Product Design and Process Selection
rahul0104
OperationExcellenceNigelandSlack.pdf
Nigel Slack Alistair Brandon-Jones Robert Johnston
Seventh Edition
OpeRAtiONS MANAgeMeNt
Seventh Edition
OpeRAtiONS MANAgeMeNt Nigel Slack Alistair Brandon-Jones Robert Johnston
www.pearson-books.com
Seventh EditionO
peRA tiO
N S M
A N
A g
eM eN
t Slack Brandon-Jones Johnston
Operations management is important, exciting, challenging … and everywhere you look!
• Important, because it enables organizations to provide services and products that we all need
• Exciting, because it is central to constant changes in customer preference, networks of supply and demand, and developments in technology
• Challenging, because solutions must be must be financially sound, resource-efficient, as well as environmentally and socially responsible
• And everywhere, because in our daily lives, whether at work or at home, we all experience and manage processes and operations.
Operations Management focuses on the sustainable and socially responsible imperatives of operations management, using over 120 cases and illustrations of real-life operations around the world, including Apple, Médecins Sans Frontières, Amazon, Ecover, Dyson, Disneyland Paris, Google, The North Face, and many more.
use with
Front cover image: © Lewis Mulatero/Getty Images
Join over 10 million students benefiting from pearson MyLabs.
This title can be supported by MyOMLab, an online homework and tutorial system designed to test and build your understanding. MyOMLab provides a personalized approach, with instant feedback and numerous additional resources to support your learning.
A student access code card may have been included with this textbook at a reduced cost. If you do not have an access code, you can buy access to MyOMLab and the eText – an online version of the book – online at www.myomlab.com.
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Welcome to OPERATIONS MANAGEMENT
Operations Management – it’s important, it’s exciting, it’s challenging, and everywhere you look!
Important, because it’s concerned with creating all of the products and services upon which we depend. Exciting, because it’s at the centre of so many of the changes affecting the world of business. Challenging, because the solutions that we fi nd need to work globally and responsibly within society and the environment. And everywhere, because every service and product that you use – the cereal you eat at breakfast, the chair you sit on, and the radio station you listen to while you eat – is the result of an operation or process.
Our aim in writing Operations Management is to give you a comprehensive understanding of the issues and techniques of operations management, and to help you get a great fi nal result in your course. Here’s how you might make the most of the text:
● Get ahead with the latest developments – from the up-to-the-minute Operations in practice features in every chapter to the focus on corporate social responsibility in the fi nal chapter – these put you at the cutting edge .
● Use the Worked examples and Problems and applications to improve your use of key quantitative and qualitative techniques, and work your way to better grades in your assignments and exams .
● Follow up on the recommended readings at the end of each chapter. They’re specially selected to enhance your learning and give you an edge in your course work.
And in particular, look out for the references to MyOMLab in the text, and log on to www.myomlab.com * where you can
● check and reinforce your understanding of key concepts using self-assessment questions, video clips and more;
● practise your problem-solving with feedback, guided solutions and an almost limitless supply of questions!
We want Operations Management to give you what you need: a comprehensive view of the subject, an ambition to put that into practice, and – of course – success in your studies. So, read on and good luck!
Nigel Slack Alistair Brandon-Jones
Robert Johnston
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OPERATIONS MANAGEMENT Seventh 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 Fax: +44 (0)1279 431059 Web: www.pearson.com/uk
First published under the Pitman Publishing imprint 1995 Second edition (Pitman Publishing) 1998 Third edition 2001 Fourth edition 2004 Fifth edition 2007 Sixth edition 2010 Seventh edition 2013
© Nigel Slack, Stuart Chambers, Christine Harland, Alan Harrison, Robert Johnston 1995, 1998 © Nigel Slack, Stuart Chambers, Robert Johnston 2001, 2004, 2007, 2010 © Nigel Slack, Alistair Brandon-Jones, Robert Johnston 2013
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, Saffron House, 6–10 Kirby Street, London EC1N 8TS.
The ePublication is protected by copyright and must not be copied, reproduced, transferred, distributed, leased, licensed or publicly performed or used in any way except as specifically permitted in writing by the publishers, as allowed under the terms and conditions under which it was purchased, or as strictly permitted by applicable copyright law. Any unauthorised distribution or use of this text may be a direct infringement of the author’s and the publishers’ rights and those responsible may be liable in law accordingly.
All trademarks used herein are the property of their respective owners. The use of any trademark in this text does not vest in the author or publisher any trademark ownership rights in such trademarks, nor does the use of such trademarks imply any affiliation with or endorsement of this book by such owners.
Pearson Education is not responsible for the content of third-party internet sites.
ISBN: 978-0-273-77620-8 (print) 978-0-273-77628-4 (PDF) 978-0-273-77621-5 (eText)
British Library Cataloguing-in-Publication Data A catalogue record for the print edition is available from the British Library
Library of Congress Cataloging-in-Publication Data A catalog record for the print edition is available from the Library of Congress
10 9 8 7 6 5 4 3 2 1 17 16 15 14 13
Print edition typeset in 9.25/12 by Charter ITC Std by 75 Print edition printed and bound in Italy by L.E.G.O. S.p.A
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
Making the most of this book and MyOMLab xvi
Preface xx
To the Instructor . . . xxii
To the Student . . . xxiii
Ten steps to getting a better grade in operations management xxiv
About the authors xxv
Acknowledgements xxvi
Part One INTRODUCTION 3
1 Operations management 4
2 Operations performance 36
3 Operations strategy 68
Part Two DESIGN 95
4 Process design 96
5 Innovation and design in services and products 125
6 Supply network design 152 Supplement to Chapter 6 – Forecasting 183
7 Layout and flow 191
8 Process technology 223
9 People, jobs and organization 251 Supplement to Chapter 9 – Work study 279
Part Three DELIVER – PLANNING AND CONTROLLING OPERATIONS 287
10 The nature of planning and control 288
11 Capacity management 322 Supplement to Chapter 11 – Analytical
queuing models 361
12 Inventory management 368
13 Supply chain management 404
14 Enterprise resource planning (ERP) 439 Supplement to Chapter 14 – Materials
requirements planning (MRP) 456
15 Lean synchronization 464
16 Project management 495
17 Quality management 534 Supplement to Chapter 17 – Statistical
process control (SPC) 562
Part Four IMPROVEMENT 577
18 Operations improvement 578
19 Risk management 610
20 Organizing for improvement 640
Part Five CORPORATE SOCIAL RESPONSIBILITY 671
21 Operations and corporate social responsibility (CSR) 672
Notes on chapters 693 Glossary 700 Index 713
Brief contents
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Why is flexibility important? 52 Why is cost important? 55 Trade-offs between performance objectives 60
Summary answers to key questions 62 Case study: Operations objectives at the
Penang Mutiara 64 Problems and applications 65 Selected further reading 66 Useful websites 67
Chapter 3 Operations strategy 68 Introduction 68
What is strategy and what is operations strategy? 70 The ‘top-down’ and ‘bottom-up’ perspectives 73 The market requirements and operations resources
perspectives 77 How can an operations strategy be put together? 86
Summary answers to key questions 89 Case study: Long Ridge Gliding Club 91 Problems and applications 92 Selected further reading 93 Useful websites 93
Contents
Guide to ‘operations in practice’, examples, short cases and case studies xii
Making the most of this book and MyOMLab xvi
Preface xx
To the Instructor . . . xxii
To the Student . . . xxiii
Ten steps to getting a better grade in operations management xxiv
About the authors xxv
Acknowledgements xxvi
Part One
Part Two
INTRODUCTION 3
Chapter 1 Operations management 4 Introduction 4
What is operations management? 6 Operations management is important in all
types of organization 8 The input–transformation–output process 13 The process hierarchy 18 Operations processes have different characteristics 23 What do operations managers do? 26
Summary answers to key questions 30 Case study: Design house partnerships at Concept
Design Services 31 Problems and applications 34 Selected further reading 34 Useful websites 35
Chapter 2 Operations performance 36 Introduction 36
Operations performance is vital for any organization 38
Why is quality important? 46 Why is speed important? 47 Why is dependability important? 49
DESIGN 95
Chapter 4 Process design 96 Introduction 96
What is process design? 97 What objectives should process design have? 98 Process types – the volume–variety effect
on process design 101 Detailed process design 109
Summary answers to key questions 120 Case study: The Action Response Applications
Processing Unit (ARAPU) 121 Problems and applications 123 Selected further reading 124 Useful websites 124
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Chapter 5 Innovation and design in services and products 125 Introduction 125
How does innovation impact on design? 127 Why is good design so important? 130 The stages of design – from concept
to specification 131 What are the benefits of interactive design? 141
Summary answers to key questions 147 Case study: Chatsworth – the adventure
playground decision 148 Problems and applications 150 Selected further reading 150 Useful websites 151
Chapter 6 Supply network design 152 Introduction 152
The supply network perspective 153 Configuring the supply network 155 Where should an operation be located? 160 Long-term capacity management 168 Break-even analysis of capacity expansion 174
Summary answers to key questions 175 Case study: Disneyland Resort Paris (abridged) 176 Problems and applications 180 Selected further reading 182 Useful websites 182
Supplement to Chapter 6 Forecasting 183 Introduction 183
Forecasting – knowing the options 183 In essence forecasting is simple 184 Approaches to forecasting 185 Selected further reading 190
Chapter 7 Layout and flow 191 Introduction 191
What is layout? 193 The basic layout types 193 What type of layout should an operation choose? 200 How should each basic layout type be
designed in detail? 204
Summary answers to key questions 217 Case study: North West Constructive Bank (abridged) 218 Problems and applications 220 Selected further reading 222 Useful websites 222
Chapter 8 Process technology 223 Introduction 223
Operations management and process technology 225
What do operations managers need to know about process technology? 225
How are process technologies evaluated? 237 How are process technologies implemented? 242
Summary answers to key questions 246 Case study: Rochem Ltd 247 Problems and applications 249 Selected further reading 249 Useful websites 250
Chapter 9 People, jobs and organization 251 Introduction 251
People in operations 253 Human resource strategy 253 Organization design 256 Job design 259 Allocate work time 271
Summary answers to key questions 273 Case study: Service Adhesives try again 274 Problems and applications 276 Selected further reading 277 Useful websites 277
Supplement to Chapter 9 Work study 279 Introduction 279
Method study in job design 279 Work measurement in job design 282
Part Three
DELIVER – PLANNING AND CONTROLLING OPERATIONS 287
Chapter 10 The nature of planning and control 288 Introduction 288
What is planning and control? 290 The effect of supply and demand on
planning and control 293 Planning and control activities 299 Controlling operations is not always routine 314
Summary answers to key questions 316
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Case study: subText Studios, Singapore (abridged) 317
Problems and applications 320 Selected further reading 321 Useful websites 321
Chapter 11 Capacity management 322 Introduction 322
What is capacity management? 324 How is capacity measured? 326 Coping with demand fluctuation 334 How can operations plan their capacity level? 343 How is capacity planning a queuing problem? 348
Summary answers to key questions 353 Case study: Blackberry Hill Farm 354 Problems and applications 358 Selected further reading 360 Useful websites 360
Supplement to Chapter 11 Analytical Queuing Models 361 Introduction 361
Notation 361 Variability 361 Incorporating Little’s law 363 Types of queuing system 363
Chapter 12 Inventory management 368 Introduction 368
What is inventory? 370 Why should there be any inventory? 372 How much to order – the volume decision 376 When to place an order – the timing decision 388 How can inventory be controlled? 392
Summary answers to key questions 398 Case study: supplies4medics.com 400 Problems and applications 401 Selected further reading 402 Useful websites 402
Chapter 13 Supply chain management 404 Introduction 404
What is supply chain management? 406 The activities of supply chain management 409 Single- and multi-sourcing 413
Relationships between operations in a supply chain 419
How do supply chains behave in practice? 424 How can supply chains be improved? 426
Summary answers to key questions 433 Case study: Supplying fast fashion 434 Problems and applications 437 Selected further reading 438 Useful websites 438
Chapter 14 Enterprise resource planning (ERP) 439 Introduction 439
What is ERP? 440 How did ERP develop? 441 Implementation of ERP systems 449
Summary answers to key questions 451 Case study: Psycho Sports Ltd 452 Problems and applications 454 Selected further reading 455 Useful websites 455
Supplement to Chapter 14 Materials requirements planning (MRP) 456 Introduction 456
Master production schedule 456 The bill of materials (BOM) 458 Inventory records 459 The MRP netting process 459 MRP capacity checks 461
Summary 463
Chapter 15 Lean synchronization 464 Introduction 464
What is lean synchronization? 465 How does lean synchronization
eliminate waste? 471 Lean synchronization applied throughout
the supply network 484 Lean synchronization compared with
other approaches 486
Summary answers to key questions 489 Case study: The National Tax Service (NTS) 490 Problems and applications 492 Selected further reading 493 Useful websites 494
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Chapter 16 Project management 495 Introduction 495
What is project management? 497 How are projects planned and controlled? 500 What is network planning? 514
Summary answers to key questions 526 Case study: United Photonics Malaysia Sdn Bhd 527 Problems and applications 531 Selected further reading 532 Useful websites 533
Chapter 17 Quality management 534 Introduction 534
What is quality and why is it so important? 536 How can quality problems be diagnosed? 540 Conformance to specification 541 Achieving conformance to specification 541 Total quality management (TQM) 548
Summary answers to key questions 556 Case study: Turnround at the Preston plant 557 Problems and applications 559 Selected further reading 560 Useful websites 560
Supplement to Chapter 17 Statistical process control (SPC) 562 Introduction 562
Control charts 562 Variation in process quality 563 Control charts for attributes 568 Control chart for variables 569 Process control, learning and knowledge 573
Summary 574 Selected further reading 574 Useful websites 574
The key elements of operations improvement 584
The broad approaches to managing improvement 588
What techniques can be used for improvement? 598
Summary answers to key questions 603 Case study: GCR Insurance 605 Problems and applications 608 Selected further reading 609 Useful websites 609
Chapter 19 Risk management 610 Introduction 610
What is risk management? 612 Assessing the potential causes of and
risks from failure 613 Preventing failure 624 How can operations mitigate the effects
of failure? 631 How can operations recover from the
effects of failure? 632
Summary answers to key questions 635 Case study: Slagelse Industrial
Services (SIS) 636 Problems and applications 638 Selected further reading 638 Useful websites 639
Chapter 20 Organizing for improvement 640 Introduction 640
Why the improvement effort needs organizing 642
Linking improvements to strategy 643 What information is needed
for improvement? 645 What should be improvement priorities? 652 How can organizational culture affect
improvement? 657 Key implementation issues 659
Summary answers to key questions 664 Case study: Re-inventing Singapore’s
libraries 666 Problems and applications 667 Selected further reading 668 Useful websites 668
Part Four
IMPROVEMENT 577
Chapter 18 Operations improvement 578 Introduction 578
Why is improvement so important in operations management? 580
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Part Five
CORPORATE SOCIAL RESPONSIBILITY 671
Chapter 21 Operations and corporate social responsibility (CSR) 672 Introduction 672
What is corporate social responsibility? 674 The wider view of corporate social responsibility 679
How can operations managers analyse CSR issues? 686
Summary answers to key questions 689 Case study: CSR as it is presented 690 Problems and applications 691 Selected further reading 691 Useful websites 691
Notes on chapters 693
Glossary 700
Index 713
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Guide to ‘operations in practice’, examples, short cases and case studies
Chapter Location Company/example Region Sector/activity Company size
Chapter 1 Operations management
p. 5 IKEA Global Retail Large p. 11 Torchbox UK Web design Small p. 12 MSF Global Charity Large p. 15 First Direct UK Banking Large p. 18 Pret A Manger Europe/USA Retail Medium p. 24 Formule 1 Europe Hospitality Large p. 25 Anantara Bangkok Riverside
Resort & Spa Thailand Hospitality Medium
p. 28 To be a great operations manager you need to . . .
General General N/A
p. 31 Concept Design Services UK Design/manufactur- ing/distribution
Medium
Chapter 2 Operations performance
p. 37 A tale of two terminals UK Airport Medium p. 44 Patagonia, a B Corp Global Garment
manufacturing Large
p. 49 Organically good quality UK Agricultural Small p. 50 When speed means life or
death General Health care Medium
p. 51 How UPS maintains its dependability
Global Distribution Large
p. 53 566 quadrillion individual muesli mixes
German Web retail Small
p. 56 Everyday low prices at Aldi Europe Retail Large p. 57 Can cost cutting go too far? China Manufacturing Large p. 64 The Penang Mutiara Malaysia Hospitality Medium
Chapter 3 Operations strategy
p. 69 Flextronix and Ryanair Europe MSC/airline Large p. 76 Apple’s retail operations
strategy Global Retail Large
p. 83 Amazon, so what exactly is your core competence?
Global Web retail Large
p. 85 Apple’s supply operations strategy
Global Manufacturing Large
p. 89 Sometimes any plan is better than no plan
European Military Large
p. 91 Long Ridge Gliding Club UK Sport Small
Chapter 4 Process design
p. 97 Fast-food drive-throughs USA Quick service restaurant Large p. 101 Ecover’s ethical operation
design Belgium/ France
Manufacturing Large
p. 109 Space4 housing processes UK Construction Medium p. 119 Heathrow delays caused by
capacity utilization UK Airport Large
p. 121 The Action Response Appli- cations Processing Unit
UK Charity Small
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Chapter Location Company/example Region Sector/activity Company size
Chapter 5 Innovation and design in services and products
p. 126 Innovative design from Dyson Global Design/manufacturing Large p. 129 The sad tale of Kodak and its
digital camera Global Manufacturing Large
p. 133 Square watermelons! Global Agriculture/retail Large p. 136 Daniel Hersheson Blow Dry
Bar UK Hairdresser Small
p. 138 Customizing for kids UK Media Small p. 144 The troubled history of the
Airbus A380 Global Aerospace Large
p. 148 Chatsworth UK Tourism Medium
Chapter 6 Supply network design
p. 153 Dell Global Computer manufacturing
Large
p. 159 HTC Taiwan Design/telecoms Large p. 162 Tata Nano India Car manufacturing Large p. 164 Counting clusters Global Various Various p. 170 Economies of scale in heart
surgery and shipping Various Health care/shipping Medium/Large
p. 176 Disneyland Resort Paris France Entertainment Large
Chapter 7 Layout and flow
p. 192 Tesco UK Retail Large p. 195 ‘Factory flow’ helps surgery
productivity UK Health care Medium
p. 199 Apple’s shop-within-a-shop in Harrods
UK Retail Large
p. 201 Cadbury’s UK Entertainment/ manufacturing
Large
p. 204 The transparent factory Germany Manufacturing Large p. 218 North West Constructive
Bank UK Financial services Medium
Chapter 8 Process technology
p. 224 I, Robot All Various Various p. 228 Customers are not always
human Netherlands Agriculture Medium
p. 229 QB House Asia Hairdressing Medium p. 244 Who’s in the cockpit? All Airlines Large p. 247 Rochem Ltd UK Food processing Medium
Chapter 9 People, jobs and organization
p. 252 W.L. Gore Global Manufacturing Large p. 255 Google Global Internet Large p. 266 McDonald’s UK Restaurants Large p. 268 Lloyds TSB UK Banking Large p. 274 Service Adhesives Europe Manufacturing Large
Chapter 10 The nature of planning and control
p. 289 BMW dealership UK Service and repair Medium p. 293 Air France Global Airline Large p. 297 Taxi App replaces dispatch-
ing office Germany Software development Medium
p. 302 Can airline passengers be sequenced?
Global Airlines Large
p. 304 The hospital triage system All Health care Large p. 309 Chicken salad sandwich –
part one All Food processing Large
p. 317 subText Studios Singapore CGI Small
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Chapter Location Company/example Region Sector/activity Company size
Chapter 11 Capacity management
p. 323 Amazon’s ‘Cyber Monday’ UK Web retailing Large p. 328 Raining on their parade Global Various Various p. 334 The London Eye UK Tourism Medium p. 335 Panettone Italy Manufacturing Medium p. 339 Annualized hours help
Lowaters to retain its core team
UK Horticulture Small
p. 342 Getting the message All Design Large p. 354 Blackberry Hill Farm UK Tourism Small
Chapter 12 Inventory planning and control
p. 369 UK’s National Blood Service UK Health care Large p. 378 Mountains of grit UK Local government Medium p. 386 Howard Smith Paper Group UK Distribution service Large p. 400 supplies4medics.com Belgium Distribution Medium
Chapter 13 Supply chain management
p. 405 Ocado UK Web retail Large p. 412 The North Face Global Manufacturing Large p. 417 Levi Strauss Global Garment design/
retailing Large
p. 418 TDG Europe Logistics services Large p. 430 Seven-Eleven Japan Japan Retail Large p. 432 Tsunami disrupts Japan’s
global supply chains Japan/ global
Various Large
p. 434 Supplying fast fashion: H&M, Benetton and Zara
Global Design/manufactur- ing/distribution/retail
Large
Chapter 14 Enterprise resource planning
p. 440 Butcher’s Pet Care UK Pet food Medium p. 443 SAP and its partners Global Various Various p. 444 Chicken salad sandwich –
part two All Food processing Large
p. 447 SAP at Rolls-Royce Global Aerospace Large p. 449 Waste management USA Waste disposal Large p. 452 Psycho Sports All Manufacturing Small
Chapter 15 Lean synchro- nization
p. 465 Toyota Global Auto manufacturing Large p. 477 Bolton Hospitals NHS Trust UK Health care Large p. 479 Torchbox UK Web design Small p. 490 The National Tax Service
(NTS) Not specified
Government Large
Chapter 16 Project management
p. 496 The Millau bridge France Construction Large p. 503 The National Trust UK Heritage Various p. 513 Imagineering projects at
Disney Global Leisure Large
p. 527 United Photonics Malaysia Sdb Bgd
Malaysia Research and development
Medium
Chapter 17 Quality management
p. 535 Four Seasons Hotel Global/UK Hospitality Large p. 538 Tea and Sympathy USA Hospitality Small p. 539 Magic Moments Not speci-
fied Photography services Small
p. 544 The Swiss Army Knife Switzerland Mfg Large p. 546 Surgical statistics USA Healthcare Medium p. 547 What a giveaway Various Food processing Various p. 551 Google Global Internet Large p. 553 Deliberate defectives Canada/
Japan Computer hardware Large
p. 557 Preston plant Canada Paper processing Medium
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Chapter Location Company/example Region Sector/activity Company size
Chapter 18 Operations improvement
p. 579 TNT Global Logistics Large p. 583 The Checklist Manifesto Global Health care Various p. 589 Heineken International Netherlands Brewery Large p. 595 Six Sigma at Xchanging UK Financial services Medium p. 605 GCR Insurance Global Insurance Large
Chapter 19 Risk management
p. 611 Cadbury UK Food Large p. 614 Risk and human error All Airlines Large p. 630 Otis Maintenance
Management System Global Facilities services Large
p. 636 Slagelse Industrial Services (SIS)
Denmark Manufacturing Large
Chapter 20 Organizing for improvement
p. 641 Sonae Corporation Portugal Retail Large p. 649 Taxing quality Denmark Government service Large p. 660 Learning from Formula 1 Global Distribution Large p. 662 Work-Out at GE Global Various Large p. 666 Re-inventing Singapore’s
Libraries Singapore Government services Large
Chapter 21 Corporate social responsibility
p. 673 Marmite UK Food processing Large p. 676 Holcim Global Quarrying Large p. 679 Hewlett-Packard USA Information systems Large p. 684 The Gap Global Retail Large p. 690 CSR as it is presented:
HSBC, Orange, John Lewis Partnership and Starbucks
Various Various Large
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Making the most of this book and MyOMLab
Check your understanding Each chapter opens with a set of Key questions to identify major topics. Summary answers conclude the chapter. You can check your understanding of each chapter by taking the Sample tests of self-assessment questions on MyOMLab at www.myomlab.com .
Figure 3.1 ygetarts snoitarepo senimaxe retpahc sihT
3 ygetarts snoitarepO INTRODUCTION
ro tnerruc sti fo tcepsa yreve liated ni nalp nac noitazinagro oN future actions, but all organizations need some strategic direction and so can benefit from some idea of 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. Here we consider four perspectives, each of which goes partway to
1.3 erugiF .ygetarts snoitarepo epahs taht secrof eht gnitartsulli shows the position of the ideas described in this chapter in the general model of operations management.
Operations performance
Operations strategy
Operations management
Topic covered in this chapter
Operations management
Direct
Design Develop
Deliver
❯ si tahw dna ygetarts si tahW ?ygetarts snoitarepo
❯ neewteb ecnereffid eht si tahW a ‘top-down’ and a ‘bottom-up’
?ygetarts snoitarepo fo weiv
❯ neewteb ecnereffid eht si tahW a ‘market requirements’ and an ‘operations resources’ view of
?ygetarts snoitarepo
❯ ygetarts snoitarepo na nac woH ?rehtegot tup eb
Key questions
Check and improve your understanding of this chapter using self-assessment questions and a personalized study plan, a video case study, and an eText – all at www.myomlab.com .
● tcudorp fo seitivitca yratnemelpmoc eht fi lufsseccus eb ot ylekil erom si ytivitca ngised sihT .detanidrooc era ngised ssecorp dna ngised ecivres ro
❯ ?evah ngised ssecorp dluohs sevitcejbo tahW
● gniveihca hguorht sremotsuc fo sdeen eht teem ot si ngised ssecorp fo esoprup llarevo ehT .tsoc dna ytilibixe fl ,ytilibadneped ,deeps ,ytilauq fo slevel etairporppa
● -imaxe edulcni esehT .seussi latnemnorivne fo tnuocca ekat osla tsum ytivitca ngised ehT nation of the source and suitability of materials, the sources and quantities of energy consumed, the amount and type of waste material, the life of the product itself, and the
.tcudorp eht fo etats efil-fo-dne
❯ ?ngised ssecorp tceffa yteirav dna emulov od woH
● ti tahw fo yteirav dna emulov eht yb decneu flni ylgnorts si ssecorp yna fo erutan llarevo ehT .ssecorp ot sah
● ssecorp llarevo tceffa yteirav dna emulov woh sezirammus sepyt ssecorp fo tpecnoc ehT .ngised
● gnisaerced dna emulov gnisaercni fo redro ni( era sepyt ssecorp eseht ,gnirutcafunam nI variety) project, jobbing, batch, mass and continuous processes. In service operations, although there is less consensus on the terminology, the terms often used (again in order of increasing volume and decreasing variety) are professional services, service shops and mass
.secivres
❯ ?liated ni dengised sessecorp era woH
● netfO .seitivitca laudividni rieht otni nwod meht gnikaerb yb yllaitini dengised era sessecorP common symbols are used to represent types of activity. The sequence of activities in a process is then indicated by the sequence of symbols representing activities. This is called ‘process mapping’. Alternative process designs can be compared using process maps and
.sevitcejbo ecnamrofrep snoitarepo rieht fo smret ni deredisnoc sessecorp devorpmi
● era emit elcyc dna ,ssergorp-ni-krow ,emit tuphguorht fo smret ni ecnamrofrep ssecorP related by a formula known as Little’s law: throughput time equals work-in-progress multi-
.emit elcyc yb deilp
● -noitaler eht ylralucitrap ,sessecorp fo ecnamrofrep eht no tceffe tnac fiingis a sah ytilibairaV .noitazilitu dna emit gnitiaw neewteb pihs
120 PART TWO DESIGN
SUMMARY ANSWERS TO KEY QUESTIONS
a dna snoitseuq tnemssessa-fles gnisu retpahc siht fo gnidnatsrednu ruoy evorpmi dna kcehC ta lla – txeTe na dna ,yduts esac oediv a ,nalp yduts dezilanosrep www.myomlab.com .
❯ ?ngised ssecorp si tahW
● dna stcudorp htob fo esoprup dna mrof lacisyhp eht sepahs hcihw ytivitca eht si ngiseD .meht ecudorp taht sessecorp eht dna secivres
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Practice makes perfect Worked examples show how quantitative and qualitative techniques can be used in operations management. Problems and applications at the end of the chapter allow you to apply these techniques, and you can get more practice as well as guided solutions from the Study plan on MyOMLab at www.myomlab.com .
CHAPTER 20 ORGANIZING FOR IMPROVEMENT 655
Worked example
-leved dna hcraeser tuo seirrac tI .ynapmoc scinortcele na fo yraidisbus a si seirotarobaL LXE opment as well as technical problem-solving work for a wide range of companies, including 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:
● snoitulos lacinhcet sti fo ytilauq ehT .sremotsuc yb ssenetairporppa deviecrep eht – ● The quality of its communications with customers fo ssenlufesu dna ycneuqerf eht –
.noitamrofni ● The quality of post-project documentation hcihw noitatnemucod eht fo ssenlufesu eht –
.troper lanif eht htiw seog ● Delivery speed .troper lanif eht fo yreviled eht dna tseuqer remotsuc neewteb emit eht – ● ytilibadneped yrevileD .etad desimorp eht no reviled ot ytiliba eht – ● Delivery flexibility .etad desiver a no troper eht reviled ot ytiliba eht – ● ytilibixelf noitacificepS .noitagitsevni eht fo erutan eht egnahc ot ytiliba eht – ● Price .remotsuc eht ot egrahc latot eht –
dna 8.02 erugiF ni debircsed elacs 9–1 eht gnisu srotcaf eseht fo hcae ot erocs a dengissa LXE then turned their attention to judging the laboratory’s performance against competitor organi- zations. Although they have benchmarked information for some aspects of performance, they
. 01.02 erugiF ni nwohs era serocs eseht htoB .srehto eht rof setamitse ekam ot evah fo hcae ot nevig dah ti sgnitar ecnamrofrep dna ecnatropmi eht dettolp seirotarobaL LXE tI . 11.02 erugiF ni nwohs si sihT .xirtam ecnamrofrep–ecnatropmi na no srotcaf evititepmoc sti
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 improvement. The matrix also indicates that the company’s documentation could almost be regarded as ‘too good’.
Figure 20.10 ’srotitepmoc tsniaga ecnamrofrep‘ dna ’sremotsuc ot ecnatropmi‘ gnitaR seirotarobaL LXE rof selacs tniop-enin eht no
608 PART FOUR IMPROVEMENT
erom dnif nac uoY .snoitarepo fo sisylana ruoy evorpmi ot pleh lliw snoitacilppa dna smelborp esehT practice problems as well as worked examples and guided solutions on MyOMLab at www.myomlab.com .
1 hcum os dneps ot evah I dluohs‘ thguoht ehs ,’yhW‘ .etummoc yliad reh fo kcis saw eihpoS time in a morning stuck in traffic listening to some babbling halfwit on the radio? We can work flexi-time after all. Perhaps I should leave the apartment at some other time?’ So resolved, Sophie deliberately varied her time of departure from her usual 8.30. Also, being an organ- ized soul, she recorded her time of departure each day and her journey time. Her records are
.1.81 elbaT ni nwohs (a) .tnemtrapa reh evael ot emit tseb eht no ediced eihpoS pleh lliw taht margaid rettacs a warD (b) ot netsil ot gnivah morf devas eb ot tcepxe ehs dluohs keew )yad 5( rep emit hcum woH
?tiwflah gnilbbab a
SNOITACILPPA DNA SMELBORP
Table 18.1 )setunim ni( semit yenruoj s’eihpoS
Day gnivaeL time
yenruoJ time
yaD gnivaeL time
yenruoJ time
yaD gnivaeL time
yenruoJ time
1 51.7 91 6 54.8 04 11 53.8 64
2 51.8 04 7 55.8 32 21 04.8 54
3 03.7 52 8 55.7 13 31 02.8 74
4 02.7 91 9 04.7 22 41 00.8 43
5 04.8 64 01 03.8 94 51 54.7 72
2 stcudorp ytilauq-hgih rof noitatuper sti fo duorp saw ynapmoc retnirp resaL deepsotnirP ehT and services. Because of this it was especially concerned with the problems that it was hav- ing with its customers returning defective toner cartridges. About 2,000 of these were being returned every month. Its European service team suspected that not all the returns were actu- ally the result of a faulty product, which is why the team decided to investigate the problem. Three major problems were identified. First, some users were not as familiar as they should have been with the correct method of loading the cartridge into the printer, or in being able to solve their own minor printing problems. Second, some of the dealers were also unaware of how to sort out minor problems. Third, there was clearly some abuse of Printospeed’s ‘no-questions-asked’ returns policy. Empty toner cartridges were being sent to unauthorized refilling companies who would sell the refilled cartridges at reduced prices. Some cartridges were being refilled up to five times and were understandably wearing out. Furthermore, the toner in the refilled cartridges was often not up to Printospeed’s high quality standards. (a) yna dna ,denoitnem sesuac elbissop eht htob sedulcni taht margaid tceffe–esuac a warD
.gnitagitsevni htrow kniht uoy taht sesuac elbissop rehto (b) ycilop snruter ’deksa-snoitseuq-on‘ eht fo esuba degella eht fo noinipo ruoy si tahW
?deepsotnirP yb detpoda
3 -nevnocni fo eerged emos uoy desuac taht eruliaf ecivres ro tcudorp tsal eht ot kcab knihT ience. Draw a cause–effect diagram that identifies all the main causes of why the failure could have occurred. Try to identify the frequency with which such causes happen. This could be done by talking with the staff of the operation that provided the service. Draw a Pareto dia- gram that indicates the relative frequency of each cause of failure. Suggest ways in which the
.eruliaf fo secnahc eht ecuder dluoc noitarepo
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Analyse operations in action The Operations in practice and Case study features in each chapter illustrate and encourage you to analyse operations management in action. You can see and hear more about how theory is applied in practice in the video clips in the Multimedia library in MyOMLab at www.myomlab.com .
126 PART TWO DESIGN
OPERATIONS IN PRACTICE
a rehtegot tup relgnapS yarruM dellac rotinaj a 7091 nI pillowcase, a fan, an old biscuit tin, and a broom han- dle. It was a great innovation – the world’s first vacuum cleaner – but not one that he ever capitalized on. One year later he had sold his patented idea to William Hoover whose company went on to dominate the vac- uum cleaner market for decades, especially in its United States homeland. Yet between 2002 and 2005 Hoover’s market share dropped from 36 per cent to 13.5 per cent. Why? Because a futuristic-looking and comparatively expensive rival product, the Dyson vacuum cleaner, had jumped from nothing to over 20 per cent of the mar- ket. In fact, the Dyson product dates back to 1978 when James (now Sir James) Dyson noticed how the air filter in the spray-finishing room of a company where he had been working was constantly clogging with power parti- cles ( just like a vacuum cleaner bag clogs with dust). So he designed and built an industrial cyclone tower, which removed the powder particles by exerting centrifugal
‘ ,saw mih gniugirtni noitseuq ehT .secrof Could the same principle work in a domestic vacuum cleaner? ’
evif dna sraey eviF thousand eh retal sepytotorp had a working design, since praised for its ‘uniqueness and functionality’. However, existing vacuum cleaner manufacturers were not as impressed – two rejected the design outright. So Dyson started making his new design himself. Within a few years Dyson cleaners were, in the UK, outselling the rivals who had once rejected them. The aesthetics and functionality of the design help to keep sales growing in spite of a higher retail price. To
‘ ngised doog ,nosyD is about looking at everyday things with new eyes and working out how they can be made bet- ter. It’s about challenging existing technology. ’
eno ygolonhcet eht koot neht sreenigne nosyD ehT stage further and developed core separator technology to capture even more microscopic dirt. Dirt now goes through three stages of separation. Firstly, dirt is drawn into a powerful outer cyclone. Centrifugal forces fling larger debris such as pet hair and dust particles into the clear bin at 500Gs (the maximum G-force the human body can take is 8Gs). Second, a further cyclonic stage, the core separa- tor, removes dust particles as small as 0.5 microns from the airflow; particles so small you could fit 200 of them on this full stop. Finally, a cluster of smaller, even faster cyclones generate centrifugal forces of up to 150,000G – extracting particles as small as mould and bacteria.
eht emac 6002 nI .dewollof snoitavonni rehtO Dyson Airblade TM naht rehtaR .reyrd dnah cirtcele na , using a broad, relatively unfocused hot air jet , the Dyson engineers decided to use a ‘blade’ of cool air that emerges from the dryer at around four hundred miles per hour (643 km/hr). The advantage of this
innovation is that it dries hands quicker (around 10 seconds) and uses less electricity than conventional hand dryers. Then came the Dyson Air Multiplier™. These are fans and fan heaters that work very differ- ently to conventional fans and electric heaters. They don’t have fast-spinning blades that chop the air and cause uncomfortable buffeting. Instead, they use Air Multiplier™ technology to draw in air and amplify it up to 18 times, producing an uninterrupted stream of smooth air. Sir James, who remains chief engineer and sole shareholder in Dyson, is enthusiastic about the Air Multiplier™. ‘ This ]sretaeh cirtcele[ business is at least as large as the vacuum cleaner sector and I hope we will do as well in this as we have done in floor cleaners’, eh said. ‘ One of the benefits of the new device is that it will heat all the air in the room to reduce the effect of hot and cold spots. Sensors measure the temperature of the surrounding air so that once the desired temperature is reached, the system cuts out, making the product much more efficient and useful than comparable heaters. eH ’ said the new heater was part of the company’s effort to turn itself into a ‘ broad-line technology company rehtar ’
‘ .rekam ecnailppa na ylno sa nees gnieb naht I would not limit the company to particular areas of technology or markets. We are developing a range of technologies to improve both industrial and consumer products so that the people using them get a better experience than with the comparable items that currently exist.’
nosyD morf ngised evitavonnI 1
So u
rc e:
D ys
o n
L td
.
CASE STUDY Rochem Ltd
‘ .repmet sih gnisol saw sedohR rD It should be a simple enough decision. There are only two alternatives. You are only being asked to choose a machine! ’
dekool eettimmoC tnemeganaM ehT abashed. Rochem Ltd was one of the largest independent companies supplying the food- processing industry. Its initial success had come with a food preservative used mainly for meat- based products and marketed under the name of ‘Lerentyl’. Other products were subsequently developed in the food colouring and food container coating fields, so that now Lerentyl accounted for only 25 per cent of total company sales, which were now slightly over £10 million.
The decision detaler ysrevortnoc hcus saw ereht hcihw revo melborp ehT
to the replacement of one of the process units used to manufacture Lerentyl. Only two such units were used; both were ‘Chemling’ machines. It was the older of the two Chemling units which was giving trouble. High breakdown figures, with erratic quality levels, meant that output-level requirements were only just being reached. The problem was: should the company replace the ageing Chemling with a new Chemling, or should it buy the only other plant on the market capable of the required process, the ‘AFU’ unit? The Chief Chemist’s staff had drawn up a comparison of the
. 5.8 elbaT ni nwohs ,stinu owt ylwen eht saw melborp eht gniredisnoc ydob ehT
formed Management Committee. The committee consisted
of the four senior managers in the firm: the Chief Chemist and the Marketing Manager, who had been with the firm since its beginning, together with the Production Manager and the Accountant, both of whom had joined the com- pany only six months before.
noitamrofni eht fo noisrev desnednoc a si swollof tahW presented by each manager to the committee, together
.noisiced eht ot sedutitta rieht htiw
The Marketing Manager dehcaer dah evitavreserp fo epyt siht rof tekram tnerruc ehT
a size of some £5 million, of which Rochem Ltd supplied approximately 48 per cent. There had, of late, been signifi- cant changes in the market – in particular, many of the users
Table 8.5 senihcam evitanretla owt eht fo nosirapmoc A
CHAPTER 8 PROCESS TECHNOLOGY 247
GNILMEHC UFA
Capital cost 000,095£ 000,088£
Processing costs htnom/000,51£ :dexiF htnom/000,04£ :dexiF
gk/057£ :elbairaV gk/006£ :elbairaV
Design capacity htnom/gk 501 htnom/gk 041
89 ; 0.7% purity 5.99 ; 0.2% purity
Quality gnitset launaM gnitset citamotuA
Maintenance gnicivres sdeen tub etauqedA doog ylbaborp – nwonk toN
After-sales services doog yreV doog eb ot ylekilnu – nwonk toN
Delivery shtnom eerhT etaidemmI
So u
rc e:
P re
ss A
ss o
ci at
io n
I m
a g
e s
(P A
P h
o to
s)
Making the most of this book and MyOMLab (continued)
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Take a different view Critical commentaries , together with Selected further reading and Useful websites at the end of each chapter, show a diversity of viewpoint and encourage you to think critically about operations management. You can link to the Useful websites in the Multimedia library of MyOMLab at www.myomlab.com .
332 PART THREE DELIVER – PLANNING AND CONTROLLING OPERATIONS
-liava ni noitcuder eht fo emoS .retpahc suoiverp eht ni 4.01 erugiF ni desu erew sa emit ’tsol‘ able capacity of a piece of equipment (or any process) is caused by time losses such as set-up and changeover losses (when the equipment or process is being prepared for its next activity), and breakdown failures when the machine is being repaired. Some capacity is lost through speed losses such as when equipment is idling (for example, when it is temporarily waiting for work from another process) and when equipment is being run below its optimum work rate. Finally, not everything processed by a piece of equipment will be error free. So some capacity is lost through quality losses.
: 4.11 erugiF ni noitaton eht gnikaT
OEE = a * p * q
yratnemmoc lacitirC
si yticapac woh ni noitazidradnats elttil ylgnisirprus si ereht ,cipot tnatropmi na hcus roF measured. Not only is a reasonably accurate measure of capacity needed for operations planning and control, it is also needed to decide whether it is worth investing in extra physical capacity such as machines. Yet not all practitioners would agree with the way in which design and effective capacity have been defi ned or measured in the previous worked example. For example, some would argue that the fi rst fi ve categories do not .’secnerrucco dennalp ,elbadiovanu ylbanosaer fo ecneuqesnoc a‘ sa rucco Product changeover set-ups can be reduced, allocating work in a different manner between processes could reduce the amount of time when no work is scheduled, even re-examining preventative maintenance schedules could lead to a reduction in lost time. One school of thought is that whatever capacity effi ciency measures are used, they should be useful as diagnostic measures which can highlight the root causes of ineffi cient use of capacity. The idea of overall equipment effectiveness (OEE) described next is often put forward as a useful way of measuring capacity effi ciencies.
Figure 11.4 ssenevitceffe tnempiuqe gnitarepO
360 PART THREE DELIVER – PLANNING AND CONTROLLING OPERATIONS
SELECTED FURTHER READING
Brandimarte, P. and Villa, A. (1999) Modelling Manufacturing Systems: From Aggregate Planning to Real Time Control, Springer, New York. Very academic, although it does contain some interest- ing pieces if you need to get ‘under the skin’ of the subject.
Hopp, W.J. and Spearman, M.L . (2000) Factory Physics, 2nd edn, McGraw-Hill, New York. Very mathematical indeed, but includes some interesting maths on queuing theory.
Olhager, J., Rudberg, M. and Wikner, J. (2001) Long-term capacity management: linking the per- spectives from manufacturing strategy and sales and operations planning, International Journal of Production Economics, vol. 69, issue 2, 215–225. Academic article, but interesting.
Vollmann, T., Berry, W., Whybark, D.C. and Jacobs, F.R. (2004) Manufacturing Planning and Control Systems for Supply Chain Management: The Definitive Guide for Professionals, McGraw- Hill Higher Education, New York. The latest version of the ‘bible’ of manufacturing planning and control. It’s exhaustive in its coverage of all aspects of planning and control, including aggregate planning.
USEFUL WEBSITES
www.bis.gov.uk/policies/employment-matters/strategies Website of the Employment Relations Directorate who have developed a framework for employers and employees which promotes a skilled and flexible labour market founded on principles of partnership.
www.worksmart.org.uk/index.php This site is from the Trades Union Congress. Its aim is ‘to help today’s working people get the best out of the world of work’.
www.dol.gov/index.htm US Department of Labor’s site with information regarding using part- time employees.
www.downtimecentral.com Lots of information on operational equipment efficiency (OEE).
www.myomlab.com Test which sections you have mastered and which you need to review, with questions, a personalized study plan, video clips, guided solutions, and cases.
www.opsman.org Useful materials.
http://operationsroom.wordpress.com Stanford University’s take on topical operations stories.
www.iomnet.org The Institute of Operations Management site. One of the main professional bod- ies for the subject.
www.poms.org A US academic society for production and operations management. Academic, but some useful material, including a link to an encyclopedia of operations management terms.
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Preface
Introduction 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 supply networks brought about by internet-based technologies, 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 topi- cal or more at the heart of business and cultural shifts.
Operations management is also challenging . Pro- moting the creativity which 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 which are used. There are over 120 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 service organizations and twenty-five per cent from manufacturing.
Who should use this book? 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 masters degrees should find that it provides them with a well-grounded and, at times, critical approach to the subject.
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Distinctive features
Clear structure The structure of the book uses a model of opera- tions management which distinguishes between direct, design, deliver and develop.
Illustrations-based Operations management is a practical subject and can- not be taught satisfactorily in a purely theoretical manner. Because of this, we have used examples and ‘boxed’ short cases which explain issues faced by real operations.
Worked examples Operations management is a subject that blends quali- tative 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 man- agement. This is why we have included ‘critical com- mentaries’ that pose alternative views to the one being expressed in the main flow of the text.
Summary answers to key questions Each chapter is summarized in the form of a list of bullet points. These extract the essential points which 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 which takes the topics covered in the chapter further, or treats some important related issues. The nature of each further reading is also explained.
Useful websites A short list of web addresses is included in each chapter for those who wish to take their studies further.
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Teaching and learning resources for the 7th edition
To the Instructor . . .
New for the seventh edition Our users have been, as usual, very generous in answer- ing our questions as to how we can improve the book. Our research for the 7th edition resulted in maintaining the successful structure of previous editions and incor- porating the following key changes:
● The topic of Corporate Social Responsibility (CSR) has been emphasized further, both in the final chapter and throughout the book.
● We have further strengthened the emphasis on the idea that ‘operations management’ is relevant to every functional area of the organization.
● The ‘Operations in Practice’ that are used to introduce the topic at the beginning of each chapter and the ‘Short case’ sections have been substantially refreshed.
● New ideas in operations management have been included in order to keep the text up to date with
the latest trends while retaining its emphasis on the foundations of the subject.
● Several of the 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 learning.
Instructor’s resources A completely new instructor’s manual is available to lec- turers adopting this textbook, together with PowerPoint presentations for each chapter and a Testbank of assess- ment questions. Visit www.pearsoned.co.uk/slack to access these.
Most importantly, a new set of online resources to enable students to check their understanding, practise key tech- niques and improve their problem-solving skills now accom- panies the book. Please see below for details of MyOMLab.
The key to greater understanding and better grades in Operations Management!
MyOMLab for instructors
MyOMLab is designed to save you time in preparing and delivering assignments and assessments for your course, and to enable your students to study independently and at their own pace. Using MyOMLab, you can take advantage of:
● A wide range of engaging resources, including PowerPoint slides and video.
● Hundreds of self-assessment questions, including algorithmically-generated quantitative values which generate a different problem every time.
● A Homework feature, allowing you to assign work for your students to prepare for your next class or seminar.
● A Gradebook which tracks students’ performance on sample tests as well as assessments of your own design.
If you’d like to learn more or fi nd out how MyOMLab could help you, please contact your local Pearson representative at www.pearsoned.co.uk/replocator or visit www.myomlab.com .
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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 which is actual organizational life. Any book has to separate topics, in order to study them, which in reality are closely related. For example, technology choice impacts on job design which in turn impacts on quality control; yet we have treated 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 fol- low 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 introductory chapter, those students who wish to start with a brief ‘overview’ of the subject may wish first to study Chapters 1, 4, 10 and 18 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 which can be found in all opera- tions. Many of these were provided by our contacts in companies, but many also come from journals, maga- zines and newspapers. So if you want to understand the importance of operations management in everyday busi- ness 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 management 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 organization)?
● What can the operation do to help the organization compete more effectively?
The key to greater understanding and better grades in Operations Management!
MyOMLab for students
MyOMLab has been developed to help students make the most of their studies in operations management. Visit MyOMLab at www.myomlab.com to fi nd valuable teaching and learning material including:
● Self-assessment questions and a personalized Study Plan to diagnose areas of strength and weakness, direct students’ learning, and improve results.
● Unlimited practice on quantitative techniques and solving problems.
● Flashcards to aid exam revision.
● Video clips and short cases to illustrate operations management in action.
● Questions that are mapped to learning objectives (rather than just to chapters).
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Ten steps to getting a better grade in operations management
We could say that the best rule for getting a better grade is to be good. We 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 operations 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. Use the Study plan feature in MyOMLab and practise to master the topics which you find difficult.
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. You can also use the revision pod casts on MyOMLab.
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. Both the chapters of the book, and the exercises on MyOMLab, incorporate qualitative and quantitative material.
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 Short cases, Case studies, and 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 each chapter and on MyOMLab. You’ll get more credit for using references that come from genuine aca- demic 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? Use the videos on MyOMLab to look further at operations in practice.
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 and MyOMLab to find out where you need to improve.
(b) Second, show that you know how to illustrate and apply the topic. The Short cases, Case studies and ‘Operations in practice’ sections, combined with those on MyOMLab, 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 not only what the issue is about, but also understand why! Read the text and apply your knowledge on MyOMLab until you really understand why the concepts and techniques of operations man- agement are important, and what they contribute to an organization’s success. Your new-found knowledge 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. Log on ( www.myomlab.com ), read on, and GOOD LUCK!
Nigel Slack Alistair Brandon-Jones
Robert Johnston
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About the authors
Nigel Slack is the Professor of Operations Management and Strategy at Warwick 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 engi- neer and production manager in light engineering. He holds a Bachelor’s degree in Engineering and Master’s and Doctor’s degrees in Management, and is a char- tered 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 Dec- isions (with Steve Cooke), 1991, published by Prentice Hall, Service Superiority (with Robert Johnston), pub- lished in 1993 by EUROMA and Cases in Operations Management (with Robert Johnston, Alan Harrison, Stuart Chambers and Christine Harland) third edition published by Financial Times Prentice Hall in 2003, The Blackwell Encyclopedic Dictionary of Operations Management (with Michael Lewis) published by Blackwell in 2005, Operations Strategy together with Michael Lewis, the third edition published by Financial Times Prentice Hall in 2011 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 3 rd edition, 2012. He has authored numerous academic papers and chap- ters in books. He also acts as a consultant to many international companies around the world in many sectors, especially financial services, transport, leisure and manufacturing. His research is in the operations and manufacturing flexibility and operations strategy areas.
Alistair Brandon-Jones is a Reader in Operations and Supply Management at Manchester Business School, , Visiting Research Fellow at the University of Bath, and Visiting Lecturer at Warwick Medical School. Prior to his move, he was a Senior Lecturer (Associate Professor) and Lecturer (Assistant
Professor) at the University of Bath, a Teaching Fellow at Warwick Business School, and worked in a number of operations and logistics roles. He has a PhD and Bachelor’s degree from the University of Warwick and is widely published in leading operations and sup- ply management journals. In addition to Operations Management, Alistair has three other co-authored books, Operations and Process Management, Essentials of Operations Management and Quantitative Analysis in Operations Management, published by Pearson. He has been nominated for the Times Higher Education Most Innovative Teacher of the Year Award, is a University of Bath Mary Tasker Teaching Prize winner, and has received a number of other awards for teaching innova- tion at both Bath and Warwick. Alistair has consulting and executive development experience with a range of organizations around the world including Eni S.p.A Oil & Gas, Italy, Crompton Greaves, India, The Royal Bank of Scotland, Schroders Investment Management, QinetiQ Defense & Security, NHS Purchasing & Supply Agency, The Welsh Assembly, Bahrain Olympic Association, and the Improvement & Development Agency .
Robert Johnston was Professor of Operations Manage- ment at Warwick Business School and its Deputy Dean. He was the founding editor of the International Journal of Service Industry Management and he also served on the editorial board of the Journal of Operations Management and the International Journal of Tourism and Hospitality Research . He was the author of the market leading text, Service Operations Management (with Graham Clark), now in its 4th edition (2012), published by Financial Times Prentice Hall. Before moving to academia Dr Johnston held several line management and senior management posts in a number of service organizations in both the public and private sectors. As a specialist in service operations, his research interests included service design, service recovery, per- formance measurement and service quality. He was the author or co-author of many books, as well as chapters in other texts, numerous papers and case studies.
We very much regret that our friend and colleague Bob Johnston passed away shortly after the manu- script for this edition was completed. He will be greatly missed by all his many friends, colleagues and students.
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Acknowledgements
During the preparation of the seventh edition of this book, the authors conducted a number of ‘ faculty workshops’ and the many useful comments from these sessions have influenced this and the other books for the ‘Warwick group’. Our thanks go to everyone who attended these sessions and other colleagues. We thank Pär Åhlström of Stockholm School of Economics and Alan Betts of ht2.org for case writing help and support, Dr Ran Bhamra, Lecturer in Engineering Management, Loughborough University and Shirley Johnston for case writing help and support. Also, Dr Maggie Zeng of Gloucestershire University, Dr Abhijeet Ghadge, Heriot Watt University, Professor Sven Åke Hörte of Lulea University of Technology, Eamonn Ambrose of University College, Dublin, Colin Armistead of Bournemouth University, Ruth Boaden of Manchester Business School, Emma Brandon-Jones of Manchester Business School, Peter Burcher of Aston University, John K. Christiansen of Copenhagen Business School, Philippa Collins of Heriot- Watt University, Henrique Correa of Rollins College, Florida, Paul Coughlan, Trinity College Dublin, Simon Croom, University of San Diego, Stephen Disney, Cardiff University, Doug Davies of University of Technology, Sydney, Tony Dromgoole of the Irish Management Institute, Dr J.A.C. de Haan of Tilburg University, Carsten Dittrich, University of Southern Denmark, David Evans of Middlesex University, Paul Forrester of Keele University, Keith Goffin, Cranfield University, Ian Graham of Edinburgh University, Alan Harle of Sunderland University, Norma Harrison of Macquarie University, Catherine Hart of Loughborough Business School, Chris Hillam of Sunderland University, Ian Holden of Bristol Business School, Matthias Holweg, Cambridge University, Mickey Howard, Exeter University, Tom Kegan of Bell College of Technology, Hamilton, Denis Kehoe, Liverpool University, Mike Lewis, Bath University, John Maguire of the University of Sunderland, Charles Marais of the University of Pretoria, 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, Cranfield University, Adrian Morris of Sunderland University, Steve New, Oxford University, John Pal of Manchester University, Peter Race of Henley College, Reading University, Ian Sadler of Victoria University, Richard Small, Supply Network Solutions, Andi Smart, Exeter University, Amrik Sohal of Monash University, 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, 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 and Peter Worthington.
Our academic colleagues in the Operations Manage- ment Group at Warwick Business School, Bath Univer- sity and Manchester Business School also helped, both by contributing ideas and by creating a lively and stimu- lating work environment. We are also grateful to many friends, colleagues and company contacts. In particular, thanks for help with this edition goes to Philip Godfrey and Cormac Campbell and their expert colleagues at OEE, David Garman and Carol Burnett of The Oakwood Partnership, Clive Buesnel of Xchanging, Hans Mayer of Nestlé, Peter Norris of the Royal Bank of Scotland, Joanne Cheung of Synter BMW, Tom Dyson of Torchbox, Michael Purtill of Four Seasons Hotel Group, John Mat- thew of HSPG.
We were lucky to receive continuing professional and friendly assistance from a great publishing team. Especial thanks to Rufus Curnow, Kate Brewin, Philippa Fiszzon, Colin Reed, Rhian McKay, Alison Prior, Kay Holman and Annette Abel.
Finally, all seven editions were organized, and largely word processed, by Angela Slack. It was, yet again, an heroic e� ort. To Angela – our thanks.
Nigel Slack Alistair Brandon-Jones
Robert Johnston
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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 (Miles, A. and Baldwin, T.), 10 July 2002; Figure 3.9 from Operations Strategy, 3rd ed., Pearson Education Limited (Slack, N. and Lewis, M.A. 2011) p. 33, Figure 1.12, © Nigel Slack and Michael Lewis 2002, 2008, 2011; Figure 7.6 from For Toyota, pat- riotism and profits may not mix, Wall Street Journal (Dawson, C.), 29 November 2011, republished with permission of Dow Jones & Company, Inc., permission conveyed through Copyright Clearance Center; Figure 9.7 adapted from A new strategy for job enrichment, California Management Review, Vol. 17 (3) (Hackman, J.R., Oldham, G., Janson, R. and Purdy, K. 1975), repub- lished with permission of University of California Press, permission conveyed through Copyright Clearance Center; Figure 10.10 from Northamptonshire Police incident grading; Figure 13.7 adapted from What is the right supply chain for your product?, Harvard Business Review, March-April, pp. 105–16 (Fisher, M.C. 1997); Figure 15.13 from C.A. Voss and A. Harrison, Strategies for implementing JIT, in Just-in-Time Manufacture ( Voss, C.A. (ed.) 1987), IFS/Springer-Verlag, Copyright © 1987 Springer; Figure 16.2 adapted from Project Management for Engineering, Business and Technology, 4th ed., Routledge (Nicholas, J.M. and Steyn, H. 2012) p. 6, Figure 1.3, © 2012 Routledge, used with permis- sion of Taylor & Francis Books (UK); Figure 16.13 adapted from Collaboration, Integrated Information, and the Project Life Cycle in Building Design and Construction and Operation, Construction Users Roundtables (CURT); 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 21.2 Marmite image, reproduced with kind permission of PLC and group companies.
Tables Table 8.1 after E-commerce and its impact on opera- tions management, International Journal of Production Economics, Vol. 75, pp. 185–97 (Gunasekaran, A., Marri, H.B., McGaughey, R.E. and Nebhwani, M.D. 2002), Elsevier; 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; Table 15.1 adapted from What is the theory of constraints, and how does it compare to lean think- ing? (Rattner, S. 2009) The Lean Enterprise Institute, Copyright © 1999 Sergio Rattner, all rights reserved; Table 21.1 from How Corporate Social Responsibility is Defined: an Analysis of 37 Definitions, Corporate Social Responsibility and Environment Management, Vol. 12, No. 2 (Dahlsrud, A. 2006) p. 4, Table 1, John Wiley and Sons.
Text Case Study on pages 148–9 from Operations and Process Management, 2nd ed., Pearson Education (Slack, N., Chambers, S., Johnston, R. and Betts, A. 2009) p. 204, © Pearson Education Limited 2006, 2009; Case Study on pages 218–20 adapted from Operations and Process Management, Pearson Education Limited (Slack, N., Chambers, S., Johnston, R. and Betts, A. 2005) © Pearson Education Limited 2006; Case Study on pages 274–6 by Dr Ran Bhamra, Lecturer in Engineering Management, Loughborough University; Case Study on page 317 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; General Displayed Text on page 440 from My way - IT at Butcher’s Pet Care, Engineering and Technology Magazine, Vol. 4 (13) (Allan, K. 2009), 21 July; Case Study on pages 490–2 by Robert Johnson and Zoe Radnor, with the help of Giovanni Bucci; General Displayed Text on pages 641–2 adapted from a case study by Professors Rui Sousa and Sofia Salgado Pinto, Católica Porto Business School, Portugal, with permission from the authors; Case Study on pages 666–7 by Professors Robert Johnson, Warwick Business School, Chai Kah Hin and Jochen Wirtz, National University of Singapore, and Christopher Lovelock, Yale University; Case Study on page 690 includes extract from Responsible Sourcing Supplier Workbook, John Lewis plc © Copyright John Lewis plc.
Photographs (Key: b-bottom; c-centre; l-left; r-right; t-top)
Alamy Images: Apex News & Pictures Agency 83, 579, Art Kowalsky 477, Candy Box Images 136, Clivestock 101, Corbis Bridge 91, Hannu Liivaar 465, Helen Sessions 417, Hugh Threlfall 31, Ingram Publishing 605, Itar-Tass Photo Agency 144, Jack Sullivan 51, Justin Kase 405, 418, Lucia Lanpur 673, M4OS Photos 323, Numb 444, Paul Marriot 201, Roger Bamber 119, Stephen Woods 252, Thomas Jackson 86, Vario images GmbH & Co.KG 204; Alistair Brandon-Jones: 44, 89, 148,
Publisher’s acknowledgements
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105b, Ingrid W 195, InnervisionArt 435, Ioana Davies 649, Jacqueline Abromeit 37, Jimmi 224, jl661227 218, Jordan Tan 289, justasc 432, Kencko Photography 297, Kzenon 56, 595, Light & Magic Photography 328cl, 335tl, 337tl, Losevsky Photo and Video 97, Luciano Mortula 9 (e), Lucky Photo 328cr, 336br, 337br, Mama- Mia 232, March Cattle 630, Markus 29, Massimiliano Pieraccini 335b, Matusciac Alexandru 387, Max Photographer 611, Michael Rolands 47cl, 48cl, 50cl, 53cl, 55cl, Minerva Studio 129, Mironov 164, Monkey Business Images 443, Montebasso 269, Natursports 660, nostal6ie 104b, Nui7711 76, PENGYOU91 104cl, PeterPhoto123 69r, Pics Five 53b, Prill 662, PT Images 9 (b), RA2 Studio 679, Richard Semik 496, Rob Wilson 69l, Robyn Mackenzie 583, Ronen 64, Santiago Cornejo 15, Scott Cornell 513, Silver John 103t, Silver-John 666, Sinisa Botas 275, Stuart Monk 199, StudioSmart 302, Suzanne Tucker 12, SV Luma 304, Toria 11, Tupungato 430, Valentyn Volkov 133, 589, Viorel Sima 684, Yeko Photo Studio 309, Yuri Acurs 105t, yuyangc 328tr, 335tr, 337tr, 341, zhangyang13576997233 121, Zurijeta 9 (d), 266t.
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In some instances we have been unable to trace the owners of copyright material, and we would appreciate any information that would enable us to do so.
170r, 228, 339, 356, 440, 503, 540; Andy Maluche/ Photographers Direct: 229; Corbis: 50b, Ultraf 690; Courtesy of Dyson: 126; Digital Vision: 378; Getty Images: 24l, 57, 162, Jasper James 2, 94, 286, 576, 670; Imagemore Co., Ltd: 400, 546; Imagestate Media: John Foxx 553, John Foxx Collection 535, John Foxx Images 354, Michael Duerinckx 334; Pearson Education Ltd: Sozaijiten 614; PhotoDisc: Don Farrell 328b, Kim Steele 557, Mitch Hrdlicka 538, Nick Rowe 369, Ryan McVay 266b, Tracy Montana 449; Photolibrary.com: Tetra Images 491; Press Association Images: 247; Rex Features: Voisin Phanic 268; Shutterstock.com: Aaron Amat 527, Adisa 641, Ahmad Faizal Yahya 255, Ajay Bhaskar 170l, Alhovik 293, alphaspirit 480, Anna Subbotina 24r, Annette Shaff 551, antipathique 138, anyunov 637, aodaodaodaod 676, Archman 109, 231, Argus 235, Blaz Kure 47tr, 48tr, 50tr, 53tr, 55tr, Buruhtan 47cr, 48cr, 50cr, 53cr, 55cr, cappi thompson 412, Chen WS 452, Cuiphoto 328tl, 336bl, 337bl, Daniel M. Nagy 38, Derek Audette 318, Deymos 176, Diego Cervo 5, 9 (c), Dmitry Kalinovsky 103b, Dragon Images 160, Ecliptic Blue 49, Eimantas Buzas 106, Evgeny Varlamov 9 (a), Filipchuk Oleg Vasiliovich 153, Food Pics 18, Food Pictures 104t, Francisco Amaral Leitão 244, Gyn9037 192, Hadrian 47tl, 48tl, 50tl, 53tl, 55tl, Hana 545, Hannamariah 342, Highviews 547, ID1974 448, ifong
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OPERATIONS MANAGEMENT
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2 Operations performance
1 Operations management
3 Operations strategy
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Part One INTRODUCTION
This part of the book introduces the idea of the operations function in different types of organization. It identifies the common set of objectives to which operations managers aspire in order to serve their customers, and it explains how operations can have an important strategic role.
Transformed resources
• Materials • Information • Customers
Transforming resources
• Facilities • Staff
Input resources
Output products and services
Value-added for customers
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
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Check and improve your understanding of this chapter using self-assessment questions and a personalized study plan, a video case study, and an eText – all at www.myomlab.com .
Figure 1.1 This chapter examines operations management
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 1 ❯ 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 processes have different characteristics?
❯ What do operations managers do?
Operations performance
Operations strategy
Operations management
Topic covered in this chapter
Operations management
Direct
Design Develop
Deliver
Key questions
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CHAPTER 1 OPERATIONS MANAGEMENT 5
OPERATIONS IN PRACTICE
(All chapters start with an ‘Operations in practice’ example that illustrates some of the issues that will be covered in the chapter.)
Love it or hate it, IKEA is the most successful furniture retailer ever. With 276 stores in 36 countries, they have managed to develop their own special way of selling fur- niture. Their stores’ layout means customers often spend two hours in the store – far longer than in rival furniture retailers. IKEA’s philosophy goes back to the original busi- ness, started in the 1950s in Sweden by Ingvar Kamprad. He built a showroom on the outskirts of Stockholm where land was cheap and simply displayed suppliers’ furniture as it would be in a domestic setting. Increasing sales soon allowed IKEA to start ordering its own self- designed products from local manufacturers. But it was innovation in its operations that dramatically reduced its selling costs. These included the idea of selling furniture as self-assembly flat packs, which reduced production and transport costs, and its ‘showroom-warehouse’ con- cept, which required customers to pick the furniture up themselves from the warehouse (which reduced retail- ing costs). Both of these operating principles are still the basis of IKEA’s retail operations process today.
Stores are designed to facilitate the smooth flow of customers, from parking, moving through the store itself, to ordering and picking up goods. At the entrance to each store large notice boards provide advice to shop- pers. For young children, there is a supervised children’s play area, a small cinema, and a parent and baby room so parents can leave their children in the supervised play area for a time. Parents are recalled via the loudspeaker system if the child has any problems. IKEA ‘allow cus- tomers to make up their minds in their own time’ but ‘information points’ have staff who can help. All furniture carries a ticket with a code number which indicates its location in the warehouse. (For larger items customers go to the information desks for assistance.) There is also an area where smaller items are displayed, and can be picked directly. Customers then pass through the ware- house where they pick up the items viewed in the show- room. Finally, customers pay at the checkouts, where a ramped conveyor belt moves purchases up to the check- out staff. The exit area has service points, and a loading area that allows customers to bring their cars from the car park and load their purchases.
Behind the public face of IKEA’s huge stores is a complex worldwide network of suppliers, 1,300 direct suppliers, about 10,000 sub-suppliers, and wholesale and transport operations, including 26 distribution centres. This supply network is vitally important to IKEA. From purchasing raw materials, right through to finished products arriving in its customers’ homes, IKEA relies on close partnerships with
its suppliers to achieve both ongoing supply efficiency and new product development. However, IKEA closely controls all supply and development activities from IKEA’s hometown of Älmhult in Sweden.
But success brings its own problems and some cus- tomers became increasingly frustrated with overcrowd- ing and long waiting times. In response IKEA launched a programme ‘designing out’ the bottlenecks. The changes included:
● clearly marked in-store short cuts allowing those cus- tomers who just want to visit one area to avoid having to go through all the preceding areas;
● express checkout tills for customers with a bag only rather than a trolley;
● extra ‘help staff ’ at key points to help customers; ● redesign of the car parks, making them easier to
navigate; ● dropping the ban on taking trolleys out to the car
parks for loading (originally implemented to stop vehicles being damaged);
● a new warehouse system to stop popular product lines running out during the day;
● more children’s play areas.
▼
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6 PART ONE INTRODUCTION
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 type of services and/or products. However, not all types of organization will nec-
essarily call the operations function by this name. (Note in addition that we also use the shorter terms ‘the operation’ or ‘operations’ inter- changeably with the ‘operations function’.) Operations managers are the people who have particular responsibility for managing some, or all, of the resources which comprise 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 com- pany, the ‘administrative manager’ in a hospital, or the ‘store manager’ in a supermarket.
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:
● 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;
IKEA spokeswoman Nicki Craddock said: ‘We know people love our products but hate our shopping experience. We are being told that by customers every day, so we can’t afford not to make changes. We realized a lot of people took offence at being herded like sheep on the long route around stores. Now if you know what you are looking for and just want to get in, grab it and get out, you can.’
Operations management is a vital part of IKEA’s success IKEA shows how important operations management is for its own success and the success of any type of organi- zation. Of course, IKEA understands its market and its customers. But, just as important, it knows that the way it manages the network of operations that design, produce and deliver its products and services must be right for its market. No organization can survive in the long term if it cannot supply its customers effectively. And this is essen- tially what operations management is about – designing, producing and delivering products and services that sat- isfy market requirements. For any business, it is a vitally important activity. Consider just some of the activities that IKEA’s operations managers are involved in:
● Arranging the store’s layout to give a smooth and effective flow of customers (called process design).
● Designing stylish products that can be flat-packed efficiently (called product design).
● Making sure that all staff can contribute to the com- pany’s success (called job design).
● Locating stores of an appropriate size in the most effective place (called supply network design).
● Arranging for the delivery of products to stores (called supply chain management).
● Coping with fluctuations in demand (called capacity management).
● Maintaining cleanliness and safety of storage areas (called failure prevention).
● Avoiding running out of products for sale (called inventory management).
● Monitoring and enhancing quality of service to cus- tomers (called quality management).
● Continually examining and improving operations practice (called operations improvement).
And these activities are only a small part of IKEA’s total operations management effort . But they do give an indication, first of how operations management should contribute to the business’s success, and second, what would happen if IKEA’s operations managers failed to be effective in carrying out any of its activities. Yet , although the relative importance of these activities will vary between different organizations, operations managers in all organizations will be making the same type of decision (even if what they actually decide is different).
✽ Operations principle All organizations have ‘operations’ that produce some mix of services and products.
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CHAPTER 1 OPERATIONS MANAGEMENT 7
● the product/ser vice 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. Table 1.1 shows the activities of the three core functions for a sample of organizations.
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 resource, marketing, and accounting and finance activities as coming within the sphere of operations management. We view the operations function as comprising all the activities necessary for the day-to-day fulfilment of customer requests. This includes sourcing services and products from suppliers and delivering services and products to customers.
It is a fundamental of modern management that functional boundaries should not hinder efficient internal processes. Figure 1.2 illustrates some of the relationships between operations 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 functions. 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 relationship 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 The activities of core functions in some organizations
Core functional activities
Internet service provider (ISP)
Fast food chain International aid charity
Furniture manufacturer
Operations Maintain hardware, software and content Implement new links and services
Make burgers, etc. Serve customers Maintain equipment
Give service to the benefi ciaries of the charity
Make components Assemble furniture
Marketing and sales
Promote services to users and get registrations Sell advertising space
Advertise on TV Devise promotional materials
Develop funding contracts Mail out appeals for donations
Advertise in magazines Determine pricing policy Sell to stores
Product/service development
Devise new services and commission new information content
Design hamburgers, pizzas, etc. Design decor for restaurants
Develop new appeals campaigns Design new assistance programmes
Design new furniture Co-ordinate with fashionable colours
✽ Operations principle Operations managers need to co-operate with other functions to ensure effective organizational performance.
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8 PART ONE INTRODUCTION
OPERATIONS MANAGEMENT IS 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 they 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 activ- ity. 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 organiza- tions 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 operations management does in five very different organizations and some common themes emerge.
Figure 1.2 The relationship between the operations function and other core and support functions of the organization
✽ Operations principle The economic sector of an operation is less important in determining how it should be managed than its intrinsic characteristics.
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CHAPTER 1 OPERATIONS MANAGEMENT 9
Automobile assembly factory – operations manage- ment uses machines to e� ciently assemble products that satisfy current customer demands
Physician (general practitioner) – operations manage- ment uses knowledge to e� ectively diagnose conditions in order to treat real and perceived patient concerns
Management consultant – operations management uses people to e� ectively create the services that will address current and potential client needs
Disaster relief charity – operations management uses our and our partners’ resources to speedily provide the supplies and services that relieve community su� ering
Advertising agency – o perations management uses our sta� ’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 assem- ble products that satisfy current customer demands.’ The statements from the other organiza- tions were similar, but used slightly different language. Operations management used not just machines but also . . . ‘knowledge, people, our and our partners’ resources’, and ‘our staff’s experi- ence 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
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10 PART ONE INTRODUCTION
visualize the operations activity in any type of organization; small or large, service or manu- facturing, public or private, profit or not-for-profit. Operations management uses ‘resources to appropriately create outputs that fulfil defined market requirements’ (see Fig. 1.3). However, although the essential nature and purpose of operations management 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 services and products efficiently and effectively. However, in practice, managing operations in a small or medium 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 difficult to separate from the mass of other issues in the organization. However, small operations can also have significant advantages; the short case on Torchbox illustrates this.
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 the operations in an animal welfare charity, hospital, research organization or govern- ment department is essentially the same as in commercial organizations. Operations have to take the same decisions – how to create and deliver services 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 objectives. 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
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 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 majority of the topics covered in this book have relevance to all types of organization, including non-profit, even if the context is different and some terms may have to be adapted.
SHORT CASE
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; probably every day, probably many times each day. So it’s important. All organizations need to have a web presence if they want to sell products and services, interact with their customers, or promote their cause. And, not surprisingly, there is a whole industry devoted to designing websites so that they have the right type of impact. In fact, taken over the years, web development has been one of the fastest-growing industries in the world. But it’s also a tough industry. Not every web design company thrives, or even survives beyond a couple of years. To succeed, web designers need technology skills, design capabilities, business awareness and operational professionalism.
One company 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 primar- ily, but not exclusively, from the charity, non-governmental organizations 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 sen- ior manager in a firm of our size cannot afford to be too specialized. All of us here have our own specific responsi- bilities; however, every one of us shares the overall respon- sibility 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 sustainabil- ity and responsible, ethical business practice; we take our work, and that of our clients, seriously. If you’re an arms
Torchbox: award-winning web designers 2
dealer, you can safely assume that we’re not going to be interested.’
Nevertheless, straightforward operational effectiveness 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 cre- ative 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.’
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12 PART ONE INTRODUCTION
SHORT CASE
Médecins Sans Frontières MSF (also called Doctors Without Borders) is an indepen dent humanitarian organization providing 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 countries around the world. Its core work takes place in crisis situations – armed conflicts, epidemics, famines and natural disasters such as floods and earthquakes. Their teams deliver both medical aid (including consultations with a doctor, hospital care, nutritional care, vaccinations, surgery, obstetrics and psychological care) and material aid (in cluding food, shelter, blankets, etc.). Each year, MSF sends around 3,000 doctors, nurses, logisticians, water-and-sanitation experts, administrators and other profes sionals to work alongside around 25,000 locally hired staff. It is one of the most admired and effective relief organizations in the world. But no amount of fine intentions can translate into effective action without superior oper- ations 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. Their response proce- dures are continuously being developed to ensure that they reach 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 possible mission can come from govern- ments, the international community, humanitarian organ- izations 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 vali- dated, MSF sends a team of medical and logistics experts to the crisis area to carry out a quick evaluation. The team assesses the situation, 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 equip- ment and resources to the area. In large crises, planes fly in all the necessary materials so that the work can begin immediately. Thanks to their pre-planned processes, specialized kits and the emergency stores, MSF can distribute material and equipment within 48 hours, ready for the response team to start work as soon as they arrive. Most MSF projects generally run for somewhere between 18 months and three and a half years. Whether an emer- gency response or a long-term health-care project, the closing process is roughly similar. Once the critical medi- cal needs have been met (which could be after weeks,
MSF operations provide medical aid to people in danger 3
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 project 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 they are dealing with urgent emergencies, when material might need to be on a plane 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 sys- tem. 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 com- plete surgical theatre the size of a small conference table and an obstetrics kit the size of a two-drawer filing cabi- net. There is an ongoing process of revising the kits every time a new drug or medical tool becomes available.
To make sure they are reacting as quickly as possible, MSF have 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 disaster 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 shipping 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.
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CHAPTER 1 OPERATIONS MANAGEMENT 13
Table 1.2 Changes in the business environment are shaping a new operations agenda
The business environment is changing . . . Prompting operations responses . . .
For example . . . For example . . . ● Increased cost-based competition
● Higher quality expectations
● Demands for better service
● More choice and variety
● Rapidly developing technologies
● Frequent new product/service introduction
● Increased ethical sensitivity
● Environmental impacts are more transparent
● More legal regulation
● Greater security awareness
● Globalization of operations networking
● Information-based technologies
● Co-creation of service
● Internet-based integration of operations activities
● Supply chain management
● Customer relationship management
● Flexible working patterns
● Mass customization
● Fast time-to-market methods
● Lean process design
● Environmentally sensitive design
● Supplier ‘partnership’ and development
● Failure analysis
● Business recovery planning
The new operations agenda The business environment has a significant impact on what is expected from operations man- agement. In recent years there have been new pressures for which the operations function has needed to develop responses. Table 1.2 lists some of these business pressures and the operations responses to them. These operations 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 globaliza- tion and increased cost pressures. Part of the agenda involves seeking ways to exploit new tech- nologies, most notably the internet. Of course, the list in Table 1.2 is not comprehensive, nor is it universal. But very few operations functions will be unaffected by at least some of these concerns.
THE INPUT–TRANSFORMATION–OUTPUT PROCESS
All operations create and deliver services and products by changing inputs into outputs using an ‘input–transformation–output’ process. Figure 1.4 shows this general transformation pro- cess model. Put simply, operations are processes that take in a set of input resources which are used to transform something, or are transformed themselves, into outputs of services and products. And although all operations conform to this general 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 operation delivering ‘services’ that change the physiological or psychological condition of patients, the other is a manufactur- ing 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 vehicle 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 them- selves. The patients form part of the input to, and the output from, the operation. The vehicle plant transforms steel, plastic, cloth, tyres and other materials into vehicles.
✽ Operations principle All processes have inputs of transforming and transformed resources that they use to create products and services.
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14 PART ONE INTRODUCTION
Inputs to the process One set of inputs to any operation’s processes are 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 informational properties (that is the purpose or form of the information); accountants do this. Some change the possession of the information, for example market research com- panies 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 systems and bus companies transform the location of their customers, while hospitals transform their physiological state. Some are concerned with transforming their psychological state , for example most entertainment services such as music, theatre, television, radio and theme parks. But customers are
not always simple ‘passive’ 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 restau- rant; they provide the stimulating environment in learning groups in education; they pro- vide information at check-in desks, and so on. When customers play this role it is usually referred to as co-production (or co-creation for new services) 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 processing inputs
✽ Operations principle Transformed resource inputs to a process are materials, information or customers.
Figure 1.4 All operations are input–transformation–output processes
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CHAPTER 1 OPERATIONS MANAGEMENT 15
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 appropriately in the bank. But if the bank makes errors in our financial transactions, we suffer in a far more fundamental way. Table 1.3 gives examples of operations with their dominant transformed resources.
SHORT CASE
It isn’t the biggest bank in Europe, but many judge it to be the best as far as its customer service is concerned. Now part of the giant HSBC Group, First Direct has no high street branches, but relies on internet-based and telephone transactions with its customers. Yet the bank has consistently been voted the best at customer service, not just when measured against other banks, but in comparison with all types of service companies. More than one in four of First Direct customers joins because of personal recommendation.
So how has it managed this? First, it focuses uncompromisingly on its custom- ers and how best to serve them. Staff in all parts of its operations – whether they are in direct con- tact with customers (such as the bank’s call centres) or in its ‘back office’ operations (such as their Information Technology provision) – are trained to understand the importance of customer care. As one of the bank’s train- ers puts it, ‘ They have continued with their philosophy of putting people first, not resting on their laurels and valu- ing training and development as an investment not a cost. When staff are treated in an excellent way, they deliver excellent customer service – the old saying you reap what you sow is so true! I’ve come across a few companies that have used some of the techniques and models in training that First Direct use, but they don’t always have the thor- ough knowledge to embed them strongly.’
First Direct is renowned for the quality of its customer service. So it’s no surprise that the bank is inviting cus- tomers to collaborate on new ideas. One of the most innovative ideas is the ‘First Direct Labs website’. The idea sounds simple, but is effective. The bank posts new ideas on the site and visitors comment on them. Natalie Cowen, Head of Brand and Communications at the bank, is enthusiastic about the idea of the ‘co-creation’ of new services. ‘ The First Direct Lab is a straightforward concept that I’m surprised more innovative companies aren’t using. We have a method of directly engaging with our custom- ers and the general public to influence and drive the direc- tion we take with products, services and, well, everything
Co-creation at First Direct 4
really. One of the main reasons people feel let down by a brand, from financial institutions to supermarkets, is that they believe their opinions and frustrations haven’t been considered. Customer service is at the heart of everything we do at First Direct, so it seemed obvious to turn to co- creation to make sure we’re on the right path. It seems obvious, but surely it’s better to discover what your custom- ers really want before spending time, money and resources on a project – co-creation allows us to do just that.’
However, customers’ ideas and preferences do not always agree with the bank’s. One of its first initiatives was to ask for feedback on plans to redesign its debit card. Customer feedback indicated that the proposed design looked too similar to its credit card, and the two were hard to tell apart when paying at the checkout. ‘When we asked customers for feedback it turned out they liked the existing design for the debit card and would prefer any changes to be made to the credit card instead ’, says Natalie Cowen.
Nor are all customer suggestions positive. For exam- ple, a proposal to develop a mobile app for finding a mortgage proved unpopular. Customers said that this was something they would do on a PC at home, not on the move. Yet even negative responses are valued by the bank because it is ‘a demonstration of the bank’s commit- ment to transparency and its willingness to throw open the design process to customers’ .
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16 PART ONE INTRODUCTION
The other set of inputs to any operations process are transforming resources . These are the resources which act upon the transformed resources. There are two types which form the ‘building blocks’ of all operations:
● facilities – the buildings, equipment, plant and process technology of the operation; ● staff – the people who operate, maintain, plan and manage the operation. (Note 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-pow- ered aircraft carrier, its facilities are ‘high-tech’ nuclear generators, and sophisticated elec- tronic 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 ‘tech- nical’ skill (accounting). Yet although skills vary, all staff can make a contribution. An assembly worker who consistently 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 manufacturing company, such as Intel, will have significant investment in physical facilities. A single chip fabrication plant can cost in excess of $4 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 consultant 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 process (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 1.5 shows a number of operations (including some described as examples in this chapter) positioned in a spectrum from ‘pure’ products to ‘pure’ services. Crude oil producers are concerned almost exclusively with the product which comes from their
✽ Operations principle All processes have transforming resources of facilities (equipment, technology, etc.) and people.
Table 1.3 Dominant transformed resource inputs of various operations
Predominantly processing inputs of materials
Predominantly processing inputs of information
Predominantly processing inputs of customers
All manufacturing operations Accountants Hairdressers
Mining companies Bank headquarters Hotels
Retail operations Market research company Hospitals
Warehouses Financial analysts Mass rapid transports
Postal services News service Theatres
Container shipping line University research unit Theme parks
Trucking companies Telecoms company Dentists
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CHAPTER 1 OPERATIONS MANAGEMENT 17
oil wells. So are aluminium smelters, but they might also deliver some services such as technical 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 applica- tions engineering. The services delivered by a restaurant are an essential part of what the cus- tomer 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 pro- vider 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 create and deliver services – a psychotherapy clinic, for example. Of the short cases and examples in this chapter, IKEA and Pret A Manger both create and deliver products and services, but IKEA’s cus- tomers are probably more interested in the ‘products’ they collect from the store than any idea of ‘service’. Torchbox produces intangible ‘products’ and web design advice ‘services’ in close collaboration with its clients, as does MSF. Formule 1 and the resort hotel 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 is both a product (sold on a disc) and a service when sold over the internet or used by the customer. A restaurant meal is both a product and also a service as it is delivered and consumed. Indeed we would argue that all opera- tions are service providers which may create and deliver products as part of the offering to their customers. This is why operations manage- ment 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 were no customers (whether business customers, users or consum- ers), there would be no operation. So it is critical that operations managers are aware of
✽ Operations principle Most operations produce a mixture of tangible products and intangible services.
Pure products
Mixture of products and services
Pure services
Crude oil production
Aluminium smelting
Specialist machine tool production
Restaurant
Information systems provider
Management consultancy
Psychotherapy clinic
IKEA (see case example)
Pret A Manger (see case example)
Torchbox (see case example)
MSF (see case example)
Formule 1 / Resort hotel (see case example)
Figure 1.5 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 examples in this chapter
✽ Operations principle Whether an operation produces tangible products or intangible services is becoming increasingly irrelevant. In a sense all operations produce service for their customers.
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18 PART ONE INTRODUCTION
customer needs, both current and potential. This information will determine what the opera- tion 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.
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
SHORT CASE
Pret A Manger are proud of their customer service. ‘We’d like to think we react to our customers’ feelings (the good, the bad, the ugly) with haste and absolute sincerity’ , they say. ‘ Pret customers have the right to be heard. Do call or email. Our UK Manag- ing Director is available if you would like to discuss Pret with him. Alternatively, our CEO hasn’t got much to do; hassle him!’
It’s a bold approach to customer ser- vice, but Pret has always been innovative. Described by the press as having ‘revolu- tionized the concept of sandwich making and eating’, Pret A Manger opened their first shop in London and now they have over 260 shops in the UK, New York, Hong Kong and Tokyo. They say that their secret is to focus continually on the quality of their food and of their service. They avoid the chemicals and preservatives common in most ‘fast’ food. ‘Many food retailers focus on extending the shelf life of their food, but that’s of no inter- est 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 prepared throughout the day. The team members serv- ing on the tills at lunchtime will have been making sand- wiches 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 turn- over 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 opportu- nities 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
Customer service at Pret A Manger 5
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’s 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 member receives an extra payment for every hour worked; and if an individual is mentioned by the mys- tery shopper for providing outstanding service, they get an extra payment. ‘ The emphasis on jollity and friendli- ness 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 contribu- tor 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.
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CHAPTER 1 OPERATIONS MANAGEMENT 19
of these operations and 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 that create some mixture of service and products. 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 customers, the effectiveness of the whole operation can be improved. Table 1.4 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, stor- age facilities, etc.). Again transformed resources flow between each unit of transforming 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 opera- tion 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 suppli- ers, several customers and may be in competition with other opera- tions 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 lev- els, 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.
✽ Operations principle A process perspective can be used at three levels: the level of the operation itself, the level of the supply network, and the level of individual processes.
Table 1.4 Some operations described in terms of their processes
Operation Some of the operation’s inputs
Some of the operation’s processes
Some of the operation’s outputs
Airline Aircraft Pilots and air crew Ground crew Passengers and freight
Check passengers in Board passengers Fly passengers and freight around the world Care for passengers
Transported passengers and freight
Department store Products for sale Sales staff Information systems Customers
Source and store products Display products Give sales advice Sell products
Customers and products ‘assembled’ together.
Police Police offi cers Computer systems Information systems Public (law-abiding and criminals)
Crime prevention Crime detection Information gathering Detaining suspects
Lawful society, public with a feeling of security
Frozen food manufacturer
Fresh food Operators Processing technology Cold storage facilities
Source raw materials Prepare food Freeze food Pack and freeze food
Frozen food
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20 PART ONE INTRODUCTION
This idea is called the hierarchy of operations and is illustrated for a business that makes television programmes and videos in Figure 1.6. 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 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 of four smaller processes: one that designs the sets, one that constructs them, one that acquires the props, and one that finishes (assembles and paints) the set.
Figure 1.6 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
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 we do 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 management is relevant to all parts of the business The example in Figure 1.6 demonstrates that it is not just the operations function that man- ages processes; all functions manage processes. For example, the marketing function will have processes 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 marketing, this is the expertise in designing and shap- ing marketing plans; in finance, it is the technical knowledge of financial reporting. Yet each will also have a ‘process management’ role of producing plans, policies, 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 ser- vice to their (often internal) customers, and they all will want to do this efficiently. So, operations management is relevant for all func- tions, and all managers should have something to learn from the principles, concepts, approaches and techniques of operations man- agement. It also means that we must distinguish between two mean- ings of ‘operations’:
● ‘operations’ as a function , meaning the part of the organization which creates and deliv- ers 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 1.5 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 its other functions. Each of these processes will contribute some part to fulfilling customer needs. For example, the television programme and video production company, described previously, creates and delivers two types of ‘product’. Both of these involve a slightly dif- ferent 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
✽ Operations principle All parts of the business manage processes so all parts of the business have an operations role and need to understand operations management principles.
✽ Operations principle Processes are defined by how the organization chooses to draw process boundaries.
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22 PART ONE INTRODUCTION
necessary for its production, as in Figure 1.7. 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’) pro- cess boundaries and organizational responsibilities around these business processes is the philosophy behind business process re-engineering (BPR) which is discussed further later (see Chapter 18).
Figure 1.7 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
Table 1.5 Some examples of processes in non-operations functions
Organizational function Some of its processes Outputs from its process Customer(s) for its outputs
Marketing and sales Planning process Forecasting process Order-taking process
Marketing plans Sales forecasts Confirmed orders
Senior management Sales staff, planners, operations Operations, finance
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 Advice Implemented working systems and aftercare
All other processes All other processes All other processes
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CHAPTER 1 OPERATIONS MANAGEMENT 23
OPERATIONS PROCESSES HAVE DIFFERENT CHARACTERISTICS
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 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 stand- ardized 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, 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 high- variation demand pattern.
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24 PART ONE INTRODUCTION
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 example, 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 experi- ence most of its ‘value-adding’ activities. Customers will have a relatively short waiting toler- ance , 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 opera- tion’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 vis- ibility. 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 standardized 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’ shop needs many shops close to centres of demand. Therefore, the low- visibility web-based operation will have lower costs than the shop.
✽ Operations principle The way in which processes need to be managed is influenced by volume, variety, variation and visibility.
SHORT CASE
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 can a highly
Two very different hotels
successful chain of affordable hotels avoid the crippling costs of high customer contact? Formule 1, a subsidiary of the French Accor group, manage to offer outstanding value by adopting two principles not always associated with
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CHAPTER 1 OPERATIONS MANAGEMENT 25
freedom, movement and harmony that are the spirit of the ‘Anantara experience’. The Anantara Bangkok Riverside Resort and Spa, which is a member of the exclusive ‘Small Luxury Hotels of the World’, is to be found luxuriating in 11 acres of tropical gardens beside the Chao Phraya River just 3 kilometres from the cen- tre of Bangkok. Its concept is about providing guests with laid-back luxury, sensitive service, with an expe- rience of local culture. The resort’s owners say that it draws its strength from the rich cultural traditions, historic heritage and natural beauty of its destination; every customer experience being a ‘unique voyage of discovery and inspiration that is distinctly Anantara’. It employs over 550 staff and has 407 spacious rooms and suites decorated in a Thai style making use of col- ourful Thai silks, hardwood floors and fine furniture. All rooms have internet access, TVs and DVD players with iPod docks and private balconies that have spec- tacular views over the city, garden or river. The hotel’s ten restaurants and bars serve local, international and fusion cuisines. The outdoor tropical pool and Jacuzzi provide areas for enjoyment and relaxation. Should any guests want to venture outside the luxury, the hotel also offers river cruises in converted rice barges, supervised activities for children, and Thai cooking classes. A frequent complimentary boat service takes guests to the Sky Train and the heart of the city. An alternative to city centre shopping is provided in the mall adjacent to the hotel.
hotel operations – standardization and an innovative use of technology. Formule 1 hotels are usually located close to the roads, junctions and cities which 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 configura- tions to suit the characteristics of each individual site. All rooms are nine square metres in area, and are designed to be attractive, functional, comfortable and soundproof. Most important, 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!
Anantara Bangkok Riverside Resort & Spa In Sanskrit the word means ‘ without end’, and Anantara really does evoke, as its publicity states, the
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 baggage handlers. These rarely seen staff perform the vital but low-contact tasks, in what is called the back-office 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 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 discre- tion in moving themselves on the dimensions. Figure 1.8 summa- rizes the implications of such positioning.
✽ Operations principle Operations and processes can (other things being equal) reduce their costs by increasing volume, reducing variety, reducing variation, and reducing visibility.
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26 PART ONE INTRODUCTION
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 service, manu- facturing, private or public sector, and no matter how the operations function is defined. We classify operations management activities under four headings: direct, design, deliver and develop.
● Directing the overall nature and 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, is a prerequisite to the detailed design of operations and process. This is treated in Chapters 1 to 3.
● Designing the operation’s services, products and processes. Design is the activity of deter- mining the physical form, shape and composition of operations and processes together with the services and products that they create. This is treated in Chapters 4 to 9.
● 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 17.
● Developing process performance. Increasingly it is recognized that operations managers, or indeed 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 18 to 21.
Figure 1.8 A typology of operations
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CHAPTER 1 OPERATIONS MANAGEMENT 27
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 individ- ual 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 1.10 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 operations and processes.
Worked example
Figure 1.9 illustrates the different positions on the dimensions of the Formule 1 hotel chain and the Anantara Bangkok Riverside Resort & Spa ( see the short case on ‘ Two very different hotels’, p. 24). Both provide the same basic service as any other hotel. However, one is a luxu- rious and intimate hotel whose customers tend to stay for relatively long periods. 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 many customers avoiding the rainy season. Customer contact, and therefore visibility, is also very high (in order to ascertain customers’ requirements and provide for them). All of which 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. The Anantara resort hotel has very high levels of service but provides them at a high cost (and therefore a high price). Conversely, Formule 1 has arranged its operation in such a way as to provide a highly stand- ardized service at minimal cost.
Figure 1.9 The four Vs profi les of two very different hotel operations
✽ Operations principle Operations management activities can be grouped into four broad categories, directing the overall strategy of the operation, designing the operation’s products, services and processes, planning and controlling delivery, and developing performance.
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28 PART ONE INTRODUCTION
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 different 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 different 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 effective operations manager must possess. Here are some of them. How many of them do you share?
Transformed resources
• Materials • Information • Customers
Transforming resources
• Facilities • Staff
Input resources
Output products and services
Value-added for customers
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
Chapter 1 Operations management Chapter 2 Operations performance Chapter 3 Operations strategy
Chapter 10 The nature of planning and control Chapter 11 Capacity management Chapter 12 Inventory planning and control Chapter 13 Supply chain management Chapter 14 Enterprise resource planning (ERP) Chapter 15 Lean synchronization Chapter 16 Project management Chapter 17 Quality management
Chapter 18 Operations improvement Chapter 19 Risk management Chapter 20 Organizing for improvement Chapter 21 Corporate social responsibility (CSR)
Chapter 4 Process design Chapter 5 Innovation and design in services and products Chapter 6 Supply network design Chapter 7 layout and flow Chapter 8 Process technology Chapter 9 People, jobs and organization
Figure 1.10 A general model of operations management
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CHAPTER 1 OPERATIONS MANAGEMENT 29
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 trying to characterize processes in this way (perhaps 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’.
● Enjoys getting things done – operations management is about doing things. It takes energy and/or commitment to fi nishing tasks. It means hitting dead- lines and not letting down customers, whether they are internal or external.
● Understands customer needs – opera- tions management is about adding value for customers. This means fully understanding what ‘value’ means for customers. It means putting yourself in the customer’s place: knowing what it is like to be the customer, and know- ing how to ensure that your services or products make the customer’s life better.
● Communicates and motivates – operations management is about directing resources to produce services or prod- ucts in an effi cient and effective 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 improve- ment, 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 their 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 effective working of other functions.
● 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.
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30 PART ONE INTRODUCTION
❯ 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 processes have different characteristics?
● 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.
● 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’ operation.
● All operations are part of a larger supply network which, through the individual contribu- tions of each operation, satisfi es 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.
● Operations differ in terms of their volume of their outputs, the variety of outputs, the varia- tion 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.
● Operations management is the activity of managing the resources which are devoted to the creation and delivery of services 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
Check and improve your understanding of this chapter using self-assessment questions and a personalized study plan, a video case study, and an eText – all at www.myomlab.com .
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CASE STUDY Design house partnerships at Concept Design Services 7
‘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” operation. 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 spe- cialist design houses that have a well-known brand, and offer them a complete service of manufacturing and distribution. In many ways we are now a “business-to-business” com- pany 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 home- wares 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 prod- uct 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 manu- facturers 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 coordinated 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 3,000 retail out- lets signed up, provided with point-of-sale display facilities. Press coverage generated an enormous interest which was re inforced by the product placement on several TV cookery and ‘life style’ 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.’
CHAPTER 1 OPERATIONS MANAGEMENT 31
❯ What do operations managers do?
● Responsibilities can be classed in four categories – direct, design, deliver, and develop.
● Direct includes understanding relevant performance objectives and setting an operations strategy.
● Design includes the design of the operation and its processes and the design of its services and products.
● Delivery includes the planning and controlling of the activities of the operation.
● Develop includes the improvement of the operation over time.
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The move to the design house partnerships ‘Over the last four years, we have been designing, manufactur- ing 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 appreciate our ability to offer a full service. We can design products 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 distri- bution 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 distribution 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, they had also acquired a reputation for being able to translate dif- ficult technical designs into manufacturable and saleable products. Design house partnerships usually involved rela- tively 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 man- ufacturing 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 material handling capabilities. Products and components passed to the packing hall, where they were assembled and inspected. The newer, more complex, products often had to move from moulding to assembly and then back again for further moulding. All prod- ucts followed the same broad process route but with more products needing several progressive moulding and assembly stages, there was an increase in ‘process flow re-cycling’ which was adding complexity. One idea was to devote a separate cell to the newer and more complex products until they had ‘bed- ded 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 cumbersome 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 surface finish, and extreme consistency of
colour. We could do this because of our expertise derived from years making aerospace products. Also, by standardizing 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 prod- ucts while releasing capacity for higher margin ones. However, there have been quite a few ‘teething problems’. Co-ordinating the production schedules is currently a problem, as is agreeing quality standards. To some extent it’s our own fault. We didn’t realize 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 relationship 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 planning the flow of products from production, through the distribution cen- tre, to the customer. Sandra White, the Planning Manager, reported to Linda Fleet and was responsible for the sched- uling of all manufacturing and distribution, and for main- taining inventory levels for all the warehoused items. ‘We try to stick to a preferred production sequence for each machine and mould so as to minimize 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 utilization. With a higher variety of complex products, batch sizes have reduced and it has brought down average utilization. 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 organized at such short notice that we often get caught with stockouts. New products in particu- lar 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 design- ers always have priority.’ (Sandra White)
Customer orders for Concept and design house partner- ship 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 car- riers for the Continental European market. A standard deliv- ery timetable was used and an ‘express delivery’ service was offered for those customers prepared to pay a small delivery
32 PART ONE INTRODUCTION
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premium. 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 deliv- eries of orders containing products out of stock at the time of ordering. The express delivery service 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 customers’ own distribution depots. However, although the organization of Focus delivery was relatively straightforward, 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 num- ber 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 they had formed alliances with design houses. This had led to substantial growth in 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 brought in through the creativity and flair of our designers. Those who can combine creativity with an understanding of our partners’ busi- ness 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 designers 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 con- straints which we have to work under in the manufacturing 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 some- times don’t seem to understand the consequences or implica- tions of their design decisions or the promises they make to the design houses. More seriously they don’t really understand that we could actually help them do their job better if they co-operated 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 dis- tribution operations. If sales could be forecast more accurately
we would achieve far high utilization, 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 and 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 accuracy, 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 positioning ourselves as a complete service partner to the designers. We have a world-class design capability together with manufacturing, 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 service 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 hap- pened because we exploited a strength we already had within the company. Moving into Concept products was only possi- ble 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 partnerships we did so because we had a set of design- ers 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 manufacturing expertise. We are great at plastic injection moulding, 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 and services.
3 What would you recommend to the company if they asked you to advise them in improving their operations?
CHAPTER 1 OPERATIONS MANAGEMENT 33
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34 PART ONE INTRODUCTION
These problems and applications will help to improve your analysis of operations. You can find more practice problems as well as worked examples and guided solutions on MyOMLab at www.myomlab.com .
1 Read the short case on Pret A Manger (p. 18) and ( a ) identify the processes in a typical Pret A Manger shop together with their inputs and outputs. ( b ) Pret A Manger also supply 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 advantages and disadvantages 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 furniture store (other than IKEA) and a sandwich or snack shop (other than Pret A Manger). Observe how each shop operates, for example, where customers go, how staff inter- act with them, how big it is, how the shop has chosen to use its space, what variety of prod- ucts it offers, and so on. Think about how these shops are similar to IKEA and Pret A Manger, and how they differ.
4 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.
5 (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 Table 1.2 , what do you think would be the new operations agenda for this company?
PROBLEMS AND APPLICATIONS
SELECTED FURTHER READING
Brandon-Jones, A. and Slack, N. ( 2008 ) Quantitative Analysis in Operations Management , FT Prentice Hall, Harlow. A useful short book covering some of the more advanced quantitative aspects of operations management.
Chase, R.B. , Jacobs, F.R. and Aquilano, N.J. ( 2004 ) Operations Management for Competitive Advantage (10th edn), McGraw-Hill/Irwin, Boston, MA. There are many good general textbooks on operations management. This is a good one, though written very much for an American audience.
Chopra, S. , Deshmukh, S., Van Mieghem, J. , Zemel E. and Anupindi R. ( 2005 ) Managing Business Process Flows: Principles of Operations Management , Prentice Hall, Upper Saddle River, NJ. Takes a ‘process’ view of operations. Mathematical but rewarding.
Hall, J.M. and Johnson, M.E. ( 2009 ) When should a process be art, not science?, Harvard Business Review , March. 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 , Nov. Hammer is one of the gurus of process design. This paper is typical of his approach .
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CHAPTER 1 OPERATIONS MANAGEMENT 35
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 edn, Blackwell Business, Oxford. For those who like technical descriptions and definitions.
USEFUL WEBSITES
www.myomlab.com Test which sections you have mastered and which you need to review, with questions, a personalized study plan, video clips, revision tips, and cases.
www.opsman.org Useful materials.
http://operationsroom.wordpress.com/ Stanford University’s take on topical operations stories.
www.iomnet.org.uk The Institute of Operations Management site. One of the main professional bodies for the subject.
www.poms.org A US academic society for production and operations management. Academic, but some useful material, including a link to an encyclopedia of operations management terms.
http://sites.google.com/site/tomiportal/home One of the longest-established portals for the subject. Useful for academics and students alike.
www.ft.com Good for researching topics and companies.
www.economist.com/ The Economist’s site, well written and interesting stuff on business generally.
Now that you have finished reading this chapter, why not visit MyOMLab at www.myomlab.com where you'll find more learning resources to help you make the most of your studies and get a better grade.
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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. So in this chapter we start by describing a very broad approach to measuring operations performance that uses the ‘triple bottom line’ to judge an operation’s social, environmental and economic impact. We also introduce the related ideas of the operation’s ‘stakeholders’, and how they judge performance, and corporate social responsibility (CSR, a topic that is treated in far more detail in Chapter 21 ). The chapter then looks at the more directly operations-related 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?
❯ Why is quality important?
❯ Why is speed important?
❯ Why is dependability important?
❯ Why is flexibility important?
❯ Why is cost important?
❯ How do operations performance objectives trade off against each other?
2
Check and improve your understanding of this chapter using self-assessment questions and a personalized study plan, a video case study, and an eText – all at www.myomlab.com .
Figure 2.1 This chapter covers the role and strategic objectives of operations management
Operations performance
Operations strategy
Operations management
Direct
Design Develop
Deliver
Topic covered in this chapter
Operations management
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CHAPTER 2 OPERATIONS PERFORMANCE 37
▼
OPERATIONS IN PRACTICE A tale of two terminals
1
could have been avoided). Press reports initially blamed glitches with the state-of-the-art baggage handling system that consisted of 18 km of conveyor belts and was (theo- retically) capable of transporting 12,000 bags per hour. And indeed the baggage handling system did experience problems which had not been exposed in testing. But BAA, the airport operator, doubted that the main problem was the baggage system itself. The system had worked until it became clogged with bags that were overwhelming BA’s handlers loading them onto the aircraft. Partly this may have been because staff were not sufficiently familiar with the new system and its operating processes, but handling staff had also suffered delays getting to their new (and unfamiliar) work areas, negotiating (new) security checks and finding (again, new) car parking spaces. Also, once staff were airside they had problems logging-in. The cumulative effect of these problems meant that the airline was unable to get ground handling staff to the correct locations for loading and unloading bags from the aircraft, so baggage could not be loaded onto aircraft fast enough, so baggage backed up clogging the baggage handling system, which in turn meant closing baggage check-in and baggage drops, leading eventually to baggage check-in being halted.
However, not every airline underestimates the opera- tional complexity of airport processes. During the same year that Terminal 5 at Heathrow was suffering queues, lost bags and bad publicity, Dubai International Airport’s Terminal 3 opened quietly with little publicity and fewer problems. Like T5, it is also huge and designed to impress. Its new shimmering facilities are solely dedicated to Emirates Airline. Largely built underground (20 metres beneath the taxiway area), the multi-level environ- ment reduces passenger walking by using 157 elevators,
On 15 April 2008 British Airways (BA) ann- oun ced that two of its most senior executives, its director of operations and its director of customer services, would leave the company. They were paying the price for the disastrous opening of British Airways’ new Terminal 5 at London’s Heathrow Airport. The opening of the £4.3bn terminal, said BA’s boss Willie Walsh with magnificent understatement, ‘ was not the company’s finest hour ’. The chaos at the terminal on its opening days made news around the world and was seen by many as one of the most public failures of basic operations management in the mod- ern history of aviation. ‘ It’s a terrible , terrible PR nightmare to have hanging over you ’, said David Learmount, an aviation expert. ‘ Somebody who may have been a faithful customer and still not have their luggage after three weeks, is not good for their [BA’s] image. The one thing that’s worse than having a stack of 15,000 bags is adding 5,000 a day to that heap. ’ According to a BA spokeswoman it needed an extra 400 volunteer staff and courier companies to wade through the backlog of late baggage. So the new terminal that had opened on 27 March could not even cope with BA’s full short-haul service until 8 April (two hundred flights in and out of T5 were cancelled in its first three days). This delayed moving its long-haul operations to the new building from Terminal 4 as sched- uled on 30 April, which, in turn, disrupted the operations of other airlines, many of whom were scheduled to move into Terminal 4 once BA had moved its long-haul flights from there. Sharing the blame with BA was the British Airports Authority (BAA) which was already suffering criticism, from passenger groups, airlines, and businesses for allegedly poor performance. BAA’s non-executive chairman, Sir Nigel Rudd, said he was ‘ bitterly disappointed’ about the opening of the terminal. ‘ It was clearly a huge embarrassment to the com- pany, me personally, and the board. Nothing can take away that failure. We had all believed genuinely that it would be a great opening, which clearly it wasn’t. ’
Yet it all should have been so different. T5 took more than six years and around 60,000 workers to build. And it’s an impressive building. It is Europe’s largest free-standing structure. It was also keenly anticipated by travellers and BA alike. Willie Walsh had said that the terminal ‘ will com- pletely change his passengers’ experience ’. He was right, but not in the way he imagined! So what went wrong? As is often the case with major operations failures, it was not one thing, but several interrelated problems (all of which
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38 PART ONE INTRODUCTION
97 escalators and 82 moving walkways. Its underground baggage handling system is the deepest and the largest of its kind in the world with 90 km of baggage belts han- dling around 15,000 items per hour, with 800 RFID (see Chapter 8 ) read/write stations for 100 per cent accurate tracking. Also like T5 it handles about 30 million passen- gers a year.
But one difference between the two terminals was that Dubai’s T3 could observe and learn lessons from the botched opening of Heathrow’s Terminal 5. Paul Griffiths, the for- mer head of London’s Gatwick Airport, who is now Dubai Airport’s chief executive, insisted that his own new terminal should not be publicly shamed in the same way. ‘ There was a
lot of arrogance and hubris around the opening of T5, with all the . . . publicity that BA gen- erated ,’ Mr Griffiths says. ‘ The first rule of cus- tomer service is under-promise and over-deliver because that way you get their loyalty. BA was telling people that they were getting a glimpse of the future with T5, which created expectation and increased the chances of disappointment. Having watched the development of T5, it was clear that we had to make sure that everyone was on-message. We just had to bang heads together so that people realized what was at stake. We knew the world would be watching and waiting after T5 to see whether T3 was the next big terminal fiasco. We worked very hard to make sure that didn’t happen.’
Paul Griffiths was also convinced that Terminal 3 should undergo a phased programme with flights added progressively, rather than a ‘ big bang’ approach where the terminal opened for business on one day. ‘ We exhaustively tested the terminal systems throughout the summer . . . We continue to make sure we’re putting large loads on it, week by week, improving reliability. We put a few flights in bit by bit, in waves rather than a big bang .’ Prior to the opening he also said that Dubai Airport would never reveal a single opening date for its new Terminal 3 until all pre-opening test programmes had been completed. ‘ T3 opened so quietly ’, said one journalist, ‘ that passengers would have known that the terminal was new only if they had touched the still-drying paint. ’
OPERATIONS PERFORMANCE IS VITAL FOR ANY ORGANIZATION
It is no exaggeration to view operations management as being able to either ‘make or break’ any business. 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 ability to compete by providing the ability to respond to customers and by developing the capabilities that will keep it ahead of its competitors in the future. For example, opera- tions management principles and the performance of its operations function proved hugely important in the Heathrow T5 and Dubai T3 launches. It was a basic failure to understand the importance of operations processes that (temporarily) damaged British Airways’ reputation. It was Dubai’s attention to detail and thorough operational preparation that avoided similar problems.
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 chal- lenges seem largely economic in nature. What will be the impact on our costs of adding a new
product or service 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’s more, the ‘economic’ deci- sions also have an environmental aspect to them. Will a new product
✽ Operations principle Operations management is fundamental to the sustainable success of any organization.
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CHAPTER 2 OPERATIONS PERFORMANCE 39
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 make a profit. And this is the great dilemma. How do operations managers try to be, simultaneously, economically viable whilst being socially and environmentally responsible?
The triple bottom line One common term that tries to capture the idea of a broader approach to assessing an organization’s performance is the ‘triple bottom line’ 2 (TBL, or 3BL), also known as ‘people, planet and profit’. Essentially, it is a straightforward idea – simply that organizations should measure 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 com- munities, and individually, for example in terms of their employees) and the environment. The influential initiative that has come out of this triple bottom line approach is that of ‘sus- tainability’. 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 successful 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. Figure 2.2 illustrates some of the issues involved in achieving the triple bottom line.
The social bottom line 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 performance 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 promote their economic and social well-being.
The environmental bottom line 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 environ- ment’. Put more directly, it is generally taken to mean the extent to which business activity negatively impacts on 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 damag- ing issues around global warming. Operations managers cannot avoid responsibility for environmental performance. It is often operational failures which are at the root of pollu- tion disasters and operations decisions (such as product design) which impact on longer- term environmental issues.
The economic bottom line 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
✽ Operations principle Operations should judge themselves on the triple bottom line principle of people, planet and profit.
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40 PART ONE INTRODUCTION
✽ Operations principle All operations should be expected to contribute to their business by controlling costs, increasing revenue, reducing risks, making investment more effective and growing long-term capabilities.
performance. 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 specialists have devised various measures (such as return on assets, etc.), which are beyond the scope of this book, to do this. But from an operations perspective, five aspects
of performance have a significant impact on economic performance (see Fig. 2.3) . ● It can reduce the costs of producing its services and products. ● It can achieve customer satisfaction (and therefore secure revenue)
through good quality and service. ● It can reduce the risk of operational failure, because well-designed
and well-run operations should be less likely to fail, and if they do they should be able to recover faster and with less disruption (this is called resilience ).
• Customer safety from products and services • Employment impact of an operation’s location • Employment implications of outsourcing • Repetitive or alienating work • Staff safety and workplace stress • Non-exploitation of developing country suppliers
• 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
• 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
People – the social account, measured by the impact of the operation on the quality of people’s lives.
Planet – the environmental account, measured by
environmental impact of the operation.
Profit – the economic account, measured by profitability, return on
assets, etc. of the operation.
Sustainability
Figure 2.2 Some ways in which operations management can impact triple bottom line performance
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CHAPTER 2 OPERATIONS PERFORMANCE 41
● It can reduce the amount of investment (sometimes called capital employed) that is nec- essary to produce the required type and quantity of products and services by increasing the effective capacity of the operation and by being innovative in how it uses its physical resources.
● It can provide the basis for future innovation by learning from its experience of operating its processes, so building a solid base of operations skills, knowledge and capability within the business.
How operations can affect profits As a simple illustration of how operations management can have a very significant effect on a business, look at how it can influence the profitability of a company. Consider two informa- tion technology (IT) support companies. Both design, supply, install, and maintain IT systems for business clients. Table 2.1 shows the effect that good operations management could have on a business’s performance.
Company A believes that the way it produces and delivers its services can be used for long- term competitive advantage. Company B, by contrast, does not seem to be thinking about how its operations can be managed creatively in order to add value for its customers and sustain its own profitability. Company A is paying its service engineers higher salaries, but expects them to contribute their ideas and enthusiasm to the business without excessive supervision. Perhaps this is why Company A is ‘wasting’ less of its expenditure on overheads. Its purchas- ing operations are also spending less on buying in the computer hardware that it installs for its customers, perhaps by forming partnerships with its hardware suppliers. Finally, Company A is spending its own money wisely by investing in ‘appropriate rather than excessive’ tech- nology of its own.
So, operations management can have a very significant impact on a business’s financial performance. Even when compared with the contribution of other parts of the business, the contribution of operations can be dramatic. Consider the following example. Kandy Kitchens currently produce 5,000 units a year. The company is considering three options for boosting its earnings. Option 1 involves organizing a sales campaign that would involve spending an
Figure 2.3 Operations can contribute to the economic bottom line through low costs, high levels of service (securing revenue), lower operational risk, lower capital requirements, and providing the capabilities that determine future innovation
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42 PART ONE INTRODUCTION
extra €100,000 in purchasing extra market information. It is estimated that sales would rise by 30 per cent. Option 2 involves reducing operating expenses by 20 per cent through form- ing improvement teams that will eliminate waste in the firm’s operations. Option 3 involves investing €70,000 in more flexible machinery that will allow the company to respond faster to customer orders and therefore charge 10 per cent extra for this ‘speedy service’. Table 2.2 illustrates the effect of these three options.
Increasing sales volume by 30 per cent certainly improves the company’s sales revenue, but operating expenses also increase. Nevertheless, earnings before investment and tax (EBIT) rise to €1,000,000. But reducing operating expenses by 20 per cent is even more effective, increas- ing EBIT to €1,200,000. Furthermore, it requires no investment to achieve this. The third
Table 2.1 Some operations management characteristics of two companies
Company A has operations managers who . . . Company B has operations managers who . . .
Employ skilled, enthusiastic people, and encourage them to contribute ideas for cutting out waste and working more effectively.
Employ only people who have worked in similar companies before and supervise them closely to make sure that they ‘earn their salaries’.
Carefully monitor their customers’ perception of the quality of service they are receiving and learn from any examples of poor service and always apologize and rectify any failure to give excellent service.
Have rigid ‘completions of service’ sheets that customers sign to say that they have received the service, but they never follow up to check on customers’ views of the service that they have received.
Have invested in simple but appropriate systems of their own that allow the business to plan and control its activities effectively.
Have bought an expensive integrative system with extensive functionality, because ‘you might as well invest in state-of-the art technology’.
Hold regular meetings where staff share their experiences and think about how they can build their knowledge of customer needs, new technologies, and how their services will have to change in the future to add value for their customers and help the business to remain competitive.
At the regular senior managers’ meeting always have an agenda item entitled ‘Future business’.
Last year’s financial details for Company A: Sales revenue = €10,000,000 Wage costs = €2,000,000 Supervisor costs = €300,000 General overheads = €1,000,000 Bought-in hardware = €5,000,000 Margin = €1,700,000 Capital expenditure = €600,000
Last year’s financial details for Company B: Sales revenue = €9,300,000 Wages costs = €1,700,000 Supervisor costs = €800,000 General overheads = €1,300,000 Bought-in hardware = €6,500,000 Margin = €700,000 Capital expenditure = €1,500,000
Table 2.2 The effects of three options for improving earning at Kandy Kitchens
Original (sales volume = 50,000 units) (€,000)
Option 1 – Sales campaign Increase sales volumes by 30% to 65,000 units (€,000)
Option 2 – Operations efficiency Reduce operating expenses by 20% (€,000)
Option 3 – ‘Speedy service’ Increase price by 10% (€,000)
Sales revenue 5,000 6,500 5,000 5,500
Operating expenses 4,500 5,550 3,800 4,500
EBIT * 500 1,000 1,200 1,000
Investment required 100 70
*EBIT = Earnings before interest and tax = Net sales - Operating expenses. It is sometimes called ‘operating profit’.
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CHAPTER 2 OPERATIONS PERFORMANCE 43
✽ Operations principle All operations decisions should reflect the interests of stakeholder groups.
option involves improving customer service by responding more rapidly to customer orders. The extra price this will command improves EBIT to €1,000,000 but requires an investment of €70,000. Note how options 2 and 3 involve operations management in changing the way the company operates. Note also how, potentially, reducing operating costs and improving cus- tomer service can equal and even exceed the benefits that come from improving sales volume.
The ‘stakeholder’ perspective on operations performance The triple bottom line is an increasingly adopted approach to reaching a broad and compre- hensive assessment of operations performance, but there are other similar concepts. One is to judge the impact an operation has on its stakeholders. Stakeholders are the people and groups who have a legitimate interest in the operation’s activities. Some stakeholders are internal, for example the operation’s employees; others are external, for example custom- ers, society or community groups, and a company’s shareholders. Some external stakehold- ers have a direct commercial relationship with the organization, for example suppliers and customers; others do not, for example industry regulators. In not-for-profit operations, these stakeholder groups can overlap. So, voluntary workers in a charity may be employees, shareholders and customers all at once. However, in any kind of organization, it is a responsibility of the operations function to understand the (sometimes conflicting) objectives of its stakeholders and set its objectives accordingly.
Figure 2.4 illustrates just some of the stakeholder groups who would have an interest in how an organization’s operations function performs. But although each of these groups, to different extents, will be interested in operations performance, they are likely to have very different views of which aspect of performance is important. Table 2.3 identifies typical stake- holder requirements. But stakeholder relationships are not just one way. It is also useful to consider what an individual organization or business wants of the stakeholder groups them- selves. Some of these requirements are also illustrated in Table 2.3 .
Corporate social responsibility (CSR) Yet another idea related to the triple bottom line approach is that of corporate social respon- sibility (generally known as CSR). According to the UK government’s definition: ‘CSR is essen- tially about how business takes account of its economic, social and environmental impacts in the way it operates – maximizing the benefits and minimizing the downsides . . . Specifically, we see CSR as the voluntary actions that business can take, over and above compliance with minimum legal requirements, to address both its own competitive interests and the interests of wider society. ’ A more direct link with the stakeholder concept is to be found in the definition used by Marks & Spencer, the UK-based retailer. ‘Corporate social responsibility . . . is listening and responding
Figure 2.4 Stakeholder groups with a legitimate interest in the operation’s activities
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44 PART ONE INTRODUCTION
to the needs of a company’s stakeholders. This includes the requirements of sustainable develop- ment. 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, both from an ethical and a commercial point of view. It is treated again at various points throughout this text (and the final chapter, Chapter 21 , is devoted entirely to the topic).
SHORT CASE
In most countries it’s 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 Britain, for example, has allowed people to form ‘community interest companies’ that have a broader set of objectives. Some argue that conventional ‘for-profit firms’ come under pressure to discard 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, devel- ops 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 sim- ply concentrating on maximizing profits. According to Mr Chouinard, Patagonia is one of the new ‘benefit corpora- tions’ (usually 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 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 envi- ronmental crisis .’ They use environmentally sensitive materials (organic cotton, recycled and recyclable poly- ester, 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. Their employees enjoy good bene- fits, including generous health care, subsidized day care, flexible work schedules and paid time off for environ- mental internships. Many employees share their values,
Patagonia, a B Corp 3
care about quality and are active in environmental and community causes.
But, like most clothing companies, Patagonia out- sources its production. So how does it ensure that the company’s values are also upheld in their supply chain? It is important, they say, to work with suppliers, ‘ that share our values of integrity and environmentalism. 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 their supply chain, Patagonia launched its Footprint Chronicles , in which they trace the environmental and social impact of products from design through fibre creation to construc- tion to shipment to their warehouse.
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CHAPTER 2 OPERATIONS PERFORMANCE 45
Table 2.3 Typical stakeholders’ performance objectives
Stakeholder What stakeholders want from the operation
What the operation wants from stakeholders
Shareholders Return on investment Stability of earnings Liquidity of investment
Investment capital Long-term commitment
Directors/top management
Low/acceptable operating costs Secure revenue Well-targeted investment Low risk of failure Future innovation
Coherent, consistent, clear, and achievable strategies Appropriate investment
Staff Fair wages Good working conditions Safe work environment Personal and career development
Attendance Diligence/best efforts Honesty Engagement
Staff representative bodies (e.g. trade unions)
Conformance with national agreements Consultation
Understanding Fairness Assistance in problem solving
Suppliers (of materials, services, equipment, etc.)
Early notice of requirements Long-term orders Fair price On-time payment
Integrity of delivery, quality and volume Innovation Responsiveness Progressive price reductions
Regulators (e.g. fi nancial regulators)
Conformance to regulations Feedback on effectiveness of regulations
Consistency of regulation Consistency of application of regulations Responsiveness to industry concerns
Government (local, national, regional)
Conformance to legal requirements Contribution to (local/national/regional) economy
Low/simple taxation Representation of local concerns Appropriate infrastructure
Lobby groups (e.g. environmental lobby groups)
Alignment of the organization’s activities with whatever the group are promoting
No unfair targeting Practical help in achieving aims (if the organization wants to achieve them)
Society Minimize negative effects from the operation (noise, traffi c, etc.) and maximize positive effects ( jobs, local sponsorship, etc.)
Support for organization’s plans
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 one hand, with the expectation that they will manage in the interests of (all or part of) society in general with accountability and transparency. Even if a business wanted to 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
▼
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46 PART ONE INTRODUCTION
The five operations performance objectives Triple bottom line, stakeholder and CSR objectives form the backdrop to operations deci- sion making, but running operations at an operational day-to-day level requires a more tightly defined set of objectives. These are the five basic ‘performance objectives’ and they apply to all types of operation. Imagine that you are an operations manager in any kind of business – a hospital administrator, for example, or a production manager at a car plant. What kind of things are you likely to want to do in order to satisfy customers and contribute to competitiveness?
● You would want to do things right; that is, you would not want to make mistakes, and would want to satisfy your customers by providing error-free goods and services which are ‘fit for their purpose’. This is giving a quality advantage.
● You would want to do things fast, minimizing the time between a customer asking for goods or services and the customer receiving them in full, thus increasing the availability of your goods and services and giving a speed advantage.
● You would want to do things on time, so as to keep the delivery promises you have made. If the operation can do this, it is giving a dependability advantage.
● You would want to be able to change what you do; that is, being able to vary or adapt the operation’s activities to cope with unexpected circumstances or to give customers 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 manag- ing to do this, it is giving a cost advantage.
The next part of this chapter examines these five performance objec- tives in more detail by looking at what they mean for four different operations: a general hospital, an automobile factory, a city bus com- pany 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 qual- ity. 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.
✽ Operations principle Operations performance objectives can be grouped together as quality, speed, dependability, flexibility and cost.
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? ’ 4 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
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 qual- ity. At the supermarket it could also mean that goods run out on the supermarket shelves with a resulting loss of revenue to the operation and irritation to the external customers. Sorting the problem out could also distract the supermarket management from giving attention to the other parts of the supermarket operation. This in turn could result in further mistakes being made. So, quality (like the other performance objectives, as we shall see) has both an external impact which influ- ences customer satisfaction, and an internal impact which leads to stable and efficient processes.
WHY IS SPEED IMPORTANT?
Speed means the elapsed time between customers requesting products or services and them receiving them. Figure 2.6 illustrates what speed means for the four operations. The main benefit to the operation’s (external) customers of speedy delivery of goods and services is that the faster they can have the product or service, the more likely they are to buy it, or the more they will pay for it, or the greater the benefit they receive (see the short case below, ‘When speed means life or death’).
✽ Operations principle Quality can give the potential for better services and products and save costs.
Figure 2.5 Quality means different things in different operations
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48 PART ONE INTRODUCTION
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 automobile plant again. If the total throughput time for the door panel is six weeks, door
panels are being processed through their first operation six weeks before they reach their final destination. The quantity of door panels being processed will be determined by the forecasts for demand six weeks ahead. If instead of six weeks, they take only one week to move through the plant, the door panels being processed through their first stage are intended to meet demand only one week ahead. Under these
✽ Operations principle Speed can give the potential for faster delivery of services and products and save costs.
Figure 2.6 Speed means different things in different operations
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CHAPTER 2 OPERATIONS PERFORMANCE 49
circumstances it is far more likely that the number and type of door panels being processed are the number and type which eventually will be needed.
WHY IS DEPENDABILITY IMPORTANT?
Dependability means doing things in time for customers to receive their goods or services exactly when they are needed, or at least when they were promised. Figure 2.7 illustrates what dependability means in the four operations. Customers might only judge the 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.
SHORT CASE
‘Organic farming means taking care and getting all the details right. It is about quality from start to finish. Not only the quality of the meat that we produce but also quality of life and quality of care for the countryside.’ Nick Fuge is the farm manager at Lower Hurst Farm located within the Peak District National Park of the UK. He has day-to-day responsibil- ity for the well-being of all the livestock and the operation of the farm on strict organic principles. The 85-hectare farm has been producing high-quality beef for almost 20 years but changed to fully organic production in 1998. Organic farming is a tough regime. No artificial fertilizers, genetically modified feedstuff or growth-promoting agents are used. All beef sold from the farm is home bred and can be traced back to the animal from which it came. ‘ The quality of the herd is most important,’ says Nick, ‘as is animal care. Our customers trust us to ensure that the cattle are organically and humanely reared, and slaughtered in a manner that minimizes any distress. If you want to understand the difference between conventional and organic farming, look at the way we use veterinary help. Most conventional farmers use veterinarians like an emergency service to put things right when there is a prob- lem with an animal. The amount we pay for veterinary assistance is lower because we try to avoid problems with the animals from the start. We use veterinaries as consult- ants to help us in preventing problems in the first place.’
Catherine Pyne runs the butchery and the mail-order meat business. ‘After butchering, the cuts of meat are indi- vidually vacuum-packed, weighed and then blast frozen. We worked extensively with the Department of Food and
Organically good quality 5
Nutrition at Oxford Brooks University to devise the best way to encapsulate the nutritional, textural and flavoursome characteristics of the meat in its prime state. So, when you defrost and cook any of our products you will have the same tasty and succulent eating qualities associated with the best fresh meat.’ After freezing, the products are packed in boxes, designed and labelled for storage in a home freezer. Customers order by phone or through the internet for next-day delivery in a special ‘mini deep freeze’ reusable container which maintains the meat in its frozen state. ‘It isn’t just the quality of our product which has made us a success’, says Catherine. ‘We give a personal and inclusive level of service to our customers that makes them feel close to us and maintains trust in how we produce and prepare the meat. The team of people we have here is also an important aspect of our business. We are proud of our product and feel that it is vitally important to be personally identified with it.’
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50 PART ONE INTRODUCTION
SHORT CASE
Of all the operations which have to respond quickly to customer demand, few have more need of speed than the emergency services. In responding to road accidents especially, every second is critical. The treatment you receive during the first hour after your accident (what is called the ‘golden hour’) can determine whether you survive and fully recover or not. Making full use of the golden hour means speeding up three elements of the total time to treatment – the time it takes for the emergency services to find out about the accident, the time it takes them to travel to the scene of the accident, and the time it takes to get the casualty to appropriate treatment.
Alerting the emergency services immediately is the idea behind Mercedes-Benz’s TeleAid system. As soon as the vehicle’s airbag is triggered, an on-board computer reports through the mobile phone network to a control centre (drivers can also trigger the system manually if not too badly hurt); satellite tracking allows the vehicle to be
When speed means life or death 6
precisely located and the owner identified (if special medi- cation is needed). Getting to the accident quickly is the next hurdle. Often the fastest method is by helicopter. When most rescues are only a couple of minutes’ flying time back to the hospital, speed can really save lives. However, it is not always possible to land a helicopter safely at night (because of possible overhead wires and other hazards) so
Figure 2.7 Dependability means different things in different operations
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CHAPTER 2 OPERATIONS PERFORMANCE 51
Dependability inside the operation Inside the operation internal customers will judge each other’s performance partly by how relia- ble the other processes are in delivering material or information on time. Operations where inter- nal dependability is high are more effective than those which are not, for a number of reasons.
Dependability saves time Take, for example, the maintenance and repair centre for the city bus company. If the centre runs out of some crucial spare parts, the manager of the centre will need to spend time trying to arrange a special delivery of the required parts and the resources allocated to service the buses will not be used as productively as they would have been with- out this disruption. More seriously, the fleet will be short of buses until they can be repaired
SHORT CASE
What do you do when it’s coming up to the biggest gift-giving time of the year, you are responsible for the gifts’ deliv- ery and your aircraft, which are vital for dependable delivery, are grounded by a freak snowstorm a continent away, or mechanical problems, or an air traffic controllers’ dispute in France?
That is the potential problem facing all global parcel delivery companies; and it’s made worse when customers blame you for any non-delivery. Generally freight operators have to absorb the cost when a delivery doesn’t arrive on time, so weather and other disruptions directly affect their customer service, reputation and, ultimately, profitability. UPS, the largest express carrier and package deliv- ery company in the world, reckons that each late shipment will cost them 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 of lateness for the total cost of any lack of dependability to be huge.
So what do UPS do to minimize disruption to their delivery network when it’s coming up to a peak demand time like Christmas and there is a possibility of bad weather? The obvious thing is to very carefully keep a constant watch on the weather forecast, and indeed
How UPS maintains its dependability 7
they do have meteorologists and other staff who do this. But they also build in a buffer of extra operational capacity. At UPS headquarters a ‘hot status board’ on the wall identifies cities and regions where the com- pany has spare pilots and planes whose task is to ‘rescue volume’: that is, the spare resources are used to come to the aid of packages stuck somewhere. UPS says that this ‘hot spares programme’ rescues more than 1 million packages annually and saves the company more than $20 million in revenue.
accident data helps to select the ambulance’s waiting posi- tion, and global positioning systems help controllers to mobilize the nearest unit. At all times a key requirement for fast service is effective communication between all who are involved in each stage of the emergency. Modern com- munications technology can play an important role in this.
conventional ambulances will always be needed, both to get paramedics quickly to accident victims and to speed them to hospital. One increasingly common method of ensuring that ambulances arrive quickly at the accident site is to position them, not at hospitals, but close to where accidents are likely to occur. Computer analysis of previous
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52 PART ONE INTRODUCTION
and the fleet operations manager will have to spend time rescheduling services. So, entirely due to the one failure of dependability of supply, a significant part of the operation’s time has been wasted coping with the disruption.
Dependability saves money Ineffective use of time will translate into extra cost. The spare parts might cost more to be delivered at short notice and maintenance staff will expect to be paid even when there is not a bus to work on. Nor will the fixed costs of the operation, such as heating and rent, be reduced because the two buses are not being serviced. The reschedul- ing of buses will probably mean that some routes have inappropriately sized buses and some services could have to be cancelled. This will result in empty bus seats (if too large a bus has to be used) or a loss of revenue (if potential passengers are not transported).
Dependability gives stability The disruption caused to operations by a lack of dependabil- ity 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 cir- cumstances, each part of the operation can concentrate on improving its own area of responsibility without having its attention continually diverted by a lack of dependable service from the other parts.
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 prod- ucts 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 dif- ferent 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 companies have devel- oped their flexibility in such a way that products and services are customized for each indi- vidual customer. Yet they manage to produce them in a high-volume, mass-production manner which keeps costs down. This approach is called mass customization. Sometimes this is achieved through flexibility in design. For example, Dell is one of the largest volume producers of personal computers in the world, yet allows each customer to ‘design’ (albeit in a limited sense) their own configuration. Sometimes flexible technology is used to achieve the same effect. Another exam- ple 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 cus- tomer and analyse facial characteristics. Together with a list of customers’ personal preferences, the system then recommends a particular design and displays it on the image of the customer’s face. In consultation with the optician the customer can adjust shapes and sizes until the final
✽ Operations principle Dependability can give the potential for more reliable delivery of services and products and save costs.
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CHAPTER 2 OPERATIONS PERFORMANCE 53
SHORT CASE
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, say mymuesli, for anyone to invent their all-time favourite muesli. ‘ We wanted to provide customers 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 breakfast 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 first vis- iting the website customers first have to pick a muesli base (full nutritional information is provided). After this customers can add other basics and ingredients such as
566 quadrillion individual muesli mixes – now that’s fl exible 8
▼
Figure 2.8 Flexibility means different things in different operations
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54 PART ONE INTRODUCTION
design is chosen. Within the store the frames are assembled from a range of pre-manufactured components and the lenses ground and fitted to the frames. The whole process takes around an hour. Another example is mymuesli (see the short case above).
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 Chapter 6 ) can respond 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 individual with individual needs. The hospital staff cannot take time to ‘get into the routine’ of treating a par- ticular complaint; they must have the flexibility to adapt quickly. They must also have sufficiently flexible facilities and equipment so that time is not wasted waiting for equipment to be brought
to the patient. The time of the hospital’s resources is being saved because they are flexible in ‘changing over’ from one task to the next.
Flexibility maintains dependability Internal flexibility can also help to keep the operation on schedule when unexpected events disrupt the operation’s plans. For example, if the sudden influx of patients to the hospital requires emergency surgical procedures, routine opera- tions will be disrupted. This is likely to cause distress and considerable
✽ Operations principle Flexibility can give the potential to create new services and products, in a wider variety and with differing volumes and with differing delivery dates, as well as save costs.
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 euros, with over 40 people working for the com- pany. It has now expanded its operations to the United Kingdom. ‘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 emails 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 .’
fruit, nuts and seeds, and extras. And the company will deliver it direct by courier to your door! The name for the muesli (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’, ‘para- dise meal’ and, rather charmingly, ‘darling’s breakfast’.
The company purchase their ingredients from selected suppliers and dealers throughout the world. One of mymuesli’s great assets is the multitude of eccentric and exotic ingredients (from over 20 countries) included in the product range, like carrots, Tibetan goji-berries, cedar nuts or jelly babies. Philipp Kraiss, one of the com- pany founders, is constantly on the lookout for ‘new
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CHAPTER 2 OPERATIONS PERFORMANCE 55
inconvenience. A flexible hospital might be able to minimize the disruption by possibly hav- ing reserved operating theatres for such an emergency, and being able to bring in medical staff quickly that are ‘on call’.
WHY IS COST IMPORTANT?
To the companies which compete directly on price, cost will clearly be their major operations objective. The lower the cost of producing their goods and services, the lower can be the price to their customers. Even those companies which do not compete on price will be interested in keeping costs low. Every euro or dollar removed from an operation’s cost base is a further euro or dollar added to its profits. Not surprisingly, low cost is a universally attractive objective. The short case ‘Everyday low prices at Aldi’ describes how one retailer keeps its costs down.
The ways in which operations management can influence cost will depend largely on where the operation costs are incurred. The operation will spend its money on staff (the money spent on employing people), facilities, technology and equipment (the money spent on buying, caring for, operating and replacing the operation’s ‘hardware’) and materials (the money spent on the ‘bought-in’ materials consumed or transformed in the opera- tion). 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 lev- els of quality, speed, dependability, and flexibility that their customers require. The meas- ure that is most frequently used to indicate how successful an operation is at doing this is
✽ Operations principle Cost is always an important objective for operations management, even if the organization does not compete directly on price.
Figure 2.9 Cost means different things in different operations
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56 PART ONE INTRODUCTION
productivity. Productivity is the ratio of what is produced by an operation to what is required to produce it.
Productivity = Output from the operation
Input to the operation
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.
Singlefactor 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.
Multifactor productivity = Output from the operation All inputs to the operation
SHORT CASE
Aldi is an international ‘limited assortment’ supermarket specializing in ‘private label’, mainly food, products. It has carefully focused its service concept and delivery system to attract customers in a highly competitive market. The company believe that their unique approach to operations management make it, ‘ . . . virtually impos- sible for competitors to match our combi- nation of price and quality’.
Aldi operations challenge the norms of retailing. They are deliberately sim- ple, using basic facilities to keep down overheads. Most stores stock only a lim- ited range of goods (typically around 700, compared with 25,000 to 30,000 stocked by conventional supermar- ket 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
Everyday low prices at Aldi 9
include open carton displays which eliminate the need for special shelving, no grocery bags to encourage recy- cling as well as saving costs, and using a ‘cart rental’ sys- tem which requires customers to return the cart to the store to get their coin deposit back.
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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
5 = 40 patients/employees/week
Labour productivity = 200
(5 * 35) = 1.143 patients/labour hour
Multifactor productivity = 200
(3900 + 2000) = 0.0339 patients/£
Can cost cutting go too far? 10 SHORT CASE
There is a good reason why most electronic components are made in China: it’s cheap. Companies such as Taiwan’s Foxconn, who produce many of the world’s computer, consumer electronics, and communications products for customers such as Apple, Dell, Nokia and Sony, have perfected the art and science of squeezing cost out of their oper- ations processes. But, although Foxconn is known for having an obsession with cut- ting its costs and has moved much of its manufacturing into China and other low- cost areas, with plants in South-East Asia, Eastern Europe, and South America, it has been criticized for pushing its workers too far. In 2010 there was a cluster of suicides at its factories, with 18 workers throwing themselves from the tops of the company’s buildings; 14 people died. The firm oper- ates a huge industrial park, which it calls Foxconn City, in Shenzhen, just across the border from Hong Kong, with 15 multi-storey manufacturing buildings, each devoted to one customer. This is where the suicides took place. It prompted Foxconn to install safety nets in some of its fac- tories and hire counsellors 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 others. Food and lodging are free, as are extensive recreational 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 con- cern 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 work- ing conditions. They were eventually coaxed down by managers after two days on top of the three-floor plant. ‘ We were put to work without any training, and paid piecemeal ’, said one of the protesting workers. ‘ The assembly line ran very fast and after just one morning we all had blisters and the skin on our hands 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 regimented fashion that is not always popular with workers.
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58 PART ONE INTRODUCTION
Improving productivity One obvious way of improving an operation’s productivity is to reduce the cost of its inputs while maintaining the level of its outputs. This means reducing the costs of some or all of its transformed and transforming resource inputs. For example, a bank may choose to relocate its call centres to places where its facility-related costs (for 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 operation. 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 wastage is minimized. All oper- ations 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.
Cost reduction through internal effectiveness Our previous discussion distinguished between the benefits of each performance objective to externally and internally. Each of the various performance objectives has several internal effects, but all of them affect cost. So one important way to improve cost performance is to improve the performance of the other operations objectives (see Fig. 2.10).
Figure 2.10 Performance objectives have both external and internal effects. Internally, cost is influenced by the other performance objectives
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CHAPTER 2 OPERATIONS PERFORMANCE 59
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.
● High-quality operations do not waste time or effort having to re-do things, nor are their internal customers inconvenienced by flawed service.
● Fast operations reduce the level of in-process inventory between processes as well as reduc- ing 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 processes to operate efficiently.
● Flexible operations adapt to changing circumstances quickly and without disrupting the rest of the operation. Flexible processes can also change over between tasks quickly and without wasting time and capacity.
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60 PART ONE INTRODUCTION
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 accommodate any number of different performance objectives. For example, Figure 2.11(b) shows a proposal for using a polar diagram to assess the relative performance of different police forces in the UK.11
TRADE-OFFS BETWEEN PERFORMANCE OBJECTIVES
Earlier we examined how improving the performance of one objective inside the operation could also improve other performance objectives. Most notably better quality, speed, depend- ability and flexibility can improve cost performance. But externally this is not always the case. In fact there may be a ‘trade-off ’ between performance objectives. In other words improving the performance of one performance objective might only be achieved by sacrificing 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 summary of the trade-off idea comes from Professor Wickham Skinner, who said:
‘most managers will readily admit that there are compromises or trade-offs to be made in designing an airplane or truck. In the case of an airplane, trade-offs would involve matters such as cruising speed, take-off and landing distances, initial cost, maintenance, fuel consump- tion, 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]’.12
But there are two views of trade-offs. The first emphasizes ‘repositioning’ performance objectives by trading-off improvements in some objectives for a reduction in performance in others. The other emphasizes increasing the ‘effectiveness’ of the operation by overcom- ing trade-offs so that improvements in one or more aspects of performance can be achieved
Figure 2.11 Polar representations of (a) the relative importance of performance objectives for a taxi service and a bus service, and (b) a police force targets and performance
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CHAPTER 2 OPERATIONS PERFORMANCE 61
Figure 2.12 The efficient frontier identifies operations with performances that dominate other operations’ performance
without any reduction in the performance of others. Most businesses at some time or other will adopt both approaches. This is best illus- trated through the concept of the ‘efficient frontier’ of operations performance.
Trade-offs and the efficient frontier Figure 2.12 (a) shows the relative performance of several companies in the same industry in terms of their cost efficiency and the variety of products or services that they offer to their customers. Presumably all the operations would ideally like to be able to offer very high variety while still having very high levels of cost efficiency. However, the increased complexity that a high variety of product or service offerings brings will generally reduce the operation’s ability to operate efficiently. Conversely, one way of improving cost efficiency is to severely limit the variety on offer to customers. The spread of results in Figure 2.12 (a) is typical of an exercise such as this. Operations A, B, C, D all have chosen a different balance between variety and cost efficiency. But none is dominated by any other operation in the sense that another operation necessarily has ‘superior’ performance. Operation X, however, has an inferior performance because operation A is able to offer higher variety at the same level of cost efficiency, and operation C offers the same variety but with better cost efficiency. The convex line on which operations A, B, C and D lie is known as the ‘efficient frontier’. They may choose to position themselves differently (presumably because of different market strategies) but they cannot be criticized for being ineffective. Of course any of these operations that lie on the efficient fron- tier 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 effec- tively. Operation B has the same ratio between the two performance objectives but is achieving them more effectively.
However, a strategy that emphasizes increasing effectiveness is not confined to those operations that are dominated, such as operation X. Those with a position on the efficient frontier will generally also want
✽ Operations principle In the short term, operations cannot achieve outstanding performance in all its operations objectives.
✽ Operations principle Operations that lie on the ‘efficient frontier’ have performance levels that dominate those which do not.
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62 PART ONE INTRODUCTION
to improve their operations effectiveness by overcoming the trade-off that is implicit in the effi- cient frontier curve. For example, suppose operation B in Figure 2.12 (b) wants to improve both its variety and its cost efficiency simultaneously and move to position B1. It may be able to do this, but only if it adopts operations improvements that extend the efficient frontier. For exam- ple, one of the decisions that any supermarket manager has to make is how many checkout positions to open at any time. If too many checkouts are opened then there will be times when the checkout staff do not have any customers to serve and will be idle. The customers, however, will have excellent service in terms of little or no waiting time. Conversely, if too few checkouts are opened, the staff will be working all the time but customers will have to wait in long queues. There seems to be a direct trade-off between staff utilization (and therefore cost) and customer waiting time (speed of service). Yet even the supermarket manager might, for example, allocate
a number of ‘core’ staff to operate the checkouts but also arrange for those other staff who are performing other jobs in the supermarket to be trained and ‘on-call’ should demand suddenly increase. If the man- ager 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 sys- tem of staff allocation, the manager can both improve customer service and keep staff utilization high.
This distinction between positioning on the efficient frontier and increasing operations effectiveness by extending the frontier is an important one. Any business must make clear the extent to which it is expecting the operation to reposition itself in terms of its performance objectives and the extent to which it is expecting the operation to improve its effectiveness in several ways simultaneously.
● Operations management can either ‘make or break’ any business. In most businesses it rep- resents the bulk of its assets.
● The triple bottom line (TBL, or 3BL), includes the social bottom line, the environmental bot- tom 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 profi t.
● 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 effectively.
● In particular, operations can affect economic performance in fi ve 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.
❯ Why is operations performance vital in any organization?
SUMMARY ANSWERS TO KEY QUESTIONS
Check and improve your understanding of this chapter using self-assessment questions and a personalized study plan, a video case study, and an eText – all at www.myomlab.com .
✽ Operations principle An operation’s improvement path can be described in terms of repositioning and/or overcoming its performance trade-offs.
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❯ Why is flexibility important?
● By ‘changing what they do’, operations seek to influence the flexibility with which the company produces goods and services.
● Externally, flexibility can:
● produce new products and services (product/service flexibility);
● produce a wide range or mix of products and services (mix flexibility);
● produce different quantities or volumes of products and services (volume flexibility);
● produce products and services at different times (delivery flexibility).
● Internally, flexibility can help speed up response times, save time wasted in changeovers, and maintain dependability.
❯ Why is cost important?
● By ‘doing things cheaply’, operations seek to influence the cost of the company’s goods and services.
● Externally, low costs allow organizations to reduce their price in order to gain higher volumes or, alternatively, increase their profitability on existing volume levels.
● Internally, cost performance is helped by good performance in the other performance objectives.
CHAPTER 2 OPERATIONS PERFORMANCE 63
❯ Why is quality important?
● 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.
❯ Why is speed important?
● By ‘doing things fast’, operations seek to influence the speed with which goods and services are delivered.
● Externally, speed is an important aspect of customer service.
● Internally, speed both reduces inventories by decreasing internal throughput time and reduces risks by delaying the commitment of resources.
❯ Why is dependability important?
● 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.
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64 PART ONE INTRODUCTION
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 res- taurants, 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 customers would become unacceptably long, we will call in staff from other restaurants in the hotel. Of course, to do this we have to make sure that our staff are multi- skilled. In fact we have a policy of making sure that restaurant staff can always do more than one job. It’s this kind of flexibility which allows us to maintain fast response to the customer.’
❯ How do operations performance objectives trade off against each other?
● Trade-offs are the extent to which improvements in one performance objective can be achieved by sacrifi cing performance in others. The ‘effi cient frontier’ concept is a useful approach to articulating trade-offs and distinguishes between repositioning performance on the effi cient frontier and improving performance by overcoming trade-offs.
CASE STUDY Operations objectives at the Penang Mutiara 13
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 run- ning 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 qual- ity 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 to- wards 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 iden- tify 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 having to repeat the information they gave on the previous visit. Reception staff simply check to see if guests have stayed before, retrieve the information and take them straight to their room without irritating delays. Quality of ser- vice also means helping guests sort out their own problems. If the airline loses a guest’s luggage en route to the hotel, for example, he or she will arrive at the hotel understandably irritated. ‘The fact that it is not us who have irritated them is not really the issue. It is our job to make them feel better.’
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Dependability is also a fundamental principle of a well- managed hotel. ‘We must always keep our promises. For example, rooms must be ready on time and accounts must be ready for presentation when a guest departs; the guests expect a dependable service and anything less than full dependability is a legitimate cause for dissatisfaction.’ It is on the grand occasions, however, when dependability is par- ticularly important in the hotel. When staging a banquet, for example, everything has to be on time. Drinks, food, entertainment have to be available exactly as planned. Any deviation from the plan will very soon be noticed by customers. ‘ It is largely a matter of planning the details and anticipating what could go wrong. Once we’ve done the planning we can anticipate possible problems and plan how to cope with them, or better still, prevent them from occur- ring in the first place.’
Flexibility means a number of things to the hotel. First of all it means that they should be able to meet a guest’s requests. ‘We never like to say NO! For example, if a guest asks for some Camembert cheese and we don’t have it in stock, we will make sure that someone goes to the super- market and tries to get it. If, in spite of our best efforts, we can’t get any we will negotiate an alternative solution with the guest. This has an important side-effect – it greatly helps us to maintain the motivation of our staff. We are constantly being asked to do the seemingly impossible – yet we do it, and our staff think it’s great. We all like to be part of an organi- zation which is capable of achieving the very difficult, if not the impossible.’ Flexibility in the hotel also means the abil- ity to cope with the seasonal fluctuations in demand. They achieve this partly by using temporary part-time staff. In the back-office parts of the hotel this isn’t a major problem. In the laundry, for example, it is relatively easy to put on an extra shift in busy periods by increasing staffing levels. However, this is more of a problem in the parts of the hotel that have direct contact with the customer. ‘ New temporary staff can’t be expected to have the same customer contact skills as our more regular staff. Our solution to this is to keep
the temporary staff as far in the background as we possibly can and make sure that our skilled, well-trained staff are the ones who usually interact with the customer. So, for example, a waiter who would normally take orders, service the food, and take away the dirty plates would in peak times restrict his or her activities to taking orders and serving the food. The less skilled part of the job, taking away the plates, could be left to temporary staff.’
As far as cost is concerned, around 60 per cent of the hotel’s total operating expenses go on food and beverages, so one obvious way of keeping costs down is by making sure that food is not wasted. Energy costs, at 6 per cent of total operating costs, are also a potential source of saving. However, although cost savings are welcome, the hotel is very careful never to compromise the quality of its service in order to cut costs. ‘It is impeccable customer service which gives us our competitive advantage, not price. Good service means that our guests return again and again. At times, around half our guests are people who have been before. The more guests we have, the higher is our 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 vol- umes high and our costs low.’
QUESTIONS 1 Describe how you think the hotel’s management will:
(a) make sure that the way it manages the hotel is appropriate to the way it competes for business;
(b) implement any change in strategy; (c) develop its operation so that it drives the long-term
strategy of the hotel. 2 The case study describes how quality, speed,
dependability, flexibility and cost impact on the hotel’s external customers. Explain how each of these performance objectives might have internal benefits.
These problems and applications will help to improve your analysis of operations. You can find more practice problems as well as worked examples and guided solutions on MyOMLab at www.myomlab.com .
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
PROBLEMS AND APPLICATIONS
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66 PART ONE INTRODUCTION
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 manuscripts with a new scanning machine and one proofreader in case the machine breaks down. Currently the proofreaders check 15 manuscripts every week between them. Each is paid €80,000 per year. Hiring the new scanning machine will cost €5,000 each calendar month, but it could check 50 manu scripts per week. 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, iden-
tify how quality, speed, dependability and flexibility can help to reduce the cost of producing their services.
6 Visit the websites of two or three large oil companies such as Exxon, BP, Shell, Elf, etc. Examine how they describe their policies towards their customers, suppliers, shareholders, employees and society at large. Identify areas of the company’s operations where there may be conflicts between the needs of these different stakeholder groups. Discuss or reflect on how (if at all) such companies try and reconcile these conflicts.
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, Jul/Aug. The latest pronouncements on the Balanced Scorecard approach (which we cover in Chapter 18).
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 sub- stantial 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.
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CHAPTER 2 OPERATIONS PERFORMANCE 67
Waddock, S. ( 2003 ) Stakeholder performance implications of corporate responsibility, International Journal of Business Performance Management, vol. 5, numbers 2–3, 114–124. An introduction to stakeholder analysis.
USEFUL WEBSITES
www.myomlab.com Test which sections you have mastered and which you need to review, with questions, a personalized study plan, video clips, revision tips, and cases.
www.opsman.org Useful materials.
http://operationsroom.wordpress.com/ Stanford University’s take on topical operations stories.
www.iomnet.org.uk The Institute of Operations Management site. One of the main professional bodies for the subject.
www.poms.org A US academic society for production and operations management. Academic, but some useful material, including a link to an encyclopedia of operations management terms.
http//sites.google.com/site/tomiportal/home One of the longest-established portals for the subject. Useful for academics and students alike.
www.ft.com Good for researching topics and companies.
www.economist.com The Economist’s site, well written and interesting stuff of business generally.
www.worldbank.org Global issues. Useful for international operations strategy research.
www.weforum.org Global issues, including some operations strategy ones.
Now that you have finished reading this chapter, why not visit MyOMLab at www.myomlab.com where you'll find more learning resources to help you make the most of your studies and get a better grade.
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Figure 3.1 This chapter examines operations strategy
3 Operations strategy INTRODUCTION No organization can plan in detail every aspect of its current or future actions, but all organizations need some strategic direction and so can benefit from some idea of 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. Here we consider 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 performance
Operations strategy
Operations management
Topic covered in this chapter
Operations management
Direct
Design Develop
Deliver
❯ 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 an ‘operations resources’ view of operations strategy?
❯ How can an operations strategy be put together?
Key questions
Check and improve your understanding of this chapter using self-assessment questions and a personalized study plan, a video case study, and an eText – all at www.myomlab.com .
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CHAPTER 3 OPERATIONS STRATEGY 69
OPERATIONS IN PRACTICE
The two most important attributes of any operations strategy are first that it aligns operations activities with the strategy of the whole organization, and second that it gives clear guidance. Here are two examples of very different businesses and very different strategies which nonetheless meet both criteria.
Ryanair is today Europe’s largest low-cost airline (LCAs) and whatever else can be said about its strategy, it does not suffer from any lack of clarity. It has grown by offering low-cost basic services and has devised an operations strategy which is in line with its market posi- tion. The efficiency of the airline’s operations supports its low-cost market position. Turnaround time at airports is kept to a minimum. This is achieved partly because there are no meals to be loaded onto the aircraft and partly through improved employee productivity. All the aircraft in the fleet are identical, giving savings through standardization of parts, maintenance and servicing. It also means large orders to a single aircraft supplier and therefore the opportunity to negotiate prices down. Also, because the company often uses secondary air- ports, landing and service fees are much lower. Finally, the cost of selling its services is reduced where possible.
Ryanair has developed its own low-cost internet booking service. In addition, the day-to-day experi- ences of the company’s operations managers can also modify and refine these strategic decisions. For exam- ple, Ryanair changed its baggage handling contractors at Stansted Airport in the UK after problems with mis- directing customers’ luggage. The company’s policy on customer service is also clear. ‘We patterned Ryanair after Southwest Airlines, the most consistently profitable airline in the US,’ says Michael O’Leary, Ryanair’s Chief Executive. ‘Southwest founder Herb Kelleher created a formula for success that works by flying only one type of airplane – the 737, using smaller airports, providing no-frills service
on-board, selling tickets directly to customers and offer- ing passengers the lowest fares in the market. We have adapted his model for our marketplace and are now set- ting the low-fare standard for Europe. Our customer ser- vice,’ says O’Leary, ‘is about the most well defined in the world. We guarantee to give you the lowest air fare. You get a safe flight. You get a normally on-time flight. That’s the package. We don’t, and won’t, give you anything more. Are we going to say sorry for our lack of customer service? Absolutely not. If a plane is cancelled, will we put you up in a hotel overnight? Absolutely not. If a plane is delayed, will we give you a voucher for a restaurant? Absolutely not.’
Flextronics is a global company based in Singapore that lies behind such well-known brand names as Nokia and Dell, who are increasingly using Electronic Manufacturing Services (EMS) companies, such as Flextronics, which specialize in providing the outsourced design, engineering, manufacturing and logistics opera- tions for the big brand names. It is amongst the biggest of those EMS suppliers that offer the broadest world- wide capabilities, from design to end-to-end vertically integrated global supply chain services. Flextronics’ operations strategy must balance their customers’ need for low costs (electronic goods are often sold in a fiercely competitive market) with their need for responsive and flexible service (electronics markets can also be volatile). The company achieves this in a number of ways. First, it has an extensive network of design, manufacturing, and logistics facilities in the world’s major electronics markets, giving them significant scale and the flexibility to move activities to the most appropriate location to serve customers. Second, Flextronics offers vertical inte- gration capabilities that simplify global product devel- opment and supply processes, moving a product from its initial design through volume production, test, dis- tribution, and into post-sales service, responsively and
Two operations strategies: Flextronics and Ryanair 1
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70 PART ONE INTRODUCTION
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 relative 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 pat- tern of decisions gives an indication of the actual strategic behaviour.
Operations strategy Operations strategy concerns the pattern of strategic decisions and actions which set the role, objectives and activities of the operation. The term ‘operations strategy’ sounds at first like a con- tradiction. How can ‘operations’, a subject that is generally concerned with the day-to-day crea- tion 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 opera- tions strategy is the specific decisions and actions which set the opera- tions role, objectives and activities. The process of operations strategy is the method that is used to make the specific ‘content’ decisions.
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 where they contribute very lit- tle to the competitive success of the business through to the point where they are directly
✽ Operations principle Operations is not the same as operational, it does have a strategic role.
efficiently. Finally, Flextronics has developed integrated industrial parks to exploit fully the advantages of their global, large-scale, high-volume capabilities. Positioned in low-cost regions, yet close to all major world mar- kets, Flextronics industrial parks can significantly reduce the cost of production. Locations include Gdansk in Poland; Sárvàr in Hungary; Guadalajara in Mexico; Sorocaba in Brazil; Chennai in India; and Shanghai in China. Flextronics’ own suppliers are encouraged to
locate within these parks, from which products can be produced on-site and shipped directly from the indus- trial park to customers, greatly reducing freight costs of incoming components and outgoing products. Products not produced on-site can be obtained from Flextronics’ network of regional manufacturing facilities located near the industrial parks. Using this strategy, Flextronics says it can provide cost-effective delivery of finished products within 1–2 days of orders.
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responsible for its competitive success. This means that they should be able to, in turn, master the skills to first ‘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 strategy; you cannot even see it; all you can see is how the oper- ation 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 customers to access online information, issue quotations, request further information, check credit details, send out documentation and so on. Without effec- tive 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 capabilities 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 processes flexible enough to make novel components, organize its staff to understand the new technologies, develop relationships with its suppliers which help them respond quickly when supplying new parts, and so on.
Driving business strategy The third, and most difficult, role of operations is to drive strat- egy 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 customers (chefs) as well as its suppliers around the world (fishing companies 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 com- pany’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 evalu- ate the role and contribution of the operations function. The model traces the progression of the operations function from what is the largely negative role of stage 1 operations to it 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 isn’t holding the company back in any way. It attempts to improve by ‘avoiding making mistakes’.
Stage 2: External neutrality The first step of breaking out of stage 1 is for the operations func- tion 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 compa- nies 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 amongst 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 appropriate operations resources. The operation is trying to be ‘internally supportive’ by providing a credible operations strategy.
✽ Operations principle Operations should try to, progressively, implement, support and drive strategy.
CHAPTER 3 OPERATIONS STRATEGY 71
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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 do not only imply that it is possible for operations to take such a leading role, but are 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 effect, 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.
Stage 4: Externally supportive Yet Hayes and Wheelwright suggest a further stage – stage 4, where the company views the operations function as providing the foundation for its com- petitive 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’.
72 PART ONE INTRODUCTION
Figure 3.2 The Four-stage model of operations contribution
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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. ● Operations strategy involves exploiting the capabilities of operations resources in chosen
markets.
None of these four perspectives alone gives the full picture of what operations strategy is. But together they provide some idea of the pressures which go to form the content of operations strategy. We will treat each in turn (see Fig. 3.3).
Figure 3.3 The four perspectives on operations strategy
CHAPTER 3 OPERATIONS STRATEGY 73
THE ‘TOP-DOWN’ AND ‘BOTTOM-UP’ PERSPECTIVES
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.
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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 exam- ple, a printing services group has a company which prints packaging for consumer products. The group’s management figures that, in the long term, only companies with significant market share will achieve
substantial profitability. Its corporate objectives therefore stress market dominance. The con- sumer packaging company decides to achieve volume growth, even above short-term profita- bility or return on investment. The implication for operations strategy is that it needs to expand rapidly, investing in extra capacity (factories, 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 probably result in a very different operations strategy. The role of operations is there- fore 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
✽ Operations principle Operations strategies should reflect top-down corporate and/or business objectives.
Figure 3.4 The top-down perspective of operations strategy and its application to the printing services group
74 PART ONE INTRODUCTION
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into account the circumstances, experiences and capabilities of the various businesses that form the group. Similarly, businesses, when reviewing their strategies, will consult the indi- vidual functions within the business about their constraints and capabilities. They may also incorporate the ideas which come from each function’s day-to-day experience. Therefore an alternative view to the top-down perspective is that many strategic ideas emerge over time from operational experience. Sometimes companies move in a particular strategic direc- tion 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 examining 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 succeeds in its expansion plans. However, in doing so it finds that having 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 a sepa- rate division dedicated to providing fast, high-margin printing ser- vices to those customers 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 experi- ence over time is sometimes called the concept of emergent strategies 4 ( 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 per- spective is clear: shape the operation’s objectives and action, at least partly, by the knowl- edge it gains from its day-to-day activities. The key virtues required for shaping strategy from the bottom up are an ability to learn from experience and a philosophy of continual and incremental improvement.
✽ Operations principle Operations strategy should reflect bottom-up experience of operational reality.
Figure 3.5 The bottom-up perspective of operations strategy and its application to the printing services group
CHAPTER 3 OPERATIONS STRATEGY 75
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SHORT CASE
This is the first of two short cases in this chapter that features operations strategy at Apple. Why? Because Apple is comprised of different parts, and different parts of a business often need different operations strategies. This case looks at Apple’s retail operations strategy, the one later in the chapter looks at their sup- ply strategy.
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 Steve Jobs, then Apple’s boss, decided to build Apple Stores because conventional computer retailers were reluctant to stock its Mac computers. They said that the Apple brand was too weak (which, at the time, it was). The original Apple stores were heavily influenced by Gap (the clothing retailer) and so many Gap employees moved to work for Apple that they joked about working for ‘Gapple’. However, even with the experienced Gap retailers, Apple wanted to develop its own ideas. Consequently they built a ‘prototype store’ near their 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 their retail opera- tions 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 allows the company to pro- duce very high sales. In fact its sales productivity (sales per square metre) is above many luxury goods retailers, for example Tiffany.
Second, the customer experience: according to Ron Johnson, who built up Apple’s shop network, says, ‘People come to the Apple Store for the experience, and they’re willing 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 building relationships and trying to make peo- ple’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 product Apple doesn’t carry. Compare that with other retailers where the emphasis is on encouraging
Apple’s retail operations strategy 5
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 strat- egy. Employees are helped to cultivate their air of cool confidence through extensive training, and it’s easier to be approachable and calm when there is little pressure to push sales. Training emphasizes the importance of problem solving rather than selling and treating cus- tomers with courtesy. For example, staff have been told never to correct a customer’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’s difficult to explain why customers flock to the stores to buy Apple products at full price when discount retailers sell them cheaper.
76 PART ONE INTRODUCTION
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THE MARKET REQUIREMENTS AND OPERATIONS RESOURCES PERSPECTIVES
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 operations 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, and so on. These factors which define the customers’ requirements are called competitive factors. 6 Figure 3.6 shows the relationship between some of the more common competi- tive factors and the operation’s performance objectives. This list is not exhaustive; 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. 7 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 perfor- mance 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
Figure 3.6 Different competitive factors imply different performance objectives
CHAPTER 3 OPERATIONS STRATEGY 77
✽ Operations principle Operations strategy should reflect the requirements of the business’s markets.
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of success, but are important in another way. They are those aspects of competitiveness where the operation’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 dis- qualify the company from being considered by many customers. But any further improve- ment above the qualifying level is unlikely to gain the company much competitive benefit. To order-winning and qualifying 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 factors 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 operation’s performance at the factor varies. Order-winning factors show a steady and significant increase in their contribution to competitiveness as the operation gets better at
providing them. Qualifying factors are ‘givens’; they are expected by customers and can severely disadvantage the competitive position of the operation if it cannot raise its performance above the qualifying level. Less important objectives have little impact on customers no matter how well the operation performs in them.
Different customer needs imply different objectives 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, 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.
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
Figure 3.7 Order-winning, qualifying and less important competitive factors
78 PART ONE INTRODUCTION
✽ Operations principle Competitive factors can be classified as order winners or qualifiers.
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Competitive factors
Order winners Price Customization
Accessibility Quality of service
Speed Reliability
Qualifiers Quality Speed
Range Price
Less important Accessibility
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
Product range Medium but standardized, little need for special terms
Very wide range, many need to be customized
Design changes Occasional Continual
Delivery Fast decisions Dependable service
Quality Means error-free transactions
Means close relationships
Volume per service type Most service are high volume
Most services are low volume
Profit margins Most are low to medium, some high
Medium to high
Internal performance Cost Flexibility
objectives Speed Quality
Quality Dependability
CHAPTER 3 OPERATIONS STRATEGY 79
through four stages – introduction, growth, maturity and decline. The implication of this for operations management is that products and services will require different operations strategies 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.
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Figure 3.8 The effects of the product/service life cycle on operations performance objectives
80 PART ONE INTRODUCTION
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 40 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; how- ever, most work is fairly routine. 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 start- ing to undercut us on price. Yet I still feel that we can operate profitably in this market and anyway, we still need these capabilities to serve our other clients. The other 60 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)
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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.
✽ Operations principle Operations strategy objectives will change depending on the stage of the business’s services and products.
CHAPTER 3 OPERATIONS STRATEGY 81
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 (e.g. lawyers and other staff) and processes (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
Qualifi ers Quality (conformance) Dependability
Speed
Less important Customization Price
Operations partners should stress
Cost
Speed
Quality of relationship
Legal skills
Quality Flexibility
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The operations resources perspective The fourth and final perspective we shall take on operations strategy is based on a partic- ularly influential theory of business strategy – the resource-based view (RBV) of the firm.8
Put simply, 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 capabilities) 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 strategic success. Furthermore, the impact of its ‘operations resource’ capabilities will be at least as great as, if not greater than, that which it gets from its market position. So under- standing 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 consid- ering 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 language. 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 com- pany’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; however, the company does not have the resources, financial or physical, to take it up. From a market perspective, it is good business; but 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.
Intangible resources An operations resource perspective must start with an understanding of the resource capa- bilities 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 transform- ing 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 complete picture of what it can do. Trying to understand an operation by list- ing 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 mecha- nisms 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 intangible resources. An operation’s intangible resources include such things as its relationship with suppliers, the reputation it has with its custom- ers, its knowledge of its process technologies and the way its staff can work together in new product and service development. These intangible resources may not always be obvi- ous 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
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SHORT CASE
The founder and boss of Amazon, Jeff Bezos, was at a conference speaking about the company ’s plans. Although Amazon was generally seen as an internet book retailer and then a more general internet retailer, Jeff Bezos was actually pushing three of Amazon’s ‘utility computing’ services. These were: a company that pro- vides cheap access to online computer storage, a com- pany that allows program developers to rent computing capacity on Amazon systems, and a service that con- nects firms with other firms who perform specialist tasks that are difficult to automate. 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
Amazon, so what exactly is your core competence? 9
in extra revenue. In addition, Amazon had developed a search engine, a video download business, a service (Fulfilment By Amazon) that allowed other companies to use Amazon’s logistics capability, including the handling of returned items, and a service that provided access to Amazon’s ‘back-end’ technology.
Amazon’s apparent redefinition of its strategy was immediately criticized by some observers. ‘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; this is what we’ve been doing for the last 11 years. 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 technology and logistics services.
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. 10
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
CHAPTER 3 OPERATIONS STRATEGY 83
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strengthen competitive advantage. So, for example, if a firm did not have the good foresight (or luck) to acquire a strategic resource (such as a supply contract with a specialist sup- plier) 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 example, if a new process is developed in a company’s Stockholm site and is based on the knowledge and experience of the Stockholm staff, the process will be difficult (although not totally impos- sible) to sell to another company based elsewhere in Europe (or even in Sweden if the staff do not want to move). As a result, the advantages that derive from the process’s resources are more likely to be retained over time.
They are difficult to imitate or substitute for These two factors help define how easily 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 more connected with the tacit knowledge embed- ded within the organization, the more difficult they are for competi- tors 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 infrastruc- tural decisions are those which influence the workforce organization and the planning and control, and improvement activities. This distinction in operations strategy has been com- pared to 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 effec- tive 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. Table 3.3 illustrates both structural and infrastructural decision areas, arranged
✽ Operations principle The long-term objective of operations strategy is to build operations-based capabilities.
Table 3.3 Structural and infrastructural strategic decision areas
Structural strategic decisions Typical questions which the strategy should help to answer
New product/service design ● How should the operation decide which products or services to develop and how to manage the development process?
Supply network design ● Should the operation expand by acquiring its suppliers or its customers? If so, what customers and suppliers should it acquire?
● How should it develop the capabilities of its customers and suppliers? ● What capacity should each operation in the network have? ● What number of geographically separate sites should the operation have
and where should they be located? ● What activities and capacity should be allocated to each plant?
Process technology ● What types of process technology should the operation be using? ● Should it be at the leading edge of technology or wait until the
technology is established?
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Infrastructural strategic decisions Typical questions which the strategy should help to answer
Job design and organization ● What role should the people who staff the operation play in its management?
● How should responsibility for the activities of the operations function be allocated between different groups in the operation?
● What skills should be developed in the staff of the operation?
Planning and control ● How should the operation forecast and monitor the demand for its products and services?
● How should the operation adjust its activity levels in response to demand fl uctuations?
● What systems should the operation use to plan and control its activities? ● How should the operation decide the resources to be allocated to its
various activities?
Inventory ● How should the operation decide how much inventory to have and where it is to be located?
● How should the operation control the size and composition of its inventories?
Supplier development ● How should the operation choose its suppliers? ● How should it develop its relationship with its suppliers? ● How should it monitor its suppliers’ performance?
Improvement ● How should the operation’s performance be measured? ● How should the operation decide whether its performance is
satisfactory? ● How should the operation ensure that its performance is refl ected in its
improvement priorities? ● Who should be involved in the improvement process? ● How fast should the operation expect improvement in performance to
be? ● How should the improvement process be managed?
Failure prevention risk and recovery
● How should the operation maintain its resources so as to prevent failure? ● How should the operation plan to cope with a failure if one occurs?
SHORT CASE
Earlier in this chapter we looked at Apple’s retail opera- tions strategy. Here we move on to how Apple supplies those, and other, of its 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, mak- ing sure that current products are always supplied fast
Apple’s supply operations strategy 11
▼ 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 gives 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 technologies (touch-screens, chips, LED displays, etc.).
CHAPTER 3 OPERATIONS STRATEGY 85
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When a new component first comes out, it is usually very expensive to produce, and constructing a fac- tory 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 invest- ment. 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 advan- tages for Apple. First, it gives Apple access to new com- ponent technology months (or even years) before its rivals, allowing it to launch radical new products that are literally impossible for competitors 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 experienced and skilled provider of those parts.
In summary, according to Marty Lariviere, at 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. ’
to correspond approximately to the chapter headings used in this book. The table also shows some typical questions which each strategic decision area should be addressing.
HOW CAN AN OPERATIONS STRATEGY BE PUT TOGETHER?
The process of strategy formulation is concerned with ‘how’ operations strategies are put together. But, 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 inev- itably be a simplification of a messy reality, we shall use a four-stage model to illustrate some of the elements of ‘process’. This stage model is shown in Figure 3.9 . It divides the process of operations strategy into formulation, implementation, monitoring and control. 12
Operations strategy formulation 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 (e.g. annual) planning cycle and operations strat- egy 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 ‘formulation processes’ which are, or can be, used to formulate operations strategies. Most consultancy companies have developed their own frameworks, as have several academics.
✽ Operations principle The process of operation strategy involves formulation, implementation, monitoring and control.
86 PART ONE INTRODUCTION
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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 hind- sight, 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 potential 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 coher- ence. 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 engi- neers 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 tech- nology’s potential, for example by emailing customers with service options before the ser- vice engineer visits.
Does operations strategy have correspondence? The strategies 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 technol- ogy investment decisions might err towards the purchase of ‘off-the-shelf’ (as opposed 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 strate- gies that reduce purchasing costs; performance measurement systems that stress efficiency and productivity; continuous improvement strategies that emphasize continual cost reduc- tion; 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 which decisions are particularly critical is very much a pragmatic one which must be based on the particular circumstances of an individual firm’s opera- tions strategy. But they must be identified.
Operations strategy
formulation
Operations strategy
implementation
Operations strategy
monitoring
Operations strategy control
Figure 3.9 The four stages of the process of operations strategy Source: Operations Strategy, 3rd ed., Pearson Education Limited (Slack, N. and Lewis, M.A. 2011) p.33, Figure 1.12, © Nigel Slack and Michael Lewis 2002, 2008, 2011
CHAPTER 3 OPERATIONS STRATEGY 87
✽ Operations principle Operations strategies should be comprehensive, coherent, correspond to stated objectives and identify the critical issues.
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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 formulation 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 will 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 a complex plan into a set of rela- tively 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 16).
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 plans) 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 implementa- tion. 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 operationally (which is discussed in Chapter 10), but there are differences. At a strategic level, control can be difficult because strategic objectives are not always clear and unambig- uous. Ask 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 circumstances 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.
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SHORT CASE
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 soldiers discov- ered 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 headquarters, they discovered that the map was not of the Alps at all, but of the Pyrenees. And 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
Sometimes any plan is better than no plan 13
frozen to death. Yet their renewed confidence motivated them to get up and create opportunities.
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 operations strategy that is more useful than adhering to some over-simplistic description of a strategy process.
CHAPTER 3 OPERATIONS STRATEGY 89
SUMMARY ANSWERS TO KEY QUESTIONS
● 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.
❯ What is strategy and what is operations strategy?
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❯ What is the difference between a ‘top-down’ and a ‘bottom-up’ view of operations 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.
❯ 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 resource’ 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 opera- tions 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 influence the systems and procedures that determine how the operation will work in practice.
❯ How can an operations strategy be put together?
● Putting an operations strategy together is called ‘the process’ of operations strategy. There are four stages in the process of operations strategy.
● 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.
● Implementation – the way that strategy is operationalized or executed. Three issues are often mentioned by strategy practitioners as being important in achieving successful imple- mentation: the clarity of the strategy, the nature of the leadership provided by top manage- ment, 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 devia- tion from the plan.
90 PART ONE INTRODUCTION
● 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 specific decisions which are taken to achieve specific objectives. The process is the procedure which is used within a business to formulate its strategy.
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● 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 Long Ridge Gliding Club 14
Long Ridge Gliding Club is a not-for-profit or- ganization run by its members. The large grass airfield is located on the crest of a ridge about 400 metres above sea level. It is an ideal place to practise ridge soaring and cross-country fly- ing. The gliders are launched using a winch machine which can propel them from a stand- ing start to around 110 kilometres per hour (70 mph), 300 metres above the airfield, in just five seconds. The club is housed in a set of old farm buildings with simple but comfortable facilities for members. A bar and basic catering services are provided by the club steward and inexpen- sive bunkrooms are available for club members wishing to stay overnight.
The club has a current membership of nearly 150 pilots who range in ability from novice to expert. While some members have their own glid- ers, the club has a fleet of three single-seater and three twin-seater gliders available to its members. The club also offers trial flights to members of the public. (In order to provide insurance cover they actually sell a three- month membership with a ‘free’ flight at the start.) These ‘cas- ual flyers’ 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 which are popular as birthday and Christmas pre- sents. The club’s brochure and website encourage people to:
‘Experience the friendly atmosphere and excellent facili- ties and enjoy the thrill of soaring above Long Ridge’s dra- matic scenery. For just £70 you could soon be in the air. Phone now or just turn up and our knowledgeable staff will be happy to advise you. We have a team of profes- sional instructors dedicated to make this a really memo- rable experience.’
The average flight for a trial lesson is around 10 minutes. If the conditions are right the customer may be lucky and get a longer flight, although at busy times the instructors may feel under pressure to return to the ground to give another lesson. Sometimes when the weather is poor, or there is low cloud and wind in the wrong direction, almost not fit for flying at all, the instructors still do their best to get people airborne but they are restricted to a ‘circuit’: a
takeoff, immediate circle and land. This only takes two min- utes. Circuits are also used to help novice pilots practise landings and takeoffs. At the other end of the scale many of the club’s experienced pilots can travel long distances and fly back to the airfield. The club’s record for the longest flight is 755 kilometres taking off from the club’s airfield and landing back on the same airfield eight hours later, never having touched the ground. (They take sandwiches and drinks and a bottle they can use to relieve themselves!)
The club has three part-time employees: a club stew- ard, an office administrator and a mechanic. In the summer months the club also employs a winch driver (for launching the gliders) and two qualified flying instructors. Throughout the whole year essential tasks such as maintaining the glid- ers, getting them out of the hangar and towing them to the launch point, staffing the winches, keeping the flying log, bringing back gliders, and providing look-out cover are undertaken on a voluntary basis by club members. It takes a minimum of five experienced people (club members) to be able to launch one glider. The club’s membership includes ten qualified instructors who, together with the two paid summer instructors, provide instruction in two-seater glid- ers for the club’s members and the casual flyers.
CHAPTER 3 OPERATIONS STRATEGY 91
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When club members come to fly they are expected to arrive by 9.30 am and be prepared to stay all day to help each other and any casual flyers get airborne while they wait their turn to fly. On a typical summer’s day there might be ten club members requiring instruction plus four casual fly- ers and also six members with their own gliders who have to queue up with the others for a launch hoping for a single long-distance flight. In the winter months there would typi- cally be six members, one casual flyer and six experienced pilots. Club members would hope to have three flights on a good day, with durations of between 2 and 40 (average 10) minutes per flight, depending on conditions. However, if the weather conditions change they may not get a flight. Last year there were 180 days when flying took place, 140 in the ‘summer’ season and 40 in the ‘winter’. Club members are charged an £8.00 winch fee each time they take to the air. In addition, if they are using one of the club’s gliders, they are charged 50p per minute that they are in the air.
Bookings for trial flights and general administration are dealt with by the club’s administrator who is based in a cabin close to the car park and works most weekday mornings from 9.00 am to 1.00 pm. An answerphone takes messages at other times. The launch point is out of sight and 1.5 km from the cabin but a safe walking route is sign- posted. Club members can let themselves onto the airfield and drive to the launch point. At the launch point the 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. Occasionally they will turn up for a pre-booked trial flight and will be turned away because either the weather is unsuitable or there are not
enough club members to get a glider into the air. The casual flyers are encouraged to help out with the routine tasks but often seem reluctant to do so. After their flight they are left to find their own way back to their cars.
Income from the casual flyers is seen to be small com- pared to membership income and launch fees but the club’s management committee views casual flying as a ‘loss leader’ to generate club memberships, which are £350 per annum. The club used to generate a regular surplus of around £10,000 per year which is used to upgrade the glid- ers and other facilities. However, insurance costs have risen dramatically due to their crashing and severely damaging four gliders during the last two years. Two of the accidents resulted in the deaths of one member and one casual flyer and serious injuries to three other members.
The club’s committee is under some pressure from members to end trial flights because they reduce the num- ber 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. Although they provide a useful source of income for the hard-pressed club (around 700 were sold in the previous year), only a handful have been converted into club memberships.
QUESTIONS 1 Evaluate the service to club members and casual flyers
by completing a table similar to Table 3.1 .
2 Chart the five performance objectives to show the differing expectations of club members and casual flyers and compare these with the actual service delivered.
3 What advice would you give to the club chairman?
92 PART ONE INTRODUCTION
These problems and applications will help to improve your analysis of operations. You can find more practice problems as well as worked examples and guided solutions on MyOMLab at www.myomlab.com .
1 Explain how the four perspectives of operations strategy would apply to Ryanair and Flextronics.
2 Compare the operations strategies of 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 IKEA described in Chapter 1 ?
PROBLEMS AND APPLICATIONS
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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.
Hayes, R.H. , Pisano, G.P. , Upton, D.M. and Wheelwright, S.C. ( 2005 ) Operations, Strategy, and Technology: Pursuing the competitive edge , John Wiley & Sons, Inc., Hoboken, NJ. The gospel according to the Harvard school of operations strategy. Articulate, interesting and informative.
Slack, N. and Lewis, M. ( 2011 ) Operations Strategy , third edn, FT Prentice Hall, Harlow. What can we say – just brilliant!
Spring, M. and Araujo, L . ( 2009 ) Service, services and products: rethinking operations strat- egy, International Journal of Operations & Production Management, vol. 29, issue 5, 444–467. Academic, but interesting.
USEFUL WEBSITES
www.myomlab.com Test which sections you have mastered and which you need to review, with questions, a personalized study plan, video clips, revision tips, and cases.
www.opsman.org Useful materials.
http://operationsroom.wordpress.com/ Stanford University’s take on topical operations stories.
www.iomnet.org.un The Institute of Operations Management site. One of the main professional bodies for the subject.
www.poms.org A U.S. academic society for production and operations management. Academic, but some useful material, including a link to an encyclopedia of operations management terms.
www.ft.com Good for researching topics and companies.
www.economist.com The Economist’s site, well written and interesting stuff of business generally.
www.worldbank.org Global issues. Useful for international operations strategy research.
www.weforum.org Global issues, including some operations strategy ones.
CHAPTER 3 OPERATIONS STRATEGY 93
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) McDonald’s has come to epitomize the ‘fast food’ industry. When the company started in the 1950s it was the first to establish itself in the market. Now there are hundreds of ‘fast food’ brands in the market competing in different ways. Some of the differences between these fast food chains are obvious. For example, some specialize in chicken products, others in pizza and so on. However, some differences are less obvious. Originally, McDonald’s com- peted on low price, fast service and a totally standardized service offering. They also offered a very narrow range of items on their menu. Visit a McDonald’s restaurant and deduce what you believe to be its most important performance objectives. Then try to identify two other chains which appear to compete in a slightly different way. Then try to identify how these differences in the relative importance of competitive objectives must influence the structural and infrastructural decisions of each chain’s operations strategy.
Now that you have finished reading this chapter, why not visit MyOMLab at www.myomlab.com where you'll find more learning resources to help you make the most of your studies and get a better grade.
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4 Process design
6 Supply network design
8 Process technology
7 Layout and fl ow
9 People, jobs and organization
5 Innovation and design in services and products
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Part Two DESIGN
All operations managers are designers, because design is the process of satisfying people’s requirements through shaping or configuring products, services and processes. This part of the book looks at how managers can manage the design of the products and services they produce and the processes that produce them. At the most strategic level ‘design’ means shaping the networks of operations that supply products and services. At a more operational level it means the arrangements of the processes, technology and people that constitute operations processes.
Process design
Supply network design
Layout and flow
People, jobs and
organization
Product/service design
Process technology
Operations management
Direct
Develop
Deliver
Design
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Check and improve your understanding of this chapter using self-assessment questions and a personalized study plan, a video case study, and an eText – all at www.myomlab.com .
❯ What is process design?
❯ What objectives should process design have?
❯ How do volume and variety affect process design?
❯ How are processes designed in detail?
❯ What are the effects of process variability?
Key questions INTRODUCTION As a job description, ‘designer’ sounds like someone who is exclusively concerned with how a product looks. But the design activity is much broader than that and, while there is no universally recognized definition of ‘design’, we take it to mean ‘the process by which some functional requirement of people is satisfied through the shaping or configuration of the resources and/or activities that comprise a product, or a service, or the transformation process that produces them’. All operations managers are designers. When they purchase or rearrange the position of a piece of equipment, or when they change the way of working within a process, it is a design decision because it affects the physical shape and nature of their processes. Here we examine the design of processes. Figure 4.1 shows where this topic fits within the overall model of operations management.
Process design
4
Process design
Supply network design
Layout and flow
People, jobs and
organization
Product/service design
Process technology
Operations managementDesign
Direct
Develop
Deliver
Topic covered in this chapter
Figure 4.1 The design activities in operations management
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CHAPTER 4 PROCESS DESIGN 97
OPERATIONS IN PRACTICE
The quick service restaurant (QSR) indus- try reckon that the very first drive-through dates back to 1928 when Royce Hailey first promoted the drive-through service at his Pig Stand restaurant in Los Ange- les. Customers would simply drive by the back door of the restaurant where the chef would come out and deliver the restau- rant’s famous ‘Barbequed Pig’ sandwiches. Today, drive-through processes are slicker and faster. They are also more common – in 1975, McDonald’s did not have any drive- throughs, and now more than 90 per cent of its US restaurants incorporate a drive- through process. In fact 80 per cent of re- cent fast-food growth has come through the growing number of drive-throughs. Says one indus- try specialist, ‘There are a growing number of customers for whom fast food is not fast enough. They want to cut waiting time to the very minimum without even getting out of their car. Meeting their needs depends on how smooth we can get the process.’
The competition to design the fastest and most reli- able drive-through process is fierce. Starbucks’ drive- throughs have strategically placed cameras at the order boards so that servers can recognize regular customers and start making their order even before it’s placed. Burger King has experimented with sophisticated sound systems, simpler menu boards and see-through food bags to ensure greater accuracy (no point in being fast if you don’t deliver what the customer ordered).
These details matter. McDonald’s reckon that their sales increase one per cent for every six seconds saved at a drive-through, while a single Burger King restaurant calculated that its takings increased by 15,000 dollars
a year each time it reduced queuing time by one sec- ond. Menu items must be easy to read and understand. Designing ‘combo meals’ (burger, fries and a cola), for example, saves time at the ordering stage. Perhaps the most remarkable experiment in making drive-through process times slicker is being carried out by McDonald’s in the USA. On California’s central coast 150 miles from Los Angeles, a call centre takes orders remotely from 40 McDonald’s outlets around the country. The orders are then sent back to the restaurants through the inter- net and the food is assembled only a few metres from where the order was placed. It may only save a few sec- onds on each order, but that can add up to extra sales at busy times of the day. But not everyone is thrilled by the boom in drive-throughs. People living in the vicin- ity may complain of the extra traffic they attract and the unhealthy image of fast food, combined with a process that does not even make customers get out of their car, is, for some, a step too far.
Fast-food drive-throughs 1
WHAT IS PROCESS DESIGN?
To ‘design’ is to conceive the looks, arrangement, and workings of something before it is cre- ated . In that sense it is a conceptual exercise. Yet it is one which must deliver a solution that will work in practice. Design is also an activity that can be approached at different levels of detail. One may envisage the general shape and intention of something before getting down to defining its details. This is certainly true for process design. At the start of the process design activity it is important to understand the design objectives, especially at first, when the overall shape and nature of the process is being decided. The most common way of doing this is by positioning it according to its volume and variety characteristics. Eventually the details of the process must be analysed to ensure that it fulfils its objectives effectively. Yet, it is often only through getting to grips with the detail of a design that the feasibility of its overall shape
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98 PART TWO DESIGN
can be assessed. But don’t think of this as a simple sequential process. There may be aspects concerned with the objectives, or the broad positioning of the process, that will need to be modified following its more detailed analysis.
Process design and service/product design are interrelated Often we will treat the design of services and products, on the one hand, and the design of the processes which make them, on the other, as though they were separate activities. Yet they are clearly interrelated. It would be foolish to commit to the detailed design of any product or service without some consideration of how it is to be produced. Small changes in the design of products and services can have profound implications for the way the operation eventually has to produce them. Similarly, the design of a process can constrain the freedom of product and service designers to operate as they would wish ( see Fig. 4.2 ). This holds good whether
the operation is producing products or services. However, the overlap between the two design activities is generally greater in operations which produce services. Because many services involve the customer in being part of the transformation process, the service, as far as the customer sees it, cannot be separated from the process to which the customer is subjected. Overlapping product and process design has implications for the organization of the design activity (as will be dis-
cussed in Chapter 5 ). Certainly, when product designers also have to make or use the things which they design, it can concentrate their minds on what is important. For example, in the early days of flight, the engineers who designed the aircraft were also the test pilots who took them out on their first flight. For this reason, if no other, safety was a significant objective in the design activity.
✽ Operations principle The design of processes cannot be done independently of the services and/or products that they are creating.
Figure 4.2 The design of products/services and processes are interrelated and should be treated together
WHAT OBJECTIVES SHOULD PROCESS DESIGN HAVE?
The whole point of process design is to make sure that the performance of the process is appropriate for whatever it is trying to achieve. For example, if an operation competed pri- marily on its ability to respond quickly to customer requests, its processes would need to be designed to give fast throughput times. This would minimize the time between customers requesting a product or service and them receiving it. Similarly, if an operation competed on low price, cost-related objectives would be likely to dominate its process design. Some kind
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CHAPTER 4 PROCESS DESIGN 99
of logic should link what the operation as a whole is attempting to achieve, and the performance objectives of its individual processes. This is illustrated in Table 4.1 .
Operations performance objectives translate directly to process design objectives, as shown in Table 4.1 . But, because processes are managed at a very operational level, process design also needs to consider a more ‘micro’ and detailed set of objectives. These are largely concerned with flow through the process. When whatever are being ‘processed’ enter a process they will progress through a series of activities where they are ‘transformed’ in some way. Between these activities they may dwell for some time in inventories, waiting to be transformed by the next activity. This means that the time that a unit spends in the process (its throughput time) will be longer than the sum of all the transforming activities that it passes through. Also the resources that perform the process’s activities may not be used all the time because not all items will necessarily require the same activities and the capacity of each resource may not match the demand placed upon it. So neither the items moving through the process, nor the resources performing the activities may be fully utilized. Because of this the way that items leave the process is unlikely to be exactly the same as the way they arrive at the process. It is common for more ‘micro’ performance flow objectives to be used that describe process flow performance. For example:
● Throughput rate (or flow rate) is the rate at which items emerge from the process, i.e. the number of items passing through the process per unit of time.
● Cycle time, or takt time, is the reciprocal of throughput rate – it is the time between items emerging from the process. The term ‘takt’ time is the same, but is normally applied to
Table 4.1 The impact of strategic performance objectives on process design objectives and performance
Operations performance objective
Typical process design objectives Some benefi ts of good process design
Quality ● Provide appropriate resources, capable of achieving the specifi cation of products or services
● Error-free processing
● Products and services produced ‘on-specifi cation’
● Less recycling and wasted effort within the process
Speed ● Minimum throughput time ● Output rate appropriate for demand
● Short customer waiting time ● Low in-process inventory
Dependability ● Provide dependable process resources ● Reliable process output timing and
volume
● On-time deliveries of products and services ● Less disruption, confusion and rescheduling
within the process
Flexibility ● Provide resources with an appropriate range of capabilities
● Change easily between processing states (what, how, or how much is being processed?)
● Ability to process a wide range of products and services
● Low cost/fast product and service change ● Low cost/fast volume and timing changes ● Ability to cope with unexpected events (e.g.
supply or a processing failure)
Cost ● Appropriate capacity to meet demand ● Eliminate process waste in terms of:
● excess capacity ● excess process capability ● in-process delays ● in-process errors ● inappropriate process inputs
● Low processing costs ● Low resource costs (capital costs) ● Low delay/inventory costs (working capital
costs)
✽ Operations principle The design of any process should be judged on its quality, speed, dependability, flexibility and cost performance.
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‘paced’ processes like moving belt assembly lines. It is the ‘beat’, or tempo, of working required to meet demand. 2
● Throughput time is the average elapsed time taken for inputs to move through the process and become outputs.
● The number of items in the process (also called the ‘work in pro- gress’, or in-process inventory), as an average over a period of time.
● The utilization of process resources is the proportion of available time that the resources within the process are performing useful work.
Standardization of processes One of the most important process design objectives, especially in large organizations, con- cerns the extent to which process designs should be standardized. By standardization in this context we mean ‘doing things in the same way’, or more formally, ‘adopting a common sequence of activities, methods and use of equipment’. It is a significant issue in large organi- zations because very often different ways of carrying out similar or identical tasks emerge over time in the various parts of the organization. But, why not allow many different ways of doing the same thing? That would give a degree of autonomy and freedom for individu- als and teams to exercise their discretion. The problem is that allowing numerous ways of doing things causes confusion, misunderstandings, and eventually, inefficiency. In health- care processes, it can even cause preventable deaths. For example, in 2012, the Royal College
of Physicians in the UK revealed that there were more than 100 types of charts that were used for monitoring patients’ vital signs in use in UK hospitals. 3 This leads to confusion, they said. Potentially, thousands of hospital deaths could be prevented if doctors and nurses used a stand- ardized bed chart. Because hospitals can use different charts, doctors and nurses have to learn how to read new ones when they move. They
recommended that there should be just one chart and one process for all staff that check on patients’ conditions. Professor Derek Bell said: ‘ Developing and adopting a standardized early warning system will be one of the most significant developments in healthcare in the next decade.’
Standardization is also an important objective in the design of some services and prod- ucts, for similar reasons (see Chapter 5 ). The practical dillema for most organizations is how to draw the line between processes that are required to be standardized, and those that are allowed to be different.
Environmentally sensitive process design With the issues of environmental protection becoming more important, process designers have to take account of ‘green’ issues (see Chapter 21 ). In many developed countries, legislation has already provided some basic standards. Interest has focused on some fundamental issues:
● The sources of inputs to a product or service. (Will they damage rainforests? Will they use up scarce minerals? Will they exploit the poor or use child labour?)
● Quantities and sources of energy consumed in the process. (Do plastic beverage bottles use more energy than glass ones? Should waste heat be recovered and used in fish farming?)
● The amounts and type of waste material that are created in the manufacturing processes. (Can this waste be recycled efficiently, or must it be burnt or buried in landfill sites?)
● The life of the product itself . (If a product has a long useful life will it consume fewer resources than a short-life product?)
● The end-of-life of the product . (Will the redundant product be difficult to dispose of in an environmentally friendly way?)
Designers are faced with complex trade-offs between these factors, although it is not always easy to obtain all the information that is needed to make the ‘best’ choices. To help make more rational decisions in the design activity, some industries are experimenting with
✽ Operations principle Process flow objectives should include throughput rate, throughput time, work- in-progress, and resource utilization; all of which are interrelated.
✽ Operations principle Standardizing processes can give some significant advantages, but not every process can be standardized.
100 PART TWO DESIGN
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life-cycle analysis. This technique analyses all the production inputs, the life-cycle use of the product and its final disposal, in terms of total energy used and all emitted wastes. The inputs and wastes are evalu- ated at every stage of a service or product’s creation, beginning with the extraction or farming of the basic raw materials. The short case below, ‘Ecover’s ethical operation design’, demonstrates that it is pos- sible to include ecological considerations in all aspects of product and process design.
PROCESS TYPES – THE VOLUME–VARIETY EFFECT ON PROCESS DESIGN
Earlier (in Chapter 1 ) we saw how processes range from those producing at high volume (for example, credit card transaction processing) to low volume (for example, funding a large complex take-over deal). Also processes can range from producing a very low variety
✽ Operations principle The design of any process should include consideration of ethical and environmental issues.
SHORT CASE
Ecover cleaning products, such as wash- ing liquid, are famously ecological. In fact it is the company’s whole rationale. ‘We clean with care’, say Ecover. ‘Whether you’re washing your sheets, your floors, your hands or your dishes, our products don’t contain those man-made chemicals that can irritate your skin.’ But it isn’t just their products that are based on an eco- logically sustainable foundation. Ecover’s ecological factories in France and Belgium also embody the company’s commitment to sustainability. Whether it’s their factory roof, their use of energy or the way they treat the water used in the production pro- cesses, Ecover point out that they do their best to limit environmental impact. For example, the Ecover factory operates entirely on green electricity – the type produced by wind generators, tidal generators and other natural sources. What is more, they make the most of the energy they do use by choosing energy-efficient lighting, and then only using it when needed. And, although the machinery they use in the fac- tories is standard for the industry, they keep their energy and water consumption down by choosing low-speed appliances that can multi-task and don’t require water to clean them. For example, the motors on their mixing machines can mix 25 tonnes of Ecover liquid while ‘con- suming no more electricity than a few flat irons’. And they have a ‘squeezy gadget that’s so efficient at getting every last drop of product out of the pipes, they don’t need to be rinsed through’. Ecover say that they ‘hate waste, so we’re big on recycling. We keep the amount of packaging used in our products to a minimum, and make sure what- ever cardboard or plastic we do use can be recycled, reused
Ecover’s ethical operation design 4
or re-filled. It’s an ongoing process of improvement; in fact, we’ve recently developed a new kind of green plastic we like to call “Plant-astic” that’s 100% renewable, reusable and recyclable – and made from sugarcane.’
Even the building is ecological. It is cleverly designed to follow the movement of the sun from east to west, so that production takes place with the maximum amount of natural daylight (good for saving power and good for working conditions). The factory’s frame is built from pine rather than more precious timbers and the walls are constructed using bricks that are made from clay, wood pulp and mineral waste. They require less energy to bake, yet they’re light, porous and insulate well. The fac- tories’ roofs are covered in thick, spongy Sedum (a flow- ering plant, often used for natural roofing) that gives insulation all year round. In fact it’s so effective that they don’t need heating or air conditioning – the temperature never drops below 4°C and never rises above 26°C.
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of products or services (for example, in an electricity utility) to a very high variety (for example, in an architects’ practice). Usually the two dimensions of volume and variety go together – but in a reversed way. So low-volume processes often produce a high variety of products and services, and high-volume operations processes often produce a nar- row variety of products and services. Thus there is a continuum from
low volume/high variety through to high volume/low variety, on which we can position pro- cesses. And within a single operation there could be processes with very different positions on this volume–variety spectrum. So, for example, compare the approach taken in a medi- cal service during mass medical treatments, such as large-scale immunization programmes, with that taken in transplant surgery where the treatment is designed specifically to meet the needs of one person. In other words, no one type of process design is best for all types of requirement in all circumstances – different products or services with different volume– variety positions require different processes.
Process types The position of a process on the volume–variety continuum shapes its overall design and the general approach to managing its activities. These ‘general approaches’ to designing and managing processes are called process types. Different terms are used to identify process types depending on whether they are predominantly manufacturing or service processes, and there is some variation in the terms used. For example, it is not uncommon to find the ‘manu- facturing’ terms used in service industries. Figure 4.3 illustrates how these ‘process types’ are used to describe different positions on the volume–variety spectrum.
Project processes Project processes deal with discrete, usually highly customized products; often with a rela- tively long timescale between the completion of each item, where each job has a well-defined start and finish. Project processes have low volume and high variety. Activities involved in the process can be ill-defined and uncertain. Transforming resources may have to be organized especially for each item (because each item is different). The process may be complex, partly because the activities in such processes often involve significant discretion to act according to
✽ Operations principle The design of any process should be governed by the volume and variety it is required to produce.
Figure 4.3 Different process types imply different volume–variety characteristics for the process
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professional judgement. Examples of project processes include software design, movie pro- duction, most construction companies, and large fabrication operations such as those manu- facturing turbo generators.
The major construction site shown in the picture is a project process. Each ‘item’ (building) is different and poses different challenges to those running the process (civil engineers)
Jobbing processes Jobbing processes also deal with high variety and low volumes. However, while in project processes each item has resources devoted more or less exclusively to it, in jobbing processes each product has to share the operation’s resources with many others. Resources will pro- cess a series of items but, although each one will require similar attention, they may differ in their exact needs. Many jobs will probably be ‘one-offs’ that are never repeated. Again, job- bing processes could be relatively complex; however, they usually produce physically smaller products and, although sometimes requiring considerable skill, such processes often involve fewer unpredictable circumstances. Examples of jobbing processes include made-to-measure tailors, many precision engineers such as specialist toolmakers, furniture restorers, and the printer who produces tickets for the local social event.
This craftsman is using general purpose wood- cutting technology to make a product for an individual customer. The next product made will be different (although maybe similar) for a different customer
Batch processes Batch processes may look like jobbing processes, but do not have the same degree of variety. As the name implies, each time batch processes produce more than one item at a time. So each part of the process has periods when it is repeating itself, at least while the ‘batch’ is being processed. If the size of the batch is just two or three items, it is little different to job- bing. Conversely, if the batches are large, and especially if the products are familiar to the operation, batch processes can be fairly repetitive. Because of this, the batch type of process can be found over a wide range of volume and variety levels. Examples of batch processes include machine tool manufacturing, the production of some special gourmet frozen foods, and the manufacture of most of the component parts which go into mass-produced assem- blies such as automobiles.
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Mass processes Mass processes are those which produce items in high volume and relatively narrow variety (narrow in terms of its fundamentals – an automobile assembly process might produce thou- sands of variants, yet essentially the variants do not affect the basic process of production). The activities of mass processes are usually repetitive and largely predictable. Examples of mass processes include frozen food production, automatic packing lines, automobile plants, television factories, and DVD production.
In this kitchen, food is being prepared in batches. All batches go through the same sequence (preparation, cooking and storage) but each batch is of a different dish
Continuous processes Continuous processes have even higher volume and usually lower variety than mass processes. They also usually operate for longer periods of time. Sometimes they are literally continuous in that their products are inseparable, being produced in an endless flow. They often have rel- atively inflexible, capital-intensive technologies with highly predictable flow and, although products may be stored during the process, their predominant characteristic is of smooth flow from one part of the process to another. Examples of continuous processes include water pro- cessing, petrochemical refineries, electricity utilities, steel making and some paper making.
The automobile plant is everyone’s idea of a mass process. Each product is almost (but not quite) the same, and made in large quantities
This continuous water treatment plant almost never stops (it only stops for maintenance) and performs only one task (filtering impurities). Often we only notice the process if it goes wrong
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Professional services Professional services are high-contact processes where customers spend a considerable time in the service process. They can provide high levels of customization (the process being highly adaptable in order to meet individual customer needs). Professional services tend to be people-based rather than equipment-based, and usually staff are given considerable discre- tion in servicing customers. Professional services include management consultants, lawyers’ practices, architects, doctors’ surgeries, auditors, health and safety inspectors and some com- puter field service operations.
Here consultants are preparing to start a consultancy assignment. They are discussing how they might approach the various stages of the assignment, from understanding the real nature of the problem through to the implementation of their recommended solutions. This is a process map, although a very high-level one. It guides the nature and sequence of the consultants’ activities
Service shops Service shops have levels of volume and variety (and customer contact, customization and staff discretion) between the extremes of professional and mass services (see next para- graph). Service is provided via mixes of front- and back-office activities. Service shops include banks, high street shops, holiday tour operators, car rental companies, schools, most restau- rants, hotels and travel agents.
The health club shown in the picture has front-office staff who can give advice on exercise programmes and other treatments. To maintain a dependable service the staff need to follow defined processes every day
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Mass services Mass services have many customer transactions, involving limited contact time and little cus- tomization. Staff are likely to have a relatively defined division of labour and have to follow set procedures. Mass services include supermarkets, a national rail network, an airport, tele- communications service, library, television station, the police service and the enquiry desk at
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a utility. For example, one of the most common types of mass service are the call centres used by almost all companies that deal directly with consumers. Coping with a very high volume of enquiries requires some kind of structuring of the process of communicating with cus- tomers. This is often achieved by using a carefully designed enquiry process (sometimes known as a script).
✽ Operations principle Process types indicate the position of processes on the volume–variety spectrum.
This is an account management centre at a retail bank. It deals with thousands of customer requests every day. Although each customer request is different, thay are all of the same type – involving customer accounts
Critical commentary
Although the idea of process types can be useful, it is in many ways simplistic. In reality there is no clear boundary between process types. For example, many processed foods are manufactured using mass production processes but in batches. So, a ‘batch’ of one type of cake (say) can be followed by a ‘batch’ of a marginally different cake (perhaps with different packaging), followed by yet another, etc. Essentially this is still a mass process, but not quite as pure a version of mass processing as a manufacturing process that only makes one type of cake. Similarly, the categories of service processes are likewise blurred. For example, a specialist camera retailer would normally be categorized as a service shop, yet it also will give, sometimes very specialized, technical advice to customers. It is not a professional service like a consultancy, of course, but it does have elements of a professional service process within its design. This is why the volume and variety characteristics of a process are sometimes seen as being a more realistic way of describing processes. The product–process matrix described next adopts this approach.
The product–process matrix The most common method of illustrating the relationship between a process’s volume– variety position and its design characteristics is shown in Figure 4.4 . Often called the ‘ product– process’ matrix, 5 it can in fact be used for any type of process whether producing products or services. The underlying idea of the product–process matrix is that many of the more impor- tant elements of process design are strongly related to the volume–variety position of the pro- cess. So, for any process, the tasks that it undertakes, the flow of items through the process, the layout of its resources, the technology it uses, and the design of jobs, are all strongly influ- enced by its volume–variety position. This means that most processes should lie close to the
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diagonal of the matrix that represents the ‘fit’ between the process and its volume–variety position. This is called the ‘natural’ diagonal, or the ‘line of fit’.
Moving off the natural diagonal A process lying on the natural diagonal of the matrix shown in Figure 4.4 will normally have lower operating costs than one with the same volume–variety position that lies off the diag- onal. This is because the diagonal represents the most appropriate process design for any volume–variety position. Processes that are on the right of the ‘natu- ral’ diagonal would normally be associated with lower volumes and higher variety. This means that they are likely to be more flexible than seems to be warranted by their actual volume–variety position. That is, they are not taking advantage of their ability to standardize their activities. Because of this, their costs are likely to be higher than they would be with a process that was closer to the diagonal. Conversely, processes that are on the left of the diagonal have adopted a position that would normally be used for higher vol- ume and lower variety processes. Processes will therefore be ‘over-standardized’ and probably too inflexible for their volume–variety position. This lack of flexibility can also lead to high costs because the process will not be able to change from one activity to another as readily as a more flexible process. 6 So a first step in examining the design of an existing process is to check if it is on the natural diagonal of the product–process matrix. The volume–variety position of the process may have changed without any corresponding change in its design. Alternatively, design changes may have been introduced without considering their suitability for the process’s volume–variety position.
Manufacturing operations
process types
Service operations
process types
Project
Jobbing
Batch
Mass
Continuous
Professional service
Service shop
The ‘natural’ diagonal or ‘line of fit’
Mass service
Low volume
High variety
High volume
Low variety
More process flexibility than is
needed, so high cost
Less process flexibility than is
needed, so high cost
P ro
c e
s s c
h a
ra c
te ri
s ti
c s
Product/service characteristics
Figure 4.4 Deviating from the ‘natural’ diagonal on the product–process matrix has consequences for cost and flexibility Source : Based on Hayes and Wheelwright
✽ Operations principle Moving off the ‘natural diagonal’ of the product–process matrix will incur excess cost.
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Example The ‘meter installation’ unit of a water utility company installed and repaired water meters. Each installation job could vary significantly because the requirements of each customer varied and because meters had to be fitted into different water pipe systems. When a cus- tomer requested an installation a supervisor would survey the customer’s water system and inform the installation team. An appointment would then be made for an installer to visit the customer’s location and install the meter. Then the company decided to install a new ‘stand- ard’ remote-reading meter to replace the wide range of existing meters. This new meter was designed to make installation easier by including universal quick-fit joints that reduced pipe cutting and jointing during installation. As a pilot, it was also decided to prioritize those cus- tomers with the oldest meters and conduct trials of how the new meter worked in practice. All other aspects of the installation process were left as they were. However, after the new meters were introduced, the costs of installation were far higher than forecast and the installers were frustrated at the waste of their time and the now relatively standardized installation job. So the company decided to change its process. It cut out the survey stage of the process because, using the new meter, 98 per cent of installations could be fitted in one visit, minimizing dis- ruption to the customer. Just as significantly, fully qualified installers were often not needed, so installation could be performed by less expensive labour.
This example is illustrated in Figure 4.5. The initial position of the installation process is at point A. The installation unit were required to install a wide variety of meters into a very wide variety of water systems. This needed a survey stage to assess the nature of the job and the use of skilled labour to cope with the complex tasks. The installation of the new type of meter changed the volume–variety position for the process by reducing the variety the jobs tackled by the process and increasing the volume it had to cope with. However, the process was not changed and therefore the design of the process was appropriate for its old volume–variety position, but not the new one. In effect it had moved to point B in Figure 4.5. It was off the diagonal, with unnecessary flexibility and high operating costs. Redesigning the process to take advantage of the reduced variety and complexity of the job (position C on Figure 4.5) allowed installation to be performed far more efficiently.
The ‘natural’ diagonal or ‘line of fit’
New service, old process, so excess process
flexibility and high cost
P ro
c e ss
c h a ra
c te
ri st
ic s
A B
C
Original service with appropriate process
characteristics
New service with new process
having appropriate process
characteristics
Low volume
High variety
High volume
Low variety Product/service characteristics
Figure 4.5 A product–process matrix with process positions from the water meter example
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SHORT CASE Space4 housing processes 7
You don’t usually build a house this way. It’s more like the way you would expect an automobile to be made. Nevertheless, Space4’s huge building in Birmingham (UK) contains what some believe could be the future of house building. Space4 is a division of Persimmon, who are the UK’s largest house builder. It has a production line whose 90 operators, many of whom have automobile assembly experience, are capable of producing the timber-framed panels that form the shell of the new homes at a rate of a house every hour. The automated, state-of-the-art elec- tronic systems within the production pro- cess control all facets of the operation, ensuring that scheduling and operations are timely and accurate. There is a direct link between the Computer Aided Design (CAD) systems that design the houses and the manu- facturing processes that make them, reducing the time between design and manufacture. The machinery itself incorporates automatic predictive and preventative maintenance routines that minimize the chances of unexpected breakdowns. But not everything about the process relies on automation. Because of their previ- ous automobile assembly experience, staff are used to the just-in-time high-efficiency culture of modern mass production. After production, the completed panels are stacked in three-metre-high piles and are then forklifted into trucks where they are dispatched to building sites across the UK. Once the panels arrive at the building site,
the construction workforce can assemble the exterior of a 1,200 sq ft (average size) new home in a single day. Because the external structure of a house can be built in a few hours, and enclosed in a weatherproof cover- ing, staff working on the internal fittings of the house, such as plumbers and electricians, can have a secure and dry environment in which to work, irrespective of exter- nal conditions. Furthermore, the automated production process uses a type of high-precision technology which means there are fewer mistakes in the construction pro- cess on site. This means that the approval process from the local regulatory authority takes less time. This pro- cess, says Space4, speeds up the total building time from 12–14 weeks to 8–10 weeks.
DETAILED PROCESS DESIGN
After the overall design of a process has been determined, its individual activities must be con- figured. At its simplest, this detailed design of a process involves identifying all the individual activities that are needed to meet the objectives of the process, and deciding on the sequence in which these activities are to be performed and who is going to do them. There will, of course, be some constraints to this. Some activities must be carried out before others and some activi- ties can only be done by certain people or equipment. Nevertheless, for a process of any reason- able size, the number of alternative process designs is usually large. Because of this, process design is often done using some simple visual approach, such as process mapping.
Process mapping Process mapping simply involves describing processes in terms of how the activities within the process relate to each other. There are many techniques which can be used for process mapping (or process blueprinting, or process analysis, as it is sometimes called). However, all
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the techniques identify the different types of activity that take place during the process and show the flow of materials or people or information through the process.
Process mapping symbols Process mapping symbol s are used to classify different types of activity. And although there is no universal set of symbols used all over the world for any type of process, there are some that are commonly used. Most of these derive either from the early days of ‘scientific’ management around a century ago (see Chapter 9 ) or, more recently, from information system flowchart- ing. Figure 4.6 shows the symbols we shall use here.
These symbols can be arranged in order, and in series or in parallel, to describe any pro- cess. For example, Figure 4.7 shows one of the processes used in a theatre lighting operation. The company hires out lighting and stage effects equipment to theatrical companies and event organizers. Customers’ calls are routed to the store technician. After discussing their requirements, the technician checks the equipment availability file to see if the equipment can be supplied from the company’s own stock on the required dates. If the equipment cannot
be supplied, in-house customers may be asked whether they want the company to try and obtain it from other possible suppliers. This offer depends on how busy and how helpful individual technicians are. Sometimes customers decline the offer and a ‘Guide to Customers’ leaflet is sent to the customer. If the customer does want a search,
the technician will call potential suppliers in an attempt to find available equipment. If this is not successful the customer is informed, but if suitable equipment is located it is reserved for delivery to the company’s site. If equipment can be supplied from the company’s own stores, it is reserved on the equipment availability file and the day before it is required a ‘kit wagon’ is taken to the store where all the required equipment is assembled, taken back to the workshop and checked. If any equipment is faulty it is repaired at this point. After that it is packed in special cases and delivered to the customer.
Different levels of process mapping For a large process, drawing process maps at this level of detail can be complex. This is why processes are often mapped at a more aggregated level, called high-level process mapping, before more detailed maps are drawn. Figure 4.8 illustrates this for the total ‘supply and install lighting’ process in the stage lighting operation. At the highest level the process can be drawn simply as an input–transformation–output process with materials and customers as its input
Figure 4.6 Some common process mapping symbols
✽ Operations principle Process mapping is needed to expose the reality of process behaviour.
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Customer request
Check availability
file
Supply from stock?
Customer wants
search? Search
Confirm to
supplier
Call customer
Reserve on
availability file
Kit wagon to store
Assemble kit
Check equipment
Needs attention?
Repair
Pack for delivery
Deliver to customer
Send customer
guide
Stored equip.
Y
N
Y Y
Y
N N
N Kit to workshop
Supplier’s equipment to
store
Supplier
Find supplier?
Figure 4.7 Process map for ‘enquire to delivery’ process at stage lighting operation
resources and lighting services as outputs. No details of how inputs are transformed into out- puts are included. At a slightly lower or more detailed level, what is sometimes called an out- line process map (or chart) identifies the sequence of activities but only in a general way. So the process of ‘enquire to delivery’ that is shown in detail in Figure 4.7 is here reduced to a sin- gle activity. At the more detailed level, all the activities are shown in a ‘detailed process map’ (the activities within the process ‘install and test’ are shown).
Although not shown in Figure 4.8, an even more micro set of process activities could be mapped within each of the detailed process activities. Such a micro-detailed process map could specify every single motion involved in each activity. Some quick service restaurants, for example, do exactly that. In the lighting hire company example, most activities would not be mapped in any more detail than that shown in Figure 4.8. Some activities, such as ‘return to base’, are probably too straightforward to be worth mapping any further. Other activities, such as ‘rectify faulty equipment’, may rely on the technician’s skills and discretion to the extent that the activity has too much variation and is too complex to map in detail. Some activities, however, may need mapping in more detail to ensure quality or to protect the company’s interests. For example, the activity of safety-checking the customer’s site to ensure that it is compliant with safety regulations will need specifying in some detail to ensure that the company can prove it exercised its legal responsibilities.
Process visibility It is sometimes useful to map such processes in a way that makes the degree of visibility of each part of the process obvious. This allows those parts of the process with high visibility to be designed so that they enhance the customer’s perception of the process. Figure 4.9 shows yet another part of the lighting equipment company’s operation: the ‘collect and check’ pro- cess. The process is mapped to show the visibility of each activity to the customer. Here four levels of visibility are used. There is no hard and fast rule about this; many processes simply
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‘Install and test’
‘Collect and check’
The operation of supplying and installing lighting equipment The outline process of supplying
and installing lighting equipment
The detailed process of the ‘Install and test’ activity
To customer
site Safety check
Compliant?
Rectify in time?
Pass check?
Rectify in time?
Rectify
File failure note
Inform customer
Install Routine control check
Job sign-off
Return to base
Rectify Call for
help Y
N
N
N
N
YY
Y
‘Enquire to delivery’
Figure 4.8 The ‘supply and install’ operations process mapped at three levels
distinguish between those activities that the customer could see and those that they couldn’t. The boundary between these two categories is often called the ‘line of visibility’. In Figure 4.9 three categories of visibility are shown. At the very highest level of visibility, above the ‘line of interaction’, are those activities that involve direct interaction between the lighting company’s staff and the customer. Other activities take place at the customer’s site or in the presence of the customer but involve less or no direct interaction. Yet further activities (the two transport activities in this case) have some degree of visibility because they take place away from the company’s base and are visible to potential customers, but are not visible to the immediate customer.
Throughput time, cycle time and work in progress So far we have looked at the more conceptual (process types) and descriptive (process map- ping) aspects of process design. We now move on the equally important analytical perspec- tive. And the first stage is to understand the nature of, and relationship between, throughput time, cycle time and work-in-progress. As a reminder: throughput time is the elapsed time between an item entering the process and leaving it, cycle time is the average time between items being processed, and work-in-progress is the number of items within the process at any point in time. In addition the work content for each item will also be important for some
analysis. It is the total amount of work required to produce a unit of output. For example, suppose that in an assemble-to-order sandwich shop, the time to assemble and sell a sandwich (the work content) is two minutes and that two people are staffing the process. Each member of staff will serve a customer every two minutes: therefore every two minutes, two customers are being served, and so on average
✽ Operations principle Process analysis derives from an understanding of the required process cycle time.
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Line of interaction
Agree report
To site
Check it worked
OK
Y
To base
Check and clean equipment
Call customer to agree
terms
Worked OK?
Did it work OK?
Equipment to storeY
Prepare report
Amend usage
records
N
Very high visibility
High visibility
Medium visibility
Back office – low
visibility
Line of visibility
N
Take out equipment
Figure 4.9 The ‘collect and check’ process mapped to show different levels of process visibility
a customer is emerging from the process every minute (the cycle time of the process). When customers join the queue in the process they become work-in-progress (sometimes written as WIP). If the queue is ten people long (including that customer) when the customer joins it, he or she will have to wait ten minutes to emerge from the process. Or put more succinctly…
Throughput time = Work-in-progress : Cycle time
In this case: 10 minutes’ wait = 10 people in the system * 1 minute per person
Little’s law This mathematical relationship (throughput time = work-in-progress * cycle time) is called Little’s law. It is simple but very useful, and it works for any stable process. Little’s law states that the average number of things in the system is the product of the average rate at which things leave the system and average time each one spends in the system. Or, put another way, the average number of objects in a queue is the product of the entry rate and the average hold- ing time.
For example, suppose it is decided that in a new sandwich assembly and sales process, the average number of customers in the process should be limited to around ten and the max- imum time a customer is in the process should be on average four minutes. If the time to assemble and sell a sandwich (from customer request to the customer leaving the process) in the new process has been reduced to 1.2 minutes, how many staff should be serving?
Putting this into Little’s law:
Throughput time = 4 minutes and
Work-in-progress, WIP = 10 So since:
Throughput time = WIP * cycle time
Cycle time = Throughput time
WIP
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Worked example
Mike was totally confident in his judgement. ‘You’ll never get them back in time’, he said. ‘They aren’t just wasting time, the process won’t allow them to all have their coffee and get back for 11 o’clock.’ Looking outside the lecture theatre, Mike and his colleague Dick were watching the 20 business people who were attending the seminar queuing to be served coffee and bis- cuits. The time was 10.45 and Dick knew that unless they were all back in the lecture theatre at 11 o’clock there was no hope of finishing his presentation before lunch.
‘I’m not sure why you’re so pessimistic’, said Dick. ‘They seem to be interested in what I have to say and I think they will want to get back to hear how operations management will change their lives.’ Mike shook his head. ‘I’m not questioning their motivation,’ he said , ‘I’m questioning the ability of the process out there to get through them all in time. I have been timing how long it takes to serve the coffee and biscuits. Each coffee is being made fresh and the time between the server asking each customer what they want and them walking away with their coffee and biscuits is taking 48 seconds. Remember that, according to Little’s law, throughput equals work in process multiplied by cycle time. If the work in process is the 20 managers in the queue and cycle time is 48 seconds, the total throughput time is going to be 20 multiplied by 0.8 minutes which equals 16 minutes. Add to that sufficient time for the last person to drink their coffee and you must expect a total throughput time of a bit over 20 minutes. You just haven’t allowed lo ng enough for the process.’ Dick was impressed. ‘Err . . . what did you say that law was called again? ’ ‘Little’s law’, said Mike.
Cycle time for the process = 4
10 = 0.4 minute
That is, a customer should emerge from the process every 0.4 minutes, on average. Given that an individual can be served in 1.2 minutes:
Number of servers required = 1.2 0.4
= 3
In other words, three servers would serve three customers in 1.2 minutes. Or one customer in 0.4 minute.
✽ Operations principle Little’s law states that Throughput time = Work-in-progress * Cycle time.
Worked example
Every year it was the same. All the workstations in the building had to be renovated (tested, new software installed, etc.) and there was only one week in which to do it. The one week fell in the middle of the August vacation period when the renovation process would cause minimum disruption to normal working. Last year the company’s 500 workstations had all been renovated within one working week (40 hours). Each renovation last year took on aver- age 2 hours and 25 technicians had completed the process within the week. This year there would be 530 workstations to renovate but the company’s IT support unit had devised a faster testing and renovation routine that would only take on average 1 and a half hours instead of 2 hours. How many technicians will be needed this year to complete the renovation pro- cesses within the week?
Last year:
Work-in-progress (WIP) = 500 work stations
Time available (Tt ) = 40 hours
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Throughput efficiency This idea that the throughput time of a process is different from the work content of what- ever it is processing has important implications. What it means is that for significant amounts of time no useful work is being done to the materials, information, or customers that are progressing through the process. In the case of the simple example of the sandwich process described earlier, customer throughput time is restricted to 4 minutes, but the work content of the task (serving the customer) is only 1.2 minutes. So, the item being processed (the cus- tomer) is only being ‘worked on’ for 1.2/4 = 30 per cent of its time. This is called the through- put efficiency of the process.
Percentage throughput efficiency = Work content
Throughput time * 100
In this case the throughput efficiency is very high, relative to most processes, perhaps because the ‘items’ being processed are customers who react badly to waiting. In most material and information transforming processes, throughput efficiency is far lower, usually in single per- centage figures.
Average time to renovate = 2 hours
Therefore throughput rate (Tr) = 1 > 2 hours per technician = 0.5N
where N = Number of technicians
Little's law: WIP = Tt * Tr
500 = 40 * 0.5N
N = 500
40 * 0.5
= 25 technicians
This year: Work-in-progress (WIP) = 530 workstations
Time available = 40 hours
Average time to renovate = 1.5 hours
Throughput rate Tr = 1 > 1.5 per technician = 0.67N
where N = Number of technicians
Little's law: WIP = Tt * Tr
530 = 40 * 0.67N
N = 530
40 * 0.67
= 19.88 (say 20) technicians
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Worked example
A vehicle licensing centre receives application documents, keys in details, checks the infor- mation provided on the application, classifies the application according to the type of licence required, confirms payment and then issues and mails the licence. It is currently processing an average of 5,000 licences every 8-hour day. A recent spot check found 15,000 applications that were ‘in progress’ or waiting to be processed. The sum of all activi- ties that are required to process an application is 25 minutes. What is the throughput effi- ciency of the process?
Work in progress = 15,000 applications
Cycle time = time producing
Time producing
Number produced =
8hours 5,000
= 480 minutes
5,000 = 0.096 minutes
From Little’s law,
Throughput time = WIP * Cycle time
Throughput time = 15,000 x 0.096
= 1,440 minutes = 24 hours = 3 days of working
Throughput efficiency = Work content
Throughput time =
25 1,440
= 1.74 per cent
Although the process is achieving a throughput time of 3 days (which seems reasonable for this kind of process) the applications are only being worked on for 1.7 per cent of the time they are in the process.
Value-added throughput efficiency The approach to calculating throughput efficiency that is described above assumes that all the ‘work content’ is actually needed. Changing a process can significantly reduce the time that is needed to complete the task. Therefore, work content is actually dependent upon the methods and technology used to perform the task. It may be also that individual elements of a task may not be considered ‘value-added’. So, value-added throughput effi- ciency restricts the concept of work content to only those tasks that are literally adding value to whatever is being processed. This often eliminates activities such as movement, delays and some inspections.
For example, if in the vehicle licensing worked example, of the 25 minutes of work content only 20 minutes were actually adding value, then:
Value-added throughput efficiency = 20
1,440 = 1.39 per cent
Workflow 8 When the transformed resource in a process is information (or documents containing information), and when information technology is used to move, store and manage the information, process design is sometimes called ‘workflow’ or ‘workflow management’. It is defined as ‘the automation of procedures where documents, information or tasks are passed between participants according to a defined set of rules to achieve, or contribute
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to, an overall business goal’. Although workf low may be managed manually, it is almost always managed using an IT system. The term is also often associated with Business Process Re-engineering (see Chapter 1 and Chapter 18 ). More specifically, workflow is concerned with the following:
● Analysis, modelling, definition and subsequent operational implementation of business processes.
● The technology that supports the processes. ● The procedural (decision) rules that move information/documents through processes. ● Defining the process in terms of the sequence of work activities, the human skills needed to
perform each activity, and the appropriate IT resources.
The effects of process variability So far in our treatment of process design we have assumed that there is no significant variability either in the demand to which the process is expected to respond, or in the time taken for the process to perform its various activities. Clearly, this is not the case in reality. So, it is important to look at the variability that can affect processes and take ac count of it.
There are many reasons why variability occurs in processes. These can include: the late (or early) arrival of material, information or customers; a temporary malfunction or breakdown of process technology within a stage of the process; the recycling of ‘mis-processed’ materials, information or customers to an earlier stage in the process; variation in the requirements of items being processed, etc. All these sources of variation interact with each other, but result in two fundamental types of variability:
● Variability in the demand for processing at an individual stage within the process, usually expressed in terms of variation in the inter-arrival times of items to be processed.
● Variation in the time taken to perform the activities (i.e. process a unit) at each stage.
To understand the effect of arrival variability on process performance it is first useful to examine what happens to process performance in a very simple process as arrival time changes under conditions of no variability. For example, the simple process shown in Figure 4.10 is comprised of one stage that performs exactly 10 minutes of work. Items arrive at the process at a constant and predictable rate. If the arrival rate is 1 unit every 30 minutes, then the process will be utilized for only 33.33 per cent of the time, and the items will never have to wait to be processed. This is shown as point A on Figure 4.10 . If the arrival rate increases to 1 arrival every 20 minutes, the utilization increases to 50 per cent, and again the items will not have to wait to be processed. This is point B on Figure 4.10 . If the arrival rate increases to 1 arrival every 10 minutes, the process is now fully utilized, but, because a unit arrives just as the previous one has finished being processed, no unit has to wait. This is point C on Figure 4.10 . However, if the arrival rate ever exceeded 1 unit every 10 minutes, the waiting line in front of the process activity would build up indefinitely, as is shown as point D in Figure 4.10 . So, in a perfectly constant and predictable world, the rela- tionship between process waiting time and utilization is a rectangular function as shown by the red line in Figure 4.10 .
However, when arrival and process times are variable, then sometimes the process will have items waiting to be processed, while at other times the process will be idle, waiting for items to arrive. Therefore the process will both have a ‘non-zero’ average queue and be under-utilized in the same period. So, a more realistic point is that shown as point X in Figure 4.10 . If the average arrival time were to be changed with the same variability, the blue line in Figure 4.10 would show the relationship between average waiting time and process
✽ Operations principle Variability in a process acts to reduce its efficiency.
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Figure 4.10 The relationship between process utilization and number of items waiting to be processed for constant, and variable, arrival and process times
utilization. As the process moves closer to 100 per cent utilization, the higher the average waiting time will become. Or, to put it another way, the only way to guarantee very low wait- ing times for the items is to suffer low process utilization.
The greater the variability in the process, the more the waiting time utilization deviates from the simple rectangular function of the ‘no variability’ conditions that was shown in Figure 4.10 . A set of curves for a typical process is shown in Figure 4.11 (a). This phenomenon has important implications for the design of processes. In effect it presents three options to process designers wishing to improve the waiting time or utilization performance of their processes, as shown in Figure 4.11 (b). Either,
● accept long average waiting times and achieve high utilization (point X); ● accept low utilization and achieve short average waiting times (point Y); or ● reduce the variability in arrival times, activity times, or both, and achieve higher utiliza-
tion and short waiting times (point Z).
To analyse processes with both inter-arrival and activity time variability, queuing or ‘waiting line’ analysis can be used. This is treated in the supplement to Chapter 11 . But, do not dismiss the relationship shown in Figures 4.10 and 4.11 as some minor technical phenomenon. It is
far more than this. It identifies an important choice in process design that could have strategic implications. Which is more important to a business, fast throughput time, or high utilization of its resources? The only way to have both of these simultaneously is to reduce vari- ability in its processes, which may itself require strategic decisions such as limiting the degree of customization of products or services,
✽ Operations principle Process variability results in simultaneous waiting and resource under-utilization.
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Figure 4.11 The relationship between process utilization and number of items waiting to be processed for variable arrival and activity times
SHORT CASE
It may be the busiest international air- port in the world, but it is unlikely to win any prizes for being the most loved. Long delays, overcrowding and a shortage of capacity have meant that Heathrow is often a cause of frustration to harassed passengers. Yet to the airlines it is an attractive hub. Its size and location give it powerful ‘network effects’. This means that it can match incoming passengers with outgoing flights to hundreds of dif- ferent cities. Actually it is its attractive- ness to the airlines that is one of its main problems. Heathrow ’s runways are in such demand that they are almost always operating at, or close to, their maximum capacity. In fact its runways operate at 99 per cent of capacity. This compares with about 70 per cent at most other large airports. This means that any slightest vari- ability (bad weather or an unscheduled landing, such as a plane having to turn back with engine trouble) causes delays, which in turn cause more delays. (See Figure 4.11
Heathrow delays caused by capacity utilization 9
for the theoretical explanation of this effect.) The result is that a third of all flights at Heathrow are delayed by at least 15 minutes. This is poor when compared with other large European airports such as Amsterdam and Frankfurt, which have 21 per cent and 24 per cent of flights delayed respectively.
CHAPTER 4 PROCESS DESIGN 119
or imposing stricter limits on how products or services can be delivered to customers, and so on. It also demonstrates an important point concerned with the day-to-day management of process – the only way to absolutely guarantee a 100 per cent utilization of resources is to accept an infinite amount of work-in-progress and/or waiting time.
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● This design activity is more likely to be successful if the complementary activities of product or service design and process design are coordinated.
❯ What objectives should process design have?
● The overall purpose of process design is to meet the needs of customers through achieving appropriate levels of quality, speed, dependability, fl exibility and cost.
● The design activity must also take account of environmental issues. These include exami- nation of the source and suitability of materials, the sources and quantities of energy consumed, the amount and type of waste material, the life of the product itself, and the end-of-life state of the product.
❯ How do volume and variety affect process design?
● The overall nature of any process is strongly infl uenced by the volume and variety of what it has to process.
● The concept of process types summarizes how volume and variety affect overall process design.
● In manufacturing, these process types are (in order of increasing volume and decreasing variety) project, jobbing, batch, mass and continuous processes. In service operations, although there is less consensus on the terminology, the terms often used (again in order of increasing volume and decreasing variety) are professional services, service shops and mass services.
❯ How are processes designed in detail?
● Processes are designed initially by breaking them down into their individual activities. Often common symbols are used to represent types of activity. The sequence of activities in a process is then indicated by the sequence of symbols representing activities. This is called ‘process mapping’. Alternative process designs can be compared using process maps and improved processes considered in terms of their operations performance objectives.
● Process performance in terms of throughput time, work-in-progress, and cycle time are related by a formula known as Little’s law: throughput time equals work-in-progress multi- plied by cycle time.
● Variability has a signifi cant effect on the performance of processes, particularly the relation- ship between waiting time and utilization.
120 PART TWO DESIGN
SUMMARY ANSWERS TO KEY QUESTIONS
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❯ What is process design?
● Design is the activity which shapes the physical form and purpose of both products and services and the processes that produce them.
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CASE STUDY The Action Response Applications Processing Unit (ARAPU)
Introduction Action Response is a London-based charity ded- icated to providing fast responses to critical situ- ations throughout the world. It was founded by Susan N’tini, its Chief Executive, to provide rela- tively short-term aid for small projects until they could obtain funding from larger donors. The charity receives requests for cash aid, usually from an intermediary charity, and looks to pro- cess the request quickly, providing funds where and when they are needed . ‘Give a man a fish and you feed him today, teach him to fish and you feed him for life. It’s an old saying and it makes sense but – and this is where Action Response comes in – he might starve while he’s training to catch fish.’ ( Susan N’tini)
Nevertheless, Susan does have some wor- ries. She faces two issues in particular. First she is receiving complaints that funds are not getting through quickly enough. Second the costs of running the operation are starting to spiral. She explains. ‘We are becoming a victim of our own success. We have striven to provide greater acces- sibility to our funds; people can access applica- tion forms via the internet, by post and by phone. But we are in danger of losing what we stand for. It is taking longer to get the money to where it is needed and our costs are going up. We are in danger of failing on one of our key objectives: to minimize the proportion of our turnover that is spent on administration. At the same time we always need to be aware of the risk of bad publicity through making the wrong decisions. If we don’t check applications thoroughly, funds may go to the “wrong” place and if the newspapers gets hold of the story we would run a real risk of losing the goodwill, and therefore the funds, from our many supporters.’
Susan held regular meetings with key stakeholders. One charity that handled a large number of applications for people in Nigeria told her of frequent complaints about the delays over the processing of the applications. A sec- ond charity representative complained that when he tel- ephoned to find out the status of an application the ARAPU staff did not seem to know where it was or how long it might be before it was complete. Furthermore he felt that this lack of information was eroding his relationship with his own clients, some of whom were losing faith in him as a result. ‘ Trust is so important in the relationship’, he explained.
Some of Susan’s colleagues, while broadly agreeing with her anxieties over the organization’s responsiveness and efficiency, took a slightly different perspective. ‘One of the
really good things about Action Response is that we are more flexible than most charities. If there a need and if they need support until one of the larger charities can step in, then we will always consider a request for aid. I would not like to see any move towards high process efficiency harming our abil- ity to be open-minded and consider requests that might seem a little unusual at first.’ ( Jacqueline Horton, Applications Assessor)
Others saw the charity as performing an important counselling role. ‘Remember that we have gained a lot of experience in this kind of short-term aid. We are often the first people that are in a position to advise on how to apply for larger and longer-term funding. If we developed this aspect of our work we would again be fulfilling a need that is not adequately supplied at the moment.’ (Stephen Nyquist, Applications Assessor)
The ARAPU process Potential aid recipients, or the intermediary charities repre- senting them, apply for funds using a standard form. These forms can be downloaded from the internet or requested
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via a special helpline. Sometimes the application will come directly from an individual community leader but more usually it will come via an intermediary charity that will help the applicant to complete the form. The application is sent to ARAPU, usually by fax or post (some were submitted online, but few communities have this facility).
ARAPU employs seven applications assessors with sup- port staff who are responsible for data entry, coding, filing and ‘completing’ (staff who prepare payment, or explain why no aid can be given). In addition, a board of unpaid trustees meets every Thursday, to approve the assessors’ decisions. The unit’s IT system maintained records of all transactions, providing an update on the number of appli- cations received, approved, declined, and payments allo- cated. These reports identified that the Unit received about 300 new applications per week and responded to about the same number (the Unit operates a 35-hour week). But whilst the Unit’s financial targets were being met, the trend indicated that cost per application was increasing. The tar- get for the turnaround of an application, from receipt of application to response, was 20 days, and although this was not measured formally, it was generally assumed that turna- round time was longer than this. Accuracy had never been an issue as all files were thoroughly assessed to ensure that all the relevant data was collected before the applications were processed. Productivity seemed high and there was always plenty of work waiting for processing at each sec- tion, with the exception that the ‘completers’ were some- times waiting for work to come from the committee on a Thursday. Susan had conducted an inspection of all sec- tions’ in-trays that had revealed a rather shocking total of about 2,000 files waiting within the process, not counting those waiting for further information.
Processing applications The processing of applications is a lengthy procedure requiring careful examination by applications assessors who are trained to make well-founded assessments in line with the charity’s guidelines and values. Incoming appli- cations are opened by one of the four ‘receipt’ clerks who check that all the necessary forms have been included in the application. The receipt clerks take about 10 minutes per application. These are then sent in batches to the coding staff, twice a day. The five coding clerks allocate a unique identifier to each application and key the informa- tion on the application into the system. The coding stage takes about 20 minutes for each application. Files are then sent to the senior applications assessors’ secretary’s desk. As assessors become available, the secretary provides the next job in the line to the assessor.
About one hundred of the cases seen by the assessors each week are put aside after only 10 minutes ‘scanning’
because the information is ambiguous so further infor- mation is needed. The assessor returns these files to the secretaries, who write to the applicant (usually via the inter- mediate charity) requesting additional information, and return the file to the ‘receipt’ clerks who ‘store’ the file until the further information eventually arrives (usually between 1 and 8 weeks). When it does arrive, the file enters the pro- cess and progresses through the same stages again. Of the applications that require no further information, around half (150) are accepted and half (150) declined. On aver- age, those applications that were not ‘recycled’ took around 60 minutes to assess.
All the applications, whether approved or declined, are stored prior to ratification. Every Thursday the Committee of Trustees meets to formally approve the applications assessors’ decisions. The committee’s role is to sample the decisions to ensure that the guidelines of the charity are upheld. In addition they will review any particularly unu- sual cases highlighted by the applications assessors. Once approved by the committee the files are then taken to the completion officers. There are three ‘decline’ officers whose main responsibility is to compile a suitable response to the applicant pointing out why the application failed and offering, if possible, helpful advice. An experienced ‘decline’ officer takes about 30 minutes to finalize the file and write a suitable letter. Successful files are passed to the four ‘payment’ officers where again the file is completed, letters (mainly standard letters) are created and payment instructions are given to the bank. This usually takes around 50 minutes, including dealing with any queries from the bank about payment details. Finally the paperwork itself is sent, with the rest of the file, to two ‘dispatch’ clerks who complete the documents and mail them to the applicant. The dispatch activity takes, on average, 10 minutes for each application.
The feeling amongst the staff was generally good. When Susan consulted the team they said their work was clear and routine, but their life was made difficult by charities that rang in expecting them to be able to tell them the status of an application they had submitted. It could take them hours, sometimes days, to find any individual file. Indeed two of the ‘receipt’ clerks now were working almost full time on this activity. They also said that charities frequently com- plained that decision making seemed slow.
QUESTIONS 1 What objectives should the ARAPU process be trying
to achieve?
2 What is the main problem with the current ARAPU process?
3 How could the ARAPU process be improved?
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2 A laboratory process receives medical samples from hospitals in its area and then subjects them to a number of tests that take place in different parts of the laboratory. The average response time for the laboratory to complete all its tests and mail the results back to the hos- pital (measured from the time that the sample for analysis arrives) is 3 days. A recent process map has shown that, of the 60 minutes that are needed to complete all the tests, the tests themselves took 30 minutes, moving the samples between each test area took 10 minutes, and double-checking the results took a further 20 minutes. What is the throughput efficiency of this process? What is the value-added throughput efficiency of the process? (State any assumptions that you are making.) If the process is rearranged so that all the tests are per- formed in the same area, thus eliminating the time to move between test areas, and the tests themselves are improved to half the amount of time needed for double-checking, what effect would this have on the value-added throughput efficiency?
3 The regional government office that deals with passport applications is designing a process that will check applications and issue the documents. The number of applications to be pro- cessed is 1,600 per week and the time available to process the applications is 40 hours per week. What is the required cycle time for the process?
4 For the passport office, described above, the total work content of all the activities that make up the total task of checking, processing and issuing a passport is, on average, 30 minutes. How many people will be needed to meet demand?
5 The same passport office has a ‘clear desk’ policy that means that all desks must be clear of work by the end of the day. How many applications should be loaded onto the process in the morning in order to ensure that every one is completed and desks are clear by the end of the day? (Assume a 7.5 hour (450 minutes) working day.)
6 Visit a drive-through quick service restaurant and observe the operation for half an hour. You will probably need a stopwatch to collect the relevant timing information. Consider the fol- lowing questions: (a) Where are the bottlenecks in the service (in other words, what seems to take the longest
time)? (b) How would you measure the efficiency of the process? (c) What appear to be the key design principles that govern the effectiveness of this process? (d) Using Little’s law, how long would the queue have to be before you think it would be not
worth joining the queue?
CHAPTER 4 PROCESS DESIGN 123
PROBLEMS AND APPLICATIONS
These problems and applications will help to improve your analysis of operations. You can find more practice problems as well as worked examples and guided solutions on MyOMLab at www.myomlab.com .
1 Read again the description of fast food drive-through processes at the beginning of this chapter. (a) Draw a process map that reflects the types of process described. (b) What advantage do you think is given to McDonald’s through its decision to establish a
call centre for remote order-taking for some of its outlets?
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SELECTED FURTHER READING
Chopra, S. , Anupindi, R. , Deshmukh, S.D. , Van Mieghem, J.A. and Zemel, E. ( 2012 ) Managing Business Process Flows, 2nd edn , Prentice Hall, Upper Saddle River, NJ. An excellent, although mathematical, approach to process design in general.
Hammer, M. ( 1990 ) Reengineering Work: Don’t automate, obliterate, Harvard Business Review , July–August. This is the paper that launched the whole idea of business processes and process man- agement in general to a wider managerial audience. Slightly dated but worth reading.
Hopp, W.J. and Spearman, M.L. ( 2001 ) Factory Physics, 2nd edn, McGraw-Hill, New York. Very technical so don’t bother with it if you aren’t prepared to get into the maths. However, some fasci- nating analysis, especially concerning Little’s law.
Smith, H. and Fingar, P. ( 2003 ) Business Process Management: The Third Wave , Meghan-Kiffer Press, Tampa, FL. A popular book on process management from a BPR perspective.
USEFUL WEBSITES
www.bpmi.org Site of the Business Process Management Initiative. Some good resources including papers and articles.
www.bptrends.com News site for trends in business process management generally. Some inter- esting articles.
www.iienet.org The American Institute of Industrial Engineers site. They are an important profes- sional body for process design and related topics.
www.waria.com A Workflow and Reengineering association website. Some useful topics.
www.myomlab.com Test which sections you have mastered and which you need to review, with questions, a personalized study plan, video clips, revision tips, and cases.
www.opsman.org Useful materials.
http://operationsroom.wordpress.com/ Stanford University’s take on topical operations stories.
http://sites.google.com/site/tomiportal/home One of the longest-established portals for the subject. Useful for academics and students alike.
www.ft.com Good for researching topics and companies.
www.economist.com The Economist’s site, well written and interesting stuff of business generally.
Now that you have finished reading this chapter, why not visit MyOMLab at www.myomlab.com where you'll find more learning resources to help you make the most of your studies and get a better grade.
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Figure 5.1 The design activities in operations management covered in this chapter
INTRODUCTION New service and product design is concerned with putting new ideas into practice by embedding them in services and products. And innovation is the act of introducing new ideas. So the activity of service and product design and the objective of ‘innovation’ are closely linked. Innovation is about novel ideas. Design is about making ideas practical. Both are important because services and products are often the first thing that customers see of a company. And although operations managers may only have partial responsibility for service and product design, they always have some responsibility, if only to provide the information and advice upon which successful service or product development depends. But increasingly operations managers are expected to take a more active part in service and product design. Unless a service, however well conceived, can be implemented, and unless a product, however well designed, can be produced to a high standard, it can never bring its full benefits. Figure 5.1 shows where the issues covered here fit into the overall operations model.
❯ How does innovation impact on design?
❯ Why is good service and product design important?
❯ What are the stages in service and product design?
❯ What are the benefits of interactive design?
Process design
Supply network design
Layout and flow
People, jobs and
organization
Product/service design
Process technology
Operations managementDesign
Direct
Develop
Deliver
Topic covered in this chapter
Key questions
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Innovation and design in services and products 5
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126 PART TWO DESIGN
OPERATIONS IN PRACTICE
In 1907 a janitor called Murray Spangler put together a pillowcase, a fan, an old biscuit tin, and a broom han- dle. It was a great innovation – the world’s first vacuum cleaner – but not one that he ever capitalized on. One year later he had sold his patented idea to William Hoover whose company went on to dominate the vac- uum cleaner market for decades, especially in its United States homeland. Yet between 2002 and 2005 Hoover’s market share dropped from 36 per cent to 13.5 per cent. Why? Because a futuristic-looking and comparatively expensive rival product, the Dyson vacuum cleaner, had jumped from nothing to over 20 per cent of the mar- ket. In fact, the Dyson product dates back to 1978 when James (now Sir James) Dyson noticed how the air filter in the spray-finishing room of a company where he had been working was constantly clogging with power parti- cles ( just like a vacuum cleaner bag clogs with dust). So he designed and built an industrial cyclone tower, which removed the powder particles by exerting centrifugal forces. The question intriguing him was, ‘Could the same principle work in a domestic vacuum cleaner?’
Five years and five thousand prototypes later he had a working design, since praised for its ‘uniqueness and functionality’. However, existing vacuum cleaner manufacturers were not as impressed – two rejected the design outright. So Dyson started making his new design himself. Within a few years Dyson cleaners were, in the UK, outselling the rivals who had once rejected them. The aesthetics and functionality of the design help to keep sales growing in spite of a higher retail price. To Dyson, good design ‘is about looking at everyday things with new eyes and working out how they can be made bet- ter. It’s about challenging existing technology.’
The Dyson engineers then took the technology one stage further and developed core separator technology to capture even more microscopic dirt. Dirt now goes through three stages of separation. Firstly, dirt is drawn into a powerful outer cyclone. Centrifugal forces fling larger debris such as pet hair and dust particles into the clear bin at 500Gs (the maximum G-force the human body can take is 8Gs). Second, a further cyclonic stage, the core separa- tor, removes dust particles as small as 0.5 microns from the airflow; particles so small you could fit 200 of them on this full stop. Finally, a cluster of smaller, even faster cyclones generate centrifugal forces of up to 150,000G – extracting particles as small as mould and bacteria.
Other innovations followed. In 2006 came the Dyson Airblade TM , an electric hand dryer. Rather than using a broad, relatively unfocused hot air jet , the Dyson engineers decided to use a ‘blade’ of cool air that emerges from the dryer at around four hundred miles per hour (643 km/hr). The advantage of this
innovation is that it dries hands quicker (around 10 seconds) and uses less electricity than conventional hand dryers. Then came the Dyson Air Multiplier™. These are fans and fan heaters that work very differ- ently to conventional fans and electric heaters. They don’t have fast-spinning blades that chop the air and cause uncomfortable buffeting. Instead, they use Air Multiplier™ technology to draw in air and amplify it up to 18 times, producing an uninterrupted stream of smooth air. Sir James, who remains chief engineer and sole shareholder in Dyson, is enthusiastic about the Air Multiplier™. ‘ This [electric heaters] business is at least as large as the vacuum cleaner sector and I hope we will do as well in this as we have done in floor cleaners’, he said. ‘ One of the benefits of the new device is that it will heat all the air in the room to reduce the effect of hot and cold spots. Sensors measure the temperature of the surrounding air so that once the desired temperature is reached, the system cuts out, making the product much more efficient and useful than comparable heaters.’ He said the new heater was part of the company’s effort to turn itself into a ‘ broad-line technology company’ rather than being seen as only an appliance maker. ‘I would not limit the company to particular areas of technology or markets. We are developing a range of technologies to improve both industrial and consumer products so that the people using them get a better experience than with the comparable items that currently exist.’
Innovative design from Dyson 1
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HOW DOES INNOVATION IMPACT ON DESIGN?
So, what is ‘innovation’? There are many definitions: it is ‘a new method, idea, product, etc.’ (Oxford English Dictionary); ‘change that creates a new dimension of performance’ (Peter Drucker, a well-known management writer); ‘the act of introducing something new’ (the American Heritage Dictionary); ‘a new idea, method or device’ (Webster Online Dictionary). What runs through all these definitions is the idea of novelty and change. Innovation is simply about doing something new. ‘Design’ (as we described it in Chapter 4 ) is to ‘ conceive the looks, arrangement, and workings of something... [a design] must deliver a solution that will work in practice .’ Innovation creates the novel idea; design makes it work in practice. The two con- cepts are intimately related, which is why we treat them in the same chapter. First we will look at some of the basic ideas that help to understand innovation.
The innovation S-curve When new ideas are introduced in services, products or processes, they rarely have an impact that increases uniformly over time. Usually performance follows an S-shaped progress. So, in the early stages of a new idea’s introduction, although often large amounts of resources, time and effort are needed to introduce the idea, relatively small performance improvements are experienced. However, with time, as experience and knowledge about the new idea grow, performance increases. But as the idea becomes established, extending its performance fur- ther becomes increasingly difficult (see Fig. 5.2 (a)). But when one idea reaches its mature, ‘levelling off’ period, it is vulnerable to a further new idea being intro- duced which, in turn, moves through its own S-shaped progress. This is how innovation works: the limits of one idea being reached which prompts a newer, better idea, with each new S-curve requiring some degree of re-design ( see Fig. 5.2 (b)).
Incremental or radical innovation An obvious difference between how the pattern of new ideas emerges in different operations or industries is the rate and scale of innovation. Some industries, such as telecommunica- tions, enjoy frequent and often significant innovations. Others, such as house building, do have innovations, but they are usually less dramatic. So some innovation is radical, result- ing in discontinuous, ‘breakthrough’ change, while other innovations are more incremental, leading to smaller, continuous changes. Radical innovation often includes large technological advancements which may require completely new knowledge and/or resources, making exist- ing services and products obsolete and therefore non-competitive. Incremental innovation, by contrast, is more likely to involve relatively modest technological changes, building upon existing knowledge and/or resources so existing services and products are not fundamentally changed. This is why established companies may favour incremental innovation because they have the experience to have built up a significant pool of knowledge (on which incremental innovation is based). In addition, established companies are more likely to have a mindset that emphasizes continuity, perhaps not even recognizing potential innovative opportunities (see the short case on Kodak). New entrants to markets, however, have no established posi- tion to lose, nor do they have a vast pool of experience. They may be more likely to try for more radical innovation.
The Henderson–Clark model Although distinguishing between incremental and radical innovation is useful, it does not fully make clear why some companies succeed or fail at innovation. Two researchers, Henderson and Clark, 2 looked at the question of why some established companies sometimes fail to exploit seemingly obvious incremental innovations. They answered this question by
✽ Operations principle The innovation activity is an important part of service and product design.
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dividing the technological knowledge required to develop new services and products into ‘knowledge of the components of knowledge’ and ‘knowledge of how the components of knowledge link together’. They called this latter knowledge ‘architectural knowledge’. Figure 5.3 shows what has become known as the Henderson–Clark model. It refines the simpler idea of the split between incremental and radical innovation. In this model incremental innovation is built upon existing component and architectural knowledge, whereas radical innovation changes both component and architectural knowledge. Modular innovation is built on existing archi- tectural knowledge, but requires new knowledge for one or more components. By contrast, architectural innovation will have a great impact upon the linkage of components (or the architecture), but the knowledge of single components is unchanged.
So, for example, in health-care services, simple (but useful and possibly novel at the time) innovations in a primary care (general practitioner) doctors’ clinic, such as online appoint- ment websites, would be classed as incremental innovation because neither any elements nor
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(a) The basic S-shaped improvement in performance (b) Innovation following multiple S-shaped curves
Figure 5.2 The S-shaped curve of innovation
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Figure 5.3 The Henderson–Clark model
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SHORT CASE
The once mighty Eastman Kodak Company dominated the photographic and film markets for decades. But no longer: thirty years ago it employed over 140,000 people and made substantial profits; by 2010 it had shrunk to around 19,000, with regular quarterly losses. This dramatic fall from grace is usually put down to the company’s failure to see the approach of digital photography or fully appreciate how it would totally under- mine Kodak’s traditional products. Yet , ironically, Kodak was more than ahead of its competitors than most people outside the company realized. It actu- ally invented the digital camera. Sadly though, it lacked the foresight to make the most of it . For years the company had, as one insider put it , ‘ too much technology in its labs rather than in the market ’.
It was back in 1975 when a newly hired scientist at Kodak, Steve Sasson, was given the task of researching how to build a camera using a comparatively new type of electronic sensor – the charged-couple device (CCD). He found little previous research so he used the lens from a Kodak motion-picture camera, an analogue-to- digital convertor, some CCD chips and some digital cir- cuitry that he made himself. By December 1975 he had an operational prototype. Yet the advance was largely, although not completely, ignored inside the company. ‘ Some people talked about reasons it would never happen, while others looked at it and realized it was important’ , he says. He also decided not to use the word ‘digital’ to describe his trial product. ‘ I proposed it as filmless pho- tography, an electronic stills camera. Calling it “digital”
The sad tale of Kodak and its digital camera 3
would not have been an advantage. Back then “digital” was not a good term. It meant new, esoteric technol- ogy .’ Some resistance came from genuine, if mistaken, technical reservations. But others feared the magnitude of the changes that digital photography could bring. Objections ‘were coming from the gut: a realization that [digital] would change everything – and threaten the company’s entire film-based business model’. Some see Kodak’s reluctance to abandon its traditional product range as understandable. It was making vast profits and as late as 1999 it was making over three billion dollars from film sales. Todd Gustavson, curator of technol- ogy at the George Eastman House museum, says that, ‘Kodak was almost recession-proof until the rise of digital. A film-coating machine was like a device that printed money.’ So Kodak’s first digital camera, the Quicktake, was licensed to and sold by Apple in 1994.
In 2012 Kodak filed for bankruptcy protection.
the relationship between them is changed. If the practice invests in a new diagnostic heart scanner, that element of their diagnosis task has been changed and will probably need new knowledge, but the overall architecture of the service has not been changed. This innovation would be classed as ‘modular’. An example of architectural innovation would be the practice providing ‘walk-in’ facilities in the local city centre. It would provide more or less the same ser- vice as the regular surgery (no new components), but the relationship between the service and patients has changed. Finally, if the practice adopted some of the ‘telemedicine’ technology (see Chapter 8 ) that monitors patient signs and can react to significant changes in patient condition, then this would be radical innovation. The components are novel (monitors) as is the overall architecture of the service (distance diagnosis).
✽ Operations principle Innovation can be classified on two dimensions: innovation of components of a design and innovation of the linkages between them.
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WHY IS GOOD DESIGN SO IMPORTANT?
Good design takes innovative ideas and makes them practical. Good design also communi- cates the purpose of the service or product to its market, and brings financial rewards to the business. Service and product design, therefore, can be seen as starting and ending with the customer. So the design activity has one overriding objective: to provide products, services and processes which will satisfy the operation’s customers. Product designers try to achieve aesthetically pleasing designs which meet or exceed customers’ expectations. They also try to design a product which performs well and is reliable during its lifetime. Further, they should design the product so that it can be manufactured easily and quickly. Similarly, service design- ers try to put together a service which meets, or even exceeds, customer expectations. Yet at the same time the service must be within the capabilities of the operation and be delivered at reasonable cost.
Critical commentary
Remember that not all new services and products are created in response to a clear and articulated customer need. While this is usually the case, especially for services and products that are similar to (but presumably better than) their predecessors, more radical innovations are often brought about by the innovation itself creating demand. Customers don’t usually know that they need something radical. For example, in the late 1970s people were not asking for microprocessors; they did not even know what they were. They were improvised by an engineer in the USA for a Japanese customer who made calculators. Only later did they become the enabling technology for the PC and after that the innumerable devices that now dominate our lives.
What is designed in a service or product? All services and products can be considered as having three aspects:
● A concept which articulates the nature, use and value of the service or product. Developing the concept is a crucial stage in the design of services and products because customers are buying more than just physical and evident components; they are buying into a particular concept. Patients consuming a new drug are not concerned about the ingredients nor the way they were made, they are concerned about the benefits it will provide. This is why designers often talk about a ‘new concept’.
● A package of ‘component’ services and products that provide those benefits defined in the concept. A service or product is not a single homogenous entity; it is a package of elements. The purchase of an automobile includes the vehicle itself with its associated services such as ‘warranties’, ‘after- sales services’, etc. A restaurant meal is more than the food: it is also about serving the food, the attentions of the waiting staff, etc. Some parts of the package are ‘core’ in that they are fundamental to achieving the concept and could not be removed without destroy-
ing the nature of the service or product. Other parts are supporting; they serve to enhance the core.
● The process defines the way in which the component services and products will be created and delivered. For an automobile, an assembly line has to be designed and built which will assemble the various components. In the restaurant, the processes of food purchase, preparation and cooking need to be designed, as do the way customers are moved from reception to the table, and the way that table service is performed.
✽ Operations principle The design of a service or product must include its concept, package and process.
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The design activity is itself a process Producing designs for services and products is itself a process which conforms to the input– transformation–output model (described in Chapter 1 ). It therefore has to be designed and managed like any other process. Figure 5.4 illustrates the design activity as an input– transformation–output diagram. The transformed resource inputs will consist mainly of information in the form of market forecasts, market preferences, technical data, and so on. Transforming resource inputs includes operations managers and specialist technical staff, and design equipment and software. One can describe the objectives of the design activity in the same way as we do any transformation pro- cess. All operations satisfy customers by producing their services and goods according to customers’ desires for quality, speed, dependabil- ity, flexibility and cost. In the same way, the design activity attempts to produce designs to the same objectives.
THE STAGES OF DESIGN – FROM CONCEPT TO SPECIFICATION
Fully specified designs rarely spring, fully formed, from a designer’s imagination. The design activity must pass through several key stages. These form the sequence shown in Figure 5.5 , although in practice designers will often recycle or backtrack through the stages. Nor is this sequence of stages descriptive of the stages used by all companies, yet most will use some stage model similar to this one. It moves from the concept generation stage to a screening stage, a preliminary design stage that produces a design to be evaluated and prototyped, before reaching the final design.
Concept generation This is where innovative ideas become the inspiration for new service or product concepts. And innovation can come from many different sources.
✽ Operations principle The design activity is a process that can be managed using the same principles as other processes.
Transformed resources, e.g: • technical information • market information • time information
Transforming resources, e.g: • test and design equipment • design and technical staff • lead user (customer) feedback • supplier advice • collaborators
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The product/service design process whose performance is measured by the • quality • speed • dependability • flexibility and • cost of how designs are created.
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Figure 5.4 The design activity is itself a process
✽ Operations principle Design processes involve a number of stages that move an innovation from a concept to a fully specified state.
Figure 5.5 The stages of product/service design
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Ideas from customers Marketing, the function generally responsible for identifying new service or product opportunities, may use market research tools for gathering data from customers in a structured way to test out ideas or check services or products against predetermined criteria.
Listening to customers Ideas may come from customers on a day-to-day basis: from com- plaints, or from everyday transactions. Although some organizations may not see gathering this information as important (and may not even have mechanisms in place to facilitate it), it is an important potential source of ideas.
Ideas from competitor activity Most organizations follow the activities of their competitors. A new idea from a competitor may be worth imitating, or better still, improving. Taking apart a competitor’s service or product to explore potential new ideas is called ‘reverse engineering’. Some aspects of services may be difficult to reverse engineer (especially ‘back-office’ services) as they are less transparent to competitors.
Ideas from staff The contact staff in a service organization or the salesperson in a product- orientated organization could meet customers every day. These staff may have good ideas about what customers like and do not like. They may have gathered suggestions from custom- ers or have ideas of their own. One well-known example – which may be an urban myth – is that an employee at Swan Vestas, the matchmaker, suggested having one instead of two sand- paper strips on the matchbox. It saved a fortune!
Ideas from research and development Many organizations have a formal research and development (R&D) function. As its name implies, its role is twofold. Research develops new knowledge and ideas in order to solve a particular problem or to grasp an opportunity. Development utilizes and operationalizes the ideas that come from research. And although ‘development’ may not sound as exciting as ‘research’, it often requires as much creativity and even more persistence. One product has commemorated the persistence of its development engineers in its company name. Back in 1953 the Rocket Chemical Company set out to create a rust-prevention solvent and degreaser to be used in the aerospace industry. It took them 40 attempts to get the water displacing formula worked out. So that is what they called the prod- uct. WD-40 literally stands for Water Displacement, fortieth attempt.
Open sourcing – using a ‘development community’4
Not all ‘products’ or services are created by professional, employed designers for commercial purposes. Many of the software applications that we all use, for example, are developed by an open community, including the people who use the products. If you use Google, the inter- net search facility, or use Wikipedia, the online encyclopaedia, or shop at Amazon, you are using open-source software. The basic concept of open-source software is extremely simple. Large communities of people around the world, who have the ability to write software code, come together and produce a software product. The finished product is not only available to be used by anyone or any organization for free but is regularly updated to ensure it keeps pace with the necessary improvements. The production of open-source software is very well organized and, like its commercial equivalent, is continuously supported and maintained. However, unlike its commercial equivalent, it is absolutely free to use.
Over the last few years the growth of open-source has been phenomenal, with many organ- izations transitioning over to using this stable, robust and secure software. With the maturity open-source software now has to offer, organizations have seen the true benefits of using free software to drive down costs and to establish themselves on a secure and stable platform. Open-source has been the biggest change in software development for decades and is setting new open standards in the way software is used. The open nature of this type of develop- ment also encourages compatibility between products. BMW, for example, was reported to be developing an open-source platform for vehicle electronics. Using an open-source approach, rather than using proprietary software, BMW can allow providers of ‘infotainment’ services to develop compatible, plug-and-play applications.
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Crowdsourcing 5 Closely related to the open-sourcing idea is that of ‘crowdsoucing’. Crowdsourcing is the act of taking a job traditionally performed by a designated agent (usually an employee) and outsourc- ing it to an undefined, generally large group of people in the form of an open call. Although in essence it is not a totally new idea, it has become a valuable source of ideas largely through the use of the internet and social networking. For example, Procter & Gamble, the consumer products company, asked amateur scientists to explore ideas for a detergent dye whose colour changed when enough has been added to dishwater. Other uses of the idea involve govern- ment agencies asking citizens to prioritize spending (or cutting spending) projects.
Concept screening Not all concepts which are generated will necessarily be capable of further development into services and products. Designers need to be selective as to which concepts they progress to the next design stage. The purpose of the concept-screening stage is to evaluate concepts by assessing the worth or value of design options. This involves assessing each concept or option against a number of design criteria. While the criteria used in any particular design exercise will depend on the nature and circumstances of the exercise, it is useful to think in terms of three broad categories of design criteria:
● The feasibility of the design option – can we do it? ● Do we have the skills (quality of resources)? ● Do we have the organizational capacity (quantity of resources)? ● Do we have the financial resources to cope with this option?
SHORT CASE
It sounds like a joke, but it is a genuine product innova- tion motivated by a market need. It’s green, it’s square and it comes originally from Japan. It’s a square water- melon! Why square? Because Japanese grocery stores are not large and space cannot be wasted. Also a round watermelon does not fit into a refrigerator very conveni- ently. There is also the problem of trying to cut the fruit when it keeps rolling around. So an innovative farmer from Japan’s south-western island of Shikoku solved the problem by devising the idea of making a cube-shaped watermelon which could easily be packed and stored. But there is no genetic modification or clever science in- volved in growing watermelons. It simply involves plac- ing the young fruit into wooden boxes with clear sides. During its growth, the fruit naturally swells to fill the sur- rounding shape. Now the idea has spread from Japan. ‘Melons are among the most delicious and refreshing fruit around but some people find them a problem to store in their fridge or to cut because they roll around’, said Dam- ien Sutherland, the exotic fruit buyer for Tesco, the UK supermarket. ‘ We’ve seen samples of these watermelons and they literally stop you in their tracks because they are so eye-catching. These square melons will make it easier than ever to eat because they can be served in long strips rather than in the crescent shape .’ But not everyone liked
Square watermelons! 6
the idea. Comments on news websites included: ‘Where will engineering everyday things for our own unreasonable convenience stop? I prefer melons to be the shape of mel- ons!’ and ‘They are probably working on straight bananas next!’. Other were more enthusiastic. ‘I would like to buy square sausages so then they would be easier to turn over in the frying pan. Round sausages are hard to keep cooked all over.’
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● The acceptability of the design option – do we want to do it? ● Does the option satisfy the performance criteria which the design is trying to achieve?
(These will differ for different designs.) ● Will our customers want it? ● Does the option give a satisfactory financial return?
● The vulnerability of each design option – do we want to take the risk? ● Do we understand the full consequences of adopting the option? ● Being pessimistic, what could go wrong if we adopt the option? What
would be the consequences of everything going wrong? (This is called the ‘downside risk’ of an option.)
The design ‘funnel’ Applying these evaluation criteria progressively reduces the number of options which will be available further along in the design activity. For example, deciding to make the outside casing of a camera case from aluminium rather than plastic limits later decisions, such as the overall size and shape of the case. This means that the uncertainty surrounding the design reduces as the number of alternative designs being considered decreases. Figure 5.6 shows what is sometimes called the design funnel, depicting the progressive reduction of design options from many to one. But reducing design uncertainty also impacts on the cost of changing one’s mind on some detail of the design. In most stages of design the cost of changing a decision is bound to incur some sort of rethinking and recalculation of costs. Early on in the design activ- ity, before too many fundamental decisions have been made, the costs of change are relatively low. However, as the design progresses the interrelated and cumulative decisions already made become increasingly expensive to change.
Critical commentary
Not everyone agrees with the concept of the design funnel. For some it is just too neat and ordered an idea to refl ect accurately the creativity, arguments and chaos that sometimes characterize the design activity. First, they argue, managers do not start out with an infi nite number of options. No one could process that amount of information – and anyway, designers often have some set solutions in their mind, looking for an opportunity to be used. Second, the number of options being considered often increases as time goes by. This may actually be a good thing, especially if the activity was unimaginatively specifi ed in the fi rst place. Third, the real process of design often involves cycling back, often many times, as potential design solutions raise fresh questions or become dead ends. In summary, the idea of the design funnel does not describe what actually happens in the design activity. Nor does it necessarily even describe what should happen.
Balancing evaluation with creativity The systematic process of evaluation is important but it must be balanced by the need for design creativity. Creativity is a vital ingredient in effective design. The final quality of any design of service or product will be influenced by the creativity of its designers. Increasingly, creativity is seen as an essential ingredient not just in the design of services and products, but also in the design of operations processes. Partly because of the fast-changing nature of many industries, a lack of creativity (and consequently of innovation) is seen as a major risk. Of course, creativity can be expensive. By its nature it involves exploring sometimes unlikely pos- sibilities. Many of these will die as they are proved to be inappropriate. Yet, to some extent, the process of creativity depends on these many seemingly wasted investigations. As Art Fry, the inventor of 3M’s Post-it note products, said: ‘ You have to kiss a lot of frogs to find the prince. But remember, one prince can pay for a lot of frogs.’
✽ Operations principle The screening of designs should include feasibility, acceptability and vulnerability criteria.
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Preliminary design Having generated an acceptable, feasible and viable service or product concept, the next stage is to create a preliminary design. The objective of this stage is to have a first attempt at both specifying the component services and products in the package, and defining the processes to create the package.
Specify the components of the package The first task in this stage of design is to define exactly what will go into the service or product: that is, specifying the components of the package. This will require the collec- tion of information about such things as the constituent component parts which make up the service or product package and the component (or product) structure – the order in which the component parts of the package have to be put together. For example, the components for a remote mouse for a computer may include upper and lower casings, and a control unit and packaging, which are themselves made up
