Tag: research

On August 25, Hurricane Harvey hit the Texas Gulf Coast with severe effects in the Houston metropolitan area, other parts of Texas, and Louisiana. When such disasters happen, we are all emotionally affected by the human tragedy, injuries and death (close to 50 deaths accounted for so far), devastation of properties that families had worked long and hard to build, and the desperation that follows as people try to pick up their lives.

Part of a supply chain manager’s job is to think about how such natural disasters will affect their company’s supply chain. In the tightly connected global supply chains of today, there is a high likelihood that there will be an impact, regardless of how far away the event occurred. Many recent disasters serve as examples of this global impact: Hurricane Katrina in New Orleans, the Japanese earthquake and tsunami north of Tokyo, or the flooding in Thailand. American and Western European car companies’ plant operations that sourced components from Japanese suppliers were halted within a week. And PC makers were disrupted due to the loss of 40% of worldwide capacity in hard disk drives in the Thai floods. Hurricane Harvey is another strong reminder of lessons learned in supply chain risks and their management, and how devastating and far reaching the effects of such events can be for supply chains.

It is perhaps a bit hyperbolic, but rightly so, to say that the whole world will feel the pinch of Harvey.

As a supply chain manager, your first level reaction is to consider which customers, products, facilities, employees and suppliers will be the most exposed to Hurricane Harvey. What is the overall revenue exposure, and how long will it take to recover? Houston is a metropolitan area with an economic output of half a trillion dollars, and companies in almost all industries have some type of location or sales outfit there. In most cases, the impact will be nothing more than a flooded basement, power outages, and restricted access to facilities due to other infrastructure failures, and some delayed shipments. Home Depot and Lowes reported close to 60 temporary store closures due to flooding, but given the increased demand of their products in infrastructure and home improvement projects, their recovery will most likely be swift.

The most important part, and the company’s first priority, is to check for employees that are located in affected areas, and quickly verify their wellbeing. Procter & Gamble’s Folgers plant in New Orleans was exposed to Hurricane Katrina, and one of the company’s biggest challenges after the event was tracing the fates of its employees and ensuring their safety. In the oil drilling, refining, and chemical manufacturing industries, some of the main production and distribution facilities are in the Houston area, so one needs to think about the first order effects on businesses from flooded, non-operable facilities. Some news outlets reported that 25% of the U.S. oil refining capacity was closed by the end of August, including the two largest refineries. This will imply serious disruptions to gasoline supply in the Southeast and the Midwest. Based on my own causal observations, gas prices in the St. Louis area were 20-30 cents higher this Labor Day weekend, with increases expected to last for a month. Depending on how fast the refineries recover, and the overall supply conditions of crude oil in the area, fears of fuel shortages might drive gas prices up, inevitably affecting the logistics costs of all businesses. Twenty percent of the offshore crude oil supply was shut down as flooding disrupted wells and caused pipeline operators to close their taps. But this might be welcome, as some of the crude oil demand is down at the same time due to the idled refineries. Crude oil prices slid down by almost 50 cents a few days after the hurricane. Natural gas production has been disrupted as well, with potential implications for heating and power generation fuel supply and prices.

hurricane-harvey

Hurricane Harvey

Infrastructure damages to ports, airports, and roads have immediate effects on all supply chains. The major airports in Houston were not affected much beyond some delayed flights (around 1,000 flights over a day or two) and unexpected delays in reopening. Even smaller airports were back in operation by the end of August. However, port traffic is more seriously affected. The ports of Houston and Corpus Christi are two of the largest in the U.S. (second and sixth, respectively), with both ports’ operations severely affected for more than a week. East of Houston, Port Arthur is completely underwater, and the closure of regional railways and highways led to FedEx, UPS, and USPS halting all deliveries to impacted areas. Major railroads (KC Southern, BNSF, Union Pacific, et al.) completely halted or reduced their level of operations around the coastal region and surrounding areas. Facilities receiving shipments from suppliers in the area should expect moderate to significant delays. Retailers and manufacturers far from Texas will be affected by the impact on transportation and rail networks, and should expect increased logistics costs to eat into their margins. In the trucking industry, which had capacity shortages prior to the event, the impact will be an additional shortage of 10%. As increased emergency shipment prices and demand shift some of the capacity to the Southeast, prices will rise nationwide. Capacity shortages and increased fuel costs might have a double-whammy effect on transportation logistics costs for all companies, particularly those in the grocery, food, and beverages industries.

As any supply chain manager understands all too well, it is not necessarily the original event (in this case, the hurricane), but the ripple effects of the event that cause the major supply chain disruptions.

In retrospect, the Japanese earthquake of March 2011 was the least of their worries. About half an hour after the shaking ended, a tsunami—two to three times higher than projected—inundated the shores nearest the quake’s epicenter. And 180 kilometers away from the quake’s epicenter, the nuclear power plant at Fukushima Daiichi flooded, incapacitating the backup diesel generators responsible for cooling three of the six nuclear reactors. Within 24 hours of the tsunami, these reactors exploded, spreading harmful radiation. Hurricane Harvey caused a similar scenario, albeit with substantially fewer consequences. As the hurricane blew in, employees of the Arkema chemical plant in Crosby, TX had to make sure that the plant’s volatile chemicals remained refrigerated. When the power went out and the floodwaters knocked out the plant’s generators, the only alternative was to move the chemicals to nine huge, refrigerated trucks, each with their own generator. However, when six feet of water swamped the trucks (described by an Arkema spokesman as “watching physics at work”), a series of explosions followed. Fortunately, the fire and blasts were not as dire as feared, but in the eyes of a safety investigator, it was “a wake-up call for an industry and their safety regulators who have not adequately taken action on lessons from Hurricane Katrina, as well as the Fukushima nuclear disaster in Japan.” A large number of the more than 1,300 chemical plants in Texas—many of them driven there by the access to gulf ports and shale gas operations—are vulnerable to flooding events.

If someone were trying to anticipate the ripple effects on supply chains resultant from the Harvey disaster, ethylene and its derivative products, polyethylene and PVC, will be the proverbial “usual suspects” to cause a bullwhip effect. Sixty percent of the U.S. ethylene capacity has been closed due to Harvey-related floods. Ethylene and its derivatives are used to produce plastics, antifreeze, house paint, vinyl products, and rubber; thus, shortages of it will affect multiple manufacturers and consumer markets. With the U.S. accounting for 20% of the global ethylene production, and with current utilization being very high, any small hiccup will drive supply-demand imbalances. It is too early to predict the magnitude of shortages, but petrochemical plants in the Gulf region are already advising customers of their inability to meet their commitments for polyethylene, polypropylene, and PVC. And the “bullwhip” game begins (!) with bigger firms hoarding capacity, smaller ones scrabbling to find any capacity at any price, suppliers rationing orders, inflated projections of demand, and rapidly escalating prices. The complexity of the ethylene manufacturing process, the longer restart times for closed operations, the lead times required to ensure safety of operation, and the current transportation bottlenecks make for an inflexible supply chain, incapable of adjusting to any small supply or demand shocks. Ethylene-dependent industries are in for a roller coaster ride in the next few months, and the rest of us might have to pay for it.

There are two main tools the supply chain manager possesses to effectively mitigate the damage of major disaster events and drive the quick recovery of supply chains. The first is redundancy, as in having extra resources, capacity, and people, and the second is operational flexibility, as in dynamically reallocating the resources based on updated information and the needs of the realized situation. Thus far, both of these tools have been deployed by federal agencies and companies in handling the Harvey disaster aftermath. Experts expect that the effects on gas prices will be less severe because gasoline inventories are higher than they were in the aftermath of Hurricane Ike in 2008. Also, the crude oil supply concerns can be alleviated through some release of oil from the Strategic Petroleum Reserves by the U.S. government. Going forward, it is better to plan ahead for some excess capacity and location diversification in our stretched energy infrastructure, as the heavy concentration along the Gulf Coast, together with very high utilization, makes it particularly vulnerable to natural disasters. Our ports have learned from the past, either through hurricanes or labor strikes, to be ready to effectively reroute shipments to meet logistics needs for customers. Global logistics companies have real-time information on the location and the container load of their ships and can drive dynamic rerouting as needed. Maersk is dynamically deciding whether to wait at the Houston port or reroute its container ships to other ports. Manufacturers fearing shortages of ethylene supplies are looking for substitute materials or alternative global suppliers. Hopefully, some of the downstream retailers have adequate inventories of needed products to handle a short period disruption in logistics services. Alternatively, price increases can also drive the demand away from low inventory products to other substitutes.

Wall Street is counting on the resilience of the supply chains. The stock markets have weathered the Harvey storms and have even gained in the aftermath. Effectively, the market is counting on companies to have learned lessons from the past and to have prepared their supply chains accordingly, either through careful planning, redundancy, or operational flexibility to manage the impacts of this disaster. The markets are comforted by the fact that any financial losses in the region will not propagate, as home insurance policies are not covering flooding and the major insurers will not be exposed to catastrophic losses. Other companies’ exposures on the service and delivery side are dealt with by supply contracts, which include “force majeure” clauses for events that result from natural and unavoidable catastrophes beyond the firms’ control. But I prefer the more optimistic explanation that markets trust the supply chain executives as consummate risk managers who have learned the lessons of the past. Hopefully they will be able to use the real-time information and data they have, and exercise a flexibility in their decision making to adjust operations for whatever outcomes result. Markets are betting that the companies using the best risk management techniques will find competitive opportunities against less-prepared rivals, and fully leverage the new opportunities created by the recovery efforts. Let us all be optimistic for the resilience of our supply chains and the fast recovery of the Gulf Region!

Panos Kouvelis is the Director of The Boeing Center for Supply Chain Innovation and Emerson Distinguished Professor in Operations and Manufacturing Management. He has consulted with and/or taught executive programs for Emerson, IBM, Dell Computers, Boeing, Hanes, Duke Hospital, Solutia, Express Scripts, Spartech, MEMC, Ingram Micro, Smurfit Stone, Reckitt & Colman, and Bunge on supply chain, operations strategy, inventory management, lean manufacturing, operations scheduling and manufacturing system design issues.



For more supply chain digital content and cutting-edge research, check us out on the socials [@theboeingcenter] and our website [olin.wustl.edu/bcsci]

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A Boeing Center digital production

The Boeing Center

Supply Chain  //  Operational Excellence  //  Risk Management

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Twenty years ago, through the exceptional generosity of the McDonnell Douglas Foundation, The Boeing Center for Technology, Information, and Manufacturing was endowed in the Olin Business School. Since then, we have served as a powerful catalyst for technology-driven innovation, process optimization, risk management, and global supply chain excellence.

In honor of our 20th anniversary, and to more accurately reflect our focus, we adopted a new look and changed our name to The Boeing Center for Supply Chain Innovation. And with a renewed vigor, we completed the most successful year in our history. Not only did we work on a record number of corporate projects, but we also hosted several events featuring exceptional speakers and supported research on a number of cutting-edge topics.

This spring, we welcomed Mike Pinedo, the Julius Schlesinger Professor of Operations Management at New York University, to talk about operational risk management in the service industry at our 13th annual Meir Rosenblatt memorial lecture. And we welcomed John Stroup, President and CEO of Belden Inc., to share his perspectives on Industry 4.0 and the emerging technologies that will impact the manufacturing industry and beyond. Both presentations were intellectually stimulating and thought provoking.

We also held our inaugural project competition and awards ceremony, the Project of the Year Symposium, which highlighted our top five corporate projects from the 2016-2017 academic year. The Symposium featured presentations from our student teams that worked on projects for Anheuser-Busch InBev, Belden, Boeing, Emerson, and Monsanto. The teams competed for awards in “Project of the Year,” “Greatest Immediate Business Impact,” and “Presentation Excellence,” and split a $10,500 prize pool. A summary of all our spring projects can be found below.

Our 3rd annual Supply Chain Finance & Risk Management Conference took place on May 14-15. The aim of the conference, which was attended by prominent academic researchers from top business schools from around the world, was to stimulate interactions and knowledge sharing at the interface of operations and finance, and supply chain risk management. The conference featured presentations based on current research trends, including real operations and risk management, crowd funding, finance, trade credit, and hedging. There was also a panel discussion on emerging themes and directions of the field.  One of the initiatives resulting from the conference will be an edited book, comprised of short papers submitted by attendees, to be published this fall as an issue in the Foundations and Trends in Technology, Information and Operations Management book series.

We would also like to share with you some of the corporate projects The Boeing Center and student teams have led for our corporate clients this year.

Lastly, we would like to thank all of our corporate member companies for providing us with the opportunity to offer valuable experiential learning to our students, who dedicated long hours to ensure delivery of insightful and impactful supply chain solutions. We hope you all had an awesome summer, and we look forward to working with you again soon!


Learn more about sponsored projects and membership through The Boeing Center.

Anheuser-Busch InBev

This project revolved around optimizing the inventory mix at distribution centers for some of ABI’s craft beer products, particularly Stella Artois. The team utilized mathematical models with the potential to reduce accessorial costs and increase product freshness. Student team:  Miles Bolinger, Sam Huo, Huyen Nguyen, Roberto Ortiz, and Jon Slack.

 

Belden

The team working on this project used the QR inventory modeling approach to identify opportunities and costs for improving service levels at PPC, a Belden subsidiary in Syracuse, NY.  Student team:  Bonnie Bao, Michael Stein, Yuying Wang, and Yuyao Zhu.

 

Boeing

The goal of this project was to determine the most influential order and part characteristics affecting on-time delivery statistics of Boeing’s transactional spare parts business.  Student team:  Vineet Chauhan, Phil Goetz, Brian Liu, Sontaya Sherrell, and Fan Zhang.

 

Edward Jones

The team’s objective was to analyze the technology deployment process at Edward Jones. They did this by conducting interviews and collecting survey data to run a capacity analysis and generate a personnel network diagram.  Student team:  Huang Deng, Wyatt Gutierrez, Cynthia Huang, Drew Ruchte, and Jamie Yue.

 

Emerson

The Emerson project team worked with ProTeam’s Richmond Hill facility to determine the optimal product mix, optimize inventory management of stock, and develop a data analysis model to facilitate future upkeep of the system.  Student team:  Kushal Chawla, Serena Chen, Kai Ji, Jeffrey Lantz, and Zoe Zhao.

 

Express Scripts

The purpose of this project was to optimize Express Scripts’ distribution network by considering logistics costs, formulary configuration, and inventory vs. service levels.  Student team:  Himanshu Aggarwal, Jinsoo Chang, and Janet Qian.

 

MilliporeSigma

In this project, the team worked with MilliporeSigma’s facility in Temecula, CA to develop a model to help determine the economic production quantity for each SKU based on customer demand, production cost, inventory value, and shelf life.  Student team:  Perri Goldberg, Youngho Kim, Ayshwarya Rangarajan, Prateek Sureka, and Flora Teng.

 

Monsanto

The objective of this project was to understand, define, and map out the credit processes within Monsanto.  Student team:  Hai Cao, Yanyan Li, Ashwin Kumar, Jonathan Neff, Tom Siepman, and Xukun Zan.

 

West Pharmaceutical Services

This project sought to accurately compute the approximate safety stock levels, reorder points, and replenishment quantities at West Pharma’s Kinston plant using a continuous review model.  Student team:  Matthew Drory, Rohan Kamalia, Mrigank Kanoi, Ray Tang, and Jiani Zhai.

 


For more supply chain digital content and cutting-edge research, check us out on the socials [@theboeingcenter] and our website [olin.wustl.edu/bcsci]

• • •

A Boeing Center digital production

The Boeing Center

Supply Chain  //  Operational Excellence  //  Risk Management

Website  • LinkedIn  • Subscribe  • Facebook  • Instagram  • Twitter  • YouTube


Operational risk can have a crippling effect on a company if not managed properly. This is especially true in the financial services industry. Banks and investment firms must pay close attention to variables that have the potential to impact their operations, not only from the breakdown of technology and processes, but also from a personnel perspective. The responsibility of managing one’s money is great, and the inability to properly anticipate and manage potential risk factors can have a devastating effect, all the way up to the industry level. A case in point was the subprime mortgage crisis of the late 2000s, which led to a nationwide economic recession.

Mike Pinedo, the Julius Schlesinger Professor of Operations Management at New York University’s Stern School of Business, is an expert in risk management research, particularly in the context of the financial services industry. In his presentation at The Boeing Center’s 13th annual Meir Rosenblatt Memorial Lecture, he described the main types of primary risks in a financial services company: market risk, credit risk, and operational risk. Ops risk, which is the risk of a loss resulting from inadequate or failed internal processes, people, or external events, may be the most important factor, he claimed.

Pinedo goes on to describe various types of operational costs such as human resources, I.T. investments, and insurance costs, and how they impact corporate risk management. For example, rogue traders can pose a risk if they make inadvisable decisions, so some investment firms choose to take out insurance against that possibility. Other types of ops risk include transaction errors, loss of or damage to assets, theft, and fraud, all of which can pose a catastrophic risk at the industry level. Pinedo adeptly inserted anecdotes into his lecture to provide examples of these risk factors playing out in the real world.

The annual Meir J. Rosenblatt Memorial Lecture brings the “rock stars” of supply chain and operations to the Danforth Campus every fall. Each lecture gives prominent thinkers and practitioners alike the opportunity to hear an expert in the field highlight emerging trends.

This lecture series was established in 2003 to honor the memory of Meir J. Rosenblatt, who taught from 1987 to 2001 at Olin Business School as the Myron Northrop Distinguished Professor of Operations and Manufacturing Management. A leader among faculty, Rosenblatt often won the Teacher of the Year award at Olin and authored the book “Five Times and Still Kicking: A Life with Cancer,” having battled cancer multiple times throughout his life.


For more supply chain digital content and cutting-edge research, check us out on the socials [@theboeingcenter] and our website [olin.wustl.edu/bcsci]

• • •

A Boeing Center digital production

The Boeing Center

Supply Chain  //  Operational Excellence  //  Risk Management

Website  • LinkedIn  • Subscribe  • Facebook  • Instagram  • Twitter  • YouTube


The Boeing Center for Supply Chain Innovation presents…an interview with Professor Panos Kouvelis, Emerson Distinguished Professor of Operations and Manufacturing Management and Director of The Boeing Center for Supply Chain Innovation at Washington University in St. Louis, about the Global Supply Chain Benchmark Study, a collaborative research initiative of faculty at leading business schools including Olin. Below is an excerpt of the report; for the complete report, go here → http://bit.ly/GSCBS2016

BACKGROUND

“For the past 25 years manufacturing offshoring to low-cost locations like China has been the dominant strategy for many western manufacturing companies. This has led to a significant reduction of manufacturing jobs in developed economies. Recently, many manufacturers have reported they plan to bring back at least a part of their global production volume to developed countries. General Electric, for example, announced in 2012 they would relocate manufacturing and R&D of their household appliances business, which had previously been offshored to China and Mexico, to Louisville, KY in the USA.1 Similarly, Plantronics, a U.S. based manufacturer of headphones, shifted production volume back from China to Mexico.2 At the same time companies from perceived low-cost countries have reported investments in manufacturing capacity in developed economies. For instance, the Chinese company Lenovo recently brought back the production of personal computers to North America.

While there seems to be an emerging trend to reshore production, traditional offshoring to developing economies continues to be a viable phenomenon. For example, General Motors recently announced a USD 12bn investment in new plants in China.4 These examples offer just a glimpse of the magnitude of manufacturing location decisions companies are currently making in a wave of restructuring of their global supply chains.”

EXECUTIVE SUMMARY

“Despite the growing attention in the business press to reports of companies relocating manufacturing to western countries, there is very little empirical research on the scale of such decisions, their drivers and their impact. Hence, in this study we investigate current trends in production sourcing. Based on a survey of 74 leading manufacturing companies predominantly from North America, Europe and Japan we shed some light on (1) what production sourcing decisions are currently being made, (2) what drives these decisions and (3) what results do they lead to.

Our research suggests that there is a significant wave of restructuring of global supply chains in progress. Companies de- and increase production volume all over the globe as shown in the overview presented in Exhibit 1. However, we did not observe a dominant strategy for sourcing production volume. Companies make different decisions for a variety of reasons. While China continues to be the most attractive country for manufacturing, many companies reported following (also) other strategies. Moreover, we see that decision making has evolved from simple cost comparisons to more complex trade-offs between a magnitude of factors that are deemed important, i.e., across quality, market access and risk. Based on these and other reported drivers we see a shift of production not only to China but also to Eastern Europe and the ASEAN countries which are being used as nearshore sources of production for Western European and Chinese markets respectively.

For North America we see evidence for a return of manufacturing. It is not a strong trend but in our sample more companies report shifting production volume to North America rather than offshoring to other countries. This pattern is not consistent with the much cited reshoring trend predicted by many business and political commentators. The movement we observed is not driven by the reshoring of American firms but rather by European and Asian firms offshoring who account for 60% of the production volume increase in North America. While this is good news for manufacturing in North America, the indicators for the future of manufacturing in Western Europe appear to be less bright. Indeed, Western Europe is one of only two regions for which our sample reports a net decrease of production volume. Companies reported offshoring for a variety of reasons including shifting to either less costly locations or to places closer to market demand.

Despite the decline in production volume in certain regions, there is no evidence for a further decline in manufacturing jobs. In fact our sample reports that for China, Western and Eastern Europe their sourcing decisions hardly impacted employment. Moreover, it was only for North America and Japan that growth of manufacturing employment is observed.

We believe the analyses and insights presented in this research not only inform but also call for action. Executives should look at their supply chains critically by challenging their current footprint and production sourcing choices. We explicitly encourage benchmarking against the companies in our sample within their industry and across industries. Insights into market expectations and the forces driving the reported production sourcing and technology decisions should stimulate a discussion about future strategic actions.

For policy makers – especially in Western (European) countries – this research provides information concerning the perceived attractiveness of regions worldwide. Reading the report will provide policy makers with data about the trends in industry and the factors that have led companies to shift production into or away from particular regions and can thus inform the debate on how manufacturing policy can boost competitiveness, attract and retain manufacturing jobs.”

For the complete report, go here → http://bit.ly/GSCBS2016




Will you have buyer’s regret it if you don’t get that pricey upgrade on a new car or phone? A constant stream of new products and fancy upgrades tempts consumers constantly to go for the new, improved, bigger and better. Invoking such buyer’s regret has long been a marketing strategy for companies as they attempt to influence purchases. However, researchers at Olin have found it can be both risky and rewarding for a firm’s profits.

In research forthcoming in Management Science, Olin’s Baojun Jiang, assistant professor of marketing, and Chakravarthi Narasimhan, the Philip L. Siteman Professor of Marketing, along with co-author Ozge Turut from Sabanci University in Istanbul, Turkey, developed an analytical framework, based on well-established consumer behavior data regarding regret, to model a market with two types of businesses: one with an established product and the other with a product that has a new, improved feature.

Narasimhan

Chakravarthi Narasimhan

They then examined the concepts of switching regret (when a consumer switches brands or firms, then regrets the choice) and repeat-purchase regret (when the consumer opts for the familiar product and then regrets not getting the newer higher-quality one).“If firms know that these different segments of consumers exist, how would they compete?” Narasimham asked. “Depending upon the possible magnitude of the anticipated regret, we show that firms don’t have to be so aggressive in competing.”

The research, he said, changed their initial assumptions. “Initially our thought was these firms are invoking regret, which means they will be competing on price more aggressively,” Narasimham said. “Our research found, under some cases, they would not.”

The key insight is if it appears to be that the market is more segmented, then you have your own set of customers that you can care about and you don’t have to aggressively compete with the other firm.

“That’s when it’s a win-win situation,” Narasimhan said.

On the other hand, the researchers found that invoking buyer’s regret — or even attempting to address a new customer’s concerns — can also trigger risk. It depends on how the customer base shifts toward the new product or feature, and how much competing firms are willing to sacrifice to welcome new buyers.

Jiang

Baojun Jiang

“If a firm tries to invoke anticipated regret in customers to gain market share, the distribution of consumer preferences may shift in a way that makes the market less segmented than before,” Jiang said. “This can make the competition become more intense, inducing both firms to lower their prices, which makes both firms worse off.

“Similarly, the new firm might not want to alleviate switching regret as much, if doing so would make the market less segmented,” Jiang said. “Put differently, though stronger switching regret makes consumers less likely to buy the new firm’s product, it can make the consumer segments more separated, which can benefit, rather than hurt, the new firm because both firms will have less incentive to drop the prices to poach each other’s customers.”

The bottom line: Competing companies should carefully consider both the risks and rewards of invoking buyer’s regret.

The strategy could have big payoffs, but could also backfire, depending on the customer base and the segmentation of the market.

“In very small-priced items, it’s not that big of a deal,” Narasimhan said. “Take chewing gum. What is your cost? Ultimately, a few cents. If you don’t like it, you spit it out and that’s that. Where it matters is where the consumer’s cost is high. That’s where these kinds of effects would play out.”


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