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OPEraTiOns ManagEMEnT
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OPERATIONS MANAGEMENT Eighth edition
nigel slack alistair Brandon-Jones robert Johnston
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Pearson Education Limited Edinburgh Gate Harlow CM20 2JE United Kingdom Tel: +44 (0)1279 623623 Web: www.pearson.com/uk
First published under the Pitman Publishing imprint 1995 (print) Second edition (Pitman Publishing) 1998 (print) Third edition 2001 (print) Fourth edition 2004 (print) Fifth edition 2007 (print) Sixth edition 2010 (print) Seventh edition 2013 (print and electronic) Eighth edition published 2016 (print and electronic)
© Nigel Slack, Stuart Chambers, Christine Harland, Alan Harrison, Robert Johnston 1995, 1998 (print) © Nigel Slack, Stuart Chambers, Robert Johnston 2001, 2004, 2007, 2010 (print) © Nigel Slack, Alistair Brandon-Jones, Robert Johnston 2013, 2016 (print and electronic)
The rights of Nigel Slack, Alistair Brandon-Jones and Robert Johnston to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988.
The print publication is protected by copyright. Prior to any prohibited reproduction, storage in a retrieval system, distribution or transmission in any form or by any means, electronic, mechanical, recording or otherwise, permission should be obtained from the publisher or, where applicable, a licence permitting restricted copying in the United Kingdom should be obtained from the Copyright Licensing Agency Ltd, Barnard’s Inn, 86 Fetter Lane, London EC4A 1EN.
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ISBN: 978 1 292 09867 8 (print) 978 1 292 09871 5 (PDF) 978 1 292 17190 6 (ePub)
British Library Cataloguing-in-Publication Data A catalogue record for the print edition is available from the British Library
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Print edition typeset in 9.25/12 Charter ITC Std by 76 Printed in Slovakia by Neografia
NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION
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Guide to ‘operations in practice’, examples, short cases and case studies xii
Preface xvi
To the Instructor. . . xviii
To the Student. . . xix
Ten steps to getting a better grade in operations management xx
About the authors xxi
Acknowledgements xxii
Publisher’s acknowledgements xxiv
Part One DirECTing ThE OPEraTiOn 3 1 Operations management 4
2 Operations performance 38
3 Operations strategy 74
4 Product and service innovation 109
5 The structure and scope of operations 140
Supplement to Chapter 5 — Forecasting 170
Part Two DEsigning ThE OPEraTiOn 181 6 Process design 182
7 Layout and flow 216
8 Process technology 246
9 People in operations 276
Supplement to Chapter 9 — Work study 306
Part Three DELivEr 315 10 Planning and control 317
11 Capacity management 350
Supplement to Chapter 11 — Analytical queuing models 391
12 Supply chain management 398
13 Inventory management 432
14 Planning and control systems 468
Supplement to Chapter 14 — Materials requirements planning (MRP) 491
15 Lean operations 498
Part Four DEvELOPMEnT 531 16 Operations improvement 532
17 Quality management 572
Supplement to Chapter 17 — Statistical process control 603
18 Managing risk and recovery 616
19 Project management 646
Notes on chapters 681 Useful websites 689 Glossary 691 Index 704
Brief contents
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How is operations performance judged at an operational level? 48
How can operations performance be measured? 63
How do performance objectives trade off against each other? 66
Summary answers to key questions 68 Case study : Operations objectives at the
Penang Mutiara 70 Problems and applications 72 Selected further reading 73
Chapter 3: Operations strategy 74 Introduction 74
What is strategy and what is operations strategy? 76
What is the difference between a ‘top-down’ and ‘bottom-up’ view of operations strategy? 80
What is the difference between a ‘market requirements’ and an ‘operations resources’ view of operations strategy? 84
How can operations strategy form the basis for operations improvement? 92
How can an operations strategy be put together? The process of operations strategy 98
Summary answers to key questions 102 Case study : McDonald's: half a century
of growth 104 Problems and applications 107 Selected further reading 108
Chapter 4: Product and service innovation 109 Introduction 109
What is product and service innovation? 110 What is the strategic role of product
and service innovation? 114 What are the stages of product and
service innovation? 119 What are the benefits of interactive
product and service innovation? 130 Summary answers to key questions 134
Contents
Guide to ‘operations in practice’, examples, short cases and case studies xii Preface xvi To the Instructor. . . xviii To the Student. . . xix Ten steps to getting a better grade in operations management xx About the authors xxi Acknowledgements xxii Publisher’s acknowledgements xxiv
Part One
DirECTing ThE OPEraTiOn 3
Chapter 1: Operations management 4 Introduction 4
What is operations management? 5 Why is operations management important
in all types of organization? 8 What is the input–transformation–output
process? 13 What is the process hierarchy? 19 How do operations and processes differ? 22 What do operations managers do? 27 Summary answers to key questions 31 Case study : Design house partnerships at
Concept Design Services 33 Problems and applications 36 Selected further reading 36
Chapter 2: Operations performance 38 Introduction 38
Why is operations performance vital in any organization? 39
How is operations performance judged at a societal level? 41
How is operations performance judged at a strategic level? 46
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Case study: Developing ‘Savory Rosti-crisps’ at Dreddo Dan’s 136
Problems and applications 138 Selected further reading 139
Chapter 5: The structure and scope of operations 140 Introduction 140
What do we mean by the ‘structure’ and ‘scope’ of operations’ supply networks? 141
What configuration should a supply network have? 145
How much capacity should operations plan to have? 149
Where should operations be located? 154 How vertically integrated should an
operation’s network be? 156 How do operations decide what to do
in-house and what to outsource? 161 Summary answers to key questions 164 Case study: Aarens Electronic 166 Problems and applications 168 Selected further reading 169
Supplement to Chapter 5: Forecasting 170 Introduction 170
Forecasting – knowing the options 170 In essence forecasting is simple 171 Approaches to forecasting 172 Selected further reading 178
Summary answers to key questions 211 Case study: The Action Response Applications
Processing Unit (ARAPU) 212 Problems and applications 214 Selected further reading 214
Chapter 7: Layout and flow 216 Introduction 216
What is layout and how can it influence performance? 217
What are the basic layout types used in operations? 220
How does the appearance of an operation affect its performance? 231
How should each basic layout type be designed in detail? 234
Summary answers to key questions 240 Case study: The event hub 241 Problems and applications 244 Selected further reading 244
Chapter 8: Process technology 246 Introduction 246
What is process technology? 247 What do operations managers need to
know about process technology? 251 How are process technologies evaluated? 258 How are process technologies
implemented? 264 Summary answers to key questions 271 Case study: Rochem Ltd 272 Problems and applications 274 Selected further reading 274
Chapter 9: People in operations 276 Introduction 276
Why are people so important in operations management? 277
How do operations managers contribute to human resource strategy? 279
How can the operations function be organized? 281
How do we go about designing jobs? 286 How are work times allocated? 300 Summary answers to key questions 301 Case study: Grace faces (three) problems 302
Part Two
DEsigning ThE OPEraTiOn 181
Chapter 6: Process design 182 Introduction 182
What is process design? 183 What should be the objectives of
process design? 185 How do volume and variety affect
process design? 189 How are processes designed in detail? 195
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Problems and applications 304 Selected further reading 305
Supplement to Chapter 9: Work study 306 Introduction 306
Method study in job design 306 Work measurement in job design 309
Supplement to Chapter 11: analytical queuing models 391 Introduction 391
Notation 391 Variability 391 Incorporating Little’s law 393 Types of queuing system 393
Chapter 12: supply chain management 398 Introduction 398
What is supply chain management? 399 How should supply chains compete? 402 How should relationships in supply chains
be managed? 407 How is the supply side managed? 412 How is the demand side managed? 419 What are the dynamics of supply chains? 423 Summary answers to key questions 426 Case study: Supplying fast fashion 428 Problems and applications 430 Selected further reading 431
Chapter 13: inventory management 432 Introduction 432
What is inventory? 434 Why should there be any inventory? 437 How much to order? The volume decision 442 When to place an order? The timing decision 452 How can inventory be controlled? 458 Summary answers to key questions 463 Case study: supplies4medics.com 465 Problems and applications 466 Selected further reading 467
Chapter 14: Planning and control systems 468 Introduction 468
What are planning and control systems? 469 What is enterprise resource planning and
how did it develop into the most common planning and control system? 475
How should planning and control systems be implemented? 483
Summary answers to key questions 486
DELivEr 315
Chapter 10: Planning and control 317 Introduction 317
What is planning and control? 318 What is the difference between planning
and control? 319 How do supply and demand affect planning
and control? 321 What are the activities of planning and control? 327 Summary answers to key questions 345 Case study: subText Studios Singapore 346 Problems and applications 348 Selected further reading 349
Chapter 11: Capacity management 350 Introduction 350
What is capacity management? 351 How are demand and capacity
measured? 354 How should the operation’s base capacity
be set? 364 What are the ways of coping with
mismatches between demand and capacity? 366
How can operations understand the consequences of their capacity decisions? 373
Summary answers to key questions 382 Case study: Blackberry Hill Farm 384 Problems and applications 388 Selected further reading 389
Part Three
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Case study: Psycho Sports Ltd 487 Problems and applications 489 Selected further reading 490
Supplement to Chapter 14: Materials requirements planning (MrP) 491 Introduction 491
Master production schedule 491 The bill of materials (BOM) 492 Inventory records 494 The MRP netting process 494 MRP capacity checks 497 Summary 497
Chapter 15: Lean operations 498 Introduction 498
What is lean? 499 How does lean eliminate waste? 506 How does lean apply throughout the
supply network? 519 How does lean compare with other
approaches? 521 Summary answers to key questions 524 Case study: Saint Bridget’s Hospital 525 Problems and applications 527 Selected further reading 528
Summary answers to key questions 566 Case study: Reinventing Singapore’s
libraries 568 Problems and applications 569 Selected further reading 570
Chapter 17: Quality management 572 Introduction 572
What is quality and why is it so important? 573
What steps lead towards conformance to specification? 580
What is total quality management (TQM)? 587 Summary answers to key questions 597 Case study: Turnaround at the
Preston plant 599 Problems and applications 601 Selected further reading 602
Supplement to Chapter 17: statistical process control 603 Introduction 603
Control charts 603 Variation in process quality 604 Control charts for attributes 608 Control chart for variables 610 Summary of supplement 615 Selected further reading 615
Chapter 18: Managing risk and recovery 616 Introduction 616
What is risk management? 617 How can operations assess the
potential causes and consequences of failure? 619
How can failures be prevented? 632 How can operations mitigate the effects
of failure? 637 How can operations recover from the
effects of failure? 639 Summary answers to key questions 642 Case study: Slagelse Industrial
Services (SIS) 643 Problems and applications 645 Selected further reading 645
Part Four DEvELOPMEnT 531
Chapter 16: Operations improvement 532 Introduction 532
Why is improvement so important in operations management? 533
What are the key elements of operations improvement? 540
What are the broad approaches to improvement? 545
What techniques can be used for improvement? 554
How can the improvement process be managed? 559
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Chapter 19: Project management 646 Introduction 646
What is project management? 647 How are projects planned? 653 How are projects controlled? 669 Summary answers to key questions 674 Case study: United Photonics Malaysia Sdn Bhd 675
Problems and applications 679 Selected further reading 680
Notes on chapters 681
Useful websites 689
Glossary 691
Index 704
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guide to ‘operations in practice’, examples, short cases and case studies
Chapter Location Company/example Region Sector/activity Company size
1 Operations management
Lego Europe Manufacturing Large Torchbox UK Web design Small MSF Global Charity Large Pret a Manger Global Hospitality Medium Formule 1 Europe Hospitality Large Ski Verbier Exclusive Europe Hospitality Small Hewlet Packard Manufacturing Large To be a great operations manager…
Global N/A N/A
Concept design services General Design/manufactur- ing/distribution
Medium
2 Operations performance
Novozymes Europe Pharmaceutical Large Patagonia Global Garments Large Holcim Global Cement/aggregates Large Quality Street Global Confectionary Large The Golden Hour General Healthcare N/A UPS Global Distribution Large Mymusli German Web retail Small Aldi Europe Retail Large Foxconn Taiwan Manufacturing Large
The Penang Mutiara Malaysia Hospitality Medium
3 Operations strategy
SSTL UK/ Space Aerospace Medium Apple retail Global Retail Large Amazon Global Web retail Large Apple supply operations Global Manufacturing Large Nokia Global Telecomm Large Sometimes any plan is better than no plan
Europe Military Large
McDonalds Global Hospitality Large
4 Product and service innova- tion
Apple iPhone Global Design Large Kodak Global Manufacturing Smaller Square watermelons Global Agriculture Various IKEA Global Design/ Retail Large Dyson Global Manufacturing Large The circular economy Global Sustainability Various Dreddo Dan’s Global Snack food Large
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Chapter Location Company/example Region Sector/activity Company size
5 The structure and scope of operations
ARM and Intel Global Design and Design/ manufacturing
Large
Hollywood studios USA Creative Large Surgery and shipping India/Global Healthcare/transporta-
tion Large
Counting clusters Various Various Various HTC Taiwan Design/manufacturing Large Samsun Korea Manufacturing Large Aarens Electronic Netherlands Manufacturing Medium
6 Process design
Changi airport Singapore Air travel Large Fast food Global Hospitality Large Ecover Europe Manufacturing Large Sands Film Studio UK Creative Small Space4 housing UK Construction Medium Sainsbury ’s UK Retail Large
Shouldice hospital Canada Healthcare Small
Action response UK Charity Small
7 Layout and flow
Volkswagen Germany Manufacturing Large Google USA Technology Large Factory flow helps surgery UK Healthcare Medium Apple’s shop UK Retail Large Cadbury ’s UK Manufacturing/ enter-
tainment Large
Nestlé Global Manufacturing Large
Office cubicles Various Design Various
Zodiac France / Global
Manufacturing Medium
The Event Hub UK Policing Medium
8 Process technology
I Robot Global Various Various Technology or people? Various Various Various QB house Asia Hairdressing Medium Marmite UK Food Large Technology failures UK Technology Large
Who’s in the cockpit? Global Various Airlines Various
Rochem UK Food processing Medium
9 People in operations
W L Gore Global Manufacturing Large High customer contact jobs USA Air travel Large McDonald’s Global Hospitality Large Yahoo USA Technology Large Music while you work Global Various Various
Grace faces (three) problems UK Legal Medium
10 Planning and control
Joanne manages the schedule
UK Retail Medium
Operations control at Air France
Global Airline Large
Uber Global Technology platform Large Can airline passengers be sequenced?
General Airports Various
The hospital triage system Global Healthcare Various The life and times of a chicken sandwich (part 1)
UK Food processing Medium
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Chapter Location Company/example Region Sector/activity Company size
11 Capacity management
Heathrow UK Airports Large Panettone Italy Food processing Large Amazon Global Retail Large Lowaters UK Horticulture Medium Demand management USA Public Large Baseball games USA Leisure Medium Blackberry hill farm UK Leisure Small
12 supply chain management
Ocado UK Retail Large The North Face Global Garment manufacture Large Apple Global Technology Large The tsunami effect Asia Various Various
Levi Strauss Global Garment manufacture Large
Seven-Eleven Japan Japan Retail Large
Supplying fast fashion Global Garment design/ manufacture/ retail
Large
13 inventory management
National Health Service Blood and Transplant service
UK Public sector Large
Energy inventory Global Power generation Large Treasury wines Australia Wine production Large Gritting roads Europe Public sector Large Flame electrical South Africa Wholesale Small Amazon Global Retail Large Supplies4medics Europe Retail Medium
14 Planning and control systems
Butchers pet care UK (Dog) food production Medium SAP and its partners Global Systems developers The life and times of a chick- en salad sandwich (part 2)
UK Food production Medium
What a waste USA Recycling Large Psycho sports N/A Manufacturing Small
15 Lean operations
Jamie’s lean meals UK Domestic food preparation
N/A
Pixar adopts lean USA Creative Large Toyota Global Auto production Large Waste reduction in airline maintenance
N/A Air transport N/A
Andon’s in Amazon Global Retail Large
Torchbox UK Web design Small
St Bridget’s Hospital Sweden Healthcare Medium
16 improve- ment
Sonae Corporation Portugal Retail Large The checklist manifesto N/A Healthcare Various 6Wonderkinder Germany App developer Small Improvement at Heineken Netherlands Brewer Large
6Sigma at Wipro India Outsourcers Large
Learning from Formula 1 UK Transport Various
Reinventing Singapore’s libraries
Singapore Public sector Medium
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Chapter Location Company/example Region Sector/activity Company size
17 Quality management
TNT Express Global Transport Large Victorinox Switzerland Manufacturing Large Four Seasons Global Hospitality Large Magic moments UK Photography Small Ryanair’s Europe Airline Large Millbrook Proving Ground UK Auto testing Medium Quick Food Products UK Food production Small Fat finger syndrome Global Finance Various Deliberate defectives Canada Manufacturing Large Preston plant Canada Manufacturing Medium
18 Managing risk and recovery
Tesco UK Retail Large Findus Europe Food production Large G4S UK Outsourcer Large The rise of the micromort N/A Various Various Is failure designed-in to airline operations?
Netherlands Airline Large
General motors USA Auto manufacture Large Slagelse Industrial Services Denmark Manufacturing Medium
19 Project management
Disney Global Leisure Large Vasa’s first voyage Sweden Military N/A Halting the growth of ma- laria
Global Healthcare Large
The Scottish Parliament Building
UK Construction Large
United Photonics Malaysia Development Large
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Preface
introduction - Operations may not run the World, but it makes the World run Operations management is important . It is concerned with creating the services and products upon which we all depend. And all organizations produce some mixture of services and products, whether that organization is large or small, manufacturing or service, for profit or not for profit, public or private. Thankfully, most companies have now come to understand the importance of opera- tions. This is because they have realized that effective operations management gives the potential to improve both efficiency and customer service simultaneously. But more than this, operations management is everywhere , it is not confined to the operations function. All manag- ers, whether they are called Operations or Marketing or Human Resources or Finance, or whatever, manage pro- cesses and serve customers (internal or external). This makes, at least part of their activities ‘operations’.
Operations management is also exciting . It is at the centre of so many of the changes affecting the business world – changes in customer preference, changes in sup- ply networks brought about by internet-based technolo- gies, changes in what we want to do at work, how we want to work, where we want to work, and so on. There has rarely been a time when operations management was more topical or more at the heart of business and cultural shifts.
Operations management is also challenging . Promoting the creativity that will allow organizations to respond to so many changes is becoming the prime task of operations managers. It is they who must find the solutions to technological and environmental chal- lenges, the pressures to be socially responsible, the increasing globalization of markets and the difficult- to- define areas of knowledge management.
The aim of this book This book provides a clear, authoritative, well-structured and interesting treatment of operations management as it applies to a variety of businesses and organizations. The text provides both a logical path through the activi- ties of operations management and an understanding of their strategic context.
More specifically, this text is:
● Strategic in its perspective. It is unambiguous in treating the operations function as being central to competitiveness.
● Conceptual in the way it explains the reasons why operations managers need to take decisions.
● Comprehensive in its coverage of the significant ideas and issues which are relevant to most types of operation.
● Practical in that the issues and challenges of making operations management decisions in practice are dis- cussed. The ‘Operations in practice’ feature, which starts every chapter, the short cases that appear through the chapters, and the case studies at the end of each chapter, all explore the approaches taken by operations managers in practice.
● International in the examples that are used. There are over 110 descriptions of operations practice from all over the world.
● Balanced in its treatment. This means we reflect the balance of economic activity between service and manufacturing operations. Around seventy-five per cent of examples are from organizations that deal primarily in services and twenty-five per cent from those that are primarily manufacturing.
Who should use this book? This book is for anyone who is interested in how services and products are created.
● Undergraduates on business studies, technical or joint degrees should find it sufficiently structured to provide an understandable route through the subject (no prior knowledge of the area is assumed).
● MBA students should find that its practical discus- sions of operations management activities enhance their own experience.
● Postgraduate students on other specialist Master’s degrees should find that it provides them with a well-grounded and, at times, critical approach to the subject.
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summary answers to key questions Each chapter is summarized in the form of a list of bullet points. These extract the essential points that answer the key questions posed at the beginning of each chapter.
Case studies Every chapter includes a case study suitable for class discussion. The cases are usually short enough to serve as illustrations, but have sufficient content also to serve as the basis of case sessions.
Problems and applications Every chapter includes a set of problem-type exercises. These can be used to check out your understanding of the concepts illustrated in the worked examples. There are also activities that support the learning objectives of the chapter that can be done individually or in groups.
selected further reading Every chapter ends with a short list of further reading that takes the topics covered in the chapter further, or treats some important related issues. The nature of each further reading is also explained.
Distinctive features Clear structure The structure of the book uses the ‘4Ds’ model of opera- tions management that distinguishes between the strate- gic decisions that govern the direction of the operation, the design of the processes and operations that create products and services, planning and control of the deliv- ery of products and services, and the development, or improvement of operations.
illustrations-based Operations management is a practical subject and cannot be taught satisfactorily in a purely theoretical manner. Because of this we have used examples and short ‘opera- tions in practice’ cases that explain some of the issues faced by real operations.
Worked examples Operations management is a subject that blends qualita- tive and quantitative perspectives; ‘worked examples’ are used to demonstrate how both types of technique can be used.
Critical commentaries Not everyone agrees about what is the best approach to the various topics and issues with operations manage- ment. This is why we have included ‘critical commentar- ies’ that pose alternative views to the one being expressed in the main flow of the text.
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Teaching and learning resources for the 8th edition
To the instructor . . .
new for the eighth edition This 8 th Edition is different. In fact, it’s the biggest set of changes that we have made between editions. We have been consulting widely with our users, who have very kindly contributed to advising us on how we should further improve both the structure and content of the book. First the structure – we have retained the ‘4Ds’ structure (direct, design, delivery and development) that has proved to be exceptionally popular, but we have shifted two chapters that were in the ‘design’ section into the ‘direct’ section. Our users, quite rightly, pointed out that ‘design innovation’ and ‘the structure and scope of operations’ (what was called ‘Supply network design’ in previous editions) were both fundamental and strategic, and so therefore should be included in the first part of the book. We have done this and made both chap- ters more strategic. We have also moved two chapters (Quality management and Project management) into the ‘Development’ section on the grounds that they are both increasingly seen as part of operations improvement. In terms of the content, we have included various aspects of sustainability and Corporate Social Responsibility in each chapter rather than separating the issue out at the end of the book. The issues covered are just too important to be segregated in that way. Needless to say, as usual, we have tried to keep up to date with the (increasingly) rapid changes taking place in the (wonderful) world of operations.
Specifically, the 8th edition includes the following key changes:
● There are now more than 110 of the popular ‘Opera- tions in Practice’ examples throughout the book, over 40 per cent of which are new.
● The importance of sustainability and Corporate Social Responsibility (CSR) has been emphasised further, and included throughout the book.
● We have even further strengthened the emphasis on the idea that ‘operations management’ is relevant to every type of business and all functional areas of the organization.
● Many new ideas in operations management have been incorporated, including the ‘three level’ approach to performance, the relationship between innovation, creativity and design, crowdsourcing, ideas management, business ecosystems, triadic rela- tionships, office layout, telecommuting and organi- sational ‘ambidexterity’. However, we have retained the emphasis on the foundations of the subject.
● Six of the 19 cases at the end of the chapter are new (but the old ones are still available on the website), and provide an up-to-date selection of operations issues.
● The book has been visually redesigned to aid learn- ing. Instructor’s resources A completely new instruc- tor’s manual is available to lecturers adopting this textbook, together with PowerPoint presentations for each chapter and a Testbank of assessment ques- tions. Visit www.pearsoned.co.uk/slack to access these. Most importantly, a new set of online resourc- es to enable students to check their understanding, practise key techniques and improve their problem- solving skills now accompanies the book.
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Making the most of this book
To the student . . .
All academic textbooks in business management are, to some extent, simplifications of the messy reality that is actual organizational life. Any book has to separate top- ics, in order to study them, which in reality are closely related. For example, technology choice impacts on job design that in turn impacts on quality management; yet, for simplicity, we are obliged to treat these topics individually. The first hint therefore in using this book effectively is to look out for all the links between the individual topics. Similarly with the sequence of topics: although the chapters follow a logical structure, they need not be studied in this order. Every chapter is, more or less, self-contained. Therefore study the chapters in whatever sequence is appropriate to your course or your individual interests. But because each part has an intro- ductory chapter, those students who wish to start with a brief ‘overview’ of the subject may wish first to study Chapters 1 , 6 , 10 and 16 and the chapter summaries of selected chapters. The same applies to revision – study the introductory chapters and summary answers to key questions.
The book makes full use of the many practical exam- ples and illustrations that can be found in all operations. Many of these were provided by our contacts in compa- nies, but many also come from journals, magazines and newspapers. So if you want to understand the impor- tance of operations management in every-day business life look for examples and illustrations of operations
management decisions and activities in newspapers and magazines. There are also examples which you can observe every day. Whenever you use a shop, eat a meal in a restaurant, borrow a book from the library or ride on public transport, consider the operations manage- ment issues of all the operations for which you are a customer.
The case exercises and study activities are there to provide an opportunity for you to think further about the ideas discussed in the chapters. Study activities can be used to test out your understanding of the specific points and issues discussed in the chapter and discuss them as a group, if you choose. If you cannot answer these you should revisit the relevant parts of the chap- ter. The case exercises at the end of each chapter will require some more thought. Use the questions at the end of each case exercise to guide you through the logic of analysing the issue treated in the case. When you have done this individually try to discuss your analy- sis with other course members. Most important of all, every time you analyse one of the case exercises (or any other case or example in operations management) start off your analysis with the two fundamental questions:
● How is this organization trying to compete (or satisfy its strategic objectives if a not-for-profit organiza- tion)?
● What can the operation do to help the organization compete more effectively?
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Ten steps to getting a better grade in operations management
I could say that the best rule for getting a better grade is to be good. I mean really, really good! But, there are plenty of us who, while fairly good, don’t get as good a grade as we really deserve. So, if you are studying opera- tions management, and you want a really good grade, try following these simple steps:
Step 1 Practise, practise, practise. Use the Key ques- tions and the Problems and applications to check your understanding.
Step 2 Remember a few key models , and apply them wherever you can. Use the diagrams and models to describe some of the examples that are contained within the chapter.
Step 3 Remember to use both quantitative and quali- tative analysis. You’ll get more credit for appropri- ately mixing your methods: use a quantitative model to answer a quantitative question and vice versa, but qualify this with a few well-chosen sentences.
Step 4 There’s always a strategic objective behind any operational issue. Ask yourself, ‘Would a similar opera- tion with a different strategy do things differently?’ Look at the ‘Operations in practice’ pieces in the book.
Step 5 Research widely around the topic. Use websites that you trust – we’ve listed some good websites at the end of the book. You’ll get more credit for using references that come from genuine academic sources.
Step 6 Use your own experience. Every day, you’re experiencing an opportunity to apply the principles of operations management. Why is the queue at the airport check-in desk so long? What goes on behind the ‘hole in the wall’ of your bank’s ATM machines?
Step 7 Always answer the question. Think ‘what is really being asked here? What topic or topics does this
question cover?’ Find the relevant chapter or chapters, and search the Key questions at the beginning of each chapter and the Summary at the end of each chapter to get you started.
Step 8 Take account of the three tiers of accumulating marks for your answers.
(a) First, demonstrate your knowledge and under- standing. Make full use of the text to find out where you need to improve.
(b) Second, show that you know how to illustrate and apply the topic. The Case studies and ‘Operations in practice’ sections give you hundreds of different examples.
(c) Third, show that you can discuss and analyse the issues critically. Use the Critical commentaries within the text to understand some of the alterna- tive viewpoints.
Generally, if you can do (a) you will pass; if you can do (a) and (b) you will pass well, and if you can do all three, you will pass with flying colours!
Step 9 Remember what the issue is about, but also understand why! Read the text until you really under- stand why the concepts and techniques of operations management are important, and what they contribute to an organization’s success. Your new-found knowl- edge will stick in your memory, allow you to develop ideas, and enable you to get better grades.
Step 10 Start now! Don’t wait until two weeks before an assignment is due. GOOD LUCK!
Nigel Slack
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about the authors
nigel slack is an Emeritus Professor of Operations Management and Strategy at Warwick University, an Honorary Professor at Bath University and an Associate Fellow of Said Business School, Oxford University. Previously he has been Professor of Service Engineering at Cambridge University, Professor of Manufacturing Strategy at Brunel University, a University Lecturer in Management Studies at Oxford University and Fellow in Operations Management at Templeton College, Oxford. He worked initially as an industrial apprentice in the hand-tool industry and then as a production engineer and production manager in light engineer- ing. He holds a Bachelor’s degree in Engineering and Master’s and Doctor’s degrees in Management, and is a Chartered Engineer. He is the author of many books and papers in the operations management area, including The Manufacturing Advantage , published by Mercury Business Books, 1991, and Making Management Decisions (with Steve Cooke), 1991, published by Prentice Hall, Service Superiority (with Robert Johnston), published in 1993 by EUROMA, The Blackwell Encyclopedic Dictionary of Operations Management (with Michael Lewis) pub- lished by Blackwell, Operations Strategy together with Michael Lewis, the fourth edition published by Pearson in 2014 and Perspectives in Operations Management (Volumes I to IV) also with Michael Lewis, published by Routledge in 2003, Operations and Process Management , with Alistair Brandon-Jones, Robert Johnston and Alan Betts, now in its 4th Edition 2015. He has authored
numerous academic papers and chapters in books. He also acts as a consultant to many international com- panies around the world in many sectors, especially financial services, transport, leisure and manufactur- ing. His research is in the operations and manufacturing flexibility and operations strategy areas.
alistair Brandon-Jones is a Professor in Operations and Supply Management and Associate Dean for Post- Experience Education at the University of Bath School of Management, He was formerly a Reader at Manchester Business School, an Assistant and Associate Professor at Bath School of Management and a Teaching Fellow Warwick Business School, where he also completed his PhD. His other books include Operations and Process Management , Essentials of Operations Management , and Quantitative Analysis in Operations Management . Alistair is an active empirical researcher focusing on e-enabled operations and supply management, healthcare opera- tions, and professional services. This work, supported by a range of grants, has been published in many lead- ing management journals. Alistair has consulting and executive development experience with organizations around the world, in various sectors including petro- chemicals, health, financial services, manufacturing, defence, and government. In addition, he has won sev- eral university, national, and international awards for teaching excellence.
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acknowledgements
During the preparation of the eighth edition of this book (and previous editions) we have received an immense amount of help from friends and colleagues in the Operations Management community. In particular everybody who has attended one of the regular ‘fac- ulty work-shops’ deserves thanks for the many useful comments. The generous sharing of ideas from these sessions has influenced this and all the other OM books that we prepare. Our thanks go to everyone who attend- ed these sessions and other colleagues. It is, to some extent, invidious to single out individuals – but we are going to. We thank Pär Åhlström of Stockholm School of Economics, James Aitken of University Of Surrey, Yongmei Bentley of the University Of Bedfordshire, Helen Benton of Anglia Ruskin University, Ran Bhamra, Loughborough University, Tony Birch of Birmingham City University, Abhijeet Ghadge of Heriot Watt University, Professor Sven Åke Hörte of Lulea University of Technology, Eamonn Ambrose of University College, Andrea Benn of University of Brighton, Dublin, Mattia Bianchi of the Stockholm School of Economics John K Christiansen of Copenhagen Business School, Philippa Collins of Heriot-Watt University, Henrique Correa of Rollins College, Florida, Paul Coughlan of Trinity College Dublin, Simon Croom of the University of San Diego, Stephen Disney of Cardiff University, Doug Davies of University of Technology, Sydney, Tony Dromgoole of the Irish Management Institute, J.A.C. de Haan of Tilburg University, Carsten Dittrich of the University of Southern Denmark, David Evans of Middlesex University, Ian Evans of Sunderland University, Paul Forrester of Keele University, Ian Graham of Edinburgh University, Ian Fouweather of Bradford University, Alan Harle of Sunderland University, Norma Harrison of Macquarie University, Catherine Hart of Loughborough Business School, Steve Hickman of University Of Exeter, Chris Hillam of Sunderland University, Ian Holden of Bristol Business School, Matthias Holweg, Oxford University, Mickey Howard of Exeter University, Kim Hua Tan of the University Of Nottingham, Stavros Karamperidis of Heriot Watt University, Tom Kegan of Bell College of Technology, Hamilton, Denis Kehoe of Liverpool University, Mike Lewis of Bath University, Xiaohong Li of Sheffield Hallam University, John Maguire of the University of Sunderland, Charles Marais of the University of Pretoria, Peter McCullen of
University Of Brighton, Roger Maull, Exeter University, Bart McCarthy, Nottingham University, Harvey Maylor of Cranfield University, John Meredith Smith of EAP, Oxford, Michael Milgate of Macquarie University, Keith Moreton of Staffordshire University, Chris Morgan of Cranfield University, Adrian Morris of Sunderland University, Andy Neely of Cambridge University, Steve New of Oxford University, John Pal of Manchester Business School, Antony Potter of Manchester Business School, Gary Priddis of University of Brighton, Sofia Salgado Pinto of the Católica Porto Business School, Peter Race of Henley College, Reading University, Gary Ramsden of University Of Lincoln, Steve Robinson of Southampton Solent University, James Rowell of University Of Buckingham, Frank Rowbotham of University Of Birmingham, Ian Sadler of Victoria University, Hamid Salimian of University of Brighton, Sarah Schiffling of University of Lincoln, Andi Smart, Exeter University, Amrik Sohal of Monash University, Nigel Spinks of the University Of Reading, Rui Soucasaux Sousa of the Católica Porto Business School, Alex Skedd of Northumbria Business School, Martin Spring of Lancaster University, Dr Ebrahim Soltani of the University of Kent, R. Stratton of Nottingham Trent University, James Stone, Aston University, Dr. Nelson Tang of the University of Leicester, David Twigg of Sussex University, Helen Valentine of the University of the West of England, Professor Roland van Dierdonck of the University of Ghent, Dirk Pieter van Donk of the University of Groningen, Arvind Upadhyay of University of Brighton, Vessela Warren of University Of Worcester, Bill Wright of Bpp Professional, Ying Xie of Anglia Ruskin University, Maggie Zeng of Gloucestershire University and Li Zhou of University Of Greenwich University.
Our academic colleagues at both Warwick Business School, Bath School of Management have also helped, both by contributing ideas and by creating a lively and stimulating work environment. At Warwick, thanks go to, Nicola Burgess, Mehmet Chakkol, Max Finne, Emily Jamieson, Mark Johnson, Pietro Micheli, Rhian Silvestro, and Chris Voss. At Bath, thanks go to Brian Squire, Chris Archer-Brown, Maria Battarra, Emma Brandon-Jones, Günes Erdogan, Marco Formentini, Emmanuel Fragniere, Andrew Graves, Jooyoung Jeon, Richard Kamm, Mike Lewis, Sheik Meeran, Dimitris
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Paraskevopoulos, Tony Roath, Jens Roehrich, Christos Vasilakis, and Baris Yalabik.
Our late friend and colleague, Bob Johnston con- tributed both expertise and wisdom to earlier editions of this book. We still miss his intelligence, insight and support.
We were lucky to receive continuing profession- al and friendly assistance from a great publishing team. Especial thanks to Kate Brewin, Caitlin Lisle, Tim
Parker, Kelly Miller, Kay Holman, Neville Hankins, Lucy Chantler, Isobel McLean, Frances Topp and Sasmita Sinha.
Finally, to our families, who both supported and tolerated our nerdish obsession, thanks are inadequate, but thanks anyway to Angela and Kathy, and Emma and Noah.
Nigel Slack Alistair Brandon-Jones
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Publisher ’s acknowledgements
We are grateful to the following for permission to repro- duce copyright material:
Figures Figure 2.11b from Spidergram to check on police forces, The Times, 10/07/2002 (Miles, A. and Bladwin, T.) reproduced with permission; Figure 3.15 adapted from Operations Strategy, 4 ed., Pearson Education (Slack N. and Lewis M.A. 2015) reproduced with permission; Figure 5.6 from Operations and Process Management: Principles and Practice for Strategic Impact, Pearson Education (Slack, Nigel, Brandon-Jones, A., Johnston, R. and Betts, A. 2012) reproduced with permission; Figure 7.6 from For Toyota, patriotism and profits may not mix, Wall Street Journal, 29/11/2011 (Dawson, C.) reprinted with permission of Wall Street Journal, Copyright © 2011 Dow Jones & Company, Inc. All Rights Reserved Worldwide. License numbers 3841860034292 and 3841860323322; Figure 8.4 from Unilever UK, Reproduced with kind permission of Unilever PLC and group companies; Figure 9.7 adapted from A new strat- egy for job enrichment, California Management Review, Vol. 17 (3) (Hackman, J.R., Oldham, G., Janson, R. and Purdy, K. 1975) republished with permission of University of California Press, permission conveyed through Copyright Clearance Center, Inc.; Figure 12.6 adapted from What is the right supply chain for your product?, Harvard Business Review, March-April, pp. 105–116 (Fisher, M.C. 1997), reprinted by permis- sion of Harvard Business Review. Copyright ©1997 by Harvard Business Publishing; all rights reserved; Figure 12.10 adapted from Purchasing must become sup- ply management, Harvard Business Review, September (Kraljic, Peter 1983), reprinted by permission of Harvard Business Review. Copyright ©1983 by Harvard Business Publishing; all rights reserved; Figure 15.7 from Applying Lean in Offices, Hospitals, Planes and Trains, Presentation at The Lean Services Summit, Amsterdam, June 24 (2004) p. 30, McKinsey & Company, www.mckinsey. com. Copyright © 2004 McKinsey & Company. All rights reserved. Reprinted by permission; Figure 15.12 adapted from C.A. Voss and A. Harrison, Strategies for implement- ing JIT, in, Just-in-Time Manufacture, IFS/Springer-Verlag (Voss, C.A. (ed.) 1987) Copyright © 1987 Springer; Figure 17.4 adapted from A conceptual model of service
quality and implications for future research, Journal of Marketing, Vol. 49, Fall, pp. 41-50 (Parasuraman, A., Zeithaml, V.A. and Berry, L.B. 1985), American Marketing Association; Figure 19.4 from Reinventing Project Management: The Diamond Approach to Successful Growth and Innovation, Harvard Business School Press (Shenhar, A.J. and Dvir, D. 2007) reprinted by permis- sion of Harvard Business Review Press. Copyright © 2007 by the Harvard Business Publishing Corporation; all rights reserved.; Figure 19.6 adapted from Managing Sensitive Projects: A Lateral Approach, English version by Cutrin, T. and Etcheber, P. Routledge, NY (D’Herbemont, O. and César B 1998) republished with permission of Routledge Publishing Inc. Permission conveyed through Copyright Clearance Center, Inc.; Figure 19.19 adapted from Collaboration, Integrated Information, and the Project Life Cycle in Building Design and Construction and Operation, Construction Users Roundtables (CURT).
Tables Table S9.2 adapted from Principles of Motion Economy: Revisited, Reviewed and Restored, Proceedings of the Southern Management Association Annual Meeting (Atlanta, GA 1983) (Barnes, F.C. 1983) p. 298; Tables 9.3 and 9.4 from J.L. Kobrick and B.J. Fine, Climate and human performance, in, The Physical Environment and Work John Wiley (Oborne, D.J. and Gruneberg, M.M. (eds.) 1983) reproduced with permission of Wiley in the format Book via Copyright Clearance Center; Table 15.1 adapted from What is the Theory of Constraints, and How Does it Compare to Lean Thinking? The Lean Enterprise Institute (Rattner, S. 2009) Copyright © 1999 Sergio Rattner. All rights reserved.
Text Case Study on pages 346–49 adapted from Operations and Process Management, 3rd ed., Pearson Education (Slack, N., Brandon-Jones, A., Johnston, R. and Betts, A. 2012) © Pearson Education Limited 2006, 2009, 2012; Box on page 470 adapted from My way - IT at Butcher’s Pet Care, Engineering and Technology Magazine, Vol. 4 (13) (Allan K.); Box on pages 499–500 written and sup- plied by Janina Aarts and Mattia Bianchi, Department of Management and Organization, Stockholm School of
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Co., Ltd: 465tr; Reproduced with the kind permis- sion of Société des Produits Nestlé S.A.: 229tr; Newlife Paints Ltd: 129tr; PhotoDisc: 433tr, 484br; Press Association Images: AP / Eckehard Schulz 272tr; Rex Shutterstock: Amer Ghazzal 53tr; Sands Films Studio: 193cr; Shutterstock.com: Haider Y. Abdulla 346tr, Alphaspirit 287, 514br, Aaron Amat 676tc, Andresr 575br, Anyunov 644tl, ArchMan 196br, Anna Baburkina 617tr, Blend Images 232br, Anna Bogush 441tr, Buruhthan 50br, 51br, 54cr, 56cr, 58br, Vladimir Caplinskij 166tr, Roberto Caucino 43br, Chen WS 487tr, Ant Clausen 190tl, Creations 505tr, Digital Storm 250tr, T P Feller 5r, Iakov Filimonov 234tr, Gabriel12 186br, Karel Gallas 384tr, Angelo Giampiccolo 322tr, Arina P Habich 436tr, Hadrian 50tl, 51cl, 54tl, 56tl, 58cl, Indianstockimages 9c, Stuart Jenner 9cl, 551br, Jezper 357tr, JHDT Productions 296tr, Jimmi 248tr, Justasc 416tr, Matej Kastelic 97c, Robert Kneschke 590cr, Ktsdesign 115c, Blaz Kure 50tr, 51cr, 54tr, 56tr, 58cr, Lamarinx 190bl, Lightspring 150, Liunian 191bl, Dmitry Lobanov 56, Luchunyu 192bl, Ludinko 451br, SV Luma 333tr, Robyn Mackenzie 537tr, Marques 278, Michaeljung 192c, Stuart Monk 224br, Monkey Business Images 163tr, 478tr, Natursports 564br, 650tr, Sergey Nivens 40tr, Nucleartist 156tr, Ollyy 201tr, 298tr, Pathdoc 267br, Sean Pavone 425tr, Phovoir 212tr, Potstock 192cl, Raimundas 142tr, Rido 111tr, Michael Rolands 50bl, 51bl, 54cl, 56cl, 58bc, Shadow216 647, StockLite 146cr, Stockphoto mania 151tr, Stokkete 534tr, Supergenijalac 9tl, 191cl, Jordan Tan 318br, Graham Taylor 241tr, Cappi Thompson 403br, Anatoly Tiplyashin 104br, Toria 11tr, TravnikovStudio 330br, VectorLifestylepic 568tr, Vipubadee 578tr, Valentyn Volkov 122tr, 543, Tatyana Vyc 191tl, Ingrid W 221tr, Wavebreakmedia 302cr, www.BillionPhotos.com 575tr, Yeko Photo Studio 337cr, Zurijeta 293br; Ski Verbier Exclusive Ltd: 25br; The Kobal Collection: Paramount Pictures 269cr
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Economics, reproduced with permission; Box on page 534 adapted from Case study by Professors Rui Sousa and Sofia Salgado Pinto, Católica Porto Business School, Portugal; Case Study on pages 568-69 from Professors Robert Johnson, Warwick Business School, Chai Kah Hin and Jochen Wirtz, National University of Singapore, and Christopher Lovelock, Yale University.
Photos The publisher would like to thank the following for their kind permission to reproduce their photographs:
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2 Operations performance
1 Operations management
3 Operations strategy
4 Product and service innovation
5 the structure and scope of operations
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part one DireCtinG the OPeratiOn
Transformed resources • Materials • Information • Customers
Transforming resources • Facilities • Staff
Input resources
Output products and services
Operations management
Develop - Improving the operation’s capabilities
Direct - Steering operations
and processes
Design - Shaping processes,
products and services
Deliver - Planning and
controlling ongoing operations
Value added for customers
this part of the book introduces the idea of ‘operations’ and the operations function. it also examines the fundamental activities and decisions that shape the overall direction and strategy of the operations function. the chapters in this part are:
● chapter 1 operations management – this introduces the common ideas that describe the nature and role of operations and processes in all types of organization.
● chapter 2 operations performance – this identifies how the performance of the operations function can be judged.
● chapter 3 operations strategy – this examines how the activities of the operations function can have an important strategic impact.
● chapter 4 product and service innovation – this looks at how innovation can be built into the product and service design process.
● chapter 5 the structure and scope of operations – this describes the major decisions that determine how and the extent to which an operation adds value through its own activities.
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intrODuCtiOn operations management is about how organizations create and deliver services and products. everything you wear, eat, sit on, use, read or knock about on the sports field comes to you courtesy of the operations managers who organized its creation and delivery. every book you borrow from the library, every treatment you receive at the hospital, every service you expect in the shops and every lecture you attend at university – all have been created by operations. While the people who supervised their creation and delivery may not always be called operations managers, that is what they really are. and that is what this book is concerned with – the tasks, issues and decisions of those operations managers who have made the services and products on which we all depend. this is an introductory chapter, so we will examine what we mean by ‘operations management’, how operations processes can be found everywhere, how they are all similar yet different, and what it is that operations managers do ( see Fig. 1.1 ).
Operations management
Key questions
❯ What is operations management?
❯ Why is operations management important in all types of organization?
❯ What is the input– transformation–output process?
❯ What is the process hierarchy?
❯ how do operations and processes differ?
❯ What do operations managers do?
1
Topic covered in this chapter
Operations management
Direct
Design Develop
Deliver
Direct
Operations performance
The structure
and scope of operations
Operations strategy
Operations management
Product and service innovation
Figure 1.1 this chapter examines operations management
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ChaPter 1 operations management 5
What iS OPeratiOnS ManaGeMent?
Operations management is the activity of managing the resources that create and deliver ser- vices and products. The operations function is the part of the organization that is responsible for this activity. Every organization has an operations function because every organization creates some types of services and/or products. However, not all types of organization will necessarily call the operations function by this name. (Note in addition that we also use the shorter terms ‘the oper- ation’ or ‘operations’ interchangeably with the ‘operations function’.) Operations managers are the people who have particular responsi- bility for managing some, or all, of the resources that make up the operations function. Again in some organizations, the operations manager could be called by some other name. For example, he or she might be called the ‘fleet manager’ in a distribution company, the ‘administrative manager’ in a hospital, or the ‘store manager’ in a supermarket.
✽ ✽ ✽ Operations principle Operations principle Operations principle
OPeratiOnS in PraCtiCe
‘ We want any child playing with LEGO ® bricks to have a high quality play experience, and in addition we also want to make a positive impact through the way we operate – from our focus on business ethics to reducing our impact on the environment ,’ says Jørgen Vig Knudstorp, ceo of the Lego group.
of all businesses, the toy business is one of the world's trickiest. Difficult to forecast, unfailingly subject to fickle kids' latest fads and subject to constant techno- logical innovation. Yet the Lego group, a privately held, family-owned company with headquarters in Billund, Denmark, has, in recent years, thrived in the business, becoming one of the most reputable companies in the world, according to the reputation institute, and one of the leading manufacturers of play materials. it is a suc- cess founded on a deceptively simple idea. one Lego brick is unremarkable, but put one or two together and possibilities start to emerge. With another few bricks the number of things you can create rises exponentially. For example, there are more than 915 million possible ways of arranging six standard four-by-two bricks, and with the approximately 4,200 different elements in the Lego range and 58 different colours together with various decorations, the total number of active combinations is many more. and, however many bricks you assemble, irrespective of what colour or set they are from, your pieces will always fit together perfectly. all of the basic Lego elements use the same method to stick together. they have studs on top that are slightly bigger than and tubes on the inside. pressing the bricks together pro- duces an ‘interference fit ’ that provides a temporary joint without the use of an additional fastener. But this
principle does depend on the elements being made to very high levels of precision and quality, which explains the company's motto, ‘only the best is good enough’.
ole Kirk Kristiansen, a Danish carpenter, who started selling wooden toys as a way of earning extra money, founded the company in 1932. these included wooden toy bricks, the forerunners of the plastic bricks, which are now so successful that it is estimated that there are now 86 bits of Lego for every person on the planet. Bricks, and other Lego ‘elements’, are manufactured at the group's factories in Denmark, hungary, the czech republic and mexico, locations that have been cho- sen to be near their key markets in europe and the Usa . these sites have been expanded to cope with increased demand, together with new factories built in nyiregyhaza in hungary and Jiaxing in china. products made in these factories serve a global market. the aim, according to Bali padda, executive Vice president and
Lego: building a creative experience 1
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s h
u tt
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o ck
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6 Part One Directing the operation
The LEGO example illustrates how important the operations function is for any com- pany whose reputation depends on producing safe, high-quality, sustainable and prof- itable products or ser vices. Its operations, like its market, are globally located, it is meticulous about ensuring that its processes operate to precise quality standards, and it has invested heavily in process technology that reduces the environmental impact of its operations and the cost of its products. Of course, exactly what is involved in producing products and services will depend to some extent on the type of organization of which the operations function is a part. Table 1.1 shows some of the activities of the operations function for various types of organization.
Operations in the organization The operations function is central to the organization because it creates and delivers services and products, which is its reason for existing. The operations function is one of the three core functions of any organization. These are:
chief operations officer of the Lego group, is to ‘ build a stable manufacturing base around the world, ulti- mately making sure that LEGO products are available to children and their parents when and where they want them ’. and it is the company's operations processes that are central to maintaining its reputation for quality, and its ability to produce millions of elements profita- bly and sustainably.
the process starts at the main warehouse that con- tains the silos holding raw plastic granulates. at the Billund operation, 60 tonnes of plastic is processed every 24 hours. the silos are linked to the moulding machines by a complex arrangement of tubes. the moulding stage is particularly important, because every Lego piece must be made to a demanding level of pre- cision, with tolerances as small as 10 micrometres. at each machine, the plastic is heated and pumped into the mould through a main channel, which divides into a number of narrower channels, each corresponding to a single brick. Water is used to cool the moulds, which can produce up to 32 bricks, and, when the plastic has solidified (only a couple of seconds), they release the bricks into containers. these moulds are expen- sive, and each element requires its own mould. the average cost of a mould is around €80,000 with some costing more than €360,000. a sensor detects when a container is full and a robot trolley is automatically sent. the robots travel between the machines, picking up boxes and leaving empty ones so production can be continued. the automation means that few people are required for the process. the robots transport the boxes to conveyors, which move them into the stor- age area where robotic cranes stack them until they are
needed. From there some pieces go to the ‘decoration’ stage where they are individually painted. Decoration is the most expensive part of the Lego process. other pieces go straight to packing, where the Lego sets take their final form. in the packaging process the pieces go into a machine that separates them individually, counts them using optical sensors, and places them in their box. the automatic movement system knows exactly how much a box should weigh at any stage and as the packing process continues, high-precision scales mon- itor the weight of the box. any deviation, even of a few micrograms, sets off an alarm. at the end of the pro- cess the boxes are sealed shut, automatically weighed to ensure there are no missing components, checked by a worker trained to look for things like plastic bags sticking out of the box, packed by a robot six to a case, and finally sent off for distribution.
Quality assurance staff perform frequent inspections and tests on the various Lego elements, such as drop, torque, tension, compression, bite and impact tests to make sure the toys are robust and safe. only about 18 of every million Lego elements produced, (that is 0.00002 per cent) fail to pass the tests. in addition, throughout the process, the company tries to achieve high levels of environmental sustainability. plastic is extensively recy- cled in the factory. all scrap, for example the plastic that fills the channels that take the hot plastic into moulds, or faulty pieces that escape from automated handling, are ground up and used back into the production process. similarly, the transparent plastic that is used to clean the channels when the production colour is changed in a moulding machine are also ground up and sold to other companies that produce other plastic products.
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ChaPter 1 operations management 7
● the marketing (including sales) function – which is responsible for communicating the organization’s services and products to its markets in order to generate customer requests;
● the product/service development function – which is responsible for coming up with new and modified services and products in order to generate future customer requests;
● the operations function – which is responsible for the creation and delivery of services and products based on customer requests.
In addition, there are the support functions which enable the core functions to operate effectively. These include, for example, the accounting and finance function, the technical function, the human resources function and the information systems function. Remember that different organizations will call their various functions by different names and will have a different set of support functions. Almost all organizations, however, will have the three core functions, because all organizations have a fundamental need to sell their products and services, meet customer requests for services and products, and come up with new services and products to satisfy customers in the future.
In practice, there is not always a clear division between the three core functions or between core and support functions. This leads to some confusion over where the boundaries of the operations function should be drawn. In this book we use a relatively broad definition of operations. We treat much of the product/service development, technical and information systems activities and some of the human resources, marketing, and accounting and finance activities as coming within the sphere of operations management. We view the operations function as compris- ing all the activities necessary for the day-to-day fulfilment of customer requests within the constraints of environmental and social sustainability. This includes sourcing services and products from suppliers and delivering services and products to customers.
It is fundamental to modern management that functional boundaries should not hinder efficient internal processes. Figure 1.2 illustrates some of the relationships between opera- tions and other functions in terms of the flow of information between them. Although it is not comprehensive, it gives an idea of the nature of each relationship. However, note that the support functions have a different relationship with operations than the other core func- tions. Operations management’s responsibility to support functions is primarily to make sure that they understand operations' needs and help them to satisfy these needs. The rela- tionship with the other two core functions is more equal – less of ‘ this is what we want ’ and more ‘ this is what we can do currently – how do we reconcile this with broader business needs? ’
table 1.1 Some activities of the operations function in various organizations
internet service provider
Fast food chain international aid charity
Furniture manufacturer
maintain and update hardware Update software and content respond to customer queries implement new services ensure security of customer data
Locate potential sites for restaurants provide processes and equipment to produce burgers etc. maintain service quality Develop, install and maintain equipment reduce impact on local area, and packaging waste
provide aid and development projects for recipients provide fast emergency response when needed procure and store emergency supplies Be sensitive to local cultural norms
procure appropriate raw materials and components make sub-assemblies assemble fi nished products Deliver products to customers reduce environmental impact of products and processes
✽ ✽ ✽ Operations principle Operations principle Operations principle
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8 Part One Directing the operation
WhY iS OPeratiOnS ManaGeMent iMPOrtant in ALL tYPeS OF OrGaniZatiOn?
In some types of organization it is relatively easy to visualize the operations function and what it does, even if we have never seen it. For example, most people have seen images of an auto-
mobile assembly. But what about an advertising agency? We know vaguely what these agencies do – they create the advertisements that we see in magazines and on television – but what is their operations function? The clue lies in the word ‘create’. Any business that creates something must use resources to do so, and so must have an operations activity. Also the automobile plant and the advertising agency do have one important element in common: both have a higher objective – to make a profit from creating and delivering their products or services.
Yet not-for-profit organizations also use their resources to create and deliver services, not to make a profit, but to serve society in some way. Look at the following examples of what opera- tions management does in five very different organizations and some common themes emerge.
Product/service development
function
Technical function
The broad scope of operations management’s
responsibilities
Accounting and finance
function
Human resources (HR)
function
Core functions
Support functions
Information systems (IS)
function
Marketing function
Operations function
Process technology
needs
Process technology
options
Provision of relevant data
Communicating the capabilities and constraints of
operations processes
New product/ service ideas
Financial analysis for performance measurement and decision
making
Communicate human resource
needs
Recruitment, development and training
Communicating information
system needs
Systems for design, planning and control and
improvement
Market requirements
Communicating the capabilities and constraints of
operations processes
Figure 1.2 the relationship between the operations function and other core and support functions of the organization
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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ChaPter 1 operations management 9
Automobile assembly factory – Operations manage- ment uses machines to effi ciently assemble products that satisfy current customer demands
Physician (general practitioner) – Operations manage- ment uses knowledge to eff ectively diagnose conditions in order to treat real and perceived patient concerns
Management consultant – Operations management uses people to eff ectively create the services that will ad- dress current and potential client needs
Disaster relief charity – Operations management uses ours and our partners' resources to speedily provide the supplies and services that relieve community suff ering
Advertising agency – Operations management uses our staff ’s knowledge and experience to creatively present ideas that delight clients and address their real needs
Start with the statement from the ‘easy to visualize’ automobile plant. Its summary of what operations management does is: ‘ Operations management uses machines to efficiently assemble products that satisfy current customer demands. ’ The statements from the other
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10 Part One Directing the operation
organizations were similar, but used slightly different language. Operations management used not just machines but also ‘knowledge, people, our and our partners’ resources', and ‘our staffs’ experience and knowledge', to ‘efficiently (or effectively, or creatively) assemble (or produce, change, sell, move, cure, shape, etc.) products (or services or ideas) that satisfy (or match or exceed or delight) customer (or client or citizens' or society) demands (or needs or concerns or even dreams).’
So whatever terminology is used there is a common theme and a common purpose to how we can visualize the operations activity in any type of organization – small or large, service or manufacturing, public or private, profit or not-for-profit. Operations manage- ment uses ‘resources to appropriately create outputs that fulfil defined market requirements’ (see Fig. 1.3). However, although the essential nature and purpose of operations manage- ment is the same in any type of organization, there are some special issues to consider, particularly in smaller organizations and those whose purpose is to maximize something other than profit.
Operations management in the smaller organization Operations management is just as important in small organizations as it is in large ones. Irrespective of their size, all companies need to create and deliver their service and products efficiently and effectively. However, in practice, managing operations in a small or medi- um-size organization has its own set of problems. Large companies may have the resources to dedicate individuals to specialized tasks but smaller companies often cannot, so people may have to do different jobs as the need arises. Such an informal structure can allow the company to respond quickly as opportunities or problems present themselves. But decision making can also become confused as individuals' roles overlap. Small companies may have exactly the same operations management issues as large ones but they can be more diffi- cult to separate from the mass of other issues in the organization. However, small opera- tions can also have significant advantages; the short case on Torchbox illustrates this.
Transforming resources
Operations management uses...
Resources to
People
Technology
Knowledge
Information
Partners
etc.
Demands
Needs
Concerns
Dreams
Etc.
E�ectively
E�ciently
Creatively
Reliably
Accurately
etc.
Transformation objectives
Nature of the objectives
Customers’ objectives
Nature of the product/service
Nature of the transformation
Performance standard
The operation’s customers
Appropriately
Produce
Assemble
Sell
Move
Cure
Diagnose
Shape
Fabricate
etc.
Create
Services
Products
Ideas
Solutions
Knowledge
etc.
Outputs that
Meet
Satisfy
Exceed
Delight
etc.
Fulfil
Current
Potential
Perceived
Emerging
Real
etc.
Defined
Customer
Citizens’
Clients’
Society's
etc.
Market Requirements
Figure 1.3 Operations management uses resources to appropriately create outputs that fulfil defined market requirements.
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ChaPter 1 operations management 11
OPeratiOnS in PraCtiCe
We may take it for granted, yet browsing websites, as part of your studies, your job, or your leisure, is an activity that we all do – proba- bly every day, probably many times each day. so it is important . all organizations need to have a web presence if they want to sell prod- ucts and services, interact with their customers, or promote their cause. and, not surprisingly, there is a whole industry devoted to design- ing websites so that they have the right type of impact. in fact, taken over the years, web development has been one of the fastest grow- ing industries in the world. But it is also a tough industry. not every web design company thrives, or even survives beyond a couple of years. to succeed, web designers need tech- nology skills, design capabilities, business awareness and operational professionalism. one that has succeeded is torchbox, an independently owned web design and development company based in oxfordshire. Founded back in 2000, it now employs 30 people, providing ‘ high-quality, cost-effective, and ethical solutions for clients who come primarily, but not exclusively, from the charity, non-governmental organisations and public sectors ’.
co-founder and technical Director tom Dyson has been responsible for the technical direction of all major developments. ‘ There are a number of advantages about being a relatively small operation ’, he says. ‘ We can be hugely flexible and agile, in what is still a dynamic mar- ket. But at the same time we have the resources and skills to provide a creative and professional service. Any senior manager in a firm of our size cannot afford to be too specialised. All of us here have their own specific responsibilities; however, every one of us shares the overall responsibility for the firm's general development. We can also be clear and focused on what type of work we want to do. Our ethos is important to us. We set out to work with clients who share our commitment to environmental sustainability and responsible, ethical business practice; we take our work, and that of our clients, seriously. If you're an
arms dealer, you can safely assume that we're not going to be interested. '
nevertheless, straightforward operational effective- ness is also essential to torchbox's business. ‘ We know how to make sure that our projects run not only on time and to budget ’, says olly Willans, also a co-founder and the firm's creative Director, ‘ but we also like to think that we provide an enjoyable and stimulating experience – both for our customers’ development teams and for our staff too. High standards of product and service are important to us: our clients want accessibility, usability, performance and security embedded in their web designs, and of course, they want things delivered on-time and on-budget. We are in a creative industry that depends on fast- moving technologies, but that doesn't mean that we can't also be efficient. We back everything we do with a robust feature-driven develop- ment process using a kanban project management method- ology which helps us manage our obligations to our clients .'
the ‘kanban’ approach used by the torchbox web development teams originated from car manufacturers like toyota (it is fully explained in chapter 15 ). ‘ Using sound operations management techniques helps us constantly to deliver value to our clients ’, says tom Dyson. ‘ We like to think that our measured and controlled approach to handling and controlling work helps ensure that every hour we work pro- duces an hour's worth of value for our clients and for us. ’
torchbox: award-winning web designers 2
Operations management in not-for-profit organizations Terms such as ‘competitive advantage’, ‘markets’ and ‘business’, which are used in this book, are usually associated with companies in the for-profit sector. Yet operations management is also relevant to organizations whose purpose is not primarily to earn profits. Managing
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12 Part One Directing the operation
the operations in an animal welfare charity, hospital, research organization or government department is essentially the same as in commercial organizations . Operations have to take the same decisions – how to create and deliver service and products, invest in technology, contract out some of their activities, devise performance measures, improve their operations performance, and so on. However, the strategic objectives of not-for-profit organizations may be more complex and involve a mixture of political, economic, social or environmental objec- tives. Because of this there may be a greater chance of operations decisions being made under conditions of conflicting objectives. So, for example, it is the operations staff in a children’s welfare department who have to face the conflict between the cost of providing extra social workers and the risk of a child not receiving adequate protection. Nevertheless the vast major- ity of the topics covered in this book have relevance to all types of organization, including non-profit ones, even if the context is different and some terms may have to be adapted.
OPeratiOnS in PraCtiCe
médecins sans Frontières (msF; also called Doctors Without Borders) is an independent humanitarian organization pro- viding medical aid where it is most needed, regardless of race, religion, politics or gender, and raising awareness of the plight of the people it helps in coun- tries around the world. its core work takes place in crisis situa- tions – armed conflicts, epidem- ics, famines and natural disasters such as floods and earthquakes. the teams deliver both medical aid (including consultations with a doctor, hospital care, nutri- tional care, vaccinations, surgery, obstetrics and psychological care) and material aid (including food, shelter, blankets, etc.). each year, msF sends around 3,000 doctors, nurses, logisticians, water and sanitation experts, administrators and other professionals to work alongside around 25,000 locally hired staff. it is one of the most admired and effec- tive relief organizations in the world. But no amount of fine intentions can translate into effective action without superior operations management. as msF says, it must be able to react to any crisis with ‘ fast response, efficient logistics systems, and efficient project management ’.
msF makes every effort to respond quickly and effi- ciently to crises around the world. its response procedures are continuously being developed to ensure that it reaches those most in need as quickly as possible. the process has five phases: proposal, assessment, initiation, running the project, and closing. the information that prompts a pos- sible mission can come from governments, the interna- tional community, humanitarian organizations such as the
United nations, financial bodies such as the humanitarian aid Department of the european commission (echo), or msF teams already present in the region. once the information has been checked and validated, msF sends a team of medical and logistics experts to the crisis area to carry out a quick evaluation. the team assesses the situa- tion, the number of people affected, and the current and future needs, and sends a proposal back to the msF office. When the proposal is approved, msF staff start the process of selecting personnel, organizing materials and resources, and securing project funds. initiating a project involves sending technical equipment and resources to the area. in large crises, aircraft fly in all the necessary materials so that the work can begin immediately. thanks to its pre- planned processes, specialized kits and the emergency stores, msF can distribute material and equipment within 48 hours, ready for the response teams to start work as soon as they arrive. most msF projects generally run for
MSF operations provide medical aid to people in danger 3
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ChaPter 1 operations management 13
the new operations agenda Over the last few years, changes in the business environment have had a significant impact on the challenges faced by operations managers. Some of them are in response to changes in the nature of the demand side. Many (although not all) industries have experienced increas- ing cost-based competition while simultaneously their customers' expectations of quality and variety have increased. Markets have become more global, sometimes meaning a demand for a higher variety, or even totally customized products and services. Rapidly developing (often digital) technologies are leading to more frequent, new product/service introductions. Customers have increased ethical and environmental sensitivity. Also, the impact of new pro- cess technologies, in both manufacturing and service, is having a dramatic effect, radically altering the operating practices of almost every industry. This leads to operations having to change the way they create their products and services, serve their customers, relate to stake- holders and involve their workforce. Just as importantly, globalized supply markets are open- ing new options in how operations source input goods and services. Very few businesses have not at least considered purchasing from out- side their own geographic area. But while bringing opportunities for cost savings, a bigger supply market also brings new problems of long supply chains, supply vulnerability and reputational risk. All this has led to new pressures for which the operations function has needed to develop responses. Figure 1.4 identifies just some of the operations responses to these business pressures. (If you do not recognize some of the terms in Figure 1.4 , do not worry – we will explain them throughout the book.) These responses form a major part of a new agenda for operations. Parts of this agenda are trends which have always existed but have accelerated, such as globalization and increased cost pres- sures. Part of the agenda involves seeking way to exploit new technologies, most notably the Internet. Of course, the items in Figure 1.4 are not comprehensive, nor are they universal. But very few operations functions will be unaffected by at least some of these issues.
What iS the inPut–tranSFOrMatiOn–OutPut PrOCeSS?
All operations create and deliver service and products by changing inputs into outputs using an ‘input–transformation–output’ process. Figure 1.5 shows this general transformation pro- cess model that is the basis of all operations. Put simply, operations are processes that take
somewhere between 18 months and three and a half years. Whether an emergency response or a long-term healthcare project, the closing process is roughly similar. once the critical medical needs have been met (which could be after weeks, months or years depending on the situation), msF begins to close the project with a gradual withdrawal of staff and equipment. at this stage, the pro- ject closes or is passed on to an appropriate organization. msF will also close a project if risks in the area become too great to ensure staff safety.
Whether it is dealing with urgent emergencies, when material might need to be on an aircraft within 24 hours, or a long-running programme where a steady supply of equipment and drugs is vital, everything msF does on the ground depends on an efficient logistics system. it is based on the principle that msF staff should always have exactly the right materials for the job at hand. so msF has developed and produced pre-packaged disaster kits
ready for transport within hours, including a complete surgical theatre the size of a small conference table and an obstetrics kit the size of a two-drawer file. there is an ongoing process of revising the kits every time a new drug or medical tool becomes available.
to make sure it is reacting as quickly as possible, msF has four logistical centres based in europe and east africa plus stores of emergency materials in central america and east asia. these purchase, test and store equipment so that aircraft can be loaded and flown into crisis areas within 24 hours. the pre-packaged disas- ter kits are custom-cleared within the logistics centres, ready for flight. But not all supplies are needed quickly. if it is not a dire emergency, msF reduces its costs by ship- ping the majority of material and drugs by sea. Because of this, it is vital to monitor stock levels and anticipate future needs so that orders can be placed up to three months in advance of expected requirements.
✽ ✽ ✽ Operations principle Operations principle Operations principle
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14 Part One Directing the operation
in a set of input resources which are used to transform something, or are transformed them- selves, into outputs of services and products. And although all operations conform to this gen- eral input–transformation–output model, they differ in the nature of their specific inputs and outputs. For example, if you stand far enough away from a hospital or a car plant, they might look very similar, but move closer and clear differences do start to emerge. One is a service
Risk management
Internet-based integration of
operations activities
Fast time to market
Global operations networks
Customer relationship
management
Mass customization
Co-creation of service Operating
models
Internet of things
‘Big data’ analysis
3D printing
Algorithmic decision making
Enterprise resource management
Environmentally sensitive design
Business recovery planning
Developments in the business, technical,
social, regulatory and political environment
Sustainability
Flexible working patterns
Supplier partnership and development
Figure 1.4 Changes in the business environment are shaping a new operations agenda
Input resources
Output products and services
Value- added for customers
THE TRANSFORMATION
PROCESS
Transformed resources • Materials • Information • Customers
Transforming resources
• Facilities • Staff
Figure 1.5 all operations are input–transformation–output processes
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ChaPter 1 operations management 15
operation delivering ‘services’ that change the physiological or psychological condition of patients, the other is a manufacturing operation creating and delivering ‘products’. What is inside each operation will also be different. The hospital contains diagnostic, care and therapeutic processes whereas the motor vehi- cle plant contains metal forming machinery and assembly processes. Perhaps the most important difference between the two operations, however, is the nature of their inputs. The hospital transforms the customers themselves. The patients form part of the input to, and the output from, the operation. The vehicle plant transforms steel, plas- tic, cloth, tyres and other materials into vehicles.
inputs to the process One set of inputs to any operation’s processes is transformed resources. These are the resources that are treated, transformed or converted in the process. They are usually a mix- ture of the following:
● Materials – operations which process materials could do so to transform their physical properties (shape or composition, for example). Most manufacturing operations are like this. Other operations process materials to change their location (parcel delivery compa- nies, for example). Some, like retail operations, do so to change the possession of the mate- rials. Finally, some operations store materials, such as warehouses.
● Information – operations which process information could do so to transform their infor- mational properties (that is, the purpose or form of the information); accountants do this. Some change the possession of the information, for example market research companies sell information. Some store the information, for example archives and libraries. Finally, some operations, such as telecommunication companies, change the location of the information.
● Customers – operations which process customers might change their physical properties in a similar way to materials processors: for example, hairdressers or cosmetic surgeons. Some store (or more politely accommodate ) customers: hotels, for example. Airlines, mass rapid transport sys- tems and bus companies transform the location of their custom- ers, while hospitals transform their physiological state. Some are concerned with transforming their psychological state , for exam- ple most entertainment services such as music, theatre, television, radio and theme parks. But customers are not always simple ‘pas- sive’ items to be processed. They can also play a more active part in many operations and processes. For example, they create the atmosphere in a restaurant; they provide the stim- ulating environment in learning groups in education; they provide information at check-in desks; and so on. When customers play this role it is usually referred to as ‘co-production’ because the customer plays a vital part in the provision of the product/service offering.
Some operations have inputs of materials and information and customers, but usually one of these is dominant. For example, a bank devotes part of its energies to producing printed statements by processing inputs of material, but no one would claim that a bank is a printer. The bank also is concerned with processing inputs of customers at its branches and contact centres. However, most of the bank’s activities are concerned with process- ing inputs of information about its customers’ financial affairs. As customers, we may be unhappy with badly printed statements and we may be unhappy if we are not treated appro- priately in the bank. But if the bank makes errors in our financial transactions, we suffer in a far more fundamental way. Table 1.2 gives examples of operations with their dominant transformed resources.
The other set of inputs to any operations process is transforming resources . These are the resources which act upon the transformed resources. There are two types which form the ‘building blocks’ of all operations:
✽ ✽ ✽ Operations principle Operations principle Operations principle
✽ ✽ ✽ Operations principle Operations principle Operations principle
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16 Part One Directing the operation
● facilities – the buildings, equipment, plant and process technology of the operation; ● staff – the people who operate, maintain, plan and manage the operation. (Note that we
use the term ‘staff’ to describe all the people in the operation, at any level.)
The exact nature of both facilities and staff will differ between operations. To a five-star hotel, its facilities consist mainly of ‘low-tech’ buildings, furniture and fittings. To a nuclear- powered aircraft carrier, its facilities are ‘high-tech’ nuclear generators and sophisticated electronic equipment. Staff will also differ between operations. Most staff employed in a factory assembling domestic refrigerators may not need a very high level of technical skill. In contrast, most staff employed by an accounting company are, hopefully, highly skilled in
their own particular ‘technical’ skill (accounting). Yet although skills vary, all staff can make a contribution. An assembly worker who con- sistently misassembles refrigerators will dissatisfy customers and increase costs just as surely as an accountant who cannot add up. The balance between facilities and staff also varies. A computer chip man- ufacturing company, such as Intel, will have significant investment in physical facilities. A single chip fabrication plant can cost in excess
of $5 billion, so operations managers will spend a lot of their time managing their facilities. Conversely, a management consultancy firm depends largely on the quality of its staff. Here operations management is largely concerned with the development and deployment of con- sultant skills and knowledge.
Outputs from the process Products and services are different. Products are usually tangible things whereas services are activities or processes. A car or a newspaper or a restaurant meal is a product, whereas a service is the activity of the customer using or consuming that product. Some services do not involve products. Consultancy advice or a haircut is a processes (though some products may be supplied in support of the service, such as a report or a hair gel). Also, while most products can be stored, at least for a short time, service only happens when it is consumed or used. So accommodation in an hotel room for example will perish if it is not sold that night, a restau- rant table will remain empty unless someone uses it that evening.
Most operations produce both products and services Some operations create and deliver just services and others just products, but most operations combine both elements. Figure 1.6 shows a number of operations (including some described as examples in this chapter) positioned in a spectrum from ‘pure’ products to ‘pure’ service. Crude oil producers are concerned almost exclusively with the product which comes from their oil wells. So are aluminium smelters, but they might also deliver some services such as technical
table 1.2 Dominant transformed resource inputs of various operations
Predominantly processing inputs of materials
Predominantly processing inputs of information
Predominantly processing inputs of customer
all manufacturing operations mining companies retail operations Warehouses postal services container shipping line trucking companies
accountants Bank headquarters market research company Financial analysts news service University research unit telecoms company
hairdressers hotels hospitals mass rapid transports theatres theme parks Dentists
✽ ✽ ✽ Operations principle Operations principle Operations principle
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ChaPter 1 operations management 17
advice. Services in these circumstances are called facilitating services. To an even greater extent, machine tool manufacturers deliver facilitating services such as technical advice and applications engineering. The services delivered by a restaurant are an essential part of what the customer is paying for. It is both a manufacturing operation which creates and delivers meals and a provider of service in the advice, ambience and service of the food. An information systems provider may create software ‘products’, but primarily it is providing a service to its customers, with facilitating products. Certainly, a management consultancy, although it produces reports and documents, would see itself primarily as a service provider. Finally, pure services solely cre- ate and deliver services, a psychotherapy clinic, for example. Of the ‘Operations in practice’ examples in this chapter, LEGO (or at least the part of the LEGO Group we described in this chapter) produces tangible products, and Pret A Manger both creates and ‘serves’ its products. It therefore has substantial service content. Médecins Sans Frontières sup- plies physical aid in emergencies, but also intangible advice and medical help.
Torchbox’s customers receive no physical product but are paying for the design and func- tionality of the website designs. Likewise, hotels such as Formule 1 are close to being pure services, although they both have some tangible elements such as food.
Increasingly the distinction between services and products is dif- ficult to define and not particularly useful. Software has moved from being primarily a product (sold on a disk) to an intangible download when sold over the Internet to an even less tangible rental or subscrip- tion service based ‘in the cloud’. A restaurant meal is both a product and also a service as it is delivered and consumed. Indeed we would argue that all operations are service providers which may create and deliver products as part of the offering to their customers. This is why
Operations in practice examples from this chapter
Pure products
Pure services
Crude oil production
Examples
Aluminium smelting
Specialist machine tool production
Restaurant
Information systems provider
Management consultancy
Psychotherapy clinic
LEGO
Médecins Sans Frontières
Pret A Manger
Torchbox
Formule 1 / Ski Verbier
Figure 1.6 the output from most operations is a mixture of products and services. Some general examples are shown here together with some of the operations featured as ‘operations in practice’ examples in this chapter
✽ ✽ ✽ Operations principle Operations principle Operations principle
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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18 Part One Directing the operation
operations management is important to all organizations. Whether they see themselves as manufacturers or service providers is very much a secondary issue.
Customers Customers may be an input to many operations (see earlier) but they are also the reason for their existence. If there are no customers (whether business customers, users or consumers), there will be no operation. So it is critical that operations managers are aware of customers’ needs, both current and potential. This information will determine what the operation has to do and how it has to do it (the operation’s strategic performance objectives) which in turn defines the service/product offering to be designed, created and delivered.
OPeratiOnS in PraCtiCe
pret a manger is proud of its customer service. ‘ We'd like to think we react to our customers’ feelings (the good, the bad, the ugly) with haste and absolute sincerity ’, it says. ‘ Pret customers have the right to be heard. Do call or email. Our UK Managing Director is available if you would like to discuss Pret with him. Alternatively, our CEO hasn’t got much to do; hassle him! ’
it is a bold approach to customer service, but pret has always been innovative. Described by the press as having ‘revolutionized the concept of sandwich making and eating’, pret a manger opened its first shop in London and now has over 260 shops in the UK, new York, hong Kong and tokyo. it says that its secret is to focus continually on the quality of its food and of its service. pret avoids the chemicals and preserv- atives common in most ‘fast’ food. ‘ Many food retailers focus on extending the shelf life of their food, but that’s of no interest to us. We sell food that can’t be beaten for freshness. At the end of the day, we give whatever we haven’t sold to charity to help feed those who would otherwise go hungry .’ pret a manger shops have their own kitchen where fresh ingredients are delivered every morning, with food pre- pared throughout the day. the team members serving on the tills at lunchtime will have been making sandwiches in the kitchen that morning. ‘ We are determined never to forget that our hardworking people make all the difference. They are our heart and soul. When they care, our business is sound. If they cease to care, our business goes down the drain. In a retail sector where high staff turnover is normal, we’re pleased to say our people are much more likely to stay around! We work hard at building great teams. We take our reward schemes and career opportunities very seriously. We don’t work nights (generally), we wear jeans, we party!’
customer feedback is regarded as being particularly important at pret. examining customers’ comments for improvement ideas is a key part of weekly management meetings, and of the daily team briefs in each shop.
moreover, staff at pret are rewarded in cash for being nice to customers. they collect bonuses for delivering outstanding customer service. every week, each pret outlet is visited by a secret shopper who scores the shop on such performance measures as speed of ser- vice, product availability and cleanliness. in addition the mystery shopper rates the ‘engagement level’ of the staff; questions include, ‘Did servers connect with eye contact, a smile and some polite remarks?’ assessors score out of 50. if the store gets 43 points or more every team mem- ber receives an extra payment for every hour worked; and if an individual is mentioned by the mystery shop- per for providing outstanding service, he or she gets an extra payment. ‘ The emphasis on jollity and friendliness has been a winner’, said James murphy of the Future Foundation, a management consultant. ‘In the highly competitive sandwich market, that’s been a big contrib- utor to their success.’ But not everyone agrees with using mystery shoppers. ‘It is the equivalent of asking one cus- tomer in a shop what they thought at that exact moment, and then planning an entire store- improvement strategy around the one piece of feedback’, says Jeremy michael of the service management group, another consultancy.
Customer service at Pret a Manger 4
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ChaPter 1 operations management 19
What iS the PrOCeSS hierarChY?
So far we have discussed operations management, and the input–transformation–output model, at the level of ‘the operation’. For example, we have described ‘the web designer’, ‘the bank’, ‘the sandwich shop’, ‘the disaster relief operation’, and so on. But look inside any of these operations. One will see that all operations consist of a collection of processes (though these processes may be called ‘units’ or ‘departments’) interconnecting with each other to form a network. Each process acts as a smaller version of the whole operation of which they form a part, and transformed resources flow in between them. In fact, within any operation the mechanisms that actually transform inputs into outputs are these processes. A ‘process’ is an arrangement of resources and activities that transform inputs into outputs that sat- isfy (internal or external) customer needs. They are the ‘building blocks’ of all operations, and they form an ‘internal network’ within an operation. Each process is, at the same time, an internal supplier and an internal customer for other processes. This ‘internal customer’ concept provides a model to analyse the internal activities of an operation. It is also a useful reminder that, by treating internal customers with the same degree of care as external cus- tomers, the effectiveness of the whole operation can be improved. Table 1.3 illustrates how a wide range of operations can be described in this way.
Within each of these processes is another network of individual units of resource such as individual people and individual items of process technology (machines, computers, storage facilities, etc.). Again transformed resources flow between each unit of transform- ing resource. So any business, or operation, is made up of a network of processes and any process is made up of a network of resources. But also any business or operation can itself be viewed as part of a greater network of businesses or operations. It will have operations that supply it with the services and products it needs and unless it deals directly with the end consumer, it will supply customers who themselves may go on to supply their own customers. Moreover, any operation could have several suppliers, several customers and may be in competition with
table 1.3 Some operations described in terms of their processes
Operation Some of the operation's processes
airline passenger check-in assistance, baggage drop, security/seat check, board passengers, fl y passengers and freight around the world, fl ight scheduling, in-fl ight passenger care, transfer assistance, baggage reclaim, etc.
Department store source merchandise, manage inventory, display products, give sales advice, sales, aftercare, complaint handling, delivery service, etc.
police service crime prevention, crime detection, information gathering/ collating, victim support, formally charging/detaining suspects, managing custody suites, liaising with court/justice system, etc.
ice cream manufacturer
source raw materials, input quality checks, prepare ingredients, assemble products, pack products, fast-freeze products, quality checks, fi nished goods inventory, etc.
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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20 Part One Directing the operation
other operations creating similar services or products to itself. This network of operations is called the supply network. In this way the input–transformation–output model can be used at a number of different ‘levels of analysis’. Here we have used the idea to analyse businesses at three levels: the process, the operation and the supply network. But one could define many different ‘levels of analysis’, moving upwards from small to larger processes, right up to the huge supply network that describes a whole industry.
This idea is called the hierarchy of operations and is illustrated for a business that makes television programmes and videos in Figure 1.7. It will have inputs of production, technical and administrative staff, cameras, lighting, sound and recording equipment, and so on. It transforms these into finished programmes, music videos, etc. At a more macro level, the business itself is part of a whole supply network, acquiring services from creative agencies, casting agencies and studios, liaising with promotion agencies, and serving its broadcast- ing company customers. At a more micro level within this overall operation there are many
The supply network-flow between operations
The operation-flow between processess
Processes-flow between resources (people and facilities)
The ‘Set and props manufacturing’ process
The programme and video supply network
The programme and video operation
Studios
Casting agency
Creative agency
Promotion agency
Program/ video maker
Broadcasting company
Marketing and sales
Finance and accounting
Production unit
Post production
Engineering
Set and props manufacture
Set construction
Props acquisition
Set finishing
Set design
Figure 1.7 Operations and process management requires analysis at three levels: the supply network, the operation and the process
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ChaPter 1 operations management 21
individual processes: workshops manufacturing the sets; marketing processes that liaise with potential customers; maintenance and repair processes that care for, modify and design tech- nical equipment; production units that shoot the programmes and videos; and so on. Each of these individual processes can be represented as a network of yet smaller processes, or even individual units of resource. So, for example, the set manufacturing process could comprise four smaller processes: one that designs the sets, one that constructs them, one that acquires the props, and one that finishes (paints) the set.
Operations management is relevant to all parts of the business The example in Figure 1.7 demonstrates that it is not just the operations function that manages processes; all functions manage processe s . For example, the marketing function will have pro- cesses that create demand forecasts, processes that create advertising campaigns and processes that create marketing plans. These processes in the other functions also need managing using similar principles to those within the operations function. Each function will have its ‘technical’ knowledge. In market- ing, this is the expertise in designing and shaping marketing plans; in finance, it is the technical knowledge of financial reporting. Yet each will also have a ‘process management’ role of producing plans, poli- cies, reports and services. The implications of this are very important. Because all managers have some responsibility for managing processes, they are, to some extent, operations managers. They all should want to give good service to their (often internal) customers, and they all will want to do this efficiently. So, operations management is relevant for all functions, and all managers should have some- thing to learn from the principles, concepts, approaches and techniques of operations manage- ment. It also means that we must distinguish between two meanings of ‘operations’:
● ‘Operations’ as a function , meaning the part of the organization which creates and delivers services and products for the organization’s external customers.
● ‘Operations’ as an activity, meaning the management of the processes within any of the organization’s functions.
Table 1.4 illustrates just some of the processes that are contained within some of the more common non-operations functions, the outputs from these processes and their ‘customers’.
Business processes Whenever a business attempts to satisfy its customers’ needs it will use many processes, both in its operations and in its other functions. Each of these processes will contribute some part to fulfilling customer needs. For example, the television programme and video
Critical commentary
the idea of the internal network of processes is seen by some as being over-simplistic. in reality the relationship between groups and individuals is signifi cantly more complex than that between commercial entities. one cannot treat internal customers and suppliers exactly as one does external customers and suppliers. external customers and suppliers usually operate in a free market. if an organization believes that in the long run it can get a better deal by purchasing services and products from another supplier, it will do so. But internal customers and suppliers are not in a ‘free market’. they cannot usually look outside either to purchase input resources or to sell their output services and products (although some organizations are moving this way). rather than take the ‘economic’ perspective of external commercial relationships, models from organizational behaviour, it is argued, are more appropriate.
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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22 Part One Directing the operation
production company, described previously, creates and delivers two types of ‘product’. Both of these involve a slightly different mix of processes within the company. The company decides to reorganize its operations so that each product is created from start to finish by a dedicated process that contains all the elements necessary for its production, as in Figure 1.8 . So customer needs for each product are entirely fulfilled from within what is called an ‘end-to-end’ business
process. These often cut across conventional organizational boundaries. Reorganizing (or ‘re-engineering’) process boundaries and organizational responsibilities around these busi- ness processes is the philosophy behind business process re-engineering (BPR) which is discussed further in Chapter 16 .
hOW DO OPeratiOnS anD PrOCeSSeS DiFFer?
Although all operations processes are similar in that they all transform inputs, they do differ in a number of ways, four of which, known as the four Vs, are particularly important:
● The volume of their output. ● The variety of their output. ● The variation in the demand for their output. ● The degree of visibility which customers have of the creation of their output.
the volume dimension Let us take a familiar example. The epitome of high-volume hamburger production is McDonald’s, which serves millions of burgers around the world every day. Volume has impor- tant implications for the way McDonald’s operations are organized. The first thing you notice is the repeatability of the tasks people are doing and the systemization of the work where
table 1.4 Some examples of processes in non-operations functions
Organizational function Some of its processes Outputs from its processes Customer(s) for its outputs
marketing and sales
planning process Forecasting process order taking process
marketing plans sales forecasts confi rmed orders
senior management sales staff , planners, operations operations, fi nance
Finance and accounting
Budgeting process capital approval processes invoicing processes
Budgets capital request evaluations invoices
everyone senior management, requesters external customers
human resources management
payroll processes recruitment processes training processes
salary statements new hires trained employees
employees all other processes all other processes
information technology
systems review process help desk process system implementation project processes
system evaluation systems advice implemented working systems and aftercare
all other processes in the business
✽✽✽ Operations principle Operations principle Operations principle
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ChaPter 1 operations management 23
standard procedures are set down specifying how each part of the job should be carried out. Also, because tasks are systematized and repeated, it is worthwhile developing specialized fryers and ovens. All this gives low unit costs. Now consider a small local cafeteria serving a few ‘short-order’ dishes. The range of items on the menu may be similar to the larger opera- tion, but the volume will be far lower, so the repetition will also be far lower and the number of staff will be lower (possibly only one person) and therefore individual staff are likely to perform a wider range of tasks. This may be more rewarding for the staff, but less open to systemization. Also, it is less feasible to invest in specialized equipment. So the cost per burger served is likely to be higher (even if the price is comparable).
the variety dimension A taxi company offers a relatively high-variety service. It is prepared to pick you up from almost anywhere and drop you off almost anywhere. To offer this variety it must be relatively flexible. Drivers must have a good knowledge of the area, and communication between the base and the taxis must be effective. However, the cost per kilometre travelled will be higher for a taxi than for a less customized form of transport such as a bus service. Although both provide the same basic service (transportation), the taxi service has a higher variety of routes and times to offer its customers, while the bus service has a few well-defined routes, with a set schedule. If all goes to schedule, little, if any, flexibility is required from the bus operation. All is standardized and regular, which results in relatively low costs compared with using a taxi for the same journey.
the variation dimension Consider the demand pattern for a successful summer holiday resort hotel. Not surprisingly, more customers want to stay in summer vacation times than in the middle of winter. At the height of ‘the season’ the hotel could be full to its capacity. Off-season demand, however,
Programme set and props manufactur
Programme post production
Music video post production
Music video marketing and
sales
Music video production unit
Programme finance and accounting
Engineering
End-to-end process for programme production
Programme marketing and
sales
Programme production unit
Music video finance and accounting
Music video set and props manufacture
End-to-end process for music video production
Figure 1.8 the television and video company divided into two ‘end-to-end’ business processes, one dedicated to creating programmes and the other dedicated to creating music videos
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24 Part One Directing the operation
could be a small fraction of its capacity. Such a marked variation in demand means that the operation must change its capacity in some way, for example by hiring extra staff for the summer. The hotel must try to predict the likely level of demand. If it gets this wrong, it could result in too much or too little capacity. Also, recruitment costs, overtime costs and under-utilization of its rooms all have the effect of increasing the hotel’s costs operation com- pared with a hotel of a similar standard with level demand. A hotel which has relatively level demand can plan its activities well in advance. Staff can be scheduled, food can be bought and rooms can be cleaned in a routine and predictable manner. This results in a high utiliza- tion of resources and unit costs which are likely to be lower than those hotels with a highly variable demand pattern.
the visibility dimension Visibility is a slightly more difficult dimension of operations to envisage. It means how much of the operation’s activities its customers experience, or how much the operation is exposed to its customers. Generally, customer-processing operations are more exposed to their cus- tomers than material- or information-processing operations. But even customer-processing operations have some choice as to how visible they wish their operations to be. For exam- ple, a retailer could operate as a high-visibility ‘bricks and mortar’, or a lower visibility web- based, operation. In the ‘bricks and mortar’, high-visibility operation, customers will directly experience most of its ‘value-adding’ activities. Customers will have a relatively short wait- ing tolerance , and may walk out if not served in a reasonable time. Customers’ perceptions, rather than objective criteria, will also be important. If they perceive that a member of the operation’s staff is discourteous to them, they are likely to be dissatisfied (even if the staff member meant no discourtesy), so high-visibility operations require staff with good customer contact skills. Customers could also request services or products which clearly would not be sold in such a shop, but because the customers are actually in the operation they can ask what they like! This is called high received variety. This makes it difficult for high-visibility operations to achieve high productivity of resources, so they tend to be relatively high-cost operations. Conversely, a web-based retailer, while not a pure low-contact operation, has far
lower visibility. Behind its website, it can be more ‘factory-like’. The time lag between the order being placed and the items ordered by the customer being retrieved and dispatched does not have to be minutes, as in the shop, but can be hours or even days. This allows the tasks of finding the items, packing and dispatching them to be standard- ized by staff who need few customer contact skills. Also, there can be relatively high staff utilization . The web-based organization can also centralize its operation on one (physical) site, whereas the ‘bricks and
mortar’ operation needs many shops close to centres of demand. Therefore, the low-visibility web-based operation will have lower costs than the shop.
Mixed high- and low-visibility processes Some operations have both high- and low-visibility processes within the same operation. In an airport, for example, some activities are totally ‘visible’ to its customers such as informa- tion desks answering people’s queries. These staff operate in what is termed a front-office environment. Other parts of the airport have little, if any, customer ‘visibility’, such as the bag- gage handlers. These rarely seen staff perform the vital but low-contact tasks, in the back-of- fice part of the operation.
the implications of the four Vs of operations processes All four dimensions have implications for the cost of creating and delivering services and products. Put simply, high volume, low variety, low variation and low customer contact all help to keep processing costs down. Conversely, low volume, high variety, high variation and high customer contact generally carry some kind of cost penalty for the operation. This is why
✽ ✽ ✽ Operations principle Operations principle Operations principle
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ChaPter 1 operations management 25
OPeratiOnS in PraCtiCe
Ski Verbier exclusive it is the name of the company that gives it away: ski Verbier exclusive Ltd is a provider of ‘upmarket ’ ski holi- days in the swiss winter sports resort of Verbier. With 23 years’ experience of organizing holidays, ski Verbier exclusive looks after luxury proper- ties in the resort that are rented from their owners for letting to ski Verbier exclusive’s clients. the properties vary in size and the configuration of their rooms, but the flexibility to reconfig- ure the rooms to cater for the varying requirements of client groups is impor- tant. ‘ We are very careful to cultivate as good a relationship with the owners, as we are with our clients that use our hol- iday service’ , says tom avery, Joint founder and Director of the company. ‘ We have built the business on develop- ing these personal relationships, which is why our clients come back to us year after year (40% to 50% of clients are returners) . We pride ourselves on the personal service that we give to every one of our clients; from the moment they begin planning their ski holiday, to the journey home. What counts is experience, expertise, obsessive eye for detail and the understated luxury of our chalets combined with our ability to customise client experience. ’ and client requests can be anything from organizing a special mountain pic- nic complete with igloos, to providing an ice sculpture of Kermit the Frog for a kids’ party. the personal concierge service begins from the moment the client books. the company ’s specialist staff have all lived and worked in Verbier and take care of all details of the trip well in advance, from organ- izing airport transfers to booking a private ski instructor, from arrang- ing private jet or helicopter flights to Verbier ’s local airport, to making lunch reservations in the best moun- tain restaurants. ‘ We cater for a small, but discerning market ’, says tom. ‘ Other companies may be bigger, but with us it’s our personal service that clients remember. ’ however, snow does not last all the year round. the company ’s busiest period is mid-December to mid-april. that is when all the prop- erties that the company manages are full. the rest of the year is not so busy,
but the company does offer bespoke summer vacations in some of its properties. these can be either self- catering, or with the full concierge service that clients get in the ski season. ‘ We adapt to clients’ requirements ’, says tom. ‘ That is why the quality of our staff is so important. They have to be good at working with clients, be able to judge the type of relationship that is appropriate, and be committed to providing what makes a great holiday. That’s why we put so much effort into recruiting, training and retaining our staff.’
Formule 1 hotels are high-contact operations – they are staff- intensive and have to cope with a range of customers, each with a variety of needs and expectations. so, how
two very diff erent hospitality operations
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26 Part One Directing the operation
the volume dimension is drawn with its ‘low’ end at the left, unlike the other dimensions, to keep all the ‘low-cost’ implications on the right. To some extent the position of an operation in the four dimensions is determined by the demand of the market it is serving. However, most operations have some discretion in moving themselves on the dimen- sions. Figure 1.9 summarizes the implications of such positioning.
can a highly successful chain of affordable hotels avoid the crippling costs of high customer contact? Formule 1, a subsidiary of the French accor group, manages to offer outstanding value by adopting two principles not always associated with hotel operations – standardization and an innovative use of technology. Formule 1 hotels are usually located close to the roads, junctions and cities that make them visible and accessible to prospective customers. the hotels themselves are made from state- of-the-art volumetric prefabrications. the prefabricated units are arranged in various configurations to suit the characteristics of each individual site. all rooms are 9 square metres in area, and are designed to be attractive, functional, comfortable and soundproof. most impor- tant, they are designed to be easy to clean and maintain. all have the same fittings, including a double bed, an
additional bunk-type bed, a wash basin, a storage area, a working table with seat, a wardrobe and a television set. the reception of a Formule 1 hotel is staffed only from 6.30 am to 10.00 am and from 5.00 pm to 10.00 pm. outside these times an automatic machine sells rooms to credit card users, provides access to the hotel, dispenses a security code for the room and even prints a receipt. technology is also evident in the washrooms. showers and toilets are automatically cleaned after each use by using nozzles and heating elements to spray the room with a disinfectant solution and dry it before it is used again. to keep things even simpler, Formule 1 hotels do not include a restaurant, as they are usually located near existing ones. however, a continental breakfast is available, usually between 6.30 am and 10.00 am, and of course on a ‘self-service’ basis!
Volume
Implications Implications
Low High
VarietyHigh Low
Variation in demand High Low
VisibilityHigh Low
Low repetition Each sta� member performs more of each task Less systemization High unit costs
High repeatability Specialization Capital intensive Low unit costs
Well defined Routine Standardized Regular Low unit costs
Stable Routine Predictable High utilization Low unit costs
Time lag between production and consumption Standardization Low contact skills High sta� utilization Centralization Low unit costs
Flexible Complex Match customer needs High unit costs
Changing capacity Anticipation Flexibility In touch with demand High unit costs
Short waiting tolerance Satisfaction governed by customer perception Customer contact skills needed Received variety is high High unit costs
Figure 1.9 a typology of operations
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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ChaPter 1 operations management 27
Worked example
Figure 1.10 illustrates the different positions on the dimensions of the ski Verbier exclusive operation and the Formule 1 hotel chain ( see the ‘operations in practice’ exam- ple above). at the most basic level, both provide the same basic service. they accom- modate people. Yet they are very different: ski Verbier exclusive provides luxurious and bespoke vacations for a relatively small segment of the ski holiday market . its variety of services is almost infinite in the sense that customers can make individual requests in terms of food and entertainment. Variation is high with four months of 100 per cent occupancy, followed by a far quieter period. customer contact, and therefore visibility, are also very high (in order to ascertain customers’ requirements and provide for them). all of this is very different from the Formule 1 branded hotels, whose customers usually stay one night, where the variety of services is strictly limited, and business and holiday customers use the hotel at different times, which limits variation. most notably, though, customer contact is kept to a minimum. ski Verbier exclusive has very high levels of ser- vice, which means it has relatively high costs. its prices therefore are not cheap – certainly not as cheap as Formule 1, which has arranged its operation in such a way as to provide a highly standardized service at minimal cost.
Ski Verbier exclusive
The Formule 1 hotel brand
Visibility
Variation
Variety
VolumeLow
High
High
High
High
Low
Low
Low
Figure 1.10 the four Vs profiles of two very different hospitality operations
What DO OPeratiOnS ManaGerS DO?
The exact details of what operations managers do will, to some extent, depend on the way an organization defines the boundaries of the function. Yet there are some general classes of activities that apply to all types of operation irrespective of whether they are ser- vice, manufacturing, private or public sector, and no matter how the operations function is defined. We classify operations management activities under the four headings: direct, design, deliver and develop.
● Directing the overall strategy of the operation. A general understanding of operations and processes and their strategic purpose and performance, together with an appreciation of how strategic purpose is translated into reality, are prerequisites to the detailed design of operations and process. This is treated in Chapters 1 to 5 .
● Designing the operation’s resources and processes. Design is the activity of determining the physical form, shape and composition of operations and processes in line with the ser- vices and products that they create. This is treated in Chapters 6 to 9 .
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28 Part One Directing the operation
● Planning and control process delivery . After being designed, the delivery of services and products from suppliers and through the total operation to customers must be planned and controlled. This is treated in Chapters 10 to 15 .
● Developing process performance. Increasingly it is recognized that operations man- agers, or any process managers, cannot simply routinely deliver services and products in the same way that they always have done. They have a responsibility to develop the capabilities of their processes to improve process performance. This is treated in Chapters 16 to 19 .
Operations management impacts environmental sustainability It is worth noting at this point that many of the activities of operations managers have a huge impact on their organization’s environmental sustainability. Environmental sustain- ability means (according to the Brundtland Report from the United Nations) ‘ meeting the needs of the present without compromising the ability of future generations to meet their own needs ’. Put more directly, it means the extent to which business activity negatively impacts the natural environment. It is clearly an important issue, not only because of the obvious impact on the immediate environment of hazardous waste, air, and even noise, pollution, but also because of the less obvious, but potentially far more damaging, issues around global warming.
It is important to operations managers because the pollution-causing disasters which make the headlines seem to be the result of a whole variety of causes – oil tankers run aground,
nuclear waste is misclassified, chemicals leak into a river, or gas clouds drift over industrial towns. But in fact they all have something in common. They were all the result of an operations-based failure. Somehow operations procedures were inadequate. Less dramatic in the short term, but perhaps more important in the long term, is the environmental impact of products which cannot by recycled and processes which consume large amounts of energy. In fact many of operations management’s environmental issues are concerned with waste. Operations management decisions in product and service
design significantly affect the utilization of materials both in the short term and in long-term recyclability. Process design influences the proportion of energy and labour that is wasted as well as materials wastage. Planning and control may affect materials wastage (packag- ing being wasted by mistakes in purchasing, for example), but also affects energy and labour wastage. Improvement, of course, is dedicated largely to reducing wastage. Here environ- mental responsibility and the conventional concerns of operations management coincide. Reducing waste, in all its forms, may be environmentally sound but it also saves cost for the organization.
the model of operations management We can now combine two ideas to develop the model of operations and process management that will be used throughout this book. The first is the idea that operations and the processes
that make up both the operations and other business functions are transformation systems that take in inputs and use process resources to transform them into outputs. The second idea is that the resources both in an organization’s operations as a whole and in its individual processes need to be managed in terms of how they are directed , how they are designed , how delivery is planned and controlled, and how they are developed and improved. Figure 1.11 shows how these two ideas go together. This book will use this model to examine the more important decisions that should be of interest to all managers of oper- ations and processes.
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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ChaPter 1 operations management 29
OPeratiOnS in PraCtiCe
hp began recycling hardware as far back as 1987, when it was the only major computer manufacturer to oper- ate its own recycling facility. since then hp has recov- ered over 227 billion pounds (1.27 billion kilograms) of products for reuse or recycling. its recycling programme seeks to reduce the environmental impact of its prod- ucts, minimizing waste going to landfills by helping customers discard products conveniently in an envi- ronmentally sound manner. recovered materials, after recycling, have been used to make various products, including auto body parts, clothes hangers, plastic toys, fence posts, and roof tiles.
hp has developed a standard for management of hardware at the end of its useful life to ensure the hard- ware is responsibly recycled or recovered. it also helps other electronics recyclers to work effectively with its products by providing disassembly instructions to them.
more than 75 per cent of its ink cartridges and 24 per cent of LaserJet toner cartridges are manufactured with what is known as ‘closed loop’ recycled plastic. this indi- cates that ink cartridges that include recycled plastic will contain 50–70 per cent recycled plastic and LaserJet toner cartridges that include recycled plastic will contain 10–20 per cent recycled plastic. hp sees its recycling service as providing an easy way to recycle. its specially developed state-of-the-art processes are designed to make sure that computer hardware, empty hp printing supplies and other items are recycled responsibly. the hp recycling programme includes such customer-friendly features as recycling hp inkjet and LaserJet cartridges for free, recycling any brand of computer hardware, being able to use its online ordering tool to request recycling services, and recycling hp Large Format and Banner media for free.
hP's recycling activities 5
to be a great operations manager you need to… 6 so, you are considering a career in operations management, and you want to know, ‘is it for you?’ What skills and personal qualities will you need to make a success of the job as well as enjoying yourself as you progress in the profession? Well, the fi rst thing to recognize is that there are many diff erent roles encompassed within the general category of ‘operations management’. someone who makes a great risk control system designer in an investment bank may not thrive as a site manager in a copper mine. a video game project manager has a diff erent set of day-to- day tasks when compared with a purchasing manager for a hospital. so the fi rst skill you need is to understand the range of operations-related responsibilities that exist in various industries; and there is no better way to do this than by reading this book! however, there are also some generic skills that an eff ective operations manager must possess. here are some of them. how many of them do you share?
● Enjoys getting things done – operations management is about doing things. it takes energy and/or commitment to fi nishing tasks. it means hitting deadlines and not letting down customers, whether they are internal or external.
● Understands customer needs – operations man- agement is about adding value for customers. this means fully understanding what ‘value’ means for customers. it means ‘putting your- self in the customer’s place’: knowing what it is like to be the customer, and knowing how to ensure that your services or products make the customer’s life better
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30 Part One Directing the operation
Transformed resources • Materials • Information • Customers
Transforming resources • Facilities • Staff
Input resources
Output products and services
Value added for customers
Operations management
Deliver – improving the operation’s capabilities
Direct – steering operations
and processes
Design – shaping processes,
products and services
Develop – planning and
controlling ongoing operations
Chapter 10 Planning and control of operations Chapter 11 Capacity management Chapter 12 Supply chain management Chapter 13 Inventory management Chapter 14 Planning and control systems Chapter 15 Lean operations
Chapter 16 Operations improvement Chapter 17 Quality management Chapter 18 Risk and recovery Chapter 19 Project management
Chapter 6 Process design Chapter 7 Layout and flow Chapter 8 Process technology Chapter 9 People in operations
Chapter 1 Operations management Chapter 2 Operations performance Chapter 3 Operations strategy Chapter 4 Product and service innovation Chapter 5 The structure and scope of operations
Figure 1.11 a general model of operations management
● Communicates and motivates – operations management is about directing resources to produce services or prod- ucts in an effi cient and eff ective manner. this means articulating what is required and persuading people to do it. interpersonal skills are vital. operations managers must be ‘people people’.
● Learns all the time – every time an operations manager initiates an action (of any kind) there is an opportunity to learn from the result. operations management is about learning, because without learning there can be no improvement, and improvement is an imperative for all operations.
● Committed to innovation – operations management is always seeking to do things better. this means creating new ways of doing things, being creative, imaginative, and (sometimes) unconventional.
● Knows his or her contribution – operations management may be the central function in any organization, but it is not the only one. it is important that operations managers know how they can contribute to the eff ective working of other functions.
▼
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ChaPter 1 operations management 31
● Capable of analysis – operations management is about making decisions. each decision needs to be evaluated (sometimes with very little time). this involves looking at both the quantitative and the qualitative aspects of the decision. operations managers do not necessarily have to be mathematical geniuses, but they should not be afraid of numbers!
● Keeps cool under pressure – operations managers often work in pressured situations. they need to be able to remain calm no matter what problems occur.
Critical commentary
the central idea in this introductory chapter is that all organizations have operations processes which create and deliver services and products and all these processes are essentially similar. however, some believe that by even trying to characterize processes in this way (perhaps even by calling them ‘processes’) one loses or distorts their nature, depersonalizes or takes the ‘humanity ’ out of the way in which we think of the organization. this point is often raised in not-for-profi t organizations, especially by ‘professional’ staff . For example, the head of one european ‘medical association’ (a doctors’ trade union) criticized hospital authorities for expecting a ‘sausage factory service based on productivity targets’ . no matter how similar they appear on paper, it is argued, a hospital can never be viewed in the same way as a factory. even in commercial businesses, professionals, such as creative staff , often express discomfort at their expertise being described as a ‘process’.
● operations management is the activity of managing the resources which are devoted to the creation and delivery of service and products. it is one of the core functions of any business, although it may not be called operations management in some industries.
● operations management is concerned with managing processes. and all processes have internal customers and suppliers. But all management functions also have processes. therefore, operations management has relevance for all managers.
❯ What is operations management?
SuMMarY anSWerS tO KeY QueStiOnS
● operations management uses the organization’s resources to create outputs that fulfi l defi ned market requirements. this is the fundamental activity of any type of enterprise.
● operations management is increasingly important because today ’s business environment requires new thinking from operations managers.
❯ Why is operations management important in all types of organization?
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32 Part One Directing the operation
❯ What is the input–transformation–output process?
❯ What is the process hierarchy?
● all operations can be modelled as input–transformation–output processes. they all have inputs of transforming resources, which are usually divided into ‘facilities’ and ‘staff ’, and transformed resources, which are some mixture of materials, information and customers.
● most operations create and deliver a combination of services and products, rather than being a ‘pure’ service or ‘product’ product operation.
● all operations are part of a larger supply network which, through the individual contribu- tions of each operation, satisfies end customer requirements.
● all operations are made up of processes that form a network of internal customer–supplier relationships within the operation.
● end-to-end business processes that satisfy customer needs often cut across functionally based processes.
❯ how do operations and processes differ?
❯ What do operations managers do?
● operations and processes differ in terms of the volume of their outputs, the variety of out- puts, the variation in demand for their outputs, and the degree of ‘visibility ’ they have.
● high volume, low variety, low variation and low customer ‘visibility ’ are usually associated with low cost.
● responsibilities can be classed in four categories – direct, design, deliver and develop:
● Direct includes understanding relevant performance objectives, setting an operations strategy, managing innovation and the scope of the operation.
● Design includes the design of the operation and its processes and its resources.
● Delivery includes the planning and controlling of the activities of the operation.
● Develop includes the improvement of the operation over time.
● increasingly operations managers have a responsibility for an operations environmental performance.
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CaSe StuDY Design house partnerships at Concept Design Services
‘ I can't believe how much we have changed in a relatively short time. From being an inward looking manufacturer, we became a customer focused “design and make” opera- tion. Now we are an integrated service provider. Most of our new business comes from the partnerships we have formed with design houses. In effect, we design products jointly with specialist design houses that have a well-known brand, and offer them a complete service of manufacturing and distri- bution. In many ways we are now a “business-to-business” company rather than a “business-to-consumer” company. ’ ( Jim thompson, ceo, concept Design services (cDs))
cDs had become one of europe’s most profitable home- ware businesses. originally founded in the 1960s, the com- pany had moved from making industrial mouldings, mainly in the aerospace sector, and some cheap ‘homeware’ items such as buckets and dustpans, sold under the ‘Focus’ brand name, to making very high-quality (expensive) stylish homewares with a high ‘design value’.
the move into ‘Concept’ products the move into higher margin homeware had been mas- terminded by Linda Fleet, cDs’s marketing Director, who had previously worked for a large retail chain of paint and wallpaper retailers.
‘ Experience in the decorative products industry had taught me the importance of fashion and product development, even in mundane products such as paint. Premium-priced colours and new textures would become popular for one or two years, supported by appropriate promotion and features in lifestyle magazines. The manufacturers and retailers who created and supported these products were dramatically more profitable than those who simply provided standard ranges. Instinctively, I felt that this must also apply to homeware. We decided to develop a whole co-ordinated range of such items, and to open up a new distribution network for them to serve up-market stores, kitchen equipment and specialty retailers. Within a year of launching our first new range of kitchen homeware under the “Concept” brand name, we had over 3000 retail outlets signed up, provided with point-of-sale display facilities. Press coverage generated an enormous interest which was reinforced by the product place- ment on several TV cookery and “lifestyle” programmes. We soon developed an entirely new market and within two years Concept products were providing over 75 per cent of our revenue and 90 per cent of our profits. The price realization of Concept products is many times higher than for the “Focus” range. To keep ahead we launched new ranges at regular intervals. ’
the move to the design house partnerships ‘ Over the last four years, we have been designing, manu- facturing and distributing products for some of the more
prestigious design houses. This sort of business is likely to grow, especially in Europe where the design houses appre- ciate our ability to offer a full service. We can design prod- ucts in conjunction with their own design staff and offer them a level of manufacturing expertise they can’t get elsewhere. More significantly, we can offer a distribution service which is tailored to their needs. From the custom- er’s point of view the distribution arrangements appear to belong to the design house itself. In fact they are based exclusively on our own call centre, warehouse and distri- bution resources. ’
the most successful collaboration was with Villessi, the italian designers. generally it was cDs’s design expertise which was attractive to ‘design house’ partners. not only did cDs employ professionally respected designers, but also it had acquired a reputation for being able to translate difficult technical designs into manufacturable and salea- ble products. Design house partnerships usually involved relatively long lead times but produced unique products with very high margins, nearly always carrying the design house’s brand.
‘ this type of relationship plays to our strengths. our design expertise gains us entry to the partnership but we are soon valued equally for our marketing, distribution and manufacturing competence.’ (Linda Fleet, marketing Director)
Manufacturing operations all manufacturing was carried out in a facility located 20 km from head office. its moulding area housed large injection-moulding machines, most with robotic mate- rials handling capabilities. products and components passed to the packing hall, where they were assembled and inspected. the newer, more complex products often
ChaPter 1 operations management 33
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34 Part One DIRECTING THE OPERATION
had to move from moulding to assembly and then back again for further moulding. All products followed the same broad process route but with more products need- ing several progressive moulding and assembly stages, there was an increase in ‘process flow recycling ’ which was adding complexity. One idea was to devote a sepa- rate cell to the newer and more complex products until they had ‘bedded in’. This cell could also be used for testing new moulds. However, it would need investment in extra capacity that would not always be fully utilized. After manufacture, products were packed and stored in the adjacent distribution centre.
‘When we moved into making the higher margin Concept products, we disposed of most of our older, small injection-moulding machines. Having all larger machines allowed us to use large multi-cavity moulds. This increased productivity by allowing us to produce several products, or components, each machine cycle. It also allowed us to use high quality and complex moulds which, although cumber- some and more difficult to change over, gave a very high quality product . For example, with the same labour we could make three items per minute on the old machines, and 18 items per minute on the modern ones using multi moulds. That’s a 600 per cent increase in productivity. We also achieved high dimensional accuracy, excellent sur- face finish, and extreme consistency of colour. We could do this because of our expertise derived from years making aerospace products. Also, by standardising on single large machines, any mould could fit any machine. This was an ideal situation from a planning perspective, as we were often asked to make small runs of Concept products at short notice.’ (Grant Williams, CDS Operations Manager)
Increasing volume and a desire to reduce cost had resulted in CDS subcontracting much of its Focus products to other (usually smaller) moulding companies.
‘We would never do it with any complex or Design House partner products, but it should allow us to reduce the cost of making basic products while releasing capacity for higher margin ones. However there have been quite a few “teething problems”. Coordinating the production schedules is currently a problem, as is agreeing quality standards. To some extent it’s our own fault. We didn’t realise that subcontracting was a skill in its own right. And although we have got over some of the problems, we still do not have a satisfactory relation- ship with all of our subcontractors.’ (Grant Williams, CDS Operations Manager)
Planning and distribution services The distribution services department of the company was regarded as being at the heart of the company ’s customer service drive. Its purpose was to integrate the efforts of design, manufacturing and sales by plan- ning the flow of products from production, through the distribution centre, to the customer. Sandra White, the Planning Manager, reported to Linda Fleet and was
responsible for the scheduling of all manufacturing and distribution, and for maintaining inventory levels for all the warehoused items
‘We try to stick to a preferred production sequence for each machine and mould so as to minimise set-up times by starting on a light colour, and progressing through a sequence to the darkest . We can change colours in 15 minutes, but because our moulds are large and technically complex, mould changes can take up to three hours. Good scheduling is important to maintain high plant utilisation. With a higher variety of complex products, batch sizes have reduced and it has brought down average utilisation. Often we can’t stick to schedules. Short-term changes are inevitable in a fashion market. Certainly better forecasts would help…but even our own promotions are sometimes organised at such short notice that we often get caught with stockouts. New products in particular are difficult to forecast , especially when they are “fashion” items and/ or seasonal. Also, I have to schedule production time for new product mould trials; we normally allow 24 hours for the testing of each new mould received, and this has to be done on production machines. Even if we have urgent orders, the needs of the designers always have priority.’ (Sandra White)
Customer orders for Concept and design house part- nership products were taken by the company ’s sales call centre located next to the warehouse. The individual orders would then be dispatched using the company ’s own fleet of medium and small distribution vehicles for UK orders, but using carriers for the Continental European market . A standard delivery timetable was used and an ‘express delivery ’ service was offered for those customers prepared to pay a small delivery pre- mium. However, a recent study had shown that almost 40 per cent of express deliveries were initiated by the company rather than customers. Typically this would be to fulfil deliveries of orders containing products out of stock at the time of ordering. The express delivery ser- vice was not required for Focus products because almost all deliveries were to five large customers. The size of each order was usually very large, with deliveries to cus- tomers’ own distribution depots. However, although the organization of Focus delivery was relatively straightfor- ward, the consequences of failure were large. Missing a delivery meant upsetting a large customer.
Challenges for CDS Although the company was financially successful and very well regarded in the homeware industry, there were a number of issues and challenges that it knew it would have to address. The first was the role of the design department and its influence over new product development.
New product development had become particularly important to CDS, especially since it had formed alliances with design houses. This had led to substantial growth in
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ChaPter 1 operations management 35
both the size and the influence of the design department, which reported to Linda Fleet.
‘Building up and retaining design expertise will be the key to our future. Most of our growth is going to come from the business which will be bought in through the creativity and flair of our designers. Those who can combine creativity with an understanding of our partners’ business and design needs can now bring in substantial contracts. The existing business is important of course, but growth will come directly from these people’s capabilities.’ (Linda Fleet)
But not everyone was so sanguine about the rise of the design department.
‘It is undeniable that relationships between the design- ers and other parts of the company have been under strain recently. I suppose it is, to some extent, inevitable. After all, they really do need the freedom to design as they wish. I can understand it when they get frustrated at some of the constraints which we have to work under in the man- ufacturing or distribution parts of the business. They also should be able to expect a professional level of service from us. Yet the truth is that they make most of the problems themselves. They sometimes don’t seem to understand the consequences or implications of their design decisions or the promises they make to the design houses. More seri- ously they don’t really understand that we could actu- ally help them do their job better if the cooperated a bit more. In fact, I now see some of our design house partners’ designers more than I do our own designers. The Villessi designers are always in my factory and we have developed some really good relationships.’ (grant Williams)
the second major issue concerned sales forecasting, and again there were two different views. grant Williams was convinced that forecasts should be improved.
‘Every Friday morning we devise a schedule of production and distribution for the following week. Yet, usually before Tuesday morning, it has had to be significantly changed because of unexpected orders coming in from our customers’ weekend sales. This causes tremendous disruption to both manufacturing and distribution operations. If sales could be forecast more accurately we would achieve far high utiliza- tion, better customer service, and, I believe, significant cost savings.'
however, Linda Fleet saw things differently. ‘Look, I do understand Grant’s frustration, but after all, this
is a fashion business. By definition it is impossible to forecast accurately. In terms of month-by-month sales volumes we are in fact pretty accurate, but trying to make a forecast for every week end every product is almost impossible to do accurately. Sorry, that’s just the nature of the business we're in. In fact, although Grant complains about our lack of forecast accu- racy, he always does a great job in responding to unexpected customer demand.’
Jim thompson, the managing Director, summed up his view of the current situation.
‘Particularly significant has been our alliances with the Italian and German design houses. In effect we are position- ing ourselves as a complete service partner to the designers. We have a world-class design capability together with man- ufacturing, order processing, order-taking and distribution services. These abilities allow us to develop genuinely equal partnerships which integrate us into the whole industry’s activities.’
Linda Fleet also saw an increasing role for collaborative arrangements.
‘It may be that we are seeing a fundamental change in how we do business within our industry. We have always seen ourselves as primarily a company that satisfies con- sumer desires through the medium of providing good ser- vice to retailers. The new partnership arrangements put us more into the “business to business” sector. I don't have any problem with this in principle, but I'm a little anxious as to how much it gets us into areas of business beyond our core expertise.’
the final issue which was being debated within the com- pany was longer term, and particularly important.
‘The two big changes we have made in this company have both happened because we exploited a strength we already had within the company. Moving into Concept products was only possible because we brought our high- tech precision expertise that we had developed in the aerospace sector into the homeware sector where none of our new competitors could match our manufacturing excellence. Then, when we moved into design house part- nerships we did so because we had a set of designers who could command respect from the world class design houses with whom we formed partnerships. So what is the next move for us? Do we expand globally? We are strong in Europe but nowhere else in the world. Do we extend our design scope into other markets, such as furniture? If so, that would take us into areas where we have no manufac- turing expertise. We are great at plastic injection mould- ing, but if we tried any other manufacturing processes, we would be no better than, and probably worse than, other firms with more experience. So what’s the future for us?' ( Jim thompson, ceo cDs)
QueStiOnS 1 Why is operations management important in CDS?
2 Draw a four Vs profile for the company ’s products/ services.
3 What would you recommend to the company if it asked you to advise it in improving its operations?
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36 Part One Directing the operation
1 read the ‘operations in practice’ case on pret a manger. (a) identify the processes in a typical pret a manger shop together with their inputs and outputs. (b) pret a manger also supplies business lunches (of sandwiches and other take-away food). What are the implications for how it manages its processes within the shop? (c) What would be the advantages and dis- advantages if pret a manger introduced ‘central kitchens’ that made the sandwiches for a number of shops in an area?
2 compare and contrast torchbox and pret a manger in terms of the way that they need to manage their operations.
3 Visit a hotel (other than Formule 1) and a sandwich or snack shop (other than pret a manger). observe how each operation appears to work: for example, where customers go, how staff interact with them, how big it is, how the operation has chosen to use its space, what variety of products/services it offers, and so on. think about how these shops are similar to Formule 1 and pret a manger, and how they differ.
4 reread the ‘operations in practice’ case on Lego. Lego also lends its name to a chain of Lego-themed amusement parks aimed at younger children and families. although the Lego group has a share in the parks, they are largely owned and operated by a theme park com- pany – merlin entertainments. Visit the website for one of these theme parks (or visit an actual site if you want a day out) and compare the Lego manufacturing operation with the theme park operations using the four Vs.
5 Visit and observe three restaurants. compare them in terms of the four Vs. think about the impact of volume, variety, variation and visibility on the day-to-day management of each of the operations and consider how each operation attempts to cope with its volume, variety, variation and visibility.
6 (Advanced) Find a copy of a financial newspaper ( Financial Times , Wall Street Journal , The Economist , etc.) and identify one company which is described in the paper that day. Using the list of issues identified in Figure 1.4 , what do you think would be the new operations agenda for this company?
SeLeCteD Further reaDinG
anupindi, r. and Chopra, S. (2013) Managing Business Process Flows , 3rd edn, Pearson, harlow.
takes a ‘process’ view of operations; it is mathematical but rewarding.
Barnes, D. (2007) Operations Management: An international perspective , Cengage Learning, Boston, Ma.
a text that is similar in outlook to this one, but with more of a (useful) international perspective.
Brandon-Jones, a . and Slack, n. (2008) Quantitative Analysis in Operations Management , Financial times Prentice hall, harlow.
a useful short book covering some of the more advanced quantitative aspects of operations management.
hall, J.M. and Johnson, M.e. (2009) When should a process be art, not science?, Harvard Business Review , March.
PrOBLeMS anD aPPLiCatiOnS
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ChaPter 1 operations management 37
one of the few articles that looks at the boundaries of conventional process theory.
hammer, M. and Stanton, S. (1999) how process enterprises really work, Harvard Business Review, november–December.
hammer is one of the gurus of process design. this paper is typical of his approach.
Jacobs, F.r. and Chase, r.B. (2012) Operations and Supply Chain Management, 3rd edn, McGraw- hill/irwin, new York.
there are many good general textbooks on operations management. this takes a supply chain per- spective, though written very much for an american audience.
Johnston, r., Clark, e. and Shulver M. (2012) Service Operations Management, 4th edn, Pearson, harlow.
What can we say! a great treatment of service operations from the same stable as this textbook.
Slack, n. and Lewis, M.a. (eds) (2005) The Blackwell Encyclopedic Dictionary of Operations Management, 2nd ed, Blackwell Business, Oxford.
For those who like technical descriptions and definitions.
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intrOduCtiOn operations are judged by the way they perform. however, there are many ways of judging performance and there are many different individuals and groups doing the judging. also, performance can be assessed at different levels. so in this chapter we start by describing a very broad approach to assessing operations performance at a societal level that uses the ‘triple bottom line’ to judge an operation’s social, environmental and economic impact. We then look at how operations performance can be judged in terms of how it affects an organization’s ability to achieve its overall strategy. the chapter then looks at the more directly operational- level aspects of performance – quality, speed, dependability, flexibility and cost. 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 .
Operations performance
Key questions
❯ why is operations performance vital in any organization?
❯ how is operations performance judged at a societal level?
❯ how is operations performance judged at a strategic level?
❯ how is operations performance judged at an operational level?
❯ how can operations performance be measured?
❯ how do operations performance objectives trade off against each other?
2
Topic covered in this chapter
Operations management
Direct
Design Develop
Deliver
Direct
Operations performance
The structure
and scope of operations
Operations strategy
Operations management
Product and service innovation
Figure 2.1 this chapter examines operations performance
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CHAPTER 2 OPERATIONS PERFORMANCE 39
WHY IS OPERATIONS PERFORMANCE VITAL IN ANY ORGANIZATION?
It is no exaggeration to view operations management as being able either to ‘make or break’ any business – not just because the operations function is large and, in most businesses, repre- sents the bulk of its assets and the majority of its people, but because the operations function gives the power to compete by providing the ability to respond to customers and by develop- ing the capabilities that will keep it ahead of its competitors in the future. But when things go wrong in operations, the reputational damage can last for years. For example, air travel depends on the smooth and efficient operation of airport terminals, so when Terminal 5 at London’s Heathrow Airport first opened and there was chaos on its opening days, it was seen by many as one of the most public failures of basic operations management in the modern history of aviation. The problems included a lack of adequate training in new systems, con- fusing signage, slow baggage handling and a failure to understand how the terminal’s indi- vidual processes needed to be integrated. It needed an extra 400 volunteer staff and courier companies to wade through the backlog of late baggage, and 200 flights in and out of the terminal were cancelled in its first three days. Now, the terminal works well and is popular with passengers, but it has taken time to shake off the poor reputation it gained in those first chaotic days.
So, to understand the importance of operations management, one must first understand why things can go wrong in operations and their impact. We will deal with the nature of oper- ations failures in Chapter 18 , but the first point to make is that when operations do go wrong it can be very obvious. Look at the various high-profile problems and disasters reported in the news. Very many of them are the direct result of poor operations management. From bank ATM failures that inconvenience an operation’s customers, to air crashes that kill them, oper- ations failures are both obvious and serious. Not that all operations failures have to be dra- matic. One could argue that simply doing what has always been done is a failure to exploit opportunities to do things better. In this view, what is sometimes known as ‘keeping the show on the road’ rather than exploring chances for improvement is also a failure. However, do not think that operations management is just about avoiding failure; its contribution to an organization’s overall success if far greater than that. Operations management can ‘make’ the organization in several ways. First, operations management is concerned with doing things better – better quality, better service, better responsiveness, better reliability, better flexibility, better cost, and better use of capital invested in facilities. And it is this focus on ‘better’, on improvement, that can potentially make operations the driver of improvement for the whole organization. Second, through the continual learning that can come from its improvement activities, operations management can build the ‘difficult to imitate’ capabilities that can have a significant strategic impact. (We will deal further with this issue in the next chapter on operations strategy.) Third, operations management is very much concerned with ‘process’, with how things are done. And there is a relationship between process and outcome. Good operations management is the best way to produce good products and services.
Of course, operations managers will always face new challenges, not only when they have major new projects to manage like Terminal 5, but also more generally as their economic, social, political and technological environment changes. Many of these decisions and challenges seem largely economic in nature. What will be the impact on our costs of adding a new product or ser- vice feature? Can we generate an acceptable return if we invest in new technology? Other decisions have more of a ‘social’ aspect. How do we make sure that all our suppliers treat their staff fairly? Yet others have an environmental impact. Are we doing enough to reduce our carbon footprint? What is more, the ‘economic’ decisions also have an environmental aspect to them. Will a new product feature make end-of-life recycling more difficult? Will the new technology increase pollution? Similarly the ‘social’ decisions must be made in the context of their economic consequences. Sure, we want suppliers to treat staff well, but we also need to
✽ ✽ ✽ Operations principle Operations principle Operations principle
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40 PART ONE DIRECTING THE OPERATION
make a profit. And this is the great dilemma. How do operations managers try to be, simul- taneously, economically viable while being socially and environmentally responsible? This is why we start our treatment of operations performance at the ‘societal’ level, looking at the ‘triple bottom line’.
OPERATIONS IN PRACTICE
It is not surprising perhaps that a company whose prod- ucts help other firms to operate more sustainably should itself be keen to stress its own environmental and social performance. This certainly is true for Novozymes, the Denmark-based company, whose worldwide production of enzymes, micro-organisms, and biopharmaceutical ingredients help its customers in the household care, food and beverage, bioenergy, agriculture and pharmaceutical industries to ‘ make more from less, while saving energy and generating less waste '. Novozymes is the world leader in what it terms ‘bioinnovation’, particularly in the field of enzyme production and application. Enzymes are pro- teins that, in nature, initiate biochemical reactions in all living organisms. It is enzymes that convert the food in our stomachs to energy and turn the falling leaves in the for- est to compost. Novozymes’ operations find enzymes in nature and optimize them so that they can replace harsh chemicals, accelerate its customers' production processes and minimize the use of scarce resources. These enzymes are widely used in many industries, including, for exam- ple, laundry and dishwashing detergents (where they remove stains and enable low- temperature washing), while other enzymes improve the quality of bread, beer and wine, or increase the nutritional value of animal feed. They are also used in the production of biofuels where they turn starch or cellulose from biomass into sugars that can be fermented to ethanol.
How does Novozymes judge its own performance? It is a commercial company with investors who expect a return on their investment, but the company also strives to balance good business for its customers and its share- holders with the impact it has on environmental and social change. In terms of the conventional financial per- formance of its operations, the company tracks revenues from its various markets as well as its raw materials costs, productivity improvements, investment in research and development, sales and administrative costs, as well as the effects of such operational factors as the product mix at its processing operations. Of course, Novozymes also monitors how good its operations are at interacting with customers and suppliers.
In terms of its environmental performance, Novozymes has two aspects to monitor. The first is its products and services' impact on its customers' performance. The com- pany conducts peer-reviewed life cycle assessment (LCA)
studies to document the environmental impact of its biosolutions for its customers and advise them on ways to reduce their CO 2 emissions. As regards its own oper- ations, Novozymes attempts to reduce the consump- tion of natural resources (including water usage) every year and mitigate the negative environmental impact of its production processes. Likewise, the improvement in energy efficiency is driven by continuous process optimi- zations and the implementation of energy-saving projects at their global production sites. But all production pro- cesses produce waste and by- products, so Novozymes seeks continual improvement in the amount of waste and by-products that are sent for landfill or incineration. This has the double effect of reducing the cost of waste treat- ment as well as minimizing the company's environmen- tal footprint. As a result of these efforts, the Dow Jones Sustainability Index, a global sustainability benchmark, has ranked Novozymes among the top 3 per cent of com- panies in the chemical industry sector.
The company also track several aspects of its social performance. These include: employee satisfaction and development, diversity and equal opportunities, occu- pational health and safety, compliance with human rights and labour standards, corporate citizenship efforts and business integrity. Perhaps most impres- sively, Novozymes sets long-term performance targets in key aspects of its performance that are integrated into incentive schemes throughout the organization. Long-term financial performance is measured conven- tionally through the rate of sales growth, profitability and the return on invested capital. However, in addition,
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CHAPTER 2 OPERATIONS PERFORMANCE 41
Performance at three levels Looking at the example of how Novozymes monitors and reports its performance demon- strates the point that ‘performance’ is not a straightforward or simple concept. First, it is multi-faceted in the sense that a single measure can never fully communicate the success, or otherwise, of something as complex as an operation. Several measures will always be needed to convey a realistic overview of the various aspects of performance. Second, per- formance can be assessed at different levels, from the broad, long-term, societal level of Novozymes’ environmental monitoring, for example, to its more operational-level con- cerns over how it improves day-to-day efficiency, or how it serves its individual custom- ers. In the rest of this chapter we will look at how operations can judge its performance at three levels:
● The broad, societal level, using the idea of the ‘triple bottom line’. ● The strategic level of how an operation can contribute to the organization’s overall
strategy. ● The operational level, using the five operations ‘performance objectives’.
These three levels of operations performance are illustrated in Figure 2.2 .
HOW IS OPERATIONS PERFORMANCE JUDGED AT A SOCIETAL LEVEL?
No operation exists, or performs, in isolation. The decisions that are made within any opera- tion and the way it goes about its day-to-day activities will affect a whole variety of ‘stakehold- ers’. Stakeholders are the people and groups who have a legitimate interest in the operation’s activities. Some stakeholders are inter- nal, 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 commercial relationship with the organization, for example suppliers and custom- ers; 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) objec- tives of its stakeholders and set its objectives accordingly. Figure 2.3 illustrates just some of the stakeholder groups who would have an interest in how an organization’s operations func- tion 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 perfor- mance is important. Nevertheless, if one is to judge operations at a broad societal level, one must judge the impact it has on its stakeholders.
Novozymes also has a number of ‘impact targets’. Within five years the company says that its aim is to:
● reach 6 billion people, especially in emerging mar- kets, with its products that enhance sustainability;
● educate by providing knowledge of the potential of biology to 1 million people by training in factories, local-community outreach and involvement with universities and business schools;
● catalyse five global partnerships for change through high-impact partnerships with public and private organizations to create answers for a sustainable world;
● deliver 10 transformative innovations that change the lives of many people and fulfil sustainability goals.;
● save the world 100 million tons of CO 2 a year through customers applying its products;
● enable its employees to develop their skills.
✽ ✽ ✽ Operations principle Operations principle Operations principle
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42 PART ONE DIRECTING THE OPERATION
Corporate social responsibility (CSR) This idea that operations should take into account their impact on a broad mix of stakeholders is often termed ‘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 minimiz- ing 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 definition 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 requirements 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 CSR 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 several times at various points throughout this book.
The triple bottom line One common term that tries to capture the idea of a broader approach to assessing an organ- ization’s performance is the ‘triple bottom line’2 (TBL, or 3BL), also known as ‘people, plant and profit’. Essentially, it is a straightforward idea: simply that organizations should measure
Operations strategic impact
Risk Capital
Learning
People
Planet
Sustain – ability
Revenue
Profit
Cost
• Quality • Speed • Dependability • Flexibility • Cost
Operational level – operations performance objectives
Strategic level – operations strategic impact
Societal level – operations sustainability
Figure 2.2 Three levels of operations performance
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CHAPTER 2 OPERATIONS PERFORMANCE 43
Customers • Acceptable price • Good service • Quality o�erings
Shareholders • Return on investment • Stability of earnings • Liquidity of investment
Government • Conformance to legal requirements • Contribution to economy
Regulatory bodies • Conformance to regulations • Feedback on e�ectiveness of regulations
Lobby groups • Alignment of the organization’s activities with whatever the groups are promoting
Suppliers • Early notice of requirements • Long-term orders • Fair price • On-time payment
‘Society’ • Minimize negative e�ects from the operation (noise, tra�c, etc.) • Maximize positive e�ects (jobs, local sponsorship, etc.)
Top management • Acceptable profit • Return on investment • Low risk of failure • Future innovation
Sta� • Fair wages • Good working conditions • Personal/career development
Sta� representative bodies • Conformance with national agreements • Consultation
Figure 2.3 Stakeholder groups with typical operations objectives
OPERATIONS IN PRACTICE
In most counties it is a principle that is enshrined in law: companies must look after the interests of their owners; in other words, their shareholders. But that is beginning to change. Since 2005 the UK, for example, has allowed people to form ‘community interest companies’ that have a broader set of objectives. Some argue that con- ventional ‘for-profit firms’ come under pressure to dis- card social goals in favour of increasing profits. Charities and ‘non-profit firms’ are constrained in their ability to raise capital when they need to grow. Similarly, in 2012 Yvon Chouinard, founder and owner of Patagonia Inc., the outdoor-clothing firm that designs, develops and markets clothing and gear for a wide range of outdoor sports, became the first business person to take advan- tage of a new law in California that gave businesses greater freedom to follow strategies which they believe benefit society as a whole rather than simply concentrat- ing on maximizing profits. According to Mr Chouinard,
Patagonia is one of the new ‘benefit corporations’ (usu- ally called ‘B Corps’). To meet the criteria as a B Corp, a firm should have a clear and unequivocal social and/ or environmental mission, and a legal responsibility to respect the interests of workers, the community and the environment as well as its shareholders. It must also issue
Patagonia, a B Corp 3
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44 PART ONE DIRECTING THE OPERATION
themselves not just on the traditional economic profit that they generate for their owners, but also on the impact their operations have on society (broadly, in the sense of communities, and individually, for example in terms of their employees) and the ecological impact on the environ- ment. The influential initiative that has come out of this triple bottom line approach is that of
‘sustainability’. A sustainable business is one that creates an acceptable profit for its owners, but minimizes the damage to the environment and enhances the existence of the people with whom it has contact. In other words, it balances economic, environmental and societal inter- ests. This gives the organization its ‘licence to operate’ in society. The assumption underlying the triple bottom line (which is not universally accepted) is that a sustainable business is more likely to remain suc-
cessful in the long term than one which focuses on economic goals alone. Only a company that produces a balanced TBL is really accounting for the total cost of running its operations.
The social bottom line (People) – the social account, measured by the impact of the operation on the quality of people’s lives The idea behind the social bottom line performance is not just that there is a connection between businesses and the society in which they operate – that is self-evident. Rather it is that businesses should accept that they bear some responsibility for the impact they have on society and balance the external ‘societal’ consequences of their actions with the more direct internal consequences, such as profit. At the level of the individual, social bottom line per- formance means devising jobs and work patterns which allow individuals to contribute their talents without undue stress. At a group level, it means recognizing and dealing honestly with employee representatives. In addition, businesses are also a part of the larger community and, it is argued, should be recognizing their responsibility to local communities by helping to pro- mote their economic and social well-being.
Some ways that operations can impact the social bottom line performance include the following:
● Customer safety from products and services ● Employment impact of an operation’s location
independently verified information on its social and environmental impact in addition to its financial results.
Patagonia's Mission Statement goes like this: ‘ Build the best product, cause no unnecessary harm, and use business to inspire and implement solutions to the environ- mental crisis .’ The company uses environmentally sen- sitive materials (organic cotton, recycled and recyclable polyester, and hemp among them) and both sponsor and participate in a host of environmental initiatives that range from promoting wildlife corridors to combating genetic engineering. Its employees enjoy good benefits, including generous healthcare, subsidized day care, flex- ible work schedules and paid time off for environmental internships. Many employees share the company's val- ues, care about quality and are active in environmental and community causes. But, like most clothing compa- nies, Patagonia outsources its production. So how does it ensure that the company's values are also upheld in its supply chain? It is important, it says, to work with
suppliers ‘ that share our values of integrity and environ- mentalism. In the past, we found we didn't have to make a lot of extra effort to achieve this. Our demand for high quality and our close relationships with the small number of factories we did business with pretty much assured it. It really is true that you can't make good products in a bad factory, and we did business with some of the world's best. They were, for the most part, efficient and well run. The people who worked in them tended to have a lot of experience. Despite high employee turnover elsewhere in the garment industry, these factories were able to retain employees because they paid them fairly and treated them humanely. ’ Transparency is also important. In an effort to understand the social and environmental impacts of its supply chain, Patagonia launched its Footprint Chronicles , in which it traces the environmental and social impact of products from design through fibre creation to construc- tion to shipment to its warehouse.
✽ ✽ ✽ Operations principle Operations principle Operations principle
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CHAPTER 2 OPERATIONS PERFORMANCE 45
● Employment implications of outsourcing ● Repetitive or alienating work ● Staff safety and workplace stress ● Non-exploitation of developing country suppliers.
The environmental bottom line (Planet) – the environmental account, measured by environmental impact of the operation Environmental sustainability (according to the World Bank) means ‘ ensuring that the over- all productivity of accumulated human and physical capital resulting from development actions more than compensates for the direct or indirect loss or degradation of the environment ’. Put more directly, it is generally taken to mean the extent to which business activity negatively impacts the natural environment. It is clearly an important issue, not only because of the obvi- ous impact on the immediate environment of hazardous waste, air and even noise pollution, but also because of the less obvious, but potentially far more damaging, issues around global warming. Operations managers cannot avoid responsibility for environmental performance. It is often operational failures which are at the root of pollution disasters and operations deci- sions (such as product design) which impact on longer term environmental issues.
Some ways that operations can impact the environmental bottom line performance include the following:
● Recyclability of materials, energy consumption, waste material generation ● Reducing transport-related energy ● Noise pollution, fume and emission pollution ● Obsolescence and wastage ● Environmental impact of process failures ● Recovery to minimize impact of failures.
OPERATIONS IN PRACTICE
Holcim is a global company, based in Switzerland, and employs around 80,000 people, with production sites in around 70 countries. It is one of the world's leading man- ufacturers and distributors of cement and aggregates (for example, crushed stone, gravel and sand). It also supplies ready-mix concrete and asphalt as well as offering con- sulting, research, trading, engineering and other services. But, along with other companies in this sector, Holcim faces some considerable challenges in pursuing its sus- tainability objectives. After all, cement manufacture is an activity that has a significant impact on almost every aspect of sustainability and social responsibility. Concrete is the second most used resource in the world after water. As the chief ingredient in concrete, cement is therefore a key requirement of modern society, but its manufacture is a resource- and energy-intensive process. This possi- bly explains why Holcim put so much effort into its sus- tainable development strategies. It aspires, it says, ‘ to be the world's most respected and attractive company in our industry, creating value for all our stakeholders, by placing sustainable development at the core of our business strat- egy aims to enhance this value, safeguards our reputation
and contributes to continued success ’. Holcim's strategy and its approach to value creation attempts to integrate economic, environmental and social impacts using the ‘triple bottom line’ approach.
To achieve its triple bottom line business goals, Holcim has established a set of group-wide performance targets. But, before targets are met, the company aims to understand its current performance. Holcim does this
Holcim works with the ‘triple bottom line’ 4
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46 PART ONE DIRECTING THE OPERATION
The economic bottom line (Profit) – the economic account, measured by profitability, return on assets, etc., of the operation The organization’s top management represent the interests of the owners (or trustees, or electorate, etc.) and therefore are the direct custodians of the organization’s economic per- formance. Broadly this means that operations managers must use the operation’s resources effectively, and there are many ways of measuring this ‘economic bottom line’. Finance spe- cialists have devised various measures (such as return on assets etc.), that are beyond the scope of this book, to do this.
Some ways that operations can impact the financial bottom line performance include the following:
● Cost of producing products and services ● Revenue from the effects of quality, speed, dependability and flexibility ● Effectiveness of investment in operations resources ● Risk and resilience of supply ● Building capabilities for the future.
We will build on these ‘economic bottom line’ issues in the next section on judging opera- tions performance at a strategic level.
HOW IS OPERATIONS PERFORMANCE JUDGED AT A STRATEGIC LEVEL?
Many (although not all) of the activities of operations managers are operational in nature. That is, they deal with relatively immediate, detailed and local issues. However, it is a cen- tral idea in operations management that the type of decisions and activities that operations
by establishing consistent measurement and report- ing techniques, as well as implementing management systems to monitor progress toward its goals. Yet CSR- related performance measurement systems should not,
says Holcim, be separate from the more conventional business systems. To work effectively, CSR performance systems are integrated into overall business processes and supported by appropriate training.
Critical commentary
The dilemma with using this wide range of triple bottom line, stakeholders or CSR to judge operations performance is that organizations, particularly commercial companies, have to cope with the confl icting pressures of maximizing profi tability on the one hand, with the expectation that they will manage in the interests of (all or part of ) society in general with accountability and transparency, on the other. Even if a business wanted to refl ect 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 fi rms (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 fi rms in our economy to measure their own performance? How do we want them to determine what is better versus worse? ' 5 He also holds that using stakeholder perspectives gives undue weight to narrow special interests who 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 behaviour ’.
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CHAPTER 2 OPERATIONS PERFORMANCE 47
managers carry out can also have a significant strategic impact. Therefore, if one is assessing the performance of the operations function, it makes sense to ask how it impacts the organi- zation’s strategic ‘economic’ position. We will examine that in more detail the way that oper- ations management can think about the strategic role. But, at a strategic level, there are five aspects of operations performance that we identified as contributing to the ‘economic’ aspect of the triple bottom line that can have a significant impact, see Figure 2.4.
Let us start by looking at how operations affect profit. At a simple (and simplistic) level, profit is the difference between the costs of producing products and services and the reve- nue the organization secures from its customers in exchange. (In public sector operations an equivalent, although difficult to measure, performance metric could be ‘welfare per unit of expenditure’.)
Operations management affects costs It seems almost too obvious to state, but almost all the activities that operations managers regularly perform (and all the topics that are described in this book) will have an affect on the cost of producing products and services. Clearly the efficiency with which an operation pur- chases its transformed and transforming resources, and the efficiency with which it converts its transformed resources, will determine the cost of its products and services. And for many operations managers it is the most important aspect of how they judge their performance. Indeed, there cannot be many, if any, organizations that are indifferent to their costs.
Operations management affects revenue Yet cost is not necessarily always the most important strategic objective for operations manag- ers. Their activities also can have a huge effect on revenue. High-quality, error-free products and services, delivered fast and on time, where the operation has the flexibility to adapt to customers’ needs, are likely to command a higher price and sell more than those with lower levels of quality, delivery and flexibility. And operations managers are directly responsible for issues such as quality, speed of delivery, dependability and flexibility, as we will discuss later in the chapter.
Operations strategic contribution
Less failure, reduced errors, better resilience
Lower risk of operations
failure
High e�ciency, less waste
Enhanced service for customers
Higher revenue
Higher utilization of operations
capacity
Less capital required to
provide capacity
Operations build the capabilities that enable future innovation
Opportunities for process learning and improvement
Higher profitsLower operating costs
Figure 2.4 Operations can contribute to financial success through low costs, increasing revenue, lowering risk, making efficient use of capital, and building the capabilities for future innovation
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48 PART ONE DIRECTING THE OPERATION
The main point here is that operations activities can have a significant effect on, and there- fore should be judged on, the organization’s profitability. Moreover, even relatively small improvements on cost and revenue can have a proportionally even greater effect on profit- ability. For example, suppose a business has an annual revenue of €1,000,000 and annual costs of €900,000, and therefore a ‘profit’ of €100,000. Now suppose that, because of the excellence of its operations managers in enhancing quality and delivery, revenue increases by 5 per cent and costs reduce by 5 per cent. Revenue now is €1,050,000 and costs €855,000. So profit is now €195,000. In other words, a 5 per cent change in cost and revenue has improved profitability by 95 per cent. But profit is not the only aspect of strategic performance that is affected by operations activities.
Operations management affects the required level of investment How an operation manages the transforming resources that are necessary to produce the required type and quantity of its products and services will also have a strategic affect. If, for example, an operation increases its efficiency so that it can produce (say) 10 per cent more output, then it will not need to spend investment (sometimes called capital employed) to pro- duce 10 per cent more output. Producing more output with the same resources (or sometimes producing the same output with fewer resources) affects the required level of investment.
Operations management affects the risk of operational failure Well-designed and run operations should be less likely to fail. That is, they are more likely to operate at a predictable and acceptable rate without either letting customers down or incur-
ring excess costs. And if they ever do suffer failures, well-run opera- tions should be able to recover faster and with less disruption (this is called resilience).
Operations management affects the ability to build the capabilities on which future innovation is based Operations managers have a unique opportunity to learn from their experience of operating their processes in order to understand more about those processes. This accumulation of process knowledge can build into the skills, knowledge and experience that allow the
business to improve over time. But more than that, it can build into what are known as the ‘capabilities’ that allow the business to innovate in the future. We will examine this idea of operations capabilities in more detail in the next chapter.
HOW IS OPERATIONS PERFORMANCE JUDGED AT AN OPERATIONAL LEVEL?
Assessing performance at a societal level through the idea of the triple bottom line, and judg- ing how well an operation is contributing to its general strategic objectives, are clearly impor- tant, particularly in the longer term. Both these levels form the backdrop to all operations decision making. But running operations at an operational day-to-day level requires a more tightly defined set of objectives. These are called operations ‘performance objectives’. There are five of them and they apply to all types of operation. Imagine that you are an operations manager in any kind of business – a hospital administrator, for example, or a production man- ager in an automobile plant. What kinds of things are you likely to want to do in order to sat- isfy 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.
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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CHAPTER 2 OPERATIONS PERFORMANCE 49
● 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 individ- ual treatment. Being able to change far enough and fast enough to meet customer require- ments 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 man- aging 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.
Why is quality important? 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 man- agement from giving attention to 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 will see) has both an external impact, which influences customer satisfaction, and an internal impact, which leads to stable and effi- cient processes.
✽ ✽ ✽ Operations principle Operations principle Operations principle
✽ ✽ ✽ Operations principle Operations principle Operations principle
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50 PART ONE DIRECTING THE OPERATION
Figure 2.5 Quality means different things in different operations
OPERATIONS IN PRACTICE
It has been a point of some debate for generations of children (and some adults): ‘ what is your favourite amongst the Quality Street assortment of chocolates? ’ The world-famous brand of assorted chocolates is made in the same area of the UK where John Mackintosh first made this new type of sweet by mixing hard and soft caramel in 1890. But it was John Mackintosh's son who conceived and developed Quality Street in 1936. His idea (novel at the time) was to wrap each individual sweet separately and package them in a tin to preserve their quality. And Nestlé, which has owned the brand since 1988, has maintained this emphasis on quality. In fact, like all Nestlé products, Quality Street is made under the strict quality standards enshrined in the com- pany's quality policy that outlines its commitment to ‘ build trust by offering products and services that match consumer expectation and preference ’. In other words, Nestlé understands that quality has a profound effect on how its products are viewed by consumers. As a food company (the largest in the world), it is also aware of its responsibility to comply with all food safety and regula- tory requirements. ‘ I don't think most people are aware
of the amount of work that goes into ensuring that the food they eat is safe ’, says John O'Brien, Head of the Food Safety and Integrity Research Programme at the Nestlé Research Center in Lausanne, Switzerland. ‘ It's only when something goes wrong that they sit up and take notice… Consumers rightly expect that the product they buy is safe to eat and contains what it says on the label ’, he said. ‘ But they also expect fewer preservatives on that label. ’ At Quality Street the sweets are free from artificial col- ours, flavourings and preservatives, and since 2009, the packaging has been completely recyclable. The coloured wrappers are biodegradable and can be composted with garden waste, while the foil wrappers and the tin container can be recycled in the same way as cans. Yet, while consumer perception and particularly safety is of paramount concern at Quality Street, high-quality operations also have an impact on costs. One of Nestlé's quality policy is to ‘ gain a zero-defect, no-waste attitude by everyone in our company ’. Their ‘Quality Management System’ is used globally to guarantee compliance with quality standards and to create value for consumers. It is audited and verified by independent certification
Quality at Quality Street 6
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CHAPTER 2 OPERATIONS PERFORMANCE 51
Why is speed important? Speed means the elapsed time between customers requesting products or services and their 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
bodies to prove conformity to internal standards, laws and regulatory requirements. And quality is a priority throughout the whole supply chain. ‘Quality by design’ is built in during product development and the compa- ny's ‘Supplier Code’ sets minimum standards that it asks its suppliers, employees, agents and subcontractors to respect and to adhere to at all times. In the factory it applies internationally recognized good manufacturing practices (GMP) that cover all aspects of manufacturing, including standard operating procedures, people man- agement and training, equipment maintenance, and handling of materials. Even when the chocolates get to the consumers, the company's worldwide consumer ser- vices organization allows them to respond immediately to any consumer enquiry, question or concern.
And the favourite Quality Street? Well several vari- ants have been and gone, including Malt Toffee, Fruits of the Forest Cream, Almond Octagon and Gooseberry
Cream. But of the 12 Quality Streets you will find in each tin today, one (admittedly unscientific) study claimed it was the Strawberry Cream.
Figure 2.6 Speed means different things in different operations
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52 PART ONE DIRECTING THE OPERATION
they will pay for it, or the greater the benefit they receive ( see the ‘Operations in practice’ case ‘In “The Golden Hour” even two minutes counts’).
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 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 auto-
mobile plant again. If the total throughput time for the door panel is six weeks, door panels are being processed through their first opera- tion 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 pan- els being processed are the number and type that eventually will be needed.
✽ ✽ ✽ Operations principle Operations principle Operations principle
OPERATIONS IN PRACTICE
It is often called ‘ The Golden Hour ’. It is the hour immediately following traumatic injury in which med- ical treatment to prevent irreversible internal damage and optimize the chance of survival is most effective. ‘ The Golden Hour ’ was first described by Dr R. Adams Cowley, at the University of Maryland Medical Center in Baltimore, from his personal experiences in Europe following the Second World War, and then in Baltimore in the 1960s, Dr Cowley recognized that the sooner trauma patients reached definitive care – particularly if they arrived within 60 minutes of being injured – the better their chance of survival. So of all the services that have to respond quickly to demand, few have more need of speed than the emergency services. In
responding to road accidents especially, every second is critical. Major trauma is the leading cause of death in those under 45 years of age and is also a major cause of debilitating long-term injuries. Making full use of ‘ The Golden Hour ’ means speeding up three elements of the total time to treatment: the time it takes for the emer- gency services to find out the details of 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. That is why the London Air Ambulance ser- vice was delighted when a new tablet app saved their emergency team two minutes in responding to emer- gencies. Rather than having to take all the details of an emergency before they rushed to their helicopter,
In ‘ The Golden Hour ’ even two minutes counts 7
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CHAPTER 2 OPERATIONS PERFORMANCE 53
Why is dependability important? Dependability means doing things in time for customers to receive products 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 depend- ability 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.
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 num- ber 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 no bus to work on. Nor will the fixed costs of the operation, such as heating and rent, be reduced because the buses are not being serviced. The reschedul- ing of buses will probably mean that some routes have inappropriately sized buses and some
the app together with enhanced mobile communica- tion allows them to set off immediately and receive the details on their tablet when they are in the air. But is getting airborne two minutes sooner really significant? It is, when one considers that, if starved of oxygen, a million brain cells can die every minute. It allows the service's advanced trauma doctors and paramedics to perform procedures to relieve pain, straighten broken limbs, even perform open-chest surgery to restart the heart, often within minutes of injury. Including trauma medics in the team, in effect, brings the hospital to the patient, wherever that may be. When most rescues are only a couple of minutes' flying time back to the hospi- tal, speed can really saves lives. However, it is not always possible to land a helicopter safely at night (because of possible overhead wires and other hazards) so conven- tional ambulances will always be needed, both to get paramedics quickly to accident victims and to speed them to hospital. The London Air Ambulance service team works alongside the conventional Ambulance Service to provide rapid, effective treatment as soon as
possible after injury. One increasingly common method of ensuring that ambulances arrive quickly at the acci- dent site is to position them, not at hospitals, but close to where accidents are likely to occur. Computer analy- sis of previous accident data helps to select the ambu- lance's waiting position, and global positioning systems help controllers to mobilize the nearest unit.
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54 PART ONE DIRECTING THE OPERATION
Figure 2.7 Dependability means different things in different operations
OPERATIONS IN PRACTICE
What do you do when it is coming up to the biggest gift-giving time of the year, you are responsible for deliv- ery and your aircraft that are vital for dependable deliv- ery are grounded by a freak snowstorm a continent away, or mechanical problems, or an air traffic controllers dis- pute in France, or whatever? That is the problem fac- ing all global parcel delivery companies; and it is made worse when customers blame you for any non-delivery. Generally freight operators have to absorb the cost when a delivery does not arrive on time, so weather, and other disruptions, directly affect their customer service, reputa- tion and, ultimately, profitability. UPS, the largest express carrier and package delivery company in the world, reck- ons that each late shipment will cost it between $5 and $30 in revenue. And with almost 16 million packages and documents delivered worldwide every day it only takes a fraction of a percentage point to be late for the total cost of any lack of dependability to be huge.
So what does UPS do to minimize disruption to its delivery network when it is coming up to a peak demand time like Christmas and there is a possibility of bad weather? The obvious thing is to keep a constant watch
How UPS maintains its dependability 8
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CHAPTER 2 OPERATIONS PERFORMANCE 55
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).
Dependability gives stability The disruption caused to oper- ations 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 predictable. Under such circumstances, each part of the operation can concentrate on improving its own area of respon- sibility without having its attention continually diverted by a lack of dependable service from the other parts.
Why is flexibility important? 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 pro- duce 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 ser- vices or products.
Figure 2.8 gives examples of what these different types of flexibility mean to the four dif- ferent operations.
Mass customization One of the beneficial external effects of flexibility is the increased ability of operations 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 compa- nies have developed their flexibility in such a way that products and services are custom- ized 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 f lexibility 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. Another example is Paris Miki, an upmarket eyewear retailer which has the largest number of eyewear stores in the world, which 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 rec- ommends a particular design and displays it on the image of the customer’s face. In consul- tation with the optician the customer can adjust shapes and sizes until the final design is
very carefully on the weather forecast, and indeed UPS does have meteorologists and other staff who do this. But it also builds in a buffer of extra operational capac- ity. At UPS headquarters a ‘hot status board’ on the wall identifies cities and regions where the company has spare
pilots and aircraft whose task is to ‘rescue volume’: that is, the spare resources are used to come to the aid of pack- ages stuck somewhere. UPS says that this ‘hot spares pro- gram’ rescues more than 1 million packages annually and saves the company more than $20 million in revenue.
✽ ✽ ✽ Operations principle Operations principle Operations principle
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56 PART ONE DIRECTING THE OPERATION
Figure 2.8 Flexibility means different things in different operations
OPERATIONS IN PRACTICE
The idea might sound somewhat unusual, but it has proved a great success. Three university students, Hubertus Bessau, Philipp Kraiss and Max Wittrock, in the small city of Passau, Germany, came up with the concept of mymuesli – the first web-based platform where you can mix your own organic muesli online, with a choice of 75 different ingredients. This makes it possible to create 566 quadrillion individual muesli mixes – and you can even name your own muesli. So, irrespective of whether you are a chocolate addict, a raisin hater or an athlete, this incredible variety will make it easy, says mymusli, for anyone to invent their all-time favourite muesli. ‘ We wanted to provide cus- tomers with nothing else but the perfect muesli ’, they say. ‘ Of course the idea of custom-mixing muesli online might sound wacky…but think about it – it's the break- fast you were always looking for .’ All muesli is mixed in the Passau production site according to strict quality standards and hygiene law requirements. Ingredients are strictly organic, without additional sugar, additives,
preservatives or artificial colours. On visiting the web- site customers first have to pick a muesli base (full nutri- tional information is provided). After this customers can add other basics and ingredients such as fruit, nuts and seeds and extras. And the company will deliver it direct by courier to your door! The name for the muesli
566 quadrillion individual muesli mixes –now that's fl exible 9
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CHAPTER 2 OPERATIONS PERFORMANCE 57
chosen. Within the store the frames are assembled from a range of pre-manufactured com- ponents and the lenses ground and fitted to the frames. The whole process takes around an hour. Another example is the mymuesli case.
Agility Judging operations in terms of their agility has become popular. Agility is really a combina- tion 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 Chapters 5 and 12) can respond to the uncertainty in the market. Agility means 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 com- plaints. Fractures, cuts or drug overdoses do not come in batches. Each patient is an indi- vidual 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 equip- ment 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 flex- ible 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 who are ‘on call’.
(chosen by the customer) is printed on the can to make it even more personal. Names chosen by customers for their individual muesli mixes include ‘reindeer food’, ‘donkey's breakfast’, ‘sweet dream’, ‘paradise meal’ and, rather charmingly, ‘darling's breakfast ’. The company purchases its ingredients from selected suppliers and dealers throughout the world. One of mymuesli's great assets is the multitude of eccentric and exotic ingredi- ents (from over 20 countries) included in the product range, like carrots, Tibetan goji-berries, cedar nuts or jelly babies. Philipp Kraiss, one of the company found- ers, is constantly on the lookout for ‘new, crazy and tasty ’ muesli ingredients. During its first year mymuesli
was awarded several business prizes (one of which was awarded by the Financial Times Germany), and has now grown to have annual sales worth over €1 million, with over 40 people working for the company. It has now expanded its operations to the UK. ‘ We seriously hope that mymuesli will find just as many friends here in the UK as in Germany and Austria ’, says Max Wittrock, another of the three founding members. ‘ And we are looking forward to a great deal of feedback, so we can continue to improve our products. Last year thousands of e-mails and user replies in Germany really have helped us immensely with the project. Because after all ’, Wittrock says, ‘ it is supposed to be a user-generated breakfast .’
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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Why is cost important? To the companies that 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 fur- ther euro or dollar added to its profits. Not surprisingly, low cost is a universally attractive
objective. The case on everyday low prices at Aldi describes how one retailer keeps its costs down.
The ways in which operations management can inf luence cost will depend largely on where the operation’s costs are incurred. The operation will spend its money on staff (the money spent on employ- ing people), facilities, technology and equipment (the money spent on buying, caring for, operating and replacing the operation’s ‘hard- ware’) 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, supermarket and bus company.
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 this is most frequently used to indicate is productivity. Productivity is the ratio of what is produced by an operation (its output) to what is required to produce it (its input):
Productivity = Output from the operation
Input to the operation
Figure 2.9 Cost means different things in different operations
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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CHAPTER 2 OPERATIONS PERFORMANCE 59
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 = Output from the operation
One input to the operation
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 man- aged 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
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 reduc- ing the costs of some or all of its transformed and transforming resource inputs. For exam- ple, a bank may choose to locate its call centres to a place where its facility-related costs (for
OPERATIONS IN PRACTICE
Aldi is an international ‘limited assortment’ supermar- ket specializing in ‘private label’, mainly food products. It has carefully focused its service concept and deliv- ery system to attract customers in a highly competitive market. The company believes that its unique approach to operations management makes it ‘ virtually impos- sible for competitors to match our combination of price and quality ’. And it has proved especially successful in meeting the increasingly price-conscious behaviour of customers. How has it done this? By challenging the norms of retail operations. They are deliberately sim- ple, 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 pro- duced according to Aldi quality specifications and are only sold in Aldi stores. Without the high costs of brand marketing and advertising, and 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 recycling as well as saving costs, multiple bar codes on packages (to speed up scanning) 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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60 PART ONE DIRECTING THE OPERATION
example, rent) are cheaper. A software developer may relocate its entire operation to India or China where skilled 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 oper- ation. For example, 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 wast- age 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.
Worked example
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 is the clinic's single-factor labour productivity and its multi-factor productivity?
Labour productivity = 200 = 40 patients/employees/week 5
Labour productivity = 200 = 1.143 patients/labour hour 5 * 35
Multi-factor productivity = 200 = 0.0339 patients/£ (3,900 + 2,000)
OPERATIONS IN PRACTICE
There is a good reason why most electronic components are made in China. It is cheap. Companies such as Taiwan’s Foxconn, which produces many of the world’s computer, consumer electronics and communications products for customers such as Apple, Dell, Nokia and Sony, have per- fected the art and science of squeezing cost out of their operations processes. But, can cost cutting conflict with respect for people (in a triple bottom line sense, see ear- lier). Although Foxconn is known for having an obsession with cutting its costs and has moved much of its manu- facturing into China and other low-cost areas with plants in South-East Asia, Eastern Europe and Latin America, it has been criticized for pushing its workers too far. In the past there have been a cluster of suicides at its factories, with 18 workers throwing themselves from the tops of the company ’s buildings (14 people died) and violence between employees. The firm operates a huge industrial park, which it calls Foxconn City in Shenzhen, just across the border from Hong Kong, with 15 multi-storey manu- facturing buildings, each devoted to one customer. This
is where the suicides took place. It prompted Foxconn to install safety nets in some of its factories and hire counsel- lors to help its workers.
However, Boy Lüthje of the Institute of Social Research in Frankfurt says that conditions at the firm are actually not that bad when compared with many
Can cost cutting go too far? 11
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Cost reduction through internal effectiveness Our previous discussion distinguished between the benefits of each performance objective 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 oper- ations objectives ( see Fig. 2.10 ):
others. Food and lodging are free, as are extensive recre- ational facilities. But workers routinely put in overtime in excess of the 36 hours a month permitted under Chinese law and plenty of people seek jobs with the company. Moreover, the suicide rate at the company is lower than that among the general population in China. Yet the deaths raised questions about working conditions in electronics manufacturing in general and in particular at Foxconn. Nor was this the last time concern was raised over working conditions. In 2012 around 150 workers at Wuhan threatened to commit suicide by leaping from
their factory roof in protest at their working conditions. They were eventually coaxed down after two days on top of the three-floor plant by managers. ‘ We were put to work without any training, and paid piecemeal ’, said one of the protesting workers. ‘T he assembly line ran very fast and after just one morning we all had blisters and the skin on our hand was black. The factory was also really choked with dust and no one could bear it .’ Some reports indicate that Foxconn is more advanced in designing its processes than many of its competitors, but it is run in a regi- mented fashion that it not always popular with workers.
Figure 2.10 Performance objectives have both external and internal effects. Internally, cost is influenced by the other performance objectives
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62 PART ONE DIRECTING THE OPERATION
● High-quality operations do not waste time or effort having to redo things, nor are their internal customers inconvenienced by flawed service.
● Fast operations reduce the level of in-process inventory between micro operations, as well as reducing administrative overheads.
● Dependable operations do not spring any unwelcome surprises on their internal custom- ers. 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.
Worked example
Slap.com is an Internet retailer of speciality cosmetics. It orders products from a number 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. These 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 €2 per item.
● Negotiate with suppliers to ensure that they respond to delivery requests faster. It is esti- mated that this would cut the value of inventories held by slap.com by €1,000,000.
● 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 1 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 €2 per item.
Because demand varies through the year, sometimes staff have to work overtime. Currently the overtime wage bill for the year is €150,000. 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 €50,000 per year.
If the company dispatch 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. Currently 0.25 per cent of 5 million items are mis-packed. This amounts to 12,500 items per year. At €2 repacking charge per item, this is a cost of €25,000 that would be saved.
Getting faster delivery from suppliers helps reduce the amount of inventory in stock by €1,000,000. If the company is paying 10 per cent of the value of stock for keeping it in storage the saving will be €1,000,000 * 0.1 = €100,000.
Ensuring that all orders are dispatched by the end of the day increases the dependability of the company ’s operations. Currently, 1 per cent are late; in other words, 50,000 items per year. This is costing €2 * 50,000 = €100,000 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 €50,000 per year, but it saves €150,000 per year. Therefore, increasing flexibility could save €100,000 per year.
So, in total, by improving the operation’s quality, speed, dependability and flexibility, a total of €325,000 can be saved.
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The polar representation of performance objectives A useful way of representing the relative importance of performance objectives for a prod- uct 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 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 accom- modate 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.12
HOW CAN OPERATIONS PERFORMANCE BE MEASURED?
Having defined the three levels of operations performance, any business will need to meas- ure how well, or badly, it is doing. This is performance measurement. It is the process of quantifying action, where measurement means the process of quantification and the per- formance of the operation is assumed to derive from actions taken by its management. Some kind of performance measurement is a prerequisite for judging whether an operation is good, bad or indifferent. Without performance measurement, it is impossible to exert any control over an operation on an ongoing basis, or to judge whether any improvement is being made.
Performance measurement, as we are treating it here, concerns three generic issues:
● What factors to include as performance measures? ● Which are the most important performance measures? ● What detailed measures to use?
What factors to include as performance measures? Earlier in this chapter we explained how operations performance could be described at three levels: the societal level that included consideration of social and environmental factors as well as economic ones, the strategic level that included consideration of risk, capital and
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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’s targets and performance
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64 PART ONE DIRECTING THE OPERATION
innovation capability issues as well as profitability, and the operational level that included the more directly operations-related factors of quality, speed, dependability, flexibility and cost. There are two important points to make here. First, sometimes these measures are aggregated into ‘composite’ measures that combine several measures, such as ‘customer satisfaction’, ‘overall service level’ or ‘operations agility’. These more aggregated ‘composite’ performance measures help to present a picture of the overall performance of a business, although they may include some influences outside those that operations performance improvement would normally address (customer satisfaction may partly be a function of how a service is adver- tised, for example). Second, all of the factors at each level can be broken down into more detailed measures. Figure 2.12 gives examples of this. These more detailed performance measures are usually monitored more closely and more often, and although, by themselves, they provide a limited view of an operation’s performance, taken together they do provide a more descriptive and complete picture of what should be and what is happening within the operation. In practice, most organizations will choose to use performance measures from all three levels.
Which are the most important performance measures? One of the problems of devising a useful performance measurement system is trying to achieve some balance between having a few key measures on the one hand (straightforward and simple, but may not reflect the full range of organizational objectives), or, on the other hand, having many detailed measures (complex and difficult to manage, but capable of con- veying many nuances of performance). Broadly, a compromise is often reached by making sure that there is a clear link between the operation’s overall strategy, the most important (or ‘key’) performance indicators (often called KPIs) that reflect strategic objectives, and the bundle of detailed measures that are used to ‘flesh out’ each key performance indicator. Obviously, unless strategy is well defined then it is difficult to ‘target’ a narrow range of key performance indicators.
Quality
Operational level
Strategic level
Societal level
For example … Defects per unit Customer complaints Scrap level Warranty costs
Social (People)
For example … Employee satisfaction Health and safety Community programmes Gender balance
Economic (Profit)
For example … Return on invested capital Share price Profitable growth
Environmental (Planet)
For example …. CO2 emissions Packaging waste Water usage Biodiversity
Speed
For example … Customer query time Order lead time Throughput time
Dependability
For example … Mean time between failures Lateness complaints
Flexibility
For example … Time to market Product range Customization
Cost
For example … Transaction costs Labour productivity Machine e�ciency Variance against budget
Risk and resilience
For example … Service interruptions Business continuity response
Capital utilization
For example … Return on assets Capacity utilization
Capability for innovation
For example … Revenue from new o�erings Pipeline of innovative o�erings
Service and revenue
For example … Profitability Welfare per unit of expenditure
E�ciency and cost
Figure 2.12 Performance measures at the three levels
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CHAPTER 2 OPERATIONS PERFORMANCE 65
What detailed measures to use? The five performance objectives – quality, speed, dependability, f lexibility and cost – are really composites of many smaller measures. For example, an operation’s cost is derived from many factors which could include the purchasing efficiency of the operation, the efficiency with which it converts materials, the productivity of its staff, the ratio of direct to indirect staff, and so on. All of these measures individually give a partial view of the operation’s cost performance, and many of them overlap in terms of the information they include. However, each of them does give a perspective on the cost performance of an operation that could be useful either to identify areas for improvement or to monitor the extent of improvement. If an organization regards its ‘cost’ performance as unsatisfac- tory, disaggregating it into ‘purchasing efficiency’, ‘operations efficiency’, ‘staff productiv- ity’, etc., might explain the root cause of the poor performance. The ‘operational’ level in Figure 2.12 shows some of the partial measures which can be used to judge an operation’s performance.
The balanced scorecard approach Arguably, the best-known performance measurement approach, and one used by many organizations, is the ‘balanced scorecard’ devised by Kaplan and Norton: ‘ The balanced score- card retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation. ’ 13
In the three-level framework used here, it lies across the strategic and operational levels. As well as including financial measures of performance, in the same way as traditional per- formance measurement systems, the balanced scorecard approach also attempts to provide the important information that is required to allow the overall strategy of an organization to be reflected adequately in specific performance measures. In addition to financial meas- ures of performance, it also includes more operational measures of customer satisfaction, internal processes, innovation and other improvement activities. In doing so it measures the factors behind financial performance which are seen as the key drivers of future financial success. In particular, it is argued that a balanced range of measures enables managers to address the following questions ( see Fig. 2.13 ):
● How do we look to our shareholders (financial perspective)? ● What must we excel at (internal process perspective)? ● How do our customers see us (the customer perspective)? ● How can we continue to improve and build capabilities (the learning and growth
perspective)?
The balanced scorecard attempts to bring together the elements that reflect a business’s strategic position, including product or service quality measures, product and service development times, customer complaints, labour productivity, and so on. At the same time it attempts to avoid perfor- mance reporting becoming unwieldy by restricting the number of measures and focusing especially on those seen to be essential. The advantages of the approach are that it presents an overall picture of the organization’s performance in a single report, and, by being com- prehensive in the measures of performance it uses, encourages com- panies to take decisions in the interests of the whole organization rather than sub-optimizing around narrow measures.
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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66 PART ONE DIRECTING THE OPERATION
HOW DO PERFORMANCE OBJECTIVES TRADE OFF AGAINST EACH OTHER?
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 perfor- mance in 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 sum- mary 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 consumption, 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]. ’ 14
But there are two views of trade-offs. The first emphasizes ‘reposi- tioning’ performance objectives by trading off improvements in some objectives for a reduction in performance in others. The other empha- sizes increasing the ‘effectiveness’ of the operation by overcoming trade-offs so that improvements in one or more aspects of performance can be achieved without 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 2.14 (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
Overall strategic objectives
Customer performance measures
To achieve strategic impact, how should we be viewed by customers?
Internal process performance measures
To achieve strategic impact, what aspects of performance should business process excel at?
Financial performance measures
To achieve strategic impact, how should we be viewed by shareholders?
Learning and growth performance measures
To achieve strategic impact, how will we build capabilities over time?
Figure 2.13 The measures used in the balanced scorecard
✽ ✽ ✽ Operations principle Operations principle Operations principle
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CHAPTER 2 OPERATIONS PERFORMANCE 67
variety while still having very high levels of cost efficiency. However, the increased com- plexity 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 limit severely the variety on offer to customers. The spread of results in Figure 2.14 (a) is typical of an exercise such as this. Operations A, B, C, D all have chosen a different bal- ance 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, how- ever, 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) 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 objec- tives 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 2.14 (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
Cost e�ciencyCost e�ciency
(b)(a)
DD
C C XX
B
B1A B
A
V ar
ie ty
V ar
ie ty
The new ‘e�cient frontier’
The ‘e�cient frontier’
Figure 2.14 The efficient frontier identifies operations with performances that dominate other operations’ performance
✽ ✽ ✽ Operations principle Operations principle Operations principle
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68 PART ONE DIRECTING THE OPERATION
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 perfor-
mance objectives and the extent to which it is expecting the operation to improve its effective- ness in several ways simultaneously.
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
❯ How is operations performance judged at a societal level?
● Operations decisions aff ect a variety of ‘stakeholders’. Stakeholders are the people and groups who have a legitimate interest in the operation’s activities.
● This idea that operations should take into account the impact on a broad mix of stakehold- ers is termed ‘corporate social responsibility ’ (CSR).
● Performance at the societal level often uses the idea of the triple bottom line (TBL, or 3BL, also known as ‘People, Planet and Profi t’). It includes the social bottom line, the environ- mental bottom line and the economic bottom line.
● The social bottom line incorporates the idea that businesses should accept that they bear some responsibility for the impact they have on society and balance the external ‘societal’ consequences of their actions with the more direct internal consequences, such as profit.
● The environmental bottom line incorporates the idea that operations should accept that they bear some responsibility for the impact they have on the natural environment.
● The economic bottom line incorporates the conventional fi nancial measures of perfor- mance derived from using the operation’s resources eff ectively.
● Operations management can either ‘make or break’ any business. In most businesses it represents the bulk of its assets.
● The positive eff ects of a well-run operation include a focus on improvement, the building of ‘diffi cult to imitate’ capabilities, and an understanding of the processes that are the build- ing blocks of all operations.
● The negative eff ects of a poorly run operation include failures that are obvious to custom- ers (and expensive for the organization), a complacency that leads to the failure to exploit opportunities for improvement.
❯ Why is operations performance vital in any organization?
SUMMARY ANSWERS TO KEY QUESTIONS
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CHAPTER 2 OPERATIONS PERFORMANCE 69
❯ How is operations performance judged at a strategic level?
● The type of decisions and activities that operations managers carry out can have a signifi- cant strategic impact.
● In particular, operations can affect economic performance in five ways:
● It can reduce the costs.
● It can achieve customer satisfaction through service.
● It can reduce the risk of operational failure.
● It can reduce the amount of investment that is necessary.
● It can provide the basis for future innovation.
❯ How is operations performance judged at an operational level?
● The five ‘performance objectives’ that are used to assess the performance of operations at an operational level are quality, speed, dependability, flexibility and cost.
● Quality is important because:
● 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.
● Speed is important because:
● By ‘doing things fast’, operations seek to influence the speed with which goods and ser- vices 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.
● Dependability is important because:
● 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.
● Flexibility is important because:
● 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).
● Externally, flexibility can produce a wide range or mix of products and services (mix flex- ibility).
● Externally, flexibility can produce different quantities or volumes of products and ser- vices (volume flexibility).
● Externally, flexibility can produce products and services at different times (delivery flexi- bility).
● Internally, flexibility can help speed up response times, save time wasted in changeovers, and maintain dependability.
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70 PART ONE DIRECTING THE OPERATION
● Cost is important because:
● By ‘doing things cheaply ’, operations seek to infl uence 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 profi tability on existing volume levels.
● Internally, cost performance is helped by good performance in the other performance objectives.
❯ How can operations performance be measured?
● It is unlikely that for any operation a single measure of performance will adequately refl ect the whole of a performance objective. Usually operations have to collect a whole bundle of partial measures of performance.
● The balanced scorecard (BSC) is a commonly used approach to performance measurement and incorporates measures related to:
● How do we look to our shareholders (fi nancial perspective)?
● What must we excel at (internal process perspective)?
● How do our customers see us (the customer perspective)?
● How can we continue to improve and build capabilities (the learning and growth perspective)?
❯ How do operations performance objectives trade off against each other?
● Trade-off s are the extent to which improvements in one performance objective can be achieved by sacrifi cing performance in others. The ‘effi cient frontier’ concept is a useful approach to articulating trade-off s and distinguishes between repositioning performance on the effi cient frontier and improving performance by overcoming trade-off s.
CASE STUDY Operations objectives at the Penang Mutiara 15
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 manager 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 hard- ware 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 information they gave on the
70 PART ONE DIRECTING THE OPERATION
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CHAPTER 2 OPERATIONS PERFORMANCE 71
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 guests sort out their own problems. If the air- line 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 overloaded 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 above the level where response time to custom- ers 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 dependabil- ity 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 exam- ple, everything has to be on time. Drinks, food, entertain- ment 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 it 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 supermarket 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. The hotel achieves this partly by using tempo- rary part-time staff. In the back-office parts of the hotel this
is not a major problem. In the laundry, for example, it is rela- tively easy to put on an extra shift in busy periods by increas- ing 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 cus- tomer 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, ser- vice 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 oper- ating 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 com- petitive advantage, not price. Good service means that our guests return again and again. At times, around half our guests are peo- ple who have been before. The more guests we have, the higher is our utilization 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 manager will:
(a) make sure that the way he manages the hotel is appropriate to the way it competes for business;
(b) implement any change in strategy; (c) develop his operation so that it drives the long-
term strategy of the hotel.
2 The case describes how quality, speed, dependability, flexibility and cost impact the hotel’s external customers. Explain how each of these performance objectives might have internal benefits.
CHAPTER 2 OPERATIONS PERFORMANCE 71
So u
rc e:
A la
m y
Im ag
es : A
n d
re w
W o
o d
le y
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72 PART ONE DIRECTING THE OPERATION
1 The ‘forensic science’ service of a European country has traditionally been organized to pro- vide 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 disadvan- tages of this to the stakeholders of the operation? What do you think are the internal implica- tions to the new centralized operation that will provide this service?
2 The health clinic described in the worked example earlier in the chapter has expanded by hiring one extra employee and now has six employees. It has also leased some new health monitoring equipment which allows patients to be processed faster. This means that its total output is now 280 patients per week. Its wage costs have increased to £4,680 per week and its overhead costs to £3,000 per week. What are its single-factor labour productivity and its multi-factor productivity now?
3 A publishing company plans to replace its four proofreaders who look for errors in manu- scripts 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 €80,000 per year. Hiring the new scanning machine will cost €5,000 each calendar month. How will this new system affect the proofreading department’s productivity?
4 Bongo’s Pizzas have 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 €1 and the average cost of each pizza delivered is €5, 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?
5 Step 1 – Look again at the figures in the chapter which illustrate the meaning of each perfor- mance 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 pro- ducing their services.
6 Visit the websites of two or three large oil companies such as Exxon, BP, Shell, Total, 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.
7 Devise a performance measurement scheme for the performance of the course you are following.
PROBLEMS AND APPLICATIONS
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CHAPTER 2 OPERATIONS PERFORMANCE 73
SELECTED FURTHER READING
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, 373–395.
What it says on the tin.
Kaplan, R.S. and Norton, D.P. (2005) The balanced scorecard: measures that drive performance, Harvard Business Review, July–August.
The latest pronouncements on the balanced scorecard approach.
Neely, A. (2012) Business Performance Measurement: Unifying Theory and Integrating Practice, Cambridge University Press, Cambridge.
A collection of papers on the details of measuring performance objectives.
Pine, B. J. (1993) Mass Customization, Harvard Business School Press, Boston, MA.
The first substantial work on the idea of mass customization. Still a classic.
Savitz, A.W. and Weber, K. (2006) The Triple Bottom Line: How Today’s Best-Run Companies Are Achieving Economic, Social and Environmental Success – and How You Can Too, Jossey-Bass, San Francisco.
Good on the triple bottom line.
Waddock, S. (2003) Stakeholder performance implications of corporate responsibility, International Journal of Business Performance Management, vol. 5, nos 2–3, 114–124.
An introduction to stakeholder analysis.
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Direct
Operations performance
The structure
and scope of operations
Operations strategy
Operations management
Product and service innovation
Topic covered in this chapter
Operations management
Direct
Design Develop
Deliver
Figure 3.1 This chapter examines operations strategy
INTRODUCTION No organization can plan in detail every aspect of its future actions; there is always some degree of uncertainty about what conditions will exist in the future. There will always have to be some adjustment to plans to accommodate circumstances. But simply always reacting to current, possibly short-term, issues can lead to constant changes in direction and the operation becoming volatile and unstable. That is why all organizations need the ‘backdrop’ of a well-understood strategic direction, so they know (at least, roughly) where they are heading and how they could get there. Once the operations function has understood its role in the business and after it has articulated its performance objectives, it needs to formulate a set of general principles which will guide its decision making. This is the operations strategy of the company. Yet the concept of ‘strategy ’ itself is not straightforward; neither is operations strategy. This chapter considers four perspectives, each of which goes partway to illustrating the forces that shape operations strategy. Figure 3.1 shows the position of the ideas described in this chapter in the general model of operations management.
Operations strategy
Key questions
❯ What is strategy and what is operations strategy?
❯ What is the difference between a ‘top-down’ and a ‘bottom-up’ view of operations strategy?
❯ What is the difference between a ‘market requirements’ and ‘operations resources’ view of operations strategy?
❯ How can operations strategy form the basis for operations improvement?
❯ How can an operations strategy be formulated? The process of operations strategy
3
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CHAPTER 3 OPERATIONS STRATEGY 75
OPERATIONS IN ACTION
You do not think of space satellites as cheap items, and of course they are not. They can be expensive – very expensive. And in the early days of space missions, this meant that only superpowers could afford to develop and launch them. The conventional wisdom was that space was such a hostile environment that satellites would have to be constructed using only specially developed components that could endure the severe conditions encountered in space. Satellites therefore would always be expensive items. Yet in the late 1970s this assumption was challenged by Sir Martin Sweeting, who then was studying for his PhD at the University of Surrey in the UK. The aerospace research team in the Electrical Engineering Department at the University of Surrey had built its first satellite (called UoSAT-1) using commercial off-the-shelf components. It was about as big as two microwave ovens, weighing in at 72 kg. By contrast, some of the huge satellites being launched by government space agencies were as large as a London double-decker bus. UoSAT-1 was launched in 1981 with the help of NASA, who had been persuaded to provide a free launch, piggybacking on the back of a mission to put a large scientific satellite into orbit. The team fol- lowed this up with a second satellite (UoSAT-2) built in just six months and launched in 1984. A year later Surrey Satellite Technology Limited (SSTL) was formed as a spinout company from the University of Surrey to transfer the results of its research into a commercial enterprise. The firm’s vision was to open up the mar- ket for space exploration by pioneering the use of small and relatively cheap, but reliable, satellites built from readily available off-the-shelf components – then a rev- olutionary idea. Now SSTL is the world’s leading small- satellite company and has delivered space missions for a whole range of applications including Earth observa- tion, science, communications and in-orbit technol- ogy demonstration. The company is at the forefront of space innovation, exploiting advances in technologies and challenging conventions to bring affordable space exploration to international customers. The company, which has launched over 40 satellites, is based across four sites in South-East England, and employs more than 500 staff. Since 2014 SSTL has been an independent company within the Airbus defence and space group.
As the market for satellites developed, scientific and technological innovations have led to what has been called a ‘democratisation’ of space, with SSTL main- taining what it says is a 40 per cent share of the global export market for small affordable satellites. How has it achieved this success from such small beginnings? Well,
partly because it was an early player in the market having the vision to see that there would be a market for small satellites that could serve the ambitions of smaller coun- tries, companies, research groups and even schools. As the company says, the small-satellite revolution started with SSTL. But in addition, it has always been innovative in finding ways of keeping the cost of building the satel- lites down to a minimum. SSTL pioneered the low-cost, low-risk approach to delivering operational satellite missions within short development timescales and with the capability that potential customers wanted. In the early 1980s, as the first microcomputers became com- mercially available, Sir Martin Sweeting speculated that it may be possible to use programmable technology to build small satellites that were ‘intelligent’ when com- pared with conventional large and expensive hard-wired satellites. It also would allow the satellite to be repro- grammed from the ground. Particularly important was the company ’s use of commercial off-the-shelf tech- nology. Combined with a determination to learn some- thing from each new project, a pragmatic approach to manufacture and low-cost operations, it enabled SSTL to keep costs as low as realistically possible. In effect, using industry-standard parts meant exploiting the (often enormous) investments by consumer electronics companies, auto part manufacturers and others who had developed complex components for their products. Even if this sometimes limited what a satellite could do, it provided the scale economies that would be impossi- ble if SSTL were designing and making customized com- ponents from scratch. ‘ We were being parasitic, if you like ’, admits Sir Martin.
However, not all commercially available compo- nents made for terrestrial use are up to coping with conditions in space, which is a hugely important issue. Reliability is essential in a satellite. (It is difficult to
Changing the economics of space exploration 1
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76 PART ONE DIRECTING THE OPERATION
repair them once in space.) And even though off-the- shelf components and systems have become increas- ing reliable, they must be rigorously tested to make sure that they are up to the severe conditions found in space. One of the key problems is how compo- nents react to the high levels of radiation in space. For example, different smartphone constituents (a regular source of components) react in different ways to radi- ation. Knowing which bits can be used and which can- not is an important piece of knowledge. Yet, although individual components and systems are often bought off the shelf, the company does most of its operations activities itself. This allows SSTL to provide a complete
in-house design, manufacture, launch and operation service as well as a range of advice, analysis and con- sultancy services. ‘ What distinguishes us is our vertically integrated capability, from design and research to man- ufacturing and operations ’, says Sir Martin. ‘ We don’t have to rely on suppliers, although of course we buy in components when that is advantageous. ’ And innova- tion? It is still as important as it was at the company ’s start. Surrey University has retained a 1 per cent stake in the company because ‘ we wanted to cement the very close relationship between company and university ’, says Sir Martin. ‘ We work together on a number of research projects and staff flow back and forth between us. ’
WHAT IS STRATEGY AND WHAT IS OPERATIONS STRATEGY?
Surprisingly, ‘strategy’ is not particularly easy to define. Linguistically the word derives from the Greek word strategos , meaning ‘leading an army’. And although there is no direct histori- cal link between Greek military practice and modern ideas of strategy, the military metaphor is powerful. Both military and business strategy can be described in similar ways, and include some of the following:
● Setting broad objectives that direct an enterprise towards its overall goal. ● Planning the path (in general rather than specific terms) that will achieve these goals. ● Stressing long-term rather than short-term objectives. ● Dealing with the total picture rather than stressing individual activities. ● Being detached from, and above, the confusion and distractions of day-to-day activities.
Here, by strategic decisions, we mean those decisions which: are widespread in their effect on the organization to which the strategy refers; define the position of the organization rela- tive to its environment; and move the organization closer to its long-term goals. But ‘strategy’ is more than a single decision; it is the total pattern of the decisions and actions that influence the long-term direction of the business. Thinking about strategy in this way helps us to discuss an organization’s strategy even when it has not been explicitly stated. Observing the total pattern of decisions gives an indication of the actual strategic behaviour.
Operations strategy Operations strategy concerns the pattern of strategic decisions and actions that set the role, objectives and activities of the operation. The term ‘operations strategy’ sounds at first like a contradiction. How can ‘operations’, a subject that is generally concerned with the day-to- day creation and delivery of goods and services, be strategic? ‘Strategy’ is usually regarded as the opposite of those day-to-day routine activities. But ‘ operations’ is not the same as ‘ operational ’. ‘Operations’ are the resources that create products and services. ‘Operational’ is the opposite of strategic, meaning day-to-day and detailed. So, one can examine both the operational and the strategic aspects of operations. It is also conventional to distinguish
between the ‘content’ and the ‘process’ of operations strategy. The content of operations strategy is the specific decisions and actions that set the operations role, objectives and activities. The process of operations strategy is the method that is used to make the specific ‘content’ decisions.
✽ Operations principle ‘Operations’ is not the same as ‘operational’; it does have a strategic role.
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CHAPTER 3 OPERATIONS STRATEGY 77
From implementing to supporting to driving strategy Most businesses expect their operations strategy to improve operations performance over time. In doing this they should be progressing from a state contributing very little to the com- petitive success of the business through to the point where they are directly responsible for its competitive success. This means that they should be able to, in turn, master the skills first to ‘implement’, then ‘support’ and then ‘drive’ operations strategy.
Implementing business strategy The most basic role of operations is to implement strategy. You cannot, after all, touch a strat- egy; you cannot even see it; all you can see is how the operation behaves in practice. For example, if an insurance company has a strategy of moving to an entirely online service, its operations function will have to supervise the design of all the processes which allow custom- ers to access online information, issue quotations, request further information, check credit details, send out documentation, and so on. Without effective implementation even the most original and brilliant strategy will be rendered totally ineffective.
Supporting business strategy Support strategy goes beyond simply implementing strategy. It means developing the capa- bilities which allow the organization to improve and refine its strategic goals. For example, a mobile phone manufacturer wants to be the first in the market with new product innovations, so its operations need to be capable of coping with constant innovation. It must develop pro- cesses flexible enough to make novel components, organize its staff to understand the new technologies, develop relationships with its suppliers which help them to respond quickly when supplying new parts, and so on.
Driving business strategy The third, and most difficult, role of operations is to drive strategy by giving it a unique and long-term advantage. For example, a specialist food-service company supplies restaurants with frozen fish and fish products. Over the years it has built up close relationships with its custom- ers (chefs) as well as with its suppliers around the world (fishing com- panies and fish farms). In addition it has its own small factory which develops and produces a continual stream of exciting new products. In fact the whole company’s success is based largely on these unique operations capabilities. The operation drives the company’s strategy.
Hayes and Wheelwright’s four stages of operations contribution The ability of any operation to play these roles within the organization can be judged by con- sidering the organizational aims or aspirations of the operations function. Professors Hayes and Wheelwright of Harvard University 2 developed a four-stage model which can be used to evaluate the role and contribution of the operations function. The model traces the progres- sion of the operations function from what is the largely negative role of stage 1 operations to its becoming the central element of competitive strategy in excellent stage 4 operations. Figure 3.2 illustrates the four stages.
Stage 1: Internal neutrality This is the very poorest level of contribution by the operations function. It is holding the company back from competing effectively. It is inward looking and, at best, reactive with very little positive to contribute towards competitive success. Paradoxically, its goal is ‘to be ignored’ (or, ‘internally neutral’). At least then it is not holding the company back in any way. It attempts to improve by ‘avoiding making mistakes’.
✽ Operations principle Operations should try, progressively, to implement, support and drive strategy.
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78 PART ONE DIRECTING THE OPERATION
Stage 2: External neutrality The first step of breaking out of stage 1 is for the operations function to begin comparing itself with similar companies or organizations in the outside market (being ‘externally neutral’). This may not immediately take it to the ‘first division’ of companies in the market, but at least it is measuring itself against its competitors’ performance and trying to implement ‘best practice’.
Stage 3: Internally supportive Stage 3 operations are among the best in their market. Yet, stage 3 operations still aspire to be clearly and unambiguously the very best in the market. They achieve this by gaining a clear view of the company’s competitive or strategic goals and supporting it by developing appro- priate operations resources. The operation is trying to be ‘internally supportive’ by providing a credible operations strategy.
Stage 4: Externally supportive Yet Hayes and Wheelwright suggest a further stage – stage 4 – where the company views the oper- ations function as providing the foundation for its competitive success. Operations look to the long term. It forecasts likely changes in markets and supply, and it develops the operations-based capabilities which will be required to compete in future market conditions. Stage 4 operations are innovative, creative and proactive and are driving the company’s strategy by being ‘one step ahead’ of competitors – what Hayes and Wheelwright call being ‘externally supportive’.
Figure 3.2 The four-stage model of operations contribution
Redefining industry expectations
Clearly the best in the industry
As good as competitors
Holding the organization back Implementing
strategy
In c
re a
si n
g s
tr a
te g
ic im
p a
c t
Increasing operations capabilities
Internally neutral
Externally neutral
Internally supportive
Externally supportive
Supporting strategy
Driving strategy
Stage 2 Adopt best
practice
Stage 1 Correct the
worst problems
Stage 4 Give an
operations advantage
Stage 3 Link strategy
with operations
Inc rea
sin g c
on trib
uti on
of op
era tio
ns
Critical commentary
The idea that operations can have a leading role in determining a company’s strategic direction is not universally supported. Both Hayes and Wheelwright’s stage 4 of their four- stage model and the concept of operations ‘driving’ strategy not only imply that it is possible
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CHAPTER 3 OPERATIONS STRATEGY 79
Perspectives on operations strategy Different authors have slightly different views and definitions of operations strategy. Between them, four ‘perspectives’ emerge: 3
● Operations strategy is a top-down reflection of what the whole group or business wants to do. ● Operations strategy is a bottom-up activity where operations improvements cumulatively
build strategy. ● Operations strategy involves translating market requirements into operations decisions
(sometimes called the ‘outside-in’ perspective). ● Operations strategy involves exploiting the capabilities of operations resources in chosen
markets (sometimes called the ‘inside-out’ perspective).
None of these four perspectives alone gives the full picture of what operations strategy is. But together they provide some idea of the pressures that go to form the content of operations strategy. First we will treat the top-down and bottom-up perspectives together, then the mar- ket requirements and operations resource perspectives together ( see Fig. 3.3 ).
for operations to take such a leading role, but are also explicit in seeing it as a ‘good thing’. A more traditional stance taken by some authorities is that the needs of the market will always be pre-eminent in shaping a company’s strategy. Therefore, operations should devote all their time to understanding the requirements of the market (as defi ned by the marketing function within the organization) and devote themselves to their main job of ensuring that operations processes can actually deliver what the market requires. Companies can only be successful, they argue, by positioning themselves in the market (through a combination of price, promotion, product design and managing how products and services are delivered to customers) with operations very much in a ‘supporting’ role. In eff ect, they say, Hayes and Wheelwright’s four-stage model should stop at stage 3. The issue of an ‘operations resource’ perspective on operations strategy is discussed later in the chapter.
Figure 3.3 The four perspectives on operations strategy
Market requirement perspective
What the market position requires operations to do
Operations resources
perspective
What operations resources can do
Top-down perspective
What the business wants operations
to do
What day-to-day experience suggests operations should do
Bottom-up perspective
Operations strategy
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80 PART ONE DIRECTING THE OPERATION
WHAT IS THE DIFFERENCE BETWEEN A ‘ TOP-DOWN’ AND ‘BOTTOM-UP’ VIEW OF OPERATIONS STRATEGY?
Top-down strategies A large corporation will need a strategy to position itself in its global, economic, political and social environment. This will consist of decisions about what types of business the group wants to be in, what parts of the world it wants to operate in, how to allocate its cash between its various businesses, and so on. Decisions such as these form the corporate strategy of the corporation. Each business unit within the corporate group will also need to put together its own business strategy which sets out its individual mission and objectives. This business strat- egy guides the business in relation to its customers, markets and competitors, and also the strategy of the corporate group of which it is a part. Similarly, within the business, functional strategies need to consider what part each function should play in contributing to the strate- gic objectives of the business.
So, one perspective on operations strategy is that it should take its place in this hierarchy of strategies. Its main influence, therefore, will be whatever the business sees as its strategic direction. For example, a printing services group has a company that prints packaging for consumer products. The group’s management figure that, in the long-term, only companies with significant market share will achieve substantial profitability. Its corporate objectives therefore stress market dominance. The consumer packaging company decides to achieve volume growth, even above short-term profitability or return on investment. The implication for operations strategy is that it needs to expand rapidly, investing in extra capacity (fac- tories, equipment and labour) even if it means some excess capacity in some areas. It also needs to establish new factories in all parts of its market to offer relatively fast delivery. The
important point here is that different business objectives would prob- ably result in a very different operations strategy. The role of opera- tions is therefore largely one of implementing or ‘operationalizing’ business strategy. Figure 3.4 illustrates this strategic hierarchy, with some of the decisions at each level and the main influences on the strategic decisions.
‘Bottom-up’ strategies The ‘top-down’ perspective provides an orthodox view of how functional strategies should be put together. But in fact the relationship between the levels in the strategy hierarchy is more complex than this. When any group is reviewing its corporate strategy, it will also take into account the circumstances, experiences and capabilities of the various businesses that form the group. Similarly, businesses, when reviewing their strategies, will consult the individual functions within the business about their constraints and capabilities. They may also incor- porate the ideas which come from each function’s day-to-day experience. Therefore an alter- native view to the top-down perspective is that many strategic ideas emerge over time from operational experience. Sometimes companies move in a particular strategic direction because the ongoing experience of providing products and services to customers at an operational level convinces them that it is the right thing to do. There may be no high-level decisions examin- ing alternative strategic options and choosing the one which provides the best way forward. Instead, a general consensus emerges from the operational level of the organization.
Suppose the printing services company described previously suc- ceeds in its expansion plans. However, in doing so it finds that hav- ing surplus capacity and a distributed network of factories allows it to offer an exceptionally fast service to customers. It also finds that some customers are willing to pay considerably higher prices for such a responsive service. Its experiences lead the company to set up
✽ Operations principle Operations strategies should reflect top-down corporate and/or business objectives.
✽ Operations principle Operations strategy should reflect bottom-up experience of operational reality.
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CHAPTER 3 OPERATIONS STRATEGY 81
Figure 3.4 The top-down perspective of operations strategy and its application to the printing services group
Corporate strategy decisions • What businesses to be in? • Allocation of cash to businesses? • How to manage the relationships between different businesses?
Business strategy decisions • Defining the mission of the business e.g. – growth targets – return on investment – profitability targets – cash generation • Setting competitive objectives
Functional strategy decisions • The role of the function • Translating business objectives into functional objectives • Allocation of resources so as to achieve functional objectives • Performance improvement priorities
Printing services group corporate strategy • Specialize in packaging businesses • Become a major player in all its markets
Consumer packaging business strategy • Rapid volume growth • Fast service • Economies of scale
Operations strategy • Capacity expansion • Tolerate some over-capacity in the short term • New locations established
a separate division dedicated to providing fast, high-margin printing services to those cus- tomers willing to pay. The strategic objectives of this new division are not concerned with high-volume growth but high profitability.
This idea of strategy being shaped by operational-level experience over time is some- times called the concept of emergent strategies4 (see Fig. 3.5). This view of operations strategy is perhaps more descriptive of how things really happen, but at first glance it seems less useful in providing a guide for specific decision making. Yet while emergent strategies are less easy to categorize, the principle governing a bottom-up perspective is clear: shape the operation’s objectives and action, at least partly, by the knowledge it gains from its day-to-day activities. The key virtues required for shaping strategy from the bot- tom up are an ability to learn from experience and a philosophy of continual and incre- mental improvement.
Top-down and bottom-up perspectives on operations strategy can reinforce each other The top-down and bottom-up perspectives are often seen as being diametrically opposite ways of looking at operations strategy, but they are not. In fact the two perspectives can be mutually reinforcing. This is how it can work. The top-down perspective sets the overall direction and objectives for operations decisions and activities. In fact, in order to imple- ment top-down strategy, the day-to-day activities of the operation must be aligned with the strategy. So a way of judging operational day-to-day activities of an operation is to
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82 PART ONE DIRECTING THE OPERATION
Figure 3.5 The ‘bottom-up’ perspective of operations strategy
Surplus capacity allows fast service
Offers option of faster service at premium price
New ‘fast service’ division established
Operational experience
Emergent sense of what the strategy should be
Operations strategy
Figure 3.6 Top-down and bottom-up perspectives on operations strategy can reinforce each other
Top-down Strategic intention
Bottom-up Operational day-to-day
experience
Operations-based capabilities can be exploited strategically
Day-to-day experience can be built into operations-
based capability
Operations processes can capture day-to-day
experience
Strategy needs to be implemented
Implementation involves aligning day-to-day operations
activities with strategy
Day-to-day operations should be run to reflect
strategic intention
check that they fully ref lect the overall top-down strategy of the organization. But as we indicated in the last paragraph, the experience gained from day-to-day activities can be accumulated and built into capabilities that an organization could possibly exploit stra- tegically. (We will expand this idea of ‘capabilities’ in the next section.) This idea of how top-down and bottom-up perspectives on operations strategy can reinforce each other is shown in Figure 3.6.
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CHAPTER 3 OPERATIONS STRATEGY 83
OPERATIONS IN PRACTICE
One of the principles of operations strategy is that what operations do ‘on the ground’ should be aligned with what a business is trying to achieve in its market. The way Apple designs and runs its retail operations is a good example of this. (Later in this chapter we will look at Apple’s sup- ply strategy.) However, Apple has not always had a retail operations strategy, because Apple has not always sold its products through its own shops. It was back in 1990 when the late Steve Jobs, then Apple’s boss, decided to build Apple Stores because conventional computer retail- ers were reluctant to stock his Mac computers. They said that the Apple brand was too weak (which, at the time, it was). The original Apple Stores were heavily influ- enced by Gap (the clothing retailer) and so many Gap employees moved to work for Apple that they joked about working for ‘Gapple’. Yet, even with the experienced Gap retailers, Apple wanted to develop its own ideas. Consequently it built a ‘prototype store’ near its Californian headquarters and tested its retail concepts for a year before opening the first Apple Stores. This early learning period was important. It allowed Apple to come to the conclusion that the two key issues for its retail operations strategy were store location and the experience that customers would have within the stores.
First, store location: Apple has stores in some of the highest profile locations on Earth. This is expensive, but the large number of customers it attracts together with the Apple range of products allow the company to pro- duce very high sales. In fact its sales productivity (sales per square metre) is above many luxury goods retailers such as Tiffany. Second, the customer experience: according to
Ron Johnson, who built up Apple’s shop network: ‘ People come to the Apple Store for the experience, and they’re will- ing to pay a premium for that. There are lots of components to that experience, but maybe the most important is that the staff isn’t focused on selling stuff, it’s focused on build- ing relationships and trying to make people’s lives better. The staff is exceptionally well trained, and they’re not on commission, so it makes no difference to them if they sell you an expensive new computer or help you make your old one run better so you’re happy with it. Their job is to figure out what you need and help you get it, even if it’s a prod- uct Apple doesn’t carry. Compare that with other retailers where the emphasis is on encouraging customers to buy more, even if they don’t want or need it. That doesn’t enrich their lives, and it doesn’t deepen the retailer’s relationship with them. It just makes their wallets lighter. ’ Yet creating the customer experience is not a matter of chance – it is carefully designed into Apple’s strategy. Employees are helped to cultivate their air of cool confidence through extensive training, and it is easier to be approacha- ble and calm when there is little pressure to push sales. Training emphasizes the importance of problem solving rather than selling and treating customers with courtesy. For example, staff have been told never to correct a cus- tomer’s mispronunciation of a product in case it is seen as patronizing. Of course, Apple’s products are attractive and Apple customers are famously passionate about the brand, but if Apple products were the only reason for the stores’ success, it is difficult to explain why customers flock to the stores to buy Apple products at full price when dis- count retailers sell them cheaper.
Apple’s retail operations strategy 5
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WHAT IS THE DIFFERENCE BETWEEN A ‘MARKET REQUIREMENTS’ AND AN ‘OPERATIONS RESOURCES’ VIEW OF OPERATIONS STRATEGY?
Market-requirements-based strategies No operation that continually fails to serve its markets adequately is likely to survive in the long term. Without an understanding of what markets require, it is impossible to ensure that the operation is achieving the right priority between its performance objectives (quality, speed, dependability, flexibility and cost).
The market influence on performance objectives Operations seek to satisfy customers through developing their five performance objectives. For example, if customers particularly value low-priced products or services, the operation will place emphasis on its cost performance. Alternatively, a customer emphasis on fast deliv- ery will make speed important to the operation. When it is important that products or services are delivered exactly when they are promised, the performance objective of dependability
will be essential for the operation. When customers value products or services that have been adapted or designed specifically for them, flexibility will be vital, and so on. This list is not exhaustive; the key point is that whatever competitive factors are important to customers should influence the priority of each performance objective.
Order-winning and qualifying objectives A particularly useful way of determining the relative importance of competitive factors is to distinguish between ‘order-winning’ and ‘qualifying’ factors. 6 Order-winning factors are those things which directly and significantly contribute to winning business. They are regarded by customers as key reasons for purchasing the product or service. Raising performance in an order-winning factor will either result in more business or improve the chances of gaining more business. Qualifying factors may not be the major competitive determinants of success, but are important in another way. They are those aspects of competitiveness where the oper- ation’s performance has to be above a particular level just to be considered by the customer. Performance below this ‘qualifying’ level of performance will possibly disqualify the company from being considered by many customers. But any further improvement above the qualifying level is unlikely to gain the company much competitive benefit. To order-winning and qualify- ing factors can be added less important factors which are neither order winning nor qualifying. They do not influence customers in any significant way. They are worth mentioning here only because they may be of importance in other parts of the operation’s activities.
Figure 3.7 shows the difference between order-winning, qualifying and less important fac- tors in terms of their utility or worth to the competitiveness of the organization. The curves illustrate the relative amount of competitiveness (or attractiveness to customers) as the oper-
ation’s performance at the factor varies. Order-winning factors show a steady and significant increase in their contribution to competitive- ness as the operation gets better at providing them. Qualifying factors are ‘givens’; they are expected by customers and can severely disad- vantage the competitive position of the operation if it cannot raise its
performance above the qualifying level. Less important objectives have little impact on cus- tomers no matter how well the operation performs in them.
If, as is likely, an operation produces goods or services for more than one customer group, it will need to determine the order-winning, qualifying and less important competitive factors for each group. For example, Table 3.1 shows two ‘product’ groups in the banking industry. Here the distinction is drawn between the customers who are looking for banking services for their private and domestic needs (current accounts, overdraft facilities, savings accounts,
✽ Operations principle Operations strategy should reflect the requirements of the business’s markets.
✽ Operations principle Competitive factors can be classified as order winners or qualifiers.
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CHAPTER 3 OPERATIONS STRATEGY 85
Figure 3.7 Order-winning, qualifying and less important competitive factors. Different customer needs imply different objectives
Table 3.1 Different banking services require different performance objectives
Retail banking Corporate banking
Products Personal financial services such as loans and credit cards
Special services for corporate customers
Customers Individuals Businesses
Range of services offered Medium but standardized, little need for special terms
Very wide range, many need to be customized
Changes to service design Occasional Continual
Delivery Fast decisions Dependable service
Quality Means error-free transactions Means close relationships
Volume per service type Most services are high volume Most services are low volume
Profit margins Most are low to medium, some high Medium to high
Competitive factors
Order winners Price Customization
Accessibility Quality of service
Ease of transaction Reliability/trust
Qualifiers Quality Ease of transaction
Range Price
Less important Accessibility
Internal performance Cost Flexibility
objectives Speed Quality
Quality Dependability
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86 PART ONE DIRECTING THE OPERATION
mortgage loans, etc.) and those corporate customers who need banking services for their (often large) organizations. These latter services would include such things as letters of credit, cash transfer services and commercial loans.
Worked example
‘ It is about four years now since we specialized in the small to medium firms’ market. Before that we also used to provide legal services for anyone who walked in the door. So now we have built up our legal skills in many areas of corporate and business law. However, within the firm, I think we could focus our activities even more. There seem to be two types of assignment that we are given. About forty per cent of our work is relatively routine. Typically these assignments are to do with things like property purchase and debt collection. Both these activities involve a relatively standard set of steps which can be automated or carried out by staff without full legal qualifications. Of course, a fully qualified lawyer is needed to make some decisions, however most work is fairly rou- tine. Customers expect us to be relatively inexpensive and fast in delivering the service. Nor do they expect us to make simple errors in our documentation, in fact if we did this too often we would lose business. Fortunately our customers know that they are buying a standard service and don’t expect it to be customized in any way. The problem here is that specialist agencies have been emerging over the last few years and they are starting to undercut us on price. Yet I still feel that we can oper- ate profitably in this market and anyway, we still need these capabilities to serve our other clients. The other sixty per cent of our work is for clients who require far more specialist services, such as assignments involving company merger deals or major company restructuring. These assignments are complex, large, take longer, and require significant legal skill and judgement. It is vital that clients respect and trust the advice we give them across a wide range of legal specialisms. Of course they assume that we will not be slow or unreliable in preparing advice, but mainly it’s trust in our legal judgement which is important to the client. This is popular work with our lawyers. It is both interesting and very profitable. But should I create two separate parts to our business: one to deal with routine services and the other to deal with specialist services? And, what aspects of operations performance should each part be aiming to excel at? ” (Managing Partner, Branton Legal Services)
Analysis Table 3.2 has used the information supplied above to identify the order winners, qualifiers and less important competitive factors for the two categories of service. As the Managing Partner suspects, the two types of service are very different. Routine services must be relatively inex- pensive and fast, whereas the clients for specialist services must trust the quality of advice and range of legal skills available in the firm. The customers for routine services do not expect errors and those for specialist services assume a basic level of dependability and speed. These are the qualifiers for the two categories of service. Note that qualifiers are not ‘unimportant’. On the contrary, failure to be ‘up to standard’ at them can lose the firm business. However, it is the order winner which attracts new business. Most significantly, the performance objectives which each operations partner should stress are very different. Therefore there does seem to be a case for separating the sets of resources (for example, lawyers and other staff ) and pro- cesses (information systems and procedures) that produce each type of service.
Table 3.2 Competitive factors and performance objectives for the legal firm
Service category Routine services Specialist services
Examples Property purchase Company merger deals
Debt collection Company restructuring
Order winner Price Quality of service
Speed Range of skills
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CHAPTER 3 OPERATIONS STRATEGY 87
The product/service life cycle influence on performance objectives One way of generalizing the behaviour of both customers and competitors is to link it to the life cycle of the products or services that the operation is producing. The exact form of product/service life cycles will vary, but generally they are shown as the sales volume passing through four stages: introduction, growth, maturity and decline. The implication of this for operations management is that products and services will require different operations strate- gies in each stage of their life cycle ( see Fig. 3.8 ).
Introduction stage When a product or service is first introduced, it is likely to be offering something new in terms of its design or performance, with few competitors offering the same product or service. The needs of customers are unlikely to be well understood, so operations management needs to develop the flexibility to cope with any changes and be able to give the quality to maintain product/service performance.
Service category Routine services Specialist services
Qualifi ers Quality (conformance) Dependability
Speed
Less important Customization Price
Operations partners Cost Quality of relationship
should stress Speed Legal skills
Quality Flexibility
Figure 3.8 The effects of the product/service life cycle on operations performance objectives
Dominant operations performance objectives
Likely qualifiers
Likely order winners
Competitors
Customers
Flexibility Quality
Quality Range
Product/service specification
Few/none
Innovators
Speed Dependability Quality
Price Range
Availability
Increasing numbers
Early adopters
Cost Dependability
Range Quality
Low price Dependable supply
Stable numbers
Bulk of market
Cost
Dependable supply
Low price
Declining number
Laggards
Introduction into market
Growth in market
acceptance Maturity of
market, sales level o�
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Decline as market
becomes saturated
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88 PART ONE DIRECTING THE OPERATION
Growth stage As volume grows, competitors may enter the growing market. Keeping up with demand could prove to be the main operations preoccupation. Rapid and dependable response to demand will help to keep demand buoyant, while quality levels must ensure that the company keeps its share of the market as competition starts to increase.
Maturity stage Demand starts to level off. Some early competitors may have left the market and the industry will probably be dominated by a few larger companies. So operations will be expected to get the costs down in order to maintain profits or to allow price cutting, or both. Because of this, cost and productivity issues, together with dependable supply, are likely to be the operation’s main concerns.
Decline stage After time, sales will decline with more competitors dropping out of the market. There might be a residual market, but unless a shortage of capacity develops, the market will continue to be dominated by price competition. Operations objectives continue to be dominated by cost.
The operations resources perspective The fourth and final perspective we will take on operations strategy is based on a particularly influential theory of business strategy – the resource-based view (RBV) of the firm. 7 Put sim- ply, the RBV holds that firms with an ‘above-average’ strategic performance are likely to have gained their sustainable competitive advantage because of the core competences (or capa- bilities) of their resources. This means that the way an organization inherits, or acquires, or develops its operations resources will, over the long term, have a significant impact on its stra- tegic success. Furthermore, the impact of its ‘operations resource’ capabilities will be at least as great, if not greater, than that which it gets from its market position. So understanding and developing the capabilities of operations resources, although often neglected, is a particularly important perspective on operations strategy.
Resource constraints and capabilities No organization can merely choose which part of the market it wants to be in without con- sidering its ability to produce services and products in a way that will satisfy that market. In other words, the constraints imposed by its operations must be taken into account. For example, a small translation company offers general translation services to a wide range of customers who wish documents such as sales brochures to be translated into another lan- guage. A small company, it operates an informal network of part-time translators who enable the company to offer translation into or from most of the major languages in the world. Some of the company’s largest customers want to purchase their sales brochures on a ‘one-stop shop’ basis and have asked the translation company whether it is willing to offer a full service, organizing the design and production, as well as the translation, of export brochures. This is a very profitable market opportunity, but the company does not have the resources, financial or physical, to take it up. From a market perspective, it is good business; from an operations resource perspective, it is not feasible.
However, the operations resource perspective is not always so negative. This perspective may identify constraints to satisfying some markets but it can also identify capabilities which can be exploited in other markets. For example, the same translation company has recently employed two new translators who have translation software skills, so now the company can offer a new ‘fast-response’ service which has been designed specifically to exploit the capabili- ties within the operations resources. Here the company has chosen to be driven by its resource capabilities rather than the obvious market opportunities.
✽ Operations principle Operations strategy objectives will change depending on the stage of the business’s services and products.
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CHAPTER 3 OPERATIONS STRATEGY 89
OPERATIONS IN ACTION
As a publicly stated ambitious target it takes some beat- ing: ‘ Amazon.com strives to be ’, it says, ‘ Earth’s most customer-centric company .’ Founded by Jeff Bezos in 1995, the Amazon.com website started as a place to buy books, giving its customers what at the time was a unique cus- tomer experience. Bezos believed that only the Internet could offer customers the convenience of browsing a selection of millions of book titles in a single sitting. During its first 30 days of business, Amazon.com fulfilled orders for customers in 45 countries – all shipped from Bezos’s Seattle-area garage. And that initial success has been fol- lowed by continued growth that is based on a clear strategy of technological innovation. Among its many technological innovations for customers, Amazon.com offers a personal- ized shopping experience for each customer, book discov- ery through ‘Search Inside The Book’, convenient checkout using ‘1-Click ® Shopping ’, and community features like Listmania and Wish Lists that help customers discover new products and make informed buying decisions. In addition Amazon operates retail websites and offers programs that enable other retailers and individual sellers to sell products on their websites. It may not be glamorous, but Amazon has focused on what have been called ‘the dull-but-difficult tasks’ such as tracking products, managing suppliers, stor- ing inventory and delivering boxes. Fulfilment By Amazon allows other companies to use Amazon’s logistics capabil- ity including the handling of returned items, and access to Amazon’s ‘back-end’ technology.
Amazon Web Services, its cloud computing busi- ness, provides the computing power for small and larger high-profile customers such as Spotify’s digital music ser- vice, and Netflix’s video streaming service. But, why should any business want to allow Amazon to have such control over its activities? Mainly because it allows entrepreneurs to create start-ups and established companies to expand their activities without the huge investment they would need to build appropriate infrastructure themselves. Amazon’s large and efficient operations are also better value that smaller companies could achieve. Now, many prominent retailers work with Amazon Services to power their e-commerce offerings from end to end, including technology services, merchandizing, customer service, and order fulfilment. Offering business-to-business ser- vices is also good for Amazon. The problem with online retailing, said Bezos, is its seasonality. At peak times, such as Christmas, Amazon has far more computing capac- ity than it needs for the rest of the year. At low points it may be using as little as 10 per cent of its total capacity. Hiring out that spare capacity is an obvious way to bring in extra revenue. Its EC2 (Elastic Compute Cloud) service provides resizable computing capacity ‘in the cloud’. It is designed, says Amazon, to make web-scale computing easier for developers: ‘ Amazon EC2’s simple web service interface allows you to obtain and configure capacity with minimal friction. It provides you with complete control of your computing resources and lets you run on Amazon’s
Amazon
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90 PART ONE DIRECTING THE OPERATION
proven computing environment. Amazon EC2 reduces the time required to obtain and boot new server instances to minutes, allowing you to quickly scale capacity, both up and down, as your computing requirements change. Amazon EC2 changes the economics of computing by allowing you to pay only for capacity that you actually use. Amazon EC2 provides developers the tools to build failure resilient appli- cations and isolate themselves from common failure scenar- ios. ’ Do not worry if you cannot follow the technicalities of Amazon’s statement, it is aimed at IT professionals. The important point is that it is a business-to-business service
based on the company’s core competence of leveraging its processes and technology that can make retail operations ultra- efficient. However, some observers immediately crit- icized Amazon’s apparent redefinition of its strategy. ‘ Why not ’, they said, ‘ stick to what you know, focus on your core competence of internet retailing? ’ Bezos’s response was clear: ‘ We are sticking to our core competence. The only thing that’s changed is that we are exposing it for (the benefit of) others .’ At least for Jeff Bezos, Amazon is not so much an Internet retailer as a provider of Internet-based technol- ogy and logistics services.
Intangible resources An operations resource perspective must start with an understanding of the resource capabil- ities and constraints within the operation. It must answer the simple questions: what do we have, and what can we do? An obvious starting point here is to examine the transforming and transformed resource inputs to the operation. These, after all, are the ‘building blocks’ of the operation. However, merely listing the type of resources an operation has does not give a com- plete picture of what it can do. Trying to understand an operation by listing its resources alone is like trying to understand an automobile by listing its component parts. To describe it more fully, we need to describe how the component parts form the internal mechanisms of the motor car. Within the operation, the equivalent of these mechanisms is its processes . Yet, even for an automobile, a technical explanation of its mechanisms still does not convey everything about its style or ‘personality’. Something more is needed to describe these. In the same way, an operation is not just the sum of its processes. In addition, the operation has some intan- gible resources. An operation’s intangible resources include such things as its relationship with suppliers, the reputation it has with its customers, its knowledge of its process technol- ogies and the way its staff can work together in new product and service development. These intangible resources may not always be obvious within the operation, but they are important and have real value. It is these intangible resources, as well as its tangible resources, that an operation needs to deploy in order to satisfy its markets. The central issue for operations management, therefore, is to ensure that its pattern of strategic decisions really does develop appropriate capabilities within its resources and processes.
Strategic resources and sustainable competitive advantage The ‘resource-based’ explanation of why some companies manage to gain sustainable com- petitive advantage is that they have accumulated better or more appropriate resources. Put simply, ‘above-average’ competitive performance is more likely to be the result of the core capabilities (or competences) inherent in a firm’s resources than its competitive positioning in its industry. And resources can have a particularly influential impact on strategic success if they exhibit some or all of the following properties: 8
● They are scarce – Unequal access to resources so that not all competing firms have scarce resources such as an ideal location, experienced engineers, proprietary software, etc., can strengthen competitive advantage. So, for example, if a firm did not have the good fore- sight (or luck) to acquire a strategic resource (such as a supply contract with a specialist supplier) when it was inexpensive, it will have to try and acquire it after it has become expensive (because other firms are also now wanting it).
● They are not very mobile – Some resources are difficult to move out of a firm. For exam- ple, if a new process is developed in a company’s Stockholm site and is based on the knowl- edge and experience of the Stockholm staff, the process will be difficult (although not totally impossible) to sell to another company based elsewhere in Europe (or even Sweden
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CHAPTER 3 OPERATIONS STRATEGY 91
if the staff do not want to move). As a result, the advantages that derive from the processes resources are more likely to be retained over time.
● They are difficult to imitate or substitute for – These two factors help define how eas- ily a resource-based advantage can be sustained over time. It is not enough only to have resources which are unique and immobile. If a competitor can copy these resources or, less predictably, replace them with alternative resources, then their value will quickly deteriorate. However, the less tangible are the resources and the more connected with the tacit knowledge embedded within the organization, the more diffi- cult they are for competitors to understand and to copy.
Structural and infrastructural decisions A distinction is often drawn between the strategic decisions which determine an operation’s structure and those which determine its infrastructure. An operation’s structural decisions are those which we have classed as primarily influencing design activities, while infrastructural decisions are those which influence the workforce organization and the planning and control, and improvement activities. This distinction in operations strategy has been compared with that between ‘hardware’ and ‘software’ in computer systems. The hardware of a computer sets limits to what it can do. In a similar way, investing in advanced technology and building more or better facilities can raise the potential of any type of operation. Within the limits which are imposed by the hardware of a computer, the software governs how effective the computer actually is in practice. The most powerful computer can only work to its full potential if its software is capable of exploiting its potential. The same principle applies with operations. The best and most costly facilities and technology will only be effective if the operation also has an appropriate infrastructure which governs the way it will work on a day-to-day basis. Figure 3.9 illustrates some typical structural and infrastructural decisions.
✽ Operations principle The long-term objective of operations strategy is to build operations-based capabilities.
Figure 3.9 Some typical structural and infrastructural operations strategy decisions
Typical structural decisions… Typical infrastructural decisions…
Which products or services should be developed?
What activities should be done internally, and what should be outsourced?
How many suppliers should we have?
How many sites should we have?
Where should sites be located?
What types of process technology should the operation be using?
What should be the capacity of each site?
How should the operations function be organized?
What skills should be developed in the operation’s sta�?
How should demand be forecast and monitored?
How should the operation adjust its activity levels in response to demand?
How should it develop supplier relationships?
How should the improvement process be managed?
How should performance be measured?
How should the operation allocate resources?
‘Structure’ – the ‘hardware’ of the operation
‘Infrastructure’ – the ‘software’ of the operation
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92 PART ONE DIRECTING THE OPERATION
OPERATIONS IN PRACTICE
Earlier in this chapter we looked at Apple’s retail opera- tions strategy. Here we move on to how Apple supplies those, and other, retail outlets.
Behind the impressive corporate facade of Apple’s Silicon Valley headquarters there are no factories churn- ing out the millions of products that Apple sells every year. Apple, like most of its competitors, outsources its production to supplier operations around the world, mainly in the manufacturing powerhouses of South-East Asia. So does this mean that Apple’s operations strategy is also outsourced along with its manufacturing? Not at all. What it does mean is that operations strategy for Apple is concerned with ‘supply ’. In other words, making sure that current products are always supplied fast enough to meet demand and new products always meet their launch dates. Over the years Apple has put together a remarkable supply network that is recognized as one of the most efficient in the world and, what is more impor- tant, gives them significant competitive advantage. The company ’s (outsourced) manufacturing, purchasing and supply logistics give it the ability to accomplish substan- tial new product launches without having to build up huge and expensive pre-launch stocks. In the words of Tim Cook, who developed Apple’s operations strategy, ‘ nobody wants to buy sour milk .
The way that Apple beats its competitors is to use its cash to secure exclusive deals on new component tech- nologies (touchscreens, chips, LED displays, etc.). When
a new component first comes out, it is usually very expensive to produce, and constructing a factory that can produce it in high volume is even more expensive. Combine this with the relatively small profit margin of many components and it becomes difficult for suppliers to make enough profit to guarantee that they can make an acceptable return on their investment. But, thanks to its successful stream of products, Apple can afford to pay for some or all of a supplier ’s construction cost of the new factory. In exchange the supplier gives exclusive rights to Apple for the new component over an agreed period. This has two advantages for Apple. First, it gives Apple access to new component technology months (or even years) before its rivals, allowing it to launch radi- cal new products that are literally impossible for com- petitors to duplicate. Second, even when the exclusive agreement expires, Apple will often have negotiated a discounted price. So it can source the component at a lower cost from the supplier that is now the most expe- rienced and skilled provider of those parts.
In summary, according to Marty Lariviere of Stanford University, ‘[Apple’s operations strategy is to] bet big on technology that lets them have distinctive products. With their limited product line and high volume, they can make commitments that other tech firms may shy away from. It also means that (if they are right) other firms are going to be hard pressed to catch up if Apple has locked up a large amount of supplier capacity. ’
Apple’s supply operations strategy 9
HOW CAN OPERATIONS STRATEGY FORM THE BASIS FOR OPERATIONS IMPROVEMENT?
An operations strategy is not just about checking that a business’s resources and processes are consistent with its overall strategy. As our earlier discussion of operations capabilities implied, it also can provide the foundation for improvement. And the objective of improvement is obvi- ous – it tries to make things better! But how much better does better mean? And does this mean better in every way or better in some specific manner? This is why, in this section, we look at two models that use the market requirements and operations capabilities perspectives that we discussed earlier, to help answer these questions. First we examine the concept of the ‘line of fit’, then the ‘importance–performance matrix’.
The ‘line of fit ’ between market requirements and operations capabilities At a strategic level, the whole purpose of operations improvement is to make operations per- formance better at serving its markets. In other words, there should be a fit between what an operation is trying to achieve in its markets (market requirements) and what it is good at doing (operations capabilities). Figure 3.10 (a) illustrates this idea by showing diagrammatically
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CHAPTER 3 OPERATIONS STRATEGY 93
the approximate alignment or ‘fit’ between an operation’s performance and the requirements of its markets. The vertical dimension represents the level of market requirements that reflect the intrinsic needs of customers or their expectations. Moving along this dimension indicates a broadly enhanced level of market performance. The horizontal scale represents the level of the organization’s operations capabilities. This includes such things as its ability to achieve its competitive objectives and the effectiveness with which it uses its resources. Moving along the dimension indicates a broadly enhanced level of operations capabilities and therefore operations performance. Be careful, however, in using this diagrammatic representation. It is a conceptual model rather than a practical tool. It is intended merely to illustrate some ideas around the concept of strategic improvement. In terms of the framework illustrated in Figure 3.10 (a), improvement means three things:
1 Achieving ‘alignment’ – This means achieving an approximate balance between ‘required market performance’ and ‘actual operations performance’. The diagonal line in Figure 3.10 (a) therefore represents a line of fit with market requirements and operations capabilities in balance.
2 Achieving ‘sustainable’ alignment – It is not enough to achieve some degree of align- ment to a single point in time. Equally important is whether operations processes could adapt to the new market conditions.
3 Improving overall performance – If the requirements placed on the organization by its mar- kets are relatively undemanding, then the corresponding level of operations capabilities will not need to be particularly high. The more demanding the level of market requirements, the greater will have to be the level of operations capabilities. But most firms would see their over- all strategic objectives as achieving alignment at a level that implies some degree of long-term competitive success. In Figure 3.10 (a) point A represents alignment at a low level, while point B represents alignment at a higher level. The assumption in most firms’ operations strategies is that point B is a more desirable position than point A because it is more likely to represent a financially successful position. High levels of market performance, achieved as a result of high levels of operations performance, being generally more difficult for competitors to match.
Figure 3.10 An operations improvement should achieve ‘fit’ between market requirements and operations performance, but deviation from the line of ‘fit’ between market requirements and operations performance can expose the operation to risk
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Level of operations capability
O� the line of fit – operations performance inadequate for market requirements
O� the line of fit – operations performance not exploited in the market
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✽ Operations principle Operations strategy should aim for alignment or ‘fit’ between an operation’s performance and the requirements of its markets.
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94 PART ONE DIRECTING THE OPERATION
Deviating from the line of fit During the improvement path (red dashed arrow) from A to B in Figure 3.10 (a) it may not be possible to maintain the balance between market requirements and operations perfor- mance. Sometimes the market may expect something that the operation cannot (temporarily) deliver. Sometimes operations may have capabilities that cannot be exploited in the market. At a strategic level, there are risks deriving from any deviation from the ‘line of fit’. For exam- ple, delays in the improvement to a new website could mean that customers do not receive the level of service they were promised. This is shown as position X in Figure 3.10 (b). Under these circumstances, the risk to the organization is that its reputation (or brand) will suffer because market expectations exceed the operation’s capability to perform at the appropriate level. At other times, the operation may make improvements before they can be fully exploited in the market. For example, the same online retailer may have improved its website so that it can offer extra services, such as the ability to customize products, before those products have been stocked in its distribution centre. This means that, although an improvement to its ordering processes has been made, problems elsewhere in the company prevent the improve- ment from giving value to the company. This is represented by point Y in Figure 3.10 (b). In both instances, improvement activity needs to move the operation back to the line of fit.
A strategic view of operations improvement priorities The idea of the line of fit is conceptually useful, but, as we mentioned earlier, not a practical tool. Yet one can use the idea of comparing market and operations perspectives to provide more direct guidance to operations managers. To do this we need to think about both market requirements and operations capabilities at a more focused and disaggregated level. So, rather than ask generally, ‘what are the market requirements for our products and/or ser- vices?’ one asks, ‘how important are the competitive factors that characterise a product or service?’ The intention is to gain an understanding of the relative importance to customers of the various competitive factors. For example, do customers for a particular product or service prefer low prices to a wide range? The needs and preferences of customers shape the impor- tance of operations objectives within the operation. Similarly, rather than ask generally, ‘what are our operations capabilities?’ one asks, ‘how good is our operation at providing the required level of performance in each of the competitive objectives?’ But how good is our performance against what criteria? Strategically the most revealing point of comparison is with competi- tors. Competitors are the points of comparison against which the operation can judge its per- formance. From a competitive viewpoint, as operations improve their performance, the improvement which matters most is that which takes the operation past the performance lev- els achieved by its competitors. The role of competitors then is in determining achieved per- formance . (In a not-for-profit context, ‘other similar operations’ can be substituted for ‘competitors’.)
Both importance and performance have to be brought together before any judgement can be made as to the relative priorities for improvement. Just because something is particularly
important to its customers does not mean that an operation should necessarily give it immediate priority for improvement. It may be that the operation is already considerably better than its competitors at serving customers in this respect. Similarly, just because an operation is not very good at something when compared with its competitors’ performance, it does not necessarily mean that it should be immedi- ately improved. Customers may not particularly value this aspect of
performance. Both importance and performance need to be viewed together to judge the pri- oritization of objectives:
● Judging importance to customers – Earlier we introduced the idea of order-winning, qualifying and less important competitive factors, and one could take these three catego- ries as an indication of the relative importance of each performance factor. But usually one
✽ Operations principle Improvement priorities are determined by importance for customers and performance against competitors or similar operations.
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CHAPTER 3 OPERATIONS STRATEGY 95
needs to use a slightly more discriminating scale. One way to do this is to take our three broad categories of competitive factors – order winning, qualifying and less important – and divide each category into three further points representing strong, medium and weak positions. Figure 3.11(a) illustrates such a scale.
● Judging performance against competitors – At its simplest, a competitive performance standard would consist merely of judging whether the achieved performance of an oper- ation is better than, the same or worse than that of its competitors. However, in much the same way as the nine-point importance scale was derived, we can derive a more discrimi- nating nine-point performance scale, as shown in Figure 3.11(b).
The priority for improvement that each competitive factor should be given can be assessed from a comparison of their importance and performance. This can be shown on an importance– performance matrix that, as its name implies, positions each competitive factor according to its scores or ratings on these criteria. Figure 3.12 shows an importance–performance matrix divided into zones of improvement priority. The first zone boundary is the ‘lower bound of acceptability’ shown as line AB in the figure. This is the boundary between acceptable and unacceptable performance. When a competitive factor is rated as relatively unimportant (8 or 9 on the importance scale), this boundary will in practice be low. Most operations are prepared to tolerate performance levels which are ‘in the same ball-park’ as their competitors (even at the bottom end of the rating) for unimportant competitive factors. They only become concerned when performance levels are clearly below those of their competitors. Conversely, when judging competitive factors that are rated highly (1 or 2 on the importance scale) they will be markedly less sanguine at poor or mediocre levels of performance. Minimum levels of acceptability for these competitive factors will usually be at the lower end of the ‘better than competitors’ class. Below this minimum bound of acceptability (AB) there is clearly a need for improvement; above this line there is no immediate urgency for any improvement. However, not all competitive factors falling below the minimum line will be seen as having
Figure 3.11 Nine-point scales for judging importance and performance; the importance–performance matrix
(a) Importance scale for competitive factors
Rating Description
1 Provides a crucial advantage to customers
High
Low
2 Provides an important advantage to customers
3 Provides a useful advantage to customers
4 Needs to be up to good industry standard
5 Needs to be up to median industry standard
6 Needs to be within close range of rest of industry
7 Not usually important but could become so
8 Very rarely considered by customers
9 Never considered by customers
(b) Performance scale for competitive factors
Rating Description
1 Considerably better than similar organizations
Good
Poor
2 Clearly better than similar organizations
3 Marginally better than similar organizations
4 Sometimes marginally better than similar organizations
5 About the same as similar organizations
6 Slightly worse than the average of similar organizations
7 Usually marginally worse than similar organizations
8 Generally worse than most similar organizations
9 Consistently worse than most similar organizations
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96 PART ONE DIRECTING THE OPERATION
the same degree of improvement priority. A boundary approximately represented by line CD represents a distinction between an urgent priority zone and a less urgent improvement zone. Similarly, above the line AB, not all competitive factors are regarded as having the same prior- ity. The line EF can be seen as the approximate boundary between performance levels which are regarded as ‘good’ or ‘appropriate’ on the one hand and those regarded as ‘too good’ or ‘excess’ on the other. Segregating the matrix in this way results in four zones which imply very different priorities:
● The ‘appropriate’ zone – Competitive factors in this area lie above the lower bound of acceptability and so should be considered satisfactory.
● The ‘improve’ zone – Lying below the lower bound of acceptability, any factors in this zone must be candidates for improvement.
● The ‘urgent-action’ zone – These factors are important to customers but performance is below that of competitors. The factors must be considered as candidates for immediate improvement.
● The ‘excess?’ zone – Factors in this area are ‘high performing’, but not important to cus- tomers. The question must be asked, therefore, whether the resources devoted to achiev- ing such a performance could be used better elsewhere.
Figure 3.12 Priority zones in the importance–performance matrix
Worked example
EXL Laboratories is a subsidiary of an electronics company. It carries out research and devel- opment as well as technical problem-solving work for a wide range of companies, includ- ing companies in its own group. It is particularly keen to improve the level of service which it gives to its customers. However, it needs to decide which aspect of its performance to improve first. It has devised a list of the most important aspects of its service:
● The quality of its technical solutions – the perceived appropriateness by customers. ● The quality of its communications with customers – the frequency and usefulness of
information.
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● The quality of post-project documentation – the usefulness of the documentation which goes with the final report.
● Delivery speed – the time between customer request and the delivery of the final report. ● Delivery dependability – the ability to deliver on the promised date. ● Delivery flexibility – the ability to deliver the report on a revised date. ● Specification flexibility – the ability to change the nature of the investigation. ● Price – the total charge to the customer.
EXL assigns a score to each of these factors using the 1–9 scale described in Figure 3.12 . After which EXL turned its attention to judging the laboratory ’s performance against compet- itor organizations. Although EXL has benchmarked information for some aspects of perfor- mance, it has to make estimates for the others. Both these scores are shown in Figure 3.13 .
EXL Laboratories plotted the importance and performance ratings it had given to each of its competitive factors on an importance–performance matrix. This is shown in Figure 3.14 . It shows that the most important aspect of competitiveness – the ability to deliver sound tech- nical solutions to its customers – falls comfortably within the appropriate zone. Specification flexibility and delivery flexibility are also in the appropriate zone, although only just. Both delivery speed and delivery dependability seem to be in need of improvement as each is below the minimum level of acceptability for their respective importance positions. However, two competitive factors, communications and cost/price, are clearly in need of immediate improvement. These two factors should therefore be assigned the most urgent priority for
Figure 3.13 Rating ‘importance to customers’ and ‘performance against competitors’ on the nine-point scales for EXL Laboratories
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improvement. The matrix also indicates that the company ’s documentation could almost be regarded as ‘too good’.
The matrix may not reveal any total surprises. The competitive factors in the ‘urgent- action’ zone may be known to be in need of improvement already. However, the exercise is useful for two reasons:
● It helps to discriminate between many factors which may be in need of improvement. ● It gives purpose and structure to the debate on improvement priorities.
Figure 3.14 The importance–performance matrix for EXL Laboratories
HOW CAN AN OPERATIONS STRATEGY BE PUT TOGETHER? THE PROCESS OF OPERATIONS STRATEGY
What is called the ‘process’ of strategy is concerned with ‘how’ strategies are put together. So the ‘process of operations strategy’ means the method that is used to determine what an operations strategy should be. It is not a simple task. Putting an operations strategy together and making it happen in practice is a complex and difficult thing to achieve. Even the most
sophisticated organizations would probably admit that they do not always get it right. And although any simple step-by-step model of how to ‘do’ operations strategy will inevitably be a simplification of a messy reality, we will use a four-stage model to illustrate some of the elements of ‘process’. This stage model is shown in Figure 3.15 . It divides the process of operations strategy into formulation, imple-
mentation, monitoring and control. 10 These four stages are shown in Figure 3.15 as a cycle. This is because, in practice, strategies may be revisited depending on the experience gained from trying to make them happen.
✽ Operations principle The process of operations strategy involves formulation, implementation, monitoring and control.
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Operations strategy formulation The formulation of operations strategy is the process of clarifying the various objectives and decisions that make up the strategy, and the links between them. Unlike day-to-day oper- ations management, formulating an operations strategy is likely to be only an occasional activity. Some firms will have a regular (for example, annual) planning cycle and operations strategy consideration may form part of this, but the extent of any changes made in each annual cycle is likely to be limited. In other words, the ‘complete’ process of formulating an entirely new operations strategy will be a relatively infrequent event. There are many ‘formu- lation processes’ which are, or can be, used to formulate operations strategies. Most consul- tancy companies have developed their own frameworks, as have several academics.
What should the formulation process be trying to achieve? Before putting an operations strategy together, it is necessary to ask the question ‘what should it be trying to achieve?’ Clearly, it should provide a set of actions that, with hindsight, have provided the ‘best’ outcome for the organization. But that really does not help us. What do we mean by ‘the best’, and what good is a judgement that can only be applied in hindsight? Yet, even if we cannot assess the ‘goodness’ of a strategy for certain in advance, we can check it out for some attributes that could stop it being a success, as follows:
● Is operations strategy comprehensive? In other words, does it include all important issues? Business history is littered with companies that simply failed to notice the poten- tial impact of, for instance, new process technology, or emerging changes in their supply network.
● Is operations strategy coherent? As a strategy evolves over time, tensions can emerge that threaten to pull the overall strategy in different directions. This can result in a loss of coherence. Coherence is when the choices made in each decision area all direct the operation in the same strategic direction, with all strategic decisions complementing and reinforcing each other in the promotion of performance objectives. For example, if new Internet-based remote diagnostic technology for heating systems is introduced which allows service engineers to customize their service advice to individual clients’ needs, it would be ‘incoherent’ not to devise a new operating process which did not enable service staff to exploit the technology’s potential, for example by emailing customers with service options before the service engineer visits.
● Does operations strategy have correspondence? The decisions pursued in each part of the strategy should correspond to the true priority of each performance objective. So, for example, if cost reduction is the main objective for an operation then its process tech- nology investment decisions might err towards the purchase of ‘off-the-shelf’ (as opposed
Figure 3.15 The stages of the process of operations strategy
Operations strategy formulation
Operations strategy implementation
Operations strategy control
Operations strategy monitoring
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to customized) equipment which would reduce the capital cost of the technology and may also imply lower maintenance and running costs. However, it is unlikely to be as flexible. Implicitly the strategy is accepting that cost is more important than flexibility. So, we would expect all other decisions to correspond with the same prioritization of objectives, for example: capacity strategies that exploit natural economies of scale; supply network strategies that reduce purchasing
costs; performance measurement systems that stress efficiency and productivity; continu- ous improvement strategies that emphasize continual cost reduction; and so on.
● Does operations strategy identify critical issues? The more critical the decision, the more attention it deserves. Although no strategic decision is unimportant, in practical terms some decisions are more critical than others. The judgement over exactly what decisions are par- ticularly critical is very much a pragmatic one which must be based on the particular cir- cumstances of an individual firm’s operations strategy. But they must be identified.
✽ Operations principle Operations strategies should be comprehensive, coherent, correspond to stated objectives and identify the critical issues.
OPERATIONS IN PRACTICE
Only a few years ago Nokia was the king of the mobile phone business – and it was a good business to be in, with double-digit growth year on year. Nokia was omni- present and all-powerful, a pioneer that had supplied the first mass wave of the expanding mobile phone indus- try. Nokia dominated the market in many parts of the world and the easily recognizable Nokia ring-tone ech- oed everywhere from boardrooms to shopping malls. So why did this, once-dominant, company eventually sink to the point where it was forced to sell its mobile com- munications business to Microsoft in 2013? The former Nokia CEO, Jormal Ollila, admitted that Nokia made sev- eral mistakes, but the exact nature of those mistakes is a point of debate among business commentators. Julian Birkinshaw, a professor at London Business School, dis- misses some of the most commonly cited reasons. Did Nokia lose touch with its customers? Well, yes, but by definition that must hold for any company whose sales drop so drastically in the face of thriving competitors. Did it fail to develop the necessary technologies? No. Nokia had a prototype touchscreen before the iPhone was launched, and its smartphones were technologi- cally superior to anything Apple, Samsung or Google had to offer for many years. Did it not recognize that the basis of competition was shifting from the hardware to the ecosystem? (A technology ecosystem in this case is a term used to describe the complex system of inter- dependent components that work together to enable mobile technology to operate successfully.) Not really. The ‘ecosystem’ battle began in the early 2000s, with Nokia joining forces with Ericsson, Motorola and Psion to create Symbian as a platform technology that would keep Microsoft at bay.
Where Nokia struggled was in relying on an opera- tions strategy that failed to allocate resources appro- priately and could not implement the changes that were necessary. As far as resource allocation was concerned, Nokia saw itself primarily as a hardware company rather than a software company. Its engi- neers were great at designing and producing hard- ware, but not the programs that drive the devices. They underestimated the importance of software (including, crucially, the apps that run on smart- phones). Largely it was hardware rather than software experts who controlled its development process. By contrast, Apple had always emphasized that hardware and software were equally important. Yet while it was losing its dominance, Nokia was well aware of most of the changes occurring in the mobile communica- tions market and the technology developments being actively pursued by competitors. Arguably, Nokia was
Nokia, a failure to change 11
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Operations strategy implementation Operations strategy implementation is the way that strategies are operationalized or exe- cuted. It means attempting to make sure that intended strategies are actually achieved. It is important because no matter how sophisticated the intellectual and analytical underpinnings of a strategy, it remains only a document until it has been implemented. But the way one implements any strategy will very much depend on the specific nature of the changes implied by that strategy and the organizational and environmental conditions that apply during its implementation. However, three issues are often mentioned by strategy practitioners as being important in achieving successful implementation:
● Clarity of strategic decisions – There is a strong relationship between the formulation stage and the implementation stage of operations strategy. The crucial attribute of the for- mulation stage is clarity. If a strategy is ambiguous it is difficult to translate strategic intent into specific actions. With clarity, however, it should be easier to define the intent behind the strategy, the few important issues that need to be developed to deliver the intent, the way that projects be led and resourced, who will be responsible for each task, and so on.
● Motivational leadership – Leadership that motivates, encourages and provides support is a huge advantage in dealing with the complexity of implementation. Leadership is needed to bring sense and meaning to strategic aspirations, maintain a sense of purpose over the implementation period, and, when necessary, modify the implementation plan in the light of experience.
● Project management – Implementation means breaking up a complex plan into a set of relatively distinct activities. Fortunately there is a well-understood collection of ideas of how to do this. It is called ‘project management’ and a whole chapter is devoted to this subject ( Chapter 19 ).
Operations strategy monitoring Especially in times when things are changing rapidly, as during strategic change, organiza- tions often want to track ongoing performance to make sure that the changes are proceeding as planned. Monitoring should be capable of providing early indications (or a ‘warning bell’ as some call it) by diagnosing data and triggering appropriate changes in how the operations strategy is being implemented. Having created a plan for the implementation, each part of it has to be monitored to ensure that planned activities are indeed happening. Any deviation from what should be happening (that is, its planned activities) can then be rectified through some kind of intervention in the operation.
Operations strategy control Strategic control involves the evaluation of the results from monitoring the implementation. Activities, plans and performance are assessed with the intention of correcting future action if that is required. In some ways this strategic view of control is similar to how it works opera- tionally (which is discussed in Chapter 10 ), but there are differences. At a strategic level, con- trol can be difficult because strategic objectives are not always clear and unambiguous. Ask
not short of awareness, but it did lack the capacity to convert awareness into action. ‘ The failure of big companies to adapt to changing circumstances is one of the fundamental puzzles in the world of business ’, says Professor Birkinshaw. Occasionally, a genuinely ‘ disruptive’ technology can wipe out an entire indus-
try. But usually the sources of failure are less dramatic. Often it is a failure to implement strategies or technol- ogies that have already been developed, an arrogant disregard for changing customer demands, or a com- placent attitude towards new competitors.
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any experienced managers; they will acknowledge that it is not always possible to articulate every aspect of a strategic decision in detail. Many strategies are just too complex for that. So, rather than adhering dogmatically to a predetermined plan, it may be better to adapt as cir- cumstances change. And the more uncertain the environment, the more an operation needs to emphasize this form of strategic flexibility and develop its ability to learn from events.
OPERATIONS IN PRACTICE
There is a famous story that illustrates the importance of having some kind of plan, even if hindsight proves it to be the wrong plan. During manoeuvres in the Alps, a detachment of Hungarian soldiers got lost. The weather was severe and the snow was deep. In these freezing conditions, after two days of wandering, the soldiers gave up hope and became reconciled to a frozen death on the mountains. Then, to their delight, one of the sol- diers discovered a map in his pocket. Much cheered by
this discovery, the soldiers were able to escape from the mountains. When they were safe back at their head- quarters, they discovered that the map was not of the Alps at all, but of the Pyrenees. What is the moral of the story? It is that a plan (or a map) may not be perfect but it gives a sense of purpose and a sense of direction. If the soldiers had waited for the right map they would have frozen to death. Yet their renewed confidence motivated them to get up and create opportunities.
Sometimes any plan is better than no plan 12
Critical commentary
The argument has been put forward that strategy does not lend itself to a simple ‘stage model’ analysis that guides managers in a step-by-step manner through to the eventual ‘answer’ that is a fi nal strategy. Therefore, the models put forward by consultants and academics are of very limited value. In reality, strategies (even those that are made deliberately, as opposed to those that simply ‘emerge’) are the result of very complex organizational forces. Even descriptive models such as the four-stage model described above in Figure 3.9 can do little more than sensitize managers to some of the key issues that they should be taking into account when devising strategies. In fact, they argue, it is the articulation of the ‘content’ of operation strategy that is more useful than adhering to some over-simplistic description of a strategy process.
● Strategy is the total pattern of decisions and actions that position the organization in its environment and that are intended to achieve its long-term goals.
● Operations strategy concerns the pattern of strategic decisions and actions which set the role, objectives and activities of the operation.
● Operations strategy has content and process. The content concerns the specifi c decisions which are taken to achieve specifi c objectives. The process is the procedure which is used within a business to formulate its strategy.
❯ What is strategy and what is operations strategy?
SUMMARY ANSWERS TO KEY QUESTIONS
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❯ What is the difference between a ‘top-down’ and a ‘bottom-up’ view of opera- tions strategy?
● The ‘top-down’ perspective views strategic decisions at a number of levels. Corporate strat- egy sets the objectives for the different businesses which make up a group of businesses. Business strategy sets the objectives for each individual business and how it positions itself in its marketplace. Functional strategies set the objectives for each function’s contribution to its business strategy.
● The ‘bottom-up’ view of operations strategy sees overall strategy as emerging from day-to- day operational experience.
❯ How can an operations strategy be formulated? The process of operations strategy
● Putting an operations strategy together is called ‘the process’ of operations strategy.
● There are four stages in the process of operations strategy, which can be viewed as a cycle:
● Formulation – which is the process of clarifying the various objectives and decisions that make up the strategy, and the links between them. This should produce strategies that are comprehensive, coherent, provide correspondence and prioritize the most critical activities or decisions.
❯ How can operations strategy form the basis for operations improvement?
● An operations strategy can provide the foundation for improvement by achieving a fit between an operation’s market requirements and its operations capabilities.
● A ‘line of fit’ diagram can illustrate this. It is a conceptual model intended to illustrate some ideas around the concept of strategic improvement.
● During improvement it may not be possible to maintain a balance between market require- ments and operations performance. When markets expect something that the operation cannot deliver, or when operations have capabilities that cannot be exploited in the mar- ket, there are strategic risks deriving from the deviation from the ‘line of fit’.
● The importance–performance matrix positions competitive factors according to their importance and the operation’s success at achieving them to determine relative improve- ment priorities.
❯ What is the difference between a ‘market requirements’ and an ‘operations resources’ view of operations strategy?
● A ‘market requirements’ perspective of operations strategy sees the main role of operations as satisfying markets. Operations performance objectives and operations decisions should be primarily influenced by a combination of customers’ needs and competitors’ actions. Both of these may be summarized in terms of the product/service life cycle.
● The ‘operations resources’ perspective of operations strategy is based on the resource-based view (RBV) of the firm and sees the operation’s core competences (or capabilities) as being the main influence on operations strategy. Operations capabilities are developed partly through the strategic decisions taken by the operation. Strategic decision areas in operations are usually divided into structural and infrastructural decisions. Structural decisions are those which define an operation’s shape and form. Infrastructural decisions are those which influ- ence the systems and procedures that determine how the operation will work in practice.
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● Implementation – the way that strategy is operationalized or executed. Three issues are often mentioned by strategy practitioners as being important in achieving successful implementation: the clarity of the strategy, the nature of the leadership provided by top management, and effective project management.
● Monitoring – involves tracking ongoing performance and diagnosing data to make sure that the changes are proceeding as planned and providing early indications of any devi- ation from the plan.
● Control – involves the evaluation of the results from monitoring the implementation so that activities, plans and performance can be assessed with the intention of correcting future action if that is required.
CASE STUDY McDonald’s: half a century of growth 13
It is loved and it is hated. It is a shining example of how good-value food can be brought to a mass market. It is a symbol of everything that is wrong with ‘industrialized’, cap- italist, bland, high-calorie and environmentally unfriendly commercialism. It is the best-known and most loved fast food brand in the world with more than 36,000 restau- rants in 117 countries, providing jobs for 1.7 million staff and feeding 69 million customers per day (yes, per day!). It is part of the homogenization of individual national cul- tures, filling the world with bland, identical, ‘cookie cutter’, Americanized and soulless operations that dehumanize its staff by forcing them to follow ridged and over-defined procedures. But whether you see it as friend, foe, or a bit of both, McDonald’s has revolutionized the food industry, affecting the lives of both the people who produce food and the people who eat it. It has also had its ups (mainly) and downs (occasionally) as markets, customers and economic circumstances change. Yet, even in the toughest times it has always displayed remarkable resilience. What follows is a brief (for such a large corporation) summary of its history.
Starting small Central to the development of McDonald’s is Ray Kroc, who by 1954 and at the age of 52 had been variously a piano player, a paper cup salesman and a multi-mixer salesman. He was surprised by a big order for eight multi-mixers from a restaurant in San Bernardino, California . When he visited the customer he found a small but successful restaurant run by two brothers Dick and Mac McDonald. They had opened their ‘Bar-B-Que’ restaurant 14 years earlier, and by the time Ray Kroc visited the brothers’ oper- ation it had a self-service drive-in format with a limited
menu of nine items. He was amazed by the effectiveness of their operation. Focusing on a limited menu including burgers, fries and beverages had allowed them to analyse every step of the process of producing and serving their food. Ray Kroc was so impressed that he persuaded the brothers to adopt his vision of creating McDonald’s res- taurants all over the USA, the first of which opened in Des Plaines, Illinois, in June 1955. However, later, Kroc and the McDonald brothers quarrelled, and Kroc bought them out. Now with exclusive rights to the McDonald’s name, the restaurants spread, and in five years there were 200 restaurants through the USA. Yet through this, and later, expansions, Ray Kroc insisted on maintaining the same principles that he had seen in the original operation: ‘ If I had a brick for every time I’ve repeated the phrase Quality, Service, Cleanliness and Value, I think I’d probably be able to bridge the Atlantic Ocean with them .’
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Priority to the process Ray Kroc had been attracted by the cleanliness, simplic- ity, efficiency and profitability of the McDonald brothers’ operation. They had stripped fast food delivery down to its essence and eliminated needless effort to make a swift assembly line for a meal at reasonable prices. Kroc wanted to build a process that would become famous for food of consistently high quality using uniform meth- ods of preparation. His burgers, buns, fries and bever- ages should taste just the same in Alaska as they did in Alabama. The answer was the ‘Speedee Service System’, a standardised process that prescribed exact preparation methods, specially designed equipment and strict prod- uct specifications. The emphasis on process standardiza- tion meant that customers could be assured of identical levels of food and service quality every time they visited any store, anywhere. Operating procedures were specified in minute detail. The first operations manual prescribed rigorous cooking instructions such as temperatures, cook- ing times and portions. Similarly, operating procedures were defined to ensure the required customer experience, for example no food items were to be held more than 10 minutes in the transfer bin between being cooked and being served. Technology was also automated. Specially designed equipment helped to guarantee consistency using ‘fool-proof ’ devices. For example, the ketchup was dispensed through a metered pump. Specially designed ‘clam shell’ grills cooked both sides of each meat patty simultaneously for a pre-set time. And when it became clear that the metal tongs used by staff to fill French-fry containers were awkward to use efficiently, McDonald’s engineers devised a simple aluminium scoop that made the job faster and easier.
For Kroc, the operating process was both his passion and the company ’s central philosophy. It was also the foundation of learning and improvement. The company ’s almost compulsive focus on process detail was not an end in itself. Rather it was to learn what contributed to con- sistent high-quality service in practice and what did not. McDonald’s always saw learning as important. It founded ‘Hamburger University ’, initially in the basement of a res- taurant in Elk Grove Village, Illinois. It had a research and development laboratory to develop new cooking, freez- ing, storing and serving methods. Also franchisees and operators were trained in the analytical techniques nec- essary to run a successful McDonald’s. It awarded degrees in ‘Hamburgerology ’. But learning was not just for head- quarters. The company also formed a ‘field service’ unit to appraise and help its restaurants by sending field service consultants to review their performance on a number of ‘dimensions’ including cleanliness, queuing, food quality and customer service. As Ray Kroc said, ‘ We take the ham- burger business more seriously than anyone else. What sets McDonald’s apart is the passion that we and our suppliers share around producing and delivering the highest-qual- ity beef patties. Rigorous food safety and quality standards
and practices are in place and executed at the highest levels every day.’
No story illustrates the company ’s philosophy of learn- ing and improvement better than its adoption of frozen fries. French-fried potatoes had always been important for McDonald’s. Initially, the company tried observing the tem- perature levels and cooking methods that produced the best fries. The problem was that the temperature during the cooking process was very much influenced by the temper- ature of the potatoes when they were placed in the cook- ing vat. So, unless the temperature of the potatoes before they were cooked was also controlled (not very practical) it was difficult to specify the exact time and temperature that would produce perfect fries. But McDonald’s researchers discovered that, irrespective of the temperature of the raw potatoes, fries were always at their best when the oil tem- perature in the cooking vat increased by 3 degrees above the low-temperature point after they were put in the vat. So by monitoring the temperature of the vat, perfect fries could be produced every time. But that was not the end of the story. The ideal potato for fries was the Idaho Russet, which was seasonal and not available in the summer months. At other times an alternative (inferior) potato was used. One grower, who, at the time, supplied a fifth of McDonald’s potatoes, suggested that he could put Idaho Russets into cold storage for supplying during the summer period. Unfortunately, all the stored potatoes rotted. Not to be beaten, he offered another suggestion. Why doesn’t McDonald’s consider switching to frozen potatoes? But the company was initially cautious about meddling with such an important menu item. However, there were other advantages in using frozen potatoes. Supplying fresh potatoes in perfect condition to McDonald’s rapidly expanding chain was increasingly dif- ficult. Frozen potatoes could actually increase the quality of the company ’s fries if a method of satisfactorily cooking them could be found. Once again McDonald’s developers came to the rescue. They developed a method of air- drying the raw fries, quick frying, and then freezing them. The sup- plier, who was a relatively small and local suppler when he first suggested storing Idaho Russets, grew his business to supply around half of McDonald’s US business.
Throughout its rapid expansion McDonald’s focused on four areas: improving the product; establishing strong supplier relationships; creating (largely customized) equip- ment; and developing franchise holders. But also it was its strict control of the menu that provided a platform of stabil- ity. Although its competitors offered a relatively wide vari- ety of menu items, McDonald’s limited its to 10 items. As one of McDonald’s senior managers at the time stressed, ‘It wasn’t because we were smarter. The fact that we were selling just ten items [and] had a facility that was small, and used a limited number of suppliers created an ideal environment.’ Capacity growth (through additional stores) was also man- aged carefully. Well-utilized stores were important to fran- chise holders, so franchise opportunities were located only where they would not seriously undercut existing stores.
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of tartar sauce, a fish fillet, and cheese on the bottom bun. But Kroc wanted to push his own meatless sandwich, called the hula burge – a cold bun with a piece of pineap- ple and cheese. Groen and Kroc competed on a Lenten Friday to see whose sandwich would sell more. Kroc’s hula burger failed, selling only six sandwiches all day while Groen sold 350 Filet-o-Fish. Similarly, the Egg McMuffin was introduced by franchisee Herb Peterson, who wanted to attract customers into his McDonald’s stores all through the day, not just at lunch and dinner. He came up with the idea for the signature McDonald’s breakfast item because he was reputedly ‘very partial to eggs Benedict and wanted to create something similar’.
Other innovations came from the company itself. When poultry became popular, Fred Turner, then the Chairman of McDonald’s, had an idea for a new meal: a chicken finger-food without bones, about the size of a thumb. After six months of research, the food technicians and scientists managed to reconstitute shreds of white chicken meat into small portions that could be breaded, fried, frozen and then reheated. Test marketing of the new product was pos- itive, and in 1983 they were launched under the name of Chicken McNuggets. These were so successful that within a month McDonald’s became the second largest purchaser of chicken in the USA. Some innovations came as a reac- tion to market conditions. Criticized by nutritionists who worried about calorie-rich burgers and shareholders who were alarmed by flattening sales, McDonald’s launched its biggest menu revolution in 30 years in 2003 when it entered the prepared salad market. McDonald’s offered a choice of dressings for its grilled chicken salad with Caesar dressing (and croutons) or the lighter option of a drizzle of balsamic dressing. Likewise, moves towards coffee sales were prompted by the ever-growing trend set by big coffee shops like Starbucks.
Problematic periods Food, like almost everything else, is subject to swings in fashion. Its is not surprising then that there have been periods when McDonald’s has had to adapt. The period from the early 1990s to the mid-2000s was difficult for parts of the McDonald’s Empire. Growth in some parts of the world stalled. Partly this was due to changes in food fashion, nutritional concerns and demographic changes. Partly it was because competitors were learning either to emulate McDonald’s operating system, or to focus on one aspect of the traditional ‘quick service’ offering, such as speed of service, range of menu items, (perceived) quality of food, or price. Burger King promoted itself on its ‘flame- grilled’ quality. Wendy ’s offered a fuller service level. Taco Bell undercut McDonald’s prices with its ‘value-pricing ’ promotions. Drive-through specialists speeded up service times. Also, ‘fast food’ was developing a poor reputation in some quarters, and as its iconic brand, McDonald’s was taking much of the heat. Similarly the company became a lightning rod for other questionable aspects of modern
Securing supply McDonald’s says that it has been the strength of the align- ment between the company, its franchisees and its suppli- ers (collectively referred to as the System) that has been the explanation for its success. But during the company ’s early years suppliers proved problematic. McDonald’s approached the major food suppliers, such as Kraft and Heinz, but without much success. Large and established suppliers were reluctant to conform to McDonald’s requirements, preferring to focus on retail sales. It was the relatively small companies who were willing to risk supplying what seemed then to be a risky venture. And as McDonald’s grew, so did its suppliers, who also valued the company ’s less adversarial relationship. One supplier is quoted as saying, ‘Other chains would walk away from you for half a cent. McDonald’s was more concerned with getting quality. McDonald’s always treated me with respect even when they became much bigger and didn’t have to.’ Furthermore, suppliers were always seen as a source if innovation. For example, one of McDonald’s meat sup- pliers, Keystone Foods, developed a novel quick- freezing process that captured the fresh taste and texture of beef patties. This meant that every patty could retain its con- sistent quality until it hit the grill. Keystone shared its technology with other McDonald’s meat suppliers for McDonald’s, and today the process is an industry standard. Yet, supplier relationships were also rigorously controlled. McDonald’s routinely analysed its suppliers’ products.
Fostering franchisees McDonald’s revenues consisted of sales by company- operated restaurants and fees from restaurants operated by franchisees. McDonald’s views itself primarily as a fran- chisor and believe franchising is ‘important to delivering great, locally-relevant customer experiences and driving profitability’. However, it also believes that directly operat- ing restaurants is essential to providing the company with real operations experience. Of the 36,000 restaurants in 117 countries, approximately 80 per cent were operated by franchisees. But where some restaurant chains concen- trated on recruiting franchisees that were then left to them- selves, McDonald’s expected its franchisees to contribute their experiences for the benefit of all. Ray Kroc’s original concept was that franchisees would make money before the company did, so he made sure that the revenues that went to McDonald’s came from the success of the restau- rants themselves rather from initial franchise fees.
Initiating innovation Ideas for new menu items have often come from fran- chisees. For example, Lou Groen, a Cincinnati franchise holder, had noticed that in Lent (a 40-day period when some Christians give up eating red meat on Fridays and instead eat only fish or no meat at all) some customers avoided the traditional hamburger. He went to Ray Kroc with his idea for a ‘Filet-o-Fish’, a steamed bun with a shot
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1 Explain how the four perspectives of operations strategy would apply to SSTL (see the ‘Operations in action’ case at the start of this chapter).
2 Compare the operations strategies of a low-cost airline, such as Ryanair, and a full-service airline such as British Airways or KLM.
3 What do you think are the qualifying and order-winning factors for (a) a top of the range Ferrari, and (b) a Renault Clio?
4 What do you think are the qualifying or order-winning factors for Pret A Manger described in Chapter 1 ?
5 Search the Internet site of Intel, the best-known microchip manufacturer, and identify what appear to be its main structural and infrastructural decisions in its operations strategy.
6 (Advanced) A gliding club has a current membership of over 100 pilots, many of whom have their own gliders. In addition the club has a fleet of six gliders available to its members. The club also offers trial flights to members of the public – ‘casual flyers’ who can book flights in advance or just turn up and fly on a first-come, first-served basis. The club sells trial flight gift vouchers that are popular as birthday and Christmas presents. If the conditions are right the customer may get a longer flight, although at busy times the instructors feel under pressure to return to the ground to give another lesson. If the weather is poor the instructors still do their best to get people airborne, but they are restricted to a short two-minute flight. Club members are expected to stay all day to help each other and any casual flyers get airborne
PROBLEMS AND APPLICATIONS
McDonald’s Chief Executive Officer, Steve Easterbrook, when he was head of the company ’s UK operation, where he redesigned the outlets to make them more modern, introduced coffee and cappuccinos, worked with farmers to raise standards and increased transparency about its supply chain. At the same time he participated fully and forcefully with the company ’s critics in the debate over fast food health concerns. But some analysts believe that the ‘burger and fries’ market is in terminal decline, and the McDonalds’s brand is so closely associated with that mar- ket that further growth will be difficult.
QUESTIONS 1 How has competition to McDonald’s changed over its
existence?
2 What are the main operations performance objectives for McDonald’s?
3 What are the most important structural and infrastructural decisions in McDonald’s operations strategy, and how do they influence its main performance objectives?
life that it was held to promote, from cultural imperialism, low-skilled jobs (called ‘McJobs’ by some critics), abuse of animals and the use of hormone-enhanced beef, to an attack on traditional (French) values (in France). A French farmer called Jose Bové (who was briefly imprisoned) got other farmers to drive their tractors through, and wreck, a half-built McDonald’s.
Similarly, in 2015 McDonald’s closed more stores in its US home market than it opened – for the first time in its 60-year history. Partly this was a result of the increase in so-called ‘fast casual’ dining, a trend that combined the convenience of traditional McDonald’s-style service with food that was seen as more healthy, even if it was more expensive. Smaller rivals, such as Chipotle and Shake Shack, had started to take domestic market share.
Surviving strategies Over recent years the company ’s strategy has been to become ‘ better, not just bigger ’, focusing on ‘ restaurant execution ’, with the goal of ‘ improving the overall experi- ence for our customers ’. In particular it has, according to some analysts, ‘gone back to basics’, a strategy used by
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while they wait their turn to fly. Casual flyers might have to stand and wait for some time until a club member has time to find out what they want. Even when a flight has been pre-booked casual flyers may then be kept waiting, on the exposed and often windy airfield, for up to two hours before their flight, depending on how many club members are present. Income from the casual flyers is small compared with membership income, but the club views casual flying as a ‘loss leader’ to generate club memberships. There is also some pressure from members to end trial flights because they reduce the number of flights members can have in a day. Some members have complained that they sometimes spend most of their day working to get casual flyers into the air and miss out on flying themselves. (a) Evaluate the service to club members and casual flyers by completing a table similar to
Table 3.1. (b) Chart the five performance objectives to show the differing expectations of club mem-
bers and casual flyers and compare these with the actual service delivered. (c) What advice would you give to the club?
SELECTED FURTHER READING
Boyer, K.K., Swink, M. and Rosenzweig, E.D. (2006) Operations strategy research in the POMS journal, Production and Operations Management, vol. 14, issue 4, 442–449.
A survey of recent research in the area.
Braithwaite, A. and Christopher, M. (2015) Business Operations Models: Becoming a Disruptive Competitor, Kogan Page, London.
Aimed at practitioners, but authoritative and interesting.
Hayes, R.H., Pisano, G.P., Upton, D.M. and Wheelwright, S.C. (2005) Pursuing the Competitive Edge, Wiley, Hoboken, NJ.
The gospel according to the Harvard school of operations strategy. Articulate, interesting and informative.
Hill, A . and Hill, T. (2009) Manufacturing Operations Strategy: Texts and Cases, Palgrave Macmillan, Basingstoke.
Biased towards manufacturing, but well structured and readable.
Slack, N. and Lewis, M. (2015) Operations Strategy, 4th edn, Pearson, Harlow.
What can we say – just brilliant, it will change your life!
108 PART ONE DIRECTING THE OPERATION
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IntrODUCtIOn new product and service innovation is concerned with putting new ideas into practice by embedding them in services and products. innovation is the act of introducing new ideas, design is about making those ideas practical. this is why the activity of product and service innovation and the activity of design are so closely linked. Both are important because products and services are often the first thing that customers see of a company. so they should have an impact. and although operations managers may not always have full responsibility for service and product innovation, they always have some kind of responsibility, if only to provide the information and advice upon which successful product or service development depends. But increasingly operations mangers are expected to take a greater and more active part in product and service innovation. unless a service, however well conceived, can be implemented, and unless a product, however well designed, can be produced to a high standard, they can never bring their full benefits. Figure 4.1 shows where this chapter fits into the overall operations model.
product and service innovation 4
Direct
Operations performance
The structure
and scope of operations
Operations
