Week 3- Operational Excellence Assignment

INTRODUCTION Both the structure and the scope of an operation’s supply network are decisions that shape how the operation interacts with other operations, with its markets, with its suppliers – in fact with the world in general. After all, no operation exists in isolation. All operations are part of a larger and interconnected network of other operations. This is called the operation’s supply network. It will include the operation’s suppliers and customers. It will also include suppliers’ suppliers and customers’ customers, and so on. At a strategic level, operations managers are involved in deciding the shape and form of their network. This is called the structure of the network. It involves deciding the overall shape of the network, the location of each operation, and how big the parts of the network that the operation owns should be. And that is the next issue faced by all operations. Exactly how much of the network should the operation own? This is called the scope of the operation. Put another way, the scope of the operation defines what it is going to do itself and what it will buy in from suppliers. This chapter treats the issues related to both the structure and scope decisions ( see Fig. 5.1 ).

The structure and scope of operations

Key questions

❯ What do we mean by the ‘structure’ and ‘scope’ of operations’ supply networks?

❯ What configuration should a supply network have?

❯ How much capacity should operations plan to have?

❯ Where should operations be located?

❯ How vertically integrated should an operation’s network be?

❯ How do operations decide what to do in-house and what to outsource?

5

Direct

Operations performance

The structure

and scope of operations

Operations strategy

Operations management

Product and service innovation

Topic covered in this chapter

Operations management

Direct

Design Develop

Deliver

Figure 5.1 This chapter covers the topic of the structure and scope of operations

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CHAPTER 5 THE STRUCTURE AND SCOPE OF OPERATIONS 141

WHAT DO WE MEAN BY THE ‘STRUCTURE’ AND ‘SCOPE’ OF OPERATIONS’ SUPPLY NETWORKS?

The ‘structure’ of an operation’s supply network relates to the shape and form of the network. The scope of an operation’s supply network relates to the extent that an operation decides to do the activities performed by the network itself, as opposed to requesting a supplier to do them. But before we examine these issues, we need to establish what we mean by ‘a sup- ply network’: ‘ A supply network is an interconnection of organizations that relate to each other through upstream and downstream linkages between the different processes and activities that produce value in the form of products and services to the ultimate consumer. ’ 1 In other words, a supply network is the means setting an operation in the context of all the other operations with which it interacts, some of which are its suppliers and its customers. Materials, parts, other information, ideas and sometimes people all flow through the network of customer– supplier relationships formed by all these operations. On its supply side an operation has its suppliers of parts, or information, or services. These suppliers themselves have their own sup- pliers which in turn could also have suppliers, and so on. On the demand side the operation has customers. These customers might not be the final consumers of the operation’s products or services; they might have their own set of customers. On the supply side is a group of oper- ations that directly supply the operation; these are often called first-tier suppliers. They are supplied by second-tier suppliers. However, some second-tier suppliers may also supply an operation directly, thus missing out a link in the network. Similarly, on the demand side of the network, ‘first-tier’ customers are the main customer group for the operation. These in turn supply ‘second-tier’ customers, although again the operation may at times supply second-tier customers directly. The suppliers and customers who have direct contact with an operation are called its immediate supply network, whereas all the operations that form the network of suppliers’ suppliers and customers’ customers, etc., are called the total supply network.

Figure 5.2 illustrates the total supply network for two operations. The first is a plastic home- ware (kitchen bowls etc.) manufacturer. On the demand side it supplies products to whole- salers who supply retail outlets. However, it also supplies some retailers directly, bypassing a stage in the network – not an uncommon situation. As products flow from suppliers to cus- tomers, orders and information flow the other way from customers to suppliers. It is a two- way process with goods flowing one way and information flowing the other. But do not think that only manufacturers can be part of supply networks. The second illustration in Figure 5.2 shows a supply network centred on a shopping mall. It also has suppliers and customers who themselves have their own suppliers and customers.

OPERATIONS IN PRACTICE

Nothing better illustrates the idea that there is more than one approach to competing in the same market than the contrasting business models of ARM and Intel in the microchip business. At one point in 2015, ARM’s chip designs were to be found in almost 99 per cent of mobile devices in the world, while Intel dominates the PC and server markets. Yet ARM and Intel are very differ- ent companies, with different approaches to the struc- ture and scope of their operations and, some claim, very different prospects for their future. They are certainly of a different size. In revenue terms Intel was around 50 times bigger than ARM. More interestingly, Intel is vertically

integrated, both designing and manufacturing its own chips, while ARM is essentially a chip designer, devel- oping intellectual property. It then licenses its processor designs to manufacturers such as Samsung, who in turn rely on subcontracting ‘chip foundry’ companies to do the actual manufacturing (ironically, including for Intel).

Intel’s integrated supply network monitors and con- trols all stages of production, from the original design concept right through to manufacturing. Keeping on top of fast-changing (and hugely expensive – it can cost around $5 billion to build a new chip-making plant) oper- ations requires very large investments. It is Intel’s near

Contrasting strategies on structure and scope: ARM versus Intel 2

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142 PART ONE DIRECTING THE OPERATION

Figure 5.2 Operations network for a plastic homeware company and a shopping mall

monopoly (therefore high volume) of the server and PC markets that helps it to keep its unit prices high, which in turn gives it the ability to finance the construction of the latest semiconductor manufacturing equipment before its competitors. And having the latest manufacturing technology is important; it can mean faster, smaller and cheaper chips with lower power consumption. As one industry source put it, ‘ Intel is one of the few companies left with the financial resources to invest in state-of-the- art manufacturing research and development. Everyone else – including all the ARM licensees – have to make do with shared manufacturing, mainstream technology, and less-aggressive physics. ’ By contrast, ARM’s supply net- work strategy was a direct result of their early lack of cash. It did not have the money to invest in its own man- ufacturing facilities (or to take the risk of subcontracting manufacturing), so it focused on licensing its ‘reference designs’. Reference designs provide the ‘technical blue- print’ of a microprocessor that third parties can enhance or modify as required. This means that partners can take ARM reference designs and integrate them in flexibly

to produce different final designs. And over the years a whole ‘ecosystem’ of tools has emerged to help develop- ers build applications around the ARM design architec- ture. The importance of ARM’s supply ‘ecosystem’ should not be underestimated. It is an approach that allows ARM’s partners to be part of ARM’s success rather than cutting them out of the revenue opportunities.

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CHAPTER 5 THE STRUCTURE AND SCOPE OF OPERATIONS 143

Why is the structure and scope of an operation’s supply network important? So why is it important to stand back and look at the whole (or a large part) of a supply net- work rather than an individual operation? Here are three reasons:

● It helps an understanding of competitiveness – Immediate customers and immediate suppliers, quite understandably, are the main concern for companies. Yet sometimes they need to look beyond these immediate contacts to understand why customers and suppliers act as they do. Any operation has only two options if it wants to understand its ultimate customers’ needs at the end of the network. It can rely on all the intermediate customers and customers’ customers, etc., who form the links in the network between the company and its end customers. Alternatively, it can look beyond its immediate customers and sup- pliers. Relying on one’s immediate network is seen as putting too much faith in someone else’s judgement of things which are central to an organization’s own competitive health.

● It helps identify significant links in the network – Not everyone in a supply network has the same degree of influence over the performance of the network as a whole. Some oper- ations contribute more to the performance objectives that are valued by end customers. So an analysis of networks needs to understand the downstream and the upstream operations which contribute most to end customers’ service. For example, the important end customers for domestic plumbing parts and appliances are the installers and service companies which deal directly with consumers. They are supplied by ‘stock holders’ who must have all parts in stock and deliver them fast. Suppliers of parts to the stock holders can best contribute to their end customers’ competitiveness partly by offering a short delivery lead time but mainly through dependable delivery. The key players in this example are the stock holders. The best way of winning end customer business in this case is to give the stock holder prompt delivery, which helps keep costs down while providing high availability of parts.

● It helps focus on long-term issues – There are times when cir- cumstances render parts of a supply network weaker than its adja- cent links. High street music stores, for example, have been largely displaced by music streaming and downloading services. A long-term supply network view would involve constantly examining technology and market changes to see how each oper- ation in the supply networks might be affected.

Structure and scope So what do we mean by the structure and scope of an operation’s supply network? The first point to make is that structure and scope are strongly related (which is why we treat them together). For example, look again at the supply network for the shopping mall in Figure 5.2 . Suppose that the company that runs the mall is dissatisfied with the service that it is receiving from the firm that supplies security services. Also suppose that it is considering three alter- natives. Option 1 is to switch suppliers and award the security contract to a competitor to the current security services supplier. Option 2 is to accept an offer from the company that sup- plies cleaning services to supply both security and cleaning services. Option 3 is to take over responsibility for security itself, hiring its own security staff who would be put on the mall’s payroll. These options are illustrated in Figure 5.3 . The first of these options changes neither the structure nor the scope of this part of the supply network. The shopping mall still has three suppliers and is doing exactly what it did before. All that has changed is that the mall’s security services are being provided by another (hopefully better) supplier. However, option 1 changes the structure of the supply network (the mall now has only two suppliers, the com- bined cleaning and security supplier, and the maintenance supplier), but not the scope of what the mall does (it does exactly what it did before). Option 3 changes both the structure of the network (again, the mall has only two suppliers, cleaning and maintenance services) and the scope of what the mall does (it now also takes on responsibility for security itself).

✽ ✽ ✽ Operations principle Operations principle Operations principle

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144 PART ONE DIRECTING THE OPERATION

So, decisions relating to structure and scope are often interrelated. But for simplicity we will treat them separately in this chapter.

The second point to make is that both structure and scope decisions are actually composed of a number of other ‘constituent’ decisions. These are shown in Figure 5.4. The structure of an operation’s supply network is determined by three sets of decisions:

1 How should the network be configured? 2 What physical capacity should each part of the network have (the long-term capacity

decision)? 3 Where should each part of the network be located (the location decision)?

The scope of an operation’s activities within the network is determined by two decisions:

1 The extent and nature of the operation’s vertical integration. 2 The nature and degree of outsourcing it engages in.

Note, however, that all of these decisions rely on forecasts of future demand that the sup- plement to this chapter explores in more detail.

Shopping mall

Security services

Security services

Cleaning services

Maintenance services

Security services

Cleaning services

Shopping mall

Maintenance services

Security services

Cleaning services

Shopping mall

Maintenance services

Structure – same as before Scope – same as before

Structure – changed Scope – same as before

Structure – changed Scope – changed

Option 1 Replace the security

services supplier

Option 2 Accept offer from cleaning services supplier to provide

security services also

Option 3 Mall to take on

responsibility for providing its own security services

Figure 5.3 Three options for the shopping mall’s supply network

Operations structure and scope

The structure of the operation’s supply network

The scope of the operation’s supply

network

Configuring the supply network

The location of supply network

operations

Vertical integration

OutsourcingThe capacity of supply network

operations

Figure 5.4 What determines an operation’s structure and scope?

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CHAPTER 5 THE STRUCTURE AND SCOPE OF OPERATIONS 145

The final point to make here is that structure and scope decisions are undeniably strate- gic. Go back to the ‘operations in practice’ example on the contrasting strategies of ARM and Intel earlier in the chapter. Their (very different) approaches to the structure and scope of their operations have totally defined how each company does business in essentially similar markets. There are few decisions that are more strategic than which other businesses you are going to trade with (structure) and how much of the total activities in the supply network you are going to take responsibility for (scope). However, both structure and scope also have a more operational aspect. As we illustrated in Figure 5.3, an operation such as the shopping mall can change its supply arrangements in a relatively short-term manner, for example by simply changing its suppliers. We will treat the more operational day-to-day aspects of struc- ture and scope in Chapter 12 on supply chain management.

WHAT CONFIGURATION SHOULD A SUPPLY NETWORK HAVE?

‘Configuring’ a supply network means determining its overall pattern. In other words, what should be the pattern, shape or arrangement of the various operations that make up the sup- ply network? Even when an operation does not directly own, or even control, other operations in its network, it may still wish to change the shape of the network. This involves attempting to manage network behaviour by reconfiguring the network so as to change the nature of the relationships between them. Reconfiguring a supply network sometimes involves parts of the operation being merged – not necessarily in the sense of a change of ownership of any parts of an operation, but rather in the way responsibility is allocated for carrying out activities. The most common example of network reconfiguration has come through the many companies that have recently reduced the number of their direct suppliers. The complexity of dealing with many hundreds of suppliers may both be expensive for an operation and (sometimes more important) prevent the operation from developing a close relationship with a supplier. It is not easy to be close to hundreds of different suppliers.

Disintermediation Another trend in some supply networks is that of companies within a network bypassing customers or suppliers to make contact directly with customers’ customers or suppliers’ sup- pliers. ‘Cutting out the intermediaries’ in this way is called disintermediation. An obvious example of this is the way the Internet has allowed some suppliers to ‘disintermediate’ tradi- tional retailers in supplying goods and services to consumers. So, for example, many services in the travel industry that used to be sold through retail outlets (travel agents) are now also available direct from the suppliers. The option of purchasing the individual components of a vacation through the websites of the airline, hotel, car-hire operation, etc., is now easier for consumers. Of course, they may still wish to purchase an ‘assembled’ product from retail travel agents, which can have the advantage of convenience. Nevertheless the process of dis- intermediation has developed new linkages in the supply network.

Co-opetition One approach to thinking about supply networks sees any business as being sur- rounded by four types of players: suppliers, customers, competitors and complementors. Complementors enable one’s products or services to be valued more by customers because they also can have the complementor’s products or services, as opposed to when they have yours alone. Competitors are the opposite; they make customers value your product or ser- vice less when they can have their product or service, rather than yours alone. Competitors can also be complementors and vice versa. For example, adjacent restaurants may see them- selves as competitors for customers’ business. A customer standing outside and wanting a meal will choose between the two of them. Yet in another way they are complementors.

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146 PART ONE DIRECTING THE OPERATION

Would that customer have come to this part of town unless there was more than one restau- rant to choose from? Restaurants, theatres, art galleries, and tourist attractions generally, all cluster together in a form of co-operation to increase the total size of their joint mar- ket. It is important to distinguish between the way companies co-operate in increasing the total size of a market and the way in which they then compete for a share of that market. Customers and suppliers, it is argued, should have ‘symmetric’ roles. Harnessing the value of suppliers is just as important as listening to the needs of customers. Destroying value in a supplier in order to create it in a customer does not increase the value of the network as a whole. So, pressurizing suppliers will not necessarily add value. In the long term it creates value for the total network to find ways of increasing value for suppliers as well as custom- ers. All the players in the network, whether they are customers, suppliers, competitors or complementors, can be both friends and enemies at different times. The term used to cap- ture this idea is ‘co-opetition’.

OPERATIONS IN PRACTICE

As far as the scope and structure of supply networks are concerned, could that most ephemeral of all industries, Hollywood’s film making business, hold messages for even the most sober of operations? It is an industry whose complexity most of us do not fully appreciate. The American writer Scott Fitzgerald said, ‘ You can take Hollywood for granted like I did, or you can dismiss it with the contempt we reserve for what we don't understand…not half a dozen men have ever been able to keep the whole equation of [making] pictures in their heads .’ The ‘equation’ involves balancing the artistic creativity and fashion awareness, necessary to cre- ate a market for its products, with the efficiency and tight operations practices which get films made and distrib- uted on time. But although the form of the equation remains the same, the way its elements relate to each other has changed profoundly. The typical Hollywood studio once did everything itself. It employed everyone from the carpenters who made the stage through to the film stars. The film star Cary Grant (one of the biggest in his day) was as much of an employee as the chauffeur who drove him to the studio, though his contract was probably more restrictive. The finished products were rolls of film that had to be mass produced and physi- cally distributed to the cinemas of the world. No longer. Studios now deal almost exclusively in ideas. They buy and sell concepts, they arrange finance, they cut market- ing deals and, above all, they manage the virtual network

of creative and not-so-creative talent that goes into a film’s production. A key skill is the ability to put together teams of self-employed film stars and the small, techni- cal specialist operations that provide technical support. It is a world that is less easy for the studios to control. The players in this virtual network, from film stars to electricians, have taken the opportunity to raise their fees to the point where, in spite of an increase in cin- ema attendance, returns are lower than at many times in the past. This opens up opportunities for the smaller, independent studios. One way to keep costs low is by using inexpensive, new talent. Technology could also help this process. Digital processes allow easier custom- ization of the ‘product’ and also mean that movies can be streamed direct to cinemas and direct to individual consumers’ homes.

Virtually like Hollywood

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The idea of the ‘business ecosystem’3

An idea that is closely related to that of co-opetition in supply networks is that of the ‘busi- ness ecosystem’. It can be defined as: ‘An economic community supported by a foundation of interacting organizations and individuals – the organisms of the business world. The economic community produces goods and services of value to customers, who are themselves members of the ecosystem. The member organisms also include suppliers, lead producers, competitors, and other stakeholders. Over time, they coevolve their capabilities and roles, and tend to align themselves with the directions set by one or more central companies.’4

One of the main differences between this idea and that of the supply network generally is the inclusion in the idea of the ecosystem of businesses that may have no or little direct rela- tionship with the main supply network, yet exist only because of that network. They interact with each other, predominantly complementing or contributing significant components of the value proposition for customers. Many examples come from the technology industries. The innovative products and services that are developed in the technology sectors cannot evolve in a vacuum. They need to attract a whole range of resources, drawing in expertise, capital, suppliers and customers to create co-operative networks. For example, the app devel- opers that develop applications for particular operating system platforms may not be ‘sup- pliers’ as such, but the relationship between them and the supply network that supplies the mobile device is mutually beneficial. Building an ecosystem of developers around a core prod- uct can increase its value to the end customer and by doing so complements the usage of the core product. Such an ecosystem of complementary products and services can also create significant barriers to entry for new competitors. Any possible competitors would not only have to compete with the core product, but also have to compete against the entire ecosystem of complementary products and services.

The terminology and metaphors used to describe business ecosystems are obviously based on that used to describe ‘natural’ biological systems, where elements in the ‘ecosystem’ affect and are affected by the others. This creates a constantly evolving set of relationships where, if they are to survive, businesses must be flexible, adaptable and preferably innovative. For an ecosystem to thrive, the relationships between elements (businesses in this case) must communicate, establish trust, share information, collaborate, experiment, and develop in a mutually supportive symbiotic manner. The comparison with the natural biological ecosys- tem is also important because it emphasizes that the relationships between things matter and that, to some extent, everything in a supply network touches everything else.

Describing supply networks – dyads and triads The supply networks that were illustrated in Figure 5.2 are, of course, simplifications. Any realistic supply network diagram will be much more complex. There are many operations, all interacting in different ways, to produce end products and services. Because of this, and to understand them better, supply network academics and professionals often choose to focus on the individual interaction between two specific operations in the network. This is called a ‘dyadic’ (simply meaning ‘two’) interaction, or dyadic relationship, and the two operations are referred to as a ‘dyad’. So if one wanted to examine the interactions that a focal operation had with one of its suppliers and one of its customers, one would examine the two dyads of ‘supplier–focal operation’ and ‘focal operation–customer’, see Figure 5.5(a). For many years most discussion (and research) on supply networks was based on dyadic relationships. This is not surprising as all relationships in a network are based on the simple dyad. However, more recently, and certainly when examining service supply networks, many authorities make the point that dyads do not reflect the real essence of a supply network. Rather, they say, it is triads, not dyads, that are the basic elements of a supply network, see Figure 5.5(b). No mat- ter how complex a network, it can be broken down into a collection of triadic interactions. The idea of triads is especially relevant in service supply networks. Operations are increas- ingly outsourcing the delivery of some aspects of their service to specialist providers, who

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148 PART ONE DIRECTING THE OPERATION

deal directly with customers on behalf of the focal operation (more usually called the ‘buying operation’, or just ‘buyer’ in this context). For example, Figure 5.5(b) illustrates the common example of an airline contracting a specialist baggage handling company to provide services to its customers on its behalf. Similarly, internal services are increasingly outsourced to form internal triadic relationships. For example, if a company outsources its IT operations, it is forming a triad between whoever is purchasing the service on behalf of the company, the IT service provider and the employees who use the IT services.

Thinking about supply networks as a collection of triads rather than dyads is strategically important. First, it emphasizes the dependence that organizations are placing on their sup- pliers’ performance when they outsource service delivery. A supplier’s service performance makes up an important part of how the buyer’s performance is viewed. Second, the control that the buyer of the service has over service delivery to its customer is diminished in a triadic relationship. In a conventional supply chain, with a series of dyadic relationships, there is the opportunity to intervene before the customer receives the product or service. However, prod- ucts or services in triadic relationships bypass the buying organization and go directly from provider to customer. Third, and partially as a consequence of the previous point, in triadic relationships the direct link between service provider and customer can result in power gradu- ally transferring over time from the buying organization to the supplier that provides the ser- vice. Fourth, it becomes increasingly difficult for the buying organization to understand what is happening between the supplier and customer at a day-to-day level. It may not even be in the supplier’s interests to be totally honest in giving performance feedback to the buyer. Finally, this closeness between supplier and customer, if it excludes the buyer, could prevent the buyer from building important knowledge. For example, suppose a specialist equipment manufac- turer has outsourced the maintenance of its equipment to a specialist provider of maintenance services. The ability of the equipment manufacturer to understand how its customers are using the equipment, how the equipment is performing under various conditions, and how custom- ers would like to see the equipment improved, is lost. The equipment manufacturer may have

Electric motor manufacturer

Washing machine maker

Baggage handling

agent Passengers

Airline

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Dyadic interaction

(a) Dyadic relationships in a simple supply network and example (b) Triadic relationship and example

Dyadic interaction

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Focal operation/

buyer

Customer

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Dyadic interaction

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Figure 5.5 Dyadic and triadic relationships in two simple supply networks and examples

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outsourced the cost and trouble of providing maintenance services, but it has also outsourced the benefits and learning that come from direct interaction with customers.

HOW MUCH CAPACITY SHOULD OPERATIONS PLAN TO HAVE?

The next set of ‘structure’ decisions concerns the size or capacity of each part of the supply net- work. Here we will treat capacity in a general long-term sense. The specific issues involved in measuring and adjusting capacity in the medium and short terms are examined in Chapter 11 .

The optimum capacity level Most organizations need to decide on the size (in terms of capacity) of each of their facilities. A chain of truck service centres, for example, might operate centres that have various capac- ities. The effective cost of running each centre will depend on the average service bay occu- pancy. Low occupancy because of few customers will result in a high cost per customer served because the fixed costs of the operation are being shared between few customers. As demand, and therefore service bay occupancy, increase, the cost per customer will reduce. However, operating at very high levels of capacity utilization (occupancy levels close to capacity) can mean longer customer waiting times and reduced customer service. There may also be less obvious cost penalties of operating centres at levels close to nominal capacity. For example, long periods of overtime may reduce produc- tivity levels as well as costing more in extra payments to staff; utilizing bays at very high utilization reduces maintenance and cleaning time that may increase breakdowns, reduce effective life, and so on. This usually means that average costs start to increase after a point which will often be lower than the theoretical capacity of the operation.

The blue curves in Figure 5.6 show this effect for the service centres of 5-, 10- and 15-bay capacity. As the nominal capacity of the centres increases, the lowest cost point at first reduces. This is because the fixed costs of any operation do not increase proportionately as its capac- ity increases. A 10-bay centre has less than twice the fixed costs of a 5-bay centre. Also the capital costs of constructing the operations do not increase proportionately to their capacity. A 10-bay centre costs less to build than twice the cost of a 5-bay centre. These two factors, taken together, are often referred to as economies of scale – a universal concept that applies (up to a point) to all types of operation. However, economies of scale do not go on for ever. Above a certain size, the lowest cost point on curves such as that shown in Figure 5.6 may increase. This occurs because of what are called diseconomies of scale, two of which are particularly important. First, complexity costs increase as size increases. The communications and co-ordination effort necessary to manage an operation tends to increase faster than capacity. Although not seen as a direct cost, this can nevertheless be very significant. Second, a larger centre is more likely to be partially underutilized because demand within a fixed location will be limited. The equivalent in operations that process physical items is transporta- tion costs. For example, if a manufacturer supplies the whole of its European market from one major plant in Denmark, all supplies may have to be brought in from several countries to the single plant and all products shipped from there throughout Europe.

Being small may have advantages Although large-scale capacity operations will usually have a cost advantage over smaller units, there are also potentially significant advantages that can be exploited by small-scale operations. One significant research study showed that small-scale operations can provide significant advantages in the following four areas:

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● They allow businesses to locate near to ‘hot spots’ that can tap into local knowledge net- works. Often larger companies centralize their research and development efforts, losing touch with where innovative ideas area generated.

● They can respond rapidly to regional customer needs and trends by basing more and smaller units of capacity close to local markets.

● They can take advantage of the potential for human resource development by allowing staff a greater degree of local autonomy. Larger scale operations often have longer career paths with fewer opportunities for ‘taking charge’.

● They can explore radically new technologies by acting in the same way as a smaller, more entrepreneurial rival. Larger, more centralized development activities are often more bureaucratic than smaller scale agile centres of development.

5 10 15 Average service bay occupancy

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Cost curve for 5- bay centre

Cost curve for 10- bay centre

‘Economy of scale’ curve for service centre capacity Economies

of scale Diseconomies

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Cost curve for 15- bay centre

Figure 5.6 Unit cost curves for individual truck service centres of varying capacities

OPERATIONS IN PRACTICE

Do not think that the idea of economies of scale applies only to manufacturing operations. It is a universal con- cept. Here are just two examples.

In the 1,000-bed Narayana Hrudayalaya Hospital, in Bangalore, India, Dr Devi Shetty (who has been called the ‘Henry Ford’ of heart surgery) has created what, according to Forbes magazine, is the world’s largest heart factory. It is a radical new approach, he says, and proves that economies of scale can transform the cost of cardiology. Dr Shetty calls his approach the ‘Wal- Martisation’ of surgery – referring to the high-volume approach of the world’s largest supermarket chain, Wal- Mart. The hospital has 42 surgeons who perform 6,000 heart operations each year, including 3,000 on children. This makes the hospital the busiest facility of its type in the world. And it is needed; it is estimated that India

Economies of scale in heart surgery and shipping 5

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The timing of capacity change Changing the capacity of any operation in a supply network is not just a matter of deciding on its optimum capacity. The operation also needs to decide when to bring new capacity ‘on-stream’. For example, Figure 5.7 shows the forecast demand for a manufacturer’s new prod- uct. In deciding when new capacity is to be introduced the company can mix the three strategies (also illustrated in Fig. 5.7 ):

● Capacity is introduced generally to lead demand – timing the introduction of capacity in such a way that there is always sufficient capacity to meet forecast demand.

requires 2.5 million heart operations every year yet only 90,000 are performed. ‘ It’s a numbers game ,’ said Dr Shetty, who has performed 15,000 heart operations. ‘ Surgeons are technicians. The more practice they get, the more specialised they become and the better the results .’ The result is that costs are slashed and the hospital can be profitable even though many patients are poor. The hospital’s charges for open-heart surgery are, on aver- age, a tenth of the cost of the cheapest procedures in the USA. But even then, treatment is too expensive for many, so wealthier patients are charged more to subsi- dise the poorest.

The Eleonora Maersk is one of seven ships in her class that are owned my Maersk Lines, the world’s biggest container-shipping company. They are among the big- gest ships ever built, almost 400 metres long (the length of four football pitches). The Eleonora Maersk is also pow- erful; it has the largest internal combustion engine ever built, as powerful as 1,000 family cars, which enables it to move all its cargo from China to Europe in just over three weeks. Yet the ship is so automated that it requires only 13 people to crew it. On board, the ship can carry 15,000

20-foot containers, each of which can hold 70,000 T-shirts. It is these economies of scale that allow a T-shirt made in China to be sent to the Netherlands for just 2.5 cents. And the economies of scale involved in build- ing and running these ships mean that things will get big- ger still. Hoping to drive costs down further, the ship’s owners have ordered 20 even larger ships with a capacity of 18,000 20-foot containers, costing $200m each.

Figure 5.7 (a) Capacity-leading and capacity-lagging strategies. (b) Smoothing with inventories means using the excess capacity in one period to produce inventory that supplies the under-capacity period

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● Capacity is introduced generally to lag demand – timing the introduction of capacity so that demand is always equal to or greater than capacity.

● Capacity is introduced to sometimes lead and sometimes lag demand, but inventory built up during the ‘lead’ times is used to help meet demand during the ‘lag’ times. This is called ‘smoothing with inventory’.

Each strategy has its own advantages and disadvantages. These are shown in Table 5.1 . The actual approach taken by any company will depend on how it views these advantages and disadvantages. For example, if the company’s access to funds for capital expenditure is limited, it is likely to find the delayed capital expenditure require- ment of the capacity-lagging strategy relatively attractive. Of course, the third strategy, smoothing with inventory, is only appropriate for

operations that produce products that can be stored. Customer-processing operations such as hotels cannot satisfy demand in one year by using rooms that were vacant the previous year.

Break-even analysis of capacity expansion An alternative view of capacity expansion can be gained by examining the cost implications of adding increments of capacity on a break-even basis. Figure 5.8 shows how increasing capac- ity can move an operation from profitability to loss. Each additional unit of capacity results in a fixed-cost break that is a further lump of expenditure which will have to be incurred before any further activity can be undertaken in the operation. The operation is unlikely to be prof- itable at very low levels of output. Eventually, assuming that prices are greater than marginal costs, revenue will exceed total costs. However, the level of profitability at the point where the output level is equal to the capacity of the operation may not be sufficient to absorb all the extra fixed costs of a further increment in capacity. This could make the operation unprofita- ble in some stages of its expansion.

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Table 5.1 The arguments for and against pure leading, pure lagging, and smoothing with inventory strategies of capacity timing

Advantages Disadvantages

Capacity-leading strategies

● Always suffi cient capacity to meet demand, therefore revenue is maximized and customers satisfi ed

● Most of the time there is a ‘capacity cushion’ that can absorb extra demand if forecasts are pessimistic

● Any critical start-up problems with new operations are less likely to aff ect supply

● Utilization of the plants is always relatively low, therefore costs will be high

● Risks of even greater (or even permanent) over-capacity if demand does not reach forecast levels

● Capital spending on capacity will be early

Capacity-lagging strategies

● Always suffi cient demand to keep the operation working at full capacity, therefore unit costs are minimized

● Over-capacity problems are minimized if forecasts prove optimistic

● Capital spending on the operation is delayed

● Insuffi cient capacity to meet demand fully, therefore reduced revenue and dissatisfi ed customers

● No ability to exploit short-term increases in demand ● Under-supply position even worse if there are start-up

problems with the new operations

Smoothing with inventory strategies

● All demand is satisfi ed, therefore customers are satisfi ed and revenue is maximized

● Utilization of capacity is high and therefore costs are low ● Very short-term surges in demand can be met from

inventories

● The cost of inventories in terms of working capital requirements can be high. This is especially serious at a time when the company requires funds for its capital expansion

● Risks of product deterioration and obsolescence

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Figure 5.8 Repeated incurring of fixed costs can raise total costs above revenue

Worked example

A specialist graphics company is investing in a new machine which enables it to make high-quality prints for its clients. Demand for these prints is forecast to be around 100,000 units in year 1 and 220,000 units in year 2. The maximum capacity of each machine the company will buy to process these prints is 100,000 units per year. They have a fixed cost of €200,000 per year and a variable cost of processing of €1 per unit. The company believes it will be able to charge €4 per unit for producing the prints.

Question What profit is it likely to make in the first and second years?

Year 1 demand = 100,000 units; therefore company will need one machine Cost of manufacturing = Fixed cost for one machine + Variable cost * 100,000 = €200,000 + (€1 * 100,000) = €300,000 Revenue = Demand * Price = 100,000 * €4 = €400,000 Therefore profit = €400,000 - €300,000 = €100,000

Year 2 demand = 220,000; therefore company will need three machines Cost of manufacturing = Fixed cost for three machines + Variable cost * 220,000 = (3 * €200,000) + (€1 * 220,000) = €820,000 Revenue = Demand * Price = 220,000 * €4 = €880,000 Therefore profit = €880,000 - €820,000 = €60,000

Note that the profit in the second year will be lower because of the extra fixed costs asso- ciated with the investment in the two extra machines.

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154 PART ONE DIRECTING THE OPERATION

WHERE SHOULD OPERATIONS BE LOCATED?

The location of each operation in a supply network is a key element in defining its struc- ture and also will have an impact on how the network operates in practice. If any opera- tion in a supply network gets the location wrong it can have a significant impact, not just on profits, but also on those of others in the network. For example, siting a data centre where potential staff with appropriate skills will not live will affect both its performance and the service it gives its customers. Location decisions will usually have an effect on an operation’s costs as well as its ability to serve its customers (and therefore its revenues). Also, location decisions, once taken, are difficult to undo. The costs of moving an oper- ation can be hugely expensive and the risks of inconveniencing customers very high. No operation wants to move very often.

Reasons for location decisions Not all operations can logically justify their location. Some are where they are for histor- ical reasons. Yet even the operations that are ‘there because they're there’ are implicitly making a decision not to move. Presumably their assumption is that the cost and disrup- tion involved in changing location would outweigh any potential benefits of a new location. When operations do move, it is usually for one or both of two reasons – changes in demand or changes in supply:

● Changes in demand – A change in location may be prompted by customer demand shift- ing. For example, as garment manufacture moved to Asia, suppliers of zips, threads, etc., started to follow them. Changes in the volume of demand can also prompt relocation. To meet higher demand, an operation could expand its existing site, or choose a larger site in another location, or keep its existing location and find a second location for an addi- tional operation; the last two options will involve a location decision. High-visibility opera- tions may not have the choice of expanding on the same site to meet rising demand. A dry cleaning service may attract only marginally more business by expanding an existing site because it offers a local, and therefore convenient, service. Finding a new location for an additional operation is probably its only option for expansion.

● Changes in supply – The other stimulus for relocation is changes in the cost, or availa- bility, of the supply of inputs to the operation. For example, a mining or oil company will need to relocate as the minerals it is extracting become depleted. The reason why so many software companies located in India was the availability of talented, well-educated, but relatively cheap staff.

The objectives of the location decision The aim of the location decision is to achieve an appropriate balance between three related objectives:

● The spatially variable costs of the operation (spatially variable means that something changes with geographical location).

● The service the operation is able to provide to its customers. ● The revenue potential of the operation.

In for-profit organizations the last two objectives are related. The assumption is that the better the service the operation can provide to its customers, the better will be its potential to attract custom and therefore generate revenue. In not-for-profit organi- zations, revenue potential might not be a relevant objective and so cost and customer service are often taken as the twin objec- tives of location. In making decisions about where to locate an

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operation, operations managers are concerned with minimizing spatially variable costs and maximizing revenue/customer service. Location affects both of these but not always equally. For example, customers may not care very much where some products are made, so location is unlikely to affect revenues significantly. However, the costs could be very greatly affected by location. Services, on the other hand, often have both costs and rev- enues affected by location. The location decision for any operation is determined by the relative strength of a number of factors, as follows:

● Labour costs – The costs of employing people with particular skills can vary between dif- ferent regions and countries. Labour costs can be expressed in two ways. However, sim- ple wage costs can be misleading when comparing locations in different countries. Labour costs must then also take into account the effects both of productivity differences and of differing currency exchange rates. Exchange rate variation can cause unit costs to change dramatically over time. Yet labour costs exert a major influence on the location decision, especially in industries (such as clothing) where labour costs, as a proportion of total costs, are relatively high.

● Labour skills availability – The skills abilities of a local population are clearly impor- tant. For example, ‘science parks’ are usually located close to universities because they hope to attract companies who are interested in using the skills available at the university.

● Land costs – The cost of acquiring or leasing the site itself can be relevant in location choice. Land and rental costs vary between countries, cities and districts. A retail opera- tion, when choosing ‘high street’ sites, will pay a particular level of rent only if it believes it can generate a certain level of revenue from the site.

● Energy costs – Operations that use large amounts of energy, such as aluminium smelters, can be influenced in their location decisions by the availability of relatively inexpensive energy.

● Transportation costs – Transportation costs include both the cost of transporting inputs from their source to the operation and the cost of transporting outputs to customers. Almost all operations are concerned with the former, but not all operations transport goods to customers; rather, customers come to them (for example, hotels). Proximity to sources of supply dominates the location decision where the cost of transporting input materials is high or difficult. Food processing and other agricultural-based activities, for example, are often carried out close to growing areas. Conversely, transportation to customers dom- inates location decisions where this is expensive or difficult. Civil engineering projects, for example, are constructed mainly where they will be needed.

● Community factors – Community factors are those influences on an operation’s costs that derive from the social, political and economic environment of its site: for example, tax rates, government financial assistance, political stability and corruption, language, local amenities, labour relations, environmental regulations and waste disposal, planning pro- cedures, etc.

● The suitability of the site itself – Different sites may have different intrinsic charac- teristics that can affect an operation’s ability to serve customers and generate revenue. For example, locate a luxury resort hotel next to a beach and it attracts custom. Move it a few kilometres away into the centre of an industrial estate and it rapidly loses its attraction.

● Image of the location – Some locations are firmly associated in customers’ minds with a particular image: for example, advanced technology in Silicon Valley, fashion design houses in Milan and financial services in the City of London.

● Convenience for customers – This is often the most important factor when service is important to customers. Locating a general hospital, for instance, in the middle of the countryside may have many advantages for its staff, and even perhaps for its costs, but clearly would be very inconvenient to its customers (patients). So, hospitals are usually located close to centres of demand.

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156 PART ONE DIRECTING THE OPERATION

OPERATIONS IN PRACTICE

Similar companies with similar needs often cluster together in the same geographical area. Why? For a number of reasons. Michael Porter of Harvard Business School, the famous strategy professor and an author- ity on industrial clusters, says that firms’ geographical proximity helps to promote economies of scale, learn- ing and productivity, as well as boosting innovation and encouraging the growth of new supplier firms. This is a winning combination, according to Professor Porter, and accounts for the existence of such clusters around the world. Here are just a few examples.

Financial services These are clustered in relatively few centres globally, even after the turbulence in financial services. London, New York, Hong Kong, Singapore, Tokyo, Chicago and Zurich dominate the industry. According to Deutsche Bank, ‘ Big is beautiful – and will remain so .’ It is far easier to build on existing market strength than start afresh. Banks have to trade with each other and even in an increasingly glo- balized world being close helps. Combine this with good regulation and free markets and it becomes a significant competitive advantage.

High tech These industries provide one of the most famous loca- tion clusters in the area south of San Francisco known as Silicon Valley, probably the most important intellectual and commercial hub of technological innovation. Yet other locations are developing. For example, Bangalore in India is fast becoming a cluster for the computer industry because of the ready availability of well- educated, low-cost English-speaking software techni- cians; it has now attracted more, and more sophisticated, business. Something similar is happening in Shanghai in China. ‘ Over the next ten years, China will become a fero- ciously formidable competitor for companies that run the entire length of the technology food chain ’, says Michael J. Moritz, a Californian venture-capital firm. Even in

higher cost countries, new clusters are growing. One is around ‘silicon roundabout’, in East London, where old Victorian warehouses are home to a growing number of Web and technology start-ups, working on everything from online game design to streaming music services and general web services (Google has offices there). There was a history of start-ups in the area stretching back a couple of decades because of relatively low office rents, a creative atmosphere generated by an influx of artists and designers, London’s world-class universi- ties, art galleries and the kinds of cafés, bars, shops and clubs that help attract creative staff. So, again, the cluster developed for clear reasons and then grew because size and focus attract other companies.

Racing cars These are mostly made in the UK, in particular in the areas of Oxfordshire or Northamptonshire. Most Formula One teams are based in the UK, as are many Indy Car teams. Even those who are not are likely to use British services. Motorsport is a flourishing cluster with around 4,500 firms working on building, maintain- ing, modifying and restoring cars, making engines and components, and providing technical and management services. Almost everything a racing team needs can be found without leaving the area.

Counting clusters 6

HOW VERTICALLY INTEGRATED SHOULD AN OPERATION’S NETWORK BE?

The scope to which an operation controls its supply network is an issue that will shape the fun- damental nature of any business. It determines the extent that an operation does things itself and the extent that it will rely on other operations to do things for it. This is often referred to as ‘vertical integration’, when it is the ownership of whole operations that is being decided, or ‘outsourcing’ when individual activities are being considered. We will look at the ‘outsourc- ing’ decision in the next section. Vertical integration is the extent to which an organization

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owns the network of which it is a part. It usually involves an organization assessing the wis- dom of acquiring suppliers or customers. And different companies, even in the same industry, can make very different decisions over how much and where in the network they want to be. Figure 5.9 illustrates the (simplified) supply network for the wind turbine power generation industry. Original equipment manufacturers (OEMs) assemble the wind turbine nacelle (the nacelle houses the generator and gearbox). Towers and blades are often built to the OEM’s specifications, either in-house or by outside suppliers. Installing wind turbines involves assembling the nacelle, tower and blades on site, erecting the tower and connecting to the electricity network. The extent of vertical integration varies by company and component. The three companies illustrated in Figure 5.9 have all chosen different vertical integration strate- gies. Company A is primarily a nacelle designer and manufacturer that also makes the parts. Company B is primarily an installer that also makes the tower and blades (but buys in the nacelle itself). Company C is primarily an operator that generates electricity and also designs and assembles the nacelles as well as installing the whole tower (but it outsources the manu- facture of the nacelle parts, tower and blades).

An organization’s vertical integration strategy can be defined in the following terms:

● The direction of integration – If a company decides that it should control more of its net- work, should it expand by buying one of its suppliers or should it expand by buying one of its customers? The strategy of expanding on the supply side of the network is sometimes called backward or ‘upstream’ vertical integration, and expanding on the demand side is sometimes called forward or ‘downstream’ vertical integration. Backward vertical inte- gration, by allowing an organization to take control of its suppliers, is often used either to gain cost advantages or to prevent competitors gaining control of important suppliers. Forward vertical integration, on the other hand, takes an organization closer to its markets and allows more freedom for an organization to make contact directly with its customers, and possibly sell complementary products and services.

Design Manufacture nacelle parts Assemble

nacelle Install Operate

Manufacture tower/blades

Company A

Parts of the supply chain owned by each company

Design Manufacture nacelle parts Assemble

nacelle Install Operate

Manufacture tower/blades

Company B

Design Tower

Blades

Nacelle details

Manufacture nacelle parts

Assemble nacelle Install Operate

Manufacture tower/blades

Company C

Figure 5.9 Three companies operating in the wind power generation industry with different vertical integration positions

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158 PART ONE DIRECTING THE OPERATION

● The extent of the process span of integration – Some organizations deliberately choose not to integrate far, if at all, from their original part of the network. Alternatively some organizations choose to become very vertically integrated. Take many large international oil companies, such as Exxon, for example. Exxon is involved with exploration and extraction as well as the refining of crude oil into a consumable product – gasoline. It also has opera- tions that distribute and retail the gasoline (and many other products) to the final customer. This path (one of several for its different products) has moved the material through the total network of processes, all of which are owned (wholly or partly) by the one company.

● The balance among the vertically integrated stages – This is not strictly about the ownership of the network; it concerns the capacity and, to some extent, the operating behaviour of each stage in the network which is owned by the organization. It refers to the amount of the capacity at each stage in the network that is devoted to supplying the next stage. So a totally balanced network relationship is one where one stage produces only for the next stage in the network and totally satisfies its requirements. Less than full balance in the stages allows each stage to sell its output to other companies or buy in some of its supplies from other companies.

Figure 5.10 illustrates these three aspects of vertical integration. The decision as to whether to vertically integrate in a particular set of circumstances is

largely a matter of a business balancing the following advantages and disadvantages as they apply to it.

The perceived advantages of vertical integration Although extensive vertical integration is no longer as popular as it once was, there are still companies who find it advantageous to own several sequential stages of their supply network. Indeed very few companies are anywhere close to ‘virtual’, with no vertical integration of stages whatsoever. What then are the reasons why companies still choose to vertically inte- grate? Most justifications for vertical integration fall into four categories:

● It secures dependable access to supply or markets – The most fundamental reasons for engaging in some vertical integration is that it can give more secure supply or bring a business closer to its customers. One reason why the oil companies which sell gasoline are also engaged in extracting it is to ensure long-term supply. In some cases there may not

Narrow extent of process span

Wide extent of process span

Balance – should excess capacity be used to supply other companies?

Component maker

Assembly operation Wholesaler Retailer

Direction – should the operation expandUpstream Downstream

Raw material supplier

Figure 5.10 The direction, extent and balance of an operation’s vertical integration

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even be sufficient capacity in the supply market to satisfy the company. It therefore has lit- tle alternative but to supply itself. Downstream vertical integration can give a firm greater control over its market positioning. For example, Apple has always adopted a supply net- work model that integrates hardware and software with both its hardware and software designed by Apple.

● It may reduce costs – The most common argument here is that ‘ We can do it cheaper than our supplier’s price .’ Such statements are often made by comparing the marginal direct cost incurred by a company in doing something itself against the price it is paying to buy the product or service from a supplier. But costs saving should also take into account start-up and learning costs. A more straightforward case can be made when there are technical advantages of integration. For example, producing aluminium kitchen foil involves roll- ing it to the required thickness and then ‘slitting’ it into the finished widths. Performing both activities in-house saves the loading and unloading activity and the transportation to another operation. Vertical integration also reduces the ‘transaction costs’ of dealing with suppliers and customers. Transaction costs are expenses, other than price, which are incurred in the process of buying and selling, such as searching for and selecting suppliers, setting up monitoring arrangements, negotiating contracts, and so on. If transaction costs can be lowered to the point where the purchase price plus transaction costs are less than the internal cost, there is little justification for the vertical integration of the activity.

● It may help to improve product or service quality – Sometimes vertical integration can be used to secure specialist or technological advantage by preventing product and service knowledge getting into the hands of competitors. The exact specialist advantage may be anything from the ‘secret ingredient’ in fizzy drinks through to a complex technological process. In either case the argument is the same: ‘ This process gives us the key identifying factor for our products and services. Vertical integration therefore is necessary to the survival of product or service uniqueness .’

● It helps in understanding other activities in the supply network – Some companies, even those that are famous for their rejection of traditional vertical integration, do choose to own some parts of the supply network other than what they regard as core. So for example, McDonald’s, the restaurant chain, although largely franchising its retail operations, does own some retail outlets. How else, it argues, could it understand its retail operations so well?

OPERATIONS IN PRACTICE

Moving to a different part of a supply network can be risky. Look at Taiwan’s HTC. For years the firm had been one of the most important suppliers to better known brands. HTC was an ‘original design manufacturer’, or ODM, developing and building high-end ‘smartphones’ for better known Western mobile operators, including Verizon and Orange. It was a good business. HTC had built an enviable reputation as an innovative and reli- able supplier of sophisticated hand-held computers and mobile phones. However, Peter Chou, the Chief Executive Officer of HTC, believed that the industry was changing. Chou could see the market becoming more difficult. Although still a profitable business, the margins from supplying other brands were shrinking. Chinese suppliers, with their lower labour costs, were provid- ing stiff competition and customers had started to look

for rival suppliers. ‘ We needed to establish a new com- petency before we got into trouble ’, explained Mr Chou. The way ahead, the company decided, was to move

HTC moves downstream (and into problems) 7

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160 PART ONE DIRECTING THE OPERATION

The perceived disadvantages of vertical integration The arguments against vertical integration tend to cluster around a number of observed dis- advantages of those companies that have practised vertical integration extensively. These are as follows:

● It creates an internal monopoly – Operations, it is argued, will only change when they see a pressing need to do so. Internal supply is less subject to the normal compet- itive forces that keep operations motivated to improve. If an external supplier serves its customers well, it will make higher profits; if not, it will suffer. Such incentives and sanctions do not apply to the same extent if the supplying operation is part of the same company.

● You cannot exploit economies of scale – Any activity that is vertically integrated within an organization is probably also carried out elsewhere in the industry. But the effort it puts into the process will be a relatively small part of the sum total of that activity within the industry. Specialist suppliers who can serve more than one customer are likely to have volumes larger than any of their customers could achieve doing things for themselves. This allows specialist suppliers to reap some of the cost benefits of economies of scale, which can be passed on in terms of lower prices to their customers.

● It results in loss of flexibility – Heavily vertically integrated companies by definition do most things themselves. This means that a high proportion of their costs will be fixed costs. They have, after all, invested heavily in the capacity that allows them to do most things in-house. A high level of fixed costs relative to variable costs means that any reduction in the total volume of activity can easily move the economics of the operation close to, or below, its break-even point.

● It cuts you off from innovation – Vertical integration means investing in the processes and technologies necessary to produce products and services in-house. But as soon as that investment is made the company has an inherent interest in maintaining it. Abandoning such investments can be both economically and emotionally difficult. The temptation is always to wait until any new technology is clearly established before admitting that one’s own is obsolete. This may lead to a tendency to lag in the adoption of new technologies and ideas.

● It distracts you from core activities (loss of focus) – The final, and arguably most pow- erful, case against vertical integration concerns any organization’s ability to be technically competent at a very wide range of activities. All companies have things that they need to be good at. And it is far easier to be exceptionally good at something if the company focuses exclusively on it rather than being distracted by many other things. Vertical integration, by definition, means doing more things, which can distract from the (few) particularly impor- tant things.

forward in the supply network and start developing its own brand. This new supply network strategy meant HTC had to develop new capabilities. More talent was recruited to strengthen its in-house design and software skills so that HTC products would have a unique look and feel. The company knew that the strategy was not without its risks. It meant investing in the marketing and sales operations that had, up till then, been the prov- ince of its customers. HTC also lost of much of its exist- ing business, because some customers were reluctant to do business with a budding rival. Just as significant,

the culture and objectives of the company had to move from ‘ efficiently implementing what had been decided by one’s customers’ to one of ‘ constantly developing radical and innovative new ideas ’. And, indeed, it did prove dif- ficult for the company. After a reasonable start in what was becoming an extremely competitive market, HTC sales of its own branded smartphones began to slump, as did its profits and share price. Some commentators said that the company had underestimated the opera- tions and marketing skills that would be needed to suc- ceed in its new business.

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HOW DO OPERATIONS DECIDE WHAT TO DO IN-HOUSE AND WHAT TO OUTSOURCE?

Theoretically ‘vertical integration’ and ‘outsourcing’ are the same thing. Vertical integration is ‘ the extent to which an organization owns the network of which it is a part ’. Outsourcing is ‘ an arrangement in which one company provides services for another company that could also be, or usually have been, provided in-house ’. 8 It is based on the idea that no single business does everything that is required to produce its products and services. Bakers do not grow wheat or even mill it into flour. Banks do not usually do their own credit checking, but retain the services of specialist credit checking agencies that have the information systems and expertise to do it better. Outsourcing is also known as the ‘do-or-buy’ decision. It has become an important issue for most businesses. This is because, although most companies have always outsourced some of their activities, a larger proportion of direct activities is now being bought from suppliers. Also, many indirect and administrative processes are now being outsourced. This is often referred to as business process outsourcing (BPO). Financial service companies in particular are out- sourcing some of their more routine back-office processes. In a similar way many processes within the HR function, from simply payroll services through to more complex training and development processes, are being outsourced to specialist companies. The processes may still be physically located where they were before, but the outsourcing service provider manages the staff and technology. The reason for doing this is often primarily to reduce cost. However, there can sometimes also be significant gains in the quality and flexibility of service offered.

What is the difference between vertical integration and outsourcing? Very little really; it is largely a matter of scale and direction. Vertical integration is a term that is usually (but not always) applied to whole operations. So, buying a supplier because you want to deny its products to a competitor, or selling the part of your business that services your products to a specialist servicing company that can do the job better, is a vertical inte- gration decision. Outsourcing usually applies to smaller sets of activities that have previously been performed in-house. Deciding to ask a specialist laboratory to perform some quality tests that your own quality control department used to do, or having your call (contact) centre taken over and run by a larger call centre company, are both outsourcing decisions.

Making the outsourcing decision Outsourcing is rarely a simple decision. Operations in different circumstances with different objectives are likely to take different decisions. Yet the question itself is relatively simple, even if the decision itself is not: ‘Does in-house or outsourced supply in a particu- lar set of circumstances give the appropriate performance objectives that it requires to compete more effectively in its markets?’ For example, if the main performance objectives for an operation are dependable delivery and meeting short-term changes in customers’ delivery requirements, the key question should be: ‘How does in-house or outsourcing give better dependability and delivery flexibility performance?’ This means judging two sets of opposing factors – those which give the potential to improve performance, and those which work against this potential being realized. Table 5.2 summarizes some arguments for in-house supply and outsourcing in terms of each performance objective.

Incorporating strategic factors into the outsourcing decision Although the effect of outsourcing on the operation’s performance objective is important, there are other factors that companies take into account when deciding if outsourcing an activity is a sensible option. For example, if an activity has long-term strategic importance

✽ ✽ ✽ Operations principle Operations principle Operations principle

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162 PART ONE DIRECTING THE OPERATION

to a company, it is unlikely to outsource it. For instance, a retailer might choose to keep the design and development of its website in-house even though specialists could perform

the activity at less cost because it plans to move into web-based retailing at some point in the future. Nor would a company usually outsource an activity where it had specialized skills or knowledge. For example, a company making laser printers may have built up specialized knowledge in the production of sophisticated laser drives. This capability may allow it to introduce product or pro- cess innovations in the future. It would be foolish to ‘give away’ such capability. After these two more strategic factors have been considered, the company’s operations performance can be taken

into account. Obviously if its operations performance is already superior to any potential supplier, it would be unlikely to outsource the activity. But also, even if its performance was currently below that of potential suppliers, it might not outsource the activity if it feels that it could significantly improve its performance. Figure 5.11 illustrates this deci- sion logic.

Outsourcing and offshoring Two supply network strategies that are often confused are those of outsourcing and offshoring. Outsourcing means deciding to buy in products or services rather than per- form the activities in-house. Offshoring means obtaining products and services from

Table 5.2 How in-house and outsourced supply may affect an operation’s performance objectives

Performance objective ‘Do-it-yourself ’ in-house supply ‘Buy-it-in’ outsourced supply

Quality The origins of any quality problems are usually easier to trace in-house and improvement can be more immediate but can be some risk of complacency

Supplier may have specialized knowledge and more experience, and may be motivated through market pressures, but communication more diffi cult

Speed Can mean synchronized schedules which speeds throughput of materials and information, but if the operation has external customers, internal customers may be low priority

Speed of response can be built into the supply contract where commercial pressures will encourage good performance, but there may be signifi cant transport/delivery delays

Dependability Easier communications can help dependability, but if the operation also has external customers, internal customers may receive low priority

Late delivery penalties in the supply contract can encourage good delivery performance, but organizational barriers may inhibit in communication

Flexibility Closeness to the real needs of a business can alert the in-house operation to required changes, but the ability to respond may be limited by the scale and scope of internal operations

Outsource suppliers may be larger with wider capabilities than in-house suppliers and more ability to respond to changes, but may have to balance confl icting needs of diff erent customers

Cost In-house operations do not have to make the margin required by outside suppliers so the business can capture the profi ts which would otherwise be given to the supplier, but relatively low volumes may mean that it is diffi cult to gain economies of scale or the benefi ts of process innovation

Probably the main reason why outsourcing is so popular. Outsourced companies can achieve economies of scale and they are motivated to reduce their own costs because it directly impacts their profi ts, but costs of communication and co-ordination with supplier need to be taken into account

✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle

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CHAPTER 5 THE STRUCTURE AND SCOPE OF OPERATIONS 163

operations that are based outside one’s own country. Of course, one may both outsource and offshore as illustrated in Figure 5.12 . Offshoring is very closely related to outsourcing and the motives for each may be similar. Offshoring to a lower cost region of the world is usually done to reduce an operation’s overall costs as is outsourcing to a supplier which has greater expertise or scale, or both.

Explore keeping this activity in-house

Is activity of strategic

importance?

No

Yes

Does company

have specialized knowledge?

No

Yes

Is company’s operations

performance superior?

No

Yes

Is significant operations

performance improvement

likely?

No

Yes

Explore outsourcing this activity

Figure 5.11 The decision logic of outsourcing

OPERATIONS IN PRACTICE

One of the best-known cautionary tales that illustrates the inherent dangers involved in subcontracting is that of how General Electric lost its microwave oven busi- ness. Although Japanese domestic appliance manufac- turers, such as Matsushita and Sanyo, dominated the global microwave industry at the beginning of the 1980s, General Electric (GE) was enjoying reasonable success in the US market with its purpose-designed microwave oven plant in Maryland. However, GE soon came under price pressures from Japanese competitors. What seemed an obvious solution was to subcontract the production of some of its more basic models, where margins were rela- tively small. GE explored the idea of subcontracting these models to one of its main rivals, Matsushita, even though giving one of its main competitors such an advantage was considered risky. GE also found a small, but go- getting, Korean company which was already selling very simple (and very cheap) models in the USA. GE decided to continue making top-of-the-range models itself, sub- contract its cheaper models to Matsushita, but also place a small order of 15,000 units of its cheaper models with the Korean company, partly to see whether it could cope with the order. Of course it also made sense for GE to send its own engineers to help the Korean company and ensure that quality standards would be maintained. The GE engineers found that, although the Korean com- pany had little knowledge, it was very willing to learn. Eventually the Korean production line started producing reasonable-quality products, still at very low prices. Over

time, the Korean company was given more and more orders by GE, who found that it was making more profit from the Korea-sourced products than those coming out of its Maryland plant. This became particularly important as the market continued to mature and costs came under increased pressure. The Maryland plant attempted to cut its own costs but this proved especially difficult with so much of its volume now subcontracted to the Korean company. In the end the Maryland plant was closed and GE withdrew entirely from the microwave oven (indeed the whole domestic appliance) market. And the Korean company? It was called Samsung, and within 10 years of starting to make them it became the world’s largest man- ufacturer of microwave ovens.

Samsung’s subcontracted success

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164 PART ONE DIRECTING THE OPERATION

Outsourcing

Domestic supplier delivers products and/or services

Offshore outsourcing

Overseas supplier delivers products and/or services

Domestic operations Focal operation performs

activities themselves

Within domestic markets

Company does not own

the assets

Company owns the

assets

International markets

Offshore operations

Focal operation’s overseas operation delivers products

and/or services

Location of operations

Ownership of operations

Figure 5.12 Offshoring and outsourcing are related but different

Critical commentary

In many instances there has been fi erce opposition to companies outsourcing some of their processes. Trade unions often point out that the only reason that outsourcing companies can do the job at lower cost is that they either reduce salaries or reduce working conditions, or both. Furthermore, they say, fl exibility is only achieved by reducing job security. Employees who were once part of a large and secure corporation could fi nd themselves as far less secure employees of a less benevolent employer with a philosophy of permanent cost cutting. Even some proponents of outsourcing are quick to point out the problems. There can be signifi cant obstacles, including understandable resistance from staff who fi nd themselves ‘outsourced’. Some companies have also been guilty of ‘outsourcing a problem’. In other words, having failed to manage a process well themselves, they ship it out rather than face up to why the process was problematic in the fi rst place. There is also evidence that, although long-term costs can be brought down when a process is outsourced, there may be an initial period when costs rise as both sides learn how to manage the new arrangement.

● The ‘structure’ of an operation’s supply network relates to the shape and form of the network.

● The scope of an operation’s supply network relates to the extent that an operation decides to do the activities performed by the network itself, as opposed to requesting a supplier to do them .

● The structure and scope of an operation’s supply network is important because it helps an understanding of competitiveness, it helps identify signifi cant links in the network, and it helps focus on long-term issues.

❯ What do we mean by the ‘structure’ and ‘scope’ of operations’ supply networks?

SUMMARY ANSWERS TO KEY QUESTIONS

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CHAPTER 5 THE STRUCTURE AND SCOPE OF OPERATIONS 165

❯ What configuration should a supply network have?

❯ How much capacity should operations plan to have?

● Even when an operation does not directly own other operations in its network, it may still wish to change the shape of the network by reconfiguring it so as to change the nature of the relationships.

● Changing the shape of the supply network may involve reducing the number of suppliers to the operation so as to develop closer relationships, and bypassing or disintermediating operations in the network.

● One may also use the idea of complementors that enable one’s products or services to be val- ued more by customers because they also can have the complementor’s products or services.

● An idea that is closely related to that of co-opetition in supply networks is that of the ‘busi- ness ecosystem’, defined as: ‘An economic community supported by a foundation of inter- acting organizations and individuals.’

● The amount of capacity an organization will have depends on its view of current and future demand. It is when its view of future demand is different from current demand that this issue becomes important.

● When an organization has to cope with changing demand, a number of capacity decisions need to be taken. These include choosing the optimum capacity for each site, balancing the various capacity levels of the operation in the network, and timing the changes in the capacity of each part of the network.

● Important influences on these decisions include the concepts of economy and diseconomy of scale.

❯ Where should operations be located?

❯ How vertically integrated should an operation’s network be?

● When operations change their location, their assumption is that the potential benefits of a new location will outweigh any cost and disruption involved in changing location. When operations do move, it is usually because of changes in demand and/or changes in supply.

● The factors that determine a location are such things as labour, land and utility costs, the image of the location, its convenience for customers and the suitability of the site itself.

● The scope to which an operation controls its supply network is the extent that it does things itself as opposed to relying on other operations to do things for it. This is often referred to as ‘vertical integration’.

● An organization’s vertical integration strategy can be defined in terms of the direction of integration, the extent of integration, and the balance among the vertically integrated stages.

● The decision as to whether to vertically integrate is largely a matter of a business balancing the advantages and disadvantages as they apply to it.

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Just outside Rotterdam in the Netherlands, Frank Jansen, the Chief Operating Officer of Aarens Electronic (AE), was jus- tifiably proud of what he described as ‘ the most advanced machine of its type in the world, which will enable us to achieve new standards of excellence for our products requiring abso- lute cleanliness and precision ’…and…‘ a quantum leap in har- nessing economies of scale and new technology to provide the most advanced operation for years to come ’ . The Rotterdam Operation was joining AE’s two existing operations in the Netherlands. They offered precision custom coating and laminating services to a wide range of customers, among the most important being Phanchem, to whom it supplied dry photoresist imaging films, a critical step in the manu- facturing of microchips. Phanchem then processed the film further and sold it direct to microchip manufacturers

The Rotterdam Operation The decision to build the Rotterdam Operation had been taken because the company believed that a new low- cost operation using ‘ultra-clean’ controlled environment technology could secure a very large part of Phanchem’s future business – perhaps even an exclusive agreement to supply 100 per cent of its needs. When planning the new operation three options were presented to AE’s Executive Committee:

(a) Expand an existing site by building a new machine within existing site boundaries. This would provide around 12 to 13 million square metres (MSM) per year of additional capacity and require around €19 million in capital expenditure.

(b) Build a new facility alongside the existing plant. This new facility could accommodate additional capacity of

around 15 MSM per year but, unlike option A, would also allow for future expansion. Initially this would require around €22 million of capital.

(c) Set up a totally new site with a much larger increment of capacity (probably around 25 MSM per year). This option would be more expensive, at least €30 million.

Frank Jansen and his team initially favoured option B but in discussion with the AE Executive Committee, opinion shifted towards the more radical option C. ‘ It may have been the highest risk option but it held considerable potential and it fitted with the AE Group philosophy of getting into high-tech specialised areas of business. So we went for it. ’ (Frank Jansen) The option of a very large, ultra-clean, state-of-the-art facil- ity also had a further advantage – it could change the eco- nomics of the photoresist imaging industry. In fact, global

● Outsourcing is ‘an arrangement in which one company provides services for another com- pany that could also be, or usually have been, provided in-house’ .

● The diff erence between vertical integration and outsourcing is largely a matter of scale and direction .

● Like the vertical integration decision, it is often a matter of balancing advantages against disadvantages under particular circumstances .

● Assessing the advisability of outsourcing should also include consideration of the strategic importance of the activity and the operation’s relative performance.

❯ How do operations decide what to do in-house and what to outsource?

166 PART ONE DIRECTING THE OPERATION

CASE STUDY Aarens Electronic

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CHAPTER 5 THE STRUCTURE AND SCOPE OF OPERATIONS 167

demand and capacity did not immediately justify investing in such a large an increase in capacity. There was probably some over-capacity in the industry. But a large-capacity, ultra-clean-type operation could provide a level of quality at such low costs that, if there were over-capacity in the indus- try, it would not be AE’s capacity that would by lying idle.

Designing the new operation During discussions on the design of the new operation, it became clear that there was one issue that was under- lying all the team’s discussions – how flexible should the process be? Should the team assume that it was designing an operation that would be dedicated exclusively to the manufacture of photoresist imaging film, and ruthlessly cut out any technological options that would enable it to manufacture other products, or should the team design a more general-purpose operation that was suitable for photoresist imaging film, but could be also make other products? It proved a difficult decision. The advantages of the more flexible option were obvious. ‘At least it would mean that there was no chance of me being stuck with an operation and no market for it to serve in a couple of year’s time.’ (Frank Jansen) But the advantages of a totally dedi- cated operation were less obvious, although there was a general agreement that both costs and quality could be superior in an operation dedicated to one product.

Eventually the team decided to concentrate on a rela- tively non-flexible, focused and dedicated large machine. ‘You can't imagine the agonies we went through when we decided not to make this a flexible machine. Many of us were not comfortable with saying, “This is going to be a photoresist machine exclusively, and if the market goes away we're in real trouble.” We had a lot of debate about that. Eventually we more or less reached a consensus for focus but it was certainly one of the toughest decisions we ever made.’ (Frank Jansen) The capital cost savings of a focused facility and operating costs savings of up to 25 per cent were powerful arguments, as was the philosophy of total process dedication. ‘The key word for us was focus. We wanted to be quite clear about what was needed to satisfy our customer in making this single type of product. As well as providing significant cost savings to us it made it a lot easier to identify the root causes of any problems because we would not have to worry about how it might affect other products. It’s all very clear. When the line was down we would not be generating revenue! It would also force us to understand our own performance. At our other operations, if a line goes down, the people can be shifted to other responsibilities. We don't have other responsibilities here – we're either making it or we're not.’ (Frank Jansen)

When the Rotterdam Operation started producing, the team had tweaked the design to bring the capacity at start-up to 32 MSM per year. And notwithstanding some initial teething troubles it was, from the start, a techni- cal and commercial success. Within six months a con- tract was signed with Phanchem to supply 100 per cent of Phanchem’s needs for the next 10 years. Phanchem’s

decision was based on the combination of manufacturing and business focus that the Rotterdam team has achieved, a point stressed by Frank Jansen: ‘Co-locating all necessary departments on the Rotterdam site was seen as particularly important. All the technical functions and the marketing and business functions are now on site.’

Developing the supply relationship At the time of the start-up, product produced in Rotterdam was shipped to Phanchem’s facility near Frankfurt, Germany, almost 500 km away. This distance caused a number of problems including some damage in transit and delays in delivery. However, the relationship between AE and Phanchem remained sound, helped by the two companies’ co-operation during the Rotterdam start-up. ‘We had worked closely with them during the design and construction of the new Rotterdam facility. More to the point, they saw that they would certainly achieve cost savings from the plant, with the promise of more savings to come as the plant moved down the learning curve.’ (Frank Jansen) The closeness of the relationship between the two companies was a result of their staff working together. AE engineers were impressed by their customer’s willingness to help out while they worked on overcoming the start-up problems. Similarly AE had helped Phanchem when it needed extra supplies at short notice. As Frank Jansen said, ‘partly because we worked together on various prob- lems the relationship has grown stronger and stronger.’

In particular the idea of a physically closer relationship between AE and Phanchem was explored. ‘During the nego- tiations with Phanchem for our 100 per cent contract there had been some talk about co-location but I don't think any- one took it particularly seriously. Nevertheless there was gen- eral agreement that it would be a good thing to do. After all, our success as Phanchem’s sole supplier of coated photoresist was tied in to their success as a player in the global mar- ket: what was good for Phanchem was good for AE.’ (Frank Jansen) Several options were discussed within and between the two companies. Phanchem had, in effect, to choose between four options:

● Stay where it was, near Frankfurt. ● Relocate to the Netherlands (which would give easier

access to port facilities) but not too close to AE (an appropriate site was available 30 km from Rotterdam).

● Locate to a currently vacant adjacent site across the road from AE’s Rotterdam plant.

● Co-locate within an extension that could be specially built onto the AE plant at Rotterdam.

Evaluating the co-location options Relatively early in the discussions between the two companies, the option of ‘doing nothing ’ by staying in Frankfurt was discounted. Phanchem wanted to sell its val- uable site near Frankfurt. The advantages of some kind of move were significant. The option of Phanchem moving to

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168 PART ONE DIRECTING THE OPERATION

a site 30 km from Rotterdam was considered but rejected because it had no advantages over locating even closer to the Rotterdam plant. Phanchem also strongly considered building and operating a facility across the road from the Rotterdam plant. But eventually the option of locating in a building attached to AE’s Rotterdam Operation became the preferred option. Co-location would have a significant impact on Phanchem’s competitiveness by reducing its operating costs, enabling it to gain market share by offer- ing quality film at attractive prices, thus increasing volume for AE. The managers at the Rotterdam plant also looked forward to an even closer operational relationship with the customer. ‘ Initially, there was some resistance in the team to having a customer on the same site as ourselves. No one in AE had ever done it before. The step from imagining our customer across the road to imagining them on the same site took some thinking about. It was a matter of getting used to the idea, taking one step at a time. ’ (Frank Jansen)

The customer becomes a paying guest However, when Frank and the Rotterdam managers pre- sented their proposal for extending the plant to the AE board the proposal was not well received. ‘ Leasing factory space to our customer seemed a long way from our core

business. As one Executive Committee member said, we are manufacturers; we aren't in the real estate business. But we felt that it would be beneficial for both companies. ’ (Frank Jansen) And even when the proposal was eventually accepted, there was still concern over sharing a facility. In fact the Executive Committee insisted that the door between the two companies’ areas should be capable of being locked from both sides. Yet the construction and commissioning of the new facility for Phanchem was also a model of co-operation. Now, all visitors to the plant are shown the door that had to be ‘capable of being locked from both sides’ and asked how many times they think it has been locked. The answer, of course, is ‘never’.

QUESTIONS 1 What were the key structure and scope decisions

taken by Aarens Electronic?

2 What were the risks involved in adopting a process design that was ‘totally dedicated’ to the one customer’s needs?

3 What were the advantages and disadvantages of each location option open to Phanchem, and why do you think it eventually chose to co-locate with AE?

PROBLEMS AND APPLICATIONS

1 Visit the websites of companies that are in the paper manufacturing/pulp production/ packaging industries. Assess the extent to which the companies you have investigated are vertically integrated in the paper supply chain that stretches from foresting through to the production of packaging materials

2 A private healthcare clinic has been offered a leasing deal where it could lease a CAT scanner at a fixed charge of €2,000 per month and a charge per patient of €6 per patient scanned. The clinic currently charges €10 per patient for taking a scan. (a) At what level of demand (in number of patients per week) will the clinic break even on the cost of leasing the CAT scan? (b) Would a revised lease that stipulated a fixed cost of €3,000 per week and a variable cost of €0.20 per patient be a better deal?

3 Revisit the ‘operations in practice’ example of the Hollywood movie business. Draw diagrams of the supply network for the industry (a) back in the days of studio power, and (b) the way the industry operates now.

4 Do the same thing for the music business, from the days when record labels controlled the business to the availability of streaming services.

5 How could universities adopt the practice of outsourcing more?

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CHAPTER 5 THE STRUCTURE AND SCOPE OF OPERATIONS 169

SELECTED FURTHER READING

Carmel, E. and Tjia, P. (2005) Offshoring Information Technology: Sourcing and Outsourcing to a Global Workforce, Cambridge University Press, Cambridge.

An academic book on outsourcing.

Corbett, M.F. (2010) The Outsourcing Revolution: Why it Makes Sense and How to Do it Right, Kaplan, Wokingham.

Not an academic book on outsourcing.

Cullen, S.K., Lacity, M. and Willcocks, L.P. (2014) Outsourcing – All You Need To Know, White Plume Publishing, Boston, MA.

Practical, interesting and intelligent.

Dell, M. (with Catherine Fredman) (1999) Direct from Dell: Strategies that revolutionized an industry, Harper Business, New York.

Michael Dell explains how his supply network strategy (and other decisions) had such an impact on the industry. Interesting and readable, but not a critical analysis!

Schniederjans, M.J. (1998) International Facility Location and Acquisition Analysis, Quorum Books, New York.

Very much one for the technically minded.

Vashistha, A. and Vashistha, A. (2006) The Offshore Nation: Strategies for Success in Global Outsourcing and Offshoring, McGraw Hill Higher Education, New York.

Another topical book on outsourcing.

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170 PART ONE DIRECTING THE OPERATION

INTRODUCTION Some forecasts are accurate. We know exactly what time the Sun will rise at any given place on Earth tomorrow or one day next month or even next year. Forecasting in a business context, however, is much more difficult and therefore prone to error. We do not know precisely how many orders we will receive or how many customers will walk through the door tomorrow, next month, or next year. Such forecasts, however, are nec- essary to help managers make decisions about resourcing the organization for the future.

FORECASTING – KNOWING THE OPTIONS

Simply knowing that demand for your goods or services is rising or falling is not enough in itself. Knowing the rate of change is likely to be vital to business planning. A firm of lawyers may have to decide the point at which, in their growing business, they will have to take on another partner. Hiring a new partner could take months so they need to be able to forecast when they expect to reach that point and then when they need to start their recruitment drive. The same applies to a plant manager who will need to purchase new plant to deal with rising demand. The manager may not want to commit to buying an expensive piece of machinery until absolutely necessary but in enough time to order the machine and have it built, delivered, installed and tested. The same is so for governments, whether planning new airports or runway capacity or deciding where and how many primary schools to build.

The first question is to know how far you need to look ahead and this will depend on the options and decisions available to you. Take the example of a local government where the number of primary-age children (5–11 year olds) is increasing in some areas and declining in other areas within its boundaries. It is legally obliged to provide school places for all such children. Government officials will have a number of options open to them and they may each have different lead times associated with them. One key step in forecasting is to know the possible options and the lead times required to bring them about ( see Table S5.1 ):

Supplement to Chapter 5 Forecasting

Table S5.1 Options available and lead time required for dealing with changes in numbers of school children

Options available Lead time required

Hire short-term teachers Hours

Hire staff

Build temporary classrooms

Amend school catchment areas

Build new classrooms

Build new schools Years

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SUPPLEMENT TO CHAPTER 5 FORECASTING 171

1 Individual schools can hire (or lay off) short-term (supply) teachers from a pool not only to cover for absent teachers, but also to provide short-term capacity while teachers are hired to deal with increases in demand. Acquiring (or dismissing) such temporary cover may only require a few hours’ notice. (This is often referred to as short-term capacity management.)

2 Hiring new (or laying off existing) staff is another option but both of these may take months to complete. (Medium-term capacity management.)

3 A shortage of accommodation may be fixed in the short to medium term by hiring or buy- ing temporary classrooms. It may only take a couple of weeks to hire such a building and equip it ready for use.

4 It may be possible to amend catchment areas between schools to try to balance an increas- ing population in one area against a declining population in another. Such changes may require lengthy consultation processes.

5 In the longer term new classrooms or even new schools may have to be built. The planning, consultation, approval, commissioning, tendering, building and equipping process may take one to five years depending on the scale of the new build.

Knowing the range of options, managers can then decide the timescale for their forecasts; indeed several forecasts might be needed for the short term, medium term and long term.

IN ESSENCE FORECASTING IS SIMPLE

In essence forecasting is easy. To know how many children may turn up in a local school tomorrow you can use the number that turned up today. In the long term, in order to forecast how many primary-aged children will turn up at a school in five years’ time one need simply look at the birth statistics for the current year for the school’s catchment area, see Fig. S5.1.

However, such simple extrapolation techniques are prone to error and indeed such approach- es have resulted in some local governments committing themselves to building schools which, five or six years later, when complete, had few children and other schools bursting at the seams with temporary classrooms and temporary teachers, often resulting in falling morale and declining educational standards. The reason why such simple approaches are prone to prob- lems is that there are many contextual variables (see Fig. S5.2) which will have a potentially significant impact on, for example, the school population five years hence. For example:

1 One minor factor in developed countries, though a major factor in developing countries, might be the death rate in children between birth and 5 years of age. This may be depend- ent upon location with a slightly higher mortality rate in the poorer areas compared with the more affluent areas.

2 Another more significant factor is immigration and emigration as people move into or out of the local area. This will be affected by housing stock and housing developments, the ebb and flow of jobs in the area and the changing economic prosperity of the area.

3 One key factor which has an impact on the birth rate in an area is the amount and type of the housing stock. City centre tenement buildings tend to have a higher proportion of children per dwelling, for example, than suburban semi-detached houses. So not only will existing housing stock have an impact on the child population, but also will the type of housing developments under construction, planned and proposed.

Figure S5.1 Simple prediction of future child population

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172 PART ONE DIRECTING THE OPERATION

APPROACHES TO FORECASTING

There are two main approaches to forecasting. Managers sometimes use qualitative methods based on opinions, past experience and even best guesses. There is also a range of qualitative forecasting techniques available to help managers evaluate trends, causal relationships and make predictions about the future. Also, quantitative forecasting techniques can be used to model data. Although no approach or technique will result in an accurate forecast, a com- bination of qualitative and quantitative approaches can be used to great effect by bringing together expert judgements and predictive models.

Qualitative methods Imagine you were asked to forecast the outcome of a forthcoming football match. Simply looking at the teams’ performance over the last few weeks and extrapolating it is unlikely to yield the right result. Like many business decisions, the outcome will depend on many other factors. In this case the strength of the opposition, their recent form, injuries to players on both sides, the match location and even the weather will have an influence on the outcome. A qualitative approach involves collecting and appraising judgements, options, even best guesses as well as past performance from ‘experts’ to make a prediction. There are several ways this can be done: a panel approach, the Delphi method and scenario planning.

Panel approach Just as panels of football pundits gather to speculate about likely outcomes, so too do politi- cians, business leaders, stock market analysts, banks and airlines. The panel acts like a focus group allowing everyone to talk openly and freely. Although there is the great advantage of several brains being better than one, it can be difficult to reach a consensus, or sometimes the views of the loudest or highest status may emerge (the bandwagon effect). Although more reliable than one person’s views, the panel approach still has the weakness that everybody, even the experts, can get it wrong.

Figure S5.2 Some of the key causal variables in predicting child populations

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SUPPLEMENT TO CHAPTER 5 FORECASTING 173

Delphi method1

Perhaps the best-known approach to generating forecasts using experts is the Delphi meth- od. This is a more formal method which attempts to reduce the influences from procedures of face-to-face meetings. It employs a questionnaire, emailed or posted to the experts. The replies are analysed, summarized and returned, anonymously, to all the experts. The experts are then asked to reconsider their original response in the light of the replies and arguments put forward by the other experts. This process is repeated several more times to conclude either with a consensus or at least a narrower range of decisions. One refinement of this approach is to allocate weights to the individuals and their suggestions based on, for example, their experience, their past success in forecasting, other people’s views of their abilities. The obvious problems associated with this method include constructing an appropriate question- naire, selecting an appropriate panel of experts and trying to deal with their inherent biases.

Scenario planning One method for dealing with situations of even greater uncertainty is scenario planning. This is usually applied to long-range forecasting, again using a panel. The panel members are usually asked to devise a range of future scenarios. Each scenario can then be discussed and the inher- ent risks considered. Unlike the Delphi method, scenario planning is not necessarily concerned with arriving at a consensus but looking at the possible range of options and putting plans in place to try to avoid the ones that are least desired and taking action to follow the most desired.

Quantitative methods There are two main approaches to qualitative forecasting, Time series analysis and causal modelling techniques.

Time series examine the pattern of past behaviour of a single phenomenon over time, tak- ing into account reasons for variation in the trend in order to use the analysis to forecast the phenomenon’s future behaviour.

Causal modelling is an approach which describes and evaluates the complex cause–effect relationships between the key variables (such as in Fig. S5.2).

Time series analysis Simple time series plot a variable over time and then, by removing underlying variations with assignable causes, use extrapolation techniques to predict future behaviour. The key weakness with this approach is that it simply looks at past behaviour to predict the future, ignoring caus- al variables which are taken into account in other methods such as causal modelling or qualita- tive techniques. For example, suppose a company is attempting to predict the future sales of a product. The past three years’ sales, quarter by quarter, are shown in Fig. S5.3(a). This series of past sales may be analysed to indicate future sales. For instance, underlying the series might be a linear upward trend in sales. If this is taken out of the data, as in Fig. S5.3(b), we are left with a cyclical seasonal variation. The mean deviation of each quarter from the trend line can now be taken out, to give the average seasonality deviation. What remains is the random variation about the trends and seasonality lines, Fig. S5.3(c). Future sales may now be predicted as lying within a band about a projection of the trend, plus the seasonality. The width of the band will be a function of the degree of random variation.

Forecasting unassignable variations The random variations which remain after taking out trend and seasonal effects are without any known or assignable cause. This does not mean that they do not have a cause, however, just that we do not know what it is. Nevertheless, some attempt can be made to forecast it, if only on the basis that future events will, in some way, be based on past events. We will examine two of the more common approaches to fore- casting which are based on projecting forward from past behaviour. These are:

● moving-average forecasting; ● exponentially smoothed forecasting.

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174 PART ONE DIRECTING THE OPERATION

Moving-average forecasting The moving-average approach to forecasting takes the previ- ous n periods’ actual demand figures, calculates the average demand over the n periods, and uses this average as a forecast for the next period’s demand. Any data older than the n periods plays no part in the next period’s forecast. The value of n can be set at any level, but is usually in the range 4 to 7.

Example – Eurospeed parcels Table S5.2 shows the weekly demand for Eurospeed, a European-wide parcel delivery company. It measures demand, on a weekly basis, in terms of the number of parcels which it is given to deliver (irrespective of the size of each parcel). Each week, the next week’s demand is forecast by taking the moving average of the previous four weeks’ actu- al demand. Thus if the forecast demand for week t is Ft and the actual demand for week t is At, then:

Ft = At-1 + At-2 + At-3 + At-4

4

For example, the forecast for week 35 is:

F35 = (72.5 + 66.7 + 68.3 + 67.0)/4 = 68.8

Figure S5.3 Time series analysis with (a) trend, (b) seasonality and (c) random variation

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SUPPLEMENT TO CHAPTER 5 FORECASTING 175

Exponential smoothing There are two significant drawbacks to the moving-average approach to forecasting. First, in its basic form, it gives equal weight to all the previous n periods which are used in the calculations (although this can be overcome by assigning dif- ferent weights to each of the n periods). Second, and more important, it does not use data from beyond the n periods over which the moving average is calculated. Both these prob- lems are overcome by exponential smoothing, which is also somewhat easier to calculate. The exponential-smoothing approach forecasts demand in the next period by taking into account the actual demand in the current period and the forecast which was previously made for the current period. It does so according to the formula:

Ft = aAt-1 + (1 - x)Ft-1 where a is the smoothing constant. The smoothing constant a is, in effect, the weight which is given to the last (and therefore

assumed to be most important) piece of information available to the forecaster. However, the other expression in the formula includes the forecast for the current period which included the previous period’s actual demand, and so on. In this way all previous data has a (diminish- ing) effect on the next forecast.

Table S5.3 shows the data for Eurospeed’s parcels forecasts using this exponential- smoothing method, where a = 0.2. For example, the forecast for week 35 is:

F35 = 0.2 * 67.0 + 0.8 * 68.3 = 68.04

The value of a governs the balance between the responsiveness of the forecasts to chang- es in demand and the stability of the forecasts. The closer a is to zero, the more forecasts

Table S6.2 Moving-average forecast calculated over a four-week period

Week Actual demand (thousands) Forecast

20 63.3

21 62.5

22 67.8

23 66.0

24 67.2 64.9

25 69.9 65.9

26 65.6 67.7

27 71.1 66.3

28 68.8 67.3

29 68.4 68.9

30 70.3 68.5

31 72.5 69.7

32 66.7 70.0

33 68.3 69.5

34 67.0 69.5

35 68.6

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176 PART ONE DIRECTING THE OPERATION

will be dampened by previous forecasts (not very sensitive but stable). Fig. S5.4 shows the Eurospeed volume data plotted for a four-week moving average, exponential smoothing with a = 0.2 and exponential smoothing with a = 0.3.

Causal models Causal models often employ complex techniques to understand the strength of relationships between the network of variables and the impact they have on each other. Simple regression models try to determine the ‘best-fit’ expression between two variables. For example, suppose an ice cream company is trying to forecast its future sales. After examining previous demand, it figures that the main influence on demand at the factory is the average temperature of the previous week. To understand this relationship, the company plots demand against the previ- ous week’s temperatures. This is shown in Fig. S5.5. Using this graph, the company can make a reasonable prediction of demand, once the average temperature is known, provided that the other conditions prevailing in the market are reasonably stable. If they are not, then these other factors which have an influence on demand will need to be included in the regression model, which becomes increasingly complex.

These more complex networks comprise many variables and relationships each with their own set of assumptions and limitations. While developing such models and assessing the importance of each of the factors and understanding the network of interrelationships are beyond the scope of this text, many techniques are available to help managers undertake this more complex modelling and also feed back data into the model to further refine and develop it, in particular structural equation modelling.

Table S5.3 Exponentially smoothed forecast calculated with smoothing constant A = 0.2

Week (t) Actual demand (thousands) (A)

Forecast (Ft = AAt−1 + (1 - A)Ft−1) (A = 0.2)

20 63.3 60.00

21 62.5 60.66

22 67.8 60.03

23 66.0 61.58

24 67.2 62.83

25 69.9 63.70

26 65.6 64.94

27 71.1 65.07

28 68.8 66.28

29 68.4 66.78

30 70.3 67.12

31 72.5 67.75

32 66.7 68.70

33 68.3 68.30

34 67.0 68.30

35 68.04

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SUPPLEMENT TO CHAPTER 5 FORECASTING 177

The performance of forecasting models Forecasting models are widely used in management decision making, and indeed most deci- sions require a forecast of some kind, yet the performance of this type of model is far from impressive. Hogarth and Makridakis,2 in a comprehensive review of the applied management and finance literature, show that the record of forecasters using both judgement and sophis- ticated mathematical methods is not good. What they do suggest, however, is that certain

Figure S5.4 A comparison of a moving-average forecast and exponential smoothing with the smoothing constant A = 0.2 and 0.3

Figure S5.5 Regression line showing the relationship between the previous week’s average temperature and demand

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178 PART ONE DIRECTING THE OPERATION

forecasting techniques perform better under certain circumstances. In short-term forecasting there is ‘considerable inertia in most economic and natural phenomena. Thus the present states of any variables are predictive of the short-term future (i.e. three months or less). Rather simple mechanistic methods, such as those used in time series forecasts, can often make accurate short- term forecasts and even out-perform more theoretically elegant and elaborate approaches used in econometric forecasting.’3

Long-term forecasting methods, although difficult to judge because of the time lapse between the forecast and the event, do seem to be more amenable to an objective causal approach. In a comparative study of long-term market forecasting methods, Armstrong and Grohman4 conclude that econometric methods offer more accurate long-range forecasts than do expert opinion or time series analysis, and that the superiority of objective causal methods improves as the time horizon increases.

SELECTED FURTHER READING

Hoyle, R.H. (ed.) (1995) Structural Equation Modeling, Sage, Thousand Oaks, CA.

For the specialist.

Hyndman, R. J. and Athanasopoulos, G. (2013) Forecasting: principles and practice, OTexts, https://www.otexts.org

A very good introduction, although technical at times.

Makridakis, S.G. (1998) Forecasting, 3rd edn, Wiley, New York.

A classic.

Maruyama, G.M. (1997) Basics of Structural Equation Modeling, Sage, Thousand Oaks, CA.

For the specialist.

Silver, N. (2013) The Signal and the Noise: The Art and Science of Prediction, Penguin, Harmondsworth.

A readable book on the meaning of forecasting and statistics. A miracle!

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6 Process design

8 Process technology

7 Layout and fl ow

9 People in operations

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Part Two DESIGNING THE OPERATION

Operations management

Direct

Design Develop

Deliver

Design

Layout and flow

Process design

Process technology

People in operations

This part of the book looks at how the resources and processes of operations are designed. By ‘design’ we mean how the overall shape and arrangement of transforming resources impact the flow of transformed resources as they move through the operation, and the nature of those transforming resources. And that is the order in which we treat the four key issues that concern the design of operations. The chapters in this part are:

● Chapter 6 Process design – This examines various types of process, and how these ‘building blocks’ of operations are designed.

● Chapter 7 Layout and flow – This looks at how different ways of arranging physical facilities affect the nature of flow through the operation.

● Chapter 8 Process technology – This describes how the effectiveness of operations is influenced by the fast-moving developments in process technology.

● Chapter 9 People in operations – This looks at the elements of human resource management that are traditionally seen as being directly within the sphere of operations management.

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introDUCtion in chapter 1 we described how all operations consist of a collection of processes (though these processes may be called ‘units’ or ‘departments’) that interconnect with each other to form an internal network. each process acts as a smaller version of the whole operation of which they form a part, and transformed resources flow between them. We also defined a process as ‘an arrangement of resources and activities that transform inputs into outputs that satisfy (internal or external) customer needs’. they are the ‘building blocks’ of all operations, and as such they play a vital role in how well operations operate. this is why process design is so important. Unless its individual processes are well designed, an operation as a whole will not perform as well as it could. and operations managers are at the forefront of how processes are designed. in fact 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, as well as its performance. this chapter examines the design of processes. Figure 6.1 shows where this topic fits within the overall model of operations management.

Process design

Key questions

❯ what is process design?

❯ what should be the objectives of process design?

❯ how do volume and variety affect process design?

❯ how are processes designed in detail?

6

Topic covered in this chapter

Operations management

Direct

Design Develop

Deliver

Design

Layout and flow

Process design

Process technology

People in operations

Figure 6.1 this chapter examines process design

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CHAPTER 6 PROCESS DESIGN 183

WHAT IS PROCESS DESIGN?

To ‘design’ (as we explained in Chapter 4 ) is to conceive the looks, arrangement and workings of something before it is created. In that sense it is a conceptual exercise. Yet it is one that 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, espe- cially at first, when the overall shape and nature of the process are being decided. The most common way of doing this is by positioning it according to its volume and variety character- istics. Eventually the details of the process must be analysed to ensure that it fulfils its objec- tives effectively. Yet, it is often only through getting to grips with the detail of a design that the feasibility of its overall shape can be assessed. But do not 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 product/service design are interrelated Often we will treat the design of products and services, on the one hand, and the design of the processes that 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 eventu- ally has to produce them. Similarly, the design of a process can con- strain the freedom of product and service designers to operate as they would wish ( see Fig. 6.2 ). This holds good whether the operation is producing products or services. However, the overlap between the two design activities is generally greater in operations that 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 prod- uct and process design has implications for the organization of the design activity, as we dis- cussed in Chapter 4 . Certainly, when product designers also have to make or use the things

✽ ✽ ✽ Operations principle Operations principle Operations principle

Figure 6.2 The design of products/services and processes are interrelated and should be treated together

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184 PART TWO DESIGNING THE OPERATION

that 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 IN PRACTICE

Airports are complex operations – really complex. Their processes handle passengers, aircraft, crew, bag- gage, commercial cargo, food, security, restaurants and numerous customer services that all interact. The oper- ations managers, who oversee the daily operations of an airport, must cope with Civil Aviation Administration rules and regulations, a huge number of airport service contracts, usually thousands of staff with a wide vari- ety of specialisms, airlines with sometimes competing claims to service priority, customers who fly every week and others who have a family of seven with two baby strollers and fly once a decade. Also their processes are vulnerable to disruptions from late arrivals, aircraft mal- function, weather, the industrial action of workers two continents away, conflicts, terrorism and erupting vol- canoes. Designing the processes that can operate under these conditions must be one of the most challenging operations tasks. So to win prizes for ‘Best Airport’ cus- tomer service and operating efficiency year after year have to be something of an achievement. Which is what the sixth busiest international airport, Changi Airport in Singapore, has done. As a major air hub in Asia, Changi serves more than 100 international airlines flying to some 300 cities in about 70 countries and territories worldwide. It handles almost 60 million passengers (that is roughly 10 times the size of Singapore's population). A flight takes off or lands at Changi roughly once every 90 seconds.

In 2017 Changi plans to open its new Terminal 4, which was started in 2013. The new US$1.03 billion T4 is expected to handle about 16 million passengers per year and will increase the airport's annual passenger handling capacity to 82 million. Every stage of the cus- tomers' journey through the terminal has been designed to be as smooth as possible. The aim of all the processes that make up the terminal is to provide fast, smooth and seamless flow for passengers. Each stage in the customer journey must have enough capacity to cope with anticipated demand. A new overhead bridge will be built across the airport boulevard connecting T4 with Singapore's highway system and enable the movement of cars, buses and airside vehicles. Two new car parks will accommodate up to 1,500 vehicles. The terminal will be internally connected to the new car parks via sheltered

links. Once passengers arrive at the two- storey terminal building they will pass through kiosks and automated options for self check-in, self bag tagging and self bag- drops. Their bags will then be transported to the aircraft via an advanced and automated baggage handling sys- tem . Similarly, automated options, including face recog- nition technology, will be used at immigration counters and departure-gate boarding. Biometric technology and fast and seamless travel (FAST) services are being imple- mented at the terminal to speed passenger throughput, reduce staffing and increase efficiency. After security checks, passengers find themselves in 15,000 m 2 of shop- ping, dining, liquor, tobacco, perfumery, cosmetics and other retail spaces. This space will implement a new walk-through retail concept. It will feature local, cultural and heritage-themed restaurants, as well as retail stores. The space also features a Central Galleria 300 m long, which will be a glazed open space that visually connects the departure, check-in, arrival and transit areas across the terminal. The emphasis on the aesthetic appeal of the terminal is something that Changi has long con- sidered important. It already boasts a butterfly garden, orchid and sunflower gardens, as well as a koi pond.

The feelings of passengers using the terminal are an important part of its design. Mr Yam Kum Weng, Executive Vice-President of CAG, one of the compa- nies helping to develop the design for the new termi- nal, said, ‘ T4 breaks new ground in passenger experience for travellers, while ensuring smooth and efficient oper- ations for airlines and airport agencies. Architecturally, the design of T4 will be functional, and yet have its

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CHAPTER 6 PROCESS DESIGN 185

WHAT SHOULD BE THE OBJECTIVES OF PROCESS DESIGN?

The whole point of process design is to make sure that the per- formance of the process is appropriate for whatever it is trying to achieve. For example, if an operation competed primarily on its ability to respond quickly to customer requests, its processes would need to be designed to give fast throughput times. This would mini- mize the time between customers requesting a product or service and their receiving it. Similarly, if an operation competed on low price, cost- related objectives are likely to dominate its process design. Some kind of logic should link what the operation as a whole is attempting to achieve and the per- formance objectives of its individual processes. As when we examined product and service design innovation (see Chapter 4 ) , we will include ‘sustainability’ as an operational objective of process design, even though it is really a far broader societal issue that is part of the organ- ization’s ‘triple bottom line’ (see Chapter 2 ) . This is illustrated in Table 6.1 .

own distinct character compared to the other three terminals at Changi Airport. Our focus for the devel- opment of T4 will be on its interior and ensuring that the design and layout continues to be passenger-centric and user-friendly. It will offer what passengers want – a good range of leisure amenities, convenient facilities and attractive commercial offerings. ’ And with so many different companies involved in the day-to-day oper- ation of the airport it was vital to include as many

stakeholders as possible during the design. Workshops were conducted with various stakeholders, including airlines, ground handlers, immigration and security agencies, retail and food and beverage operators, as well as other users to ensure that the T4 design met the needs of each party. The objective was to ensure that T4, when operational, could deliver a seamless and refreshing experience for travellers, and also be a place where staff will feel proud and motivated to work.

✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle

Table 6.1 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 product of services Error-free processing

Products and services produced to specifi cation Less recycling and wasted eff ort 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)

Sustainability Minimize energy usage Reduce local impact on community Produce for easy disassembly

Lower negative environmental and societal impact

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186 PART TWO DESIGNING THE OPERATION

Operations performance objectives translate directly to process design objectives as shown in Table 6.1 . 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 con- cerned with flow through the process. When whatever is being ‘processed’ enters a process it will progress through a series of activities where its is ‘transformed’ in some way. Between these activities it 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 transform- ing activities that it passes through. Also, the resources that perform the processes 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, that is 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 ‘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-progress’, or in-process inven- tory) 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.

✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle

OPERATIONS IN PRACTICE

One of the most studied types of process is the ‘fast food drive-through’. The quick service restaurant (QSR) industry reckons 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 Angeles. Customers would simply drive by the back door of the restaurant where the chef would come out and deliver the restaurant's famous ‘Barbequed Pig ’ sandwiches. Today, drive-through processes are slicker, and far, far, faster. In fact there is intense competition to design the fastest and most reliable drive-through pro- cess. Starbuck's drive-throughs have strategically placed cameras at the order boards so that servers can rec- ognize 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 do not deliver what the customer ordered). These details matter. McDonald's reckons that its sales increase by 1 per cent for every six seconds saved at a drive-through. Perhaps the most

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CHAPTER 6 PROCESS DESIGN 187

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 organiza- tions 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 to individuals and teams to exercise their discretion. The problem is that allowing numerous ways of doing things causes confusion, mis- understandings and, eventually, inefficiency. In healthcare processes, it can even cause preventable deaths. For example, 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. 4 This leads to confusion, it said. Potentially, thousands of hospital deaths could be prevented if doctors and nurses used a standardized bed chart. Because hospitals can use different charts, doctors and nurses have to learn how to read new ones when they move. The Royal College 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 standardised 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 products and services, for similar reasons (see Chapter 4 ) . The practical dilemma 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’ (sustainability) issues. In many developed countries, legisla- tion 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?)

remarkable experiment in making drive-through pro- cess times slicker is being carried out by McDonald's in the USA. On California's central coast 150 miles (240 km) 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 Internet and the food is assembled only a few metres from where the order was placed. It may only save a few seconds on each order, but that can add up to extra sales at busy times of the day.

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. However, complex individual items that require customization meals can slow down the process, which is becoming an

issue for operators as fashions move towards customized salads and sandwiches. Yet there are signs that, above a certain speed of service, other aspects of process perfor- mance become more important. As the chief operations manager at Taco Bell says, ‘ you can get really fast but ruin the overall experience, because now you're not friendly and now you're not taking the time to guarantee accuracy or make sure the products have been built the way you want them to be built. So there's a careful balance in there that we have to continually look at through our testing process, to make sure that the packaging we're providing, the product builds, the tools we give, the training we give, is such that it will support our current speed targets but allow us to continue to improve on our experience, on our accuracy, on our friendliness. ’

✽ ✽ ✽ Operations principle Operations principle Operations principle

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188 PART TWO DESIGNING THE OPERATION

● 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 fac- tors, although it is not always easy to obtain all the information that is needed to make the ‘best’ choices. To help make more rational deci- sions in the design activity, some industries are experimenting with 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 evaluated at every stage of a product or service’s creation, beginning with the extraction or farming of the basic raw mate- rials. The case ‘Ecover’s ethical operations design’ demonstrates that it is possible to include ecological considerations in all aspects of product and process design.

✽ ✽ ✽ Operations principle Operations principle Operations principle

OPERATIONS IN PRACTICE

Ecover cleaning products, such as washing liquid, are famously ecolog- ical. In fact it is the company's whole rationale. ‘ We clean with care ’, says 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 is not just its products that are based on an ecologically sus- tainable foundation. Ecover's ecologi- cal factories in France and Belgium also embody the company's commitment to sustainability. Whether it is the com- pany's factory roof, its use of energy or the way it treats the water used in the production processes, Ecover points out that it does its best to limit environ- mental 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, Ecover makes the most of the energy it does use by choosing energy-efficient lighting, and then only using it when needed. And, although the machin- ery used in the factories is standard for the industry, Ecover keeps its energy and water consumption down by choosing low-speed appliances that can multi-task and do not require water to clean them. For example,

the motors on the mixing machines can mix 25 tonnes of Ecover liquid while ‘ consuming no more electricity than a few flat irons ’. And Ecover has 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 says that ‘ we hate waste, so we're big on recycling. We keep the amount of packaging used in our products to a minimum, and make sure whatever cardboard or plastic we do use can be recycled, re-used or re-filled. It's an ongoing pro- cess of improvement; in fact, we've recently developed a

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CHAPTER 6 PROCESS DESIGN 189

HOW DO VOLUME AND VARIETY AFFECT PROCESS DESIGN?

In Chapter 1 we saw how processes range from those producing at high volume (for exam- ple, credit card transaction processing) to a low volume (for example, funding a large com- plex takeover deal). Also processes can range from producing a very low variety 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 vari- ety of products and services, and high-volume operations processes often produce a narrow 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 processes. 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 medical service during mass medical treatments, such as large-scale immunization programmes, with that taken in transplant surgery where the treatment is designed specifi- cally 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 6.3 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 professional judgement. Examples of project processes include software design, movie pro- duction, most construction companies, and large fabrication operations such as those manu- facturing turbogenerators.

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 are light, porous and insulate well. The factories' roofs are covered in thick, spongy Sedum (a flowering plant, often used for natural roofing) that gives insulation all year round. In fact it is so effective that they do not need heating or air-conditioning – the temperature never drops below 4°C and never rises above 26°C.

✽ ✽ ✽ Operations principle Operations principle Operations principle

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190 PART TWO DESIGNING THE OPERATION

The major construction site shown in the picture is a pro- ject process. Each ‘item’ (building) is diff erent and poses diff erent challenges to those running the process (civil en- gineers)

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 involving 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 diff erent (although maybe similar) for a diff erent customer

Figure 6.3 Different process types imply different volume–variety characteristics for the process

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CHAPTER 6 PROCESS DESIGN 191

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 jobbing. 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 com- ponent parts which go into mass-produced assemblies such as automobiles.

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 diff erent dish

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.

The automobile plant is everyone’s idea of a mass pro- cess. Each product is almost (but not quite) the same, and made in large quantities

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 relatively 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.

This continuous water treatment plant almost never stops (it only stops for maintenance) and performs only one task (fi ltering impurities). Often we only notice the process if it goes wrong

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192 PART TWO DESIGNING THE OPERATION

Professional services Professional services are high-contact processes where customers spend a considerable time in the service process. These services 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 considera- ble discretion in servicing customers. Professional services include management consultants, lawyers’ practices, architects, doctors’ surgeries, auditors, health and safety inspectors, and some computer field service operations.

Here consultants are preparing to start a consultancy as- signment. They are discussing how they might approach the various stages of the assignment, from understanding the real nature of the problem through to the implemen- tation 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-offi ce staff who can give advice on exercise programmes and other treatments. To maintain a dependable service the staff need to follow defi ned processes every day

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, telecommunications service, library, television station, the police service and the enquiry desk at a utility. For exam- ple, one of the most common types of mass service is the call cen- tre 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 customers. This is

often achieved by using a carefully designed enquiry process (sometimes known as a script).

This is an account management centre at a retail bank. It deals with thousands of customer requests every day. Al- though each customer request is diff erent, they are all of the same type – involving customer accounts

✽ ✽ ✽ Operations principle Operations principle Operations principle

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CHAPTER 6 PROCESS DESIGN 193

OPERATIONS IN PRACTICE

Every film or television programme that is set in any period, other than the pres- ent day, needs costumes for its actors. And most films have a lot of characters, so that means a lot of costumes. Look at Sands Films Studio in London and you will see a well-established and perma- nent costume-making workshop. You will also see a typical ‘jobbing’ process. Sands Films provides a wide range of wardrobe and costume services. Its customers are the film, stage and TV production compa- nies each of which has different require- ments and time constraints. And because each project is different and has different requirements, the workshop's jobs go from making a single simple outfit to pro- viding a wide variety of specially designed costumes and facilities over an extended production period. The facilities include most normal tailoring processes such as cutting, dyeing and printing, to varied specialist services such as corset and crinoline making as well as millinery (hats). During the design and making process actors often visit the workshop, which has been called an ‘Aladdin's cave’ of theatrical costumes. ‘ This is really where the actors come face to face with their character for the first time, and it's a fascinating process to watch ,; Olivier Stockman, the company's Managing

Sands Films Studio, jobbing costume makers 6

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 diff erent cake (perhaps with diff erent 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 made 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.

Director, says. Making a costume can only start once a project has been approved and a costume designer appointed, although discussions with the workshop may have started prior to that. When the budget and the tim- ing have been agreed, the designer can start to present ideas and finished design to the workshop. And although the processes in the workshop are well established, each costume requires different skills and so have different routes through the stages.

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194 PART TWO DESIGNING THE OPERATION

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 6.4. Often called the ‘product– process’ matrix,7 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 important elements of process design are strongly related to the volume–variety position of the process. 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 influenced by its volume–variety position. This means that most processes should lie close to the 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 6.4 will normally have lower operating costs than one with the same volume–variety position that lies off the diagonal. This is because the diagonal represents the most appropriate process design for any volume–variety position. Processes that are on the right of the ‘natural’ 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

Manufacturing operations

process types

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process types

Low volume High variety

High volume Low variety

Product/service characteristics

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More process flexibility than is needed,

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Figure 6.4 Deviating from the ‘natural’ diagonal on the product–process matrix has consequences for cost and flexibility Source: Based on Hayes And Wheelwright7

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CHAPTER 6 PROCESS DESIGN 195

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 volume 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 activ- ity to another as readily as a more flexible process. 8 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 cor- responding change in its design. Alternatively, design changes may have been introduced without considering their suitability for the processes volume–variety position.

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 customer 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 ‘standard’ 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 customers 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 intro- duced 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 disruption 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 6.5 . The initial position of the installation pro- cess is at point A. The installation unit was 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 reduc- ing the variety of the jobs tackled by the process and increasing the volume it had to cope with. However, the process was not changed, so 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 6.5 . 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 in Fig. 6.5 ) allowed installation to be performed far more efficiently.

HOW ARE PROCESSES DESIGNED IN DETAIL?

After the overall design of a process has been determined, its individual activities must be configured. 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.

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196 PART TWO DESIGNING THE OPERATION

The ‘natural’ diagonal or ‘line of fit’

New service, old process, so excess process flexibility and

high cost 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

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Figure 6.5 A product–process matrix with process positions from the water meter example

OPERATIONS IN PRACTICE

Productivity in house building is a problem. While most industries have made sometimes spectacular productivity gains, house building has actually been getting less productive. To add to the problem, a combination of popu- lation growth and rapid urbanization means that, in many countries, demand for housing is rising rapidly. But some companies are try- ing to remedy this by adopting new production methods. Space4 is one of these. It is a division of Persimmon, who are the UK's largest house builder. Its huge building in Birmingham (UK) contains what some believe could be the future of house building. It is more like the way you would expect an automobile to be made. 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 process control all

facets of the operation, ensuring that scheduling and operations are timely and accurate. There is a direct link between the CAD systems that design the houses and

Space4 housing processes 9

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CHAPTER 6 PROCESS DESIGN 197

There will, of course, be some constraints to this. Some activities must be carried out before others, and certain people or equipment can only do some activities. Nevertheless, for a process of any reasonable 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 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 symbols 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’ manage- ment around a century ago (see Chapter 9 ) or, more recently, from information system flow charting. Figure 6.6 shows the symbols we will use here.

These symbols can be arranged in order, and in series or in parallel, to describe any process. For example, Figure 6.7 shows one of the processes used in a theatre lighting operation. The company hires out lighting and stage effects equipment to theatrical com- panies 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 to obtain it from other possible suppliers. This offer depends on how busy and how helpful individual tech- nicians 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’

the manufacturing processes that make them, reduc- ing 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 automa- tion. Because of their previous automobile assembly expe- rience, staff are used to the just-in-time, high-efficiency culture of modern mass production. After production, the completed panels are stacked in piles 3 metres high piles and are then fork-lifted into trucks prior to dispatch 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 (112 m 2 , 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 weather- proof covering, 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 external conditions. Furthermore, the automated pro- duction process uses a type of high-precision technology, which means there are fewer mistakes in the construction process on site. This means that the approval process from the local regulatory authority takes less time. This process, says Space4, speeds up the total building time from 12–14 weeks to 8–10 weeks.

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198 PART TWO DESIGNING THE OPERATION

is taken to the store where all the required equipment is assembled, taken back to the workshop, checked, and if any equipment is faulty it is repaired at this point. After that it is packed in special cases and delivered to the customer.

Figure 6.6 Some common process mapping symbols

Check availability

file

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Stored equip.

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Supplier

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search?

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Needs attention?

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Figure 6.7 Process map for ‘enquire to delivery’ process at stage lighting operation

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CHAPTER 6 PROCESS DESIGN 199

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 6.8 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 mate- rials and customers as its input resources and lighting services as outputs. No details of how inputs are transformed into outputs are included. At a slightly lower or more detailed level, what is sometimes called an outline 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 6.7 is here reduced to a single 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 6.8, 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 restau- rants, 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 6.8. Some activities, such as ‘return to base’, are probably too straightforward to be worth mapping any fur- ther. 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

‘Install and test’

‘Collect and

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The operation of supplying and installing lighting equipment The outline process of supplying

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The detailed process of the ‘Install and test’ activity

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site Safety check Compliant?

Rectify in time?

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Rectify in time?

Rectify

File failure note

Inform customer

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N

N

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Rectify Call forhelp

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200 PART TWO DESIGNING THE OPERATION

map in detail. Some activities, however, may need mapping in more detail to ensure qual- ity 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 6.9 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 distinguish between those activities that the customer could see and those that the customer could not. The boundary between these two categories is often called the ‘line of visibility’. In Figure 6.9 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 to 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

Line of interaction

Agree report

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OK

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terms

Worked OK?

Did it work OK?

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Prepare report

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High visibility

Medium visibility

Back o�ce – low

visibility

Line of visibility

N

Take out equipment

To site

Amend usage

records

Equipment to store

Figure 6.9 The ‘collect and check’ process mapped to show different levels of process visibility

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CHAPTER 6 PROCESS DESIGN 201

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 analyses. 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 mem- ber of staff will serve a customer every two minutes; therefore, every two minutes, two customers were being served and so on average 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 10 people long (including that customer) when the customer joins it, he or she will have to wait 10 minutes to emerge from the process. Or put more succinctly:

Throughput time = Work-in-progress * Cycle time In this case: 10-minute 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 holding 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 10 and the maximum 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?

OPERATIONS IN PRACTICE

Sometimes it gets embarrassing when customers see through the line of visibility. This happened when staff at Sainsbury's, a UK supermarket, mistakenly put up in its window a poster encouraging its workers to get customers to spend more. The poster, urging staff to get people to spend an extra 50p, appeared in a store in East London. It read: ‘ Fifty pence challenge – Let's encourage every customer to spend an additional 50p during each shopping trip between now and the year- end .’ Unfortunately, before the mistake was noticed, a customer took a picture and posted it on Twitter saying: ‘ .@sainsburys not sure this is supposed to be in your window’. Quickly Sainsbury's tweeted back saying it should have remained behind closed doors and was meant for staff only. A spokesperson for Sainsbury's said: ‘ We often use posters to make store targets fun

and achievable for our colleagues. They are intended for colleague areas in the store, but this one was mistakenly put on public display .’

Puncturing the line of visibility (by mistake) 10

✽ ✽ ✽ Operations principle Operations principle Operations principle

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202 PART TWO DESIGNING THE OPERATION

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

Cycle time for the process = 4 = 0.4 minutes

10

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:

The number of servers required = 1.2 = 3 0.4

In other words, three servers would serve three customers in 1.2 minutes, that is one customer in 0.4 minutes.

✽ ✽ ✽ Operations principle Operations principle Operations principle

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 biscuits. The time was 10.45 am and Dick knew that unless they were all back in the lecture theatre at 11 o'clock there would be 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 cus- tomer 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 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 long enough for the process. ’ Dick was impressed: ‘ Er… what did you say that law was called again? ’ ‘ Little's law ’, said Mike.

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 min- imum 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 average 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 take on average only 1½ hours instead

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CHAPTER 6 PROCESS DESIGN 203

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 workstations

Time available (Tt) = 40 hours

Average time to renovate = 2 hours

Therefore throughput rate (Tr) = 1/2 hour per technician

= 0.5N

where N = Number of technicians

From 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

From Little's law: WIP = Tt * Tr 530 = 40 * 0.67N

N = 530 40 * 0.67

= 19.88 (say 20) technicians

Throughput efficiency This idea that the throughput time of a process is different from the work content of whatever 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 pro- gressing 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.

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 mate- rial and information transforming processes, throughput efficiency is far lower, usually in single percentage figures.

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204 PART TWO DESIGNING THE OPERATION

Value-added throughput efficiency The approach to calculating throughput efficiency that is described above assumes that all the ‘work content’ is actually needed. 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 efficiency 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 licensing worked example, of the 25 minutes of work content only 20 minutes was actually adding value, then:

Value added throughput efficiency = 20 = 1.39% 1,440

Workflow 11 When the transformed resource in a process is information (or documents containing infor- mation), and when information technology is used to move, store and manage the informa- tion, 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 to, an overall busi- ness goal’. Although workflow 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 Chapters 1 and 16 ) . 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.

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 for eight hours every day. A recent spot check found 15,000 applica- tions that were ‘in progress’ or waiting to be processed. The sum of all activities that are required to process an application is 25 minutes. What is the throughput efficiency of the process?

Work in progress = 15000 applications

Cycle time = Time producing

Time producing = 8 hours = 480 minutes = 0.96 minutes Number produced 5,000 5,000

From Little's law:

Throughput time = WIP * Cycle time

= 15,000 * 0.096

= 1,440 minutes = 24 hours = 3 days of working

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.

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CHAPTER 6 PROCESS DESIGN 205

Process bottlenecks A bottleneck in a process is the activity or stage where congestion occurs because the work- load placed is greater than the capacity to cope with it. In other words, it is the most over- loaded part of a process. And as such it will dictate the rate at which the whole process can operate. For example, look at the simple process illustrated in Figure 6.10 . It has four stages and the total amount of work to complete the work required for each item passing through the process is 10 minutes. In this simple case each of the four stages has the same capacity. In the first case (a) the 10 minutes of work is equally allocated between the four stages, each hav- ing 2.5 minutes of work. This means that items will progress smoothly through the process without any stage holding up the flow, and the cycle time of the process is 2.5 minutes. In the second case (b) the work has not been allocated evenly. In fact this is usually the case because it is difficult (in fact close to impossible) to allocate work absolutely equally. In this case stage 4 of the process has the greatest load (3 minutes). It is the bottleneck, and will constrain the cycle time of the process to 3 minutes.

Bottlenecks reduce the efficiency of a process because, although the bottleneck stage will be fully occupied, the other stages will be under- loaded. In fact the total amount of time invested in processing each item is four times the cycle time because, for every unit produced, all four stages have invested an amount of time equal to the cycle time. When the work is equally allocated between the stages, the total time invested in each product or service produced is 4 * 2.5 = 10 minutes. However, when work is unequally allocated, as illustrated, the time invested is 3.0 * 4 = 12 minutes. So, in total 2.0 minutes of time, 16.67 per cent of the total, is wasted. The activity of trying to allocate work equally between stages is called ‘balancing’, and the wasted time, expressed as a percentage, is called ‘balancing loss’.

Balancing work time allocation Allocating work to process stages must respect the ‘precedence’ of the individual tasks that make up the total work content of the job that the process is performing. The most common way of showing task prec- edence is by using a ‘precedence diagram’ . This is a representation of

✽ ✽ ✽ Operations principle Operations principle Operations principle

3

2

1

0

3

2

1

0Lo ad

(m in

ut es

) Lo

ad (m

in ut

es )

2.3 2.5 2.2 3.0

Cycle time = 3.0 min

(b) Work unequally allocated between stages

Work allocated to stage

Stage 1 Stage 2 Stage 3 Stage 4

Idle time

2.52.5 2.5 2.5

Cycle time = 2.5 min

(a) Work equally allocated between stages

Figure 6.10 The bottleneck is that part of the process that is the most overloaded relative to its capacity

✽ ✽ ✽ Operations principle Operations principle Operations principle

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206 PART TWO DESIGNING THE OPERATION

the ordering of the elements, where individual tasks are represented by circles connected by arrows, which signify the ordering of the tasks. Figure 6.11 in the following worked example illustrates how precedence diagrams can be used.

Worked example

Karlstad Kakes (KK) is a manufacturer of speciality cakes, which has recently obtained a contract to supply a major supermarket chain with a speciality cake in the shape of a space rocket. It has been decided that the volumes required by the supermarket warrant a special production process to perform the finishing, decorating and packing of the cake. This line would have to carry out the elements shown in Table 6.2 .

Figure 6.11 shows the precedence diagram for the total job. The initial order from the supermarket is for 5,000 cakes a week and the number of hours worked by the factory is 40 per week. From this:

The required cycle time = 40 hours * 60 minutes

4,000

= 0.48 minutes

The required number of stages = 1.68 minutes (the total work content)

0.48 minutes (the required cycle time)

= 3.5 stages

Table 6.2 The individual tasks that make up the total job of the finishing, decorating and packing of the cake

Task a: De-tin and trim Task d: Clad in top fondant Task g: Apply blue icing

Task b: Reshape Task e: Apply red icing Task h: Fix transfers

Task c: Apply base fondant Task f: Apply green icing Task i: To base and pack

Idle time each cycle = (0.48 – 0.42) + (0.48 – 0.36) + (0.48 – 0.42) = 0.24 min

Balancing loss = = 12.5%

Work allocated to stage Idle time

Cycle time = 0.48 min

a b

0.12 min 0.30 min

c

0.36 min

f

0.05 min

Lo ad

(m in

ut es

)

Stage 1

0.42

Stage 3

0.42

Stage 4

0.48

Stage 2

0.36

0.24 4 × 0.48

g

0.10 min

0.17 min

h

0.08 min

i

0.25 min

e

d

0.25 min

Figure 6.11 Precedence diagram for Karlstad Kakes with allocation of tasks to each stage

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CHAPTER 6 PROCESS DESIGN 207

Arranging the stages All the stages necessary to fulfil the requirements of the process may not be arranged in a sequential ‘single line'. For example, suppose a mortgage application process requires four stages working on the task to maintain a cycle time of one application processed every 15 minutes. One possible arrangement of the four stages would be to arrange them sequen- tially, each stage having 15 minutes’ worth of work. However, (theoretically) the same output rate could also be achieved by arranging the four stages as two shorter lines, each of two stages with 30 minutes’ worth of work each. Alternatively, following this logic to its ultimate conclusion, the stages could be arranged as four parallel stages, each responsible for the whole work content. Figure 6.12 shows these options.

This is a simplified example, but it represents a genuine issue. Should the process be organ- ized as a single ‘long thin’ arrangement, or as several ‘short fat’ parallel arrangements, or somewhere in between? (Note that ‘long’ means the number of stages and ‘fat’ means the amount of work allocated to each stage.) In any particular situation there are usually techni- cal constraints which limit either how ‘long and thin’ or how ‘short and fat’ the process can be, but there is usually a range of possible options within which a choice needs to be made. The advantages of each extreme of the ‘long thin’ to ‘short fat’ spectrum are very different and help to explain why different arrangements are adopted.

The advantages of the long thin arrangement include:

● Controlled flow of items. This is easy to manage. ● Simple handling . This is especially so if the items being processed are heavy, large or diffi-

cult to move. ● Lower capital requirements . If a specialist piece of equipment is needed for one task in the

job, only one piece of equipment would need to be purchased; on short fat arrangements every stage would need one.

● More efficient operation . If each stage is performing only a small part of the total job, the person at the stage will have a higher proportion of direct productive work as opposed to the non-productive parts of the job, such as picking up tools and materials.

(This latter point is particularly important and is fully explained in Chapter 9 when we discuss job design.)

The advantages of the short fat arrangement include:

● Higher mix flexibility . If the process needs to work on several types of item, each stage or whole process could specialize in different types.

● Higher volume flexibility . As volume varies, stages can simply be closed down or started up as required; long thin arrangements would need rebalancing each time the cycle time changed.

● Higher robustness . If one stage breaks down or ceases operation in some way, the other parallel stages are unaffected; a long thin arrangement would cease operating completely.

● Less monotonous work . In the mortgage example, the staff in the short fat arrangement are repeating their tasks only every hour; in the long thin arrangement it is every 15 minutes.

This means four stages. Working from the left on the precedence diagram, tasks a and b can be allocated to

stage 1. Allocating task c to stage 1 would exceed the cycle time. In fact, only task c can be allocated to stage 2 because including task d would again exceed the cycle time. Task d can be allocated to stage 3. Either task e or f can also be allocated to stage 3, but not both or the cycle time would be exceeded. In this case task e is chosen. The remaining tasks then are allocated to stage 4. The dashed lines in Figure 6.11 show the final allocation of tasks to each of the four stages.

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208 PART TWO DESIGNING THE OPERATION

The effects of process variability So far in our treatment of process design we have assumed that there is no significant varia- bility 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 account 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 (that is, process a unit) at each stage.

To understand the effect of arrival variability on process performance it is first useful to exam- ine 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 6.13 is composed of one stage that performs exactly 10 minutes of work. Items arrive at the process at a constant

Figure 6.12 The arrangement of stages in a process can be described on a spectrum from ‘long thin’ to ‘short fat’

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CHAPTER 6 PROCESS DESIGN 209

and predictable rate. If the arrival rate is one 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 in Figure 6.13 . If the arrival rate increases to one arrival every 20 min- utes, the utilization increases to 50 per cent, and again the items will not have to wait to be processed. This is point B in Figure 6.13 . If the arrival rate increases to one 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 in Figure 6.13 . However, if the arrival rate ever exceeded one 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 6.13 . So, in a perfectly constant and predictable world, the relationship between process waiting time and utilization is a rectangular function as shown by the red line in Figure 6.13 .

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, wait- ing for items to arrive. Therefore the process will have a ‘non-zero’ average queue and also be under-utilized in the same period. So, a more realistic point is that shown as point X in Figure 6.13 . If the average arrival time were to be changed with the same variability, the blue line in Figure 6.13 would show the relationship between average waiting time and process 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 6.13 . A set of curves for a typical process is shown in Figure 6.14 (a). This phenomenon has important implications for the design of processes. In effect it presents three options to

✽ ✽ ✽ Operations principle Operations principle Operations principle

Figure 6.13 The relationship between process utilization and number of items waiting to be processed for constant, and variable, arrival and process times

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210 PART TWO DESIGNING THE OPERATION

process designers wishing to improve the waiting time or utilization performance of their processes, as shown in Figure 6.14 (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 6.13 and 6.14 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 busi- ness: fast throughput time or high utilization of its resources? The only way to have both of these simultaneously is to reduce variability in its processes, which may itself require strategic decisions such as limiting the degree of customization of products or services, 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 guarantee absolutely 100 per cent utilization of resources is to accept an infinite amount of work-in-progress and/or waiting time.

Figure 6.14 The relationship between process utilization and number of items waiting to be processed for variable arrival and activity times

✽ ✽ ✽ Operations principle Operations principle Operations principle

OPERATIONS IN PRACTICE

Shouldice Hospital is a Canadian hernia treatment hos- pital. Its approach to hernia treatment started when Dr Earle Shouldice, the founder, removed the appen- dix from a 7-year-old girl who refused to stay quietly in

bed. In spite of her activity, no harm was done. In fact he found that encouraging post-operative activity could make recovery times shorter and more predictable. The hospital has a very standardized surgical procedure,

Shouldice Hospital cuts variability 12

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CHAPTER 6 PROCESS DESIGN 211

called the ‘Shouldice method’, that all its surgeons fol- low strictly. Pre-surgery, Shouldice sends surveys to its patients asking for information that helps ensure that the patients are good candidates for the treatment Shouldice offers (this further helps reduce variability in process time). Shouldice requires patients to be at an accept- able weight appropriate to their height. Prospective patients who are overweight must lose weight. Patients enter the hospital the day before surgery and are given a briefing about the procedures to be followed the next day. The night before the operation is also intended as an opportunity for patients to come to know each other – Shouldice encourages patients to work together to promote recovery. The hospital schedules the surgeries in such a way that variability in the arrivals of custom- ers is virtually non-existent. This means that Shouldice

can operate in a routine and regular manner. This means that it can keep nearly all its beds full without creating customer waits. The procedure most commonly used at Shouldice involves sewing muscle layers together in an overlapping manner, a technique that is said to be particularly reliable. After discharge, Shouldice sends out an email newsletter to all of its patients that includes a questionnaire for Shouldice's post-operative follow-up programme, which shows that fewer than 1 per cent of patients have a recurrence after hernia repair. The ques- tionnaire also helps the hospital to refine the knowledge that keeps its procedures reliable. So, by reducing the variability in its operations (‘operations’ in both senses of the word) the hospital has designed a set of processes that can both be highly utilized and reduce customer waiting time.

● Design is the activity which shapes the physical form and purpose of both products and services and the processes that produce them.

● The design activity is more likely to be successful if the complementary activities of product or service design and process design are coordinated.

❯ What is process design?

SUMMARY ANSWERS TO KEY QUESTIONS

● 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 exam- ination 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.

❯ What should be the objectives of 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 aff ect 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 do volume and variety affect process design?

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212 PART TWO DESIGNING THE OPERATION

Introduction Action Response is a London-based charity dedicated to providing fast responses to critical situations through- out the world. It was founded by Susan N'tini, its Chief Executive, to provide relatively short-term aid for small projects until it could obtain funding from larger donors. The charity receives requests for cash aid usually from an intermediary charity and looks to process 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 worries. 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 accessibility to our funds; people can access application 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 there- fore 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 tele- phoned 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 effi- ciency, 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 is 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 ability to be open- minded and consider requests that might seem a little unusual at first .’ ( Jacqueline Horton, Applications Assessor)

● 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 is 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 eff ect on the performance of processes, particularly the relation- ship between waiting time and utilization.

❯ How are processes designed in detail?

CASE STUDY The Action Response Applications Processing Unit (ARAPU)

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CHAPTER 6 PROCESS DESIGN 213

Others saw the charity as performing an important coun- selling role. ‘Remember that we have gained a lot of experi- ence 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 Action Response Applications Processing Unit (ARAPU) 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 via a special help line. Sometimes the application will come directly from an individual community leader but more usually it will come via an intermediary charity that can help the applicant to complete the form. The applica- tion 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 non-paid 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 applications received, approved, declined, and payments allocated. 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 while the unit’s financial targets were being met, the trend indicated that cost per application was increasing. The target 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 turnaround time was longer than this. Accuracy had never been an issue as all files were thor- oughly assessed to ensure that all the relevant data was col- lected before the applications were processed. Productivity seemed high and there was always plenty of work waiting for processing at each section, with the exception that the ‘com- pleters’ were sometimes waiting for work to come from the committee on a Thursday. Susan had conducted an inspec- tion of all sections’ in-trays that had revealed a rather shock- ing 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 requir- ing careful examination by applications assessors trained to make well-founded assessments in line with the charity ’s guidelines and values. Incoming applications are opened by one of the four ‘receipt’ clerks who check that all the neces- sary forms have been included in the application; the receipt clerks take about 10 minutes per application. These are then sent to the coding staff, in batches, twice a day. The five cod- ing clerks allocate a unique identifier to each application and

key the information on the application into the system. The coding stage takes about 20 minutes for each application. Files are then sent to the senior applications assessor’s sec- retary’s desk. As assessors become available, the secretary provides the next job in the line to the assessor.

About 100 of the cases seen by the assessors each week are put aside after only 10 minutes of ‘scanning’ because the information is ambiguous, so further information is needed. The assessor returns these files to the secretaries, who write to the applicant (usually via the intermediate charity) request- ing additional information, and return the file to the ‘receipt’ clerks who ‘store’ the file until the further information even- tually arrives (usually between one and eight weeks). When it does arrive, the file enters the process and progresses through the same stages again. Of the applications that require no fur- ther information, around half (150) are accepted and half (150) declined. On average, those applications that were not ‘recy- cled’ 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 formally to approve the applications asses- sors’ decisions. The committee’s role is to sample the deci- sions to ensure that the guidelines of the charity are upheld. In addition the committee 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 offer- ing, if possible, to provide helpful advice. An experienced declines 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 instruc- tions are given to the bank. This usually takes around 50 min- utes, 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 doc- uments and mail them to the applicant. The dispatch activity takes, on average, 10 minutes for each application.

The feeling among the staff was generally good. When Susan consulted the team members, 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 staff 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 fre- quently complained 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 processes?

3 How could the ARAPU process be improved?

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214 PART TWO DESIGNING THE OPERATION

1 Read again the description of fast food drive-through processes in the 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?

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 hospital (measured from the time that the sample for analysis arrives) is three days. A recent process map has shown that, of the 60 minutes that is needed to complete all the tests, the tests themselves took 30 minutes, moving the samples between each test area took 10 min- utes, and double checking the results took a further 20 minutes. What is the throughput effi- ciency 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 performed 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 processed is 1,600 per week and the time available to process the applications is 40 hours per week. (a) What is the required cycle time for the process? (b) If 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?

(c) The 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 working day of 7.5 hours (450 minutes).)

4 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 following 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?

5 Reread the Shouldice Hospital example. How different would the operations issues be at an accident and emergency department?

SELECTED FURTHER READING

Chopra, S., Anupindi, R.,Deshmukh, S.D., Van Mieghem, J.A. and Zemel, E. (2012) Managing Business Process Flows , 3rd edn, Pearson, Englewood Cliffs, NJ.

An excellent, although mathematical, approach to process design in general.

PROBLEMS AND APPLICATIONS

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CHAPTER 6 PROCESS DESIGN 215

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 management 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 do not bother with it if you are not prepared to get into the maths. However, some fascinating analysis, especially concerning Little’s law.

Mahal, A. (2010) How Work Gets Done: Business Process Management, Basics and Beyond, Technics Publications, London.

Certainly not a critical look at process management, but an easily digestible coverage of ‘how to do it’.

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.

M06_SLAC8678_08_SE_C06.indd 215 6/2/16 1:22 PM

introduCtion the layout of an operation is concerned with the physical positioning of its people and facilities. it is often the first thing most of us would notice when we enter an operation because it determines what it looks like. Layout means deciding where to put all the facilities, desks, machines, equipment and people in the operation. it is also concerned with the physical appearance of an operation in a broader sense. it governs how safe, how attractive, how flexible and how efficient an operation is. it also determines how transformed resources – the materials, information and customers – flow through an operation. relatively small changes in layout – moving displays in a supermarket, or the changing rooms in a sports centre, or the position of a machine in a factory - can affect the flow through the operation which, in turn, affects the costs and general effectiveness of the operation. figure 7.1 shows the layout activity in the overall model of design in operations.

layout and fl ow

Key questions

❯ What is layout and how can it influence performance?

❯ What are the basic layout types used in operations?

❯ how does the appearance of an operation affect its performance?

❯ how should each basic layout type be designed in detail?

7

Design

Layout and flow

Process design

Process technology

People in operations

Topic covered in this chapter

Operations management

Direct

Design Develop

Deliver

figure 7.1 this chapter examines layout and flow

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CHAPTER 7 LAYOUT AND FLOW 217

In this chapter we are going to do four things. First, we will look briefly at what operations managers are trying to achieve when they lay out (or usually re-lay out) their transforming resources. Second, we describe a number of recognized ‘layout types’. These are derived largely from manufacturing, but we will use non-manufacturing examples to demonstrate how they can also be used for a whole range of operations. Third, we look at how the physical appearance of operations influences their effectiveness both for their customers and for the staff working in them. Finally, we look at just some of the (many) detailed techniques that help operations managers to design better layouts.

WHAT IS LAYOUT AND HOW CAN IT INFLUENCE PERFORMANCE?

The ‘layout’ of an operation or process means how its transforming resources are positioned relative to each other, how its various tasks are allocated to these transforming resources and the general appearance of the transforming resources. Together these three decisions will dictate the pattern and nature of how transformed resources progress through the operation or process (see Fig. 7.2). It is an important decision because, if the layout proves wrong, it can lead to over-long or confused flow patterns, customer queues, long process times, inflexible operations, unpredictable flow, high costs and a poor response for whoever is within the oper- ation, whether they are customers or staff. In addition, a radical re-layout can cause disrup- tion to ongoing operations, leading to possible customer dissatisfaction and/or lost operating time. So, because the layout decision can be difficult and expensive, operations managers are reluctant to do it too often. Therefore layout must start with a full appreciation of the objec- tives that the layout should be trying to achieve.

What makes a good layout? To a large extent the objectives of any layout will depend on the strategic objectives of the oper- ation, but there are some general objectives that are relevant to all operations. And before con- sidering the various types of layout, it is useful to consider the objectives of the layout activity:

● Inherent safety – This is the prerequisite for any layout in any type of operation. All pro- cesses that might constitute any physical or other danger to either staff or customers should not be accessible to the unauthorized. Fire exits should be clearly marked with uninhibited access. Pathways should be clearly defined and not cluttered. All signage should be clear and unambiguous.

The nature and pattern of the flow of transformed resources through

the operation or process

The relative positioning of transforming resources

The general appearance of transforming resources

The allocation of tasks to transforming resources

Figure 7.2 Layout involves the relative positioning of transforming resources within operations and processes, the allocation of tasks to the resources and their general appearance, which together dictate the nature and pattern of the flow of transformed resources through the operation or process

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218 PART TWO DESIGNING THE OPERATION

OPERATIONS IN PRACTICE

The arrangement and physical appearance of operations in many industries are changing as the nature of compe- tition changes and the needs of the people who work in them change. Here are two examples.

Volkswagen’s transparent factory Do not assume that the idea of the appearance of an operation applies only to high-contact service opera- tions. VW’s ‘transparent factory’ in the heart of Dresden in Germany certainly is visually impressive and does not look like a traditional automobile assembly plant. Inside the factory, which makes the very upmarket Phaeton sedan, the floors are expensive Canadian maple, the fac- tory walls are made of clear glass (a loudspeaker outside imitates territorial bird sounds to keep birds from flying into the glass), and the workers all wear white coats and gloves; in fact the operation has the atmosphere of a research lab rather than a factory. Partly this is because the dirtier, noisier processes such as pressing, welding and the painting of steel bodies take place in another facility. Partly, though, it is because the facility is as much a customer relations and marketing device as it is a production plant. Thousands of visitors tour the plant each year. Its layout is visitor friendly and is designed to receive 250 tourists per day by advance reservation who are charged €5 each. Customers or prospective customers are not charged. The ground floor houses a restaurant, and on the lower level there is a simulator that allows visitors a virtual test drive of the Phaeton. Yet the transparent factory is also a serious manufacturing operation, producing an average of 44 Phaetons a day, most of which are destined for China, Germany and South Korea.

Google’s revolutionary offices Operations, and therefore operations layouts, are not confined to factories, warehouses, shops and other such workspaces. Many of us who work in operations actu- ally work in offices. In financial services, government, call centres and the creative industries, all work for the most part sitting at their desks. (One estimate is that over 70 per cent of the UK’s GDP is generated by people working in offices, though it is admittedly difficult to check.) So the layout of offices can affect operations performance for these industries just as much as lay- out can in a factory. And of all companies whose staff work in offices, Google, like many high-tech companies, is paying much more attention to its employees’ work environment, the better to promote creativity and pro- ductivity. In fact, Google is famous for its innovative use

of its workspaces. This is because Google thrives on cre- ativity and it believes that the designs of its offices will provide every employee with a space that will encour- age creativity. Google put a lot of time and money into designing what it believes is the perfect work environ- ment – one that can mix business with pleasure in the sense that the staff can relax and unwind during their breaks. The layouts of Google’s offices are designed to promote creativity and collaboration. How people move about the space and who they meet and talk to are vital pieces of information that should contribute to any design. The information needs of the processes underlying activities are clearly an important driver of where the various departments of an organization are located. However, people sometimes are not fully aware of how they are interacting with one another, or with the space where they work. So, in addition to examining the formal needs of people’s jobs, it is valuable to examine employee behaviour. For example, where do people actually spend the majority of their time? Where and when do the most productive meetings happen? Where and when do people make phone calls? When is the office at its emptiest? When is it most full (and noisy)?

Elliot Felix led the team that wrote Google’s global design guidelines for its offices. ‘ Google was doubling in

Volkswagen and Google pioneer new types of layouts 1

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CHAPTER 7 LAYOUT AND FLOW 219

● Security – Similar to safety in some ways, facilities and layouts should ensure that anyone with malicious intent cannot gain access to staff, customers or property.

● Length of flow – The flow of materials, information or customers should be channelled by the layout so as to be appropriate for the objectives of the operation. In many operations this means minimizing the distance travelled by transformed resources. However, this is not always the case. In supermarkets, for example, layout objectives can include encourag- ing customers to ‘flow’ in particular ways that maximize sales.

● Minimize delays – Delays can, of course, be caused by over-long routes through the layout, as described above, but inconvenient placing of facilities, or insufficient capacity allocated to parts of the layout (that is, a bottleneck, see previous chapter), may also cause them.

● Reduce work-in-progress – Excessive work-in-progress can be caused by bottlenecks, but the layout of a process may be used deliberately to limit the ability of items to accumulate. This involves using what are called ‘kanban squares’ and are explained in Chapter 15 .

● Clarity of flow – All flow of materials and customers should be well signposted, clear and evident to staff and customers alike. For example, hospital processes often rely on sign- posted routes with different coloured lines painted on the floor to indicate the routes to various departments.

● Staff conditions – Layouts should be arranged so that staff are located away from noisy or unpleasant parts of the operation. The layout should provide for a well-ventilated, well-lit and, where possible, pleasant working environment.

● Communication – Communication between staff can be particularly important for some types of operation, such as those in creative industries. The layouts of some operations are deliberately designed to promote the kind of chance meetings between staff that can lead to the formulation of creative ideas.

● Management co-ordination – Supervision and communication should be assisted by the relative location of staff, the use of communication devices and information points.

● Accessibility – All machines, plant or equipment should be accessible to a degree that is sufficient for proper inspection, cleaning and maintenance.

● Use of space – All layouts should achieve an appropriate use of the total space available in the operation (including height as well as floor space). This usually means minimizing the space used for a particular purpose, but sometimes can mean achieving an impression of spacious luxury, as in the entrance lobby of a high-class hotel.

● Use of capital – Capital investment should be minimized (consistent with other objec- tives) when finalizing layout.

● Long-term flexibility – Layouts need to be changed periodically as the needs of the oper- ation change. A good layout will have been devised with the possible future needs of the operation in mind. For example, if demand is likely to increase for a product or service, has the layout been designed to accommodate any future expansion?

size every year and building new locations everywhere ’, he says. ‘ There was so much concern about what the ingre- dients of the offices should be and how they would all fit together cohesively for a consistent employee experience. We’re never just talking about space. We’re talking about culture, etiquette, and rituals. What a lot of people forget is that we imbue space with our values .’ There’s a rule at Google that nobody should be located more than 100 metres away from food. There are eco-friendly kitchens complete with healthy food sited at strategic locations around the buildings (that is, in addition to the

cafeteria). There are quiet places, such as libraries and sometimes aquariums, if staff want somewhere quiet to relax or think through a problem. Some parts of the office look like an apartment, which appeals to those employees who like the idea of ‘working from home’ at the office. Designing these features in office buildings is partly a consequence of the long hours worked by many people in the high-tech industries. Offices must be equipped with areas for working and areas for relaxing (even if that means playing football, an approach cham- pioned by Google).

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220 PART TWO DESIGNING THE OPERATION

● Image – The layout of an operation can help to shape the image of an organization, both in its customer markets and in the labour market from which it recruits. The appearance of a layout can be used as a deliberate attempt to establish a company’s brand.

As you see, there are many and various objectives to attempt to achieve during the layout activity. Some, such as safety, security and staff welfare, are absolutely required. Others may have to be compromised, or traded off with other objectives. For example, two processes may have need of the same piece of equipment and could quite feasibly share it. This would mean good use of the capital used to acquire that equipment. But both processes using it could mean longer and/or more confused process routes. Buying two pieces of equipment would under-utilize them, but give shorter distance travelled.

WHAT ARE THE BASIC LAYOUT TYPES USED IN OPERATIONS?

Most practical layouts are derived from only four basic layout types. These are:

● Fixed-position layout ● Functional layout ● Cell layout ● Line (sometimes called ‘product’) layout.

These layout types are loosely related to the process types described in Chapter 6. As Table 7.1 indicates, a process type does not necessarily imply only one particular basic layout.

Fixed-position layout Fixed-position layout is in some ways a contradiction in terms, since the transformed resources do not move between the transforming resources. Instead of materials, information or custom- ers flowing through an operation, the recipient of the processing is stationary and the equip- ment, machinery, plant and people who do the processing move as necessary. This could be because the product or the recipient of the service is too large to be moved conveniently, or it might be too delicate to move, or perhaps it could object to being moved. For example:

● Motorway construction– the product is too large to move. ● Open-heart surgery – patients are too delicate to move. ● High-class service restaurant – customers would object to being moved to where food is prepared. ● Shipbuilding – the product is too large to move. ● Mainframe computer maintenance – the product is too big and probably also too delicate to

move, and the customer might object to bringing it in for repair.

Table 7.1 Alternative layout types for each process type

Manufacturing Process Type

Potential Layout Types Service

Process Type

Project Fixed-position layout Functional layout Fixed-position layout

Functional layout Cell layout

Professional Service

Jobbing Functional layout Cell layout

Batch Functional layout Cell layout

Functional layout Cell layout

Service Shop

Mass Cell layout Product layout

Cell layout Product layout

Mass ServiceContinuous Product layout

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CHAPTER 7 LAYOUT AND FLOW 221

OPERATIONS IN PRACTICE

Even surgery can be seen as a process, and, like any pro- cess, it can be improved. Normally patients remain sta- tionary, with surgeons and other theatre staff performing their tasks around the patient. But this idea has been challenged by John Petri, a French consultant orthopae- dic surgeon at a hospital in Norfolk in the UK. Frustrated by spending time drinking tea while patients were pre- pared for surgery, he redesigned the process so that now he moves continually between two theatres. While he is operating on a patient in one theatre, his anaesthetist colleagues are preparing a patient for surgery in another theatre. After finishing with the first patient, the surgeon ‘scrubs up’, moves to the second operating theatre and begins the surgery on the second patient. While he is doing this the first patient is moved out of the first operat- ing theatre and the third patient is prepared ( Fig. 7.3 ). This method of overlapping operations in different theatres allows him to work for five hours at a time rather than the previous standard session of three and a half hours. ‘ If you were running a factory ’, says the surgeon, ‘ you wouldn’t allow your most important and most expensive machine to stand idle. The same is true in a hospital .’ Currently used for hip and knee replacements, this layout would not be suitable for all surgical procedures. But since its intro- duction the surgeon’s waiting list has fallen to zero and his productivity has doubled. ‘ For a small increase in run- ning costs we are able to treat many more patients ’, said

a spokesperson for the hospital management. ‘ What is important is that clinicians…produce innovative ideas and we demonstrate that they are effective. ’

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222 PART TWO DESIGNING THE OPERATION

Functional layout In functional layout, similar resources or processes are located together. This may be because it is convenient to group them together, or that the utilization of transforming resources is improved. It means that when products, information or customers flow through the opera- tion, they will take a route from activity to activity according to their needs. Different products or customers will have different needs and therefore take different routes. Usually this makes the flow pattern in the operation very complex. Examples of functional layouts include:

● Hospital – some processes (for example, X-ray machines and laboratories) are required by several types of patient; some processes (for example, general wards) can achieve high staff and bed utilization.

● Machining the parts which go into aircraft engines – some processes (for example, heat treat- ment) need specialist support (heat and fume extraction); some processes (for example, machining centres) require the same technical support from specialist setter–operators; some processes (for example, grinding machines) get high machine utilization as all parts which need grinding pass through a single grinding section.

● Supermarket – some products, such as tinned goods, are convenient to restock if grouped together. Some areas, such as those holding frozen vegetables, need the common tech- nology of freezer cabinets. Others, such as the areas holding fresh vegetables, might be together because, that way, they can be made to look attractive to customers (see the open- ing ‘Operations in practice’ case).

Like most functional layouts, a library has different types of user with different traffic pat- terns. The College library in Figure 7.4 has put its users into three categories, as follows (in fact very similar categories are used by retail customers):3

● Browsers – who seek interesting or useful materials by surfing the Internet, browsing shelves and examining items, and moving around slowly while assessing the value of items.

● Destination traffic – who have a specific purpose or errand and are not deterred from it by surroundings or other library materials.

● Beeline traffic – who concentrate on goals unconnected with personal use of the library, for example messengers, delivery staff or maintenance workers.

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Main entrance

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Work room

Books

Books

Books

BooksBooks

Books

Copy room A/V

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Director’s o�ce

Work room

Periodicals

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Figure 7.4 An example of a functional layout in a library

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CHAPTER 7 LAYOUT AND FLOW 223

Based on studies tracking these different types of customer, the library derived the follow- ing guidelines for the layout of its library:

● Position displays and services that need to be brought to users’ attention at the front of the facility.

● To the right of the entrance should be new acquisitions; items that might be selected on impulse and have no satisfactory substitutes; and items that require repeated exposure before users select them.

● On the left at the front should be items that probably will not be used unless there is maxi- mum convenience for the user, such as the dictionary and the atlas and encyclopaedias.

● The circulation desk should be on the left of the entrance, the last thing the user passes before leaving.

● The rear of the library should house items for which user motivation is strong, such as classroom-assigned materials and meeting rooms, or for which the user is willing to spend time and effort obtaining, such as microfiche printouts.

Cell layout A cell layout is one where the transformed resources entering the operation are pre-selected (or pre-select themselves) to move to one part of the operation (or cell) in which all the trans- forming resources, to meet their immediate processing needs, are located. The cell itself may be arranged in either a functional or line (see next section) layout. After being processed in the cell, the transformed resources may go on to another cell. In effect, cell layout is an attempt to bring some order to the complexity of flow that characterizes functional layout. Examples of cell layouts include:

● Some computer component manufacture– the processing and assembly of some types of computer parts may need a special area dedicated to the manufacturing of parts for one particular customer who has special requirements, such as particularly high- quality levels.

● ‘Lunch’ products area in a supermarket – some customers use the supermarket just to pur- chase sandwiches, savoury snacks, cool drinks, yoghurt, etc., for their lunch. These prod- ucts are often located close together so that customers who are just buying lunch do not have to search around the store.

● Maternity unit in a hospital – customers needing maternity attention are a well-defined group who can be treated together and who are unlikely to need the other facilities of the hospital at the same time that they need the maternity unit.

Although the idea of cell layout is often associated with manufacturing, the same prin- ciple can be, and is, used in services. In Figure 7.5 the ground floor of a department store is shown, comprising displays of various types of goods in different parts of the store. In this sense the predominant layout of the store is a functional layout. Each display area can be considered a separate process devoted to selling a particular class of goods – shoes, clothes, books, and so on. The exception is the sports shop. This area is a shop- within- a-shop area that is devoted to many goods that have a common sporting theme. For example, it will stock sports clothes, sports shoes, sports bags, sports magazines, sports books, sports equipment and gifts, and sports energy drinks. Within the ‘cell’ there are all the products that are also located elsewhere in the store. They have been located in the ‘cell’ not because they are similar goods (shoes, books and drinks would not usually be located together) but because they are needed to satisfy the needs of a particular type of customer. The store management calculate that enough customers come to the store to buy ‘sports goods’ in particular (rather than shoes, clothes, books, etc.) to devote an area specifically for them. The store is also aware that someone coming to the store with the intention of purchasing some sports shoes might also be persuaded to buy other sports goods if they are placed in the same area.

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224 PART TWO DESIGNING THE OPERATION

Line (product) layout Line layout involves locating the transforming resources entirely for the convenience of the transformed resources. Each product, piece of information or customer follows a prearranged route in which the sequence of activities that are required matches the sequence in which

Sports shop

Men’s clothes

Entrance

Luggage and gifts Women’s clothes Perfume and

jewellery

Escalators

Magazines, books and stationery

Footwear

Entrance

Figure 7.5 The floor plan of a department store showing the sports goods ‘shop-within-a-shop cell’ within the functional layout of the rest of the store

OPERATIONS IN PRACTICE

Apple has opened a string of over 300 Apple Stores all over the world in leading locations like London’s Regent Street and Covent Garden, Grand Central Station and Fifth Avenue in New York, the Louvre in Paris, and the spectacular Beijing store with its 40-ft (12 m) curved glass exterior. These stores are large, beautifully architected, and in keeping with Apple’s brand, the company. Then it was reported that Apple would be opening a store- within-a-store in one of the world’s most famous depart- ment stores. Harrods is a huge ‘upmarket’ department store in the heart of London. It covers over five acres (20,000 m 2 ) of land and the store itself features over 1 mil- lion square feet (93,000 m 2 ) of selling space. Across this area are over 330 departments that cover clothing, tech- nology accessories, and food. Commentators declared that the Apple brand would fit in well within the Harrods’ surroundings, and the Harrods Apple Store, itself, would blend in nicely with the store’s noted architecture. The Apple Store will feature most of what makes an Apple Store an Apple Store, like wooden tables and signage. Like most retail ‘cells’, all the products sold in the Apple Store in Harrods could be sold in other departments. But

they are collected together for another purpose. In this case the internal Apple Store supports the Apple brand yet does not inconvenience customers. In fact, for Apple fans, it is more convenient.

Apple’s shop-within-a-shop in Harrods 4

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CHAPTER 7 LAYOUT AND FLOW 225

the processes have been located. The transformed resources ‘flow’ along a ‘line’ of processes according to their ‘product’ needs. This is why this type of layout is sometimes called flow or product layout. Flow is clear, predictable and therefore relatively easy to control. Usually, it is the standardized requirements of the product or service that lead to operations choosing line layouts. Examples of line layout include:

● Automobile assembly – almost all variants of the same model require the same sequence of processes.

● Mass-immunization programme – all customers require the same sequence of clerical, med- ical and counselling activities.

● Self-service cafeteria – generally the sequence of customer requirements (starter, main course, dessert and drink) is common to all customers, but layout also helps control cus- tomer flow.

But do not think that line layouts are not changing. Even Toyota, the best known of all auto- mobile companies that routinely use this type of layout, is rethinking the assembly line. The appreciation of the Japanese yen has made it difficult for vehicles made in Japan to compete, and while Toyota, like other Japanese firms, has built factories in other parts of the world, if it still wants to manufacture in Japan, cost savings had to be made. Figure 7.6 shows just two of the ideas that Toyota is employing at its Miyagi factory in Japan to make assembly lines even more efficient.5 The upper illustration shows how Toyota has positioned vehicles sideways rather than the conventional lengthways. A simple idea, but it has the advantage of shorten- ing the line by 35 per cent (which saves on the cost of constructing the line and requires fewer steps by workers) and shortening the distance that workers have to walk between cars (which increases productivity). The lower illustration shows how, instead of the vehicle chassis hang- ing from overhead conveyor belts, they are positioned on raised platforms. This costs only half as much to construct and allows ceiling heights to be lowered, which is more space efficient and reduces heating and cooling costs by 40 per cent.

Figure 7.6 Contrasting arrangements in product (line) layout for automobile assembly plants Source: From For Toyota, patriotism and profits may not mix, Wall Street Journal, 29/11/2011 (Dawson, C.), Reprinted with permission of Wall Street Journal, Copyright © 2011 Dow Jones & Company, Inc. All Rights Reserved Worldwide. License numbers 3841860034292 and 3841860323322.

Conventional lengthways assembly line

New Toyota sideways line

New Toyota elevated platform

Conventional overhead chassis frame

Ceiling heights

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226 PART TWO DESIGNING THE OPERATION

Figure 7.7 A restaurant complex with all four basic layout types

Mixed layouts Many operations either design themselves hybrid layouts which combine elements of some or all of the basic layout types, or use the ‘pure’ basic layout types in different parts of the operation. For example, a hospital would normally be arranged on functional layout principles – each department representing a particular type of function (the X-ray depart- ment, the surgical theatres, the blood-processing laboratory, and so on). Yet within each department, quite different layouts are used. The X-ray department is probably arranged in a functional layout, the surgical theatres in a fixed-position layout, and the blood-processing laboratory in a line layout.

Another example is shown in Figure 7.7. Here a restaurant complex is shown with three different types of restaurant and the kitchen which serves them all. The kitchen is arranged in a functional layout, with the various processes (food storage, food preparation, cooking processes, etc.) grouped together. The traditional service restaurant is arranged in a fixed- position layout. The customers stay at their tables while the food is brought to (and some- times cooked at) the tables. The buffet restaurant is arranged in a cell-type layout with each buffet area having all the processes (dishes) necessary to serve customers with their starter, main course or dessert. Finally, in the cafeteria restaurant, all customers take the same route when being served with their meal. They may not take the opportunity to be served with every dish but they move through the same sequence of processes.

Cadbury’s (see the ‘Operations in practice’ item) has chosen to use the line layout design for both the production of chocolates and the processing of its visitors. In both cases, volumes are large and the variety offered is limited. Sufficient demand exists for each standard ‘product’, and the operations objective is to achieve consistent high quality at low cost. Both operations have little volume flexibility, and both would be expensive to change.

What type of layout should an operation choose? The importance of flow to an operation will depend on its volume and variety characteris- tics. When volume is very low and variety is relatively high, ‘flow’ is not a major issue. For example, in telecommunications satellite manufacture, a fixed-position layout is likely to be appropriate because each product is different and because products ‘flow’ through the operation very infrequently, so it is just not worth arranging facilities to minimize the flow of parts through the operation. With higher volume and lower variety, flow becomes an issue. If the variety is still high, however, an entirely flow-dominated arrangement is difficult because

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CHAPTER 7 LAYOUT AND FLOW 227

there will be different flow patterns. For example, the library in Figure 7.4 will arrange its different categories of books and its other services partly to minimize the average distance its customers have to ‘flow’ through the operation. But, because its customers’ needs vary, it will arrange its layout to satisfy the majority of its customers (but perhaps inconvenience a minority). When the variety of products or services reduces to the point where a distinct ‘category’ with similar requirements becomes evident but variety is still not small, cell layout could become appro- priate, as in the sports goods cell in Figure 7.5 . When variety is relatively small and volume

OPERATIONS IN PRACTICE

Flow of chocolate in the factory In the famous Cadbury’s chocolate factory at Bournville, on the outskirts of Birmingham, UK, production pro- cesses are based on a line layout . This has allowed Cadbury’s engineers to develop the technology to meet the technical and capacity requirements of each stage of the process. Consider, for example, the production of Cadbury’s Dairy Milk bars. First, the standard liquid chocolate is prepared from cocoa beans, fresh milk and sugar using specialized equipment, connected together with pipes and conveyors. These processes operate continuously, day and night, to ensure consistency of both the chocolate itself and the rate of output. Next, the liquid is pumped through to the moulding depart- ment, where it is dispensed into a moving line of plas- tic moulds which form the chocolate bars and vibrate them to remove any trapped air bubbles. The moulds then move through a large refrigerator so the choco- late can harden. The moulded bars then pass directly to automated wrapping and packing machines, from where they go to the warehouse.

Flow of customers in the visitor attraction Cadbury’s also has a large visitor centre called ‘Cadbury World’ alongside the factory. It is a permanent exhibition devoted entirely to chocolate and the part Cadbury’s has played in its fascinating history. The design is also based on a ‘line’ layout with a single route for all customers that promotes a smooth flow of customers, where possible avoiding bottlenecks and delays. Entry to the Exhibition Area is by timed ticket, to ensure a constant flow of input customers, who are free to walk around at their preferred speed, but are constrained to keep to the sin- gle track through the sequence of displays. On leaving this section, they are directed upstairs to the Chocolate Packaging Plant, where a guide escorts standard-sized batches of customers to the appropriate positions where they can see the packing processes and a video presenta- tion. The groups are then led down to and around the Demonstration Area, where skilled employees demon- strate small-scale production of hand-made chocolates. Finally, visitors are free to roam unaccompanied through a long, winding path of the remaining exhibits.

Chocolate and customers both have a ‘line’ layout at Cadbury’s 6

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228 PART TWO DESIGNING THE OPERATION

is high, flow can become regularized and a line layout is likely to be appropriate, as in an assembly plant. ( See Fig. 7.8 .)

Although the volume–variety characteristics of the operation will narrow the choice down to one or two layout options, there are other associated advantages and disadvantages, some of which are shown in Figure 7.9 . However, the type of operation will also influence the relative importance of these advantages and disadvantages. For

example, a high-volume television manufacturer may find the low-cost characteristics of a product layout attractive, but an amusement theme park may adopt the same layout type primarily because of the way it ‘controls’ customer flow.

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Volume

Fixed-position layout

Functional layout

Cell layout

Line layout

Low High

Va rie

ty

Regular flow becomes more important

R eg

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Figure 7.8 Different process layouts are appropriate for different volume–variety combinations

OPERATIONS IN PRACTICE

Nestlé is the largest food company in the world and has operations in almost 200 countries. It also has over 400 factories around the world, many of them in developing countries. Nestlé opened its first factory in Africa (a condensed milk production plant) in 1927. But factories are expensive to build, especially where infrastructure can be problematic and future demand uncertain. This is why Nestlé has created a blueprint

for a new type of factory that can be built in half the time of a more traditional one for about 50–60 per cent of the cost.

The modular factory will be made of multiple, easy-to-assemble component sections designed to offer a highly flexible, simple and cost-effective solu- tion for creating production sites in the developing world. Often, investing in these countries can be high

Nestlé’s fl exible factories 7

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CHAPTER 7 LAYOUT AND FLOW 229

Advantages Fixed-position layout

Functional layout

Disadvantages

• Very high mix and product flexibility • Product or customer not moved or disturbed • High variety of tasks for sta�

• Very high unit costs • Scheduling of space and activities can be di�cult • Can mean much movement of equipment and sta�

• Low unit costs for high volume • Gives opportunities for specialization of equipment • Materials or customer movement is convenient

• Can have low mix flexibility • Not very robust if there is disruption • Work can be very repetitive

• High mix and product flexibility • Relatively robust in the case of disruptions • Relatively easy supervision of transforming resources

• Low facilities utilization • Can have very high work-in- progress or customer queuing • Complex flow can be dicult to control

Cell layout

Line layout

• Gives a compromise between cost and flexibility for relatively high-variety operations • Fast throughput • Potential good sta  motivation

• Can be costly to rearrange existing layout • Can require more equipment • Can give lower equipment utilization

Figure 7.9 Some advantages and disadvantages of layout types

risk, as they can lack infrastructure, reliable energy sources and building expertise, but the modular factory concept will enable Nestlé to establish a footprint rap- idly, creating local jobs and being closer to its custom- ers and its raw materials. ‘ The model is a real evolution from the traditional bricks and mortar factories of the past ’, Alfredo Fenollosa, Nestlé Technical Head for Asia, Oceania and Africa, said. ‘ Big companies traditionally build solid stuff but the lighter structure of this modu- lar factory concept represents a real mindset change for Nestlé. We hope to be able to apply it soon in countries in Africa, and in some parts of Asia ’, he added.

The average Nestlé factory takes between 18 and 24 months and costs between SFr30m and 50m to build. The new modular factory could be complete, and up and running, in less than 12 months, at a cost of between SFr15m and 25m. The modular factory uses a series of purpose-built factory sections which can be brought, ready to use, directly to the site and connected to each other according to requirements. These could include, for example, a ready-to-use generator and boiler, a staff

canteen and changing rooms for factory employees. The factory can then be expanded, moved or its func- tion transformed without having to start from scratch. The modular factory concept is designed to industrialize simple processes like repacking and mixing dry goods such as Maggi bouillon cubes, rather than creating more complex products.

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230 PART TWO DESIGNING THE OPERATION

Cost analysis Of all the characteristics of the various layout types, perhaps the most generally signifi- cant ones are the unit cost implications of layout choice. This is best understood by dis- tinguishing between the fixed- and variable-cost elements of adopting each layout type. For any particular product or service, the fixed costs of physically constructing a fixed- position layout are relatively small compared with any other way of producing the same product or service. However, the variable costs of producing each individual product or service are relatively high compared with the alternative layout types. Fixed costs then

tend to increase as one moves from fixed-position, through process and cell, to line layout. Variable costs per product or service tend to decrease, however. The total costs for each layout type will depend on the volume of products or services produced and are shown in Figure 7.10 (a). This seems to show that for any volume there is a lowest cost basic layout. However, in practice, the cost analysis of layout selection is rarely as clear as this. The exact cost of operat- ing the layout is difficult to forecast and will probably depend on

many, often difficult to predict, factors. Rather than use thin lines to represent the cost of layout as volume increases, broad bands, within which the real cost is likely to lie, are probably more appropriate ( see Fig. 7.10 (b)). The discrimination between the different layout types is now far less clear. There are ranges of volume for which any of two or three layout types might provide the lowest operating cost. The less certainty there is over the costs, the broader the cost ‘bands’ will be, and the less clear the choice will be. The prob- able costs of adopting a particular layout need to be set in the broader context of advan- tages and disadvantages shown in Figure 7.9 .

✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle

Costs Costs

(a) (b)

Fixed-position Fixed-position

Functional Functional

Cell

Line Cell Line

Use line

Use line

Use cell

Use functional

Volume Volume

Use functional or cell or line

Use functional or cell Use functional

Use fixed-position

Use fixed-position or functional

Figure 7.10 (a) The basic layout types have different fixed- and variable-cost characteristics which seem to determine which one to use. (b) In practice the uncertainty about the exact fixed and variable costs of each layout means the decision can rarely be made on cost alone

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HOW DOES THE APPEARANCE OF AN OPERATION AFFECT ITS PERFORMANCE?

So far we have focused on the more evident ‘pattern of flow’ issues associated with layout. Yet the aesthetics of a layout (in other words, what it looks and feels like) is also important, particularly when customers experience the inside of an operation, as in high-visibility opera- tions (see Chapter 1 ) . In such operations the general look and feel of the operation will be as important, if not more important, than cost and distance criteria. Of course, the appearance of an operation must include how its facilities are arranged, but also increasingly it is recog- nized that the ‘look and feel’ of an operation can also have a significant effect on the staff of an operation, and therefore on its effectiveness and performance generally.

The effect of workplace design on staff There are some obvious and basic aspects of workplace design that will affect anyone work- ing there. These are such things as: Is it warm enough? Too warm? Sufficiently well lit to see adequately? Not too noisy? These are all the factors that deal with the physiological aspects of working – how we fit in with our physical working environment. Clearly, people who are cold, or irritated by their noisy environment, or straining to see what they are doing, will probably not be feeling, or working, particularly well. We look at these issues in Chapter 9 when we look at ‘ergonomics’. But there are other factors associated with the design of a workplace that could affect staff attitudes, motivation and behaviour. This is why in recent years many companies have devoted resources to what goes into their workplaces and what they look like. Increasingly, special meeting zones, cappuccino bars, fish tanks, relaxing bean bags, games consoles, hammocks, ping-pong tables and other such features have been integrated into workspaces. Why is this?

The core of the argument for using these design features is that a workplace is more than simply the arrangement of facilities and the pattern of flow that it creates. It is also the fur- niture, the way space is used and even the colour of the paint on the walls. Some workplace designers would go further. The aesthetics of the workplace also reflects the culture of the organization. (There is no single authoritative definition of organizational culture, but gen- erally it is taken to mean what it feels like to be part of an organization, ‘the organization’s climate’.) 8 Therefore, they argue, the appearance of a workplace should reflect the organ- ization’s culture. The key questions are: ‘what does that workplace say about our culture?’ and ‘how can we create an environment that further promotes our culture?’ What works for one company may be counter-cultural at another. 9 The Google headquarters in California (known as the Googleplex) is often cited as a good example of a workplace that reflects the company’s culture.

Nevertheless, the question is how much difference do the aesthetics and components of the working environment make? In fact, according to Thomas Davenport, an expert in ‘knowl- edge working’, there is little evidence that anyone worked more productively because of these features. ‘ There’s no clear relationship between knowledge worker performance and various appealing features of the work environment, though they may help slightly with recruiting and morale .’ 10 Rather, the proponents of improving the appearance of working environment say that the effect is subtler. It can encourage desired behaviours, in particular when the workplace reflects the activities and needs of the people working there. So, for example, flexible modular systems of furniture made up of a number of components can be changed to meet different needs as they arise. Screens can enclose a workstation if more privacy is needed, tables can be moved around for meetings, and so on. A study by Herman Miller 11 (an office furniture manufacturer) identified seven workspace attributes

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232 PART TWO DESIGNING THE OPERATION

that people value and which contribute to their satisfaction and (presumably) output. These were, in order of priority, a comfortable office, sufficient amount of work surface area, the flexibility to put their computer in the most suitable place, the capability to keep work within arm’s reach, to contain sounds within the office, to keep out distracting noises from outside the office and to have ‘visual privacy’.

The Allen curve Arranging the facilities in any workplace will directly influence how physically close individ- uals are to each other. And this, in turn, influences the likelihood of communication between individuals. So, what effect does placing individuals close together or far apart have on how they interact? The work of Thomas J. Allen at the Massachusetts Institute of Technology first established how communication dropped off with distance. In 1984 his book, Managing the

Flow of Technology , presented what has become known as the ‘Allen curve’. It showed a powerful negative correlation between the physical distance between colleagues and their frequency of communication. The Allen curve estimated that we are four times as likely to commu- nicate regularly with a colleague sitting 2 metres away from us as with someone 20 metres away, and 50 metres (for example, separate floors) marks a cut-off point for the regular exchange of certain types of tech- nical information. But, as some experts have pointed out, the office is no longer just a physical place; email, remote conferencing and collab-

oration tools mean that colleagues can communicate without ever seeing each other. However, this appears not to be the case. One study 12 shows that so-called distance-shrinking technology actually makes close proximity more important, with both face-to-face and digital communica- tions following the Allen curve. The study showed that engineers who shared a physical office were 20 per cent more likely to stay in touch digitally than those who worked elsewhere. Also, when they needed to collaborate closely, closely located colleagues emailed each other four times as frequently as colleagues in different locations.

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OPERATIONS IN PRACTICE

Some people love them, many people loathe them; the office cubicle is rarely viewed as a neutral arrangement. But originally the man who invented the concept, Robert Propst, a designer working for the office- furniture firm Herman Miller, hoped it would bring flexibility and independence to the office environment. What he was reacting against was the then common arrangement of row after row of desks (a bit like a university examination room), where office workers toiled from 9 to 5, usually with a passageway of private, closed-off offices reserved for managers. In 1968 Propst proposed what was the first modular office system, called the ‘Action Office 2’. Using his system, space could be divided up by wall-like vertical panels that could be slotted together in various ways. His original idea was that each employee could have a clamshell arrangement that gave him or her both privacy and a view. This would be furnished with desks of different heights (to prevent back strain). In addition, areas for informal meetings and coffee could be created.

Propst believed that the best way to arrange the ‘walls’ would be to join the panels at 120° angles. However, to his disappointment, office designers realized that they could squash more people into the available space if

Where did the offi ce cubicle come from? 13

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The effect of workplace design on customers – servicescapes If the appearance of an operation affects how its staff feel about working there, it certainly will also affect customers if they enter the workplace, as they do in ‘high-visibility’ operations. The term that is often used to describe the look and feel of the environment within an opera- tion from a customer’s perspective is its ‘servicescape’ (although it is sometimes also applied to how staff view their environment). There are many academic studies that have shown that the servicescape of an operation plays an important role, both positive and negative, in shap- ing customers’ views. 14 The general idea is that ambient conditions, space factors, and signs and symbols in a service operation will create an ‘environmental experience’ for both employ- ees and customers, and this environmental experience should support the service concept. The individual factors that influence this experience will then lead to certain responses (again, in both employees and customers). These responses can be put into three main categories:

● cognitive (what people think); ● emotional (what they feel); and ● physiological (what their body experiences).

However, remember that a servicescape will contain not only objective, measureable and controllable stimuli, but also subjective, immeasurable and often uncontrollable stimuli, which will influence customer behaviour. The obvious example is other customers frequent- ing an operation. As well as controllable stimuli such as the colour, lighting, design, space and music, the number, demographics and appearance of one’s fellow customers will also shape the impression of the operation.

they arranged the ‘walls’ at 90° to form the classic cubi- cle. Propst also believed that people needed to stand as often as they sat (he was ahead of his time). So he created storage spaces located away from the cubicles to encourage workers to move about and encourage ‘meaningful traffic’.

But cubicles were not universally popular. The una- dorned open-plan arrangements were demotivating, but cubicles did not solve all their problems. Open-plan offices were noisy and distracting, but cubicles could be just as bad. Cubicles failed to block unwanted noise, and at the same time could block natural light. Cubicles could even make people behave badly according to research- ers at Cornell University who found that employees in

cubicles were more likely than those in open-plan offices to have loud (and long) conversations on the phone with visiting colleagues. This, they say, is possibly because cubi- cles ‘ mask the social cues such as facial expressions and body language that influence social interactions ’. It makes it easier to consume an antisocially smelly lunch or have loud conversations on the phone, oblivious to their col- leagues’ reactions. But cubicles are still being used in offices around the world. One explanation for this is that privacy is so valued that office planners try to create the illusion of it. This seems to be borne out by the way peo- ple personalize their cubicles with, among other things, pictures, flowers and rugs, even, in some cases, curtains at the entrance, wallpaper, fairy lights and chandeliers.

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OPERATIONS IN PRACTICE

Some years ago, it was reported that a low-cost air- line was to introduce standing-only sections on flights. Predictably there were some very vocal objections. The idea, however, turned out to be a joke. Yet it high- lighted a serious issue: how can airlines reduce their

costs (and therefore their fares) by packing more pas- sengers onto the aircraft? Airbus has patented a design that uses fold-up seats resembling lines of bar stools or tractor-driver seats. Some industry commentators have suggested that airlines should consider shrinking

Facing the wrong way? 15

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234 PART TWO DESIGNING THE OPERATION

HOW SHOULD EACH BASIC LAYOUT TYPE BE DESIGNED IN DETAIL?

Once the basic layout type has been decided, the next step is to decide the detailed design of the layout. Detailed design is the act of operationalizing the broad principles that were implicit in the choice of the basic layout type.

Detailed design in fixed-position layout In fixed-position arrangements the location of resources will be determined, not on the basis of the flow of transformed resources, but on the convenience of transforming resources them- selves. The objective of the detailed design of fixed-position layouts is to achieve a layout

the size of toilets and galleys. All are ideas to accom- modate more passengers on board. One idea that has been suggested by Zodiac, a French supplier of airliner fittings, is to have passengers face each other on alter- nate seats that are hexagon shaped ( see Fig. 7.11 ). This means that passengers will not have to compete for the armrest, but they will have to look at each other. Zodiac says it is trying to promote its thin, lightweight seating arrangement, not just to increase passenger density, but also to increase shoulder and leg room. Says Pierre- Antony Vastra, Vice-President of Zodiac, ‘ It’s a different way of travelling, with people facing each other. We can have nice conversations .’ However, what has been called ‘in-your-face’ seating has met with significant opposi- tion. Wired Magazine said, ‘ If you’re around the sort of people one usually sits next to on airplanes, it would be horrible. At least if you’re all facing the same direction, you can pretend they don’t exist .’ Others called it ‘ the most atrocious idea for airplane seating design you’ve ever seen…like a sick joke ’, while others doubted that the configuration would be safe because of the difficulty of evacuating alternating seats in an emergency.

Figure 7.11 Using ‘hexagon’ seats and requiring some passengers to face backwards could increase seating density, but would you be prepared to?

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CHAPTER 7 LAYOUT AND FLOW 235

for the operation which allows all the transforming resources to maximize their contribu- tion to the transformation process by allowing them to provide an effective ‘service’ to the transformed resources. The detailed layout of some fixed-position layouts, such as building sites, can become very complicated, especially if the planned schedule of activities is changed frequently. Imagine the chaos on a construction site if heavy trucks continually (and noisily) drove past the site office, delivery trucks for one contractor had to cross other contractors’ areas to get to where they were storing their own materials, and the staff who spent most time at the building itself were located furthest away from it. Although there are techniques that help to locate resources on fixed-position layouts, they are not widely used

Detailed design in functional layout The detailed design of functional layouts is complex, as is flow in this type of layout. Chief among the factors which lead to this complexity is the very large number of different options. For example, in the very simplest case of just two work centres, there are only two ways of arranging these relative to each other . But there are 6 ways of arranging three centres and 120 ways of arranging five centres. This relationship is a factorial one. For N centres there are factorial N ( N !) different ways of arranging the centres, where:

N! = N * (N - 1) * (N - 2) * . . . * (1)

So for a relatively simple functional layout with, say, 20 work cen- tres, there are 20! = 2.433 * 10 18 ways of arranging the operation. This combinatorial complexity of functional layouts makes optimal solutions difficult to achieve in practice. Most functional layouts are designed by a combination of intuition, common sense, and system- atic trial and error.

The information for functional layouts Before starting the process of detailed design in functional layouts there are some essential pieces of information which the designer needs:

● The area required by each work centre. ● The constraints on the shape of the area allocated to each work centre. ● The degree and direction of flow between each work centre (for example, number of jour-

neys, number of loads or cost of flow per distance travelled). ● The desirability of work centres being close together or close to some fixed point in the layout.

The degree and direction of flow are usually shown on a flow record chart like that shown in Figure 7.12 in the worked example. This information could be gathered from rout- ing information, or where flow is more random; as in a library for example, the information could be collected by observing the routes taken by customers over a typical period of time.

Minimizing distance travelled In most examples of functional layout, the prime objective is to minimize the costs to the operation which are associated with flow through the operation. This usually means minimiz- ing the total distance travelled in the operation, for example as in Figure 7.13 in the worked example. The effectiveness of the layout, at this simple level, can be calculated from:

Effectiveness of layout = πFij Dij for all i Z j

where F ij = the flow in loads or journeys per period of time from work centre i to work centre j

D ij = the distance between work centre i and work centre j

The lower the effectiveness score, the better the layout. The steps in determining the location of work centres in a functional layout is illustrated in

the worked example on the Rotterdam Educational Group.

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236 PART TWO DESIGNING THE OPERATION

Worked example

Rotterdam Educational Group (REG) is a company which commissions, designs and manufac- tures education packs for distance-learning courses and training. It has leased a new building with an area of 1,800 square metres, into which it needs to fit 11 ‘departments’. Prior to mov- ing into the new building it conducted an exercise to find the average number of trips taken by its staff between the 11 departments. Although some trips are a little more significant than others (because of the loads carried by staff) it has been decided that all trips will be treated as being of equal value.

Step 1 – Collect information The areas required by each department together with the average daily number of trips between departments are shown in the flow chart in Figure 7.12 . In this example the direction of flow is not relevant and very low flow rates (less than five trips per day) have not been included.

Step 2 – Draw schematic layout Figure 7.13 shows the first schematic arrangement of departments. The thickest lines repre- sent high flow rates between 70 and 120 trips per day; the medium lines are used for flow rates between 20 and 69 trips per day; and the thinnest lines for flow rates between 5 and 19 trips per day. The objective here is to arrange the work centres so that those with the thick lines are closest together. The higher the flow rate, the shorter the line should be.

Step 3 – Adjust the schematic layout If departments were arranged exactly as shown in Figure 7.13 (a) the building which housed them would be of an irregular, and therefore high-cost, shape. The layout needs adjusting to take into account the shape of the building. Figure 7.13 (b) shows the departments arranged in a more ordered fashion which corresponds to the dimensions of the building.

Step 4 – Draw the layout Figure 7.14 shows the departments arranged with the actual dimensions of the building and occupying areas which approximate to their required areas. Although the distances between

Figure 7.12 Flow information for Rotterdam Educational Group

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CHAPTER 7 LAYOUT AND FLOW 237

Computer-aided functional layout design The combinatorial complexity of functional layout has led to the development of several heu- ristic procedures to aid the design process. Heuristic procedures use what have been described as ‘shortcuts in the reasoning process’ and ‘rules of thumb’ in the search for a reasonable solu- tion. They do not search for an optimal solution (though they might find one by chance) but rather attempt to derive a good sub-optimal solution. One such computer-based heuristic procedure is called CRAFT (Computerized Relative Allocation of Facilities Technique). The reasoning behind this procedure is that, whereas it is infeasible to evaluate factorial N ( N! ) different layouts when N is large, it is feasible to start with an initial layout and then evaluate all the different ways of exchanging two work centres.

the centroids of departments have changed from Figure 7.14 to accommodate their physical shape, their relative positions are the same. It is at this stage that a quantitative expression of the cost of movement associated with this relative layout can be calculated.

Step 5 – Check by exchanging The layout in Figure 7.14 seems to be reasonably effective but it is usually worthwhile to check for improvement by exchanging pairs of departments to see if any reduction in total flow can be obtained. For example, departments H and J might be exchanged, and the total distance travelled calculated again to see if any reduction has been achieved.

Figure 7.13 (a) Schematic layout placing centres with high traffic levels close to each other. (b) Schematic layout adjusted to fit building geometry

Figure 7.14 Final layout of building

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238 PART TWO DESIGNING THE OPERATION

There are:

N! 2!(N - 2)!

possible ways of exchanging two out of N work centres. So for a 20 work-centre layout, there are 190 ways of exchanging two work centres.

Three inputs are required for the CRAFT heuristic: a matrix of the flow between depart- ments; a matrix of the cost associated with transportation between each of the departments; and a spatial array showing an initial layout. From these:

● the location of the centroids of each department is calculated; ● the flow matrix is weighted by the cost matrix, and this weighted flow matrix is multiplied

by the distances between departments to obtain the total transportation costs of the initial layout;

● the model then calculates the cost consequence of exchanging every possible pair of departments.

The exchange giving the most improvement is then fixed, and the whole cycle is repeated with the updated cost flow matrix until no further improvement is made by exchanging two departments.

Detailed design in cell layout Figure 7.15 shows how a functional layout has been divided into four cells, each of which has the resources to process a ‘family’ of parts. In doing this the operations management has implicitly taken two interrelated decisions regarding:

● the extent and nature of the cells it has chosen to adopt; ● which resources to allocate to which cells.

Production flow analysis The detailed design of cellular layouts is difficult, partly because the idea of a cell is itself a compromise between process and product layout. To simplify the task, it is useful to con- centrate on either the process or product aspects of cell layout. If cell designers choose to

Figure 7.15 Cell layout groups the processes together which are necessary for a family of products/services

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CHAPTER 7 LAYOUT AND FLOW 239

Figure 7.16 (a) and (b) Using production flow analysis to allocate machines to cells

concentrate on processes, they could use cluster analysis to find which processes group natu- rally together. This involves examining each type of process and asking which other types of processes a product or part using that process is also likely to need. One approach to allocating tasks and machines to cells is production flow analysis (PFA), which examines both product requirements and process grouping simultaneously. In Figure 7.16(a) a manufacturing oper- ation has grouped the components it makes into eight families – for example, the components in family 1 require machines 2 and 5. In this state the matrix does not seem to exhibit any nat- ural groupings. If the order of the rows and columns is changed, however, to move the crosses as close as possible to the diagonal of the matrix which goes from top left to bottom right, then a clearer pattern emerges. This is illustrated in Figure 7.16(b) and shows that the machines could conveniently be grouped together in three cells, indicated on the diagram as cells A, B and C. Although this procedure is a particularly useful way to allocate machines to cells, the analysis is rarely totally clean. This is the case here where component family 8 needs process- ing by machines 3 and 8 which have been allocated to cell B. There are some partial solu- tions for this. More machines could be purchased and put into cell A. This would clearly solve the problem but requires investing capital in a new machine that might be under-utilized. Or, components in family 8 could be sent to cell B after they have been processed in cell A (or even in the middle of their processing route if necessary). This solution avoids the need to purchase another machine but it conflicts partly with the basic idea of cell layout – to achieve a simpli- fication of a previously complex flow. Or, if there are several components like this, it might be necessary to devise a special cell for them (usually called a remainder cell) that will almost be like a mini-functional layout. This remainder cell does remove the ‘inconvenient’ components from the rest of the operation, however, leaving it with a more ordered and predictable flow.

Detailed design in line layout The nature of the line layout design decision is a little different to the other layout types. Rather than ‘where to place what’, product layout is concerned more with ‘what to place where’. Locations are frequently decided upon and then work tasks are allocated to each loca- tion. So the ‘layout’ activity is very similar to aspects of process design, which we discussed in Chapter 6. The main product layout decisions are as follows:

● What cycle time is needed? ● How many stages are needed? ● How should the task-time variation be dealt with? ● How should the layout be balanced (bottlenecks reduced)? ● How should the stages be arranged (‘long thin’ layout to ‘short fat layout’)?

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240 PART TWO DESIGNING THE OPERATION

● The ‘layout’ of an operation or process is how its transforming resources are positioned rel- ative to each other, how its various tasks are allocated to these transforming resources, and the general appearance of the transforming resources.

● These decisions will dictate the pattern and nature of the fl ow for transformed resources as they progress through the operation or process.

● The objectives of layout include: inherent safety, security, length of fl ow, minimizing delays, reducing work-in-progress, the clarity of fl ow, staff conditions, communication, manage- ment coordination, accessibility, the use of space, the use of capital, and long-term fl exibility.

❯ What is layout and how can it influence performance?

SUMMARY ANSWERS TO KEY QUESTIONS

● There are four basic layout types. They are fi xed-position layout, functional layout, cell lay- out and line layout.

● Partly the type of layout an operation chooses is infl uenced by the nature of the process type, which in turn depends on the volume–variety characteristics of the operation. Partly also the decision will depend on the objectives of the operation. Cost and fl exibility are particularly aff ected by the layout decision.

● The fi xed and variable costs implied by each layout diff er such that, in theory, one particu- lar layout will have the minimum costs for a particular volume level. However, in practice, uncertainty over the real costs involved in layout make it diffi cult to be precise on which is the minimum cost layout.

❯ What are the basic layout types used in operations?

● The general appearance and aesthetics of a layout aff ect how staff view the operation on which they work, and how customers behave.

● The communication between people reduces with the distance between them. This is called the ‘Allen curve’.

● In addition to the conventional operations objectives that will be infl uenced by the feel and general impression of the layout design, this is often called the ‘servicescape’ of the operation.

❯ How does the appearance of an operation affect its performance?

● In fi xed-position layout the materials or people being transformed do not move but the transforming resources move around them. Techniques are rarely used in this type of layout, but some, such as resource location analysis, bring a systematic approach to minimizing the costs and inconvenience of fl ow at a fi xed-position location.

● In functional layout all similar transforming resources are grouped together in the operation. The detailed design task is usually (although not always) to minimize the distance travelled by the transformed resources through the operation. Either manual or computer-based methods can be used to devise the detailed design.

● In cell layout the resources needed for a particular class of product are grouped together in some way. The detailed design task is to group the products or customer types such that

❯ How should each basic layout type be designed in detail?

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CHAPTER 7 LAYOUT AND FLOW 241

Ross Richie, Loughborough University

The ‘event hub’ was new, shiny and fitted with the latest equipment. Chief Superintendent Janice Walker was look- ing forward to using it as the ‘Silver Commander’ of the Joint Service Command ( JSC) at the forthcoming ‘event’. An ‘event’ is a term that is used to describe a wide range of public occasions, ranging from the management of a foot- ball match, a public protest, a royal wedding through to a critical incident such as a terrorist attack. The management of an event is a highly structured and well-practised activity, bringing together many different bodies that have an inter- est in it. These could include, for example, the ambulance service, the police, transport authorities, security services and local authorities, among others.

Although event command structures (who reports to whom) were clearly defined, the design of each event was unique. The operationalized command structure needed to be sufficiently flexible to cater for all the different bodies that are represented ‘on the ground’ (OTG). These are the ambulances you may see outside a football ground or the lines of police officers escorting a demonstration. These OTG services have localized commanders, who have del- egated tactical responsibility and are called the ‘Bronze Commanders’ regardless of whether they belong to the ambulance, police or fire services, or any other body. Bronze Commanders all report to the Silver Commander.

The command hub All of the OTG services and commanders report back to a centralized intelligence and decision-making command hub. It is often located away from the event, co- ordinated through a vast array of visual and audio communica- tion networks. Within the hub there are representatives from each of the Bronze command units providing direct communication and command links to each of the OTG resources. Also in the hub, there is the single strategic com- mander – called the ‘Silver Commander’. In larger events,

there may be as many as 80 different personnel in the com- mand hub, co-ordinating between the Silver Commander and 15–20 OTG Bronze Commanders who, between them, manage more than 400 individual resources and assets.

The Silver Commander Janice has acted as a Silver Commander before and knew that it was a highly pressured role, even though this time she would have a tactical advisor, a recorder (recording all decisions and actions), a communications officer and a runner in her support team. ‘ At some difficult phases of an Event, you may be making several critical decisions every minute. Silver Commanders have to assimilate a wide range of intelligence from many sources, match this with your resources and their locations, communicate your decisions to the OTG Bronze Commanders, and do all this within strict policy and legislative constraints. ’

In the upcoming event (a large protest march) Janice would have operational information inputs from:

● The Bronze command representatives. ● Their communications offi cer (who summarizes radio

communications).

convenient cells can be designed around their needs. Techniques such as production fl ow analysis can be used to allocate products to cells.

● In line (sometimes called ‘product’) layout, the transforming resources are located in sequence specifi cally for the convenience of products or product types. The detailed design of product layouts includes a number of decisions, such as the cycle time to which the design must conform, the number of stages in the operation, the way tasks are allocated to the stages in the line, and the arrangement of the stages in the line.

CASE STUDY The event hub

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242 PART TWO DESIGNING THE OPERATION

● Intelligence feeds (from a specialist intelligence function). ● Any visual feeds, for example CCTV, policy logs, news

and social media.

She would also have advisory inputs from tactical, media and legal advisors. These advisory inputs were usually more discursive than the information coming from the OTG oper- ational units. In the hub, the Bronze representatives would have support teams of their own. In this event, for example, the local authority planned to have five CCTV operators to support their function, whereas the ambulance service rep- resentation was only a single officer. Figure 7.17 shows the organizational ‘chain of command’ for the event.

Hub layout The bodies and services represented in the hub had var- ying requirements. For example, some of the intelligence functions needed to be sure that their computer screens would not be overlooked by other functions that were not security cleared to an appropriate level because of the sensitivity and secrecy of their information (such as the local authority representatives). This meant that they had been located in the far corner of the hub. Yet the intelligence functions would also need to get operational updates from the ambulance service and local authority to direct their intelligence gathering efforts. Janice was wor- ried that, because of this, there would be a high degree of travelling between different functions in the room.

The layout of the hub is shown in Figure 7.18. One of the greatest points of interest in the room was the mapping

screen, where a screen placed on the wall had special geo- graphic information updated from all the OTG units. Both Bronze and Silver Commanders would probably need to view the real-time updates shown on this screen.

Janice, as Silver Commander, was allocated the only office in the hub. This was conventional practice because the Silver Commander needed a quiet place to go and con- sider his or her decisions and take confidential guidance from advisors.

Prior to the event, Janice had planned for ‘update meetings’ in the meeting room with 12 of her key per- sonnel every two or three hours during the march. The meeting room was located 30 metres away from the hub, though in the same building. Also in the same building a secure area was provided for the wider intelligence func- tions. This was 10 metres away from the hub through two sets of locked doors. This provided a confidential area for the intelligence functions to operate without risk of infor- mation leakage.

Janice knew that events could be hectic, so in order to manage the busy room, and control the noise levels of the room, she had appointed a room manager who would sit in the centre of the room. The job of this officer would be to control movement within the room and intervene if noise levels became excessive.

What happened? Janice was proved correct about its being hectic dur- ing the march. The first two hours of the protest went

Bronze Commander

Operator

Unit E

Unit D

Bronze Commander

Operator Runner CCTV

Unit L

Operator

Unit G

Unit F

Silver Commander

Media advisor Legal advisor

Bronze representative

Bronze Commander

Bronze representative

Bronze representative

Bronze representativeIntelligence

Operator

Communications officer Tactical advisor

Runner

Unit C

Unit B

Unit A

Bronze Commander

Unit K

Unit J

Unit H

Bronze Commander

Figure 7.17 The chain of command for the event

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CHAPTER 7 LAYOUT AND FLOW 243

according to plan with good co-ordination within her team and between her team and the protest organizers. However, as the march progressed three things happened more or less concurrently. First, a splinter group from the march took a separate, non-agreed, route that required extra resources to police. Second, one of the people marching suffered a heart attack and needed emergency treatment and transport to the nearest hospital (difficult in the crowds). Third, an unexpected (and unauthor- ized), but small, counter-demonstration took place as the march passed a football stadium. And although the two sets of demonstrators were kept apart, there was raised tension and a need for extra monitoring of the situation. All of this resulted in an intense period of decision making and information gathering. Janice found herself continu- ally moving between her office, the command teams and the screens, never spending more than a couple of min- utes in one place. She was often followed by her tactical advisor, recorder and communications officer who had to run between her and their workstations, because their computers and radios were fixed to the desk.

To try and reduce the travel of her staff, finally Janice abandoned her office and moved her chair over to her ‘Silver Commander’s team’ area, close to the information screen. However, the general noise levels in the room were interrupting discussions, and Janice’s update meetings were also disturbing others in the room.

The move had a positive effect of unifying Janice and her team. However, now there was now a constant flow of Bronze representatives and media advisors to and from the area where Janice was sitting. Yet this was preferable to the earlier disruption caused by her moving around the room. She also made a further decision, which was not to consult the CCTV footage or the information screen, and moved her desk away from the screen area. ‘It was information overload’, said Janice. ‘Using these boards, I don’t need to micro-manage the resources, this is what my extended chain of command is in place to do.’

After several hectic hours, the event concluded success- fully, with no injuries or serious incident, and with the oper- ation being regarded as very successful. However, Janice had firm views on the new hub layout: ‘The layout of the room hindered decision-making. The transfer of information on this kind of time critical operation is vital. There must be a better way of setting out the hub. It would not require much capital to re-design the area to reflect what we do. It could be more like a production process that takes into account the common transfer processes between each function.’

QUESTIONS 1 What should an ideal design of an event centre be able

to do?

2 Sketch out a layout for an event centre that would work better than the existing one.

Media & legal advisors fireservice

Other intelligence functions

Meeting room

Local authority Bronze police representatives

Bronze police representatives

Silver Commander’s

officer

Silver Commander's team

NHS & ambulance services

Special demographic monitor screens

Room manager & visitors

Spare seats

Intelligence functions

CCTV monitor

Figure 7.18 The layout of the command hub

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244 PART TWO DESIGNING THE OPERATION

1 Reread the ‘Operations in practice’ case at the start of the chapter that describes the Volkswagen and Google operations. What do you think the main objectives of each layout were?

2 Visit and observe the flow of people in your library. Talk with the librarian (if you can) and make a list of the most important criteria that could be used if the library were to be redesigned.

3 The flow of materials through eight departments is shown in Table 7.2 . Assuming that the direction of the flow of materials is not important, construct a relationship

chart, a schematic layout and a suggested layout, given that each department is the same size and the eight departments should be arranged four along each side of a corridor.

Table 7.2 Flow of materials

D1 D2 D3 D4 D5 D6 D7 D8

D1 \ 30

D2 10 \ 15 20

D3 5 \ 12 2 15

D4 6 \ 10 20

D5 8 \ 8 10 12

D6 3 2 \ 30

D7 3 13 \ 2

D8 10 6 15 \

4 Sketch the layout of your local shop, coffee bar or sports hall reception area. Observe the area and draw on your sketch the movements of people through the area over a sufficient period of time to get over 20 observations. Assess the flow in terms of volume, variety and type of layout.

5 Visit a supermarket and observe people’s behaviour. You may wish to try and observe which areas they move slowly past and which areas they seem to move past without paying atten- tion to the products. (You may have to exercise some discretion when doing this; people gen- erally do not like to be stalked round the supermarket too obviously.) If you were to redesign the supermarket what would you recommend?

SELECTED FURTHER READING

This is a relatively technical chapter and, as you would expect, most books on the subject are tech- nical. Here are a few of the more accessible.

Karlsson, C. (1996) Radically new production systems, International Journal of Operations and Production Management , vol. 16, no. 11, 8–19.

An interesting paper because it traces the development of Volvo’s factory layouts over the years.

Meyers, F.E. (2000) Manufacturing Facilities Design and Material Handling , Prentice Hall, Upper Saddle River, NJ.

Exactly what it says, thorough.

PROBLEMS AND APPLICATIONS

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CHAPTER 7 LAYOUT AND FLOW 245

Rosenbaum, M.S. and Massiah, C. (2011) An expanded servicescape perspective, Journal of Service Management, vol. 22, issue 4, 471–490.

Academic but a good review of the research literature.

Van Meel, J., Martens, Y. and van Ree, H.J. (2010) Planning Office Spaces: A Practical Guide for Managers and Designers, Laurence King, London.

Exactly what the title says. A practical guide that includes both the ‘flow’ and the aesthetic aspects of office design.

White, J.A., White, J.A. Jr and McGinnis, L.F. (1998) Facility Layout and Location: An Analytical Approach, Prentice Hall Professional, Upper Saddle River, NJ.

One for the practitioners but including many quantitative techniques.

Wu, B. (1994) Handbook of Manufacturing and Supply Systems Design, Taylor & Francis, London.

A general treatment that includes layout and related subjects.

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introDUction there is a lot of new process technology around. there can be few, if any, operations that have not been affected by the advances in process technology. and all indications are that the pace of technological development is not slowing down. this has important implications for operations managers because all operations use some kind of process technology, whether it is a simple internet link or the most complex and sophisticated of automated factories. But whatever the technology, all operations managers need to understand what emerging technologies can do, in broad terms how they do it, what advantages the technology can give and what constraints it might impose on the operation. Figure 8.1 shows where the issues covered in this chapter relate to the overall model of operations management activities.

process technology

Key questions

❯ What is process technology?

❯ What do operations managers need to know about process technology?

❯ how are process technologies evaluated?

❯ how are process technologies implemented?

8

Operations management

Direct

Design Develop

Deliver

Design

Layout and flow

Process design

Process technology

People in operations

Topic covered in this chapter

Figure 8.1 this chapter examines process technology

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CHAPTER 8 PROCESS TECHNOLOGY 247

WHAT IS PROCESS TECHNOLOGY?

How operations managers deal with process technology is now one of the most important decisions that shape the capabilities of operations. This was not always the case, at least not for all operations. There used to be a simple division between those operations that used a lot of process technology, usually manufacturing operations, and those that used little or no process technology, usually service operations. But this is no longer true, and arguably has not been true for decades. High-volume services have for years understood the value of pro- cess technology. Online transactions for retail and other services are vital for their success. Yet even professional services such as legal and medical services can benefit from new and value-adding technologies (see the section on telemedicine later in this chapter).

So what do operations managers need to know about process technology? It must be important to them because they are continually involved in the choice, installation and man- agement of process technology. But operations managers are not (or need not be) technolo- gists as such. They do not need to be experts in engineering, computing, biology, electronics or whatever constitutes the core science of the technology. Yet they should be able to do three things. First, they need to understand the technology to the extent that they are able to articu- late what it should be able to do. Second, they should be able to evaluate alternative technol- ogies and share in the decisions of which technology to choose. Third, they must implement the technology so that it can reach its full potential in contributing to the performance of the operation as a whole. These are the three issues which this chapter deals with. This is illus- trated in Figure 8.2 and forms the structure of the chapter.

Process technology defined First, let us define what is meant by process technology. It is ‘the machines, equipment, and devices that create and/or deliver products and services’. Process technologies range from milk- ing machines to marking software, from body scanners to bread ovens, from mobile phones to milling machines. Disney World uses flight simulation technologies to create the thrill of space travel on its rides – just one in a long history of Disney Corporation and its ‘imagineers’ using technology to engineer the experience for their customers. In fact process technology is pervasive in all types of operations. Without it many of the products and services we all pur- chase would be less reliable, take longer to arrive and arrive unexpectedly, only be available in a limited variety, and be more expensive. Process technology has a very significant effect on quality, speed, dependability, flexibility and cost. That is why it is so important to operations managers, and that is why we devote a whole chapter to it. Even when technology seems peripheral to the actual creation of goods and services, it can play a key role in facilitating the

Question–What do operations managers need to know about process technology?

Stage 3 Implement the process

technology

Question–How does the process technology a�ect the operation?

Question–How can operations managers introduce new process technology smoothly?

Stage 1 Understand the

process technology

Stage 2 Evaluate the process

technology

Figure 8.2 The three stages of process technology management

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248 PART TWO DESIGNING THE OPERATION

OPERATIONS IN PRACTICE

Back in 1920, a Czech playwright, Karel Capek, first coined the name ‘robot’ (it comes from the Slavonic word for ‘work’). Since then, robots have moved from the stuff of science fiction to become a common, if not ubiquitous, element of mass production operations. There are more than a million industrial robots doing routine jobs on production lines. Robots do not take meal breaks, fall ill, complain or leave for better pay. They perform repetitive tasks cheaper than humans, give greater accuracy and repeatability, and can also be used where conditions are hazardous or uncomfortable for humans. Anyone who has seen the way that robots weld together automobile bodies, assemble complex prod- ucts, or load and unload work pieces onto a machine cannot fail to recognize the impact that robotics has had on manufacturing operations since robots were first introduced in the 1960s.

But like most new process technologies, the effect of robotics on operations management practice can be both positive and negative, depending on one’s perspective. (Film critics, who voted on Hollywood’s 50 greatest good guys and 50 greatest baddies, included a robot – the Terminator – on both lists.) Certainly they can save humans from exposure to danger. Robots were used during the clear-up operation among the rubble of the Twin Towers in New York. ‘ Enough people have died here ,’ said a spokesperson for the emergency services. ‘ We don’t want to risk any one .’ Bomb disposal squads use specialized robots which can take at least some of the risk from what remains a hazardous job. Nuclear power stations are decommissioned using robots to move, dis- mantle and manipulate hazardous radioactive material. They are also becoming both cheaper and more ver- satile in their production role. For example, Canon has announced its plans to move towards fully automating its digital camera production. Decades ago, Canon, like other manufacturers, began using cell production with teams or a single worker assembling a major part of the product, rather than repeating a simple task (see Chapter 6 ) . And over the years robots have been rou- tinely used as part of production cells. Canon calls it a ‘man–machine cell’, and says that ‘ human involvement will be phased out in making some products ’.

Only by substituting robots for people will produc- tion be kept in Japan, according to Canon, reversing the trend of Japanese manufacturers moving production to

China, India and the rest of Asia, where labour costs are cheaper. ‘ When machines become more sophisticated, human beings can be transferred to do new kinds of work ’, Jun Misumi, a Canon spokesperson, said. But it is the nature of the interface between people and robots that is concerning some experts. Akihito Sano, a professor at Nagoya Institute of Technology, has stressed the need for some way in which workers can communicate effec- tively so that robotic technology can be fine-tuned to become more practical. He also says, reassuringly, that there will always be room for human intelligence and skill. ‘ Human beings are needed to come up with inno- vations on how to use robots. Going [totally] to a no-man operation at that level is still the world of science fiction. ’ Yet people have always been nervous that new process technologies will take away their jobs. (Capek’s original play that gave robots their name described how, at first, they brought many benefits but eventually led to mass unemployment and unhappiness.) But there are some examples of a smooth introduction of robotics. Audi is said to have been successful in introducing industrial robots, partly because it asked its workers to suggest potential applications of robotics where they could both improve performance and then gave the same work- ers jobs supervising, maintaining and programming the robots. It may even be that robots can help defend manufacturing jobs in the rich world. For example, it has been pointed out that one reason why Germany has lost fewer such jobs than the UK is that it has five times as many robots for every 10,000 workers.

I, Robot 1

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CHAPTER 8 PROCESS TECHNOLOGY 249

direct transformation of inputs to an operation. For example, the computer systems which run planning and control activities, accounting systems and stock control systems can be used to help managers and operators control and improve the processes. This type of technology is called indirect process technology. It is becoming increasingly important. Many businesses spend more on the computer systems which control their processes than they do on the direct process technology which acts on its material, information or customers.

Process technology and transformed resources One common method of distinguishing between different types of process technology is by what the technology actually processes – materials, information or customers. We used this distinction in Chapter 1 when we discussed inputs to operations and processes.

Material-processing technologies These include any technology that shapes, transports, stores, or in any way changes physical objects. It obviously includes the machines and equipment found in manufacturing opera- tions (such as the robots described in the ‘Operations in practice’ case at the start of this chap- ter), but also includes trucks, conveyors, packing machines, warehousing systems and even retail display units. In manufacturing operations, technological advances have meant that the ways in which metals, plastics, fabric and other materials are processed have improved over time. Generally it is the initial forming and shaping of materials at the start, and the han- dling and movement through the supply network, that have been most affected by technology advances. Assembling parts to make products, although far more automated than it was once, presents more challenges.

Information-processing technology Information-processing technology, or just information technology (IT), is the most common single type of technology within operations, and includes any device which collects, manip- ulates, stores or distributes information. Arguably, it is the use of Internet-based technology (generally known as e-business) that has had the most obvious impact on operations – espe- cially those that are concerned with buying and selling activity (e-commerce). Its advantage was that it increased both reach (the number of customers who could be reached and the number of items they could be presented with) and richness (the amount of detail which could be provided concerning both the items on sale and customers’ behaviour in buying them). Traditionally, selling involved a trade-off between reach and richness. The widespread adoption of Internet-based technologies effectively overcame this trade-off. Also, the Internet had equally powerful implications on many other operations management tasks.

Customer-processing technology Although customer-processing operations were once seen as ‘low technology’, now process technology is very much in evidence in many services. In any airline flight, for example e-ticket reservation technology, check-in technology, the aircraft and its in-flight entertainment, all play vital parts in service delivery. Increasingly the human element of service is being reduced, with customer-processing technology used to give an acceptable level of service while signif- icantly reducing costs. There are three types of customer-processing technologies. The first category includes active interaction technology such as automobiles, telephones, Internet bookings and purchases, fitness equipment and cash machines (ATMs). In all of these, cus- tomers themselves are using the technology to create the service. By contrast, aircraft, mass transport systems, moving walkways and lifts, cinemas and theme parks are passive inter- active technology; they ‘processes’ and control customers by constraining their actions in some way. Some technology is ‘aware’ of customers but not the other way round: for example, security monitoring technologies in shopping malls or at national frontier customs areas. The

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250 PART TWO DESIGNING THE OPERATION

objective of these ‘hidden technologies’ is to track customers’ movements or transactions in an unobtrusive way.

Integrating technologies Of course, some technologies process more than one type of resource. Many newer technolo- gies process combinations of materials, people and customers. These technologies are called integrating technologies. Electronic point-of-sale (EPOS) technology, for example, processes shoppers, products and information.

OPERATIONS IN PRACTICE

In his book, The Power of Habit , Charles Duhigg relates a story to demonstrate that human beings are more predictable than we sometimes like to think. A man walked into a supermarket to complain to the manager. The supermarket had been sending direct mail to the man’s daughter containing discount vouchers for baby clothes and equipment. ‘ She is only in high school ’, the father protested. The manager apologised profusely. It was the fault of a new program that predicted pregnancy based on the buying behaviour of their customers, he said. It was obviously a mistake and he was very sorry. A few days later, the man again visited the supermarket and said that it was his turn to apologise. His daughter was indeed pregnant and due to give birth due in a few months’ time. The point of the story is that technology is increasing in sophistication to the extent that it is now capable of performing tasks that previously required skilled people making judgements based on insight and experience. Moreover, technology can often do those tasks better. A piece of software has replaced the mar- keting team trying to guess who to sell baby clothes to. So technology is not only replacing people, but also ‘climbing the skills ladder all the time’.

Of course, technological advances have always had an impact on the type of jobs that are in demand by businesses, and, by extension, the type of jobs that are eliminated. So, much of the highly routine work of some mass manufacturing, or the type of standardized accounting processes that pay invoices, have been over- taken by the ‘the robot and the spreadsheet’. Yet the type of work that is more difficult to break down into a set of standardized elements is less prone to being dis- placed by technology. The obvious examples of work that is difficult to automate are the types of manage- ment tasks that involve decision making based on judge- ment and insight, teaching small children, diagnosing complex medical conditions, and so on. However, the future may hold a less certain future for such jobs. As the convenience of data collection and analysis becomes more sophisticated, and process knowledge increases,

it becomes easier to break more types of work down into routine constituents, which allows them to be automated. Carl Benedikt Frey and Michael Osborne, of the University of Oxford, maintain that the range of jobs that are likely to be automated is far higher than many assume, especially traditionally white-collar jobs such as accountancy, legal work, technical writing and (even) teaching. It is not simply that technology is get- ting cleverer; in addition it can exploit the capability to access far more data. Medical samples can be ana- lysed cheaper and faster by image-processing software than by laboratory technicians, case precedents can be sourced by ‘text-mining ’ programs more extensively than by para-legals, computers can even turn out news stories based on sports results or financial data. Frey and Osborne go so far as to estimate the probability that technology will mean job losses for certain jobs in the next two decades (bravely, because such forecasting is notoriously difficult). Among jobs most at risk are tele- marketers (0.99, where 1.0 = certainty), accountants and auditors (0.94), retail salespersons (0.92), technical writ- ers (0.89) and retail estate agents (0.86). Those jobs least likely to be replaced include actors (0.37), firefighters (0.17), editors (0.06), chemical engineers (0.02), athletic trainers (0.007) and dentists (0.004).

Technology or people? The future of jobs 2

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WHAT DO OPERATIONS MANAGERS NEED TO KNOW ABOUT PROCESS TECHNOLOGY?

Understanding process technology does not (necessarily) mean knowing the details of the science and engineering embedded in the technology. But it does mean knowing enough about the principles behind the technology to be comfortable in evaluating some technical information, capable of dealing with experts in the technology, and confident enough to ask relevant questions.

The four key questions In particular the following four key questions can help operations managers to grasp the essentials of the technology:

● What does the technology do which is different from other similar technologies?

● How does it do it? That is, what particular characteristics of the technology are used to perform its function?

● What benefits does using the technology give to the operation? ● What constraints or risks does using the technology place on the operation?

For example, return to the ‘Operations in practice’ case that discussed some developments in robotics. Now think through the four key questions.

● What does the technology do? Primarily used for handling materials, for example load- ing and unloading work pieces onto a machine, for processing where a tool is gripped by the robot, and for assembly where the robot places parts together. Some robots have some limited sensory feedback through vision control and touch control.

● How does it do it? Through a programmable and computer-controlled (sometimes multi- jointed) arm with an effector end piece which will depend on the task being performed.

● What benefits does it give? Can be used where conditions are hazardous or uncomforta- ble for humans, or where tasks are highly repetitive. Performs repetitive tasks at lower cost than using humans and gives greater accuracy and repeatability. Some robots are starting to mimic human abilities.

● What constraints or risks does it impose? Although the sophistication of robotic move- ment is increasing, robots’ abilities are still more limited than popular images of robot- driven factories suggest. Not always good at performing tasks which require delicate sensory feedback or sophisticated judgement. The human–robot interface needs managing carefully, especially where robotics could replace human jobs.

✽ ✽ ✽ Operations principle Operations principle Operations principle

Worked example

QB House speeds up the cut 3

It was back in 1996 when Kuniyoshi Konishi became so frustrated by having to wait to get his hair cut, and then pay over 3,000 yen for the privilege, that he decided there must be a better way to offer this kind of service. ‘ Why not ’, he said, ‘ create a no-frills barbers shop where the cus- tomer could get a haircut in ten minutes at a cost of 1,000 yen [€7] ? ’ He realized that a combi- nation of technology and process design could eliminate all non-essential elements from the basic task of cutting hair. How is this done? Well, first, QB House’s barbers never handle cash. Each shop has a ticket vending machine that accepts 1,000 yen bills (and gives no change!) and issues a ticket that the customer gives the barber in exchange for the haircut. Second, QB House does not take reservations. The shops do not even have telephones. Therefore, no

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252 PART TWO DESIGNING THE OPERATION

Emerging technologies – assessing their implications The four questions are universal, in the sense that they can help to understand the implica- tions for operations management of any new or emerging technology. By ‘implications’, we mean the natural consequence for the operation of adopting the technology. In other words, what would (or could) be the effects on the operation if the technology were included in the operation’s transforming resources.

In the rest of this section we look at three technologies that, at the time of writing, were new(ish). One processes materials (3D printing), one processes informa- tion (the Internet of Things) and one processes customers (telemedicine). The intention is not to provide a comprehensive survey of technologies – that could be expanded into a whole book – nor is it to delve into technical details. Rather it is to demonstrate how operations managers have to look beyond the technology in order to start to understand their implications.

receptionist is needed, or anyone to sched- ule appointments. Third, QB House devel- oped a lighting system to indicate how long customers will have to wait. Electronic sensors under each seat in the waiting area and in each barber’s chair track how many customers are waiting in the shop and dif- ferent coloured lights are displayed outside the shop. Green lights indicate that there is no waiting, yellow lights indicate a wait of about 5 minutes, and red lights indicate that the wait may be around 15 minutes. This system can also keep track of how long it takes for each customer to be served. Fourth, QB has done away with the tradi- tional Japanese practice of shampooing customers’ hair after the haircut to remove any loose hairs. Instead, the barbers use QB House’s own ‘air wash’ system where a vacuum cleaner hose is pulled down from the ceiling and used to vacuum the cus- tomer’s hair clean. The QB House system has proved so popular that its shops (now over 200) can be found not only in Japan, but also in many other South-East Asian countries such as Singapore, Malaysia and Thailand. Each year almost 4,000,000 customers experience QB House’s 10-minute haircuts.

Analysis

● What does the technology do? Signals availability of servers, so managing customers’ expectations. It avoids hairdressers having to handle cash. Speeds service by substituting ‘air wash’ for traditional shampoo.

● How does it do it? Uses simple sensors in seats, ticket dispenser and air wash blowers. ● What benefits does it give? Faster service with predictable wait time (dependable ser-

vice) and lower costs, therefore less expensive prices. ● What constraints or risks does it impose? Risks of customer perception of quality of

service. It is not an ‘indulgent’ service. It is a basic, but value, service that customers need to know what to expect and how to use.

✽ ✽ ✽ Operations principle Operations principle Operations principle

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CHAPTER 8 PROCESS TECHNOLOGY 253

3D printing (additive manufacturing) For decades and, in some industries, for centuries, producing physical products has been dominated by the principles of mass production. Standardized designs, repetitive pro- cesses and rigid, but productive process technology help to produce most of the items we use every day at (relatively) low cost. The downside of mass production was that vari- ety and customization are difficult to achieve at the same time as economies of scale. However, a process technology called 3D printing (also known as ‘additive manufactur- ing’) could have the potential to change fundamentally the economics of manufacturing, and in doing so challenge the dominance of mass production. But 3D printing is not a new technology as such. Since the 1990s designers have been using the technology to make prototype products or parts quickly and cheaply prior to committing to the expense of equipping a factory to produce the real thing. Yet the technology has advanced to the point where it is used, not just to make prototypes, but to produce finished products for real customers.

A 3D printer produces a 3D object by laying down layer upon layer of material until the final form is obtained. This is why it is also known as ‘additive manufacturing’, because, starting from nothing, successive layers are built up. This contrasts with ‘subtractive man- ufacturing’ that starts with more material than an item requires and reduces it through cutting, drilling, squeezing and otherwise removing material until the finished form is reached. The process starts with a computer-based design which is ‘digitally decon- structed’ by software that takes a series of virtual digital slices through the design, details of which are sent to the 3D printer. Different materials can be used to build up the object from plastic to metals (and even food) and in various sizes limited only by the capacity of the printer.

Implications The obvious implication of 3D printing is the effect it has on the economics of production, especially the economics of making small quantities of novel and/or complicated items eco- nomically. The technology’s more enthusiastic proponents claim that, at last, the trade-off between speed and efficiency on the one hand, and flexibility and variety on the other, has been overcome. Most conventional process technology is at its most efficient when standard- ized products are made in large batches. But with 3D printing the cost of changing from one product to another is effectively zero. Also, because the technology is ‘additive’ it reduces waste significantly. Sometimes as much as 90 per cent of material is wasted in machining some aerospace parts, for example. It also enables a single ‘experimental’ item to be made quickly and cheaply, followed by another one after the design has been refined, as Ian Harris, from the Additive Manufacturing Consortium says: ‘It adds up to a new industry which reduces immensely the gap between design and production. Manufacturers will be able to say to their cus- tomers, “Tell us what you want” and then they will be able to make specific products for them.’ Some commentators even believe that 3D printing will challenge the advantage of low-cost, low-wage countries. As labour costs become less important, it is argued, manufacturers will return to make items close to their market.

The Internet of Things4

Back in 1973 the Universal Product Code or bar code was developed to enable a part or prod- uct type to be identified when read by a bar-code scanner. Now bar codes are used to speed up checkout operations in most large supermarkets. However, they also have a role to play in many of the stages in the supply chain that delivers products to retail outlets. During man- ufacture and in warehouses bar codes are used to keep track of products passing through processes. But bar codes do have disadvantages. It is sometimes difficult to align the item so that the bar code can be read conveniently, items can only be scanned one by one and, most significantly, the bar code only identifies the type of item not a specific item itself. That is, the

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254 PART TWO DESIGNING THE OPERATION

code identifies that an item is, say, a can of one type of drink rather than one specific can. Yet these drawbacks can be overcome through the use of automatic identification technologies such as radio frequency identification (RFID). Here an electronic product code (ePC) that is a unique number 96 bits long is embedded in a memory chip or smart tag. These tags are put on individual items so that each item has its own unique identifying code. At various points dur- ing its manufacture, distribution, storage and sale each smart tag can be scanned by a wireless radio frequency ‘reader’. This can transmit the item’s embedded identify code to a network such as the Internet. See Figure 8.3.

Over the last several years the full potential of RFID technology has risen to a more revo- lutionary level, and one which has some important implications for operations management. Embedding physical objects with sensors and actuators (from vehicles to pharmaceuticals), and connecting them using wireless networks and the protocol that connects the Internet, allows information networks and physical networks to merge to form what has become known as ‘the Internet of Things’ (IoT). SAP, the developer of enterprise resource systems, describes the Internet of Things as follows: ‘A world where physical objects are seamlessly inte- grated into the information network, and where the physical objects can become active partici- pants in business processes. Services are available to interact with these “smart objects” over the Internet, query and change their state and any information associated with them, taking into account security and privacy issues.’5

Network analyses data to be used for monitoring and

process control Sensors ‘read’ item and transmit unique

code to network

RFID chip has a unique code number 96 bits long

Products have an RFID chip that transmits its

unique code

Figure 8.3 The Internet of Things (IoT) is a combination of RFID chips, sensors and Internet protocols that allows information on the location and state of physical objects to be networked

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CHAPTER 8 PROCESS TECHNOLOGY 255

Implications According to some authorities the IoT promises to create new ways of doing business, the potential to improve processes, and more possibilities to reduce costs and risks. Putting sensors on ‘things’ gives information networks the ability to generate huge volumes of current data that can both sense the environment and communicate between the ‘things’. Operations managers can track and analyse the data to understand what is happening, even in complex systems, and respond quickly if necessary. This helps operations save significant amounts of money in lost, stolen or wasted products by helping manufacturers, distribution companies and retailers to pinpoint exactly the position and state of every item in the supply chain. So, for example, if a product had to be recalled because of a health-risk scare, the exact location of every potentially dangerous product could be immediately identified. Shoppers could easily scan a product to learn more about its characteristics and features while they are in the store, waiting at check- out counters could be eliminated because items will be scanned automatically by readers, the bill could even be automatically debited from your personal account as you leave the store. There are also potential benefits in tracking products after they leave the store. Data on how customers use products can be collected automatically and accurate recycling of waste mate- rials could be made considerably easier. McKinsey, the consultants, see six distinct types of emerging applications with implications for operations managers. These implications fall into two broad categories: first, information and analysis and, second, automation and control.

Information and analysis Because IoT networks link data from products, equipment, pro- cesses and the operating environment, they will produce enhanced information and more sophisticated analysis, which can augment operations management decisions. In particular three aspects of information and analysis could be affected:

● Knowing where things are – tracking will be easier because the movements of products and their interactions with processes will be monitored in real time. For example, some insur- ance companies will install location sensors in customers’ cars, allowing the insurer to base its fees on how a car is driven as well as where it travels.

● Knowing what is happening – the data from a large numbers of sensors, located in such infrastructural resources as roads and buildings, can report on conditions so that managers have an instantaneous awareness of events. For example, security systems can use sensor information from a combination of video, audio and vibration sensors to detect unauthor- ized entry to restricted areas.

● Knowing what to do – the IoT’s storage and computing power, when combined with advanced decision support systems, could significantly enhance decision making. For example, in retailing, shoppers can be monitored as they move through stores. Sensors record how long customers loiter at individual displays and record what they ultimately buy. The resulting data can help to optimize retail layouts.

Automation and control Controlling any operation or process involves monitoring what is actually happening within the operation or process, comparing what is actually happening with what should be happening, then making any necessary interventions to correct any devi- ations from what should be happening. So monitoring and data collection are at the heart of the control activity, and monitoring and data are what the IoT is particularly good at. When information is fed back through a network to some kind of automation that can intervene and modify process behaviour, control can be exercised (theoretically at least) without human intervention. Again, three aspects could be affected:

● Process optimization – processes that can be controlled can be more easily optimized. For example, in some semi-continuous processes in pulp and paper manufacturing, the requirement for the temperature of lime kilns to be continually adjusted limits their pro- ductivity. Yet by embedding temperature sensors in the process the kiln’s flame can be automatically adjusted to reduce temperature variance (and therefore increase quality) to near zero without frequent operator intervention.

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256 PART TWO DESIGNING THE OPERATION

● Optimized resource usage – knowing exactly how much resource is being used can help in reducing costs. For example, some energy companies are providing customers with ‘smart’ meters that give visual displays showing energy usage and the real-time costs of provid- ing it. This allows domestic commercial customers to do things such as moving the use of energy-intensive processes away from peak energy demand periods to off-peak periods.

● Fast reactions – the most demanding use of the IoT involves rapid, real-time sensing of unpredictable circumstances and immediate responses governed by automated systems. The idea is for the IoT to imitate human decision makers’ reactions, but at a faster and more accurate level. For example, it could be possible for a group of robots to clean up toxic waste spills when detected.

However, the IoT does pose problems. There are technical challenges in integrating RFID chips into physical objects in such a way that makes sure that information is accurately trans- mitted. And although, as volume has increased, the cost of such chips and sensors has fallen, cost is still a factor in adopting the technology. But perhaps the most contested issues are those relating to customer privacy in extending data capture from products beyond the checkout. It is this issue that particularly scares some civil liberties activists. Keeping track of items within a supply chain is a relatively uncontentious issue. Keeping track of items when those items are identified with particular individuals going about their everyday lives is far more problematic. So, beyond the checkout, for every arguably beneficial application there is also potential for misuse. For example, smart tags could drastically reduce theft because items could automati- cally report when they are stolen, their tags serving as a homing device to pinpoint their exact location. But similar technology could be used to trace any citizen, honest or not.

Telemedicine6

The technological breakthroughs in medical care reported in the press often focus on those dramatic ‘miracle cures’ which have undoubtedly improved the quality of medical care. Yet a whole collection of changes in medical process technology has also had a huge impact on the way healthcare operations manage themselves. In particular, telemedicine has challenged one of the most fundamental assumptions of medical treatment – that medical staff need to be physically present to examine and diagnose a patient. No longer; web-connected devices are now able to monitor an individual’s health-related data and communicate the information to healthcare professionals located anywhere in the world. Doing this allows medical staff to be alerted to changing conditions as they occur, providing a status report of a person’s health so that the appropriate care can be administered. Telemedicine generally refers to the use of information and communications technologies for the delivery of clinical care. Formally, telemedicine is the ability to provide interactive healthcare utilizing modern technology and telecommunications. It allows patients to virtually ‘visit’ physicians – sometimes live, maybe using video links; sometimes automatically in the case of an emergency; sometimes where patient data is stored and sent to physicians for diagnosis and follow-up treatment at a later time. Telemedicine may be as simple as two health professionals discussing a case over the telephone, or as complex as using diagnostic algorithms and video-conferencing equipment to conduct a real-time consultation between medical specialists in different countries. The first interactive telemedicine system was developed and marketed in the USA by MedPhone Corporation in 1989. It operated over standard telephone landlines and was used for remotely diagnosing and treating patients requiring cardiac resuscitation. A year later the company introduced a mobile cellular version.

Broadly, there are three types of telemedicine: store-and-forward, remote monitoring and interactive services.

● Store-and-forward telemedicine – involves acquiring medical data such as medical images, blood test results, dermatological data, biosigns, etc., and then transmitting this data to a (remote) medical specialist at a convenient time for assessment offline. Because this does not require the presence of both parties at the same time, there is no actual physical

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CHAPTER 8 PROCESS TECHNOLOGY 257

examination and sometimes no opportunity to collect a medical history. The store-and- forward process requires the clinician to rely on a medical record report and maybe audio/ video information as a substitute for a physical examination.

● Remote monitoring – allows medical professionals to monitor a patient remotely using various technological devices. This method is primarily used for managing chronic (long- lasting) diseases or specific conditions, such as heart disease. Because monitoring can be almost continuous, remote monitoring services can provide better, or at least comparable, health outcomes to traditional physician–patient interactions. In addition, they could be more convenient for both patient and doctor.

● Interactive telemedicine – involves real-time interactions between patient and provider. These could include online communication, telephone conversations and facilitated home visits by a non-specialist. This type of telemedicine is similar to traditional face-to-face vis- its by a physician, and normal activities such as history review, physical examination, psy- chiatric evaluations, etc., can be performed, at least partially.

Implications For communities in remote or isolated areas telemedicine can be particularly beneficial. Where previously no, or only a partial (or delayed), service was possible, it allows medi- cal services to be delivered. This is particularly important in developing countries. Known as ‘Primary Remote Diagnostic Visits’, a doctor uses devices to remotely examine and treat a patient. Telemedicine can also be useful in facilitating communication between a general practitioner and a specialist. All doctors need to seek advice. The easier, faster and cheaper it is to get this advice, the more likely they are to do it. The approach can also make use of deci- sion support diagnostic systems, which give accurate and consistent diagnoses. The quality of medical care in terms of accuracy of diagnosis and appropriateness of treatment is therefore enhanced by ‘virtually’ bringing specialist expertise to patients. New knowledge, improved medical practice, novel pharmaceuticals, the latest guidelines, and so on, can all be commu- nicated more effectively. Monitoring patients at home using standard equipment like blood pressure monitors and transmitting the information to a carer provides the basis for a faster emergency service. This is certainly true for situations where a physician is needed but no physician is present, such as on a passenger aircraft. For example, telemedicine kits are regu- larly used by pilots, cabin crew and other attending staff – non-medical experts who may have to deal with possible medical emergencies. They can use the kits to collect and transmit the data that would normally be collected in a hospital emergency room. This enables doctors, at a remote advice service, to help manage the medical emergency, make sure the right deci- sions are made and determine what treatment can be carried out and whether a diversion or medical evacuation is necessary.

Just as important in a world where some healthcare costs are likely to increase substan- tially, telemedicine has the potential to bring substantial cost savings. Requiring patients to visit physicians at their surgeries or hospitals is costly for the patient. Requiring doctors to visit patients at home can be even more expensive. Connecting through telemedicine reduces these costs dramatically. Patients having convenient access to medical advice may make fewer visits to the hospital. It is also family centred in the sense that the patient’s family life and work are less disrupted. More significantly, nurses can see up to 15 patients in four hours, whereas, visiting them in their home, they can see only 5 or 6 patients a day. Even when the costs of the technology are taken into account, telemedicine can represent a significant cost saving. Similarly, telemedicine can make the outsourcing of medical services easier. Primary-care physicians routinely outsource some services. For example, they take blood samples but send them to a specialist laboratory for analysis. With the more extensive use of telemedicine the data required for diagnostic decisions (for example, X-ray images) can be processed by a large- scale (therefore less expensive) specialist facility, possibly in a less expensive part of the world.

But there are issues with the adoption of telemedicine technology. One study7 found that there were three major barriers to the adoption of telemedicine in emergency and critical-care

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258 PART TWO DESIGNING THE OPERATION

units. The first of these is the regulatory environment in some regions. Medicine must be (of course) a regulated activity, but the difficulty and cost of obtaining permission and/or licences, especially when multiple states and multiple facilities are involved, can be prohib- itive. Second, there can be a lack of acceptance by whoever pays for medical care, whether this is government or commercial insurance companies. This creates a major financial bar- rier because it puts the payment responsibility upon the hospital or healthcare system. Third, there may be cultural barriers, with some physicians unable or unwilling to adapt clinical procedures for telemedicine applications.

HOW ARE PROCESS TECHNOLOGIES EVALUATED?

The most common technology-related decision in which operations managers will be involved is the choice between alternative technolo- gies. It is an important decision because process technology can have a significant effect on the operation’s long-term strategic capability; no one wants to change expensive technologies too frequently. This means that the characteristics of alternative technologies need to be evaluated so that they can be compared. Here we use three sets of cri- teria for evaluation:

● Does the technology fit the processing task for which it is intended? ● How does the technology improve the operation’s performance? ● Does the technology give an acceptable financial return?

✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle

OPERATIONS IN PRACTICE

For those readers who live in regions of the world where Marmite is not a big seller, Marmite is ‘a nutritious savoury spread that contains B vitamins, enjoyable in a sand- wich, on toast, bread or even as a cook- ing ingredient’. It is not to everyone’s taste, which is why it is advertised with the line ‘ you’ll either love it or hate it ’. But behind the clever advertising, Marmite, which is part of Unilever, the large food company, is a pioneer in recycling the leftovers from its production process to energy at the factory where it is made. The factory is in Burton upon Trent in the UK and every year around 18,000 tonnes of solidified Marmite deposit is left adhering to the surfaces of the machines and handling equipment that are used to produce the product. For years this residue was cleaned off and then either flushed into the sewerage system or sent to landfill sites. Then Unilever installed an anaerobic digester. This is a composter that uses the waste by-product where it is digested by microbes that feed on the waste. As they do, they release methane which is burned in a boiler connected to a generator

that produces power. The system also captures the waste heat that comes through the exhaust and helps heat the factory ’s water system. See Figure 8.4 . But the Marmite example is just one part of Unilever ’s ‘Sustainable Living Plan’, first published in 2010. Since then it has published an update every year on the progress it is making globally and nationally towards meeting its Sustainable Living Plan targets.

Love it or hate it, Marmite’s energy recycling technology 8

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Does the process technology fit the processing task? Different process technologies will be appropriate for different types of operations, not just because they process different transformed resources, but also because they do so at dif- ferent levels of volume and variety. High-variety–low-volume processes generally require process technology that is general purpose , because it can perform the wide range of pro- cessing activities that high variety demands. High-volume–low-variety processes can use technology that is more dedicated to its narrower range of processing requirements. Within

Unilever publishes its performance against its Sustainable Living Plan targets as falling into three cat- egories. The first is ‘ areas where we are making genu- inely good progress ’. These included sustainable sourcing, nutrition and eco-efficiency (including the Marmite pro- ject). The second category is ‘ areas where we have had to consider carefully how to reach our targets but are now ready to scale up ’. For instance, a programme to increase the recycling rates of aerosols, encouraging more local councils to collect aerosols kerbside. ‘ However ’, the report admitted, ‘ we have more to do, working in part- nership with industry, Government and NGOs to help to increase recycling and recovery rates .’ The third category is ‘ areas where we are finding it difficult to make progress and will need to work with others to find solutions ’. This

included targets that require a change in consumer behaviour, such as encouraging people to eat foods with lower salt levels or reducing the use of heated water in showering and washing clothes.

Amanda Sourry, Unilever UK and Ireland Chairman, said: ‘ The old view of growth at any cost is unaccept- able; today the only responsible way to do business is through sustainable growth. It’s for this reason that the Unilever Sustainable Living Plan is not just a bolt-on strategy, it’s our blue-print for the future. Today’s progress update shows that we’ve made some fantastic steps for- ward, particularly in the areas of sustainable sourcing, health and nutrition and reducing greenhouse gases. Just one year into the decade-long plan, we are proud of our achievements so far but there’s still much more to do .’

The major material used in the process is waste material produced during the manufacture of Marmite paste. A large proportion of this waste is substances 'driven o�' during the evaporation stage.

This waste is a mixture of materials generated during the manufacture of Marmite paste.

The methane in 'bio-gas' is supplied to the site boiler house where it is burnt to produce steam

Steam, produced by burning bio-gas,

provides power for the factory. It heats the product stream and lowers evaporator

pressure.

Figure 8.4 Waste product recycling at Marmite

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260 PART TWO DESIGNING THE OPERATION

the spectrum from general-purpose to dedicated process technologies three dimensions in particular tend to vary with volume and variety. Figure 8.5 illustrates these three dimen- sions of process technology:

● Its degree of ‘automation’. ● The capacity of the technology to process work, that is its ‘scale’ or ‘scalability’. ● The extent to which it is integrated with other technologies; that is, its degree of ‘coupling’

or ‘connectivity’.

The degree of automation of the technology To some extent, all technology needs human intervention. It may be minimal, for example the periodic maintenance interventions in a petrochemical refinery. Conversely, the person who operates the technology may be the entire ‘brains’ of the process, for example the sur- geon using keyhole surgery techniques. The ratio of technological to human effort it employs is sometimes called the capital intensity of the process technology. Generally processes that have high variety and low volume will employ process technology with lower degrees of auto- mation than those with higher volume and lower variety. For example, investment banks trade in highly complex and sophisticated financial ‘derivatives’, often customized to the needs of individual clients, and each may be worth millions of dollars. The back office of the bank has to process these deals to make sure that payments are made on time, documents are exchanged, and so on. Much of this processing will be done using relatively general-purpose technology such as spreadsheets. Skilled back-office staff are making the decisions rather than the tech- nology. Contrast this with higher volume, lower variety products, such as straightforward equity (stock) trades. Most of these products are simple and straightforward and are pro- cessed in very high volume of several thousand per day by ‘automated’ technology.

The scale/scalability of the technology There is usually some discretion as to the scale of individual units of technology. For example, the duplicating department of a large office complex may decide to invest in a single, very large, fast copier, or alternatively in several smaller, slower copiers distributed around the

Figure 8.5 Different process technologies are important for different volume–variety combinations

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CHAPTER 8 PROCESS TECHNOLOGY 261

operation’s various processes. An airline may purchase one or two wide-bodied aircraft or a larger number of smaller aircraft. The advantage of large-scale technologies is that they can usually process items cheaper than small-scale technologies, but usually need high volume and can cope only with low variety. By contrast, the virtues of smaller scale technology are often the nimbleness and flexibility that are suited to high-variety, lower volume process- ing. For example, four small machines can between them produce four different products simultaneously (albeit slowly), whereas a single large machine with four times the output can produce only one product at a time (albeit faster). Small-scale technologies are also more robust. Suppose the choice is between three small machines and one larger one. In the first case, if one machine breaks down, a third of the capacity is lost, but in the second, capacity is reduced to zero. The advantages of large-scale technologies are similar to those of large- capacity increments discussed in Chapter 4 .

The equivalent to scale for some types of information-processing technology is scalability . By scalability we mean the ability to shift to a different level of useful capacity quickly, and cost-effectively. Scalability is similar to absolute scale in as much as it is influenced by the same volume–variety characteristics. IT scalability relies on consistent IT platform architec- ture and the high process standardization that is usually associated with high-volume and low-variety operations.

The coupling/connectivity of the technology Coupling means the linking together of separate activities within a single piece of process technology to form an interconnected processing system. Tight coupling usually gives fast process throughput. For example, in an automated manufacturing system products flow quickly without delays between stages, and inventory will be lower – it cannot accumulate when there are no ‘gaps’ between activities. Tight coupling also means that flow is simple and predictable, making it easier to keep track of parts when they pass through fewer stages, or information when it is automatically distributed to all parts of an information network. However, closely coupled technology can be both expensive (each connection may require capital costs) and vul- nerable (a failure in one part of an interconnected system can affect the whole system). The fully integrated manufacturing system con- strains parts to flow in a predetermined manner, making it difficult to accommodate products with very different processing requirements. So, coupling is generally more suited to rela- tively low variety and high volume. Higher variety processing generally requires a more open and unconstrained level of coupling because different products and services will require a wider range of processing activities.

How does the technology improve the operation’s performance? In Chapters 2 and 3 , we identified the five operations performance objectives . So a sensible approach to evaluating the impact of any process technology on an operation is to assess how it affects the quality, speed, dependability, flexibility and cost performance of the operation. For example, consider a warehouse that stores spare parts which it packs and distributes to its customers. It is considering investing in a new ‘retrieval and packing’ system which converts sales orders into ‘retrieval lists’ and uses materials-handling equipment automatically to pick up the goods from its shelves and bring them to the packing area. The market requirements evaluation for this warehouse might be as follows:

● Quality – The impact on quality could be the fact that the computerized system is not prone to human error, which may previously have resulted in the wrong part being picked off the shelves.

● Speed – The new system may be able to retrieve items from the shelves faster than human operators can do safely.

✽✽✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle

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262 PART TWO DESIGNING THE OPERATION

● Dependability – This will depend on how reliable the new system is. If it is less likely to break down than the operators in the old system were likely to be absent (through illness etc.), then the new system may improve dependability of service.

● Flexibility – New service flexibility is not likely to be as good as the previous manual system. For example, there will be a physical limit to the size of products able to be retrieved by the automatic system, whereas people are capable of adapting to doing new things in new ways. Mix flexibility will also be poorer than was previously the case, for the same reason. Volume (and perhaps delivery) flexibility, however, could be better. The new system can work for longer hours when demand is higher than expected or deadlines are changed.

● Cost – The new system is certain to require fewer direct operatives to staff the warehouse, but will need extra engineering and maintenance support. Overall, however, lower labour costs are likely.

Does the technology give an acceptable financial return? Assessing the financial value of investing in process technology is in itself a specialized sub- ject. And while it is not the purpose of this book to delve into the details of financial analysis, it is important to highlight one important issue that is central to financial evaluation: while the benefits of investing in new technology can be spread over many years into the future, the costs associated with investing in the technology usually occur up front. So we have to consider the time value of money. Simply, this means that receiving €1,000 now is better than receiving €1,000 in a year’s time. Receiving €1,000 now enables us to invest the money so that it will be worth more than the €1,000 we receive in a year’s time. Alternatively, reversing the logic, we can ask ourselves how much would have to be invested now to receive €1,000 in one year’s time? This amount (lower than €1,000) is called the net present value of receiving €1,000 in one year’s time.

For example, suppose current interest rates are 10 per cent per annum; then the amount we would have to invest to receive €1,000 in one year’s time is:

€1,000 * 1 = €909.10

(1.10)

So the present value of €1,000 in one year’s time, discounted for the fact that we do not have it immediately , is €909.10. In two years’ time, the amount we would have to invest to receive €1,000 is:

€1,000 * 1 * 1 = €1,000 * 1 = €826.50

(1.10) (1.10) (1.10)2

The rate of interest assumed (10 per cent in our case) is known as the discount rate. More generally, the present value of € x in n years’ time, at a discount rate of r per cent, is:

€

x (1 + r/100)n

Worked example

The warehouse which we have been using as an example has been subjected to a costing and cost savings exercise. The capital cost of purchasing and installing the new technology can be spread over three years, and from the first year of its effective operation, overall operations cost savings will be made. Combining the cash that the company will have to spend and the savings that it will make, the cash flow year by year is shown in Table 8.1 .

▼

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CHAPTER 8 PROCESS TECHNOLOGY 263

However, these cash flows have to be discounted in order to assess their ‘present value’. Here the company is using a discount rate of 10 per cent. This is also shown in Table 8.1 The effective life of this technology is assumed to be six years:

Total cash fl ow (sum of all the cash fl ows) = €1.38 million

However:

Net present value (NPV) = €816,500

This is considered to be acceptable by the company. Calculating discount rates, although perfectly possible, can be cumbersome. As an alter-

native, tables are usually used such as the one in Table 8.2 . So now the net present value is:

P = DF * FV

where: DF = the discount factor from Table 8.2 FV = future value

To use the table, find the vertical column and locate the appropriate discount rate (as a percentage). Then find the horizontal row corresponding to the number of years it will take to receive the payment. Where the column and the row intersect is the present value of €1. You can multiply this value by the expected future value, in order to find its present value.

▼ Years 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%

1 €0.970 €0.962 €0.952 €0.943 €0.935 €0.926 €0.918 €0.909

2 €0.942 €0.925 €0.907 €0.890 €0.873 €0.857 €0.842 €0.827

3 €0.915 €0.889 €0.864 €0.840 €0.816 €0.794 €0.772 €0.751

4 €0.888 €0.855 €0.823 €0.792 €0.763 €0.735 €0.708 €0.683

5 €0.862 €0.822 €0.784 €0.747 €0.713 €0.681 €0.650 €0.621

6 €0.837 €0.790 €0.746 €0.705 €0.666 €0.630 €0.596 €0.565

7 €0.813 €0.760 €0.711 €0.665 €0.623 €0.584 €0.547 €0.513

8 €0.789 €0.731 €0.677 €0.627 €0.582 €0.540 €0.502 €0.467

9 €0.766 €0.703 €0.645 €0.592 €0.544 €0.500 €0.460 €0.424

10 €0.744 €0.676 €0.614 €0.558 €0.508 €0.463 €0.422 €0.386

11 €0.722 €0.650 €0.585 €0.527 €0.475 €0.429 €0.388 €0.351

12 €0.701 €0.626 €0.557 €0.497 €0.444 €0.397 €0.356 €0.319

13 €0.681 €0.601 €0.530 €0.469 €0.415 €0.368 €0.326 €0.290

14 €0.661 €0.578 €0.505 €0.442 €0.388 €0.341 €0.299 €0.263

Table 8.2 Present value of €1 to be paid in future

Year 0 1 2 3 4 5 6 7

Cash fl ow (€000s) −300 30 50 400 400 400 400 0

Present value (discounted at 10%)

−300 27.27 41.3 300.53 273.21 248.37 225.79 0

Table 8.1 Cash flows for the warehouse process technology

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264 PART TWO DESIGNING THE OPERATION

Worked example

A healthcare clinic is considering purchasing a new analysis system. The net cash flows from the new analysis system are as follows:

Year 1: −€10,000 (outflow of cash) Year 2: €3,000 Year 3: €3,500 Year 4: €3,500 Year 5: €3,000

Assuming that the real discount rate for the clinic is 9 per cent, using the net present value table ( Table 8.2 ), demonstrate whether the new system would at least cover its costs. Table 8.3 shows the calculations. It shows that, because the net present value of the cash flow is positive, purchasing the new system would cover its costs, and will be ( just) profit- able for the clinic.

HOW ARE PROCESS TECHNOLOGIES IMPLEMENTED?

Implementing process technology means organizing all the activities involved in making the technology work as intended. No matter how potentially beneficial and sophisticated the technology, it remains only a prospective benefit until it has been implemented successfully. So implementation is an important part of process technology management. Yet it is not always straightforward to make general points about the implementation process because it is very context dependent. That is, the way one implements any technology will very much depend on its specific nature, the changes implied by the technology and the organizational

Years 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0%

15 €0.642 €0.555 €0.481 €0.417 €0.362 €0.315 €0.275 €0.239

16 €0.623 €0.534 €0.458 €0.394 €0.339 €0.292 €0.252 €0.218

17 €0.605 €0.513 €0.436 €0.371 €0.317 €0.270 €0.231 €0.198

18 €0.587 €0.494 €0.416 €0.350 €0.296 €0.250 €0.212 €0.180

19 €0.570 €0.475 €0.396 €0.331 €0.277 €0.232 €0.195 €0.164

20 €0.554 €0.456 €0.377 €0.312 €0.258 €0.215 €0.179 €0.149

Year Cash fl ow Table factor Present value

1 (€10,000) * 1.000 = (€10,000.00)

2 €3,000 * 0.917 = €2,752.29

3 €3,500 * 0.842 = €2,945.88

4 €3,500 * 0.772 = €2,702.64

5 €3,000 * 0.708 = €2,125.28

Net present value = €526.09

Table 8.3 Present value calculations for the clinic.

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CHAPTER 8 PROCESS TECHNOLOGY 265

conditions that apply during its implementation. In the remainder of this chapter we look at four particularly important issues that affect technology implementation: the way technology is planned over the long term, the idea of resource and process ‘distance’, the need to consider customer acceptability, and the idea that if anything can go wrong, it will.

Technology planning in the long-term – technology roadmapping However operations managers are involved with the development of process technologies, it is likely to be in consultation and collaboration with other parts of the firm. It is also likely to be in the context of some kind of formal planning process such as technology roadmap- ping. A technology roadmap (TRM) is an approach that provides a structure that attempts to assure the alignment of developments (and investments) in technology, possible future market needs, and the new development of associated operations capabilities. Motorola orig- inally developed the approach in the 1970s so that it could support the development of its products and its supporting technologies. Bob Galvin, then Motorola’s CEO, defined a TRM as: ‘an extended look at the future of a chosen field of inquiry composed from the collective knowl- edge and imagination of the brightest drivers of change in that field’. A TRM is essentially a pro- cess that supports technology development by facilitating collaboration between the various activities that contribute to technology strategy. It allows technology managers to define their firm’s technological evolution in advance by planning the timing and relationships between the various elements that are involved in technology planning. For example, these ‘elements’ could include the business goals of the company, market developments or specific events, the component products and services that constitute related offerings, product/service and process technologies, the underlying capabilities that these technologies represent, and so on. Figure 8.6 shows the generic form of technology roadmaps, while Figure 8.7 shows an example of a TRM for the development of products/services, technologies and processes for a facilities management service.

The benefits of TRMs are mainly associated with the way they bring together the significant stakeholders involved in technology strategy and various (and often differing) perspectives

Time

Elements of technology

planning

Market developments

Products/services

Technologies

Capabilities

Business goals

Projects

Process developments

Knowledge enablers

Intellectual resources

Decision points

External events, e.g. competitor activity

Etc.

For example Timing of, and relationship between, the elements of

technology planning

Figure 8.6 The generic form of a technology roadmap (TRM)

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266 PART TWO DESIGNING THE OPERATION

Year 1 Year 2 Year 3 Year 4 etc.

Meet budget limits Integrate with divisions

Transfer knowledge to divisions

Market launch prep

Control software Interface integration

Website prototype test

Client interface portal

Establish client response centre

Develop service teams

ERP integration

Time

Digital adaptive agents

Resource planning algorithms

CRM implementation

Elements of technology planning

Strategic business goals

Product/ service development

Development of underlying technologies

Process developments

Develop resource planning model

Figure 8.7 Simplified example of a TRM for the development of products/services, technologies, and processes for a facilities management service

they have. The approach forms a basis for communication, and possibly consensus. After all, it does tackle some fundamental questions that concern any technology strategy. Why do we need to develop our technology? Where do we want to go with our technological capabilities? How far away are we from that objective? How can we get to where we want to be? In what order should we do things? By when should development goals be reached? Yet TRMs do not offer any solutions to any firm’s technological strategic options; in fact they need not offer options or alternative technology trajectories. They are essentially a narrative description of how a set of interrelated developments should (rather than will) progress. Because of this they have been criticized as encouraging over-optimistic projections of the future. Nevertheless, they do provide, at the very least, a plan against which technology strategy can be assessed.

Resource and process ‘distance’ The degree of difficulty in the implementation of process technology will depend on the degree of novelty of the new technology resources and the changes required in the operation’s processes. The less that the new technology resources are understood (influenced perhaps by the degree of innovation), the greater their ‘distance’ from the current technology resource base of the operation. Similarly, the extent to which an implementation requires an operation to modify its existing processes, the greater the ‘process distance’. The greater the resource and process distance, the more difficult any implementation is likely to be. This is because

such distance makes it difficult to adopt a systematic approach to ana- lysing change and learning from mistakes. Those implementations which involve relatively little process or resource ‘distance’ provide an ideal opportunity for organizational learning. As in any classic scien- tific experiment, the more variables that are held constant, the more confidence you have in determining cause and effect. Conversely, in an implementation where the resource and process ‘distance’ mean

✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle

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CHAPTER 8 PROCESS TECHNOLOGY 267

that nearly everything is ‘up for grabs’, it becomes difficult to know what has worked and what has not. More importantly, it becomes difficult to know why something has or has not worked. 9 This idea is illustrated in Figure 8.8 .

Figure 8.8 Learning potential depends on both technological resource and process ‘distance’

OPERATIONS IN PRACTICE

Not enough people choose ‘Choose and Book’ It was a technology project that was 10 years in the mak- ing. The ‘Choose and Book’ system should have trans- formed the way in which patients and their ‘General Practitioner’ (GP) physicians could select an outpatient hospital appointment at a convenient date and time in the UK’s National Health Service (NHS). The aim was to speed up the process and cut out the need for costly paperwork. Yet in 2014 it was quietly dropped despite costing £356m during the 10 years that it had been struggling to establish itself. It was taken as another example of the difficulties of introducing new technol- ogy systems into such a huge and complex organiza- tion. An investigation by the UK’s House of Commons’ Public Accounts Committee was told by NHS staff that, although some GPs liked the ‘Choose and Book’ system, many did not. Moreover, not all outpatient appointment slots were available on the system, which limited its use- fulness. Many patients and doctors found ‘Choose and

Book’ complicated and time consuming. One GP, Sarah Wollaston, said, ‘ the system suits patients who were good with technology but not those who were less so. Doctors often did not have time to log on to it during appoint- ments with their patients .’ A Member of Parliament

Two technology failures 10

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268 PART TWO DESIGNING THE OPERATION

said: ‘ It’s another NHS cock up. A system designed for use by GPs but only used by half of them…has been quietly dropped, so quietly that even most of the NHS seems una- ware. In the middle of all of this are patients. Choose and Book was supposed to speed things up but the evidence we heard in committee showed this was not so in most cases .’ Despite the failure of ‘Choose and Book’ (or only partial success) the government department that over- sees the NHS decided to replace it with a potentially even more expensive e-referral scheme, saying that the new e-referral system would use different technology and have additional features as well as being available on mobile apps. A spokesperson said, ‘ we are aiming to have 100% electronic referrals within the next five years – sooner than that if we can make it. That will cut out a lot of these errors. ’ It was also reported that the idea of making it compulsory for GPs to use the replacement system when it comes on-stream, with an inbuilt incen- tive and penalty scheme for doctors and hospitals, was being considered.

The BBC’s Digital Media Initiative The BBC is one of the best-known broadcasters in the world, with an unrivalled reputation for the quality of some of its programmes. Sadly, its reputation for intro- ducing new technology is less exemplary. Among its more spectacular failures was its Digital Media Initiative (DMI). The DMI was an endeavour by the BBC to dis- pense with videotapes and create a kind of ‘internal YouTube’ of archive content that staff could access, upload, edit and then air from their computers. When the project was originally envisaged, creating a sin- gle TV programme could involve 70 individual video- handling processes. DMI was meant to halve that. The project cost almost £100 million and lasted five years before it was scrapped. The flaws in the technology were exposed during the BBC’s coverage of the state funeral of Margaret Thatcher, a well-known ex-Prime Minister. The DMI was supposed to create a production system linked to the BBC’s huge broadcasting archive, but instead of

streamlining access to old video footage, video edi- tors were unable to access archive footage to use in news reports from their computers in Central London. Instead they had to transport videotapes there using taxis and the underground network from the archive storage facility in north-west London. Admitting that to continue with the project would be ‘ throwing good money after bad ’, the BBC suspended its chief technol- ogy officer. One BBC manager called the DMI project ‘ the axis of awful ’, while another said, ‘ The scale of the project was just too big, and it got out of hand .’ Anthony Fry, a member of the BBC’s governing body, said that the project had ‘ generated little or no assets for the corpora- tion. This is because much of the software and hardware which has been developed could only be used by the BBC if the project were completed, which, due to technologi- cal difficulties and changes to business needs … [was not possible]. Tony Hall, the BBC’s Director General, said that off-the-shelf tools ‘ that simply didn’t exist five years ago ’ had now become available and they could do the same job as some elements of the DMI. Professors Elizabeth Daniel of the Open University Business School and John Ward of Cranfield School of Management, commenting on the BBC DMI case, said, ‘ it is not the biggest or the worst IT project failure in the public or private sectors and, without organizations’ implementing measures to guard against them, it will almost certainly not be the last ’. While at first glance, they say, it seems the BBC’s Digital Media Initiative project suffered from the challenges encoun- tered in many other large IT projects, there are some aspects of the BBC operation and culture that may have exacerbated them. The organization appears to have reacted slowly to concerns raised at senior level, there was an inability to identify that things were going wrong and then to act impartially. The failure of the DMI was regarded as an IT failure, not of the BBC, and, most wor- rying, there was a culture which apparently did not allow staff involved to be given a voice, so, unable to feed their concerns about projects into review processes, they were instead reduced to privately voicing them.

Customer acceptability When an operation’s customers interact with its process technology it is essential to consider the customer interaction when evaluating it. If customers are to have direct contact with tech- nology, they must have some idea of how to operate it. Where customers have an active inter- action with technology, the limitations of their understanding of the technology can be the main constraint on its use. For example, even some domestic technology such as smart TVs cannot be used to their full potential by most owners. Other customer-driven technologies can face the same problem, with the important addition that if customers cannot use technologies such as Internet banking, there are serious commercial consequences for a bank’s customer service. Staff in manufacturing operations may require several years of training before they

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CHAPTER 8 PROCESS TECHNOLOGY 269

are given control of the technology they operate. Service operations may not have the same opportunity for customer training. Walley and Amin 11 suggest that the ability of the opera- tion to train its customers in the use of its technology depends on three factors: complexity, repetition, and the variety of tasks performed by the customer. If services are complex, higher levels of ‘training’ may be needed; for example, the technologies in theme parks and fast food outlets rely on customers copying the behaviour of others. Frequency of use is important because the payback for the ‘investment’ in training will be greater if the customer uses the technology frequently. Also, customers may, over time, forget how to use the technology, but regular repetition will reinforce the training. Finally, training will be easier if the customer is presented with a low variety of tasks. For example, vending machines tend to concentrate on one category of product, so that the sequence of tasks required to operate the technology remains consistent.

In other cases the technology may not be trusted by customers because it is technology and not a person. Sometimes we prefer to put ourselves in the care of a person, even if their performance is inferior to a technology. For example, the use of robot technologies in surgery has distinct advantages over conventional surgery, but in spite of the fact that the surgeon is in control, it is viewed with suspicion by some patients and physicians. When robot surgeons operate without any direct human control, rather than simply mirroring the movement of human surgeons, resistance is likely to be even greater. Similarly the idea of pilotless aircraft is difficult to ‘sell’ to customers; see the ‘Who’s in the cockpit?’ case.

OPERATIONS IN PRACTICE

Modern aircraft fly on automatic pilot for most of their time, certainly more than most passengers realize. ‘ Most people are blissfully unaware that when an aircraft lands in mist or fog, it is a computer that is landing it ’, says Paul Jackson of Jane’s All The World’s Aircraft . ‘ It is the only sen- sible thing to do ’, agrees Ken Higgins of Boeing. ‘ When auto pilots can do something better than a human pilot, we obviously use auto pilots .’ Generally this means using auto pilots to do two jobs. First, they can take control of the aircraft during the long and (for the pilot) monotonous part of the flight between take-off and landing. Automatic pilots are not prone to the tedium or weariness which can affect humans and which can cause pilot error. The second job is to make landings, especially when visibility is poor because of fog or light conditions. The auto pilot communicates with automatic equipment on the ground which allows the aircraft to be landed, if necessary, under conditions of zero visibility. In fact, automatic landings when visibility is poor are safer than when the pilot is in control. Even in the unlikely event of one of the aircraft’s two engines failing, an auto pilot can land it safely. This means that, on some flights, the auto pilot is switched on within seconds of the aircraft wheels leaving the ground and then remains in charge throughout the flight and the landing. One of the few reasons not to use the auto pilot is if the pilot is training or needs to log up the required number of landings to keep licensed.

As yet, commercial flights do not take off auto- matically, mainly because it would require airports and airlines to invest in extra guidance equipment which would be expensive to develop and install. Also take-off is technically more complex than landing. More things could go wrong and some situations (for example, an engine failure during take-off ) require split-second decision making from the pilot. Industry analysts agree that it would be technically feasible to develop automatic take-off technology that met required safety standards, but it could be prohibitively expensive.

Who’s in the cockpit? 12

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270 PART TWO DESIGNING THE OPERATION

Anticipating implementation problems The implementation of any process technology will need to account for the ‘adjustment’ issues that almost always occur when making any organizational change. By adjustment issues we mean the losses that could be incurred before the improvement is functioning as intended. But estimating the nature and extent of any implementation issues is notori- ously difficult. This is particularly true because, more often than not, Murphy’s law seems to prevail. This law is usually stated as: ‘if anything can go wrong, it will’. This effect has been identified empirically in a range of operations, especially when new types of process technology are involved. Specifically discussing technology-related change (although the ideas apply to almost any implementation), Bruce Chew of the Massachusetts Institute of Technology 13 argues that adjustment ‘costs’ stem from unforeseen mismatches between the new technology’s capabilities and needs and the existing operation. New technology rarely behaves as planned, and as changes are made their impact ripples throughout the organization. Figure 8.9 is an example of what Chew calls a Murphy curve. It shows a typ- ical pattern of performance reduction (in this case, quality) as a new process technology

Yet some in the airline industry believe that tech- nology could be developed to the point where com- mercial flights can do without a pilot on the aircraft entirely. This is not as far-fetched as it seems. In April 2001 the Northrop Grumman Global Hawk, an ‘unmanned aerial vehicle’ (UAV), completed the first entirely unmanned flight of the Pacific when it took off from California and landed nearly 24 hours later in South Australia. The Global Hawk made the jour- ney without any human intervention whatsoever. ‘ We made a historic flight with two clicks of the mouse ’, said Bob Mitchell of Northrop Grumman. The first mouse click told the aircraft to take off; the second, made after landing, told it to switch of its engine. UAVs are used for military reconnaissance purposes but enthusiasts point out that most aircraft breakthroughs, such as the

jet engine and radar, were developed for military use before they found civilian applications. However, even the enthusiasts admit that there are some significant problems to overcome before pilotless aircraft could become commonplace. The entire commercial flight infrastructure from air traffic control through to air- port control would need to be restructured, a wholly automatic pilotless aircraft would have to be shown to be safe, and, perhaps most important, passengers would have to be persuaded to fly in them. If all these objections could be overcome, the rewards are sub- stantial. Airlines’ largest single cost is the wages of its staff (far more than fuel costs or maintenance costs etc.) and, of all staff, pilots are by far the most costly. Automated flights would cut costs significantly, but no one is taking bets on its happening soon!

Figure 8.9 The reduction in performance during and after the implementation of a new process reflects ‘adjustments costs’

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CHAPTER 8 PROCESS TECHNOLOGY 271

● Process technologies are the machines, equipment or devices that help operations to cre- ate or deliver products and services. Indirect process technology helps to facilitate the direct creation of products and services.

❯ What is process technology?

SUMMARY ANSWERS TO KEY QUESTIONS

● Operations managers do not need to know the technical details of all technologies, but they do need to know the answers to four key questions: What does it do? How does it do it? What advantages does it give? What constraints does it impose?

● Process technologies can also be classifi ed according to the transformed resources that they process, namely material-processing technologies, information-processing technolo- gies and customer-processing technologies. In addition some technologies process more than one type of resource; they are called integrating technologies.

● An important element in understanding process technologies is to understand the implica- tions they hold for the operations where they will be used.

❯ What do operations managers need to know about process technology?

● All technologies should be appropriate for the activities that they have to undertake. In practice this means making sure that the degree of automation of the technology, the scale or scalability of the technology, and the degree of coupling or connectivity of the technol- ogy fi t the volume and variety characteristics of the operation.

● All technologies should be evaluated by assessing the impact that the process technology will have on the operation’s performance objectives (quality, speed, dependability, fl exibil- ity and cost).

● All technologies should be evaluated fi nancially. This usually involves the use of some of the more common evaluation approaches, such as net present value (NPV).

❯ How are process technologies evaluated?

is introduced. It is recognized that implementation may take some time; therefore allow- ances are made for the length and cost of a ‘ramp-up’ period. However, as the operation prepares for the implementation, the distraction causes performance actually to deterio- rate. Even after the start of the implementation this downward trend continues and it is only weeks, indeed maybe months, later that the old performance level is reached. The area of the dip indicates the magnitude of the adjustment costs, and therefore the level of vulnerability faced by the operation.

● Implementing process technology means organizing all the activities involved in making the technology work as intended.

● A technology roadmap (TRM) is an approach that provides a structure that attempts to assure the alignment of developments (and investments) in technology, possible future market needs, and the new development of associated operations capabilities.

❯ How are process technologies implemented?

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272 PART TWO DESIGNING THE OPERATION

Dr Rhodes was losing his temper. ‘ It should be a simple enough decision. There are only two alternatives. You are only being asked to choose a machine! ’

The Management Committee looked abashed. Rochem Ltd was one of the largest independent companies sup- plying 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 colour- ing 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 The problem over which there was such controversy related 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 two units, shown in Table 8.4 .

The body considering the problem was the newly formed Management Committee. The committee consisted of the

CASE STUDY Rochem Ltd

● The resource and process ‘distance’ implied by the technology implementation will indicate the degree of diffi culty.

● Customer acceptability may be a barrier to implementation in customer-processing technologies.

● It is necessary to allow for the adjustment costs of implementation.

Chemling AFU

Capital cost £590,000 £880,000

Processing costs Fixed: £15,000/month Fixed: £40,000/month

Variable: £750/kg Variable: £600/kg

Design capacity 105 kg/month 140 kg/month

98 ± 0.7% purity 99.5 ± 0.2% purity

Quality Manual testing Automatic testing

Maintenance Adequate but needs servicing Not known – probably good

After-sales services Very good Not known – unlikely to be good

Delivery Three months Immediate

Table 8.4 A comparison of the two alternative machines So

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CHAPTER 8 PROCESS TECHNOLOGY 273

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 company only six months earlier.

What follows is a condensed version of the information presented by each manager to the committee, together with their attitudes to the decision.

The Marketing Manager The current market for this type of preservative had reached a size of some £5 million, of which Rochem Ltd supplied approximately 48 per cent. There had, of late, been significant changes in the market – in particular, many of the users of preservatives were now able to buy products similar to Lerentyl. The result had been the evo- lution of a much more price-sensitive market than had previously been the case. Further market projections were somewhat uncertain. It was clear that the total mar- ket would not shrink (in volume terms) and best estimates suggested a market of perhaps £6 million within the next three or four years (at current prices). However, there were some people in the industry who believed that the present market only represented the tip of the iceberg.

Although the food preservative market had advanced by a series of technical innovations, ‘real’ changes in the basic product were now few and far between. Lerentyl was sold in either solid powder or liquid form, depending on the par- ticular needs of the customer. Prices tended to be related to the weight of chemical used, however. Thus, for exam- ple, the current average market price was approximately £1,050 per kg. There were, of course, wide variations depending on order size etc.

‘At the moment I am mainly interested in getting the right quantity and quality of Lerentyl each month and although Production has never let me down yet, I’m worried that unless we get a reliable new unit quickly, it soon will. The AFU machine could be on line in a few weeks, giving better quality too. Furthermore, if demand does increase (but I’m not saying it will), the AFU will give us the extra capacity. I will admit that we are not trying to increase our share of the preservative market as yet. We see our priority as establishing our other products first. When that’s achieved, we will go back to con- centrating on the preservative side of things.’

The Chief Chemist The Chief Chemist was an old friend of Dr Rhodes and together they had been largely responsible for every prod- uct innovation. At the moment, the major part of his budget was devoted to modifying basic Lerentyl so that it could be used for more acidic food products such as fruit. This was not proving easy and as yet nothing had come of the research, although the Chief Chemist remained optimistic.

‘If we succeed in modifying Lerentyl the market opportu- nities will be doubled overnight and we will need the extra

capacity. I know we would be taking a risk by going for the AFU machine, but our company has grown by gambling on our research findings, and we must continue to show faith. Also the AFU technology is the way all similar technologies will be in the future. We have to start learning how to exploit it sooner or later.’

The Production Manager The Lerentyl Department was virtually self-contained as a production unit. In fact, it was physically separate, located in a building a few yards detached from the rest of the plant. Production requirements for Lerentyl were cur- rently at a steady rate of 190 kg per month. The six techni- cians who staffed the machines were the only technicians in Rochem who did all their own minor repairs and full quality control. The reason for this was largely historical since, when the firm started, the product was experimen- tal and qualified technicians were needed to operate the plant. Four of the six had been with the firm almost from its beginning.

‘It’s all right for Dave and Eric [Marketing Manager and Chief Chemist] to talk about a big expansion of Lerentyl sales; they don’t have to cope with all the problems if it doesn’t hap- pen. The fixed costs of the AFU unit are nearly three times those of the Chemling. Just think what that will do to my budget at low volumes of output. As I understand it, there is absolutely no evidence to show a large upswing in Lerentyl. No, the whole idea [of the AFU plant] is just too risky. Not only is there the risk. I don’t think it is generally understood what the consequences of the AFU would mean. We would need twice the variety of spares for a start. But what really worries me is the staff ’s reaction. As fully qualified technicians they regard themselves as the elite of the firm; so they should, they are paid practically the same as I am! If we get the AFU plant, all their most interesting work, like the testing and the maintenance, will disappear or be greatly reduced. They will finish up as highly paid process workers.’

The Accountant The company had financed nearly all its recent capital investment from its own retained profits, but would be taking out short-term loans the following year for the first time for several years.

‘At the moment, I don’t think it wise to invest extra cap- ital we can’t afford in an attempt to give us extra capac- ity we don’t need. This year will be an expensive one for the company. We are already committed to considerably increased expenditure on promotion of our other prod- ucts and capital investment in other parts of the firm, and Dr Rhodes is not in favour of excessive funding from outside the firm. I accept that there might eventually be an upsurge in Lerentyl demand but, if it does come, it probably won’t be this year and it will be far bigger than the AFU can cope with anyway, so we might as well have three Chemling plants at that time.’

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274 PART TWO DESIGNING THE OPERATION

QUESTIONS 1 How do the two alternative process technologies

(Chemling and AFU) differ in terms of their scale and automation? What are the implications of this for Rochem?

2 Remind yourself of the distinction between feasibility, acceptability and vulnerability discussed in Chapter 4 . Evaluate both technologies using these criteria.

3 What would you recommend the company should do?

PROBLEMS AND APPLICATIONS

1 In the early part of this chapter, three technologies are described: 3D printing, the Internet of Things, and Telemedicine. Try to describe the technologies by answering the ‘four key ques- tions’ that are also described.

2 A new machine requires an investment of €500,000 and will generate profits of €100,000 for 10 years. Will the investment have a positive net present value assuming that a realistic inter- est is 6 per cent?

3 A local government housing office is considering investing in a new computer system for managing the maintenance of its properties. The system is forecast to generate savings of around £100,000 per year and will cost £400,000. It is expected to have a life of seven years. The local authority expects its departments to use a discount rate of 0.3 to calculate the finan- cial return on its investments. Is this investment financially worthwhile?

4 In the problem above, the local government’s finance officers have realized that their dis- count rate has been historically too low. They now believe that the discount rate should be doubled. Is the investment in the new computer system still worthwhile?

5 A new optical reader for scanning documents is being considered by a retail bank. The new system has a fixed cost of €30,000 per year and a variable cost of €2.5 per batch. The cost of the new scanner is €100,000. The bank charges €10 per batch for scanning documents and it believes that the demand for its scanning services will be 2,000 batches in year 1, 5,000 batches in year 2, 10,000 batches in year 3, and then 12,000 batches per year from year 4 onwards. If the realistic discount rate for the bank is 6 per cent, calculate the net present value of the investment over a five-year period.

SELECTED FURTHER READING

Arthur, W.B. (2010) The Nature of Technology: What It Is and How It Evolves, Penguin, Harmondsworth.

Popular science in a way, but very interesting on how technologies evolve.

Brain, M. (2001) How Stuff Works , Wiley, New York.

Exactly what it says. A lot of the ‘stuff ’ is product technology, but the book also explains many pro- cess technologies in a clear and concise manner without sacrificing relevant detail.

Brynjolfsson, E. and McAfee, A. (2014) The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies , W. W. Norton, New York.

This is one of the most influential recent books on how technology will change our lives.

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CHAPTER 8 PROCESS TECHNOLOGY 275

Carr, N.G. (2000) Hypermediation: ‘Commerce and Clickstream’, Harvard Business Review, January–February.

Written at the height of the Internet boom, it gives a flavour of how Internet technologies were seen.

Chew, W.B., Leonard-Barton, D. and Bohn, R.E. (1991) Beating Murphy’s Law, Sloan Management Review, vol. 5, Spring.

One of the few articles that treats the issue of why everything seems to go wrong when any new technology is introduced. Insightful.

Cobham, D. and Curtis, G. (2004) Business Information Systems: Analysis, Design and Practice, Financial Times Prentice Hall, Harlow.

A good solid text on the subject.

Evans, P. and Wurster, T. (1999) Blown to Bits: How the new economics of information transforms strategy, Harvard Business School Press, Boston, MA.

Interesting exposition of how Internet-based technologies can change the rules of the game in business.

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Operations management

Direct

Design Develop

Deliver

Design

Layout and flow

Process design

Process technology

People in operations

Topic covered in this chapter

figure 9.1 this chapter examines people in operations

❯ why are people so important in operations management?

❯ how do operations managers contribute to human resource strategy?

❯ how can the operations function be organized?

❯ how do we go about designing jobs?

❯ how are work times allocated?

key questions introduction operations management is often presented as a subject the main focus of which is on technology, systems, procedures and facilities – in other words, the non-human parts of the organization. this is not true of course. on the contrary, the manner in which an organization’s human resources are managed has a profound impact on the effectiveness of its operations function. in this chapter we look especially at the elements of human resource management which are traditionally seen as being directly within the sphere of operations management. these are how operations managers contribute to human resource strategy, organization design, job design, and the allocation of ‘work times’ to operations activities. the more detailed (and traditional) aspects of these last two elements are discussed further in the supplement on work study at the end of this chapter. Figure 9.1 shows how this chapter fits into the overall model of operations activities.

people in operations 9

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CHAPTER 9 PEOPLE IN OPERATIONS 277

WHY ARE PEOPLE SO IMPORTANT IN OPERATIONS MANAGEMENT?

To say that an organization’s human resources are its greatest asset is something of a cliché. Yet it is worth reminding ourselves of the importance of the abilities, attitudes and culture of the people who make up the operations function. It is, after all, where most ‘human resources’ are to be found. It follows that it is operations managers who are most involved in the leadership, development and organization of human resources. In this chapter we examine some of the issues that most directly affect, or are affected by, operations management; these are illus- trated in Figure 9.2 . But the influence of operations management on the organization’s staff is not limited to the topics covered in this chap- ter. Almost everything discussed in this book has a ‘people’ dimension. Yet, in some chapters, the human perspective is particularly impor- tant. In addition to this chapter, Chapters 16 and 17 , for example, are concerned largely with how the contribution of the operation’s staff can be harnessed. In essence the issues covered in this chapter define how people go about their working lives. It positions their expecta- tions of what is required of them, and it influences their perceptions of how they contribute to the organization. It defines their activities in relation to their work colleagues and it channels the flows of communication between different parts of the operation. But, of most importance, it helps to develop the culture of the organization – its shared values, beliefs and assumptions.

Operations culture What do we mean by culture in the context of the operations function? There is a wealth of academic or popular literature that treats the concept of organizational culture, but no single authoritative definition has emerged. Nevertheless most of us know roughly what is meant by ‘culture’ in an organization. It is what it feels like to be part of it – what is assumed about how things get done rather than is necessarily formally articulated. It is, in the words of one well- known writer on the subject, ‘ the way we do things around here ’ or ‘ the organisation’s climate ’. 1 But the idea of ‘organizational’ culture can also apply to a single function like the operations function. In fact there is considerable interest among researchers and practitioners in over- coming the cultural differences between different functions that can sometimes lead to what has been called ‘cultural fragmentation’. Even though there may be elements of an organiza- tion’s culture that are shared across all parts of the enterprise, different functions are very likely to have their own subcultures.

People in operations

Understand how operations can be

organized

Design the working environment

Contribute to human resource

strategy

Allocate work times

Design individuals’ and groups’ jobs

Figure 9.2 People in operations

✽ ✽ ✽ Operations principle Operations principle Operations principle

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278 PART TWO DESIGNING THE OPERATION

OPERATIONS IN PRACTICE

Most famous for its high-performance fabrics such as Gore-Tex, W.L. Gore also has an enviable reputation as being one of the best companies to work for wherever it operates. In a recent ‘Best Companies to work for’ list its associates (the company does not use the term ‘employ- ees’) gave it the very top marks for ‘feeling you can make a difference’. More than half of its staff have been with the firm for at least a decade, a consequence of its phi- losophy (‘to make money and have fun’) and its unique organizational culture and job design practices. Few in the company have any formal job titles, or job descrip- tions. There are no managers, only leaders and associates, people are paid ‘according to their contribution’ and staff help to determine each other's pay – ideas which seem revolutionary yet are based on the company's founding principles from over 50 years ago. Started by Bill and Vieve Gore in the basement of their home in Delaware, it has now become a global business with facilities in more than 45 locations around the world. Its skilled staff develop, manufacture and sell a range of innovative prod- ucts, virtually all of which are based on just one material (expanded polytetrafluoroethylene) which was discov- ered by Bob Gore (the founders' son) in 1969. It now has approximately 8,000 associates in its four main divisions (textiles, electronic, medical and industrial products) and annual revenues of over $2 billion.

Gore's approach to how it works with its staff is at the heart of the company's success. On almost every level Gore is different to other global companies. Associates are hired for general work areas rather than specific jobs, and with the guidance of their ‘spon- sors’ (not bosses), and as they develop experience, they commit to projects that match their skills. Teams organize around opportunities as they arise, with associates committing to the projects that they have chosen to work on, rather than having tasks delegated to them. Project teams are small, focused, multi-dis- ciplined, and foster strong relationships between team members. Personal initiative is encouraged, as is ‘hands-on’ innovation, which involves those clos- est to a project in its decision making. There are, says Gore, no traditional organizational charts, no chains of command, no predetermined channels of com- munication. Instead, team members communicate directly with each other and are accountable to the other members of their team. Groups are led by who- ever is the most appropriate person at each stage of a project. Leaders are not appointed by senior man- agement; they ‘emerge’ naturally by demonstrating special knowledge, skill or experience that advances

a business objective. Everyone's performance is assessed using a peer-level rating system. Even the group's CEO (one of the few people with a title), Terri Kelly, ‘emerged’ in this way. When the previous CEO retired, no shortlist of preferred candidates was inter- viewed; instead, along with board discussions, a wide range of associates were invited to nominate people they would be willing to follow. ‘ We weren't given a list of names – we were free to choose anyone in the com- pany ’, she says. ‘ To my surprise, it was me. ’

The explicit aim of the company's culture is to ‘com- bine freedom with co-operation and autonomy with synergy’. Everyone can earn the credibility to define and drive projects. Sponsors help associates chart a course in the organization that will offer personal fulfilment while maximizing their contribution to the enterprise. Associates adhere to four basic guiding principles, origi- nally expressed by Bill Gore:

● Fairness to each other and everyone with whom we come in contact.

● Freedom to encourage, help, and allow other asso- ciates to grow in knowledge, skill, and scope of responsibility.

● The ability to make one's own commitments and keep them.

● Consultation with other associates before undertak- ing actions that could impact the reputation of the company.

This degree of personal commitment and con- trol by associates would not sit happily with a large ‘corporate’-style organization. It is no surprise, then, that Gore has unusual notions of economies of scale. Bill Gore believed in the need ‘to divide so that you can multi- ply’. So when units grow to around 200 people, they are

W.L. Gore 2

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CHAPTER 9 PEOPLE IN OPERATIONS 279

Believe, know and behave Culture is difficult to explain. As was said of one organization with a particularly strong cul- ture (a university as it happens), ‘ From the outside looking in, you can’t understand it. From the inside looking out, you can’t explain it. ’ 3 As far as the operations function is concerned, it is best summed up by what the operations team believes , what it knows and how it behaves . It is these three elements of operations culture – belief, knowledge and behaviour – which provide the foundations for how it contributes to the business and how capable it is to improve over time:

● What operations believe – By ‘operations belief’, we mean what the people within the operations function accept as self-evident. For example, do operations believe that they have a responsibility to understand fully all other functions’ strategies and their implica- tions for operations; do they develop capabilities within their operations resources and processes that offer a unique and long-lasting strategic advantage?

● What operations should know – What should the operations team know? Obviously it should understand the underlying principles that govern how operations and processes work. Only with a thorough understanding of the objectives, concepts, tools and tech- niques of operations management will the operations function ever contribute fully to the success of any business.

● How operations should behave – The way operations managers should behave is not fundamentally different from any effective manager. The popular and academic literature have for decades been full of ‘key behaviours’ for effective leadership, and they do not seem to have changed much for years: ‘Don’t micromanage your team, empower them while still being available for advice.’ ‘Be a coach to your team.’ ‘Be clear and results-oriented, but help the team to see how they can achieve them.’ ‘Have a clear vision and strategy.’ ‘Always communicate; both ways – and listen to your team.’ ‘Support open discussion and listen to the team’s concerns.’ All of which are may be obvious, but make good managerial sense.

HOW DO OPERATIONS MANAGERS CONTRIBUTE TO HUMAN RESOURCE STRATEGY?

Human resource strategy is the overall long-term approach to ensuring that an organization’s human resources provide a strategic advantage. It involves two interrelated activities. First, identifying the number and type of people that are needed to manage, run and develop the organization so that it meets its strategic business objectives. Second, putting in place the programmes and initiatives that attract, develop and retain appropriate staff. It is an essential

usually split up, with these small facilities organized in clusters or campuses. Ideally a dozen or so sites are close enough to permit good communication and knowl- edge exchange, but can still be intimate yet separate enough to promote a feeling of ownership. Bill Gore also believed that people come to work to be innovative and had a desire to invent great products. This, he said, ‘ would be the glue holding the company together ’, rather than the official procedures other companies rely on. And at Gore's Livingstone plant in Scotland the story of ‘the breathable bagpipes’ is used to illustrate this type of crea- tive innovation generated from the company's culture of trust that allows people to follow their passion. The story goes that an associate who worked in Gore's filter bags

department at Livingstone was also a keen exponent of his national instrument – the bagpipes. By day he would be working on filter systems, in the evening he would play his bagpipes. It occurred to him that the physical properties of the product he was putting together dur- ing the day could make a synthetic bag for the pipes he played in the evening. Traditionally, bagpipes have a bag made from sheepskin or cow leather which fills up with moisture and becomes a smelly health hazard. He recog- nized that if you added Gore-Tex, it would be breathable and it would be dry. He put a prototype together, tried it, and it worked. So he decided to spend time developing it, created a team to develop it further, and now almost all Scottish bagpipes have a Gore-Tex bag in them.

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280 PART TWO DESIGNING THE OPERATION

activity. Here is what Accenture, one of the top consultancies in the world, has to say about it 4 : ‘ Attention to people is more critical than ever…a company’s workforce has become increasingly important to business success – so much so that most senior executives now view people and work- force issues as a critical competitive differentiator and one of their top agenda items…A superior workforce – supported by highly effective, flexible and business-oriented HR and learning organ- izations – will be essential to achieving these objectives and taking greater strides toward high performance. ’

Developing the specific details of an HR strategy is outside the scope of this book. Yet one set of issues is directly relevant: that is, how can operations managers make sure that they are well served by, and contribute to, the strategy?

An influential contribution to the strategic role of HR comes from Dave Ulrich, 5 at the University of Michigan. His assumption is that traditional HR departments are often inadequate at fulfilling a mean- ingful strategic role. He proposes four elements to the HR activity:

being a ‘strategic partner’ to the business, administering HR procedures and processes, being an ‘employee champion’, and being a ‘change agent’. Table 9.1 explains each role and suggests how operations managers can be associated with each role.

It is important to recognize the interdependence of all the activities in Table 9.1 . Managers may focus only on whatever of these activities currently demands attention. But, just as in the operations function generally, people issues are inter-reliant. There is little point in attempt- ing, for example, to develop a more egalitarian team-based structure and then fail to change the organization’s training or reward procedures. This is why a strategic perspective aimed at identifying the relationship between all four roles is necessary, and why the first step in developing an HR strategy is to understand the organization’s overall strategy. In particular, key questions are: What are the implications of the strategy for HR? And how can the people in the organization contribute to successfully achieving the strategy?

Work-related stress The idea that there is a link between HR strategy and the incidence of stress at work is not new. Even some of the early ‘scientific management’ pioneers accepted that working arrangements should not result in conditions that promoted stress. Now it is generally accepted that stress

✽ ✽ ✽ Operations principle Operations principle Operations principle

Table 9.1 Ulrich's HR roles and their relevance to operations managers

HR role What it involves Relevance to operations management (OM)

Strategic partner

Aligning HR and business strategy: ‘organizational diagnosis’, staff planning, environmental monitoring, etc.

OM integrates operations strategy with HR strategy. OM both specifi es its long-term skills requirements and relies on HR to supply/develop them informed by labour market forecasts, succession planning, etc.

Administrative expert

Running the organization's HR processes and ‘shared services’: payroll, appraisal, selection and recruitment, communication, etc.

OM is largely an ‘internal customer’ for HR's processes. OM must be clear in its requirements with agreed service levels mutually negotiated. Note that OM should also be able to advise HR on how to design and manage its processes effi ciently and eff ectively

Employee champion

Listening and responding to employees: ‘providing resources to employees’, conciliation, career advice, grievance procedures, etc.

OM and HR must develop a good working relationship and clear procedures to deal with any ‘emergency’ issues that arise. Also OM must be sensitive to feedback from HR on how it manages day-to-day operations

Change agent Managing transformation and change: ‘ensuring capacity for change’, management development, performance appraisal, organization development, etc.

OM and HR are jointly responsible for operations improvement activities. HR has a vital role in all the cultural, developmental and evaluation activities associated with improvement

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CHAPTER 9 PEOPLE IN OPERATIONS 281

can seriously undermine the quality of people’s working lives and, in turn, their effectiveness in the workplace. Here stress is defined as ‘the adverse reaction people have to excessive pres- sures or other types of demand placed on them’.6 In addition to the obvious ethical reasons for avoiding work-related stress, there are also business-related benefits, such as the following:

● Staff feel happier at work, their quality of working life is improved and they perform better. ● Introducing improvements is easier when ‘stress’ is managed effectively. ● Employment relations: problems can be resolved more easily. ● Attendance levels increase and sickness absence reduces.

Table 9.2 illustrates some of the causes of stress at work and what operations managers can do about it.

HOW CAN THE OPERATIONS FUNCTION BE ORGANIZED?

There are two issues here. The first is ‘how should the total set of processes and resources that produce products and services be organized?’ The second is ‘how should operations manag- ers, who make the decisions about operations, position themselves relative to the rest of the operations function’? We will look at the first issue by examining some common forms of organizational structures, and the second by examining the role of operations ‘decision mak- ing’. First, though, it is worth looking at how ‘organizations’ can be described.

Perspectives on organizations7

How we illustrate organizations says much about our underlying assumptions of what an ‘organization’ is and how it is supposed to work. For example, the illustration of an organi- zation as a conventional ‘organogram’ implies that organizations are neat and controllable with unambiguous lines of accountability. But this is rarely the case. In fact taking such a

Table 9.2 Causes of stress at work and what could be done about it

Causes of stress What can be done about it

Staff can become overloaded if they cannot cope with the amount of work or type of work they are asked to do

Change the way the job is designed, training needs and whether it is possible for employees to work more flexible hours

Staff can feel disaffected and perform poorly if they have no control or say over how and when they do their work

Actively involve staff in decision making, the contribution made by teams, and how reviewing performance can help identify strengths and weaknesses

Staff feel unsupported: levels of sick absence often rise if employees feel they cannot talk to managers about issues that are troubling them

Give staff the opportunity to talk about the issues causing stress, be sympathetic and keep them informed

A failure to build relationships based on good behaviour and trust can lead to problems related to discipline, grievances and bullying

Check the organization's policies for handling grievances, unsatisfactory performance, poor attendance and misconduct, and for tackling bullying and harassment

Staff will feel anxious about their work and the organization if they do not know their role and what is expected of them

Review the induction process, work out an accurate job description and maintain a close link between individual targets and organizational goals

Change can lead to huge uncertainty and insecurity

Plan ahead so change is not unexpected. Consult with employees so they have a real input, and work together to solve problems

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282 PART TWO DESIGNING THE OPERATION

mechanistic view may be neither appropriate, nor desirable. Seeing an organization as though it was unambiguously machine-like is just one of several metaphors commonly used to understand organiza- tions. One well-known analysis by Gareth Morgan proposes a number of ‘images’ or ‘metaphors’ which can be used to understand organiza- tions, as follows:

● Organizations are machines – The resources within organizations can be seen as ‘compo- nents’ in a mechanism whose purpose is clearly understood. Relations within the organiza- tion are clearly defined and orderly, processes and procedures that should occur usually do occur, and the flow of information through the organization is predictable. Such mechani- cal metaphors appear to impose clarity on what is actually messy organizational behaviour. But, where it is important to impose clarity (as in much operations analysis) such a meta- phor can be useful, and is the basis of the ‘process approach’ used in this and similar books.

● Organizations are organisms – Organizations are living entities. Their behaviour is dic- tated by the behaviour of the individual humans within them. Individuals, and their organ- izations, adapt to circumstances just as different species adapt to the environment. This is a particularly useful way of looking at organizations if parts of the environment (such as the needs of the market) change radically. The survival of the organization depends on its ability to exhibit enough flexibility to respond to its environment.

● Organizations are brains – Like brains, organizations process information and make deci- sions. They balance conflicting criteria, weigh up risks and decide when an outcome is acceptable. They are also capable of learning, changing their model of the world in the light of experience. This emphasis on decision making, accumulating experience and learning from that experience is important in understanding organizations. They consist of conflicting groups where power and control are key issues.

● Organizations are cultures – An organization’s culture is usually taken to mean its shared values, ideology, pattern of thinking and day-to-day ritual. Different organizations will have different cultures stemming from their circumstances and their history. A major strength of seeing organizations as cultures is that it draws attention to their shared ‘enact- ment of reality’. Looking for the symbols and shared realities within an organization allows us to see beyond what the organization says about itself.

● Organizations are political systems – Organizations, like communities, are governed. The system of government is rarely democratic, but nor is it usually a dictatorship. Within the mechanisms of government in an organization are usually ways of understanding alter- native philosophies, ways of seeking consensus (or at least reconciliation) and sometimes ways of legitimizing opposition. Individuals and groups seek to pursue their aims through the detailed politics of the organization. They form alliances, accommodate power rela- tionships and manage conflict. Such a view is useful in helping organizations to legitimize politics as an inevitable aspect of organizational life.

Forms of organizational structure There are many different ways of defining ‘organizational structure’; here it is seen as the way in which tasks and responsibilities are divided into distinct groupings, and how the responsibility and co-ordination relationships between the groupings are defined. Most organizational designs attempt to divide an organization into discrete parts that are given some degree of authority to make decisions within their part of the organization. All but the very smallest of organizations needs to delegate decision making in this way; it allows specialization so decisions can be taken by the most appropriate people. The main issue is what dimension of specialization should be used when grouping parts of the organization together. There are three basic approaches to this:

● Group resources together according to their functional purpose – so, for example, sales, marketing, operations, research and development, finance, etc.

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● Group resources together by the characteristics of the resources themselves – this may be done, for example, by clustering similar technologies together (extrusion technology, roll- ing, casting, etc.). Alternatively, it may be done by clustering similar skills together (audit, mergers and acquisitions, tax, etc.). It may also be done according to the resources required for particular products or services (chilled food, frozen food, canned food, etc.).

● Group resources together by the markets which the resources are intended to serve – again this may be done in various ways. Markets may be defined by location, with distinct geo- graphical boundaries (North America, South America, Europe and the Middle East, South- East Asia, etc.). Alternatively, markets may be defined by the type of customer (small firms, large national firms, large multinational firms, etc.).

There are an almost infinite number of possible organizational structures. However, some pure types of organization have emerged that are useful in illustrating different approaches to organizational design, even if, in their pure form, they are rarely found:

● The U-form organization – The unitary form, or U-form, organization clusters its resources primarily by their functional purpose. Figure 9.3(a) shows a typical U-form organization with a pyramid management structure, each level reporting to the manage- rial level above. Such structures can emphasize process efficiency above customer service and the ability to adapt to changing markets. But the U-form keeps together expertise and can promote the creation and sharing of technical knowledge. The problem then with the U-form organization is not so much the development of capabilities, but the flexibility of their deployment.

● The M-form organization – This form of organizational structure emerged because the functionally based structure of the U-form was cumbersome when companies became

Figure 9.3 (a) U-form organizations give prominence to functional groupings of resources. (b) The M-form separates the organization's resources into separate divisions. (c) Matrix form structures the organization's resources so that they have two (or more) levels of responsibility. (d) N-form organizations form loose networks internally between groups of resources and externally with other organizations

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284 PART TWO DESIGNING THE OPERATION

large, often with complex, markets. It groups together either the resources needed for each product or service group, or, alternatively, those needed to serve a particular geographical market, in separate divisions. The separate functions may be distributed throughout the different divisions (see Fig. 9.3(b)), which can reduce economies of scale and operating efficiency. But it does allow each individual division to focus on the specific needs of their markets.

● Matrix forms – Matrix structures are a hybrid, usually combining the M-form with the U-form. In effect, the organization has simultaneously two different structures (see Fig. 9.3(c)). In a matrix structure each resource cluster has at least two lines of authority, for example both to the division and to the functional groups. While a matrix organization ensures the representation of all interests within the company, it can be complex and sometimes confusing.

● The N-form organization – The ‘N’ in N-form stand for ‘network’. In N-form organiza- tions, resources are clustered into groups as in other organizational forms, but with more delegation of responsibility for the strategic management of those resources. N-forms have relatively little hierarchical reporting and control. Each cluster of resources is linked to the others to form a network, with the relative strength of the relationships between clusters changing over time, depending on circumstances (see Fig. 9.3(d)). Senior management set broad goals and attempt to develop a unifying culture but do not ‘command and control’ to the same extent as in other organizational forms.

Operations ‘developers’ – ‘staff ’ and ‘line’ roles Traditionally, it was common to distinguish between two types of roles in organizations. People occupying classic ‘staff’ positions had a monitoring, planning, shaping and ‘developing’ role. They are the ones who are charged with building up the company’s operations strategic capabil- ity. It is a task that needs some organizational ‘space’ to be performed effectively. It is certainly not a task that co-exists easily with the hectic and immediate concerns of running an operation on a day-to-day basis. These people constitute what could be termed the ‘operations developers’ or ‘central operations’. They perform what are called (slightly confusingly) ‘staff’ roles. By con- trast, people occupying ‘line’ roles are those who run the day-to-day operations. Theirs is partly a reactive role, one that involves finding ways round unexpected problems: reallocating resources, adjusting processes, solving quality problems, and so on. They need to look ahead only enough to make sure that resources are available to meet targets. Theirs is the necessary routine. Knowing where the operation is heading, keeping it on budget and pulling it back on course when the unexpected occurs – no less valuable a task than the developer’s but very different.

While these descriptions are clearly stereotypes, they do represent two types of operations task. The issue, for organizational design, is whether it is wise to separate them organizationally. It may cause more problems than it solves. Although it allows each to concentrate on their differ- ent jobs, it also can keep apart the two sets of people who have most to gain by working together. Here is the paradox: the development role does need freedom from the immediate pressures of day-to-day management but it is crucial that it understands the exact nature of these pressures. What makes the operation distinctive? Where do the problems occur? What improvements would make most difference to the performance of the operation? These are questions answered only by living with the operation, not cloistered away from it. Similarly, the day-to-day operations man- ager has to interpret the workings of the operation, collect data, explain constraints and educate developers. Without the trust and co-operation of each, neither set of managers can be effective.

Four types of operations developer role We can use the dimensions which define the perspectives on operations strategy described in Chapter 3 to examine the role that operations developers play within the operations function:

● Top down or bottom up? If operations developers have a predominantly top-down view of the world, they are likely to take a programmatic approach to activities, emphasizing the

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implementation of overall company strategy. Conversely, if they take a bottom-up view, they are more likely to favour a more emergent model of operations development where individ- ual business operations together contribute to the overall building of operations expertise.

● Market requirements or operations resource focus? If operations developers take a market requirements view of operations development, they are likely to focus on the explicit performance achieved by each part of the operations function and how far that performance serves to satisfy the operation’s customers. An operations resource focus, on the other hand, emphasizes the way in which each part of the operation function develops its competences and successfully deploys them in its marketplaces.

We can use these two dimensions to define a typology of how the operations developer role could work, as shown in Figure 9.4. It classifies operations developers into four pure types called governors, curators, trainers and facilitators – a typology. Although, in practice, the central operations function of most businesses is a combination of these pure types, usually one type predominates.

● Operations developers as governors – The term ‘governor’ is used to describe an agent of a central authority, interpreting operations strategy and arbitrating over any disputes. The term is also used to denote the mechanism that sets clear goals for each part of the operation, judges their performance and, if performance is not to target, wants to know the reason why.

● Operations developers as curators – Operations developers can be concerned primarily with performance against market requirements without being top down. They may take a more emergent view by acting as the repository of performance data and ideas regarding operations practice for the company as a whole. The term ‘curator’ is used to capture this idea. Operations developers therefore will be concerned with collecting performance information, examples of best practice, and so on. They will also be concerned with disseminating this information so that operations managers in different parts of the business can benchmark themselves against their colleagues and, where appropriate, adopt best practice from elsewhere.

● Operations developers as trainers – Moving from the market requirements to the oper- ations resources emphasis shifts the focus more to the development of internal capabili- ties. If the mindset of operations developers is top down their role becomes ‘trainers’, who

Trainer Governor

Facilitator Curator

Top down

Programmatic

Emergent

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Controlling the performance of the operations by setting clear priorities and measuring performance against targets

Nurturing the performance of the operations by collecting performance data and distributing comparative performance information

Enabling operations in the development and deployment of their capabilities through shared advice, support and learning

Instructing operations in the development and deployment of their capabilities through standardized improvement methods

Bottom up

Market requirements

Operations resources

Figure 9.4 A typology of the ‘operations developer’ role

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286 PART TWO DESIGNING THE OPERATION

develop clear objectives, usually derived from overall company strategy, and devise effec- tive methods of developing the various parts of the overall operation. And because the needs of individual parts of the operation may differ, ‘trainer’ operations developers may devise improvement methodologies that can, to some extent, be customized.

● Operations developers as facilitators – In some ways this final type of operations devel- oper role is the most difficult to operate effectively. They are again concerned with the development of operations capabilities but do so by acting as facilitators of change rather than instructors. Their role is to advise, support and generally aid the development and deployment of capabilities through a process of mentoring the various parts of the oper- ation. They share responsibility with day-to-day operations managers in forming a com- munity of operations practice. Implicit in this type of operations developer role is the acceptance of a relatively long-term approach to operations development.

HOW DO WE GO ABOUT DESIGNING JOBS?

Job design is concerned with how we structure each individual’s job, the team to which they belong (if any), their workplace and their interface with the technology they use. In this sec- tion we deal with what is usually considered to be the central people-related responsibility of operations managers – job design. It is a huge topic and we can only deal with some of the influences on, and approaches to, it.

The influences on job design that we deal with here are illustrated in Figure 9.5.

The decisions of job design Job design involves a number of separate yet related elements:

● What tasks are to be allocated to each person in the operation? Producing goods and services involves a whole range of different tasks which need to be divided between the people who staff the operation. Different approaches to the division of labour will lead to different task allocations.

● What is the best method of performing each job? Every job should have an approved (or best) method of completion. And although there are different ideas of what is ‘best’, it is generally the most efficient method that fits the task, and does not unduly interfere with other tasks.

Design individuals’ and groups’ jobs

‘Behavioural’ approaches

Flexible working

Division of labour Team working

Ergonomics‘Scientific’management

Tele- commuting

Design the working environment

Figure 9.5 The main influences on job design, work time allocation and the design of the working environment

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● How long will it take and how many people will be needed? Work measurement helps us calculate the time required to do a job, and therefore how many people will be needed.

● How do we maintain commitment? Understanding how we can encourage people and maintain job commitment is, arguably, the most important of the issues in job design. This is why behavioural approaches, including empowerment, team work and flexible working are at the core of job design.

● What technology is available and how will it be used? Many operational tasks require the use of technology. Not only does the technology need to be appropriately designed, but also so does the interface between the people and the hardware.

● What are the environmental conditions of the workplace? The conditions under which jobs are performed will have a significant impact on people’s effectiveness, Although often considered a part of job design, we treat it separately in this chapter.

OPERATIONS IN PRACTICE

Those jobs that are on the front line of dealing directly with customers (particularly a lot of customers, all the time, of all different types) can be particularly stressful. Not all customers will be reasonable, patient, courteous or even sane. The people who have these high customer contact roles need support, training and perhaps a spe- cial aptitude. And there is plenty of advice for staff that have to deal with customers who are angry because they feel that the level of service they have received is inadequate. Such advice usually includes such things as: acknowledge the (perceived) problem, try to put yourself in the position of the complainer, get the all facts straight, and try to rectify the problem. Not easy, but if complaints can be resolved to the satisfaction of the customer, there can be significant benefits. Some surveys indicate that 90 per cent of customers whose complaints are resolved are happy to use the service again, and may even go on to become advocates for the service. Nevertheless, maintaining tolerance and polite- ness in the face of some particularly difficult custom- ers can be more than even experienced staff can bear. That certainly was the case with Steven Slater, formerly an air steward on the US airline JetBlue. He was work- ing on a flight to New York and had to arbitrate when a female passenger began arguing with a male passenger about space in the overhead luggage compartment dur- ing boarding. The female passenger swore at Mr Slater and pulled down the compartment door on his head. Later, when the aircraft landed, she seemingly refused to follow his request to remain in her seat and got up to take her bag from the overhead locker while the aircraft was still taxiing. Again, the woman allegedly swore at Mr Slater. It was then that his patience ran out in a

particularly dramatic fashion. He went to the intercom and broadcast to everybody on board: ‘ To the passenger who just called me a motherf*****: F*** you. I've been in this business for 28 years and I've had it. ’ He then col- lected his hand- luggage (and two beers from the trolley) opened the cabin door, activated the inflatable chute, announced ‘ to those of you who have shown dignity and respect for 20 years, have a great ride ’ and slid out of the (fortunately stationary) aircraft onto the runway. As a way to give up your job, it is not recommended. He was later arrested and charged with criminal mischief and reckless endangerment.

The stress of high customer contact jobs 8

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288 PART TWO DESIGNING THE OPERATION

Task allocation – the division of labour Any operation must decide on the balance between using specialists or generalists. This idea is related to the division of labour – dividing up the total task into smaller parts, each of which is accomplished by a single person or team. It was first formalized as a concept by the econ- omist Adam Smith in his Wealth of Nations in 1746. Perhaps the epitome of the division of labour is the assembly line, where products move along a single path and are built up by oper- ators continually repeating a single task. This is the predominant model of job design in most mass-produced products and in some mass-produced services (fast food, for example). There are some real advantages in division-of-labour principles:

● It promotes faster learning . It is obviously easier to learn how to do a relatively short and simple task than a long and complex one. This means that new members of staff can be quickly trained and assigned to their tasks when they are short and simple.

● Automation becomes easier . Dividing a total task into small parts raises the possibility of automating some of those small tasks. Substituting technology for labour is considerably easier for short and simple tasks than for long and complex ones.

● Reduced non-productive work . This is probably the most important benefit of division of labour. In large, complex tasks the proportion of time spent picking up tools and materials, putting them down again and generally finding, positioning and searching can be very high indeed. For example, one person assembling a whole motor car engine would take two or three hours and involve much searching for parts, positioning, and so on. Around half of the person’s time would be spent on these reaching, positioning, finding tasks (called non-productive elements of work). Now consider how a motor car engine is actually made in practice. The total job is probably divided into 20 or 30 separate stages, each staffed by a person who carries out only a proportion of the total. Specialist equipment and materials handling devices can be devised to help them carry out their job more efficiently. Furthermore, there is relatively little finding, positioning and reaching involved in this simplified task. Non-productive work can be considerably reduced, perhaps to under 10 per cent, which would be very significant to the costs of the operation.

However, there are also serious drawbacks to highly divided jobs:

● Monotony . The shorter the task, the more often operators will need to repeat it. Repeating the same task, for example every 30 seconds, eight hours a day and five days a week, can hardly be called a fulfilling job. As well as any ethical objections, there are other, more obviously practical objections to jobs which induce such boredom. These include the increased likelihood of absenteeism and staff turnover, the increased likelihood of error and even deliberate sabotage of the job.

● Physical injury . The continued repetition of a very narrow range of movements can, in extreme cases, lead to physical injury. The overuse of some parts of the body (especially the arms, hands and wrists) can result in pain and a reduction in physical capability. This is sometimes called repetitive strain injury (RSI).

● Low flexibility . Dividing up a task into many small parts often gives the job design a rigidity which is difficult to change under changing circumstances. For example, if an assembly line has been designed to make one particular product but then has to change to manufacture a quite different product, the whole line will need redesigning. This will probably involve changing every operator’s set of tasks, which can be a long and difficult procedure.

● Poor robustness . Highly divided jobs imply materials (or informa- tion) passing between several stages. If one of these stages is not working correctly, for example because some equipment is faulty, the whole operation is affected. On the other hand, if each person is performing the whole of the job, any problems will only affect that one person’s output.

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Designing job methods – scientific management The term ‘scientific management’ became established in 1911 with the publication of the book of the same name by Fredrick Taylor (this whole approach to job design is sometimes referred to, pejoratively, as Taylorism). In this work he identified what he saw as the basic tenets of scientific management: 9

● All aspects of work should be investigated on a scientific basis to establish the laws, rules and formulae governing the best methods of working.

● Such an investigative approach to the study of work is necessary to establish what consti- tutes a ‘fair day’s work’.

● Workers should be selected, trained and developed methodically to perform their tasks. ● Managers should act as the planners of the work (analysing jobs and standardizing the

best method of doing the job) while workers should be responsible for carrying out the jobs to the standards laid down.

● Co-operation should be achieved between management and workers based on the ‘maxi- mum prosperity’ of both.

The important thing to remember about scientific management is that it is not particularly ‘scientific’ as such, although it certainly does take an ‘investigative’ approach to improving operations. Perhaps a better term for it would be ‘systematic management’. It gave birth to two separate, but related, fields of study: method study, which determines the methods and activities to be included in jobs; and work measurement, which is concerned with measur- ing the time that should be taken for performing jobs. Together, these two fields are often referred to as work study and are explained in detail in the supplement to this chapter.

Critical commentary

Even in 1915, criticisms of the scientifi c management approach were being voiced. In a sub- mission to the United States Commission on Industrial Relations, scientifi c management is described as:

● being in ‘spirit and essence a cunningly devised speeding up and sweating system’;

● intensifying the ‘modern tendency towards specialization of the work and the task’;

● condemning ‘the worker to a monotonous routine’;

● putting ‘into the hands of employers an immense mass of information and methods that may be used unscrupulously to the detriment of workers’;

● tending to ‘transfer to the management all the traditional knowledge, the judgement and skills of workers’;

● greatly intensifying ‘unnecessary managerial dictation and discipline’;

● tending to ‘emphasize quantity of product at the expense of quality ’.

Two themes evident in this early criticism do warrant closer attention. The fi rst is that scientifi c management inevitably results in standardization of highly divided jobs and thus reinforces the negative eff ects of excessive division of labour previously mentioned. Second, scientifi c management formalizes the separation of the judgemental, planning and skilled tasks, which are done by ‘management’, from the routine, standardized and low-skill tasks, which are left for ‘operators’. Such a separation, at the very least, deprives the majority of staff of an opportunity to contribute in a meaningful way to their jobs (and, incidentally, deprives the organization of their contribution). Both of these themes in the criticisms of scientifi c management lead to the same point: that the jobs designed under strict scientifi c management principles lead to low motivation among staff , frustration at the lack of control over their work, and alienation from the job.

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290 PART TWO DESIGNING THE OPERATION

Designing the human interface - ergonomic workplace design Ergonomics is concerned primarily with the physiological aspects of job design. Physiology is about the way the body functions. It involves two aspects: first, how a person interfaces with their immediate working area; second, how people react to environmental conditions. We will examine the second aspect of ergonomics later in this chapter. Ergonomics is sometimes referred to as human factors engineering or just ‘human factors’. Both aspects are linked by two common ideas:

● There must be a fit between people and the jobs they do. To achieve this fit there are only two alternatives. Either the job can be made to fit the people who are doing it, or, alternatively, the people can be made (or perhaps less radically, recruited) to fit the job. Ergonomics addresses the former alternative.

● It is important to take a ‘scientific’ approach to job design, for example collecting data to indicate how people react under different job design conditions and trying to find the best set of conditions for comfort and performance.

Anthropometric aspects Many ergonomic improvements are primarily concerned with what are called the anthro- pometric aspects of jobs – that is, the aspects related to people’s size, shape and other phys-

ical abilities. The design of an assembly task, for example, should be governed partly by the size and strength of the operators who do the job. The data which ergonomists use when doing this is called anthropometric data. Because we all vary in our size and capabilities, ergonomists are particularly interested in our range of capabilities, which is why anthropometric data is usually expressed in percentile terms. Figure 9.6 illustrates the idea. This shows the idea of size (in

this case height) variation. Only 5 per cent of the population are smaller than the person on the extreme left (5th percentile), whereas 95 per cent of the population are smaller than the

✽ ✽ ✽ Operations principle Operations principle Operations principle

Figure 9.6 The use of anthropometric data in job design

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person on the extreme right (95th percentile). When this principle is applied to other dimen- sions of the body, for example arm length, it can be used to design work areas. Figure 9.6 also shows the normal and maximum work areas derived from anthropometric data. It would be inadvisable, for example, to place frequently used components or tools outside the maximum work area derived from the 5th percentile dimensions of human reach.

Designing for job commitment – behavioural approaches to job design Jobs that are designed purely on division of labour, scientific management or even purely ergonomic principles can alienate the people performing them. Job design should also take into account the desire of individuals to fulfil their needs for self-esteem and personal devel- opment. This is where motivation theory and its contribution to the behavioural approach to job design is important. This achieves two important objectives of job design. First, it provides jobs which have an intrinsically higher quality of working life – an ethically desirable end in itself. Second, because of the higher levels of motivation it engenders, it is instrumental in achieving better performance for the operation, in terms of both the quality and the quantity of output. This approach to job design involves two conceptual steps: first, exploring how the various characteristics of the job affect people’s motivation; second, exploring how individu- als’ motivation towards the job affects their performance at that job.

Typical of the models which underlie this approach to job design is that by Hackman and Oldham shown in Figure 9.7.10 Here a number of ‘techniques’ of job design are recom- mended in order to affect particular core ‘characteristics’ of the job. These core character- istics are held to influence various positive ‘mental states’ towards the job. In turn, these are assumed to give certain performance outcomes. In Figure 9.7 some of the ‘techniques’ (which Hackman and Oldham originally called ‘implementing concepts’) need a little fur- ther explanation:

● Combining tasks means increasing the number of activities allocated to individuals. ● Forming natural work units means putting together activities which make a coherent

whole. ● Establishing client relationships means that staff make contact with their internal custom-

ers directly. ● Vertical loading means including ‘indirect’ activities (such as maintenance). ● Opening feedback channels means that internal customers feed back perceptions directly.

Figure 9.7 A typical ‘behavioural’ job design model

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292 PART TWO DESIGNING THE OPERATION

Hackman and Oldham also indicate how these techniques of job design shape the core characteristics of the resulting job and, further, how the core characteristics influence people’s ‘mental states’. Mental states are the attitudes of individuals towards their jobs – specifically, how meaningful they find the job, how much responsibility and control they feel they have over the way the job is done, and how much they understand about the results of their efforts. All of these mental states influence people’s performance at their job in terms of their motivation, quality of work, satisfaction with their work, turnover and absenteeism.

Job rotation If increasing the number of related tasks in the job is constrained in some way, for exam- ple by the technology of the process, one approach may be to encourage job rotation. This means moving individuals periodically between different sets of tasks to provide some variety in their activities. When successful, job rotation can increase skill flexibility and make a small contribution to reducing monotony. However, it is not viewed as universally beneficial either by management (because it can disrupt the smooth flow of work) or by the people performing the jobs (because it can interfere with their rhythm of work).

Job enlargement The most obvious method of achieving at least some of the objectives of behavioural job design is by allocating a larger number of tasks to individuals. If these extra tasks are broadly of the same type as those in the original job, the change is called job enlargement. This may not involve more demanding or fulfilling tasks, but it may provide a more complete and therefore slightly more meaningful job. If nothing else, people performing an enlarged job will not repeat themselves as often, which could make the job marginally less monotonous. So, for example, suppose that the manufacture of a product has traditionally been split up on an assembly line basis into 10 equal and sequential jobs. If that job is then redesigned so as to form two parallel assembly lines of five people, the output from the system as a whole would be maintained but each operator would have twice the number of tasks to per- form. This is job enlargement. Operators repeat themselves less frequently and presumably the variety of tasks is greater, although no further responsibility or autonomy is necessarily given to each operator.

Job enrichment Job enrichment means not only increasing the number of tasks, but also allocating extra tasks which involve more decision making, greater autonomy and greater control over the job. For example, the extra tasks could include maintenance, planning and control, or mon- itoring quality levels. The effect is both to reduce repetition in the job and to increase auton- omy and personal development. So, in the assembly line example, each operator, as well as being allocated a job which is twice as long as that previously performed, could also be allo- cated responsibility for carrying out routine maintenance and such tasks as record keeping and managing the supply of materials. Figure 9.8 illustrates the difference between what are called horizontal and vertical changes. Broadly, horizontal changes are those which extend the variety of similar tasks assigned to a particular job. Vertical job changes are those which add responsibilities, decision making or autonomy to the job. Job enlargement implies move- ment only on the horizontal scale, whereas job enrichment certainly implies movement on the vertical scale and perhaps on both scales.

Empowerment Empowerment is an extension of the autonomy job characteristic prominent in the behav- ioural approach to job design. However, it is usually taken to mean more than autonomy. Whereas autonomy means giving staff the ability to change how they do their jobs, empow- erment means giving staff the authority to make changes to the job itself, as well as how

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Figure 9.8 Job enlargement and job enrichment

OPERATIONS IN PRACTICE

In what was thought to be the first contract of its type in the UK, McDonald's, the quick-service restaurant chain, announced that it was to allow family members to cover each other's jobs. Under the deal members of the same family working in the same outlet would be able to work each other's shifts without giving any prior notice or getting a manager's permission. The company said that it hoped the contracts would ‘ encourage people to become fully trained and fully rotatable ’ . But that the main aim was to ‘ cut absenteeism and improve staff retention ’. ‘ It's great ’, said one McDonald's employee. ‘ Depending on how we feel in a morning, we decide which one of us wants to go in and work .’ Although the scheme is currently limited to family mem- bers only, McDonald's said that it might consider extending it to cover friends who work at the same restaurant.

McDonald's lets families share job

it is performed. This can be designed into jobs to different degrees. 11 At a minimum, staff could be asked to contribute their suggestions for how the operation might be improved. Going further, staff could be empowered to redesign their jobs. Further still, staff could be included in the strategic direction and performance of the whole organization. The benefits of empowerment are generally seen as providing fast responses to customer needs (includ- ing dissatisfied customers), employees who feel better about their jobs and who will interact with customers with more enthusiasm, promoting ‘word-of-mouth’ advertising and cus- tomer retention. However, there are costs associated with empowerment, including higher selection and training costs, perceived inequity of service and the possibility of poor deci- sions being made by employees.

Team working A development in job design which is closely linked to the empowerment concept is that of team-based work organization (sometimes called self-managed work teams). This is where staff, often with overlapping skills, collectively perform a defined task and have a high degree

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294 PART TWO DESIGNING THE OPERATION

of discretion over how they actually perform the task. The team would typically control such things as task allocation between members, scheduling work, quality measurement and improvement, and sometimes the hiring of staff. To some extent most work has always been a group-based activity. The concept of team work, however, is more prescriptive and assumes a shared set of objectives and responsibilities. Groups are described as teams when the virtues of working together are being emphasized, such as the ability to make use of the various skills within the team. Teams may also be used to compensate for other organizational changes such as the move towards flatter organizational structures. When organizations have fewer managerial levels, each manager will have a wider span of activities to control. Teams which are capable of autonomous decision making have a clear advantage in these circumstances. The benefits of team work can be summarized as:

● improving productivity through enhanced motivation and flexibility; ● improving quality and encouraging innovation; ● increasing satisfaction by allowing individuals to contribute more effectively; ● making it easier to implement technological changes in the workplace because teams are

willing to share the challenges this brings.

Critical commentary

Team work not only is diffi cult to implement successfully, but also can place undue stress on the individuals who form the teams. Some teams are formed because more radical solutions, such as total reorganization, are being avoided. Teams cannot compensate for badly designed organizational processes, nor can they substitute for management's responsibility to defi ne how decisions should be made. Often teams are asked to make decisions but are given insuffi cient responsibility to carry them out. In other cases, teams may provide results but at a price. The Swedish car maker Volvo introduced self- governing teams in the 1970s and 1980s which improved motivation and morale but eventually proved prohibitively expensive. Perhaps most seriously, team work is criticized for substituting one sort of pressure for another. Although teams may be autonomous, this does not mean they are stress-free. Top-down managerial control is often replaced by excessive peer pressure, which is in some ways more insidious.

Flexible working The nature of most jobs has changed significantly over the last 25 years. New technol- ogies, more dynamic marketplaces, more demanding customers and a changed under- standing of how individuals can contribute to competitive success have all had their impact. Also changing is our understanding of how home life, work and social life need to be balanced. Alternative forms of organization and alternative attitudes to work are being sought which allow, and encourage, a degree of flexibility in working practice which matches the need for flexibility in the marketplace. From an operations management per- spective, three aspects of flexible working are significant: skills flexibility, time flexibility and location flexibility.

● Skills flexibility – A flexible workforce that can move across several different jobs could be deployed (or deploy themselves) in whatever activity is in demand at the time. In the short term, staff at a supermarket may be moved from warehouse activities to shelf replenishment in the store or to the checkout, depending on what is needed at the time. In the longer term sense, multi-skilling means being able to migrate individuals from one skill set to another as longer term demand trends become obvious. So, for example,

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an engineer who at one time maintained complex equipment by visiting the sites where such equipment was installed may now perform most of his or her activities by using remote computer diagnostics and ‘help line’ assistance. The implication of job flexibil- ity is that a greater emphasis must be placed on training, learning and knowledge man- agement. Defining what knowledge and experience are required to perform particular tasks and translating these into training activities are clearly prerequisites for effective multi-skilling.

● Time flexibility – Not every individual wants to work full-time. Many people, often because of family responsibilities, only want to work for part of their time, sometimes only during specific parts of the day or week (because of childcare responsibilities etc.). Likewise, employers may not require the same number of staff at all times. They may, for example, need extra staff only at periods of heavy demand. Bringing both the supply of staff and the demand for their work together is the objective of ‘flexible time’ or flexi-time working systems. These may define a core working time for each individual member of staff and allow other times to be accumulated flexibly. Other schemes include annual hours schemes, one solution to the capacity management issue described in Chapter 11 .

● Location flexibility – The sectoral balance of employment has changed. The service sector in most developed economies now accounts for between 70 and 80 per cent of all employment. Even within the manufacturing sector, the proportion of people with indirect jobs (those not directly engaged in making products) has also increased signif- icantly. One result of all this is that the number of jobs which are not ‘location-specific’ has increased. Location-specific means that a job must take place in one fixed location. So a shop worker must work in a shop and an assembly line worker must work on the assembly line. But many jobs could be performed at any location where there are com- munication links to the rest of the organization. The realization of this has given rise to what is known as telecommuting, teleworking, ‘flexible working’, ‘home working’, mobile working, and creating the ‘virtual office’. See the ‘Operations in practice’ case of telecommuting (or not) at Yahoo.

Critical commentary

There is always a big diff erence between what is technically possible and what is organizationally feasible. Telecommuting does have its problems. In particular, those types that deny individuals the chance to meet with colleagues often face diffi culties. Problems can include the following:

● Lack of socialization – offi ces are social places where people can adopt the culture of an organization as well as learn from each other. It is naive to think that all knowledge can be codifi ed and learnt formally at a distance.

● Eff ectiveness of communication – a large part of the essential communication we have with our colleagues is unplanned and face to face. It happens on ‘chance meet’ occasions, yet it is important in spreading contextual information as well as establishing specifi c pieces of information necessary to the job.

● Problem solving – it is still often more effi cient and eff ective informally to ask a colleague for help in resolving problems than formally to frame a request using communications technology.

● It is lonely – isolation among mobile or home workers is a real problem. For many of us, the workplace provides the main focus for social interaction. A computer screen is no substitute.

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296 PART TWO DESIGNING THE OPERATION

How should the working environment be designed? The aspect of ergonomics that we examined earlier was concerned with how a person inter- faces with the physical aspects of their immediate working area, such as its dimensions. But the subject also examines how people interface with their working environment. By this we mean the temperature, lighting, noise environment, and so on. It will obviously influence the way they are performed. Working conditions which are too hot or too cold, insufficiently illu- minated or glaringly bright, excessively noisy or irritatingly silent, will all influence the way

jobs are carried out. Many of these issues are often covered by occu- pational health and safety legislation which controls environmental conditions in workplaces throughout the world. A thorough under- standing of this aspect of ergonomics is necessary to work within the guidelines of such legislation.

OPERATIONS IN PRACTICE

When Marissa Mayer, the new boss of Yahoo, ruled that employees of the company could no longer work from home, but must come into the office to work, it was met with horror throughout Silicon Valley, and beyond. The news also prompted a debate about how much freedom employees should be given to decide how, when and where they should do their jobs. Perhaps most surpris- ing was that Ms Mayer’s decision seemed to go against the trend, especially in hi-tech companies, to allow and even encourage a degree of what had become known as ‘telecommuting’ (defined as ‘the practice of working from home for a business and communicating through the use of a personal computer and communication systems’). Surveys had recently shown that home-based working in some industries, especially information sys- tems, engineering and science, was rising particularly quickly. Also, given that many of these technology firms produced the hardware and software that make work- ing from home possible, it seemed only sensible to let their employees use them. As one headline read, ‘ The “9 to 5” mentality is dead ’. And it is not surprising that tel- ecommuting is popular; it has a number of advantages for firms. First, it is popular with (most) staff, so it helps retain (and gain access to a larger pool of) talent. It also is said to improve productivity by avoiding the some- times distracting work environment. And, of course, because staff spend less time in the office, there can be substantial overhead savings.

Which is possibly why Yahoo’s decision was greeted with such criticism (‘An epic fail’, ‘Hypocrite’, ‘Idiotic’ were just some of the reactions). But it was not a fear that her employees were sitting around in their pyjamas all day that had prompted her decision to send the memo to Yahoo employees banning telecommuting. The leaked memo said that ‘ the habit has slowed the firm down and

made it harder to have serendipitous meetings that can give birth to new ideas ’ and it was the innovation that came from these meetings that the firm required. ‘ We can all feel the energy and buzz in our offices ’, the memo explained. Yahoo’s defenders say that their staff are highly skilled people, such as designers and programmers, who needed more face time with colleagues. Quite simply, for Yahoo, the costs of telecommuting were greater than its benefits. And there are some widely accepted disad- vantages of telecommuting. Working from home can be isolating, for staff and for managers who will need to put effort into keeping in touch. In fact, telecommuting can be difficult when employees require constant super- vision. There is also the question of accountability. It is difficult to judge whether staff really are working rather than watching daytime TV. Nevertheless a blanket ban on working from home is still unusual in hi-tech indus- tries. And within a year of Yahoo’s original decision, there were some indications that, under certain circumstances, telecommuting was once more being permitted.

Yahoo clamps down on telecommuting 12

✽ ✽ ✽ Operations principle Operations principle Operations principle

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Working temperature Predicting the reactions of individuals to working temperature is not straightforward. Individuals vary in the way their performance and comfort vary with temperature. Furthermore, most of us judging ‘temperature’ will also be influenced by other factors such as humidity and air movement. Nevertheless, some general points regarding working tempera- tures provide guidance to job designers:

● Comfortable temperature range will depend on the type of work being carried out, lighter work requiring higher temperatures than heavier work.

● The effectiveness of people at performing vigilance tasks reduces at temperatures above about 29°C; the equivalent temperature for people performing light manual tasks is a little lower.

● The chances of accidents occurring increase at temperatures which are above or below the comfortable range for the work involved.

Illumination levels The intensity of lighting required to perform any job satisfactorily will depend on the nature of the job. Some jobs which involve extremely delicate and precise movement, surgery for example, require very high levels of illumination. Other, less delicate jobs do not require such high levels. Table 9.3 shows the recommended illumination levels (measured in lux) for a range of activities.

Noise levels The damaging effects of excessive noise levels are perhaps easier to understand than some other environmental factors. Noise-induced hearing loss is a well-documented consequence of working environments where noise is not kept below safe limits. The noise levels of various activities are shown in Table 9.4. When reading this list, bear in mind that the recommended (and often legal) maximum noise level to which people can be subjected over the working day is 90 decibels (dB) in the UK (although in some parts of the world the legal level is lower than this). Also bear in mind that the decibel unit of noise is based on a logarithmic scale, which means that noise intensity doubles about every 3 dB. In addition to the damaging effects of high levels of noise, intermittent and high-frequency noise can also affect work performance at far lower levels, especially on tasks requiring attention and judgement.13

Table 9.3 Examples of recommended lighting levels for various activities14

Activity illuminance (lx)

Normal activities in the home, general lighting 50

Furnace rooms in glass factory 150

General office work 500

Motor vehicle assembly 500

Proofreading 750

Colour matching in paint factory 1,000

Electronic assembly 1,000

Close inspection of knitwear 1,500

Engineering testing inspection using small instruments 3,000

Watchmaking and fine jewellery manufacture 3,000

Surgery, local lighting 10,000–50,000

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298 PART TWO DESIGNING THE OPERATION

Table 9.4 Noise levels for various activities

Noise Decibels (dB)

Quiet speech 40

Light traffi c at 25 metres 50

Large busy offi ce 60

Busy street, heavy traffi c 70

Pneumatic drill at 20 metres 80

Textile factory 90

Circular saw – close work 100

Riveting machine – close work 110

Jet aircraft taking off at 100 metres 120

OPERATIONS IN PRACTICE

Background music at work is not new. It has been used in the workplace for centuries. As far back as the Industrial Revolution orchestras and singers would be hired occa- sionally to perform for workers in the quieter factories. Later, in the 1940s, the BBC launched a radio programme called Music While You Work . Broadcasting twice a day, it was made especially for factory workers. Artists who were booked for the show were told to ‘ play material with an upbeat rhythm that would keep the workers’ attention ', in the belief that it would improve productivity. But playing music at work is not always free. In the UK, for example, the law requires businesses that play any recorded music in public to get licences from the Performing Right Society (PRS), which collects fees and pays royalties to composers and their publishers. Listening to a device through head- phones, however, is free. But does music help or hinder?

Some bodies definitely think that it helps. Musicworks (which is an organization supported by the PRS, so it is not exactly independent) cites studies that show that music in the workplace promotes positive mood, can build team spirit, improves alertness and can reduce the number of workplace accidents. It can also, they say, cut the num- ber of sick days and increase workplace productivity. One study by Teresa Lesiuk at the University of Miami found that IT specialists who listened to music completed tasks more quickly and came up with better ideas than those who did not. But not everyone is convinced. ‘ If people need a high level of concentration, it could be a distraction ’, says Dr Carolyn Axtell, at the Institute of Work Psychology. ‘ When people choose to listen there can be positive effects – it can be relaxing and help manage other distractions such

as noise. But when it's imposed, they can find it annoying and stressful .’ However, individuals can differ in their reac- tion to music and problems occur when colleagues clash. ‘ You can look away if you don't want to see something, but you can't close your ears ’, she says.

In another study researchers at London University studied the apparently common practice of surgeons playing music in the operating theatre (playlists ranged from gentle classical music, through heavy metal, to elec- tronic dance music). Patients did not complain, being anaesthetized, but other members of the surgical team were not always happy. Music could damage commu- nication in a surgical team, preventing team members from hearing instructions. Even worse, when sound lev- els are uneven and a new track blasts out unexpectedly, or when a surgeon turns up the volume when his or her favourite song comes on, other team members can be

Music while you work? 15

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Ergonomics in the office As the number of people working in offices (or office-like workplaces) has increased, ergonomic principles have been applied increasingly to this type of work. At the same time, legislation has been moving to cover office technology such as computer screens and keyboards. For example, European Union directives on working with display screen equipment require organizations to assess all workstations to reduce the risks inherent in their use, plan work times for breaks and changes in activity, and provide information and training for users. Figure 9.9 illustrates some of the ergonomic factors which should be taken into account when designing office jobs.

disturbed. But notwithstanding the sometimes conflict- ing findings from researchers, some themes do emerge:

● How ‘immersive’ a task is makes a difference when evaluating music's effectiveness in increasing pro- ductive output. ‘Immersive’ refers to the variability and creative demand of the task. Creating an entirely original piece of work from scratch that demands a lot of creativity is ‘immersive’. Performing more rou- tine tasks such as answering emails is not. When the task is routine, clearly defined and repetitive, music is probably useful for most people.

● Music affects your mood. Apparently, it is not the background noise of the music itself, but rather the improved mood that your favourite music creates that is the reason for the increase in productivity. In one study, IT specialists who listened to music

completed their tasks more quickly and came up with better ideas than those who did not, because the music improved their mood.

● In open-plan offices where background chatter can be too much for some people to handle, headphones can help some people.

● Music does not help learning. It has a negative effect on absorbing and retaining new information, because it demands too much of your attention.

● Listening to music with lyrics, especially interesting and/or new lyrics, detracts from performing immer- sive tasks. Listening to lyrics activates the language centre of your brain, so trying to perform other language-related tasks is particularly difficult.

(Full disclosure: most of this book was written while listening to music.)

Figure 9.9 Ergonomics in the office environment

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300 PART TWO DESIGNING THE OPERATION

HOW ARE WORK TIMES ALLOCATED?

Without some estimate of how long it takes to complete an activity, it will not be possible to know how much work to allocate to teams or individuals, to know when a task will be com- pleted, to know how much it costs, to know if work is progressing according to schedule, and many other vital pieces of information that are needed to manage any operation. Without some estimate of work times, operations managers are ‘flying blind’. At the same time it does not need much thought before it becomes clear that measuring work times must be difficult to do with any degree of accuracy, or confidence. The time you take to do any task will depend on how skilled you are at the task, how much experience you have, how energetic or moti- vated you are, whether you have the appropriate tools, what the environmental conditions are, how tired you are, and so on. So, at best, any ‘measurement’ of how long a task will, or should, take will be an estimate. It will be our ‘best guess’ of how much time to allow for the task. That is why we call this process of estimating work times ‘work time allocation’. We are allocating a time for completing a task because we need to do so for many important opera- tions management decisions. For example, work times are needed for:

● planning how much work a process can perform (its capacity); ● deciding how many staff are needed to complete tasks; ● scheduling individual tasks to specific people; ● balancing work allocation in processes (see Chapter 7); ● costing the labour content of a product or service; ● estimating the efficiency or productivity of staff and/or processes; and ● calculating bonus payments (less important than it was at one time).

Notwithstanding the weak theoretical basis of work measurement, understanding the rela- tionship between work and time is clearly an important part of job design. The advantage of structured and systematic work measurement is that it gives a common currency for the evaluation and comparison of all types of work. So, if work time allocation is important, how should it be done? In fact, there is a long-standing body of knowledge and experience in this area. This is generally referred to as ‘work measurement’, although, as we have said, ‘meas- urement’ could be regarded as indicating a somewhat spurious degree of accuracy. Formally, work measurement is defined as ‘the process of establishing the time for a qualified worker, at a defined level of performance, to carry out a specified job’. Although not a precise definition, generally it is agreed that a specified job is one for which specifications have been established to define most aspects of the job. A qualified worker is ‘one who is accepted as having the necessary physical attributes, intelligence, skill, education and knowledge to perform the task to satisfactory standards of safety, quality and quantity’. Standard performance is ‘The rate of output which qualified workers will achieve without over-exertion as an average over the working day provided they are motivated to apply themselves to their work.’

The techniques of work measurement At one time, work measurement was firmly associated with an image of the ‘efficiency expert’, ‘time and motion’ man, or ‘rate fixer’, who wandered around factories with a stopwatch, look- ing to save a few cents or pennies. And although that idea of work measurement has (almost) died out, the use of a stopwatch to establish a basic time for a job is still relevant, and used in a technique called ‘time study’. Time study and the general topic of work measurement are treated in the supplement to this chapter.

As well as time study, there are other work measurement techniques in use. They include the following:

● Synthesis from elemental data – is a work measurement technique for building up the time for a job at a defined level of performance by totalling element times obtained previously from the studies in other jobs containing the elements concerned or from synthetic data.

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● Predetermined motion–time systems (PMTS) – is a work measurement technique whereby times established for basic human motions (classified according to the nature of the motion and the conditions under which it is made) are used to build up the time for a job at a defined level of performance.

● Analytical estimating – is a work measurement technique which is a development of esti- mating whereby the time required to carry out the elements of a job at a defined level of performance is estimated from knowledge and experience of the elements concerned.

● Activity sampling – is a technique in which a large number of instantaneous observations are made over a period of time of a group of machines, processes or workers. Each observa- tion records what is happening at that instant and the percentage of observations recorded for a particular activity or delay is a measure of the percentage of time during which that activity or delay occurs.

Critical commentary

The criticisms aimed at work measurement are many and various. Among the most common are the following:

● All the ideas on which the concept of a standard time is based are impossible to defi ne precisely. How can one possibly give clarity to the defi nition of qualifi ed workers, or spec- ifi ed jobs, or especially a defi ned level of performance?

● Even if one attempts to follow these defi nitions, all that results is an excessively rigid job defi nition. Most modern jobs require some element of fl exibility, which is diffi cult to achieve alongside rigidly defi ned jobs.

● Using stopwatches to time human beings is both degrading and usually counter-productive. At best it is intrusive, at worst it makes people ‘objects for study’.

● The rating procedure implicit in time study is subjective and usually arbitrary. It has no basis other than the opinion of the person carrying out the study.

● Time study, especially, is very easy to manipulate. It is possible for employers to ‘work back’ from a time which is ‘required’ to achieve a particular cost. Also, experienced staff can ‘put on an act’ to fool the person recording the times.

● Human resources are any organization’s, and therefore any operation’s, greatest asset. Often, most ‘human resources’ are to be found in the operations function.

❯ Why are people so important in operations management?

SUMMARY ANSWERS TO KEY QUESTIONS

● Human resource strategy is the overall long-term approach to ensuring that an organiza- tion’s human resources provide a strategic advantage. It involves identifying the number and type of people that are needed to manage, run and develop the organization so that it meets its strategic business objectives, and putting in place the programmes and initiatives that attract, develop and retain appropriate staff .

❯ How do operations managers contribute to human resource strategy?

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302 PART TWO DESIGNING THE OPERATION

Grace Whelan, Managing Partner of McPherson Charles, was puzzled. Three of her most successful teams seemed to be facing similar problems with their staff, even though each team had very different tasks, processes and types of staff. Every year the firm surveyed its entire staff in order to gauge their views, levels of satisfaction with their jobs and development needs. It was the results from the latest survey that surprised Grace. ‘ The results of the survey are really unanticipated. Only last year everything seemed fine. Now staff morale has evidently slumped in all three teams. Yet the partners who lead all of these teams are first class. Outstanding lawyers and good leaders. ’

McPherson Charles, based in Bristol in the West of England, had grown rapidly to be one of the biggest law firms in the region, with 21 partners and around 400 staff. Three years previously the firm had reorganized into 15 teams each headed by a ‘lead partner’ and specializing in practising one type of law. It had proved to be a good organ- izational structure, which encouraged teams to organize themselves appropriately for the type of clients that they dealt with. In particular three teams had flourished under

this structure: ‘family law’, ‘property ’ and ‘litigation’. Now it was these very teams whose staff were showing signs of dissatisfaction.

Before the results of the survey were published to all staff, Grace knew that she would need to have worked out some kind of response to the issues raised. She decided to go and see each of the lead partners in the three teams. The first

● One can take various perspectives on organizations. How we illustrate organizations says much about our underlying assumptions of what an ‘organization’ is. For example, organi- zations can be described as machines, organisms, brains, cultures or political systems.

● The relationship between the ‘staff ’ and ‘line’ roles in operation can be modelled using the four perspective on operations strategy that were discussed in Chapter 3 .

● There are an almost infi nite number of possible organizational structures. Most are blends of two or more ‘pure types’, such as the U-form, the M-form, matrix forms, the N-form.

❯ How can the operations function be organized?

● There are many infl uences on how jobs are designed. These include the division of labour, scientifi c management, method study, work measurement, ergonomics, behavioural ap- proaches, including job rotation, job enlargement and job enrichment, empowerment, team working, and fl exible working (including ‘telecommuting’).

❯ How do we go about designing jobs?

● The best known method is time study, but there are other work measurement techniques including synthesis from elemental data, predetermined motion-time systems (PMTS), an- alytical estimating and activity sampling.

❯ How are work times allocated?

CASE STUDY Grace faces (three) problems

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person she decided to talk to was Simon Reece, who led the family law team. Before doing so she explained what his team did.

Family law ‘They are called the “family law” team but basically what they do is to help people through the trauma of divorce, separation and break up. Their biggest “high value” clients come to them because of word of mouth recommendation. Last year they had almost a hundred of these “high value” clients and they all valued the personal touch that they were able to give them, getting to know them well and spending time with them to understand the, often “hidden” aspects of their case. Of course, not all their clients are the super-rich. About a third of the annual family law income comes from about 750 relatively routine divorce and coun- seling cases.’

Simon was blunt about the declining levels of staff sat- isfaction in his team. ‘The problem is that working with the “high value” clients is just more fun and more rewarding than the routine “bread and butter” work. So my people who do that kind of work, usually the more experienced ones, don’t want to take on the routine stuff. With “high value” cases you have to be able to untangle the personal issues from the busi- ness ones. Interviewing these clients cannot be rushed. They tend to be wealthy people with complex assets. We will often have to drop everything and go off half way round the world to meet and discuss their situation. There are no standard procedures, every client is different, and everyone has to be treated as an individual. So we have a team of individuals who rise to the challenge each time and give great service. By contrast, the routine work is a lot less interesting, yet some- times very harrowing. The more junior staff who tend to take on the routine cases can sometimes feel themselves to be “second-class citizens”. Many of them would like to get more experience with the complex high value work, but I can’t take the risk of giving them that degree of responsibility, the work is too valuable. Also, frankly, the senior people who deal with the high value work don’t want to give up their more glam- orous work. I have been trying to make sure that everyone in my team who wants to has a mix of interesting and rou- tine work over the year. It’s the only way to develop them in the long term. You have to encourage them to exercise and develop their professional judgement. They are empowered to deal with any issues themselves or call on one of the more senior members of the team for advice if appropriate. It is important to give this kind of responsibility to them so that they see themselves as part of a team. But there are still ten- sions between senior and more junior staff. We are thinking about adopting an open-plan office arrangement centred around our specialist library of family case law, to try and encourage more cooperation.’

Litigation Grace was less concerned about the litigation team, led by Hazel Lewis. ‘The litigation team has been our best success

story. The have grown far faster than any other part of the firm, and a lot of that is down to Hazel. She provides a key service for our commercial client base. Their primary work consists of handling bulk collections of debt. The group has 17 clients of which 5 provide 85% of total volume. They work closely with the accounts departments of the client companies and have developed a semi-automatic approach to debt col- lection. It’s a great service that Hazel has largely automated.’

Hazel had led the litigation team since it had been set up four years ago. As well as being the partner in charge of litigation, unusually she and her assistant were the only qualified lawyers in the team. ‘Our problems in the litigation team are not really because of any internal ten- sions or disputes. Broadly, our people are happy with what they do and how they are supervised. The issue is just that we are so different from the rest of the firm. Apart from myself and Raymond [her assistant] everyone else in the team are either technicians who look after and develop the systems that we use, or people who have worked in process- ing or call centres, before they came to us. And between us we have developed a smart operation here. Our staff input data received from their clients into the system, from that point everything progresses through a pre-defined process, letters are produced, queries responded to and eventu- ally debts collected, ultimately through court proceedings if necessary. Work tends to come in batches from clients and varies according to the time of year and client sales activities. At the moment things are fairly steady; we had almost 900 new cases to deal with last week. The details of each case are sent over by the client; our people input the data onto our screens and set up a standard diary system for sending letters out. Some people respond quickly to the first letter and often the case is closed within a week or so, other people ignore letters and eventually we initiate court proceedings. We know exactly what is required for court dealings and have a pretty good process to make sure all the right documentation is available on the day. Our problem is that the rest of the firm does not see us as being “proper lawyers”, and they are right, we’re not. But it does get difficult for our people, being looked down upon all the time. Our salary structure is different, our bonus scheme is different, and how we measure performance is differ- ent. But there is a solution. Because we have expanded so much, we need more space than is available in this build- ing. I think that we should think about moving the litiga- tion team. There is a great location out by the airport that could be expanded in the future if needed. There is really no reason for us to be located with the other teams.’

Property The ‘property ’ team was one of the largest parts of the firm and was well established in the local market with an excellent reputation for being fast, friendly and giving value for money. Most of its work was ‘domestic’, acting for individuals buying or selling their home, or their sec- ond home. Each client was allocated to a solicitor who

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304 PART TWO DESIGNING THE OPERATION

becomes his or her main point of contact. But, given that they can have up to a hundred domestic clients a week, most of the work was actually carried out by the rest of the team of ‘paralegal’ staff (staff with qualifications less than a fully qualified lawyer) behind the scenes.

Kate Hutchinson, who led the property team, was proud of the process she and her team had set up. ‘ There is a rel- atively standard process to domestic property sales and pur- chases and we think that we are pretty efficient at managing these standard jobs. Our process has four stages, one dealing with land registry searches, one liaising with banks who are providing the mortgage finance, one to make sure surveys are completed and one section that finalises the whole process to completion. We believe that this degree of specialisation can help us achieve the efficiencies that are becoming important, as the market gets more competitive. Our particular prob- lem is that increasingly we are also getting more complex “special” jobs. These are things like “volume re-mortgage” arrangements and rather complex “one-off” jobs, where a mortgage lender transfers a complex set of loan assets to another lender. These “special” jobs are always more complex than the domestic work and they are not popular with our staff. They don't always fit easily into our standard process, and they disrupt the routine of working. For example, some- times there are occasions when fast completion is particularly important and that can throw us a bit. ’

Grace was more worried about the property team than Kate appeared to be. The firm had recently formed partnerships with two large speculative builders, which dealt in special ‘plot sales’ that would also be classed as non- standard ‘specials’ by Kate. Grace knew that all these ‘specials’ did involve a lot of work and could occupy several members of the team for a time. But they were an important source of revenue. Currently the team was dealing with up to 25 ‘specials’ each week, and this would certainly increase. Grace suspected that Kate was mistaken to try and follow the same process with them as the normal domestic jobs. Maybe trying to do differ- ent things on the same process was the cause of the dis- satisfaction in the team?

QUESTIONS 1 What are the problems amongt the staff of each of the

three teams?

2 What are the individual ‘services’ offered by each of the three teams?

3 How would you describe each team’s process in terms of jobs of its staff?

4 What do you think each team leader should be doing to try and overcome their teams' problems?

PROBLEMS AND APPLICATIONS

1 A hotel has two wings, an east wing and a west wing. Each wing has four ‘room service maids’ working seven-hour shifts to service the rooms each day. The east wing has 40 standard rooms, 12 deluxe rooms and 5 suites. The west wing has 50 standard rooms and 10 deluxe rooms. The standard times for servicing rooms are as follows: standard rooms 20 standard minutes, deluxe rooms 25 standard minutes, and suites 40 standard minutes. In addition, an allowance of 5 standard minutes per room is given for any miscellaneous jobs such as collecting extra items for the room or dealing with customer requests. What is the productivity of the maids in each wing of the hotel? What other factors might also influence the productivity of the maids?

2 In the problem above, one of the maids in the west wing wants to job-share with her partner, each working three hours per day. Her colleagues have agreed to support her and will guar- antee to service all the rooms in the west wing to the same standard each day. If they succeed in doing this, how has it affected their productivity?

3 Step 1 – Make a sandwich. Any type of sandwich, preferably one that you enjoy, and docu- ment the tasks you have to perform in order to complete the job. Make sure you include all the activities including the movement of materials (bread etc.) to and from the work surface. Step 2 – So impressed were your friends with the general appearance of your sandwich that they have persuaded you to make one each for them every day. You have 10 friends so every morning you must make 10 identical sandwiches (to stop squabbling). How would you change the method by which you make the sandwiches to accommodate this higher volume?

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CHAPTER 9 PEOPLE IN OPERATIONS 305

Step 3 – The fame of your sandwiches had spread. You now decide to start a business making several different types of sandwich in high volume. Design the jobs of the two or three people who will help you in this venture. Assume that volumes run into at least 100 of three types of sandwich every day.

4 A little-known department of your local government authority has the responsibility for keeping the area’s public lavatories clean. It employs 10 people who each have a number of public lavatories that they visit, clean and report any necessary repairs every day. Draw up a list of ideas for how you would keep this fine body of people motivated and committed to performing this unpleasant task.

5 Visit a supermarket and observe the people who staff the checkouts. (a) What kind of skills do people who do this job need to have? (b) How many customers per hour are they capable of ‘processing’? (c) What opportunities exist for job enrichment in this activity? (d) How would you ensure motivation and commitment among the staff who do this job?

SELECTED FURTHER READING

Argyris, C. (1998) Empowerment: the emperor’s new clothes, Harvard Business Review, May–June.

A critical but fascinating view of empowerment.

Bock, L. (2015) Work Rules! Insights from Inside Google That Will Transform How You Live and Lead, John Murray, London.

With an agenda far wider than this chapter, it is nevertheless an absorbing book that gives an insight into an absorbing firm.

Bond, F.W. and Bunce, D. (2001) Job control mediates change in a work reorganization interven- tion for stress reduction, Journal of Occupational Health Psychology, vol. 6, 290–302.

An academic paper that is interesting on stress issues.

Bridger, R. (2003) Introduction to Ergonomics, Taylor & Francis, London.

Exactly what it says in the title, an introduction (but a good one) to ergonomics.

Dul, J. and Weerdmeester, B. (2008) Ergonomics for Beginners: A Quick Reference Guide, 3rd edn, CRC Press, Boca Raton, FL.

Good, practical guidance on the removal from the workplace of physical and mental stresses caused by poor job or environmental design.

Hackman, R.J. and Oldham, G. (1980) Work Redesign, Addison-Wesley, Reading, MA.

Somewhat dated but, in its time, ground breaking and certainly hugely influential.

Herzberg, F. (1987) One more time: how do you motivate employees? (with retrospective com- mentary), Harvard Business Review, January.

An interesting look back by one of the most influential figures in the behavioural approach to job design school.

Lantz, A. and Brav, A. (2007) Job design for learning in work groups, Journal of Workplace Learning, vol. 19, issue 5, 269–285.

Another academic paper, but one that addresses the important issue of learning as a job design objective.

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