for HBW
Introduction
Operations are judged by the way they perform. There are
many individuals and groups doing the judging and there
are many different aspects of performance on which the
assessment is being made. The people doing the judging are
called ‘stakeholders’ and the aspects of performance they
are using are called ‘performance objectives’. And if we want
to understand the strategic contribution of the operations
function, it is important to understand how we can measure
its performance. So this chapter starts by illustrating how
operations performance can impact on the success of the
whole organization. Second, we look at various perspectives
on, and aspects of performance. Finally, we examine how
performance objectives trade off against each other. On our
general model of operations management the topics covered in
this chapter are represented by the area marked on Figure 2.1.
Chapter 2 Operations performance
Key questions
➤ Why is operations performance
important in any organization?
➤ How does the operations function
incorporate all stakeholders’
objectives?
➤ What does top management expect
from the operations function?
➤ What are the performance
objectives of operations and
what are the internal and external
benefits which derive from excelling
in each of them?
➤ How do operations performance
objectives trade off against each
other ?
Figure 2.1 This chapter examines operations performance
Check and improve your understanding of this chapter using self assessment questions and a personalised study plan, audio and video downloads, and an eBook – all at www.myomlab.com.
On 15 April 2008 British Airways (BA) announced that two of its most senior executives, its director of operations and its director of customer services, would leave the company. They were paying the price for the disastrous opening of British Airways’ new Terminal 5 at London’s Heathrow airport. The opening of the £4.3bn terminal, said BA’s boss, Willie Walsh, with magnificent understatement, ‘was not the company’s finest hour’. The chaos at the terminal on its opening days made news around the world and was seen by many as one of the most public failures of basic operations management in the modern history of aviation. ‘It’s a terrible, terrible PR nightmare to have hanging over you’, said David Learmount, an aviation expert. ‘Somebody who may have been a faithful customer and still not have their luggage after three weeks, is not good for their [BA’s] image. The one thing that’s worse than having a stack of 15,000 bags is adding 5,000 a day to that heap.’ According to a BA spokeswoman it needed an extra 400 volunteer staff and courier companies to wade through the backlog of late baggage. So the new terminal that had opened on 27 March could not even cope with BA’s full short-haul service until 8 April (two hundred flights in and out of T5 were cancelled in its first three days). This delayed moving its long-haul operations to the new building from Terminal 4 as scheduled on 30 April, which, in turn, disrupted the operations of other airlines, many of which were scheduled to move into Terminal 4 once BA had moved its long-haul flights from there. Sharing the blame with BA was the British Airports Authority (BAA) which was already suffering criticism from passenger groups, airlines and businesses for allegedly poor performance. BAA’s non-executive chairman, Sir Nigel Rudd, said he was ‘bitterly disappointed’ about the opening of the terminal. ‘It was clearly a huge embarrassment to the company, me personally, and the board. Nothing can take away that failure. We had all believed genuinely that it would be a great opening, which clearly it wasn’t.’
Yet it all should have been so different. T5 took more than six years and around 60,000 workers to build. And it’s an impressive building. It is Europe’s largest free-standing structure. It was also keenly anticipated by travellers and BA alike. Willie Walsh has said that the terminal ‘will completely change his passengers’ experience’. He was right, but not in the way he imagined! So what went wrong? As is often the case with major operations failures, it was not one thing, but several interrelated problems (all of which could have been avoided). Press reports initially blamed glitches with the state-of-the-art baggage handling system
that consisted of 18 km of conveyor belts and was (theoretically) capable of transporting 12,000 bags per hour. And indeed the baggage handling system did experience problems which had not been exposed in testing. But BAA, the airport operator, doubted that the main problem was the baggage system itself. The system had worked until it became clogged with bags that were overwhelming BA’s handlers loading them onto the aircraft. Partly this may have been because staff were not sufficiently familiar with the new system and its operating processes, but handling staff had also suffered delays getting to their new (and unfamiliar) work areas, negotiating (new) security checks and finding (again, new) car parking spaces. Also, once staff were ‘airside’ they had problems logging in. The cumulative effect of these problems meant that the airline was unable to get ground handling staff to the correct locations for loading and unloading bags from the aircraft, so baggage could not be loaded onto aircraft fast enough, so baggage backed up, clogging the baggage handling system, which in turn meant closing baggage check-in and baggage drops, leading eventually to baggage check-in being halted.
However, not every airline underestimates the operational complexity of airport processes. During the same year that Terminal 5 at Heathrow was suffering queues, lost bags and bad publicity, Dubai International Airport’s Terminal 3 opened quietly with little publicity and fewer problems. Like T5, it is also huge and designed to impress. Its new shimmering facilities are solely dedicated to Emirates Airline. Largely built underground (20 metres beneath the taxiway area) the multi-level environment reduces passenger walking by using 157 elevators, 97 escalators and 82 moving walkways. Its underground baggage handling system is
Chapter 2 Operations performance 33
Operations in practice A tale of two terminals1
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the deepest and the largest of its kind in the world with 90 km of baggage belts handling around 15,000 items per hour, with 800 RFID (see Chapter 8) read/write stations for 100% accurate tracking. Also like T5 it handles about 30 million passengers a year.
But one difference between the two terminals was that Dubai’s T3 could observe and learn lessons from the botched opening of Heathrow’s Terminal 5. Paul Griffiths, the former head of London’s Gatwick Airport, who is now Dubai Airport’s chief executive, insisted that his own new terminal should not be publicly shamed in the same way. ‘There was a lot of arrogance and hubris around the opening of T5, with all the . . . publicity
that BA generated’, Mr Griffiths says. ‘The first rule of customer service is under-promise and over-deliver because that way you get their loyalty. BA was telling people that they were getting a glimpse of the future with T5, which created expectation and increased the chances of disappointment. Having watched the development of T5, it was clear that we had to make sure that everyone was on-message. We just had to bang heads together so that people realized what was at stake. We knew the world would be watching and waiting after T5 to see whether T3 was the next big terminal fiasco. We worked very hard to make sure that didn’t happen.’
Paul Griffiths was also convinced that Terminal 3 should undergo a phased programme with flights added progressively, rather than a ‘big bang’ approach where the terminal opened for business on one day. ‘We exhaustively tested the terminal systems throughout the summer . . . We continue to make sure we’re putting large loads on it, week by week, improving reliability. We put a few flights in bit by bit, in waves rather than a big bang.’ Prior to the opening he also said that Dubai Airports would never reveal a single opening date for its new Terminal 3 until all pre-opening test programmes had been completed. ‘T3 opened so quietly’, said one journalist, ‘that passengers would have known that the terminal was new only if they had touched the still-drying paint.’
Part One Introduction34
Operations performance is vital for any organization
It is no exaggeration to view operations management as being able to either ‘make or break’ any business. This is not just because the operations function is large and, in most businesses, represents the bulk of its assets and the majority of its people, but because the operations function gives the ability to compete by providing the ability to respond to customers and by developing the capabilities that will keep it ahead of its competitors in the future. For example, operations management principles and the performance of its operations function proved hugely important in the Heathrow T5 and Dubai T3 launches. It was a basic failure to understand the importance of operations processes that (temporarily) damaged British Airways’ reputation. It was Dubai’s attention to detail and thorough operational preparation that avoided similar problems. Figure 2.2 illustrates just some of the positive and the negative effects that operations management can have.
How operations can affect profits
The way operations management performs its activities can have a very significant effect on a business. Look at how it can influence the profitability of a company. Consider two information technology (IT) support companies. Both design, supply, install and maintain IT systems for business clients. Table 2.1 shows the effect that good operations management could have on a business’s performance.
Company A believes that the way it produces and delivers its services can be used for long-term competitive advantage. Company B, by contrast, does not seem to be thinking about how its operations can be managed creatively in order to add value for its customers
Operations management is a ‘make or break’ activity
Operations management can significantly affect profitability
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and sustain its own profitability. Company A is paying its service engineers higher salaries, but expects them to contribute their ideas and enthusiasm to the business without excessive supervision. Perhaps this is why Company A is ‘wasting’ less of its expenditure on overheads. Its purchasing operations are also spending less on buying in the computer hardware that it installs for its customers, perhaps by forming partnerships with its hardware suppliers. Finally, Company A is spending its own money wisely by investing in ‘appropriate rather than excessive’ technology of its own.
So, operations management can have a very significant impact on a business’s financial performance. Even when compared with the contribution of other parts of the business, the contribution of operations can be dramatic. Consider the following example. Kandy Kitchens currently produce 5,000 units a year. The company is considering three options for boosting its earnings. Option 1 involves organizing a sales campaign that would involve spending an extra a100,000 in purchasing extra market information. It is estimated that sales would rise by 30 per cent. Option 2 involves reducing operating expenses by 20 per cent through forming improvement teams that will eliminate waste in the firm’s operations. Option 3 involves investing a70,000 in more flexible machinery that will allow the company to respond faster to customer orders and therefore charge 10 per cent extra for this ‘speedy service’. Table 2.2 illustrates the effect of these three options.
Chapter 2 Operations performance 35
Figure 2.2 Operations management can ‘make or break’ any business
Increasing sales volume by 30 per cent certainly improves the company’s sales revenue, but operating expenses also increase. Nevertheless, earnings before investment and tax (EBIT) rise to a1,000,000. But reducing operating expenses by 20 per cent is even more effective, increasing EBIT to a1,200,000. Furthermore, it requires no investment to achieve this. The third option involves improving customer service by responding more rapidly to cus- tomer orders. The extra price this will command improves EBIT to a1,000,000 but requires an investment of a70,000. Note how options 2 and 3 involve operations management in changing the way the company operates. Note also how, potentially, reducing operating costs and improving customer service can equal and even exceed the benefits that come from improving sales volume.
So if operations performance has such a significant effect on the whole organization, it follows that any organization needs some way of assessing the performance of its operations function and its operations management. We shall look at three perspectives on operations performance, from macro to micro. First, we examine how each of the organization’s stake- holders may view operations performance. Next, we consider what top management may
Part One Introduction36
Table 2.1 Some operations management characteristics of two companies
Company A has operations managers who . . .
Employ skilled, enthusiastic people, and encourage them to contribute ideas for cutting out waste and working more effectively.
Carefully monitor their customers’ perception of the quality of service they are receiving and learn from any examples of poor service and always apologize and rectify any failure to give excellent service.
Have invested in simple but appropriate systems of their own that allow the business to plan and control its activities effectively.
Hold regular meetings where staff share their experiences and think about how they can build their knowledge of customer needs and new technologies, and how their services will have to change in the future to add value for their customers and help the business to remain competitive.
Last year’s financial details for Company A:
Sales revenue = A10,000,000 Wage costs = A2,000,000 Supervisor costs = A300,000 General overheads = A1,000,000 Bought-in hardware = A5,000,000 Margin = A1,700,000 Capital expenditure = A600,000
Company B has operations managers who . . .
Employ only people who have worked in similar companies before and supervise them closely to make sure that they ‘earn their salaries’.
Have rigid ‘completion of service’ sheets that customers sign to say that they have received the service, but they never follow up to check on customers’ views of the service that they have received.
Have bought an expensive integrative system with extensive functionality, because ‘you might as well invest in state-of-the-art technology’.
At the regular senior managers’ meeting always have an agenda item entitled ‘Future business’.
Last year’s financial details for Company B:
Sales revenue = A9,300,000 Wages costs = A1,700,000 Supervisor costs = A800,000 General overheads = A1,300,000 Bought-in hardware = A6,500,000 Margin = A700,000 Capital expenditure = A1,500,000
Table 2.2 The effects of three options for improving earning at Kandy Kitchens
Original Option 1 – Option 2 – Option 3 – (sales volume == sales campaign operations efficiency ‘speedy service’
50,000 units) Increase sales volumes Reduce operating Increase price by 30% to 65,000 units expenses by 20% by 10%
(B, 000) (B, 000) (B, 000) (B, 000)
Sales revenue 5,000 6,500 5,000 5,500 Operating expenses 4,500 5,550 3,800 4,500 EBIT* 500 1,000 1,200 1,000 Investment required 100 70
*EBIT = Earnings before interest and tax = Net sales – Operating expenses. It is sometimes called ‘Operating profit’.
expect of the operations function. Finally, we look at a common set of more detailed operations performance objectives.
The ‘stakeholder’ perspective on operations performance
All operations have a stakeholders. Stakeholders are the people and groups that have a legitimate interest in the operation’s activities. Some stakeholders are internal, for example the operation’s employees; others are external, for example customers, society or community groups, and a company’s shareholders. Some external stakeholders have a direct commer- cial relationship with the organization, for example suppliers and customers; others do not, for example, industry regulators. In not-for-profit operations, these stakeholder groups can overlap. So, voluntary workers in a charity may be employees, shareholders and customers all at once. However, in any kind of organization, it is a responsibility of the operations function to understand the (sometimes conflicting) objectives of its stakeholders and set its objectives accordingly.
Figure 2.3 illustrates just some of the stakeholder groups that would have an interest in how an organization’s operations function performs. But although each of these groups, to different extents, will be interested in operations performance, they are likely to have very different views of which aspect of performance is important. Table 2.3 identifies typical stakeholder requirements. But stakeholder relationships are not just one-way. It is also use- ful to consider what an individual organization or business wants of the stakeholder groups themselves. Some of these requirements are also illustrated in Table 2.3.
Corporate social responsibility (CSR)
Strongly related to the stakeholder perspective of operations performance is that of corporate social responsibility (generally known as CSR). According to the UK government’s definition, ‘CSR is essentially about how business takes account of its economic, social and environmental
impacts in the way it operates – maximizing the benefits and minimizing the downsides. . . .
Specifically, we see CSR as the voluntary actions that business can take, over and above compliance
with minimum legal requirements, to address both its own competitive interests and the interests
of wider society.’ A more direct link with the stakeholder concept is to be found in the defini- tion used by Marks and Spencer, the UK-based retailer. ‘Corporate Social Responsibility . . . is listening and responding to the needs of a company’s stakeholders. This includes the require-
ments of sustainable development. We believe that building good relationships with employees,
suppliers and wider society is the best guarantee of long-term success. This is the backbone of our
approach to CSR.’
The issue of how broader social performance objectives can be included in operations management’s activities is of increasing importance, from both an ethical and a commercial point of view. It is treated again at various points throughout this book, and the final chap- ter (Chapter 21) is devoted entirely to the topic.
Operations may attempt to satisfy a wide range of stakeholders
Chapter 2 Operations performance 37
Figure 2.3 Stakeholder groups with a ‘legitimate interest in the operation’s activities’
Part One Introduction38
Table 2.3 Typical stakeholders’ performance objectives
Stakeholder
Shareholders
Directors/top
management
Staff
Staff representative
bodies
e.g. trade unions
Suppliers of
materials, services,
equipment, etc.
Regulators
e.g. financial
regulators
Government: local,
national, regional
Lobby groups
e.g. environmental
lobby groups
Society
What stakeholders want from the operation
Return on investment Stability of earnings Liquidity of investment
Low/acceptable operating costs Secure revenue Well-targeted investment Low risk of failure Future innovation
Fair wages Good working conditions Safe work environment Personal and career development
Conformance with national agreements Consultation
Early notice of requirements Long-term orders Fair price On-time payment
Conformance to regulations Feedback on effectiveness of regulations
Conformance to legal requirements Contribution to (local /national / regional) economy
Alignment of the organization’s activities with whatever the group is promoting
Minimize negative effects from the operation (noise, traffic, etc.) and maximize positive effects ( jobs, local sponsorship, etc.)
What the operation wants from stakeholders
Investment capital Long-term commitment
Coherent, consistent, clear and achievable strategies Appropriate investment
Attendance Diligence / best efforts Honesty Engagement
Understanding Fairness Assistance in problem solving
Integrity of delivery, quality and volume Innovation Responsiveness Progressive price reductions
Consistency of regulation Consistency of application of regulations Responsiveness to industry concerns
Low/simple taxation Representation of local concerns Appropriate infrastructure
No unfair targeting Practical help in achieving stakeholder aims (if the organization wants to achieve them)
Support for organization’s plans
The dilemma with using this wide range of stakeholders to judge performance is that organ-
izations, particularly commercial companies, have to cope with the conflicting pressures
of maximizing profitability on one hand, with the expectation that they will manage in the
interests of (all or part of ) society in general with accountability and transparency. Even if
a business wanted to reflect aspects of performance beyond its own immediate interests,
how is it to do it? According to Michael Jensen of Harvard Business School, ‘At the economy-
wide or social level, the issue is this: If we could dictate the criterion or objective function to
be maximized by firms (and thus the performance criterion by which corporate executives
choose among alternative policy options), what would it be? Or, to put the issue even more
simply: How do we want the firms in our economy to measure their own performance?
How do we want them to determine what is better versus worse?’2 He also holds that using
stakeholder perspectives gives undue weight to narrow special interests that want to use
the organization’s resources for their own ends. The stakeholder perspective gives them
a spurious legitimacy which ‘undermines the foundations of value-seeking behavior’.
Critical commentary
Top management’s performance objectives for operations
Of all stakeholder groups, it is the organization’s top management who can have the most immediate impact on its performance. They represent the interests of the owners (or trustees, or electorate, etc.) and therefore are the direct custodians of the organization’s basic purpose. They also have responsibility for translating the broad objectives of the organization into a more tangible form. So what should they expect from their operations function? Broadly they should expect all their operations managers to contribute to the success of the organization by using its resources effectively. To do this it must be creative, innovative and energetic in improving its processes, products and services. In more detail, effective operations manage- ment can give five types of advantage to the business (see Figure 2.4):
● It can reduce the costs of producing products and services, and being efficient. ● It can achieve customer satisfaction through good quality and service. ● It can reduce the risk of operational failure, because well designed and well run operations
should be less likely to fail, and if they do they should be able to recover faster and with less disruption (this is called resilience).
● It can reduce the amount of investment (sometimes called capital employed) that is neces- sary to produce the required type and quantity of products and services by increasing the effective capacity of the operation and by being innovative in how it uses its physical resources.
● It can provide the basis for future innovation by learning from its experience of operating its processes, so building a solid base of operations skills, knowledge and capability within the business.
The five operations performance objectives
Broad stakeholder objectives form the backdrop to operations decision-making, and top management’s objectives provide a strategic framework, but running operations at an operational day-to-day level requires a more tightly defined set of objectives. These are the five basic ‘performance objectives’ and they apply to all types of operation. Imagine that you
Chapter 2 Operations performance 39
Figure 2.4 Operations can contribute to competitiveness through low costs, high levels of
service (securing revenue), lower operational risk, lower capital requirements, and providing
the capabilities that determine future innovation
Operations can have a significant impact on strategic success
Operations management can reduce costs
Operations management can increase revenue
Operations management can reduce risk
Operations management can reduce the need for investment
Operations management can enhance innovation
Five basic ‘performance objectives’
Part One Introduction40
are an operations manager in any kind of business – a hospital administrator, for example, or a production manager at a car plant. What kind of things are you likely to want to do in order to satisfy customers and contribute to competitiveness?
● You would want to do things right; that is, you would not want to make mistakes, and would want to satisfy your customers by providing error-free goods and services which are ‘fit for their purpose’. This is giving a quality advantage.
● You would want to do things fast, minimizing the time between a customer asking for goods or services and the customer receiving them in full, thus increasing the availability of your goods and services and giving a speed advantage.
● You would want to do things on time, so as to keep the delivery promises you have made. If the operation can do this, it is giving a dependability advantage.
● You would want to be able to change what you do; that is, being able to vary or adapt the operation’s activities to cope with unexpected circumstances or to give customers individual treatment. Being able to change far enough and fast enough to meet customer requirements gives a flexibility advantage.
● You would want to do things cheaply; that is, produce goods and services at a cost which enables them to be priced appropriately for the market while still allowing for a return to the organization; or, in a not-for-profit organization, give good value to the taxpayers or whoever is funding the operation. When the organization is managing to do this, it is giving a cost advantage.
The next part of this chapter examines these five performance objectives in more detail by looking at what they mean for four different operations: a general hospital, an automobile factory, a city bus company and a supermarket chain.
The quality objective
Quality is consistent conformance to customers’ expectations, in other words, ‘doing things right’, but the things which the operation needs to do right will vary according to the kind of operation. All operations regard quality as a particularly important objective. In some ways quality is the most visible part of what an operation does. Furthermore, it is something that a customer finds relatively easy to judge about the operation. Is the product or service as it is supposed to be? Is it right or is it wrong? There is something fundamental about quality. Because of this, it is clearly a major influence on customer satisfaction or dissatisfaction. A customer perception of high-quality products and services means customer satisfaction and therefore the likelihood that the customer will return. Figure 2.5 illustrates how quality could be judged in four operations.
Quality inside the operation
When quality means consistently producing services and products to specification it not only leads to external customer satisfaction, but makes life easier inside the operation as well.
Quality reduces costs. The fewer mistakes made by each process in the operation, the less time will be needed to correct the mistakes and the less confusion and irritation will be spread. For example, if a supermarket’s regional warehouse sends the wrong goods to the supermarket, it will mean staff time, and therefore cost, being used to sort out the problem.
Quality increases dependability. Increased costs are not the only consequence of poor quality. At the supermarket it could also mean that goods run out on the supermarket shelves with a resulting loss of revenue to the operation and irritation to the external customers. Sorting the problem out could also distract the supermarket management from giving attention to
Quality
Speed
Dependability
Flexibility
Cost
Quality is a major influence on customer satisfaction or dissatisfaction
the other parts of the supermarket operation. This in turn could result in further mistakes being made. So, quality (like the other performance objectives, as we shall see) has both an external impact which influences customer satisfaction and an internal impact which leads to stable and efficient processes.
Chapter 2 Operations performance 41
Figure 2.5 Quality means different things in different operations
‘Organic farming means taking care and getting all the
details right. It is about quality from start to finish. Not
only the quality of the meat that we produce but also
quality of life and quality of care for the countryside.’
Nick Fuge is the farm manager at Lower Hurst Farm
located within the Peak District National Park of the UK.
He has day-to-day responsibility for the well-being of
all the livestock and the operation of the farm on strict
organic principles. The 85-hectare farm has been
producing high-quality beef for almost 20 years but
changed to fully organic production in 1998. Organic
farming is a tough regime. No artificial fertilizers,
genetically modified feedstuff or growth-promoting agents
are used. All beef sold from the farm is home-bred and
can be traced back to the animal from which it came.
‘The quality of the herd is most important’, says Nick,
‘as is animal care. Our customers trust us to ensure that
the cattle are organically and humanely reared, and
slaughtered in a manner that minimizes any distress.
Short case Organically good quality3
If you want to understand the difference between
conventional and organic farming, look at the way we
use veterinary help. Most conventional farmers use
veterinarians like an emergency service to put things right
when there is a problem with an animal. The amount
we pay for veterinary assistance is lower because we try
to avoid problems with the animals from the start. We
use veterinaries as consultants to help us in preventing
problems in the first place.’
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Part One Introduction42
Catherine Pyne runs the butchery and the mail-order
meat business. ‘After butchering, the cuts of meat
are individually vacuum-packed, weighed and then
blast-frozen. We worked extensively with the Department
of Food and Nutrition at Oxford Brooks University to
devise the best way to encapsulate the nutritional, textural
and flavoursome characteristics of the meat in its prime
state. So, when you defrost and cook any of our products
you will have the same tasty and succulent eating qualities
associated with the best fresh meat.’ After freezing, the
products are packed in boxes, designed and labelled for
storage in a home freezer. Customers order by phone
or through the Internet for next-day delivery in a special
‘mini-deep-freeze’ reusable container which maintains
the meat in its frozen state. ‘It isn’t just the quality of our
product which has made us a success’, says Catherine.
‘We give a personal and inclusive level of service to our
customers that makes them feel close to us and maintains
trust in how we produce and prepare the meat. The team
of people we have here is also an important aspect of our
business. We are proud of our product and feel that it is
vitally important to be personally identified with it.’
Figure 2.6 Speed means different things in different operations
The speed objective
Speed means the elapsed time between customers requesting products or services and receiving them. Figure 2.6 illustrates what speed means for the four operations. The main benefit to the operation’s (external) customers of speedy delivery of goods and services is that the faster they can have the product or service, the more likely they are to buy it, or the more they will pay for it, or the greater the benefit they receive (see the short-case ‘When speed means life or death’).
Speed inside the operation
Inside the operation, speed is also important. Fast response to external customers is greatly helped by speedy decision-making and speedy movement of materials and information inside the operation. And there are other benefits.
Speed increases value for some customers
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Speed reduces inventories. Take, for example, the automobile plant. Steel for the vehicle’s door panels is delivered to the press shop, pressed into shape, transported to the painting area, coated for colour and protection, and moved to the assembly line where it is fitted to the automobile. This is a simple three-stage process, but in practice material does not flow smoothly from one stage to the next. First, the steel is delivered as part of a far larger batch containing enough steel to make possibly several hundred products. Eventually it is taken to the press area, pressed into shape, and again waits to be transported to the paint area. It then waits to be painted, only to wait once more until it is transported to the assembly line. Yet again, it waits by the trackside until it is eventually fitted to the automobile. The material’s journey time is far longer than the time needed to make and fit the product. It actually spends most of its time waiting as stocks (inventories) of parts and products. The longer items take to move through a process, the more time they will be waiting and the higher inventory will be. This is an important idea which will be explored in Chapter 15 on lean operations.
Speed reduces risks. Forecasting tomorrow’s events is far less of a risk than forecasting next year’s. The further ahead companies forecast, the more likely they are to get it wrong. The faster the throughput time of a process the later forecasting can be left. Consider the automobile plant again. If the total throughput time for the door panel is six weeks, door panels are being processed through their first operation six weeks before they reach their final destination. The quantity of door panels being processed will be determined by the forecasts for demand six weeks ahead. If instead of six weeks, they take only one week to move through the plant, the door panels being processed through their first stage are intended to meet demand only one week ahead. Under these circumstances it is far more likely that the number and type of door panels being processed are the number and type which eventually will be needed.
Chapter 2 Operations performance 43
Of all the operations which have to respond quickly
to customer demand, few have more need of speed
than the emergency services. In responding to road
accidents especially, every second is critical. The
treatment you receive during the first hour after your
accident (what is called the ‘golden hour’) can determine
whether you survive and fully recover or not. Making
full use of the golden hour means speeding up three
elements of the total time to treatment – the time it
takes for the emergency services to find out about the
accident, the time it takes them to travel to the scene
of the accident, and the time it takes to get the casualty
to appropriate treatment.
Alerting the emergency services immediately is the
idea behind Mercedes-Benz’s TeleAid system. As soon
as the vehicle’s airbag is triggered, an on-board computer
reports through the mobile phone network to a control
centre (drivers can also trigger the system manually if
not too badly hurt), satellite tracking allows the vehicle to
be precisely located and the owner identified (if special
medication is needed). Getting to the accident quickly is
the next hurdle. Often the fastest method is by helicopter.
When most rescues are only a couple of minutes’ flying
time back to the hospital speed can really saves lives.
Short case When speed means life or death4
However, it is not always possible to land a helicopter
safely at night (because of possible overhead wires and
other hazards) so conventional ambulances will always
be needed, both to get paramedics quickly to accident
victims and to speed them to hospital. One increasingly
common method of ensuring that ambulances arrive
quickly at the accident site is to position them, not at
hospitals, but close to where accidents are likely to occur.
Computer analysis of previous accident data helps to
select the ambulance’s waiting position, and global
positioning systems help controllers to mobilize the
nearest unit. At all times a key requirement for fast service
is effective communication between all who are involved
in each stage of the emergency. Modern communications
technology can play an important role in this.
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Part One Introduction44
The dependability objective
Dependability means doing things in time for customers to receive their goods or services exactly when they are needed, or at least when they were promised. Figure 2.7 illustrates what dependability means in the four operations. Customers might only judge the dependability of an operation after the product or service has been delivered. Initially this may not affect the likelihood that customers will select the service – they have already ‘consumed’ it. Over time, however, dependability can override all other criteria. No matter how cheap or fast a bus service is, if the service is always late (or unpredictably early) or the buses are always full, then potential passengers will be better off calling a taxi.
Figure 2.7 Dependability means different things in different operations
Mumbai is India’s most densely populated city, and every
working day its millions of commuters crowd onto packed
trains for an often lengthy commute to their workplaces.
Going home for lunch is not possible, so many office
workers have a cooked meal sent either from their home,
or from a caterer. It is Mumbai’s 5,000-strong dabbawala
collective that provides this service, usually for a monthly
fee. The meal is cooked in the morning (by family or
Short case Dabbawalas hit 99.9999% dependability5
Dependability is judged over time
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Dependability inside the operation
Inside the operation internal customers will judge each other’s performance partly by how reliable the other processes are in delivering material or information on time. Operations where internal dependability is high are more effective than those which are not, for a number of reasons.
Dependability saves time. Take, for example, the maintenance and repair centre for the city bus company. If the centre runs out of some crucial spare parts, the manager of the centre will need to spend time trying to arrange a special delivery of the required parts and the resources allocated to service the buses will not be used as productively as they would have been without this disruption. More seriously, the fleet will be short of buses until they can be repaired and the fleet operations manager will have to spend time rescheduling services. So, entirely due to the one failure of dependability of supply, a significant part of the operation’s time has been wasted coping with the disruption.
Dependability saves money. Ineffective use of time will translate into extra cost. The spare parts might cost more to be delivered at short notice and maintenance staff will expect to be paid even when there is not a bus to work on. Nor will the fixed costs of the operation, such as heating and rent, be reduced because the two buses are not being serviced. The rescheduling of buses will probably mean that some routes have inappropriately sized buses and some services could have to be cancelled. This will result in empty bus seats (if too large a bus has to be used) or a loss of revenue (if potential passengers are not transported).
Chapter 2 Operations performance 45
caterer), placed in regulation dabbas or tiffin (lunch) boxes
and delivered to each individual worker’s office at lunch
time. After lunch the boxes are collected and returned so
that they can be re-sent the next day. ‘Dabbawala’ means
‘one who carries a box’, or more colloquially, ‘lunch box
delivery man’. This is how the service works:
7am–9am The dabbas (boxes) are collected by
dabbawalas on bicycles from nearly 200,000 suburban
homes or from the dabba makers and taken to railway
stations. The dabbas have distinguishing marks on them,
using colours and symbols (necessary because many
dabbawalas are barely literate). The dabbawala then takes
them to a designated sorting place, where he and other
collecting dabbawalas sort (and sometimes bundle) the
lunch boxes into groups.
9am–11am The grouped boxes are put in the coaches
of trains, with markings to identify the destination of the
box (usually there is a designated car for the boxes).
The markings include the rail station where the boxes
are to be unloaded and the building address where the
box has to be delivered. This may involve boxes being
sorted at intermediary stations, with each single dabba
changing hands up to four times.
10am–12midday Dabbas taken into Mumbai using the
otherwise under-utilized capacity on commuter trains in
the mid-morning.
11am–12midday Arrive downtown Mumbai where dabbas
are handed over to local dabbawalas, who distribute
them to more locations where there is more sorting and
loading on to handcarts, bicycles and dabbawalas.
12midday–1pm Dabbas are delivered to appropriate
office locations.
2pm Process moves into reverse, after lunch, when the
empty boxes are collected from office locations and
returned to suburban stations.
6pm Empty dabbas sent back to the respective houses.
The service has a remarkable record of almost flawlessly
reliable delivery, even on the days of severe weather such
as Mumbai’s characteristic monsoons. Dabbawalas all
receive the same pay and at both the receiving and the
sending ends, are known to the customers personally, so
are trusted by customers. Also, they are well accustomed
to the local areas they collect from or deliver to, which
reduces the chances of errors. Raghunath Medge, the
president of the Bombay Tiffin Box Supply Charity
Trust, which oversees the dabbawallas, highlights the
importance of their hands-on operations management.
‘Proper time management is our key to success. We do
everything to keep the customer happy and they help in
our marketing.’ There is no system of documentation.
The success of the operation depends on teamwork and
human ingenuity. Such is the dedication and commitment
of the barefoot delivery men (there are only a few delivery
women) that the complex logistics operation works with
only three layers of management. Although the service
remains essentially low-tech, with the barefoot delivery
men as the prime movers, the dabbawalas now use
some modern technology, for example they now allow
booking for delivery through SMS and their web site,
(www.mydabbawala.com).
Part One Introduction46
Figure 2.8 Flexibility means different things in different operations
Dependability gives stability. The disruption caused to operations by a lack of dependability goes beyond time and cost. It affects the ‘quality’ of the operation’s time. If everything in an operation is always perfectly dependable, a level of trust will have built up between the different parts of the operation. There will be no ‘surprises’ and everything will be predict- able. Under such circumstances, each part of the operation can concentrate on improving its own area of responsibility without having its attention continually diverted by a lack of dependable service from the other parts.
The flexibility objective
Flexibility means being able to change the operation in some way. This may mean changing what the operation does, how it is doing it, or when it is doing it. Specifically, customers will need the operation to change so that it can provide four types of requirement:
● product/service flexibility – the operation’s ability to introduce new or modified products and services;
● mix flexibility – the operation’s ability to produce a wide range or mix of products and services;
● volume flexibility – the operation’s ability to change its level of output or activity to produce different quantities or volumes of products and services over time;
● delivery flexibility – the operation’s ability to change the timing of the delivery of its services or products.
Figure 2.8 gives examples of what these different types of flexibility mean to the four different operations.
Flexibility means being able to change in some way
Product/service flexibility
Mix flexibility
Volume flexibility
Delivery flexibility
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Mass customization
One of the beneficial external effects of flexibility is the increased ability of operation to do different things for different customers. So, high flexibility gives the ability to produce a high variety of products or services. Normally high variety means high cost (see Chapter 1). Furthermore, high-variety operations do not usually produce in high volume. Some com- panies have developed their flexibility in such a way that products and services are customized for each individual customer. Yet they manage to produce them in a high-volume, mass- production manner which keeps costs down. This approach is called mass customization. Sometimes this is achieved through flexibility in design. For example, Dell is one of the largest volume producers of personal computers in the world, yet allows each customer to ‘design’ (albeit in a limited sense) their own configuration. Sometimes flexible technology is used to achieve the same effect. For example, Paris Miki, an up-market eyewear retailer which has the largest number of eyewear stores in the world, uses its own ‘Mikissimes Design System’ to capture a digital image of the customer and analyse facial characteristics. Together with a list of customers’ personal preferences, the system then recommends a particular design and dis- plays it on the image of the customer’s face. In consultation with the optician the customer can adjust shapes and sizes until the final design is chosen. Within the store the frames are assembled from a range of pre-manufactured components and the lenses ground and fitted to the frames. The whole process takes around an hour.
Agility
Judging operations in terms of their agility has become popular. Agility is really a com- bination of all the five performance objectives, but particularly flexibility and speed. In addition, agility implies that an operation and the supply chain of which it is a part (supply chains are described in Chapter 6) can respond to uncertainty in the market. Agility means
Chapter 2 Operations performance 47
Television news is big business. Satellite and cable, as
well as developments in terrestrial transmission, have all
helped to boost the popularity of 24-hour news services.
But news perishes fast. A daily newspaper delivered one
day late is practically worthless. This is why broadcasting
organizations like the BBC have to ensure that up-to-date
news is delivered on time, every time. The BBC’s ability to
achieve high levels of dependability is made possible by
the technology employed in news gathering and editing.
At one time news editors would have to schedule a
video-taped report to start its countdown five seconds
prior to its broadcasting time. With new technology
the video can be started from a freeze-frame and will
broadcast the instant the command to play is given. The
team have faith in the dependability of the process. In
addition, technology allows them the flexibility to achieve
dependability, even when news stories break just before
transmission. In the hours before scheduled transmission,
journalists and editors prepare an ‘inventory’ of news
Short case Flexibility and dependability in the newsroom6
items stored electronically. The presenter will prepare
his or her commentary on the autocue and each item will
be timed to the second. If the team needs to make a
short-term adjustment to the planned schedule, the
news studio’s technology allows the editors to take
broadcasts live from journalists at their locations, on
satellite ‘takes’, directly into the programme. Editors can
even type news reports directly onto the autocue for
the presenter to read as they are typed – nerve-racking,
but it keeps the programme on time.
Mass customization
Agility
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Part One Introduction48
responding to market requirements by producing new and existing products and services fast and flexibly.
Flexibility inside the operation
Developing a flexible operation can also have advantages to the internal customers within the operation.
Flexibility speeds up response. Fast service often depends on the operation being flexible. For example, if the hospital has to cope with a sudden influx of patients from a road accident, it clearly needs to deal with injuries quickly. Under such circumstances a flexible hospital which can speedily transfer extra skilled staff and equipment to the Accident and Emergency department will provide the fast service which the patients need.
Flexibility saves time. In many parts of the hospital, staff have to treat a wide variety of complaints. Fractures, cuts or drug overdoses do not come in batches. Each patient is an individual with individual needs. The hospital staff cannot take time to ‘get into the routine’ of treating a particular complaint; they must have the flexibility to adapt quickly. They must also have sufficiently flexible facilities and equipment so that time is not wasted waiting for equipment to be brought to the patient. The time of the hospital’s resources is being saved because they are flexible in ‘changing over’ from one task to the next.
Flexibility maintains dependability. Internal flexibility can also help to keep the operation on schedule when unexpected events disrupt the operation’s plans. For example, if the sudden influx of patients to the hospital requires emergency surgical procedures, routine operations will be disrupted. This is likely to cause distress and considerable inconvenience. A flexible hospital might be able to minimize the disruption by possibly having reserved operating theatres for such an emergency, and being able to bring in medical staff quickly that are ‘on call’.
The cost objective
To the companies which compete directly on price, cost will clearly be their major operations objective. The lower the cost of producing their goods and services, the lower can be the price to their customers. Even those companies which do not compete on price will be interested in keeping costs low. Every euro or dollar removed from an operation’s cost base is a further euro or dollar added to its profits. Not surprisingly, low cost is a universally attractive objective. The short-case ‘Everyday low prices at Aldi’ describes how one retailer keeps its costs down. The ways in which operations management can influence cost will depend largely on where the operation costs are incurred. The operation will spend its money on staff (the money spent on employing people), facilities, technology and equipment (the money spent on buying, caring for, operating and replacing the operation’s ‘hardware’) and materials (the money spent on the ‘bought-in’ materials consumed or transformed in the operation). Figure 2.9 shows typical cost breakdowns for the hospital, car plant, super- market and bus company.
Low cost is a universally attractive objective
Keeping operations costs down
All operations have an interest in keeping their costs as low as is compatible with the levels of quality, speed, dependability and flexibility that their customers require. The measure that is most frequently used to indicate how successful an operation is at doing this is
Chapter 2 Operations performance 49
Figure 2.9 Cost means different things in different operations
Aldi is an international ‘limited assortment’ supermarket
specializing in ‘private label’, mainly food products. It
has carefully focused its service concept and delivery
system to attract customers in a highly competitive
market. The company believes that its unique approach
to operations management make it ‘virtually impossible
for competitors to match our combination of price and
quality’.
Aldi operations challenge the norms of retailing.
They are deliberately simple, using basic facilities to
keep down overheads. Most stores stock only a limited
range of goods (typically around 700 compared with
25,000 to 30,000 stocked by conventional supermarket
chains). The private label approach means that the
products have been produced according to Aldi quality
specifications and are only sold in Aldi stores. Without
the high costs of brand marketing and advertising and
Short case Everyday low prices at Aldi7
with Aldi’s formidable purchasing power, prices can be
30 per cent below their branded equivalents. Other
cost-saving practices include open carton displays which
eliminate the need for special shelving, no grocery bags
to encourage reuse as well as saving costs, and using a
‘cart rental’ system which requires customers to return
the cart to the store to get their coin deposit back.
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productivity. Productivity is the ratio of what is produced by an operation to what is required to produce it.
Productivity ==
Often partial measures of input or output are used so that comparisons can be made. So, for example, in the automobile industry productivity is sometimes measured in terms of the number of cars produced per year per employee. This is called a single-factor measure of productivity.
Single-factor productivity ==
This allows different operations to be compared excluding the effects of input costs. One operation may have high total costs per car but high productivity in terms of number of cars per employee per year. The difference between the two measures is explained in terms of the distinction between the cost of the inputs to the operation and the way the operation is managed to convert inputs into outputs. Input costs may be high, but the operation itself is good at converting them to goods and services. Single-factor productivity can include the effects of input costs if the single input factor is expressed in cost terms, such as ‘labour costs’. Total factor productivity is the measure that includes all input factors.
Multi-factor productivity == Output from the operation
All inputs to the operation
Output from the operation
One input to the operation
Output from the operation
Input to the operation
Improving productivity
One obvious way of improving an operation’s productivity is to reduce the cost of its inputs while maintaining the level of its outputs. This means reducing the costs of some or all of its transformed and transforming resource inputs. For example, a bank may choose to locate its call centres to a place where its facility-related costs (for example, rent), are cheaper. A software developer may relocate its entire operation to India or China where skill labour is available at rates significantly less than in European countries. A computer manufacturer may change the design of its products to allow the use of cheaper materials. Productivity can also be improved by making better use of the inputs to the operation. For example,
Single-factor productivity
Part One Introduction50
A health-check clinic has five employees and ‘processes’ 200 patients per week. Each employee works 35 hours per week. The clinic’s total wage bill is £3,900 and its total overhead expenses are £2,000 per week. What are the clinic’s single-factor labour pro- ductivity and its multi-factor productivity?
Labour productivity = = 40 patients/employee/week
Labour productivity = = 1.143 patients/labour hour
Multi-factor productivity = = 0.0339 patient/£ 200
(3900 + 2000)
200
(5 × 35)
200
5
Worked example
Productivity
Cost reduction through internal effectiveness
Our previous discussion distinguished between the benefits of each performance objective to externally and internally. Each of the various performance objectives has several internal effects, but all of them affect cost. So, one important way to improve cost performance is to improve the performance of the other operations objectives (see Figure 2.10).
● High-quality operations do not waste time or effort having to re-do things, nor are their internal customers inconvenienced by flawed service.
● Fast operations reduce the level of in-process inventory between and within processes, as well as reducing administrative overheads.
● Dependable operations do not spring any unwelcome surprises on their internal customers. They can be relied on to deliver exactly as planned. This eliminates wasteful disruption and allows the other micro-operations to operate efficiently.
● Flexible operations adapt to changing circumstances quickly and without disrupting the rest of the operation. Flexible micro-operations can also change over between tasks quickly and without wasting time and capacity.
Chapter 2 Operations performance 51
Hon Hai Precision Industry is sometimes called the
biggest company you have never heard of. Yet it is one
of the world’s largest contract electronics manufacturers
who produce many of the world’s computer, consumer
electronics and communications products for customers
such as Apple, Dell, Nokia and Sony. Since it was
founded in 1974, the company’s growth has been
phenomenal. It is now the world’s biggest contract
manufacturer for the electronics industry. Why? Because
it can make these products cheaper than its rivals. In
fact, the company is known for having an obsession
with cutting its costs. Unlike some of its rivals, it has
no imposing headquarters. The company is run from a
five-storey concrete factory in a grimy suburb of Taipei
and its annual meeting is held in the staff canteen.
‘Doing anything else would be spending your money.
Cheap is our speciality’, says chairman Terry Gow,
and he is regarded as having made Hon Hai the most
effective company in his industry at controlling costs.
The extra business this has brought has enabled the
company to achieve economies of scale above those
of its competitors. It has also expanded into making
Short case Being cheap is our speciality8
more of the components that go into its products than
its competitors. Perhaps most significantly, Hon Hai has
moved much of its manufacturing into China and other
low-cost areas with plants in South-East Asia, Eastern
Europe and Latin America. In China alone, it employs
100,000 people, and with wages rates as low as one-fifth
of those in Taiwan many of Hon Hai’s competitors have
also shifted their production into China.
All performance objectives affect cost
garment manufacturers attempt to cut out the various pieces of material that make up the garment by positioning each part on the strip of cloth so that material wastage is minimized. All operations are increasingly concerned with cutting out waste, whether it is waste of materials, waste of staff time, or waste through the under-utilization of facilities.
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Part One Introduction52
Figure 2.10 Performance objectives have both external and internal effects. Internally, cost is influenced by the
other performance objectives
Slap.com is an Internet retailer of speciality cosmetics. It orders products from a num- ber of suppliers, stores them, packs them to customers’ orders, and then dispatches them using a distribution company. Although broadly successful, the business is very keen to reduce its operating costs. A number of suggestions have been made to do this. There are as follows:
● Make each packer responsible for his or her own quality. This could potentially reduce the percentage of mis-packed items from 0.25 per cent to near zero. Repacking an item that has been mis-packed costs a2 per item.
● Negotiate with suppliers to ensure that they respond to delivery requests faster. It is estimated that this would cut the value of inventories held by slap.com by a1,000,000.
● Institute a simple control system that would give early warning if the total number of orders that should be dispatched by the end of the day actually is dispatched in time. Currently one per cent of orders is not packed by the end of the day and therefore has to be sent by express courier the following day. This costs an extra a2 per item.
Worked example
The polar representation of performance objectives
A useful way of representing the relative importance of performance objectives for a product or service is shown in Figure 2.11(a). This is called the polar representation because the scales which represent the importance of each performance objective have the same origin. A line describes the relative importance of each performance objective. The closer the line is to the common origin, the less important is the performance objective to the operation. Two
Chapter 2 Operations performance 53
Because demand varies through the year, sometimes staff have to work overtime. Currently the overtime wage bill for the year is a150,000. The company’s employees have indicated that they would be willing to adopt a flexible working scheme where extra hours could be worked when necessary in exchange for having the hours off at a less busy time and receiving some kind of extra payment. This extra payment is likely to total a50,000 per year.
If the company dispatches 5 million items every year and if the cost of holding inventory is 10 per cent of its value, how much cost will each of these suggestions save the company?
Analysis
Eliminating mis-packing would result in an improvement in quality. 0.25 per cent of 5 million items are mis-packed currently. This amounts to 12,500 items per year. At a2 repacking charge per item, this is a cost of a25,000 that would be saved.
Getting faster delivery from suppliers helps reduce the amount of inventory in stock by a1,000,000. If the company is paying 10 per cent of the value of stock for keeping it in storage the saving will be a1,000,000 × 0.1 = a100,000.
Ensuring that all orders are dispatched by the end of the day increases the depend- ability of the company’s operations. Currently, 1 per cent are late, in other words, 50,000 items per year. This is costing a2 × 50,000 = a100,000 per year which would be saved by increasing dependability.
Changing to a flexible working hours system increases the flexibility of the operation and would cost a50,000 per year, but it saves a150,000 per year. Therefore, increasing flexibility could save a100,000 per year.
So, in total, by improving the operation’s quality, speed, dependability and flexibility, a total of a325,000 can be saved.
Figure 2.11 Polar representations of (a) the relative importance of performance objectives for
a taxi service and a bus service, and (b) a police force targets and performance
Polar representation
Part One Introduction54
services are shown, a taxi and a bus service. Each essentially provides the same basic service, but with different objectives. The differences between the two services are clearly shown by the diagram. Of course, the polar diagram can be adapted to accommodate any number of different performance objectives. For example, Figure 2.11(b) shows a proposal for using a polar diagram to assess the relative performance of different police forces in the UK.9 Note that this proposal uses three measures of quality (reassurance, crime reduction and crime detection), one measure of cost (economic efficiency), and one measure of how the police force develops its relationship with ‘internal’ customers (the criminal justice agencies). Note also that actual performance as well as required performance is marked on the diagram.
Trade-offs between performance objectives
Earlier we examined how improving the performance of one objective inside the operation could also improve other performance objectives. Most notably, better quality, speed, depend- ability and flexibility can improve cost performance. But externally this is not always the case. In fact there may be a ‘trade-off ’ between performance objectives. In other words improving the performance of one performance objective might only be achieved by sacrificing the per- formance of another. So, for example, an operation might wish to improve its cost efficiencies by reducing the variety of products or services that it offers to its customers. ‘There is no such thing as a free lunch’ could be taken as a summary of this approach. Probably the best-known summary of the trade-off idea comes from Professor Wickham Skinner, who said:
‘most managers will readily admit that there are compromises or trade-offs to be made in
designing an airplane or truck. In the case of an airplane, trade-offs would involve matters
such as cruising speed, take-off and landing distances, initial cost, maintenance, fuel con-
sumption, passenger comfort and cargo or passenger capacity. For instance, no one today can
design a 500-passenger plane that can land on an aircraft carrier and also break the sound
barrier. Much the same thing is true in [operations]’.10
But there are two views of trade-offs. The first emphasizes ‘repositioning’ performance objectives by trading off improvements in some objectives for a reduction in performance in others. The other emphasizes increasing the ‘effectiveness’ of the operation by overcoming trade-offs so that improvements in one or more aspects of performance can be achieved with- out any reduction in the performance of others. Most businesses at some time or other will adopt both approaches. This is best illustrated through the concept of the ‘efficient frontier’ of operations performance.
Trade-offs and the efficient frontier
Figure 2.12(a) shows the relative performance of several companies in the same industry in terms of their cost efficiency and the variety of products or services that they offer to their customers. Presumably all the operations would ideally like to be able to offer very high variety while still having very high levels of cost efficiency. However, the increased complexity that a high variety of product or service offerings brings will generally reduce the operation’s ability to operate efficiently. Conversely, one way of improving cost efficiency is to severely limit the variety on offer to customers. The spread of results in Figure 2.12(a) is typical of an exercise such as this. Operations A, B, C, D have all chosen a different balance between variety and cost efficiency. But none is dominated by any other operation in the sense that another operation necessarily has ‘superior’ performance. Operation X, however, has an inferior performance because operation A is able to offer higher variety at the same level of cost efficiency and operation C offers the same variety but with better cost efficiency. The convex line on which operations A, B, C and D lie is known as the ‘efficient frontier’. They may choose to position themselves differently (presumably because of different market strategies)
There can be a trade-off between an operation’s performance objectives
The efficient frontier
but they cannot be criticized for being ineffective. Of course, any of these operations that lie on the efficient frontier may come to believe that the balance they have chosen between variety and cost efficiency is inappropriate. In these circumstances they may choose to reposition themselves at some other point along the efficient frontier. By contrast, operation X has also chosen to balance variety and cost efficiency in a particular way but is not doing so effectively. Operation B has the same ratio between the two performance objectives but is achieving them more effectively.
However, a strategy that emphasizes increasing effectiveness is not confined to those operations that are dominated, such as operation X. Those with a position on the efficient frontier will generally also want to improve their operations effectiveness by overcoming the trade-off that is implicit in the efficient frontier curve. For example, suppose operation B in Figure 2.12(b) wants to improve both its variety and its cost efficiency simultaneously and move to position B1. It may be able to do this, but only if it adopts operations improvements that extend the efficient frontier. For example, one of the decisions that any supermarket manager has to make is how many checkout positions to open at any time. If too many check- outs are opened then there will be times when the checkout staff do not have any customers to serve and will be idle. The customers, however, will have excellent service in terms of little or no waiting time. Conversely, if too few checkouts are opened, the staff will be working all the time but customers will have to wait in long queues. There seems to be a direct trade-off between staff utilization (and therefore cost) and customer waiting time (speed of service). Yet even the supermarket manager might, for example, allocate a number of ‘core’ staff to operate the checkouts but also arrange for those other staff who are performing other jobs in the supermarket to be trained and ‘on call’ should demand suddenly increase. If the manager on duty sees a build-up of customers at the checkouts, these other staff could quickly be used to staff checkouts. By devising a flexible system of staff allocation, the manager can both improve customer service and keep staff utilization high.
This distinction between positioning on the efficient frontier and increasing operations effectiveness by extending the frontier is an important one. Any business must make clear the extent to which it is expecting the operation to reposition itself in terms of its performance objectives and the extent to which it is expecting the operation to improve its effectiveness in several ways simultaneously.
Chapter 2 Operations performance 55
Figure 2.12 The efficient frontier identifies operations with performances that dominate other operations’
performance
Part One Introduction56
Summary answers to key questions
Check and improve your understanding of this chapter using self assessment questions
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www.myomlab.com.
➤ Why is operations performance important in any organization?
■ Operations management can either ‘make or break’ any business. It is large and, in most busi- nesses, represents the bulk of its assets, but also because the operations function gives the ability to compete by providing the ability to respond to customers and by developing the capabilities that will keep it ahead of its competitors in the future.
➤ How does the operations function incorporate all stakeholders objectives?
■ At a strategic level, performance objectives relate to the interests of the operation’s stake- holders. They relate to the company’s responsibility to customers, suppliers, shareholders, employees, and society in general.
➤ What does top management expect from the operations function?
■ Operations can contribute to the organization as a whole by: – reducing the costs – achieving customer satisfaction – reducing the risk of operational failure – reducing the amount of investment – providing the basis for future innovation.
➤ What are the performance objectives of operations and what are the internal
and external benefits which derive from excelling in each of them?
■ By ‘doing things right’, operations seek to influence the quality of the company’s goods and services. Externally, quality is an important aspect of customer satisfaction or dissatisfaction. Internally, quality operations both reduce costs and increase dependability.
■ By ‘doing things fast’, operations seek to influence the speed with which goods and services are delivered. Externally, speed is an important aspect of customer service. Internally, speed both reduces inventories by decreasing internal throughput time and reduces risks by delaying the commitment of resources.
■ By ‘doing things on time’, operations seek to influence the dependability of the delivery of goods and services. Externally, dependability is an important aspect of customer service. Internally, dependability within operations increases operational reliability, thus saving the time and money that would otherwise be taken up in solving reliability problems and also giving stability to the operation.
■ By ‘changing what they do’, operations seek to influence the flexibility with which the company produces goods and services. Externally, flexibility can: – produce new products and services (product /service flexibility); – produce a wide range or mix of products and services (mix flexibility); – produce different quantities or volumes of products and services (volume flexibility); – produce products and services at different times (delivery flexibility).
Chapter 2 Operations performance 57
Internally, flexibility can help speed up response times, save time wasted in changeovers, and maintain dependability.
■ By ‘doing things cheaply’, operations seek to influence the cost of the company’s goods and services. Externally, low costs allow organizations to reduce their price in order to gain higher volumes or, alternatively, increase their profitability on existing volume levels. Internally, cost performance is helped by good performance in the other performance objectives.
➤ How do operations performance objectives trade off against each other?
■ Trade-offs are the extent to which improvements in one performance objective can be achieved by sacrificing performance in others. The ‘efficient frontier’ concept is a useful approach to articulating trade-offs and distinguishes between repositioning performance on the efficient frontier and improving performance by overcoming trade-offs.
There are many luxurious hotels in the South-East Asia region but few can compare with the Penang Mutiara, a 440-room top-of-the-market hotel which nestles in the lush greenery of Malaysia’s Indian Ocean Coast. Owned by Pernas–OUE of Malaysia and managed by Singapore Mandarin International Hotels, the hotel’s General Man- ager is under no illusions about the importance of running an effective operation. ‘Managing a hotel of this size is an immensely complicated task’, he says. ‘Our customers
have every right to be demanding. They expect first-class
service and that’s what we have to give them. If we have
any problems with managing this operation, the customer
sees them immediately and that’s the biggest incentive for
us to take operations performance seriously. Our quality of
service just has to be impeccable. This means dealing
with the basics. For example, our staff must be courteous
at all times and yet also friendly towards our guests. And
of course they must have the knowledge to be able to
answer guests’ questions. The building and equipment –
in fact all the hardware of the operation – must support
the luxury atmosphere which we have created in the hotel.
Stylish design and top-class materials not only create the
right impression but, if we choose them carefully, are also
durable so the hotel still looks good over the years. Most of
all, though, quality is about anticipating our guests’ needs,
thinking ahead so you can identify what will delight or
irritate a guest.’ The hotel tries to anticipate guests’ needs in a number of ways. For example, if guests have been to the hotel before, staff avoid their having to repeat the informa- tion they gave on the previous visit. Reception staff simply check to see if guests have stayed before, retrieve the information and take them straight to their room without irritating delays. Quality of service also means helping
Case study Operations objectives at the Penang Mutiara11
guests sort out their own problems. If the airline loses a guest’s luggage en route to the hotel, for example, he or she will arrive at the hotel understandably irritated. ‘The fact that it is not us who have irritated them is not really the
issue. It is our job to make them feel better.’
Speed, in terms of fast response to customers’ requests is something else that is important. ‘A guest just should not be kept waiting. If a guest has a request, he or
she has that request now so it needs to be sorted out now.
This is not always easy but we do our best. For example, if
every guest in the hotel tonight decided to call room service
and request a meal instead of going to the restaurants, our
room service department would obviously be grossly over-
loaded and customers would have to wait an unacceptably
long time before the meals were brought up to their rooms.
We cope with this by keeping a close watch on how demand
for room service is building up. If we think it’s going to get ➔
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above the level where response time to customers would
become unacceptably long, we will call in staff from other
restaurants in the hotel. Of course, to do this we have to
make sure that our staff are multi-skilled. In fact we have
a policy of making sure that restaurant staff can always do
more than one job. It’s this kind of flexibility which allows
us to maintain fast response to the customer.’
Dependability is also a fundamental principle of a well- managed hotel. ‘We must always keep our promises. For example, rooms must be ready on time and accounts must
be ready for presentation when a guest departs; the guests
expect a dependable service and anything less than full
dependability is a legitimate cause for dissatisfaction.’ It is on the grand occasions, however, when dependability is particularly important in the hotel. When staging a banquet, for example, everything has to be on time. Drinks, food, entertainment have to be available exactly as planned. Any deviation from the plan will very soon be noticed by customers. ‘It is largely a matter of planning the details and anticipating what could go wrong. Once we’ve done the
planning we can anticipate possible problems and plan
how to cope with them, or better still, prevent them from
occurring in the first place.’
Flexibility means a number of things to the hotel. First of all it means that they should be able to meet a guest’s requests. ‘We never like to say NO!. For example, if a guest asks for some Camembert cheese and we don’t have it in
stock, we will make sure that someone goes to the super-
market and tries to get it. If, in spite of our best efforts, we
can’t get any we will negotiate an alternative solution with
the guest. This has an important side-effect – it greatly helps
us to maintain the motivation of our staff. We are constantly
being asked to do the seemingly impossible – yet we do
it, and our staff think it’s great. We all like to be part of an
organization which is capable of achieving the very difficult,
if not the impossible.’ Flexibility in the hotel also means the ability to cope with the seasonal fluctuations in demand. They achieve this partly by using temporary part-time staff. In the back-office parts of the hotel this isn’t a major problem. In the laundry, for example, it is relatively easy to put on an extra shift in busy periods by increasing staffing
levels. However, this is more of a problem in the parts of the hotel that have direct contact with the customer. ‘New temporary staff can’t be expected to have the same customer
contact skills as our more regular staff. Our solution to this
is to keep the temporary staff as far in the background as we
possibly can and make sure that our skilled, well-trained
staff are the ones who usually interact with the customer.
So, for example, a waiter who would normally take orders,
service the food, and take away the dirty plates would in
peak times restrict his or her activities to taking orders and
serving the food. The less skilled part of the job, taking away
the plates, could be left to temporary staff.’
As far as cost is concerned, around 60 per cent of the hotel’s total operating expenses go on food and beverages, so one obvious way of keeping costs down is by making sure that food is not wasted. Energy costs, at 6 per cent of total operating costs, are also a potential source of saving. However, although cost savings are welcome, the hotel is very careful never to compromise the quality of its service in order to cut costs. ‘It is impeccable customer service which gives us our competitive advantage, not price. Good
service means that our guests return again and again. At
times, around half our guests are people who have been
before. The more guests we have, the higher is our utiliza-
tion of rooms and restaurants, and this is what really keeps
cost per guest down and profitability reasonable. So in the
end we’ve come full circle: it’s the quality of our service
which keeps our volumes high and our costs low.’
Questions
1 Describe how you think the hotel’s management will: (a) Make sure that the way it manages the hotel is
appropriate to the way it competes for business; (b) Implement any change in strategy; (c) Develop its operation so that it drives the long-term
strategy of the hotel.
2 The case describes how quality, speed, dependability, flexibility and cost impact on the hotel’s external customers. Explain how each of these performance objectives might have internal benefits.
Part One Introduction58
These problems and applications will help to improve your analysis of operations. You
can find more practice problems as well as worked examples and guided solutions on
MyOMLab at www.myomlab.com.
The ‘forensic science’ service of a European country has traditionally been organized to provide separate forensic science laboratories for each police force around the country. In order to save costs, the government has decided to centralize this service in one large central facility close to the country’s capital. What do you think are the external advantages and disadvantages of this to the stakeholders of the operation? What do you think are the internal implications to the new centralized operation that will provide this service?
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Problems and applications
A publishing company plans to replace its four proofreaders who look for errors in manuscripts with a new scanning machine and one proofreader in case the machine breaks down. Currently the proofreaders check 15 manuscripts every week between them. Each is paid A80,000 per year. Hiring the new scanning machine will cost A5,000 each calendar month. How will this new system affect the proofreading department’s productivity?
Bongo’s Pizzas has a service guarantee that promises you will not pay for your pizza if it is delivered more than 30 minutes from the order being placed. An investigation shows that 10 per cent of all pizzas are delivered between 15 and 20 minutes from order, 40 per cent between 20 and 25 minutes from order, 40 per cent between 25 and 30 minutes from order, 5 per cent between 30 and 35 minutes from order, 3 per cent between 35 and 40 minutes from order, and 2 per cent over 40 minutes from order. If the average profit on each pizza delivered on time is A1 and the average cost of each pizza delivered is A5, is the fact that Bongo’s does not charge for 10 per cent of its pizzas a significant problem for the business? How much extra profit per pizza would be made if 5 minutes was cut from all deliveries?
Step 1. Look again at the figures in the chapter which illustrate the meaning of each performance objective for the four operations. Consider the bus company and the supermarket, and in particular consider their external customers.
Step 2. Draw the relative required performance for both operations on a polar diagram.
Step 3. Consider the internal effects of each performance objective. For both operations, identify how quality, speed, dependability and flexibility can help to reduce the cost of producing their services.
Visit the web sites of two or three large oil companies such as Exxon, Shell, Elf, etc. Examine how they describe their policies towards their customers, suppliers, shareholders, employees and society at large. Identify areas of the company’s operations where there may be conflicts between the needs of these different stakeholder groups. Discuss or reflect on how (if at all) such companies try and reconcile these conflicts.
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Chapter 2 Operations performance 59
Bourne, M., Kennerley, M. and Franco, M. (2005) Managing through measures: a study of the impact on performance, Journal of Manufacturing Technology Management, vol. 16, issue 4, 373 – 95. What it says on the tin.
Kaplan, R.S. and Norton, D.P. (2005) The Balanced Score- card: measures that drive performance, Harvard Business Review, Jul/Aug. The latest pronouncements on the Balanced Scorecard approach (which we cover in Chapter 18).
Neely, A. (ed.) (2002) Business Performance Measurement: Theory and Practice, Cambridge University Press, Cambridge.
A collection of papers on the details of measuring per- formance objectives.
Pine, B.J. (1993) Mass Customization, Harvard Business School Press, Boston. The first substantial work on the idea of mass customization. Still a classic.
Waddock, S. (2003) Stakeholder performance implications of corporate responsibility, International Journal of Business Performance Management, vol. 5, numbers 2–3, 114 –24. An introduction to stakeholder analysis.
Selected further reading
www.aom.pac.edu / bps/ General strategy site of the American Academy of Management.
www.cranfield,ac.uk/som Look for the ‘Best factory awards’ link. Manufacturing, but interesting.
www.opsman.org Lots of useful stuff.
www.worldbank.org Global issues. Useful for international operations strategy research.
www.weforum.org Global issues, including some operations strategy ones.
www.ft.com Great for industry and company examples.
Useful web sites
Now that you have finished reading this chapter, why not visit MyOMLab at www.myomlab.com where you’ll find more learning resources to help you make the most of your studies and get a better grade?