Operation and Logistics

Business Finance

Operations Management

Indiana University Bloomington

Question Description

Case attached.

Question: You work for GE Healthcare and have been tasked to make a preliminary presentation on how to improve integrated logistics for MR Operations.

Format is below:

Current Situation with Issue: Set it up fast
Next: Tell me all those Recommendations on a single slide
Next: At least 1 Support slide for each recommendation
Next: Cost / Benefit (single slide for all recommendations)
Next: Implementation with visual (single slide for all recommendations)
Next: Risk / Mitigation (single slide for all recommendations)
Next: The Closing Slide to seal the deal
Finally: Appendix: Stuff it with details and efforts

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CU213 PUBLISHED ON APRIL 18, 2018 GE Healthcare: Managing Magnetic Resonance Operations BY CARRI CHAN*, BARIS KOCAMAN†, ABIGAIL TALCOTT-SCHLAIFER‡ , Tony Gascon was the general manager for magnetic resonance (MR) value stream operations at GE Healthcare in Waukesha, WI. He was at his desk, preparing for the monthly meeting he held with the supply chain and inventory management teams, during which they would revise their forecasts for the next quarter. Trisha Pisching (acquisition/integration leader — indirect sourcing) and Rochelle Pytlik (supply chain project manager) had already been on the phone all morning with the inventory leaders of each sales region as they finalized their estimates. After the meeting, they would aggregate all global forecasts, and production schedules would be locked and pushed down to the factories. Just as Gascon was getting ready to head to the conference room, an e-mail with some startling information came from GE’s chief productivity officer. A corporate review conducted by the supply chain management group had revealed that the components of each MR machine traveled more than 260,000 miles before final installation. A full mapping of the supply chain had exposed an elaborate logistics structure with myriad technical challenges due to the complexity of the product. Gascon realized that the onus on his team to produce precise forecasts would be more critical than ever, since any uncertainty would surely be amplified due to this intricacy. As the team hunkered down for the meeting, improving the accuracy of their forecasting models was at the forefront of discussion as they explored potential ways to simplify the structure and significantly reduce the number of miles each machine traveled. It certainly wasn’t going to be easy; with production facilities on three continents, a supply source that had gravitated to global sources over time, stringent regulatory guidelines, Author affiliation * Associate Professor of Business, Columbia Business School †MS, Business Research ’18 ‡ Associate Director of the W. Edwards Deming Center, Columbia Business School Copyright information © 2018 by The Trustees of Columbia University in the City of New York. Acknowledgments The authors thank James Peterson and Philippe Cochet of GE and Nelson Fraiman of Columbia Business School for their support in the development of this case. Tony Gascon, Steven Day, Justin Meehan and Jimmie Beacham of GE provided invaluable knowledge and assistance. This case cannot be used or reproduced without explicit permission from Columbia CaseWorks. To obtain permission, please visit www.gsb.columbia.edu/caseworks, or e-mail ColumbiaCaseWorks@gsb.columbia.edu This case is for teaching purposes only and does not represent an endorsement or judgment of the material included. increased competition, and incredible complexity in the creation and transport of the MR components, the team had their work more than cut out for them. BACKGROUND In 2016, General Electric was the 31st-largest company in the world. The global conglomerate had eight business segments that generated nearly $120 billion in revenue: Aviation, Capital, Energy Connections & Lighting, Healthcare, Oil & Gas, Power, Renewable Energy, and Transportation. Healthcare accounted for 15% of revenue, with $18.38 billion in sales generating $3.2 billion in profit. Fifty-seven percent was derived from equipment, while the remaining 43% came from services. 1 The MR division generated 11% of GE Healthcare’s revenue. GE Healthcare had three primary divisions with products and services in Life Sciences and Healthcare Digital, along with Healthcare Systems, which provided technologies for diagnostic imaging and clinical systems including MR, X-ray, ultrasound, and computed tomography (CT). A portion of Healthcare Systems included repair contracts and services for equipment manufactured by both GE and its competitors. The primary market was hospitals, medical facilities, and pharmaceutical/biotech companies. Seventy percent of GE Healthcare’s revenue was derived from Healthcare Systems, with 23% coming from Life Sciences and 7% from Digital. The United States represented 43% of geographic revenue, followed by Europe and Asia at 17% each, the Middle East/Africa at 14%, and the Americas at 9%. Globally, the primary competitors to GE Healthcare in the industry included Siemens AG, Koninklijke Philips NV, and Hitachi Medical Systems. 2 Within the United States, GE Healthcare accounted for approximately 25% of the market for MRIs, second only to Siemens. In 2015, the global market for MRIs was estimated at $3.2 billion. Independent reports predicted that the worldwide diagnostic imaging market would expand at a compound annual growth rate of 6.6%,3 with the US MRI market alone reaching more than $1 billion by 2022.4 MR was a key technology, both for GE Healthcare and GE as a whole. It was a very profitable business that represented a substantial revenue stream for both new products and service contracts. Having offerings in all the major imaging modalities (CT, PET, XR, nuclear, etc.) provided GE Healthcare with a competitive advantage, enabling it to develop a variety of solutions and product packages for customers. BRILLIANT FACTORY In 2015, GE began implementing “brilliant factories” across all business divisions, leveraging lean manufacturing, advanced manufacturing, and additive manufacturing with advanced software analytics to enhance productivity.5 Philippe Cochet, the chief productivity officer at the time, was overseeing a company-wide assessment of GE’s more than 500 factories, to gauge their abilities in these three areas. GE Healthcare: Managing Magnetic Resonance Operations | Page 2 BY CARRI CHAN*, BARIS KOCAMAN†, ABIGAIL TALCOTTSCHLAIFER‡, The audit discovered that more than $12 billion was trapped in the global supply chain in the form of inventory. Companywide, inventory turns were at 4.8. Furthermore, the company found that when it did apply lean manufacturing and value-stream mapping, digitized processes and record keeping, and incorporated customer demand estimates into decisions throughout the supply chain, lead times were reduced by 50%, work-in-progress by 50% to 60%, and square footage need by 30% to 50%, while increasing productivity by 20% to 25%.6 It was this brilliant factory initiative that had led to the discovery that the MR systems were traveling such vast distances, and that the division had approximately $100 million in trapped inventory. The MR group had already implemented many lean principles by moving away from batch processing to single piece flows for most of the production over the course of the previous 10 years. From a flexibility standpoint, making a single piece at a time gave the group much greater control over quality, a critical factor when producing such an expensive and technically advanced product. Using these lean techniques and eliminating batch processing, one group in GE Healthcare went from almost $800,000 a year in scrap material waste to less than $30,000 for a single component, which itself had accounted for losses of more than 0.5% of the total output of the factory. MAGNETIC RESONANCE IMAGING First developed in the late 1970s, MR systems used a combination of magnetic fields and radio waves to noninvasively create high-quality images of the body’s internal organs and structures. By the 1980s, real-time imaging of the heart was developed, quickly followed in 1993 by functional imaging of the brain. By the 2000s, MR technology had become commonplace and was often the preferred diagnostic and treatment tool for detecting tumors, looking within blood vessels of stroke victims, and identifying bleeding and infection throughout the body. MRI was often preferable to other imaging technologies, due to its superior ability to capture three-dimensional images of soft tissues, ligaments, tendons, and muscles without emitting ionizing radiation that could be damaging to the patient. As Jimmie Beacham, chief engineer of advanced manufacturing at GE Healthcare, put it, “Magnets are miracles.” MR machines were highly complex and required incredible technical know-how to manufacture, transport, and install. The critical component was the superconducting magnet itself. The magnets were extremely powerful, ranging in magnetic field strength from 0.1 to 3.0 tesla (T) for clinical use in humans, with some magnets for research systems reaching up to 9.4T.7 MR MACHINE COMPONENTS In 2016, GE Healthcare produced nine basic MR models that were marketed to three main segments: Premium, Performance, and Value. Page 3 | GE Healthcare: Managing Magnetic Resonance Operations BY CARRI CHAN*, BARIS KOCAMAN†, ABIGAIL TALCOTT-SCHLAIFER‡, 750w HDxt PREMIUM 450w HDi Pioneer PERFORMANCE Voyager 355 BRIVO/360 Optima VALUE Creator — 8 Chnl. Explorer — 16 Chnl. The first and primary differentiation between each model was the magnet itself. Each of the nine MR systems utilized one of five different magnets that varied from 1.5T to 3.0T in field strength. While the 1.5T provided clear scans, the 3T models offered much higher, functional resolution, enabling more detailed images in less time (see Exhibit 1: MR Models and Components). The magnets weighed anywhere between 8.5 and 22 tons and contained more than 20 miles of superconducting wire. The other key components of each MR machine included gradient coils and amplifiers that transmitted the radiofrequency waves into the subject’s body, the table that slid the patient into the machine, and the cabinet that housed the computer and software platform controlling the system in its entirety. Additionally, multiple “extremity coils” were used to give better images of specific body parts, such as head, neck, spine, wrist, or knee (see Exhibit 2: Diagram of Primary MRI Machine Components). In addition to these components, there was variability in the bore size of the machine opening at either 60 or 70 cm. This 10-cm difference had a significant impact on the claustrophobic feeling that patients experienced while in the machine, with the 70 cm opening also enabling scans of larger subjects. In GE Healthcare as a whole, approximately 80% to 85% of the value added was sourced outside of the company. In the MR division, that number was closer to 60%, due to the manufacturing of these magnets. CUSTOMIZATION While these nine basic models formed the foundation of the MR product line, a system could be highly customized according to each customer’s needs. There were approximately 30 primary main system configurations, upon which hundreds of accessories could be added, from various tables to surgical suites, resulting in thousands of potential combinations. In addition to the physical accessories, software packages varied widely based on customer use GE Healthcare: Managing Magnetic Resonance Operations | Page 4 BY CARRI CHAN*, BARIS KOCAMAN†, ABIGAIL TALCOTTSCHLAIFER‡, and provided very different capabilities on the same hardware platform, depending on the customer need. While GE was confident that it differentiated on the capabilities of its equipment, service, and financials, competitors were sure of the same. Therefore, GE identified flexibility and customization as integral to long-term strategy, particularly given the vastly different ways in which its customers utilized the machines (e.g., for research on brain injuries versus sports medicine). One of the cornerstones of the MR team’s business approach and what it identified as its value proposition was customer service, noting “customization is our only standard.” FACTORY LOCATIONS AND PRODUCTION In 2015, GE had 540 factories — equal to the square footage of Manhattan and employing more than 120,000 people — and 600 warehouses.8 GE Healthcare utilized approximately 60 of these plants, with six functioning as part of the assembly and supply network for MR systems in Florence, SC; Waukesha, WI; Cleveland, OH; Monterrey, Mexico; and Bangalore, India. Additionally, in 2014, GE opened a healthcare facility in Tianjin, China, that was designed to focus specifically on MR and other imaging technologies. 9 (See Exhibit 3: Manufacturing Source for Major Components.) As the MR team in Waukesha met to try and simplify the logistics structure, they had to juggle several competing and conflicting challenges. While they had flexibility in relocating certain production facilities, others proved much trickier, due to the level of engineering and specialization that went into particular products, specifically the magnets and the body coils. It was unclear if the investment of time and cost in moving these plants and training new employees was feasible, let alone whether corporate would embrace an initiative that would have a payback estimated at more than five years. Magnets Up until 2014, all magnets were manufactured in Florence. With growing demand and the expanding market in China and the rest of Asia, the decision was made to add manufacturing capabilities to the new facility in Tianjin and divide the business into MR West, operating out of Florence, and MR East in Tianjin. Due to heavy investment, high levels of expertise and engineering required, and the technical challenges of production, manufacturing of the magnets was an enormous capital anchor and was kept to those two locations. For many of the raw materials, such as iron, sourcing was done locally, so that GE was not shipping those heavy items. As of 2016, MR East was not quite fully equivalent to MR West in its capabilities, but estimates had the former running at full operational capacity by 2021. Main Components The cabinet — or the brain of the system — was manufactured in Waukesha. This production was being slowly phased over to Florence and Tianjin, so that the cabinets would be made in the same location as the magnets themselves. Page 5 | GE Healthcare: Managing Magnetic Resonance Operations BY CARRI CHAN*, BARIS KOCAMAN†, ABIGAIL TALCOTT-SCHLAIFER‡, The interior of the cabinets consisted of gradient amplifiers manufactured in GE’s subassembly plant in Bangalore. These amplifiers were also utilized across other imaging technologies, including CT, X-ray, and ultrasound. Upon completion, the amplifiers were shipped to Waukesha and then on to Tianjin. There were few tenable options for transferring this production, because of the low cost of both parts and labor. The other primary subassembly location was in Monterrey, Mexico, where the tubes for the MR system along with the RF coils were made, directly supplying both MR East and West. The tubes were relatively inexpensive parts to manufacture, but they were quite large. Shipments had to be made with a substantial amount of air, which added significantly to freight costs. Finally, the Cleveland plant made the specialized body coils that went around the specific body parts —the head, arm, leg, etc. —being imaged. These coils were a highly focused and engineered product that required significant technical know-how (see Exhibit 4: Map of Logistics Structure). FORECASTING AND PRODUCTION PLANNING GE Healthcare was divided into seven sales regions: US/Canada, Latin America, European Growth Market, Europe, China, Asian Pacific, and Sustainable Healthcare Solutions, encompassing India/Africa/Asean. Each sales region had an inventory leader, responsible for liaising with the sales and marketing teams to ascertain projected and committed demand. These leaders then entered the forecasts for their regions into GE’s main system. Back in Waukesha, Pisching and Pytlik continually reviewed these estimates, holding monthly meetings with the regional leaders. Taking these discussions into account, along with historical demand and the number of signed contracts, they would then adjust up or down as they consolidated the forecasts for each region. Financial planning for MR production began approximately a year out, while the product forecasting was done by quarter and began six months out (“Q+1”). Within each quarter, there were six revisions done before the forecast was finalized just a few weeks before the next quarter (see Exhibit 5: Forecast and Demand Data). Forecasting was done at a high level by product and then disseminated down to the subassembly parts. Production on the magnets began based on the forecast numbers. Standard parts — the coils, tubes, and amplifiers — were also made to forecast, particularly ones that were used across several of Healthcare’s imaging technologies. For many of these components, production was done to forecast with an order attached to it further down the line, at which point the final assembly of the part was completed. The high-level demand forecasts were translated into build schedules for the factories that began 62 days before the magnet build. At this point, the window was frozen, and production was locked in. Slots were determined by a combination of current orders and forecast demand and could be allocated anywhere from six months to the 62-day lock. GE Healthcare: Managing Magnetic Resonance Operations | Page 6 BY CARRI CHAN*, BARIS KOCAMAN†, ABIGAIL TALCOTTSCHLAIFER‡, Manufacturing of the magnet was on a 28-day cycle, and production began before orders were finalized. The actual order was ascribed to the magnet as close to one week from completion. The production of the magnet was differentiated by model as soon as the manufacturing process began. LEAD TIME The labor and materials overhead was significant for the MR systems. Due to the far-flung locations and the high costs of materials, holding inventory for all models at all locations was not an option. Furthermore, beyond tying up capital in inventory, there were limits on the availability of cash for inventory set by corporate. Product Lead Time On most raw materials, lead times ranged from 12 to 16 weeks, with three primary sites, Waukesha, Florence, and Tianjin, receiving these items. The magnet itself had the longest manufacturing time of the system’s main components, at 28 days. Production of the cabinets took 6 days. The gradient amplifiers had two weeks for production, with one month added for ocean freight from Bangalore to Waukesha, where finished inventory was stored. For the coils, approximately one week was required for production, with only one day for transportation from Cleveland. The tables only took a few days to complete. Distribution to the various plants and warehouses took anywhere from 13 to 31 days, depending on the transit times. Finally, installation and trial required an additional 13 to 45 days. Storing completed machines that had not yet been sold was very costly. In addition to taking up substantial space in the factory and the high price of the cost of goods, producing too far in advance raised the chance that the MR system would become obsolete, with hardware and software changes ultimately necessitating either rework or scrapping of older materials. Customer Lead Time The average lead time for customers to receive their order was three to four months. In a pinch, production could be sped up; conversely, wait times could run up to six months. Because orders could be ascribed to magnets up until the last week of production, there was often flexibility in accommodating a customer’s need for a specific delivery time frame. If the need arose, an order could always be reallocated for a particular customer to ensure timely delivery. While there wasn’t necessarily a risk of a loss of sale if the product wasn’t delivered on time, there was a potential loss of goodwill on the part of customers and the chance that they would turn to a competitor for their next purchase, not just for MRIs but for other imaging technologies. Internal estimates predicted that delays of more than a month increased the likelihood of losing a customer for f ...
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