Department, Professor Julie Caswell, could even join us for lunch (and then had to host another speaker, who was giving a lecture on dynamic pollution taxes).

Operations Research is Fascinating -- Dr. Helander of IBM on Food Safety in a Global Supply Chain and More

Operations Research is a Fascinating Subject with topics that capture one's attention. This is one theme that we try to get across (and we believe that we are succeeding) through our Speaker Series in Operations Research / Management Science.

Our Fall 2009 lineup begins tomorrow with the presentation of Dr. Mary Helander of IBM who will speak on Food Safety in a Global Supply Chain. The announcement of her presentation even made the UMass Amherst homepage 4 days before her talk, which is testament to the importance of her topic and interest surrounding it! Tomorrow, Friday, September 18, Dr. Helander will be giving her talk at the Isenberg School of Management at 11AM in Room 128. The UMass Amherst Student Chapter of INFORMS is delighted to be hosting her talk and visit. The talk is open to the public.

There is palpable excitement around our campus about our speakers and their topics this Fall. We begin our 2009 Fall Series with Dr. Helander's work on food safety and supply chains and our series will end in December with Professor Brian Levine of the Department of Computer Science at UMass Amherst speaking on cyber forensics. Topics of importance and fascination --- those are themes that operations research and operations researchers and management scientists tackle!

You can read more about the speaker series and other activities that we have been involved in, in the Fall 2009 edition of the Supernetwork Sentinel.

Plenary talk, Net2009, Rome, and the European Soccer Championship

This morning I gave my plenary talk on supply chain network oligopolies, coalitions, and the merger paradox at the NET2009 conference at La Sapienza in Rome, Italy. I managed to find the conference room in which I was speaking due to a nice custodian who understood sufficient English and knew where the conference was taking place. The audience consisted of physicists (primarily, judging from the show of hands), operations researchers and applied mathematicians, economists, computer scientists, and a few engineers. The talks have been excellent as have been the questions. The methodologies and models of networks differ in these fields and it is fascinating to see common themes of interest and application.

I just finished eating an exquisite lunch of sauteed porcini mushrooms with pasta seasoned with parmesan cheese and parsley, grilled fish, salad, and fruit. Luckily, there is time for a short siesta since the talks will continue until around 6PM today.

One of the conference participants is from Barcelona and he showed me his Barcelona and Manchester United banner from the European soccer final, which took place in Rome yesterday. I took a photo of the banner and will post photos after my return to the US. By the way, Barcelona beat Manchester 2 to 0. Now I understand why there were so many British as well as Spaniards yesterday in Rome wearing all sorts of soccer paraphernalia. Supposedly, 50,000 fans descended on Rome to cheer the teams and all the hotels were booked so many soccer fans have been camping out wherever they can find a spot.

La Sapienza, the university that is hosting the NET2009 conference, is a world-renowned university and this is my first time speaking at this university. Interestingly, I am the only speaker from the United States!

Supply Chain Lecture is Now "Live"

Thanks to my hosts at the Institute for Transportation Studies at the University of California Davis, my lecture on supply chain networks in a global economy with a focus on vulnerabilities and synergies and what can be learned from 50 years of transportation research, which was part of the Spring 2009 series, is now "live" and online. The talk was videotaped at the Isenberg School of Management at UMass Amherst last Friday and broadcast live to the audience at UC Davis. It is now available for viewing online along with the presentation slides. The introduction is a bit lengthy and the technology did not work perfectly but the 90 minute lecture is now more or less intact and available in this format.

Special thanks go out to Susan Milne and Emid LaClaire of the IT staff at the Isenberg School and to Ning Wan at UC Davis for making this video event possible. Also, I acknowledge my UC Davis colleagues and hosts Professor Mokhtarian and Professor Fan. Finally, I thank my doctoral students: Qiang "Patrick" Qiang, Amir Masoumi, and Min Yu for being my "physical" audience at the Isenberg School during the live videostreaming.