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OPERATIONS MANAGEMENT Eighth edition
nigel slack alistair Brandon-Jones robert Johnston
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Pearson Education Limited Edinburgh Gate Harlow CM20 2JE United Kingdom Tel: +44 (0)1279 623623 Web: www.pearson.com/uk
First published under the Pitman Publishing imprint 1995 (print) Second edition (Pitman Publishing) 1998 (print) Third edition 2001 (print) Fourth edition 2004 (print) Fifth edition 2007 (print) Sixth edition 2010 (print) Seventh edition 2013 (print and electronic) Eighth edition published 2016 (print and electronic)
© Nigel Slack, Stuart Chambers, Christine Harland, Alan Harrison, Robert Johnston 1995, 1998 (print) © Nigel Slack, Stuart Chambers, Robert Johnston 2001, 2004, 2007, 2010 (print) © Nigel Slack, Alistair Brandon-Jones, Robert Johnston 2013, 2016 (print and electronic)
The rights of Nigel Slack, Alistair Brandon-Jones and Robert Johnston to be identified as authors of this work have been asserted by them in accordance with the Copyright, Designs and Patents Act 1988.
The print publication is protected by copyright. Prior to any prohibited reproduction, storage in a retrieval system, distribution or transmission in any form or by any means, electronic, mechanical, recording or otherwise, permission should be obtained from the publisher or, where applicable, a licence permitting restricted copying in the United Kingdom should be obtained from the Copyright Licensing Agency Ltd, Barnard’s Inn, 86 Fetter Lane, London EC4A 1EN.
The ePublication is protected by copyright and must not be copied, reproduced, transferred, distributed, leased, licensed or publicly performed or used in any way except as specifically permitted in writing by the publisher, as allowed under the terms and conditions under which it was purchased, or as strictly permitted by applicable copyright law. Any unauthorised distribution or use of this text may be a direct infringement of the authors’ and the publisher’s rights and those responsible may be liable in law accordingly.
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Pearson Education is not responsible for the content of third-party internet sites.
ISBN: 978 1 292 09867 8 (print) 978 1 292 09871 5 (PDF) 978 1 292 17190 6 (ePub)
British Library Cataloguing-in-Publication Data A catalogue record for the print edition is available from the British Library
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10 9 8 7 6 5 4 3 2 1 20 19 18 17 16
Cover image © Karin Hildebrand Lau / Alamy Stock Photo
Print edition typeset in 9.25/12 Charter ITC Std by 76 Printed in Slovakia by Neografia
NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION
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v
Guide to ‘operations in practice’, examples, short cases and case studies xii
Preface xvi
To the Instructor. . . xviii
To the Student. . . xix
Ten steps to getting a better grade in operations management xx
About the authors xxi
Acknowledgements xxii
Publisher’s acknowledgements xxiv
Part One DirECTing ThE OPEraTiOn 3 1 Operations management 4
2 Operations performance 38
3 Operations strategy 74
4 Product and service innovation 109
5 The structure and scope of operations 140
Supplement to Chapter 5 — Forecasting 170
Part Two DEsigning ThE OPEraTiOn 181 6 Process design 182
7 Layout and flow 216
8 Process technology 246
9 People in operations 276
Supplement to Chapter 9 — Work study 306
Part Three DELivEr 315 10 Planning and control 317
11 Capacity management 350
Supplement to Chapter 11 — Analytical queuing models 391
12 Supply chain management 398
13 Inventory management 432
14 Planning and control systems 468
Supplement to Chapter 14 — Materials requirements planning (MRP) 491
15 Lean operations 498
Part Four DEvELOPMEnT 531 16 Operations improvement 532
17 Quality management 572
Supplement to Chapter 17 — Statistical process control 603
18 Managing risk and recovery 616
19 Project management 646
Notes on chapters 681 Useful websites 689 Glossary 691 Index 704
Brief contents
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How is operations performance judged at an operational level? 48
How can operations performance be measured? 63
How do performance objectives trade off against each other? 66
Summary answers to key questions 68 Case study : Operations objectives at the
Penang Mutiara 70 Problems and applications 72 Selected further reading 73
Chapter 3: Operations strategy 74 Introduction 74
What is strategy and what is operations strategy? 76
What is the difference between a ‘top-down’ and ‘bottom-up’ view of operations strategy? 80
What is the difference between a ‘market requirements’ and an ‘operations resources’ view of operations strategy? 84
How can operations strategy form the basis for operations improvement? 92
How can an operations strategy be put together? The process of operations strategy 98
Summary answers to key questions 102 Case study : McDonald's: half a century
of growth 104 Problems and applications 107 Selected further reading 108
Chapter 4: Product and service innovation 109 Introduction 109
What is product and service innovation? 110 What is the strategic role of product
and service innovation? 114 What are the stages of product and
service innovation? 119 What are the benefits of interactive
product and service innovation? 130 Summary answers to key questions 134
Contents
Guide to ‘operations in practice’, examples, short cases and case studies xii Preface xvi To the Instructor. . . xviii To the Student. . . xix Ten steps to getting a better grade in operations management xx About the authors xxi Acknowledgements xxii Publisher’s acknowledgements xxiv
Part One
DirECTing ThE OPEraTiOn 3
Chapter 1: Operations management 4 Introduction 4
What is operations management? 5 Why is operations management important
in all types of organization? 8 What is the input–transformation–output
process? 13 What is the process hierarchy? 19 How do operations and processes differ? 22 What do operations managers do? 27 Summary answers to key questions 31 Case study : Design house partnerships at
Concept Design Services 33 Problems and applications 36 Selected further reading 36
Chapter 2: Operations performance 38 Introduction 38
Why is operations performance vital in any organization? 39
How is operations performance judged at a societal level? 41
How is operations performance judged at a strategic level? 46
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Case study: Developing ‘Savory Rosti-crisps’ at Dreddo Dan’s 136
Problems and applications 138 Selected further reading 139
Chapter 5: The structure and scope of operations 140 Introduction 140
What do we mean by the ‘structure’ and ‘scope’ of operations’ supply networks? 141
What configuration should a supply network have? 145
How much capacity should operations plan to have? 149
Where should operations be located? 154 How vertically integrated should an
operation’s network be? 156 How do operations decide what to do
in-house and what to outsource? 161 Summary answers to key questions 164 Case study: Aarens Electronic 166 Problems and applications 168 Selected further reading 169
Supplement to Chapter 5: Forecasting 170 Introduction 170
Forecasting – knowing the options 170 In essence forecasting is simple 171 Approaches to forecasting 172 Selected further reading 178
Summary answers to key questions 211 Case study: The Action Response Applications
Processing Unit (ARAPU) 212 Problems and applications 214 Selected further reading 214
Chapter 7: Layout and flow 216 Introduction 216
What is layout and how can it influence performance? 217
What are the basic layout types used in operations? 220
How does the appearance of an operation affect its performance? 231
How should each basic layout type be designed in detail? 234
Summary answers to key questions 240 Case study: The event hub 241 Problems and applications 244 Selected further reading 244
Chapter 8: Process technology 246 Introduction 246
What is process technology? 247 What do operations managers need to
know about process technology? 251 How are process technologies evaluated? 258 How are process technologies
implemented? 264 Summary answers to key questions 271 Case study: Rochem Ltd 272 Problems and applications 274 Selected further reading 274
Chapter 9: People in operations 276 Introduction 276
Why are people so important in operations management? 277
How do operations managers contribute to human resource strategy? 279
How can the operations function be organized? 281
How do we go about designing jobs? 286 How are work times allocated? 300 Summary answers to key questions 301 Case study: Grace faces (three) problems 302
Part Two
DEsigning ThE OPEraTiOn 181
Chapter 6: Process design 182 Introduction 182
What is process design? 183 What should be the objectives of
process design? 185 How do volume and variety affect
process design? 189 How are processes designed in detail? 195
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Problems and applications 304 Selected further reading 305
Supplement to Chapter 9: Work study 306 Introduction 306
Method study in job design 306 Work measurement in job design 309
Supplement to Chapter 11: analytical queuing models 391 Introduction 391
Notation 391 Variability 391 Incorporating Little’s law 393 Types of queuing system 393
Chapter 12: supply chain management 398 Introduction 398
What is supply chain management? 399 How should supply chains compete? 402 How should relationships in supply chains
be managed? 407 How is the supply side managed? 412 How is the demand side managed? 419 What are the dynamics of supply chains? 423 Summary answers to key questions 426 Case study: Supplying fast fashion 428 Problems and applications 430 Selected further reading 431
Chapter 13: inventory management 432 Introduction 432
What is inventory? 434 Why should there be any inventory? 437 How much to order? The volume decision 442 When to place an order? The timing decision 452 How can inventory be controlled? 458 Summary answers to key questions 463 Case study: supplies4medics.com 465 Problems and applications 466 Selected further reading 467
Chapter 14: Planning and control systems 468 Introduction 468
What are planning and control systems? 469 What is enterprise resource planning and
how did it develop into the most common planning and control system? 475
How should planning and control systems be implemented? 483
Summary answers to key questions 486
DELivEr 315
Chapter 10: Planning and control 317 Introduction 317
What is planning and control? 318 What is the difference between planning
and control? 319 How do supply and demand affect planning
and control? 321 What are the activities of planning and control? 327 Summary answers to key questions 345 Case study: subText Studios Singapore 346 Problems and applications 348 Selected further reading 349
Chapter 11: Capacity management 350 Introduction 350
What is capacity management? 351 How are demand and capacity
measured? 354 How should the operation’s base capacity
be set? 364 What are the ways of coping with
mismatches between demand and capacity? 366
How can operations understand the consequences of their capacity decisions? 373
Summary answers to key questions 382 Case study: Blackberry Hill Farm 384 Problems and applications 388 Selected further reading 389
Part Three
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Case study: Psycho Sports Ltd 487 Problems and applications 489 Selected further reading 490
Supplement to Chapter 14: Materials requirements planning (MrP) 491 Introduction 491
Master production schedule 491 The bill of materials (BOM) 492 Inventory records 494 The MRP netting process 494 MRP capacity checks 497 Summary 497
Chapter 15: Lean operations 498 Introduction 498
What is lean? 499 How does lean eliminate waste? 506 How does lean apply throughout the
supply network? 519 How does lean compare with other
approaches? 521 Summary answers to key questions 524 Case study: Saint Bridget’s Hospital 525 Problems and applications 527 Selected further reading 528
Summary answers to key questions 566 Case study: Reinventing Singapore’s
libraries 568 Problems and applications 569 Selected further reading 570
Chapter 17: Quality management 572 Introduction 572
What is quality and why is it so important? 573
What steps lead towards conformance to specification? 580
What is total quality management (TQM)? 587 Summary answers to key questions 597 Case study: Turnaround at the
Preston plant 599 Problems and applications 601 Selected further reading 602
Supplement to Chapter 17: statistical process control 603 Introduction 603
Control charts 603 Variation in process quality 604 Control charts for attributes 608 Control chart for variables 610 Summary of supplement 615 Selected further reading 615
Chapter 18: Managing risk and recovery 616 Introduction 616
What is risk management? 617 How can operations assess the
potential causes and consequences of failure? 619
How can failures be prevented? 632 How can operations mitigate the effects
of failure? 637 How can operations recover from the
effects of failure? 639 Summary answers to key questions 642 Case study: Slagelse Industrial
Services (SIS) 643 Problems and applications 645 Selected further reading 645
Part Four DEvELOPMEnT 531
Chapter 16: Operations improvement 532 Introduction 532
Why is improvement so important in operations management? 533
What are the key elements of operations improvement? 540
What are the broad approaches to improvement? 545
What techniques can be used for improvement? 554
How can the improvement process be managed? 559
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Chapter 19: Project management 646 Introduction 646
What is project management? 647 How are projects planned? 653 How are projects controlled? 669 Summary answers to key questions 674 Case study: United Photonics Malaysia Sdn Bhd 675
Problems and applications 679 Selected further reading 680
Notes on chapters 681
Useful websites 689
Glossary 691
Index 704
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guide to ‘operations in practice’, examples, short cases and case studies
Chapter Location Company/example Region Sector/activity Company size
1 Operations management
Lego Europe Manufacturing Large Torchbox UK Web design Small MSF Global Charity Large Pret a Manger Global Hospitality Medium Formule 1 Europe Hospitality Large Ski Verbier Exclusive Europe Hospitality Small Hewlet Packard Manufacturing Large To be a great operations manager…
Global N/A N/A
Concept design services General Design/manufactur- ing/distribution
Medium
2 Operations performance
Novozymes Europe Pharmaceutical Large Patagonia Global Garments Large Holcim Global Cement/aggregates Large Quality Street Global Confectionary Large The Golden Hour General Healthcare N/A UPS Global Distribution Large Mymusli German Web retail Small Aldi Europe Retail Large Foxconn Taiwan Manufacturing Large
The Penang Mutiara Malaysia Hospitality Medium
3 Operations strategy
SSTL UK/ Space Aerospace Medium Apple retail Global Retail Large Amazon Global Web retail Large Apple supply operations Global Manufacturing Large Nokia Global Telecomm Large Sometimes any plan is better than no plan
Europe Military Large
McDonalds Global Hospitality Large
4 Product and service innova- tion
Apple iPhone Global Design Large Kodak Global Manufacturing Smaller Square watermelons Global Agriculture Various IKEA Global Design/ Retail Large Dyson Global Manufacturing Large The circular economy Global Sustainability Various Dreddo Dan’s Global Snack food Large
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Chapter Location Company/example Region Sector/activity Company size
5 The structure and scope of operations
ARM and Intel Global Design and Design/ manufacturing
Large
Hollywood studios USA Creative Large Surgery and shipping India/Global Healthcare/transporta-
tion Large
Counting clusters Various Various Various HTC Taiwan Design/manufacturing Large Samsun Korea Manufacturing Large Aarens Electronic Netherlands Manufacturing Medium
6 Process design
Changi airport Singapore Air travel Large Fast food Global Hospitality Large Ecover Europe Manufacturing Large Sands Film Studio UK Creative Small Space4 housing UK Construction Medium Sainsbury ’s UK Retail Large
Shouldice hospital Canada Healthcare Small
Action response UK Charity Small
7 Layout and flow
Volkswagen Germany Manufacturing Large Google USA Technology Large Factory flow helps surgery UK Healthcare Medium Apple’s shop UK Retail Large Cadbury ’s UK Manufacturing/ enter-
tainment Large
Nestlé Global Manufacturing Large
Office cubicles Various Design Various
Zodiac France / Global
Manufacturing Medium
The Event Hub UK Policing Medium
8 Process technology
I Robot Global Various Various Technology or people? Various Various Various QB house Asia Hairdressing Medium Marmite UK Food Large Technology failures UK Technology Large
Who’s in the cockpit? Global Various Airlines Various
Rochem UK Food processing Medium
9 People in operations
W L Gore Global Manufacturing Large High customer contact jobs USA Air travel Large McDonald’s Global Hospitality Large Yahoo USA Technology Large Music while you work Global Various Various
Grace faces (three) problems UK Legal Medium
10 Planning and control
Joanne manages the schedule
UK Retail Medium
Operations control at Air France
Global Airline Large
Uber Global Technology platform Large Can airline passengers be sequenced?
General Airports Various
The hospital triage system Global Healthcare Various The life and times of a chicken sandwich (part 1)
UK Food processing Medium
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Chapter Location Company/example Region Sector/activity Company size
11 Capacity management
Heathrow UK Airports Large Panettone Italy Food processing Large Amazon Global Retail Large Lowaters UK Horticulture Medium Demand management USA Public Large Baseball games USA Leisure Medium Blackberry hill farm UK Leisure Small
12 supply chain management
Ocado UK Retail Large The North Face Global Garment manufacture Large Apple Global Technology Large The tsunami effect Asia Various Various
Levi Strauss Global Garment manufacture Large
Seven-Eleven Japan Japan Retail Large
Supplying fast fashion Global Garment design/ manufacture/ retail
Large
13 inventory management
National Health Service Blood and Transplant service
UK Public sector Large
Energy inventory Global Power generation Large Treasury wines Australia Wine production Large Gritting roads Europe Public sector Large Flame electrical South Africa Wholesale Small Amazon Global Retail Large Supplies4medics Europe Retail Medium
14 Planning and control systems
Butchers pet care UK (Dog) food production Medium SAP and its partners Global Systems developers The life and times of a chick- en salad sandwich (part 2)
UK Food production Medium
What a waste USA Recycling Large Psycho sports N/A Manufacturing Small
15 Lean operations
Jamie’s lean meals UK Domestic food preparation
N/A
Pixar adopts lean USA Creative Large Toyota Global Auto production Large Waste reduction in airline maintenance
N/A Air transport N/A
Andon’s in Amazon Global Retail Large
Torchbox UK Web design Small
St Bridget’s Hospital Sweden Healthcare Medium
16 improve- ment
Sonae Corporation Portugal Retail Large The checklist manifesto N/A Healthcare Various 6Wonderkinder Germany App developer Small Improvement at Heineken Netherlands Brewer Large
6Sigma at Wipro India Outsourcers Large
Learning from Formula 1 UK Transport Various
Reinventing Singapore’s libraries
Singapore Public sector Medium
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Chapter Location Company/example Region Sector/activity Company size
17 Quality management
TNT Express Global Transport Large Victorinox Switzerland Manufacturing Large Four Seasons Global Hospitality Large Magic moments UK Photography Small Ryanair’s Europe Airline Large Millbrook Proving Ground UK Auto testing Medium Quick Food Products UK Food production Small Fat finger syndrome Global Finance Various Deliberate defectives Canada Manufacturing Large Preston plant Canada Manufacturing Medium
18 Managing risk and recovery
Tesco UK Retail Large Findus Europe Food production Large G4S UK Outsourcer Large The rise of the micromort N/A Various Various Is failure designed-in to airline operations?
Netherlands Airline Large
General motors USA Auto manufacture Large Slagelse Industrial Services Denmark Manufacturing Medium
19 Project management
Disney Global Leisure Large Vasa’s first voyage Sweden Military N/A Halting the growth of ma- laria
Global Healthcare Large
The Scottish Parliament Building
UK Construction Large
United Photonics Malaysia Development Large
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Preface
introduction - Operations may not run the World, but it makes the World run Operations management is important . It is concerned with creating the services and products upon which we all depend. And all organizations produce some mixture of services and products, whether that organization is large or small, manufacturing or service, for profit or not for profit, public or private. Thankfully, most companies have now come to understand the importance of opera- tions. This is because they have realized that effective operations management gives the potential to improve both efficiency and customer service simultaneously. But more than this, operations management is everywhere , it is not confined to the operations function. All manag- ers, whether they are called Operations or Marketing or Human Resources or Finance, or whatever, manage pro- cesses and serve customers (internal or external). This makes, at least part of their activities ‘operations’.
Operations management is also exciting . It is at the centre of so many of the changes affecting the business world – changes in customer preference, changes in sup- ply networks brought about by internet-based technolo- gies, changes in what we want to do at work, how we want to work, where we want to work, and so on. There has rarely been a time when operations management was more topical or more at the heart of business and cultural shifts.
Operations management is also challenging . Promoting the creativity that will allow organizations to respond to so many changes is becoming the prime task of operations managers. It is they who must find the solutions to technological and environmental chal- lenges, the pressures to be socially responsible, the increasing globalization of markets and the difficult- to- define areas of knowledge management.
The aim of this book This book provides a clear, authoritative, well-structured and interesting treatment of operations management as it applies to a variety of businesses and organizations. The text provides both a logical path through the activi- ties of operations management and an understanding of their strategic context.
More specifically, this text is:
● Strategic in its perspective. It is unambiguous in treating the operations function as being central to competitiveness.
● Conceptual in the way it explains the reasons why operations managers need to take decisions.
● Comprehensive in its coverage of the significant ideas and issues which are relevant to most types of operation.
● Practical in that the issues and challenges of making operations management decisions in practice are dis- cussed. The ‘Operations in practice’ feature, which starts every chapter, the short cases that appear through the chapters, and the case studies at the end of each chapter, all explore the approaches taken by operations managers in practice.
● International in the examples that are used. There are over 110 descriptions of operations practice from all over the world.
● Balanced in its treatment. This means we reflect the balance of economic activity between service and manufacturing operations. Around seventy-five per cent of examples are from organizations that deal primarily in services and twenty-five per cent from those that are primarily manufacturing.
Who should use this book? This book is for anyone who is interested in how services and products are created.
● Undergraduates on business studies, technical or joint degrees should find it sufficiently structured to provide an understandable route through the subject (no prior knowledge of the area is assumed).
● MBA students should find that its practical discus- sions of operations management activities enhance their own experience.
● Postgraduate students on other specialist Master’s degrees should find that it provides them with a well-grounded and, at times, critical approach to the subject.
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summary answers to key questions Each chapter is summarized in the form of a list of bullet points. These extract the essential points that answer the key questions posed at the beginning of each chapter.
Case studies Every chapter includes a case study suitable for class discussion. The cases are usually short enough to serve as illustrations, but have sufficient content also to serve as the basis of case sessions.
Problems and applications Every chapter includes a set of problem-type exercises. These can be used to check out your understanding of the concepts illustrated in the worked examples. There are also activities that support the learning objectives of the chapter that can be done individually or in groups.
selected further reading Every chapter ends with a short list of further reading that takes the topics covered in the chapter further, or treats some important related issues. The nature of each further reading is also explained.
Distinctive features Clear structure The structure of the book uses the ‘4Ds’ model of opera- tions management that distinguishes between the strate- gic decisions that govern the direction of the operation, the design of the processes and operations that create products and services, planning and control of the deliv- ery of products and services, and the development, or improvement of operations.
illustrations-based Operations management is a practical subject and cannot be taught satisfactorily in a purely theoretical manner. Because of this we have used examples and short ‘opera- tions in practice’ cases that explain some of the issues faced by real operations.
Worked examples Operations management is a subject that blends qualita- tive and quantitative perspectives; ‘worked examples’ are used to demonstrate how both types of technique can be used.
Critical commentaries Not everyone agrees about what is the best approach to the various topics and issues with operations manage- ment. This is why we have included ‘critical commentar- ies’ that pose alternative views to the one being expressed in the main flow of the text.
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Teaching and learning resources for the 8th edition
To the instructor . . .
new for the eighth edition This 8 th Edition is different. In fact, it’s the biggest set of changes that we have made between editions. We have been consulting widely with our users, who have very kindly contributed to advising us on how we should further improve both the structure and content of the book. First the structure – we have retained the ‘4Ds’ structure (direct, design, delivery and development) that has proved to be exceptionally popular, but we have shifted two chapters that were in the ‘design’ section into the ‘direct’ section. Our users, quite rightly, pointed out that ‘design innovation’ and ‘the structure and scope of operations’ (what was called ‘Supply network design’ in previous editions) were both fundamental and strategic, and so therefore should be included in the first part of the book. We have done this and made both chap- ters more strategic. We have also moved two chapters (Quality management and Project management) into the ‘Development’ section on the grounds that they are both increasingly seen as part of operations improvement. In terms of the content, we have included various aspects of sustainability and Corporate Social Responsibility in each chapter rather than separating the issue out at the end of the book. The issues covered are just too important to be segregated in that way. Needless to say, as usual, we have tried to keep up to date with the (increasingly) rapid changes taking place in the (wonderful) world of operations.
Specifically, the 8th edition includes the following key changes:
● There are now more than 110 of the popular ‘Opera- tions in Practice’ examples throughout the book, over 40 per cent of which are new.
● The importance of sustainability and Corporate Social Responsibility (CSR) has been emphasised further, and included throughout the book.
● We have even further strengthened the emphasis on the idea that ‘operations management’ is relevant to every type of business and all functional areas of the organization.
● Many new ideas in operations management have been incorporated, including the ‘three level’ approach to performance, the relationship between innovation, creativity and design, crowdsourcing, ideas management, business ecosystems, triadic rela- tionships, office layout, telecommuting and organi- sational ‘ambidexterity’. However, we have retained the emphasis on the foundations of the subject.
● Six of the 19 cases at the end of the chapter are new (but the old ones are still available on the website), and provide an up-to-date selection of operations issues.
● The book has been visually redesigned to aid learn- ing. Instructor’s resources A completely new instruc- tor’s manual is available to lecturers adopting this textbook, together with PowerPoint presentations for each chapter and a Testbank of assessment ques- tions. Visit www.pearsoned.co.uk/slack to access these. Most importantly, a new set of online resourc- es to enable students to check their understanding, practise key techniques and improve their problem- solving skills now accompanies the book.
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Making the most of this book
To the student . . .
All academic textbooks in business management are, to some extent, simplifications of the messy reality that is actual organizational life. Any book has to separate top- ics, in order to study them, which in reality are closely related. For example, technology choice impacts on job design that in turn impacts on quality management; yet, for simplicity, we are obliged to treat these topics individually. The first hint therefore in using this book effectively is to look out for all the links between the individual topics. Similarly with the sequence of topics: although the chapters follow a logical structure, they need not be studied in this order. Every chapter is, more or less, self-contained. Therefore study the chapters in whatever sequence is appropriate to your course or your individual interests. But because each part has an intro- ductory chapter, those students who wish to start with a brief ‘overview’ of the subject may wish first to study Chapters 1 , 6 , 10 and 16 and the chapter summaries of selected chapters. The same applies to revision – study the introductory chapters and summary answers to key questions.
The book makes full use of the many practical exam- ples and illustrations that can be found in all operations. Many of these were provided by our contacts in compa- nies, but many also come from journals, magazines and newspapers. So if you want to understand the impor- tance of operations management in every-day business life look for examples and illustrations of operations
management decisions and activities in newspapers and magazines. There are also examples which you can observe every day. Whenever you use a shop, eat a meal in a restaurant, borrow a book from the library or ride on public transport, consider the operations manage- ment issues of all the operations for which you are a customer.
The case exercises and study activities are there to provide an opportunity for you to think further about the ideas discussed in the chapters. Study activities can be used to test out your understanding of the specific points and issues discussed in the chapter and discuss them as a group, if you choose. If you cannot answer these you should revisit the relevant parts of the chap- ter. The case exercises at the end of each chapter will require some more thought. Use the questions at the end of each case exercise to guide you through the logic of analysing the issue treated in the case. When you have done this individually try to discuss your analy- sis with other course members. Most important of all, every time you analyse one of the case exercises (or any other case or example in operations management) start off your analysis with the two fundamental questions:
● How is this organization trying to compete (or satisfy its strategic objectives if a not-for-profit organiza- tion)?
● What can the operation do to help the organization compete more effectively?
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Ten steps to getting a better grade in operations management
I could say that the best rule for getting a better grade is to be good. I mean really, really good! But, there are plenty of us who, while fairly good, don’t get as good a grade as we really deserve. So, if you are studying opera- tions management, and you want a really good grade, try following these simple steps:
Step 1 Practise, practise, practise. Use the Key ques- tions and the Problems and applications to check your understanding.
Step 2 Remember a few key models , and apply them wherever you can. Use the diagrams and models to describe some of the examples that are contained within the chapter.
Step 3 Remember to use both quantitative and quali- tative analysis. You’ll get more credit for appropri- ately mixing your methods: use a quantitative model to answer a quantitative question and vice versa, but qualify this with a few well-chosen sentences.
Step 4 There’s always a strategic objective behind any operational issue. Ask yourself, ‘Would a similar opera- tion with a different strategy do things differently?’ Look at the ‘Operations in practice’ pieces in the book.
Step 5 Research widely around the topic. Use websites that you trust – we’ve listed some good websites at the end of the book. You’ll get more credit for using references that come from genuine academic sources.
Step 6 Use your own experience. Every day, you’re experiencing an opportunity to apply the principles of operations management. Why is the queue at the airport check-in desk so long? What goes on behind the ‘hole in the wall’ of your bank’s ATM machines?
Step 7 Always answer the question. Think ‘what is really being asked here? What topic or topics does this
question cover?’ Find the relevant chapter or chapters, and search the Key questions at the beginning of each chapter and the Summary at the end of each chapter to get you started.
Step 8 Take account of the three tiers of accumulating marks for your answers.
(a) First, demonstrate your knowledge and under- standing. Make full use of the text to find out where you need to improve.
(b) Second, show that you know how to illustrate and apply the topic. The Case studies and ‘Operations in practice’ sections give you hundreds of different examples.
(c) Third, show that you can discuss and analyse the issues critically. Use the Critical commentaries within the text to understand some of the alterna- tive viewpoints.
Generally, if you can do (a) you will pass; if you can do (a) and (b) you will pass well, and if you can do all three, you will pass with flying colours!
Step 9 Remember what the issue is about, but also understand why! Read the text until you really under- stand why the concepts and techniques of operations management are important, and what they contribute to an organization’s success. Your new-found knowl- edge will stick in your memory, allow you to develop ideas, and enable you to get better grades.
Step 10 Start now! Don’t wait until two weeks before an assignment is due. GOOD LUCK!
Nigel Slack
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about the authors
nigel slack is an Emeritus Professor of Operations Management and Strategy at Warwick University, an Honorary Professor at Bath University and an Associate Fellow of Said Business School, Oxford University. Previously he has been Professor of Service Engineering at Cambridge University, Professor of Manufacturing Strategy at Brunel University, a University Lecturer in Management Studies at Oxford University and Fellow in Operations Management at Templeton College, Oxford. He worked initially as an industrial apprentice in the hand-tool industry and then as a production engineer and production manager in light engineer- ing. He holds a Bachelor’s degree in Engineering and Master’s and Doctor’s degrees in Management, and is a Chartered Engineer. He is the author of many books and papers in the operations management area, including The Manufacturing Advantage , published by Mercury Business Books, 1991, and Making Management Decisions (with Steve Cooke), 1991, published by Prentice Hall, Service Superiority (with Robert Johnston), published in 1993 by EUROMA, The Blackwell Encyclopedic Dictionary of Operations Management (with Michael Lewis) pub- lished by Blackwell, Operations Strategy together with Michael Lewis, the fourth edition published by Pearson in 2014 and Perspectives in Operations Management (Volumes I to IV) also with Michael Lewis, published by Routledge in 2003, Operations and Process Management , with Alistair Brandon-Jones, Robert Johnston and Alan Betts, now in its 4th Edition 2015. He has authored
numerous academic papers and chapters in books. He also acts as a consultant to many international com- panies around the world in many sectors, especially financial services, transport, leisure and manufactur- ing. His research is in the operations and manufacturing flexibility and operations strategy areas.
alistair Brandon-Jones is a Professor in Operations and Supply Management and Associate Dean for Post- Experience Education at the University of Bath School of Management, He was formerly a Reader at Manchester Business School, an Assistant and Associate Professor at Bath School of Management and a Teaching Fellow Warwick Business School, where he also completed his PhD. His other books include Operations and Process Management , Essentials of Operations Management , and Quantitative Analysis in Operations Management . Alistair is an active empirical researcher focusing on e-enabled operations and supply management, healthcare opera- tions, and professional services. This work, supported by a range of grants, has been published in many lead- ing management journals. Alistair has consulting and executive development experience with organizations around the world, in various sectors including petro- chemicals, health, financial services, manufacturing, defence, and government. In addition, he has won sev- eral university, national, and international awards for teaching excellence.
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acknowledgements
During the preparation of the eighth edition of this book (and previous editions) we have received an immense amount of help from friends and colleagues in the Operations Management community. In particular everybody who has attended one of the regular ‘fac- ulty work-shops’ deserves thanks for the many useful comments. The generous sharing of ideas from these sessions has influenced this and all the other OM books that we prepare. Our thanks go to everyone who attend- ed these sessions and other colleagues. It is, to some extent, invidious to single out individuals – but we are going to. We thank Pär Åhlström of Stockholm School of Economics, James Aitken of University Of Surrey, Yongmei Bentley of the University Of Bedfordshire, Helen Benton of Anglia Ruskin University, Ran Bhamra, Loughborough University, Tony Birch of Birmingham City University, Abhijeet Ghadge of Heriot Watt University, Professor Sven Åke Hörte of Lulea University of Technology, Eamonn Ambrose of University College, Andrea Benn of University of Brighton, Dublin, Mattia Bianchi of the Stockholm School of Economics John K Christiansen of Copenhagen Business School, Philippa Collins of Heriot-Watt University, Henrique Correa of Rollins College, Florida, Paul Coughlan of Trinity College Dublin, Simon Croom of the University of San Diego, Stephen Disney of Cardiff University, Doug Davies of University of Technology, Sydney, Tony Dromgoole of the Irish Management Institute, J.A.C. de Haan of Tilburg University, Carsten Dittrich of the University of Southern Denmark, David Evans of Middlesex University, Ian Evans of Sunderland University, Paul Forrester of Keele University, Ian Graham of Edinburgh University, Ian Fouweather of Bradford University, Alan Harle of Sunderland University, Norma Harrison of Macquarie University, Catherine Hart of Loughborough Business School, Steve Hickman of University Of Exeter, Chris Hillam of Sunderland University, Ian Holden of Bristol Business School, Matthias Holweg, Oxford University, Mickey Howard of Exeter University, Kim Hua Tan of the University Of Nottingham, Stavros Karamperidis of Heriot Watt University, Tom Kegan of Bell College of Technology, Hamilton, Denis Kehoe of Liverpool University, Mike Lewis of Bath University, Xiaohong Li of Sheffield Hallam University, John Maguire of the University of Sunderland, Charles Marais of the University of Pretoria, Peter McCullen of
University Of Brighton, Roger Maull, Exeter University, Bart McCarthy, Nottingham University, Harvey Maylor of Cranfield University, John Meredith Smith of EAP, Oxford, Michael Milgate of Macquarie University, Keith Moreton of Staffordshire University, Chris Morgan of Cranfield University, Adrian Morris of Sunderland University, Andy Neely of Cambridge University, Steve New of Oxford University, John Pal of Manchester Business School, Antony Potter of Manchester Business School, Gary Priddis of University of Brighton, Sofia Salgado Pinto of the Católica Porto Business School, Peter Race of Henley College, Reading University, Gary Ramsden of University Of Lincoln, Steve Robinson of Southampton Solent University, James Rowell of University Of Buckingham, Frank Rowbotham of University Of Birmingham, Ian Sadler of Victoria University, Hamid Salimian of University of Brighton, Sarah Schiffling of University of Lincoln, Andi Smart, Exeter University, Amrik Sohal of Monash University, Nigel Spinks of the University Of Reading, Rui Soucasaux Sousa of the Católica Porto Business School, Alex Skedd of Northumbria Business School, Martin Spring of Lancaster University, Dr Ebrahim Soltani of the University of Kent, R. Stratton of Nottingham Trent University, James Stone, Aston University, Dr. Nelson Tang of the University of Leicester, David Twigg of Sussex University, Helen Valentine of the University of the West of England, Professor Roland van Dierdonck of the University of Ghent, Dirk Pieter van Donk of the University of Groningen, Arvind Upadhyay of University of Brighton, Vessela Warren of University Of Worcester, Bill Wright of Bpp Professional, Ying Xie of Anglia Ruskin University, Maggie Zeng of Gloucestershire University and Li Zhou of University Of Greenwich University.
Our academic colleagues at both Warwick Business School, Bath School of Management have also helped, both by contributing ideas and by creating a lively and stimulating work environment. At Warwick, thanks go to, Nicola Burgess, Mehmet Chakkol, Max Finne, Emily Jamieson, Mark Johnson, Pietro Micheli, Rhian Silvestro, and Chris Voss. At Bath, thanks go to Brian Squire, Chris Archer-Brown, Maria Battarra, Emma Brandon-Jones, Günes Erdogan, Marco Formentini, Emmanuel Fragniere, Andrew Graves, Jooyoung Jeon, Richard Kamm, Mike Lewis, Sheik Meeran, Dimitris
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Paraskevopoulos, Tony Roath, Jens Roehrich, Christos Vasilakis, and Baris Yalabik.
Our late friend and colleague, Bob Johnston con- tributed both expertise and wisdom to earlier editions of this book. We still miss his intelligence, insight and support.
We were lucky to receive continuing profession- al and friendly assistance from a great publishing team. Especial thanks to Kate Brewin, Caitlin Lisle, Tim
Parker, Kelly Miller, Kay Holman, Neville Hankins, Lucy Chantler, Isobel McLean, Frances Topp and Sasmita Sinha.
Finally, to our families, who both supported and tolerated our nerdish obsession, thanks are inadequate, but thanks anyway to Angela and Kathy, and Emma and Noah.
Nigel Slack Alistair Brandon-Jones
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Publisher ’s acknowledgements
We are grateful to the following for permission to repro- duce copyright material:
Figures Figure 2.11b from Spidergram to check on police forces, The Times, 10/07/2002 (Miles, A. and Bladwin, T.) reproduced with permission; Figure 3.15 adapted from Operations Strategy, 4 ed., Pearson Education (Slack N. and Lewis M.A. 2015) reproduced with permission; Figure 5.6 from Operations and Process Management: Principles and Practice for Strategic Impact, Pearson Education (Slack, Nigel, Brandon-Jones, A., Johnston, R. and Betts, A. 2012) reproduced with permission; Figure 7.6 from For Toyota, patriotism and profits may not mix, Wall Street Journal, 29/11/2011 (Dawson, C.) reprinted with permission of Wall Street Journal, Copyright © 2011 Dow Jones & Company, Inc. All Rights Reserved Worldwide. License numbers 3841860034292 and 3841860323322; Figure 8.4 from Unilever UK, Reproduced with kind permission of Unilever PLC and group companies; Figure 9.7 adapted from A new strat- egy for job enrichment, California Management Review, Vol. 17 (3) (Hackman, J.R., Oldham, G., Janson, R. and Purdy, K. 1975) republished with permission of University of California Press, permission conveyed through Copyright Clearance Center, Inc.; Figure 12.6 adapted from What is the right supply chain for your product?, Harvard Business Review, March-April, pp. 105–116 (Fisher, M.C. 1997), reprinted by permis- sion of Harvard Business Review. Copyright ©1997 by Harvard Business Publishing; all rights reserved; Figure 12.10 adapted from Purchasing must become sup- ply management, Harvard Business Review, September (Kraljic, Peter 1983), reprinted by permission of Harvard Business Review. Copyright ©1983 by Harvard Business Publishing; all rights reserved; Figure 15.7 from Applying Lean in Offices, Hospitals, Planes and Trains, Presentation at The Lean Services Summit, Amsterdam, June 24 (2004) p. 30, McKinsey & Company, www.mckinsey. com. Copyright © 2004 McKinsey & Company. All rights reserved. Reprinted by permission; Figure 15.12 adapted from C.A. Voss and A. Harrison, Strategies for implement- ing JIT, in, Just-in-Time Manufacture, IFS/Springer-Verlag (Voss, C.A. (ed.) 1987) Copyright © 1987 Springer; Figure 17.4 adapted from A conceptual model of service
quality and implications for future research, Journal of Marketing, Vol. 49, Fall, pp. 41-50 (Parasuraman, A., Zeithaml, V.A. and Berry, L.B. 1985), American Marketing Association; Figure 19.4 from Reinventing Project Management: The Diamond Approach to Successful Growth and Innovation, Harvard Business School Press (Shenhar, A.J. and Dvir, D. 2007) reprinted by permis- sion of Harvard Business Review Press. Copyright © 2007 by the Harvard Business Publishing Corporation; all rights reserved.; Figure 19.6 adapted from Managing Sensitive Projects: A Lateral Approach, English version by Cutrin, T. and Etcheber, P. Routledge, NY (D’Herbemont, O. and César B 1998) republished with permission of Routledge Publishing Inc. Permission conveyed through Copyright Clearance Center, Inc.; Figure 19.19 adapted from Collaboration, Integrated Information, and the Project Life Cycle in Building Design and Construction and Operation, Construction Users Roundtables (CURT).
Tables Table S9.2 adapted from Principles of Motion Economy: Revisited, Reviewed and Restored, Proceedings of the Southern Management Association Annual Meeting (Atlanta, GA 1983) (Barnes, F.C. 1983) p. 298; Tables 9.3 and 9.4 from J.L. Kobrick and B.J. Fine, Climate and human performance, in, The Physical Environment and Work John Wiley (Oborne, D.J. and Gruneberg, M.M. (eds.) 1983) reproduced with permission of Wiley in the format Book via Copyright Clearance Center; Table 15.1 adapted from What is the Theory of Constraints, and How Does it Compare to Lean Thinking? The Lean Enterprise Institute (Rattner, S. 2009) Copyright © 1999 Sergio Rattner. All rights reserved.
Text Case Study on pages 346–49 adapted from Operations and Process Management, 3rd ed., Pearson Education (Slack, N., Brandon-Jones, A., Johnston, R. and Betts, A. 2012) © Pearson Education Limited 2006, 2009, 2012; Box on page 470 adapted from My way - IT at Butcher’s Pet Care, Engineering and Technology Magazine, Vol. 4 (13) (Allan K.); Box on pages 499–500 written and sup- plied by Janina Aarts and Mattia Bianchi, Department of Management and Organization, Stockholm School of
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Co., Ltd: 465tr; Reproduced with the kind permis- sion of Société des Produits Nestlé S.A.: 229tr; Newlife Paints Ltd: 129tr; PhotoDisc: 433tr, 484br; Press Association Images: AP / Eckehard Schulz 272tr; Rex Shutterstock: Amer Ghazzal 53tr; Sands Films Studio: 193cr; Shutterstock.com: Haider Y. Abdulla 346tr, Alphaspirit 287, 514br, Aaron Amat 676tc, Andresr 575br, Anyunov 644tl, ArchMan 196br, Anna Baburkina 617tr, Blend Images 232br, Anna Bogush 441tr, Buruhthan 50br, 51br, 54cr, 56cr, 58br, Vladimir Caplinskij 166tr, Roberto Caucino 43br, Chen WS 487tr, Ant Clausen 190tl, Creations 505tr, Digital Storm 250tr, T P Feller 5r, Iakov Filimonov 234tr, Gabriel12 186br, Karel Gallas 384tr, Angelo Giampiccolo 322tr, Arina P Habich 436tr, Hadrian 50tl, 51cl, 54tl, 56tl, 58cl, Indianstockimages 9c, Stuart Jenner 9cl, 551br, Jezper 357tr, JHDT Productions 296tr, Jimmi 248tr, Justasc 416tr, Matej Kastelic 97c, Robert Kneschke 590cr, Ktsdesign 115c, Blaz Kure 50tr, 51cr, 54tr, 56tr, 58cr, Lamarinx 190bl, Lightspring 150, Liunian 191bl, Dmitry Lobanov 56, Luchunyu 192bl, Ludinko 451br, SV Luma 333tr, Robyn Mackenzie 537tr, Marques 278, Michaeljung 192c, Stuart Monk 224br, Monkey Business Images 163tr, 478tr, Natursports 564br, 650tr, Sergey Nivens 40tr, Nucleartist 156tr, Ollyy 201tr, 298tr, Pathdoc 267br, Sean Pavone 425tr, Phovoir 212tr, Potstock 192cl, Raimundas 142tr, Rido 111tr, Michael Rolands 50bl, 51bl, 54cl, 56cl, 58bc, Shadow216 647, StockLite 146cr, Stockphoto mania 151tr, Stokkete 534tr, Supergenijalac 9tl, 191cl, Jordan Tan 318br, Graham Taylor 241tr, Cappi Thompson 403br, Anatoly Tiplyashin 104br, Toria 11tr, TravnikovStudio 330br, VectorLifestylepic 568tr, Vipubadee 578tr, Valentyn Volkov 122tr, 543, Tatyana Vyc 191tl, Ingrid W 221tr, Wavebreakmedia 302cr, www.BillionPhotos.com 575tr, Yeko Photo Studio 337cr, Zurijeta 293br; Ski Verbier Exclusive Ltd: 25br; The Kobal Collection: Paramount Pictures 269cr
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Economics, reproduced with permission; Box on page 534 adapted from Case study by Professors Rui Sousa and Sofia Salgado Pinto, Católica Porto Business School, Portugal; Case Study on pages 568-69 from Professors Robert Johnson, Warwick Business School, Chai Kah Hin and Jochen Wirtz, National University of Singapore, and Christopher Lovelock, Yale University.
Photos The publisher would like to thank the following for their kind permission to reproduce their photographs:
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2 Operations performance
1 Operations management
3 Operations strategy
4 Product and service innovation
5 the structure and scope of operations
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part one DireCtinG the OPeratiOn
Transformed resources • Materials • Information • Customers
Transforming resources • Facilities • Staff
Input resources
Output products and services
Operations management
Develop - Improving the operation’s capabilities
Direct - Steering operations
and processes
Design - Shaping processes,
products and services
Deliver - Planning and
controlling ongoing operations
Value added for customers
this part of the book introduces the idea of ‘operations’ and the operations function. it also examines the fundamental activities and decisions that shape the overall direction and strategy of the operations function. the chapters in this part are:
● chapter 1 operations management – this introduces the common ideas that describe the nature and role of operations and processes in all types of organization.
● chapter 2 operations performance – this identifies how the performance of the operations function can be judged.
● chapter 3 operations strategy – this examines how the activities of the operations function can have an important strategic impact.
● chapter 4 product and service innovation – this looks at how innovation can be built into the product and service design process.
● chapter 5 the structure and scope of operations – this describes the major decisions that determine how and the extent to which an operation adds value through its own activities.
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intrODuCtiOn operations management is about how organizations create and deliver services and products. everything you wear, eat, sit on, use, read or knock about on the sports field comes to you courtesy of the operations managers who organized its creation and delivery. every book you borrow from the library, every treatment you receive at the hospital, every service you expect in the shops and every lecture you attend at university – all have been created by operations. While the people who supervised their creation and delivery may not always be called operations managers, that is what they really are. and that is what this book is concerned with – the tasks, issues and decisions of those operations managers who have made the services and products on which we all depend. this is an introductory chapter, so we will examine what we mean by ‘operations management’, how operations processes can be found everywhere, how they are all similar yet different, and what it is that operations managers do ( see Fig. 1.1 ).
Operations management
Key questions
❯ What is operations management?
❯ Why is operations management important in all types of organization?
❯ What is the input– transformation–output process?
❯ What is the process hierarchy?
❯ how do operations and processes differ?
❯ What do operations managers do?
1
Topic covered in this chapter
Operations management
Direct
Design Develop
Deliver
Direct
Operations performance
The structure
and scope of operations
Operations strategy
Operations management
Product and service innovation
Figure 1.1 this chapter examines operations management
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ChaPter 1 operations management 5
What iS OPeratiOnS ManaGeMent?
Operations management is the activity of managing the resources that create and deliver ser- vices and products. The operations function is the part of the organization that is responsible for this activity. Every organization has an operations function because every organization creates some types of services and/or products. However, not all types of organization will necessarily call the operations function by this name. (Note in addition that we also use the shorter terms ‘the oper- ation’ or ‘operations’ interchangeably with the ‘operations function’.) Operations managers are the people who have particular responsi- bility for managing some, or all, of the resources that make up the operations function. Again in some organizations, the operations manager could be called by some other name. For example, he or she might be called the ‘fleet manager’ in a distribution company, the ‘administrative manager’ in a hospital, or the ‘store manager’ in a supermarket.
✽ ✽ ✽ Operations principle Operations principle Operations principle
OPeratiOnS in PraCtiCe
‘ We want any child playing with LEGO ® bricks to have a high quality play experience, and in addition we also want to make a positive impact through the way we operate – from our focus on business ethics to reducing our impact on the environment ,’ says Jørgen Vig Knudstorp, ceo of the Lego group.
of all businesses, the toy business is one of the world's trickiest. Difficult to forecast, unfailingly subject to fickle kids' latest fads and subject to constant techno- logical innovation. Yet the Lego group, a privately held, family-owned company with headquarters in Billund, Denmark, has, in recent years, thrived in the business, becoming one of the most reputable companies in the world, according to the reputation institute, and one of the leading manufacturers of play materials. it is a suc- cess founded on a deceptively simple idea. one Lego brick is unremarkable, but put one or two together and possibilities start to emerge. With another few bricks the number of things you can create rises exponentially. For example, there are more than 915 million possible ways of arranging six standard four-by-two bricks, and with the approximately 4,200 different elements in the Lego range and 58 different colours together with various decorations, the total number of active combinations is many more. and, however many bricks you assemble, irrespective of what colour or set they are from, your pieces will always fit together perfectly. all of the basic Lego elements use the same method to stick together. they have studs on top that are slightly bigger than and tubes on the inside. pressing the bricks together pro- duces an ‘interference fit ’ that provides a temporary joint without the use of an additional fastener. But this
principle does depend on the elements being made to very high levels of precision and quality, which explains the company's motto, ‘only the best is good enough’.
ole Kirk Kristiansen, a Danish carpenter, who started selling wooden toys as a way of earning extra money, founded the company in 1932. these included wooden toy bricks, the forerunners of the plastic bricks, which are now so successful that it is estimated that there are now 86 bits of Lego for every person on the planet. Bricks, and other Lego ‘elements’, are manufactured at the group's factories in Denmark, hungary, the czech republic and mexico, locations that have been cho- sen to be near their key markets in europe and the Usa . these sites have been expanded to cope with increased demand, together with new factories built in nyiregyhaza in hungary and Jiaxing in china. products made in these factories serve a global market. the aim, according to Bali padda, executive Vice president and
Lego: building a creative experience 1
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u tt
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6 Part One Directing the operation
The LEGO example illustrates how important the operations function is for any com- pany whose reputation depends on producing safe, high-quality, sustainable and prof- itable products or ser vices. Its operations, like its market, are globally located, it is meticulous about ensuring that its processes operate to precise quality standards, and it has invested heavily in process technology that reduces the environmental impact of its operations and the cost of its products. Of course, exactly what is involved in producing products and services will depend to some extent on the type of organization of which the operations function is a part. Table 1.1 shows some of the activities of the operations function for various types of organization.
Operations in the organization The operations function is central to the organization because it creates and delivers services and products, which is its reason for existing. The operations function is one of the three core functions of any organization. These are:
chief operations officer of the Lego group, is to ‘ build a stable manufacturing base around the world, ulti- mately making sure that LEGO products are available to children and their parents when and where they want them ’. and it is the company's operations processes that are central to maintaining its reputation for quality, and its ability to produce millions of elements profita- bly and sustainably.
the process starts at the main warehouse that con- tains the silos holding raw plastic granulates. at the Billund operation, 60 tonnes of plastic is processed every 24 hours. the silos are linked to the moulding machines by a complex arrangement of tubes. the moulding stage is particularly important, because every Lego piece must be made to a demanding level of pre- cision, with tolerances as small as 10 micrometres. at each machine, the plastic is heated and pumped into the mould through a main channel, which divides into a number of narrower channels, each corresponding to a single brick. Water is used to cool the moulds, which can produce up to 32 bricks, and, when the plastic has solidified (only a couple of seconds), they release the bricks into containers. these moulds are expen- sive, and each element requires its own mould. the average cost of a mould is around €80,000 with some costing more than €360,000. a sensor detects when a container is full and a robot trolley is automatically sent. the robots travel between the machines, picking up boxes and leaving empty ones so production can be continued. the automation means that few people are required for the process. the robots transport the boxes to conveyors, which move them into the stor- age area where robotic cranes stack them until they are
needed. From there some pieces go to the ‘decoration’ stage where they are individually painted. Decoration is the most expensive part of the Lego process. other pieces go straight to packing, where the Lego sets take their final form. in the packaging process the pieces go into a machine that separates them individually, counts them using optical sensors, and places them in their box. the automatic movement system knows exactly how much a box should weigh at any stage and as the packing process continues, high-precision scales mon- itor the weight of the box. any deviation, even of a few micrograms, sets off an alarm. at the end of the pro- cess the boxes are sealed shut, automatically weighed to ensure there are no missing components, checked by a worker trained to look for things like plastic bags sticking out of the box, packed by a robot six to a case, and finally sent off for distribution.
Quality assurance staff perform frequent inspections and tests on the various Lego elements, such as drop, torque, tension, compression, bite and impact tests to make sure the toys are robust and safe. only about 18 of every million Lego elements produced, (that is 0.00002 per cent) fail to pass the tests. in addition, throughout the process, the company tries to achieve high levels of environmental sustainability. plastic is extensively recy- cled in the factory. all scrap, for example the plastic that fills the channels that take the hot plastic into moulds, or faulty pieces that escape from automated handling, are ground up and used back into the production process. similarly, the transparent plastic that is used to clean the channels when the production colour is changed in a moulding machine are also ground up and sold to other companies that produce other plastic products.
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ChaPter 1 operations management 7
● the marketing (including sales) function – which is responsible for communicating the organization’s services and products to its markets in order to generate customer requests;
● the product/service development function – which is responsible for coming up with new and modified services and products in order to generate future customer requests;
● the operations function – which is responsible for the creation and delivery of services and products based on customer requests.
In addition, there are the support functions which enable the core functions to operate effectively. These include, for example, the accounting and finance function, the technical function, the human resources function and the information systems function. Remember that different organizations will call their various functions by different names and will have a different set of support functions. Almost all organizations, however, will have the three core functions, because all organizations have a fundamental need to sell their products and services, meet customer requests for services and products, and come up with new services and products to satisfy customers in the future.
In practice, there is not always a clear division between the three core functions or between core and support functions. This leads to some confusion over where the boundaries of the operations function should be drawn. In this book we use a relatively broad definition of operations. We treat much of the product/service development, technical and information systems activities and some of the human resources, marketing, and accounting and finance activities as coming within the sphere of operations management. We view the operations function as compris- ing all the activities necessary for the day-to-day fulfilment of customer requests within the constraints of environmental and social sustainability. This includes sourcing services and products from suppliers and delivering services and products to customers.
It is fundamental to modern management that functional boundaries should not hinder efficient internal processes. Figure 1.2 illustrates some of the relationships between opera- tions and other functions in terms of the flow of information between them. Although it is not comprehensive, it gives an idea of the nature of each relationship. However, note that the support functions have a different relationship with operations than the other core func- tions. Operations management’s responsibility to support functions is primarily to make sure that they understand operations' needs and help them to satisfy these needs. The rela- tionship with the other two core functions is more equal – less of ‘ this is what we want ’ and more ‘ this is what we can do currently – how do we reconcile this with broader business needs? ’
table 1.1 Some activities of the operations function in various organizations
internet service provider
Fast food chain international aid charity
Furniture manufacturer
maintain and update hardware Update software and content respond to customer queries implement new services ensure security of customer data
Locate potential sites for restaurants provide processes and equipment to produce burgers etc. maintain service quality Develop, install and maintain equipment reduce impact on local area, and packaging waste
provide aid and development projects for recipients provide fast emergency response when needed procure and store emergency supplies Be sensitive to local cultural norms
procure appropriate raw materials and components make sub-assemblies assemble fi nished products Deliver products to customers reduce environmental impact of products and processes
✽ ✽ ✽ Operations principle Operations principle Operations principle
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8 Part One Directing the operation
WhY iS OPeratiOnS ManaGeMent iMPOrtant in ALL tYPeS OF OrGaniZatiOn?
In some types of organization it is relatively easy to visualize the operations function and what it does, even if we have never seen it. For example, most people have seen images of an auto-
mobile assembly. But what about an advertising agency? We know vaguely what these agencies do – they create the advertisements that we see in magazines and on television – but what is their operations function? The clue lies in the word ‘create’. Any business that creates something must use resources to do so, and so must have an operations activity. Also the automobile plant and the advertising agency do have one important element in common: both have a higher objective – to make a profit from creating and delivering their products or services.
Yet not-for-profit organizations also use their resources to create and deliver services, not to make a profit, but to serve society in some way. Look at the following examples of what opera- tions management does in five very different organizations and some common themes emerge.
Product/service development
function
Technical function
The broad scope of operations management’s
responsibilities
Accounting and finance
function
Human resources (HR)
function
Core functions
Support functions
Information systems (IS)
function
Marketing function
Operations function
Process technology
needs
Process technology
options
Provision of relevant data
Communicating the capabilities and constraints of
operations processes
New product/ service ideas
Financial analysis for performance measurement and decision
making
Communicate human resource
needs
Recruitment, development and training
Communicating information
system needs
Systems for design, planning and control and
improvement
Market requirements
Communicating the capabilities and constraints of
operations processes
Figure 1.2 the relationship between the operations function and other core and support functions of the organization
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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ChaPter 1 operations management 9
Automobile assembly factory – Operations manage- ment uses machines to effi ciently assemble products that satisfy current customer demands
Physician (general practitioner) – Operations manage- ment uses knowledge to eff ectively diagnose conditions in order to treat real and perceived patient concerns
Management consultant – Operations management uses people to eff ectively create the services that will ad- dress current and potential client needs
Disaster relief charity – Operations management uses ours and our partners' resources to speedily provide the supplies and services that relieve community suff ering
Advertising agency – Operations management uses our staff ’s knowledge and experience to creatively present ideas that delight clients and address their real needs
Start with the statement from the ‘easy to visualize’ automobile plant. Its summary of what operations management does is: ‘ Operations management uses machines to efficiently assemble products that satisfy current customer demands. ’ The statements from the other
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10 Part One Directing the operation
organizations were similar, but used slightly different language. Operations management used not just machines but also ‘knowledge, people, our and our partners’ resources', and ‘our staffs’ experience and knowledge', to ‘efficiently (or effectively, or creatively) assemble (or produce, change, sell, move, cure, shape, etc.) products (or services or ideas) that satisfy (or match or exceed or delight) customer (or client or citizens' or society) demands (or needs or concerns or even dreams).’
So whatever terminology is used there is a common theme and a common purpose to how we can visualize the operations activity in any type of organization – small or large, service or manufacturing, public or private, profit or not-for-profit. Operations manage- ment uses ‘resources to appropriately create outputs that fulfil defined market requirements’ (see Fig. 1.3). However, although the essential nature and purpose of operations manage- ment is the same in any type of organization, there are some special issues to consider, particularly in smaller organizations and those whose purpose is to maximize something other than profit.
Operations management in the smaller organization Operations management is just as important in small organizations as it is in large ones. Irrespective of their size, all companies need to create and deliver their service and products efficiently and effectively. However, in practice, managing operations in a small or medi- um-size organization has its own set of problems. Large companies may have the resources to dedicate individuals to specialized tasks but smaller companies often cannot, so people may have to do different jobs as the need arises. Such an informal structure can allow the company to respond quickly as opportunities or problems present themselves. But decision making can also become confused as individuals' roles overlap. Small companies may have exactly the same operations management issues as large ones but they can be more diffi- cult to separate from the mass of other issues in the organization. However, small opera- tions can also have significant advantages; the short case on Torchbox illustrates this.
Transforming resources
Operations management uses...
Resources to
People
Technology
Knowledge
Information
Partners
etc.
Demands
Needs
Concerns
Dreams
Etc.
E�ectively
E�ciently
Creatively
Reliably
Accurately
etc.
Transformation objectives
Nature of the objectives
Customers’ objectives
Nature of the product/service
Nature of the transformation
Performance standard
The operation’s customers
Appropriately
Produce
Assemble
Sell
Move
Cure
Diagnose
Shape
Fabricate
etc.
Create
Services
Products
Ideas
Solutions
Knowledge
etc.
Outputs that
Meet
Satisfy
Exceed
Delight
etc.
Fulfil
Current
Potential
Perceived
Emerging
Real
etc.
Defined
Customer
Citizens’
Clients’
Society's
etc.
Market Requirements
Figure 1.3 Operations management uses resources to appropriately create outputs that fulfil defined market requirements.
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ChaPter 1 operations management 11
OPeratiOnS in PraCtiCe
We may take it for granted, yet browsing websites, as part of your studies, your job, or your leisure, is an activity that we all do – proba- bly every day, probably many times each day. so it is important . all organizations need to have a web presence if they want to sell prod- ucts and services, interact with their customers, or promote their cause. and, not surprisingly, there is a whole industry devoted to design- ing websites so that they have the right type of impact. in fact, taken over the years, web development has been one of the fastest grow- ing industries in the world. But it is also a tough industry. not every web design company thrives, or even survives beyond a couple of years. to succeed, web designers need tech- nology skills, design capabilities, business awareness and operational professionalism. one that has succeeded is torchbox, an independently owned web design and development company based in oxfordshire. Founded back in 2000, it now employs 30 people, providing ‘ high-quality, cost-effective, and ethical solutions for clients who come primarily, but not exclusively, from the charity, non-governmental organisations and public sectors ’.
co-founder and technical Director tom Dyson has been responsible for the technical direction of all major developments. ‘ There are a number of advantages about being a relatively small operation ’, he says. ‘ We can be hugely flexible and agile, in what is still a dynamic mar- ket. But at the same time we have the resources and skills to provide a creative and professional service. Any senior manager in a firm of our size cannot afford to be too specialised. All of us here have their own specific responsibilities; however, every one of us shares the overall responsibility for the firm's general development. We can also be clear and focused on what type of work we want to do. Our ethos is important to us. We set out to work with clients who share our commitment to environmental sustainability and responsible, ethical business practice; we take our work, and that of our clients, seriously. If you're an
arms dealer, you can safely assume that we're not going to be interested. '
nevertheless, straightforward operational effective- ness is also essential to torchbox's business. ‘ We know how to make sure that our projects run not only on time and to budget ’, says olly Willans, also a co-founder and the firm's creative Director, ‘ but we also like to think that we provide an enjoyable and stimulating experience – both for our customers’ development teams and for our staff too. High standards of product and service are important to us: our clients want accessibility, usability, performance and security embedded in their web designs, and of course, they want things delivered on-time and on-budget. We are in a creative industry that depends on fast- moving technologies, but that doesn't mean that we can't also be efficient. We back everything we do with a robust feature-driven develop- ment process using a kanban project management method- ology which helps us manage our obligations to our clients .'
the ‘kanban’ approach used by the torchbox web development teams originated from car manufacturers like toyota (it is fully explained in chapter 15 ). ‘ Using sound operations management techniques helps us constantly to deliver value to our clients ’, says tom Dyson. ‘ We like to think that our measured and controlled approach to handling and controlling work helps ensure that every hour we work pro- duces an hour's worth of value for our clients and for us. ’
torchbox: award-winning web designers 2
Operations management in not-for-profit organizations Terms such as ‘competitive advantage’, ‘markets’ and ‘business’, which are used in this book, are usually associated with companies in the for-profit sector. Yet operations management is also relevant to organizations whose purpose is not primarily to earn profits. Managing
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12 Part One Directing the operation
the operations in an animal welfare charity, hospital, research organization or government department is essentially the same as in commercial organizations . Operations have to take the same decisions – how to create and deliver service and products, invest in technology, contract out some of their activities, devise performance measures, improve their operations performance, and so on. However, the strategic objectives of not-for-profit organizations may be more complex and involve a mixture of political, economic, social or environmental objec- tives. Because of this there may be a greater chance of operations decisions being made under conditions of conflicting objectives. So, for example, it is the operations staff in a children’s welfare department who have to face the conflict between the cost of providing extra social workers and the risk of a child not receiving adequate protection. Nevertheless the vast major- ity of the topics covered in this book have relevance to all types of organization, including non-profit ones, even if the context is different and some terms may have to be adapted.
OPeratiOnS in PraCtiCe
médecins sans Frontières (msF; also called Doctors Without Borders) is an independent humanitarian organization pro- viding medical aid where it is most needed, regardless of race, religion, politics or gender, and raising awareness of the plight of the people it helps in coun- tries around the world. its core work takes place in crisis situa- tions – armed conflicts, epidem- ics, famines and natural disasters such as floods and earthquakes. the teams deliver both medical aid (including consultations with a doctor, hospital care, nutri- tional care, vaccinations, surgery, obstetrics and psychological care) and material aid (including food, shelter, blankets, etc.). each year, msF sends around 3,000 doctors, nurses, logisticians, water and sanitation experts, administrators and other professionals to work alongside around 25,000 locally hired staff. it is one of the most admired and effec- tive relief organizations in the world. But no amount of fine intentions can translate into effective action without superior operations management. as msF says, it must be able to react to any crisis with ‘ fast response, efficient logistics systems, and efficient project management ’.
msF makes every effort to respond quickly and effi- ciently to crises around the world. its response procedures are continuously being developed to ensure that it reaches those most in need as quickly as possible. the process has five phases: proposal, assessment, initiation, running the project, and closing. the information that prompts a pos- sible mission can come from governments, the interna- tional community, humanitarian organizations such as the
United nations, financial bodies such as the humanitarian aid Department of the european commission (echo), or msF teams already present in the region. once the information has been checked and validated, msF sends a team of medical and logistics experts to the crisis area to carry out a quick evaluation. the team assesses the situa- tion, the number of people affected, and the current and future needs, and sends a proposal back to the msF office. When the proposal is approved, msF staff start the process of selecting personnel, organizing materials and resources, and securing project funds. initiating a project involves sending technical equipment and resources to the area. in large crises, aircraft fly in all the necessary materials so that the work can begin immediately. thanks to its pre- planned processes, specialized kits and the emergency stores, msF can distribute material and equipment within 48 hours, ready for the response teams to start work as soon as they arrive. most msF projects generally run for
MSF operations provide medical aid to people in danger 3
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ChaPter 1 operations management 13
the new operations agenda Over the last few years, changes in the business environment have had a significant impact on the challenges faced by operations managers. Some of them are in response to changes in the nature of the demand side. Many (although not all) industries have experienced increas- ing cost-based competition while simultaneously their customers' expectations of quality and variety have increased. Markets have become more global, sometimes meaning a demand for a higher variety, or even totally customized products and services. Rapidly developing (often digital) technologies are leading to more frequent, new product/service introductions. Customers have increased ethical and environmental sensitivity. Also, the impact of new pro- cess technologies, in both manufacturing and service, is having a dramatic effect, radically altering the operating practices of almost every industry. This leads to operations having to change the way they create their products and services, serve their customers, relate to stake- holders and involve their workforce. Just as importantly, globalized supply markets are open- ing new options in how operations source input goods and services. Very few businesses have not at least considered purchasing from out- side their own geographic area. But while bringing opportunities for cost savings, a bigger supply market also brings new problems of long supply chains, supply vulnerability and reputational risk. All this has led to new pressures for which the operations function has needed to develop responses. Figure 1.4 identifies just some of the operations responses to these business pressures. (If you do not recognize some of the terms in Figure 1.4 , do not worry – we will explain them throughout the book.) These responses form a major part of a new agenda for operations. Parts of this agenda are trends which have always existed but have accelerated, such as globalization and increased cost pres- sures. Part of the agenda involves seeking way to exploit new technologies, most notably the Internet. Of course, the items in Figure 1.4 are not comprehensive, nor are they universal. But very few operations functions will be unaffected by at least some of these issues.
What iS the inPut–tranSFOrMatiOn–OutPut PrOCeSS?
All operations create and deliver service and products by changing inputs into outputs using an ‘input–transformation–output’ process. Figure 1.5 shows this general transformation pro- cess model that is the basis of all operations. Put simply, operations are processes that take
somewhere between 18 months and three and a half years. Whether an emergency response or a long-term healthcare project, the closing process is roughly similar. once the critical medical needs have been met (which could be after weeks, months or years depending on the situation), msF begins to close the project with a gradual withdrawal of staff and equipment. at this stage, the pro- ject closes or is passed on to an appropriate organization. msF will also close a project if risks in the area become too great to ensure staff safety.
Whether it is dealing with urgent emergencies, when material might need to be on an aircraft within 24 hours, or a long-running programme where a steady supply of equipment and drugs is vital, everything msF does on the ground depends on an efficient logistics system. it is based on the principle that msF staff should always have exactly the right materials for the job at hand. so msF has developed and produced pre-packaged disaster kits
ready for transport within hours, including a complete surgical theatre the size of a small conference table and an obstetrics kit the size of a two-drawer file. there is an ongoing process of revising the kits every time a new drug or medical tool becomes available.
to make sure it is reacting as quickly as possible, msF has four logistical centres based in europe and east africa plus stores of emergency materials in central america and east asia. these purchase, test and store equipment so that aircraft can be loaded and flown into crisis areas within 24 hours. the pre-packaged disas- ter kits are custom-cleared within the logistics centres, ready for flight. But not all supplies are needed quickly. if it is not a dire emergency, msF reduces its costs by ship- ping the majority of material and drugs by sea. Because of this, it is vital to monitor stock levels and anticipate future needs so that orders can be placed up to three months in advance of expected requirements.
✽ ✽ ✽ Operations principle Operations principle Operations principle
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14 Part One Directing the operation
in a set of input resources which are used to transform something, or are transformed them- selves, into outputs of services and products. And although all operations conform to this gen- eral input–transformation–output model, they differ in the nature of their specific inputs and outputs. For example, if you stand far enough away from a hospital or a car plant, they might look very similar, but move closer and clear differences do start to emerge. One is a service
Risk management
Internet-based integration of
operations activities
Fast time to market
Global operations networks
Customer relationship
management
Mass customization
Co-creation of service Operating
models
Internet of things
‘Big data’ analysis
3D printing
Algorithmic decision making
Enterprise resource management
Environmentally sensitive design
Business recovery planning
Developments in the business, technical,
social, regulatory and political environment
Sustainability
Flexible working patterns
Supplier partnership and development
Figure 1.4 Changes in the business environment are shaping a new operations agenda
Input resources
Output products and services
Value- added for customers
THE TRANSFORMATION
PROCESS
Transformed resources • Materials • Information • Customers
Transforming resources
• Facilities • Staff
Figure 1.5 all operations are input–transformation–output processes
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ChaPter 1 operations management 15
operation delivering ‘services’ that change the physiological or psychological condition of patients, the other is a manufacturing operation creating and delivering ‘products’. What is inside each operation will also be different. The hospital contains diagnostic, care and therapeutic processes whereas the motor vehi- cle plant contains metal forming machinery and assembly processes. Perhaps the most important difference between the two operations, however, is the nature of their inputs. The hospital transforms the customers themselves. The patients form part of the input to, and the output from, the operation. The vehicle plant transforms steel, plas- tic, cloth, tyres and other materials into vehicles.
inputs to the process One set of inputs to any operation’s processes is transformed resources. These are the resources that are treated, transformed or converted in the process. They are usually a mix- ture of the following:
● Materials – operations which process materials could do so to transform their physical properties (shape or composition, for example). Most manufacturing operations are like this. Other operations process materials to change their location (parcel delivery compa- nies, for example). Some, like retail operations, do so to change the possession of the mate- rials. Finally, some operations store materials, such as warehouses.
● Information – operations which process information could do so to transform their infor- mational properties (that is, the purpose or form of the information); accountants do this. Some change the possession of the information, for example market research companies sell information. Some store the information, for example archives and libraries. Finally, some operations, such as telecommunication companies, change the location of the information.
● Customers – operations which process customers might change their physical properties in a similar way to materials processors: for example, hairdressers or cosmetic surgeons. Some store (or more politely accommodate ) customers: hotels, for example. Airlines, mass rapid transport sys- tems and bus companies transform the location of their custom- ers, while hospitals transform their physiological state. Some are concerned with transforming their psychological state , for exam- ple most entertainment services such as music, theatre, television, radio and theme parks. But customers are not always simple ‘pas- sive’ items to be processed. They can also play a more active part in many operations and processes. For example, they create the atmosphere in a restaurant; they provide the stim- ulating environment in learning groups in education; they provide information at check-in desks; and so on. When customers play this role it is usually referred to as ‘co-production’ because the customer plays a vital part in the provision of the product/service offering.
Some operations have inputs of materials and information and customers, but usually one of these is dominant. For example, a bank devotes part of its energies to producing printed statements by processing inputs of material, but no one would claim that a bank is a printer. The bank also is concerned with processing inputs of customers at its branches and contact centres. However, most of the bank’s activities are concerned with process- ing inputs of information about its customers’ financial affairs. As customers, we may be unhappy with badly printed statements and we may be unhappy if we are not treated appro- priately in the bank. But if the bank makes errors in our financial transactions, we suffer in a far more fundamental way. Table 1.2 gives examples of operations with their dominant transformed resources.
The other set of inputs to any operations process is transforming resources . These are the resources which act upon the transformed resources. There are two types which form the ‘building blocks’ of all operations:
✽ ✽ ✽ Operations principle Operations principle Operations principle
✽ ✽ ✽ Operations principle Operations principle Operations principle
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16 Part One Directing the operation
● facilities – the buildings, equipment, plant and process technology of the operation; ● staff – the people who operate, maintain, plan and manage the operation. (Note that we
use the term ‘staff’ to describe all the people in the operation, at any level.)
The exact nature of both facilities and staff will differ between operations. To a five-star hotel, its facilities consist mainly of ‘low-tech’ buildings, furniture and fittings. To a nuclear- powered aircraft carrier, its facilities are ‘high-tech’ nuclear generators and sophisticated electronic equipment. Staff will also differ between operations. Most staff employed in a factory assembling domestic refrigerators may not need a very high level of technical skill. In contrast, most staff employed by an accounting company are, hopefully, highly skilled in
their own particular ‘technical’ skill (accounting). Yet although skills vary, all staff can make a contribution. An assembly worker who con- sistently misassembles refrigerators will dissatisfy customers and increase costs just as surely as an accountant who cannot add up. The balance between facilities and staff also varies. A computer chip man- ufacturing company, such as Intel, will have significant investment in physical facilities. A single chip fabrication plant can cost in excess
of $5 billion, so operations managers will spend a lot of their time managing their facilities. Conversely, a management consultancy firm depends largely on the quality of its staff. Here operations management is largely concerned with the development and deployment of con- sultant skills and knowledge.
Outputs from the process Products and services are different. Products are usually tangible things whereas services are activities or processes. A car or a newspaper or a restaurant meal is a product, whereas a service is the activity of the customer using or consuming that product. Some services do not involve products. Consultancy advice or a haircut is a processes (though some products may be supplied in support of the service, such as a report or a hair gel). Also, while most products can be stored, at least for a short time, service only happens when it is consumed or used. So accommodation in an hotel room for example will perish if it is not sold that night, a restau- rant table will remain empty unless someone uses it that evening.
Most operations produce both products and services Some operations create and deliver just services and others just products, but most operations combine both elements. Figure 1.6 shows a number of operations (including some described as examples in this chapter) positioned in a spectrum from ‘pure’ products to ‘pure’ service. Crude oil producers are concerned almost exclusively with the product which comes from their oil wells. So are aluminium smelters, but they might also deliver some services such as technical
table 1.2 Dominant transformed resource inputs of various operations
Predominantly processing inputs of materials
Predominantly processing inputs of information
Predominantly processing inputs of customer
all manufacturing operations mining companies retail operations Warehouses postal services container shipping line trucking companies
accountants Bank headquarters market research company Financial analysts news service University research unit telecoms company
hairdressers hotels hospitals mass rapid transports theatres theme parks Dentists
✽ ✽ ✽ Operations principle Operations principle Operations principle
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ChaPter 1 operations management 17
advice. Services in these circumstances are called facilitating services. To an even greater extent, machine tool manufacturers deliver facilitating services such as technical advice and applications engineering. The services delivered by a restaurant are an essential part of what the customer is paying for. It is both a manufacturing operation which creates and delivers meals and a provider of service in the advice, ambience and service of the food. An information systems provider may create software ‘products’, but primarily it is providing a service to its customers, with facilitating products. Certainly, a management consultancy, although it produces reports and documents, would see itself primarily as a service provider. Finally, pure services solely cre- ate and deliver services, a psychotherapy clinic, for example. Of the ‘Operations in practice’ examples in this chapter, LEGO (or at least the part of the LEGO Group we described in this chapter) produces tangible products, and Pret A Manger both creates and ‘serves’ its products. It therefore has substantial service content. Médecins Sans Frontières sup- plies physical aid in emergencies, but also intangible advice and medical help.
Torchbox’s customers receive no physical product but are paying for the design and func- tionality of the website designs. Likewise, hotels such as Formule 1 are close to being pure services, although they both have some tangible elements such as food.
Increasingly the distinction between services and products is dif- ficult to define and not particularly useful. Software has moved from being primarily a product (sold on a disk) to an intangible download when sold over the Internet to an even less tangible rental or subscrip- tion service based ‘in the cloud’. A restaurant meal is both a product and also a service as it is delivered and consumed. Indeed we would argue that all operations are service providers which may create and deliver products as part of the offering to their customers. This is why
Operations in practice examples from this chapter
Pure products
Pure services
Crude oil production
Examples
Aluminium smelting
Specialist machine tool production
Restaurant
Information systems provider
Management consultancy
Psychotherapy clinic
LEGO
Médecins Sans Frontières
Pret A Manger
Torchbox
Formule 1 / Ski Verbier
Figure 1.6 the output from most operations is a mixture of products and services. Some general examples are shown here together with some of the operations featured as ‘operations in practice’ examples in this chapter
✽ ✽ ✽ Operations principle Operations principle Operations principle
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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18 Part One Directing the operation
operations management is important to all organizations. Whether they see themselves as manufacturers or service providers is very much a secondary issue.
Customers Customers may be an input to many operations (see earlier) but they are also the reason for their existence. If there are no customers (whether business customers, users or consumers), there will be no operation. So it is critical that operations managers are aware of customers’ needs, both current and potential. This information will determine what the operation has to do and how it has to do it (the operation’s strategic performance objectives) which in turn defines the service/product offering to be designed, created and delivered.
OPeratiOnS in PraCtiCe
pret a manger is proud of its customer service. ‘ We'd like to think we react to our customers’ feelings (the good, the bad, the ugly) with haste and absolute sincerity ’, it says. ‘ Pret customers have the right to be heard. Do call or email. Our UK Managing Director is available if you would like to discuss Pret with him. Alternatively, our CEO hasn’t got much to do; hassle him! ’
it is a bold approach to customer service, but pret has always been innovative. Described by the press as having ‘revolutionized the concept of sandwich making and eating’, pret a manger opened its first shop in London and now has over 260 shops in the UK, new York, hong Kong and tokyo. it says that its secret is to focus continually on the quality of its food and of its service. pret avoids the chemicals and preserv- atives common in most ‘fast’ food. ‘ Many food retailers focus on extending the shelf life of their food, but that’s of no interest to us. We sell food that can’t be beaten for freshness. At the end of the day, we give whatever we haven’t sold to charity to help feed those who would otherwise go hungry .’ pret a manger shops have their own kitchen where fresh ingredients are delivered every morning, with food pre- pared throughout the day. the team members serving on the tills at lunchtime will have been making sandwiches in the kitchen that morning. ‘ We are determined never to forget that our hardworking people make all the difference. They are our heart and soul. When they care, our business is sound. If they cease to care, our business goes down the drain. In a retail sector where high staff turnover is normal, we’re pleased to say our people are much more likely to stay around! We work hard at building great teams. We take our reward schemes and career opportunities very seriously. We don’t work nights (generally), we wear jeans, we party!’
customer feedback is regarded as being particularly important at pret. examining customers’ comments for improvement ideas is a key part of weekly management meetings, and of the daily team briefs in each shop.
moreover, staff at pret are rewarded in cash for being nice to customers. they collect bonuses for delivering outstanding customer service. every week, each pret outlet is visited by a secret shopper who scores the shop on such performance measures as speed of ser- vice, product availability and cleanliness. in addition the mystery shopper rates the ‘engagement level’ of the staff; questions include, ‘Did servers connect with eye contact, a smile and some polite remarks?’ assessors score out of 50. if the store gets 43 points or more every team mem- ber receives an extra payment for every hour worked; and if an individual is mentioned by the mystery shop- per for providing outstanding service, he or she gets an extra payment. ‘ The emphasis on jollity and friendliness has been a winner’, said James murphy of the Future Foundation, a management consultant. ‘In the highly competitive sandwich market, that’s been a big contrib- utor to their success.’ But not everyone agrees with using mystery shoppers. ‘It is the equivalent of asking one cus- tomer in a shop what they thought at that exact moment, and then planning an entire store- improvement strategy around the one piece of feedback’, says Jeremy michael of the service management group, another consultancy.
Customer service at Pret a Manger 4
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ChaPter 1 operations management 19
What iS the PrOCeSS hierarChY?
So far we have discussed operations management, and the input–transformation–output model, at the level of ‘the operation’. For example, we have described ‘the web designer’, ‘the bank’, ‘the sandwich shop’, ‘the disaster relief operation’, and so on. But look inside any of these operations. One will see that all operations consist of a collection of processes (though these processes may be called ‘units’ or ‘departments’) interconnecting with each other to form a network. Each process acts as a smaller version of the whole operation of which they form a part, and transformed resources flow in between them. In fact, within any operation the mechanisms that actually transform inputs into outputs are these processes. A ‘process’ is an arrangement of resources and activities that transform inputs into outputs that sat- isfy (internal or external) customer needs. They are the ‘building blocks’ of all operations, and they form an ‘internal network’ within an operation. Each process is, at the same time, an internal supplier and an internal customer for other processes. This ‘internal customer’ concept provides a model to analyse the internal activities of an operation. It is also a useful reminder that, by treating internal customers with the same degree of care as external cus- tomers, the effectiveness of the whole operation can be improved. Table 1.3 illustrates how a wide range of operations can be described in this way.
Within each of these processes is another network of individual units of resource such as individual people and individual items of process technology (machines, computers, storage facilities, etc.). Again transformed resources flow between each unit of transform- ing resource. So any business, or operation, is made up of a network of processes and any process is made up of a network of resources. But also any business or operation can itself be viewed as part of a greater network of businesses or operations. It will have operations that supply it with the services and products it needs and unless it deals directly with the end consumer, it will supply customers who themselves may go on to supply their own customers. Moreover, any operation could have several suppliers, several customers and may be in competition with
table 1.3 Some operations described in terms of their processes
Operation Some of the operation's processes
airline passenger check-in assistance, baggage drop, security/seat check, board passengers, fl y passengers and freight around the world, fl ight scheduling, in-fl ight passenger care, transfer assistance, baggage reclaim, etc.
Department store source merchandise, manage inventory, display products, give sales advice, sales, aftercare, complaint handling, delivery service, etc.
police service crime prevention, crime detection, information gathering/ collating, victim support, formally charging/detaining suspects, managing custody suites, liaising with court/justice system, etc.
ice cream manufacturer
source raw materials, input quality checks, prepare ingredients, assemble products, pack products, fast-freeze products, quality checks, fi nished goods inventory, etc.
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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20 Part One Directing the operation
other operations creating similar services or products to itself. This network of operations is called the supply network. In this way the input–transformation–output model can be used at a number of different ‘levels of analysis’. Here we have used the idea to analyse businesses at three levels: the process, the operation and the supply network. But one could define many different ‘levels of analysis’, moving upwards from small to larger processes, right up to the huge supply network that describes a whole industry.
This idea is called the hierarchy of operations and is illustrated for a business that makes television programmes and videos in Figure 1.7. It will have inputs of production, technical and administrative staff, cameras, lighting, sound and recording equipment, and so on. It transforms these into finished programmes, music videos, etc. At a more macro level, the business itself is part of a whole supply network, acquiring services from creative agencies, casting agencies and studios, liaising with promotion agencies, and serving its broadcast- ing company customers. At a more micro level within this overall operation there are many
The supply network-flow between operations
The operation-flow between processess
Processes-flow between resources (people and facilities)
The ‘Set and props manufacturing’ process
The programme and video supply network
The programme and video operation
Studios
Casting agency
Creative agency
Promotion agency
Program/ video maker
Broadcasting company
Marketing and sales
Finance and accounting
Production unit
Post production
Engineering
Set and props manufacture
Set construction
Props acquisition
Set finishing
Set design
Figure 1.7 Operations and process management requires analysis at three levels: the supply network, the operation and the process
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ChaPter 1 operations management 21
individual processes: workshops manufacturing the sets; marketing processes that liaise with potential customers; maintenance and repair processes that care for, modify and design tech- nical equipment; production units that shoot the programmes and videos; and so on. Each of these individual processes can be represented as a network of yet smaller processes, or even individual units of resource. So, for example, the set manufacturing process could comprise four smaller processes: one that designs the sets, one that constructs them, one that acquires the props, and one that finishes (paints) the set.
Operations management is relevant to all parts of the business The example in Figure 1.7 demonstrates that it is not just the operations function that manages processes; all functions manage processe s . For example, the marketing function will have pro- cesses that create demand forecasts, processes that create advertising campaigns and processes that create marketing plans. These processes in the other functions also need managing using similar principles to those within the operations function. Each function will have its ‘technical’ knowledge. In market- ing, this is the expertise in designing and shaping marketing plans; in finance, it is the technical knowledge of financial reporting. Yet each will also have a ‘process management’ role of producing plans, poli- cies, reports and services. The implications of this are very important. Because all managers have some responsibility for managing processes, they are, to some extent, operations managers. They all should want to give good service to their (often internal) customers, and they all will want to do this efficiently. So, operations management is relevant for all functions, and all managers should have some- thing to learn from the principles, concepts, approaches and techniques of operations manage- ment. It also means that we must distinguish between two meanings of ‘operations’:
● ‘Operations’ as a function , meaning the part of the organization which creates and delivers services and products for the organization’s external customers.
● ‘Operations’ as an activity, meaning the management of the processes within any of the organization’s functions.
Table 1.4 illustrates just some of the processes that are contained within some of the more common non-operations functions, the outputs from these processes and their ‘customers’.
Business processes Whenever a business attempts to satisfy its customers’ needs it will use many processes, both in its operations and in its other functions. Each of these processes will contribute some part to fulfilling customer needs. For example, the television programme and video
Critical commentary
the idea of the internal network of processes is seen by some as being over-simplistic. in reality the relationship between groups and individuals is signifi cantly more complex than that between commercial entities. one cannot treat internal customers and suppliers exactly as one does external customers and suppliers. external customers and suppliers usually operate in a free market. if an organization believes that in the long run it can get a better deal by purchasing services and products from another supplier, it will do so. But internal customers and suppliers are not in a ‘free market’. they cannot usually look outside either to purchase input resources or to sell their output services and products (although some organizations are moving this way). rather than take the ‘economic’ perspective of external commercial relationships, models from organizational behaviour, it is argued, are more appropriate.
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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22 Part One Directing the operation
production company, described previously, creates and delivers two types of ‘product’. Both of these involve a slightly different mix of processes within the company. The company decides to reorganize its operations so that each product is created from start to finish by a dedicated process that contains all the elements necessary for its production, as in Figure 1.8 . So customer needs for each product are entirely fulfilled from within what is called an ‘end-to-end’ business
process. These often cut across conventional organizational boundaries. Reorganizing (or ‘re-engineering’) process boundaries and organizational responsibilities around these busi- ness processes is the philosophy behind business process re-engineering (BPR) which is discussed further in Chapter 16 .
hOW DO OPeratiOnS anD PrOCeSSeS DiFFer?
Although all operations processes are similar in that they all transform inputs, they do differ in a number of ways, four of which, known as the four Vs, are particularly important:
● The volume of their output. ● The variety of their output. ● The variation in the demand for their output. ● The degree of visibility which customers have of the creation of their output.
the volume dimension Let us take a familiar example. The epitome of high-volume hamburger production is McDonald’s, which serves millions of burgers around the world every day. Volume has impor- tant implications for the way McDonald’s operations are organized. The first thing you notice is the repeatability of the tasks people are doing and the systemization of the work where
table 1.4 Some examples of processes in non-operations functions
Organizational function Some of its processes Outputs from its processes Customer(s) for its outputs
marketing and sales
planning process Forecasting process order taking process
marketing plans sales forecasts confi rmed orders
senior management sales staff , planners, operations operations, fi nance
Finance and accounting
Budgeting process capital approval processes invoicing processes
Budgets capital request evaluations invoices
everyone senior management, requesters external customers
human resources management
payroll processes recruitment processes training processes
salary statements new hires trained employees
employees all other processes all other processes
information technology
systems review process help desk process system implementation project processes
system evaluation systems advice implemented working systems and aftercare
all other processes in the business
✽✽✽ Operations principle Operations principle Operations principle
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ChaPter 1 operations management 23
standard procedures are set down specifying how each part of the job should be carried out. Also, because tasks are systematized and repeated, it is worthwhile developing specialized fryers and ovens. All this gives low unit costs. Now consider a small local cafeteria serving a few ‘short-order’ dishes. The range of items on the menu may be similar to the larger opera- tion, but the volume will be far lower, so the repetition will also be far lower and the number of staff will be lower (possibly only one person) and therefore individual staff are likely to perform a wider range of tasks. This may be more rewarding for the staff, but less open to systemization. Also, it is less feasible to invest in specialized equipment. So the cost per burger served is likely to be higher (even if the price is comparable).
the variety dimension A taxi company offers a relatively high-variety service. It is prepared to pick you up from almost anywhere and drop you off almost anywhere. To offer this variety it must be relatively flexible. Drivers must have a good knowledge of the area, and communication between the base and the taxis must be effective. However, the cost per kilometre travelled will be higher for a taxi than for a less customized form of transport such as a bus service. Although both provide the same basic service (transportation), the taxi service has a higher variety of routes and times to offer its customers, while the bus service has a few well-defined routes, with a set schedule. If all goes to schedule, little, if any, flexibility is required from the bus operation. All is standardized and regular, which results in relatively low costs compared with using a taxi for the same journey.
the variation dimension Consider the demand pattern for a successful summer holiday resort hotel. Not surprisingly, more customers want to stay in summer vacation times than in the middle of winter. At the height of ‘the season’ the hotel could be full to its capacity. Off-season demand, however,
Programme set and props manufactur
Programme post production
Music video post production
Music video marketing and
sales
Music video production unit
Programme finance and accounting
Engineering
End-to-end process for programme production
Programme marketing and
sales
Programme production unit
Music video finance and accounting
Music video set and props manufacture
End-to-end process for music video production
Figure 1.8 the television and video company divided into two ‘end-to-end’ business processes, one dedicated to creating programmes and the other dedicated to creating music videos
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24 Part One Directing the operation
could be a small fraction of its capacity. Such a marked variation in demand means that the operation must change its capacity in some way, for example by hiring extra staff for the summer. The hotel must try to predict the likely level of demand. If it gets this wrong, it could result in too much or too little capacity. Also, recruitment costs, overtime costs and under-utilization of its rooms all have the effect of increasing the hotel’s costs operation com- pared with a hotel of a similar standard with level demand. A hotel which has relatively level demand can plan its activities well in advance. Staff can be scheduled, food can be bought and rooms can be cleaned in a routine and predictable manner. This results in a high utiliza- tion of resources and unit costs which are likely to be lower than those hotels with a highly variable demand pattern.
the visibility dimension Visibility is a slightly more difficult dimension of operations to envisage. It means how much of the operation’s activities its customers experience, or how much the operation is exposed to its customers. Generally, customer-processing operations are more exposed to their cus- tomers than material- or information-processing operations. But even customer-processing operations have some choice as to how visible they wish their operations to be. For exam- ple, a retailer could operate as a high-visibility ‘bricks and mortar’, or a lower visibility web- based, operation. In the ‘bricks and mortar’, high-visibility operation, customers will directly experience most of its ‘value-adding’ activities. Customers will have a relatively short wait- ing tolerance , and may walk out if not served in a reasonable time. Customers’ perceptions, rather than objective criteria, will also be important. If they perceive that a member of the operation’s staff is discourteous to them, they are likely to be dissatisfied (even if the staff member meant no discourtesy), so high-visibility operations require staff with good customer contact skills. Customers could also request services or products which clearly would not be sold in such a shop, but because the customers are actually in the operation they can ask what they like! This is called high received variety. This makes it difficult for high-visibility operations to achieve high productivity of resources, so they tend to be relatively high-cost operations. Conversely, a web-based retailer, while not a pure low-contact operation, has far
lower visibility. Behind its website, it can be more ‘factory-like’. The time lag between the order being placed and the items ordered by the customer being retrieved and dispatched does not have to be minutes, as in the shop, but can be hours or even days. This allows the tasks of finding the items, packing and dispatching them to be standard- ized by staff who need few customer contact skills. Also, there can be relatively high staff utilization . The web-based organization can also centralize its operation on one (physical) site, whereas the ‘bricks and
mortar’ operation needs many shops close to centres of demand. Therefore, the low-visibility web-based operation will have lower costs than the shop.
Mixed high- and low-visibility processes Some operations have both high- and low-visibility processes within the same operation. In an airport, for example, some activities are totally ‘visible’ to its customers such as informa- tion desks answering people’s queries. These staff operate in what is termed a front-office environment. Other parts of the airport have little, if any, customer ‘visibility’, such as the bag- gage handlers. These rarely seen staff perform the vital but low-contact tasks, in the back-of- fice part of the operation.
the implications of the four Vs of operations processes All four dimensions have implications for the cost of creating and delivering services and products. Put simply, high volume, low variety, low variation and low customer contact all help to keep processing costs down. Conversely, low volume, high variety, high variation and high customer contact generally carry some kind of cost penalty for the operation. This is why
✽ ✽ ✽ Operations principle Operations principle Operations principle
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ChaPter 1 operations management 25
OPeratiOnS in PraCtiCe
Ski Verbier exclusive it is the name of the company that gives it away: ski Verbier exclusive Ltd is a provider of ‘upmarket ’ ski holi- days in the swiss winter sports resort of Verbier. With 23 years’ experience of organizing holidays, ski Verbier exclusive looks after luxury proper- ties in the resort that are rented from their owners for letting to ski Verbier exclusive’s clients. the properties vary in size and the configuration of their rooms, but the flexibility to reconfig- ure the rooms to cater for the varying requirements of client groups is impor- tant. ‘ We are very careful to cultivate as good a relationship with the owners, as we are with our clients that use our hol- iday service’ , says tom avery, Joint founder and Director of the company. ‘ We have built the business on develop- ing these personal relationships, which is why our clients come back to us year after year (40% to 50% of clients are returners) . We pride ourselves on the personal service that we give to every one of our clients; from the moment they begin planning their ski holiday, to the journey home. What counts is experience, expertise, obsessive eye for detail and the understated luxury of our chalets combined with our ability to customise client experience. ’ and client requests can be anything from organizing a special mountain pic- nic complete with igloos, to providing an ice sculpture of Kermit the Frog for a kids’ party. the personal concierge service begins from the moment the client books. the company ’s specialist staff have all lived and worked in Verbier and take care of all details of the trip well in advance, from organ- izing airport transfers to booking a private ski instructor, from arrang- ing private jet or helicopter flights to Verbier ’s local airport, to making lunch reservations in the best moun- tain restaurants. ‘ We cater for a small, but discerning market ’, says tom. ‘ Other companies may be bigger, but with us it’s our personal service that clients remember. ’ however, snow does not last all the year round. the company ’s busiest period is mid-December to mid-april. that is when all the prop- erties that the company manages are full. the rest of the year is not so busy,
but the company does offer bespoke summer vacations in some of its properties. these can be either self- catering, or with the full concierge service that clients get in the ski season. ‘ We adapt to clients’ requirements ’, says tom. ‘ That is why the quality of our staff is so important. They have to be good at working with clients, be able to judge the type of relationship that is appropriate, and be committed to providing what makes a great holiday. That’s why we put so much effort into recruiting, training and retaining our staff.’
Formule 1 hotels are high-contact operations – they are staff- intensive and have to cope with a range of customers, each with a variety of needs and expectations. so, how
two very diff erent hospitality operations
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26 Part One Directing the operation
the volume dimension is drawn with its ‘low’ end at the left, unlike the other dimensions, to keep all the ‘low-cost’ implications on the right. To some extent the position of an operation in the four dimensions is determined by the demand of the market it is serving. However, most operations have some discretion in moving themselves on the dimen- sions. Figure 1.9 summarizes the implications of such positioning.
can a highly successful chain of affordable hotels avoid the crippling costs of high customer contact? Formule 1, a subsidiary of the French accor group, manages to offer outstanding value by adopting two principles not always associated with hotel operations – standardization and an innovative use of technology. Formule 1 hotels are usually located close to the roads, junctions and cities that make them visible and accessible to prospective customers. the hotels themselves are made from state- of-the-art volumetric prefabrications. the prefabricated units are arranged in various configurations to suit the characteristics of each individual site. all rooms are 9 square metres in area, and are designed to be attractive, functional, comfortable and soundproof. most impor- tant, they are designed to be easy to clean and maintain. all have the same fittings, including a double bed, an
additional bunk-type bed, a wash basin, a storage area, a working table with seat, a wardrobe and a television set. the reception of a Formule 1 hotel is staffed only from 6.30 am to 10.00 am and from 5.00 pm to 10.00 pm. outside these times an automatic machine sells rooms to credit card users, provides access to the hotel, dispenses a security code for the room and even prints a receipt. technology is also evident in the washrooms. showers and toilets are automatically cleaned after each use by using nozzles and heating elements to spray the room with a disinfectant solution and dry it before it is used again. to keep things even simpler, Formule 1 hotels do not include a restaurant, as they are usually located near existing ones. however, a continental breakfast is available, usually between 6.30 am and 10.00 am, and of course on a ‘self-service’ basis!
Volume
Implications Implications
Low High
VarietyHigh Low
Variation in demand High Low
VisibilityHigh Low
Low repetition Each sta� member performs more of each task Less systemization High unit costs
High repeatability Specialization Capital intensive Low unit costs
Well defined Routine Standardized Regular Low unit costs
Stable Routine Predictable High utilization Low unit costs
Time lag between production and consumption Standardization Low contact skills High sta� utilization Centralization Low unit costs
Flexible Complex Match customer needs High unit costs
Changing capacity Anticipation Flexibility In touch with demand High unit costs
Short waiting tolerance Satisfaction governed by customer perception Customer contact skills needed Received variety is high High unit costs
Figure 1.9 a typology of operations
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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ChaPter 1 operations management 27
Worked example
Figure 1.10 illustrates the different positions on the dimensions of the ski Verbier exclusive operation and the Formule 1 hotel chain ( see the ‘operations in practice’ exam- ple above). at the most basic level, both provide the same basic service. they accom- modate people. Yet they are very different: ski Verbier exclusive provides luxurious and bespoke vacations for a relatively small segment of the ski holiday market . its variety of services is almost infinite in the sense that customers can make individual requests in terms of food and entertainment. Variation is high with four months of 100 per cent occupancy, followed by a far quieter period. customer contact, and therefore visibility, are also very high (in order to ascertain customers’ requirements and provide for them). all of this is very different from the Formule 1 branded hotels, whose customers usually stay one night, where the variety of services is strictly limited, and business and holiday customers use the hotel at different times, which limits variation. most notably, though, customer contact is kept to a minimum. ski Verbier exclusive has very high levels of ser- vice, which means it has relatively high costs. its prices therefore are not cheap – certainly not as cheap as Formule 1, which has arranged its operation in such a way as to provide a highly standardized service at minimal cost.
Ski Verbier exclusive
The Formule 1 hotel brand
Visibility
Variation
Variety
VolumeLow
High
High
High
High
Low
Low
Low
Figure 1.10 the four Vs profiles of two very different hospitality operations
What DO OPeratiOnS ManaGerS DO?
The exact details of what operations managers do will, to some extent, depend on the way an organization defines the boundaries of the function. Yet there are some general classes of activities that apply to all types of operation irrespective of whether they are ser- vice, manufacturing, private or public sector, and no matter how the operations function is defined. We classify operations management activities under the four headings: direct, design, deliver and develop.
● Directing the overall strategy of the operation. A general understanding of operations and processes and their strategic purpose and performance, together with an appreciation of how strategic purpose is translated into reality, are prerequisites to the detailed design of operations and process. This is treated in Chapters 1 to 5 .
● Designing the operation’s resources and processes. Design is the activity of determining the physical form, shape and composition of operations and processes in line with the ser- vices and products that they create. This is treated in Chapters 6 to 9 .
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28 Part One Directing the operation
● Planning and control process delivery . After being designed, the delivery of services and products from suppliers and through the total operation to customers must be planned and controlled. This is treated in Chapters 10 to 15 .
● Developing process performance. Increasingly it is recognized that operations man- agers, or any process managers, cannot simply routinely deliver services and products in the same way that they always have done. They have a responsibility to develop the capabilities of their processes to improve process performance. This is treated in Chapters 16 to 19 .
Operations management impacts environmental sustainability It is worth noting at this point that many of the activities of operations managers have a huge impact on their organization’s environmental sustainability. Environmental sustain- ability means (according to the Brundtland Report from the United Nations) ‘ meeting the needs of the present without compromising the ability of future generations to meet their own needs ’. Put more directly, it means the extent to which business activity negatively impacts the natural environment. It is clearly an important issue, not only because of the obvious impact on the immediate environment of hazardous waste, air, and even noise, pollution, but also because of the less obvious, but potentially far more damaging, issues around global warming.
It is important to operations managers because the pollution-causing disasters which make the headlines seem to be the result of a whole variety of causes – oil tankers run aground,
nuclear waste is misclassified, chemicals leak into a river, or gas clouds drift over industrial towns. But in fact they all have something in common. They were all the result of an operations-based failure. Somehow operations procedures were inadequate. Less dramatic in the short term, but perhaps more important in the long term, is the environmental impact of products which cannot by recycled and processes which consume large amounts of energy. In fact many of operations management’s environmental issues are concerned with waste. Operations management decisions in product and service
design significantly affect the utilization of materials both in the short term and in long-term recyclability. Process design influences the proportion of energy and labour that is wasted as well as materials wastage. Planning and control may affect materials wastage (packag- ing being wasted by mistakes in purchasing, for example), but also affects energy and labour wastage. Improvement, of course, is dedicated largely to reducing wastage. Here environ- mental responsibility and the conventional concerns of operations management coincide. Reducing waste, in all its forms, may be environmentally sound but it also saves cost for the organization.
the model of operations management We can now combine two ideas to develop the model of operations and process management that will be used throughout this book. The first is the idea that operations and the processes
that make up both the operations and other business functions are transformation systems that take in inputs and use process resources to transform them into outputs. The second idea is that the resources both in an organization’s operations as a whole and in its individual processes need to be managed in terms of how they are directed , how they are designed , how delivery is planned and controlled, and how they are developed and improved. Figure 1.11 shows how these two ideas go together. This book will use this model to examine the more important decisions that should be of interest to all managers of oper- ations and processes.
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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ChaPter 1 operations management 29
OPeratiOnS in PraCtiCe
hp began recycling hardware as far back as 1987, when it was the only major computer manufacturer to oper- ate its own recycling facility. since then hp has recov- ered over 227 billion pounds (1.27 billion kilograms) of products for reuse or recycling. its recycling programme seeks to reduce the environmental impact of its prod- ucts, minimizing waste going to landfills by helping customers discard products conveniently in an envi- ronmentally sound manner. recovered materials, after recycling, have been used to make various products, including auto body parts, clothes hangers, plastic toys, fence posts, and roof tiles.
hp has developed a standard for management of hardware at the end of its useful life to ensure the hard- ware is responsibly recycled or recovered. it also helps other electronics recyclers to work effectively with its products by providing disassembly instructions to them.
more than 75 per cent of its ink cartridges and 24 per cent of LaserJet toner cartridges are manufactured with what is known as ‘closed loop’ recycled plastic. this indi- cates that ink cartridges that include recycled plastic will contain 50–70 per cent recycled plastic and LaserJet toner cartridges that include recycled plastic will contain 10–20 per cent recycled plastic. hp sees its recycling service as providing an easy way to recycle. its specially developed state-of-the-art processes are designed to make sure that computer hardware, empty hp printing supplies and other items are recycled responsibly. the hp recycling programme includes such customer-friendly features as recycling hp inkjet and LaserJet cartridges for free, recycling any brand of computer hardware, being able to use its online ordering tool to request recycling services, and recycling hp Large Format and Banner media for free.
hP's recycling activities 5
to be a great operations manager you need to… 6 so, you are considering a career in operations management, and you want to know, ‘is it for you?’ What skills and personal qualities will you need to make a success of the job as well as enjoying yourself as you progress in the profession? Well, the fi rst thing to recognize is that there are many diff erent roles encompassed within the general category of ‘operations management’. someone who makes a great risk control system designer in an investment bank may not thrive as a site manager in a copper mine. a video game project manager has a diff erent set of day-to- day tasks when compared with a purchasing manager for a hospital. so the fi rst skill you need is to understand the range of operations-related responsibilities that exist in various industries; and there is no better way to do this than by reading this book! however, there are also some generic skills that an eff ective operations manager must possess. here are some of them. how many of them do you share?
● Enjoys getting things done – operations management is about doing things. it takes energy and/or commitment to fi nishing tasks. it means hitting deadlines and not letting down customers, whether they are internal or external.
● Understands customer needs – operations man- agement is about adding value for customers. this means fully understanding what ‘value’ means for customers. it means ‘putting your- self in the customer’s place’: knowing what it is like to be the customer, and knowing how to ensure that your services or products make the customer’s life better
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30 Part One Directing the operation
Transformed resources • Materials • Information • Customers
Transforming resources • Facilities • Staff
Input resources
Output products and services
Value added for customers
Operations management
Deliver – improving the operation’s capabilities
Direct – steering operations
and processes
Design – shaping processes,
products and services
Develop – planning and
controlling ongoing operations
Chapter 10 Planning and control of operations Chapter 11 Capacity management Chapter 12 Supply chain management Chapter 13 Inventory management Chapter 14 Planning and control systems Chapter 15 Lean operations
Chapter 16 Operations improvement Chapter 17 Quality management Chapter 18 Risk and recovery Chapter 19 Project management
Chapter 6 Process design Chapter 7 Layout and flow Chapter 8 Process technology Chapter 9 People in operations
Chapter 1 Operations management Chapter 2 Operations performance Chapter 3 Operations strategy Chapter 4 Product and service innovation Chapter 5 The structure and scope of operations
Figure 1.11 a general model of operations management
● Communicates and motivates – operations management is about directing resources to produce services or prod- ucts in an effi cient and eff ective manner. this means articulating what is required and persuading people to do it. interpersonal skills are vital. operations managers must be ‘people people’.
● Learns all the time – every time an operations manager initiates an action (of any kind) there is an opportunity to learn from the result. operations management is about learning, because without learning there can be no improvement, and improvement is an imperative for all operations.
● Committed to innovation – operations management is always seeking to do things better. this means creating new ways of doing things, being creative, imaginative, and (sometimes) unconventional.
● Knows his or her contribution – operations management may be the central function in any organization, but it is not the only one. it is important that operations managers know how they can contribute to the eff ective working of other functions.
▼
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ChaPter 1 operations management 31
● Capable of analysis – operations management is about making decisions. each decision needs to be evaluated (sometimes with very little time). this involves looking at both the quantitative and the qualitative aspects of the decision. operations managers do not necessarily have to be mathematical geniuses, but they should not be afraid of numbers!
● Keeps cool under pressure – operations managers often work in pressured situations. they need to be able to remain calm no matter what problems occur.
Critical commentary
the central idea in this introductory chapter is that all organizations have operations processes which create and deliver services and products and all these processes are essentially similar. however, some believe that by even trying to characterize processes in this way (perhaps even by calling them ‘processes’) one loses or distorts their nature, depersonalizes or takes the ‘humanity ’ out of the way in which we think of the organization. this point is often raised in not-for-profi t organizations, especially by ‘professional’ staff . For example, the head of one european ‘medical association’ (a doctors’ trade union) criticized hospital authorities for expecting a ‘sausage factory service based on productivity targets’ . no matter how similar they appear on paper, it is argued, a hospital can never be viewed in the same way as a factory. even in commercial businesses, professionals, such as creative staff , often express discomfort at their expertise being described as a ‘process’.
● operations management is the activity of managing the resources which are devoted to the creation and delivery of service and products. it is one of the core functions of any business, although it may not be called operations management in some industries.
● operations management is concerned with managing processes. and all processes have internal customers and suppliers. But all management functions also have processes. therefore, operations management has relevance for all managers.
❯ What is operations management?
SuMMarY anSWerS tO KeY QueStiOnS
● operations management uses the organization’s resources to create outputs that fulfi l defi ned market requirements. this is the fundamental activity of any type of enterprise.
● operations management is increasingly important because today ’s business environment requires new thinking from operations managers.
❯ Why is operations management important in all types of organization?
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32 Part One Directing the operation
❯ What is the input–transformation–output process?
❯ What is the process hierarchy?
● all operations can be modelled as input–transformation–output processes. they all have inputs of transforming resources, which are usually divided into ‘facilities’ and ‘staff ’, and transformed resources, which are some mixture of materials, information and customers.
● most operations create and deliver a combination of services and products, rather than being a ‘pure’ service or ‘product’ product operation.
● all operations are part of a larger supply network which, through the individual contribu- tions of each operation, satisfies end customer requirements.
● all operations are made up of processes that form a network of internal customer–supplier relationships within the operation.
● end-to-end business processes that satisfy customer needs often cut across functionally based processes.
❯ how do operations and processes differ?
❯ What do operations managers do?
● operations and processes differ in terms of the volume of their outputs, the variety of out- puts, the variation in demand for their outputs, and the degree of ‘visibility ’ they have.
● high volume, low variety, low variation and low customer ‘visibility ’ are usually associated with low cost.
● responsibilities can be classed in four categories – direct, design, deliver and develop:
● Direct includes understanding relevant performance objectives, setting an operations strategy, managing innovation and the scope of the operation.
● Design includes the design of the operation and its processes and its resources.
● Delivery includes the planning and controlling of the activities of the operation.
● Develop includes the improvement of the operation over time.
● increasingly operations managers have a responsibility for an operations environmental performance.
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CaSe StuDY Design house partnerships at Concept Design Services
‘ I can't believe how much we have changed in a relatively short time. From being an inward looking manufacturer, we became a customer focused “design and make” opera- tion. Now we are an integrated service provider. Most of our new business comes from the partnerships we have formed with design houses. In effect, we design products jointly with specialist design houses that have a well-known brand, and offer them a complete service of manufacturing and distri- bution. In many ways we are now a “business-to-business” company rather than a “business-to-consumer” company. ’ ( Jim thompson, ceo, concept Design services (cDs))
cDs had become one of europe’s most profitable home- ware businesses. originally founded in the 1960s, the com- pany had moved from making industrial mouldings, mainly in the aerospace sector, and some cheap ‘homeware’ items such as buckets and dustpans, sold under the ‘Focus’ brand name, to making very high-quality (expensive) stylish homewares with a high ‘design value’.
the move into ‘Concept’ products the move into higher margin homeware had been mas- terminded by Linda Fleet, cDs’s marketing Director, who had previously worked for a large retail chain of paint and wallpaper retailers.
‘ Experience in the decorative products industry had taught me the importance of fashion and product development, even in mundane products such as paint. Premium-priced colours and new textures would become popular for one or two years, supported by appropriate promotion and features in lifestyle magazines. The manufacturers and retailers who created and supported these products were dramatically more profitable than those who simply provided standard ranges. Instinctively, I felt that this must also apply to homeware. We decided to develop a whole co-ordinated range of such items, and to open up a new distribution network for them to serve up-market stores, kitchen equipment and specialty retailers. Within a year of launching our first new range of kitchen homeware under the “Concept” brand name, we had over 3000 retail outlets signed up, provided with point-of-sale display facilities. Press coverage generated an enormous interest which was reinforced by the product place- ment on several TV cookery and “lifestyle” programmes. We soon developed an entirely new market and within two years Concept products were providing over 75 per cent of our revenue and 90 per cent of our profits. The price realization of Concept products is many times higher than for the “Focus” range. To keep ahead we launched new ranges at regular intervals. ’
the move to the design house partnerships ‘ Over the last four years, we have been designing, manu- facturing and distributing products for some of the more
prestigious design houses. This sort of business is likely to grow, especially in Europe where the design houses appre- ciate our ability to offer a full service. We can design prod- ucts in conjunction with their own design staff and offer them a level of manufacturing expertise they can’t get elsewhere. More significantly, we can offer a distribution service which is tailored to their needs. From the custom- er’s point of view the distribution arrangements appear to belong to the design house itself. In fact they are based exclusively on our own call centre, warehouse and distri- bution resources. ’
the most successful collaboration was with Villessi, the italian designers. generally it was cDs’s design expertise which was attractive to ‘design house’ partners. not only did cDs employ professionally respected designers, but also it had acquired a reputation for being able to translate difficult technical designs into manufacturable and salea- ble products. Design house partnerships usually involved relatively long lead times but produced unique products with very high margins, nearly always carrying the design house’s brand.
‘ this type of relationship plays to our strengths. our design expertise gains us entry to the partnership but we are soon valued equally for our marketing, distribution and manufacturing competence.’ (Linda Fleet, marketing Director)
Manufacturing operations all manufacturing was carried out in a facility located 20 km from head office. its moulding area housed large injection-moulding machines, most with robotic mate- rials handling capabilities. products and components passed to the packing hall, where they were assembled and inspected. the newer, more complex products often
ChaPter 1 operations management 33
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34 Part One DIRECTING THE OPERATION
had to move from moulding to assembly and then back again for further moulding. All products followed the same broad process route but with more products need- ing several progressive moulding and assembly stages, there was an increase in ‘process flow recycling ’ which was adding complexity. One idea was to devote a sepa- rate cell to the newer and more complex products until they had ‘bedded in’. This cell could also be used for testing new moulds. However, it would need investment in extra capacity that would not always be fully utilized. After manufacture, products were packed and stored in the adjacent distribution centre.
‘When we moved into making the higher margin Concept products, we disposed of most of our older, small injection-moulding machines. Having all larger machines allowed us to use large multi-cavity moulds. This increased productivity by allowing us to produce several products, or components, each machine cycle. It also allowed us to use high quality and complex moulds which, although cumber- some and more difficult to change over, gave a very high quality product . For example, with the same labour we could make three items per minute on the old machines, and 18 items per minute on the modern ones using multi moulds. That’s a 600 per cent increase in productivity. We also achieved high dimensional accuracy, excellent sur- face finish, and extreme consistency of colour. We could do this because of our expertise derived from years making aerospace products. Also, by standardising on single large machines, any mould could fit any machine. This was an ideal situation from a planning perspective, as we were often asked to make small runs of Concept products at short notice.’ (Grant Williams, CDS Operations Manager)
Increasing volume and a desire to reduce cost had resulted in CDS subcontracting much of its Focus products to other (usually smaller) moulding companies.
‘We would never do it with any complex or Design House partner products, but it should allow us to reduce the cost of making basic products while releasing capacity for higher margin ones. However there have been quite a few “teething problems”. Coordinating the production schedules is currently a problem, as is agreeing quality standards. To some extent it’s our own fault. We didn’t realise that subcontracting was a skill in its own right. And although we have got over some of the problems, we still do not have a satisfactory relation- ship with all of our subcontractors.’ (Grant Williams, CDS Operations Manager)
Planning and distribution services The distribution services department of the company was regarded as being at the heart of the company ’s customer service drive. Its purpose was to integrate the efforts of design, manufacturing and sales by plan- ning the flow of products from production, through the distribution centre, to the customer. Sandra White, the Planning Manager, reported to Linda Fleet and was
responsible for the scheduling of all manufacturing and distribution, and for maintaining inventory levels for all the warehoused items
‘We try to stick to a preferred production sequence for each machine and mould so as to minimise set-up times by starting on a light colour, and progressing through a sequence to the darkest . We can change colours in 15 minutes, but because our moulds are large and technically complex, mould changes can take up to three hours. Good scheduling is important to maintain high plant utilisation. With a higher variety of complex products, batch sizes have reduced and it has brought down average utilisation. Often we can’t stick to schedules. Short-term changes are inevitable in a fashion market. Certainly better forecasts would help…but even our own promotions are sometimes organised at such short notice that we often get caught with stockouts. New products in particular are difficult to forecast , especially when they are “fashion” items and/ or seasonal. Also, I have to schedule production time for new product mould trials; we normally allow 24 hours for the testing of each new mould received, and this has to be done on production machines. Even if we have urgent orders, the needs of the designers always have priority.’ (Sandra White)
Customer orders for Concept and design house part- nership products were taken by the company ’s sales call centre located next to the warehouse. The individual orders would then be dispatched using the company ’s own fleet of medium and small distribution vehicles for UK orders, but using carriers for the Continental European market . A standard delivery timetable was used and an ‘express delivery ’ service was offered for those customers prepared to pay a small delivery pre- mium. However, a recent study had shown that almost 40 per cent of express deliveries were initiated by the company rather than customers. Typically this would be to fulfil deliveries of orders containing products out of stock at the time of ordering. The express delivery ser- vice was not required for Focus products because almost all deliveries were to five large customers. The size of each order was usually very large, with deliveries to cus- tomers’ own distribution depots. However, although the organization of Focus delivery was relatively straightfor- ward, the consequences of failure were large. Missing a delivery meant upsetting a large customer.
Challenges for CDS Although the company was financially successful and very well regarded in the homeware industry, there were a number of issues and challenges that it knew it would have to address. The first was the role of the design department and its influence over new product development.
New product development had become particularly important to CDS, especially since it had formed alliances with design houses. This had led to substantial growth in
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ChaPter 1 operations management 35
both the size and the influence of the design department, which reported to Linda Fleet.
‘Building up and retaining design expertise will be the key to our future. Most of our growth is going to come from the business which will be bought in through the creativity and flair of our designers. Those who can combine creativity with an understanding of our partners’ business and design needs can now bring in substantial contracts. The existing business is important of course, but growth will come directly from these people’s capabilities.’ (Linda Fleet)
But not everyone was so sanguine about the rise of the design department.
‘It is undeniable that relationships between the design- ers and other parts of the company have been under strain recently. I suppose it is, to some extent, inevitable. After all, they really do need the freedom to design as they wish. I can understand it when they get frustrated at some of the constraints which we have to work under in the man- ufacturing or distribution parts of the business. They also should be able to expect a professional level of service from us. Yet the truth is that they make most of the problems themselves. They sometimes don’t seem to understand the consequences or implications of their design decisions or the promises they make to the design houses. More seri- ously they don’t really understand that we could actu- ally help them do their job better if the cooperated a bit more. In fact, I now see some of our design house partners’ designers more than I do our own designers. The Villessi designers are always in my factory and we have developed some really good relationships.’ (grant Williams)
the second major issue concerned sales forecasting, and again there were two different views. grant Williams was convinced that forecasts should be improved.
‘Every Friday morning we devise a schedule of production and distribution for the following week. Yet, usually before Tuesday morning, it has had to be significantly changed because of unexpected orders coming in from our customers’ weekend sales. This causes tremendous disruption to both manufacturing and distribution operations. If sales could be forecast more accurately we would achieve far high utiliza- tion, better customer service, and, I believe, significant cost savings.'
however, Linda Fleet saw things differently. ‘Look, I do understand Grant’s frustration, but after all, this
is a fashion business. By definition it is impossible to forecast accurately. In terms of month-by-month sales volumes we are in fact pretty accurate, but trying to make a forecast for every week end every product is almost impossible to do accurately. Sorry, that’s just the nature of the business we're in. In fact, although Grant complains about our lack of forecast accu- racy, he always does a great job in responding to unexpected customer demand.’
Jim thompson, the managing Director, summed up his view of the current situation.
‘Particularly significant has been our alliances with the Italian and German design houses. In effect we are position- ing ourselves as a complete service partner to the designers. We have a world-class design capability together with man- ufacturing, order processing, order-taking and distribution services. These abilities allow us to develop genuinely equal partnerships which integrate us into the whole industry’s activities.’
Linda Fleet also saw an increasing role for collaborative arrangements.
‘It may be that we are seeing a fundamental change in how we do business within our industry. We have always seen ourselves as primarily a company that satisfies con- sumer desires through the medium of providing good ser- vice to retailers. The new partnership arrangements put us more into the “business to business” sector. I don't have any problem with this in principle, but I'm a little anxious as to how much it gets us into areas of business beyond our core expertise.’
the final issue which was being debated within the com- pany was longer term, and particularly important.
‘The two big changes we have made in this company have both happened because we exploited a strength we already had within the company. Moving into Concept products was only possible because we brought our high- tech precision expertise that we had developed in the aerospace sector into the homeware sector where none of our new competitors could match our manufacturing excellence. Then, when we moved into design house part- nerships we did so because we had a set of designers who could command respect from the world class design houses with whom we formed partnerships. So what is the next move for us? Do we expand globally? We are strong in Europe but nowhere else in the world. Do we extend our design scope into other markets, such as furniture? If so, that would take us into areas where we have no manufac- turing expertise. We are great at plastic injection mould- ing, but if we tried any other manufacturing processes, we would be no better than, and probably worse than, other firms with more experience. So what’s the future for us?' ( Jim thompson, ceo cDs)
QueStiOnS 1 Why is operations management important in CDS?
2 Draw a four Vs profile for the company ’s products/ services.
3 What would you recommend to the company if it asked you to advise it in improving its operations?
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36 Part One Directing the operation
1 read the ‘operations in practice’ case on pret a manger. (a) identify the processes in a typical pret a manger shop together with their inputs and outputs. (b) pret a manger also supplies business lunches (of sandwiches and other take-away food). What are the implications for how it manages its processes within the shop? (c) What would be the advantages and dis- advantages if pret a manger introduced ‘central kitchens’ that made the sandwiches for a number of shops in an area?
2 compare and contrast torchbox and pret a manger in terms of the way that they need to manage their operations.
3 Visit a hotel (other than Formule 1) and a sandwich or snack shop (other than pret a manger). observe how each operation appears to work: for example, where customers go, how staff interact with them, how big it is, how the operation has chosen to use its space, what variety of products/services it offers, and so on. think about how these shops are similar to Formule 1 and pret a manger, and how they differ.
4 reread the ‘operations in practice’ case on Lego. Lego also lends its name to a chain of Lego-themed amusement parks aimed at younger children and families. although the Lego group has a share in the parks, they are largely owned and operated by a theme park com- pany – merlin entertainments. Visit the website for one of these theme parks (or visit an actual site if you want a day out) and compare the Lego manufacturing operation with the theme park operations using the four Vs.
5 Visit and observe three restaurants. compare them in terms of the four Vs. think about the impact of volume, variety, variation and visibility on the day-to-day management of each of the operations and consider how each operation attempts to cope with its volume, variety, variation and visibility.
6 (Advanced) Find a copy of a financial newspaper ( Financial Times , Wall Street Journal , The Economist , etc.) and identify one company which is described in the paper that day. Using the list of issues identified in Figure 1.4 , what do you think would be the new operations agenda for this company?
SeLeCteD Further reaDinG
anupindi, r. and Chopra, S. (2013) Managing Business Process Flows , 3rd edn, Pearson, harlow.
takes a ‘process’ view of operations; it is mathematical but rewarding.
Barnes, D. (2007) Operations Management: An international perspective , Cengage Learning, Boston, Ma.
a text that is similar in outlook to this one, but with more of a (useful) international perspective.
Brandon-Jones, a . and Slack, n. (2008) Quantitative Analysis in Operations Management , Financial times Prentice hall, harlow.
a useful short book covering some of the more advanced quantitative aspects of operations management.
hall, J.M. and Johnson, M.e. (2009) When should a process be art, not science?, Harvard Business Review , March.
PrOBLeMS anD aPPLiCatiOnS
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ChaPter 1 operations management 37
one of the few articles that looks at the boundaries of conventional process theory.
hammer, M. and Stanton, S. (1999) how process enterprises really work, Harvard Business Review, november–December.
hammer is one of the gurus of process design. this paper is typical of his approach.
Jacobs, F.r. and Chase, r.B. (2012) Operations and Supply Chain Management, 3rd edn, McGraw- hill/irwin, new York.
there are many good general textbooks on operations management. this takes a supply chain per- spective, though written very much for an american audience.
Johnston, r., Clark, e. and Shulver M. (2012) Service Operations Management, 4th edn, Pearson, harlow.
What can we say! a great treatment of service operations from the same stable as this textbook.
Slack, n. and Lewis, M.a. (eds) (2005) The Blackwell Encyclopedic Dictionary of Operations Management, 2nd ed, Blackwell Business, Oxford.
For those who like technical descriptions and definitions.
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intrOduCtiOn operations are judged by the way they perform. however, there are many ways of judging performance and there are many different individuals and groups doing the judging. also, performance can be assessed at different levels. so in this chapter we start by describing a very broad approach to assessing operations performance at a societal level that uses the ‘triple bottom line’ to judge an operation’s social, environmental and economic impact. We then look at how operations performance can be judged in terms of how it affects an organization’s ability to achieve its overall strategy. the chapter then looks at the more directly operational- level aspects of performance – quality, speed, dependability, flexibility and cost. finally we examine how performance objectives trade off against each other. on our general model of operations management the topics covered in this chapter are represented by the area marked on figure 2.1 .
Operations performance
Key questions
❯ why is operations performance vital in any organization?
❯ how is operations performance judged at a societal level?
❯ how is operations performance judged at a strategic level?
❯ how is operations performance judged at an operational level?
❯ how can operations performance be measured?
❯ how do operations performance objectives trade off against each other?
2
Topic covered in this chapter
Operations management
Direct
Design Develop
Deliver
Direct
Operations performance
The structure
and scope of operations
Operations strategy
Operations management
Product and service innovation
Figure 2.1 this chapter examines operations performance
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CHAPTER 2 OPERATIONS PERFORMANCE 39
WHY IS OPERATIONS PERFORMANCE VITAL IN ANY ORGANIZATION?
It is no exaggeration to view operations management as being able either to ‘make or break’ any business – not just because the operations function is large and, in most businesses, repre- sents the bulk of its assets and the majority of its people, but because the operations function gives the power to compete by providing the ability to respond to customers and by develop- ing the capabilities that will keep it ahead of its competitors in the future. But when things go wrong in operations, the reputational damage can last for years. For example, air travel depends on the smooth and efficient operation of airport terminals, so when Terminal 5 at London’s Heathrow Airport first opened and there was chaos on its opening days, it was seen by many as one of the most public failures of basic operations management in the modern history of aviation. The problems included a lack of adequate training in new systems, con- fusing signage, slow baggage handling and a failure to understand how the terminal’s indi- vidual processes needed to be integrated. It needed an extra 400 volunteer staff and courier companies to wade through the backlog of late baggage, and 200 flights in and out of the terminal were cancelled in its first three days. Now, the terminal works well and is popular with passengers, but it has taken time to shake off the poor reputation it gained in those first chaotic days.
So, to understand the importance of operations management, one must first understand why things can go wrong in operations and their impact. We will deal with the nature of oper- ations failures in Chapter 18 , but the first point to make is that when operations do go wrong it can be very obvious. Look at the various high-profile problems and disasters reported in the news. Very many of them are the direct result of poor operations management. From bank ATM failures that inconvenience an operation’s customers, to air crashes that kill them, oper- ations failures are both obvious and serious. Not that all operations failures have to be dra- matic. One could argue that simply doing what has always been done is a failure to exploit opportunities to do things better. In this view, what is sometimes known as ‘keeping the show on the road’ rather than exploring chances for improvement is also a failure. However, do not think that operations management is just about avoiding failure; its contribution to an organization’s overall success if far greater than that. Operations management can ‘make’ the organization in several ways. First, operations management is concerned with doing things better – better quality, better service, better responsiveness, better reliability, better flexibility, better cost, and better use of capital invested in facilities. And it is this focus on ‘better’, on improvement, that can potentially make operations the driver of improvement for the whole organization. Second, through the continual learning that can come from its improvement activities, operations management can build the ‘difficult to imitate’ capabilities that can have a significant strategic impact. (We will deal further with this issue in the next chapter on operations strategy.) Third, operations management is very much concerned with ‘process’, with how things are done. And there is a relationship between process and outcome. Good operations management is the best way to produce good products and services.
Of course, operations managers will always face new challenges, not only when they have major new projects to manage like Terminal 5, but also more generally as their economic, social, political and technological environment changes. Many of these decisions and challenges seem largely economic in nature. What will be the impact on our costs of adding a new product or ser- vice feature? Can we generate an acceptable return if we invest in new technology? Other decisions have more of a ‘social’ aspect. How do we make sure that all our suppliers treat their staff fairly? Yet others have an environmental impact. Are we doing enough to reduce our carbon footprint? What is more, the ‘economic’ decisions also have an environmental aspect to them. Will a new product feature make end-of-life recycling more difficult? Will the new technology increase pollution? Similarly the ‘social’ decisions must be made in the context of their economic consequences. Sure, we want suppliers to treat staff well, but we also need to
✽ ✽ ✽ Operations principle Operations principle Operations principle
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40 PART ONE DIRECTING THE OPERATION
make a profit. And this is the great dilemma. How do operations managers try to be, simul- taneously, economically viable while being socially and environmentally responsible? This is why we start our treatment of operations performance at the ‘societal’ level, looking at the ‘triple bottom line’.
OPERATIONS IN PRACTICE
It is not surprising perhaps that a company whose prod- ucts help other firms to operate more sustainably should itself be keen to stress its own environmental and social performance. This certainly is true for Novozymes, the Denmark-based company, whose worldwide production of enzymes, micro-organisms, and biopharmaceutical ingredients help its customers in the household care, food and beverage, bioenergy, agriculture and pharmaceutical industries to ‘ make more from less, while saving energy and generating less waste '. Novozymes is the world leader in what it terms ‘bioinnovation’, particularly in the field of enzyme production and application. Enzymes are pro- teins that, in nature, initiate biochemical reactions in all living organisms. It is enzymes that convert the food in our stomachs to energy and turn the falling leaves in the for- est to compost. Novozymes’ operations find enzymes in nature and optimize them so that they can replace harsh chemicals, accelerate its customers' production processes and minimize the use of scarce resources. These enzymes are widely used in many industries, including, for exam- ple, laundry and dishwashing detergents (where they remove stains and enable low- temperature washing), while other enzymes improve the quality of bread, beer and wine, or increase the nutritional value of animal feed. They are also used in the production of biofuels where they turn starch or cellulose from biomass into sugars that can be fermented to ethanol.
How does Novozymes judge its own performance? It is a commercial company with investors who expect a return on their investment, but the company also strives to balance good business for its customers and its share- holders with the impact it has on environmental and social change. In terms of the conventional financial per- formance of its operations, the company tracks revenues from its various markets as well as its raw materials costs, productivity improvements, investment in research and development, sales and administrative costs, as well as the effects of such operational factors as the product mix at its processing operations. Of course, Novozymes also monitors how good its operations are at interacting with customers and suppliers.
In terms of its environmental performance, Novozymes has two aspects to monitor. The first is its products and services' impact on its customers' performance. The com- pany conducts peer-reviewed life cycle assessment (LCA)
studies to document the environmental impact of its biosolutions for its customers and advise them on ways to reduce their CO 2 emissions. As regards its own oper- ations, Novozymes attempts to reduce the consump- tion of natural resources (including water usage) every year and mitigate the negative environmental impact of its production processes. Likewise, the improvement in energy efficiency is driven by continuous process optimi- zations and the implementation of energy-saving projects at their global production sites. But all production pro- cesses produce waste and by- products, so Novozymes seeks continual improvement in the amount of waste and by-products that are sent for landfill or incineration. This has the double effect of reducing the cost of waste treat- ment as well as minimizing the company's environmen- tal footprint. As a result of these efforts, the Dow Jones Sustainability Index, a global sustainability benchmark, has ranked Novozymes among the top 3 per cent of com- panies in the chemical industry sector.
The company also track several aspects of its social performance. These include: employee satisfaction and development, diversity and equal opportunities, occu- pational health and safety, compliance with human rights and labour standards, corporate citizenship efforts and business integrity. Perhaps most impres- sively, Novozymes sets long-term performance targets in key aspects of its performance that are integrated into incentive schemes throughout the organization. Long-term financial performance is measured conven- tionally through the rate of sales growth, profitability and the return on invested capital. However, in addition,
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CHAPTER 2 OPERATIONS PERFORMANCE 41
Performance at three levels Looking at the example of how Novozymes monitors and reports its performance demon- strates the point that ‘performance’ is not a straightforward or simple concept. First, it is multi-faceted in the sense that a single measure can never fully communicate the success, or otherwise, of something as complex as an operation. Several measures will always be needed to convey a realistic overview of the various aspects of performance. Second, per- formance can be assessed at different levels, from the broad, long-term, societal level of Novozymes’ environmental monitoring, for example, to its more operational-level con- cerns over how it improves day-to-day efficiency, or how it serves its individual custom- ers. In the rest of this chapter we will look at how operations can judge its performance at three levels:
● The broad, societal level, using the idea of the ‘triple bottom line’. ● The strategic level of how an operation can contribute to the organization’s overall
strategy. ● The operational level, using the five operations ‘performance objectives’.
These three levels of operations performance are illustrated in Figure 2.2 .
HOW IS OPERATIONS PERFORMANCE JUDGED AT A SOCIETAL LEVEL?
No operation exists, or performs, in isolation. The decisions that are made within any opera- tion and the way it goes about its day-to-day activities will affect a whole variety of ‘stakehold- ers’. Stakeholders are the people and groups who have a legitimate interest in the operation’s activities. Some stakeholders are inter- nal, for example the operation’s employees; others are external, for example customers, society or community groups and a company’s shareholders. Some external stakeholders have a direct commercial relationship with the organization, for example suppliers and custom- ers; others do not, for example industry regulators. In not-for-profit operations, these stakeholder groups can overlap. So, voluntary workers in a charity may be employees, shareholders and customers all at once. However, in any kind of organization, it is a responsibility of the operations function to understand the (sometimes conflicting) objec- tives of its stakeholders and set its objectives accordingly. Figure 2.3 illustrates just some of the stakeholder groups who would have an interest in how an organization’s operations func- tion performs. But although each of these groups, to different extents, will be interested in operations performance, they are likely to have very different views of which aspect of perfor- mance is important. Nevertheless, if one is to judge operations at a broad societal level, one must judge the impact it has on its stakeholders.
Novozymes also has a number of ‘impact targets’. Within five years the company says that its aim is to:
● reach 6 billion people, especially in emerging mar- kets, with its products that enhance sustainability;
● educate by providing knowledge of the potential of biology to 1 million people by training in factories, local-community outreach and involvement with universities and business schools;
● catalyse five global partnerships for change through high-impact partnerships with public and private organizations to create answers for a sustainable world;
● deliver 10 transformative innovations that change the lives of many people and fulfil sustainability goals.;
● save the world 100 million tons of CO 2 a year through customers applying its products;
● enable its employees to develop their skills.
✽ ✽ ✽ Operations principle Operations principle Operations principle
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42 PART ONE DIRECTING THE OPERATION
Corporate social responsibility (CSR) This idea that operations should take into account their impact on a broad mix of stakeholders is often termed ‘corporate social responsibility’ (generally known as CSR). According to the UK government’s definition: ‘CSR is essentially about how business takes account of its economic, social and environmental impacts in the way it operates – maximizing the benefits and minimiz- ing the downsides…Specifically, we see CSR as the voluntary actions that business can take, over and above compliance with minimum legal requirements, to address both its own competitive interests and the interests of wider society.’ A more direct link with the stakeholder concept is to be found in the definition used by Marks and Spencer, the UK-based retailer: ‘Corporate Social Responsibility…is listening and responding to the needs of a company’s stakeholders. This includes the requirements of sustainable development. We believe that building good relationships with employees, suppliers and wider society is the best guarantee of long-term success. This is the backbone of our approach to CSR.’
The issue of how CSR objectives can be included in operations management’s activities is of increasing importance, from both an ethical and a commercial point of view. It is treated several times at various points throughout this book.
The triple bottom line One common term that tries to capture the idea of a broader approach to assessing an organ- ization’s performance is the ‘triple bottom line’2 (TBL, or 3BL), also known as ‘people, plant and profit’. Essentially, it is a straightforward idea: simply that organizations should measure
Operations strategic impact
Risk Capital
Learning
People
Planet
Sustain – ability
Revenue
Profit
Cost
• Quality • Speed • Dependability • Flexibility • Cost
Operational level – operations performance objectives
Strategic level – operations strategic impact
Societal level – operations sustainability
Figure 2.2 Three levels of operations performance
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CHAPTER 2 OPERATIONS PERFORMANCE 43
Customers • Acceptable price • Good service • Quality o�erings
Shareholders • Return on investment • Stability of earnings • Liquidity of investment
Government • Conformance to legal requirements • Contribution to economy
Regulatory bodies • Conformance to regulations • Feedback on e�ectiveness of regulations
Lobby groups • Alignment of the organization’s activities with whatever the groups are promoting
Suppliers • Early notice of requirements • Long-term orders • Fair price • On-time payment
‘Society’ • Minimize negative e�ects from the operation (noise, tra�c, etc.) • Maximize positive e�ects (jobs, local sponsorship, etc.)
Top management • Acceptable profit • Return on investment • Low risk of failure • Future innovation
Sta� • Fair wages • Good working conditions • Personal/career development
Sta� representative bodies • Conformance with national agreements • Consultation
Figure 2.3 Stakeholder groups with typical operations objectives
OPERATIONS IN PRACTICE
In most counties it is a principle that is enshrined in law: companies must look after the interests of their owners; in other words, their shareholders. But that is beginning to change. Since 2005 the UK, for example, has allowed people to form ‘community interest companies’ that have a broader set of objectives. Some argue that con- ventional ‘for-profit firms’ come under pressure to dis- card social goals in favour of increasing profits. Charities and ‘non-profit firms’ are constrained in their ability to raise capital when they need to grow. Similarly, in 2012 Yvon Chouinard, founder and owner of Patagonia Inc., the outdoor-clothing firm that designs, develops and markets clothing and gear for a wide range of outdoor sports, became the first business person to take advan- tage of a new law in California that gave businesses greater freedom to follow strategies which they believe benefit society as a whole rather than simply concentrat- ing on maximizing profits. According to Mr Chouinard,
Patagonia is one of the new ‘benefit corporations’ (usu- ally called ‘B Corps’). To meet the criteria as a B Corp, a firm should have a clear and unequivocal social and/ or environmental mission, and a legal responsibility to respect the interests of workers, the community and the environment as well as its shareholders. It must also issue
Patagonia, a B Corp 3
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44 PART ONE DIRECTING THE OPERATION
themselves not just on the traditional economic profit that they generate for their owners, but also on the impact their operations have on society (broadly, in the sense of communities, and individually, for example in terms of their employees) and the ecological impact on the environ- ment. The influential initiative that has come out of this triple bottom line approach is that of
‘sustainability’. A sustainable business is one that creates an acceptable profit for its owners, but minimizes the damage to the environment and enhances the existence of the people with whom it has contact. In other words, it balances economic, environmental and societal inter- ests. This gives the organization its ‘licence to operate’ in society. The assumption underlying the triple bottom line (which is not universally accepted) is that a sustainable business is more likely to remain suc-
cessful in the long term than one which focuses on economic goals alone. Only a company that produces a balanced TBL is really accounting for the total cost of running its operations.
The social bottom line (People) – the social account, measured by the impact of the operation on the quality of people’s lives The idea behind the social bottom line performance is not just that there is a connection between businesses and the society in which they operate – that is self-evident. Rather it is that businesses should accept that they bear some responsibility for the impact they have on society and balance the external ‘societal’ consequences of their actions with the more direct internal consequences, such as profit. At the level of the individual, social bottom line per- formance means devising jobs and work patterns which allow individuals to contribute their talents without undue stress. At a group level, it means recognizing and dealing honestly with employee representatives. In addition, businesses are also a part of the larger community and, it is argued, should be recognizing their responsibility to local communities by helping to pro- mote their economic and social well-being.
Some ways that operations can impact the social bottom line performance include the following:
● Customer safety from products and services ● Employment impact of an operation’s location
independently verified information on its social and environmental impact in addition to its financial results.
Patagonia's Mission Statement goes like this: ‘ Build the best product, cause no unnecessary harm, and use business to inspire and implement solutions to the environ- mental crisis .’ The company uses environmentally sen- sitive materials (organic cotton, recycled and recyclable polyester, and hemp among them) and both sponsor and participate in a host of environmental initiatives that range from promoting wildlife corridors to combating genetic engineering. Its employees enjoy good benefits, including generous healthcare, subsidized day care, flex- ible work schedules and paid time off for environmental internships. Many employees share the company's val- ues, care about quality and are active in environmental and community causes. But, like most clothing compa- nies, Patagonia outsources its production. So how does it ensure that the company's values are also upheld in its supply chain? It is important, it says, to work with
suppliers ‘ that share our values of integrity and environ- mentalism. In the past, we found we didn't have to make a lot of extra effort to achieve this. Our demand for high quality and our close relationships with the small number of factories we did business with pretty much assured it. It really is true that you can't make good products in a bad factory, and we did business with some of the world's best. They were, for the most part, efficient and well run. The people who worked in them tended to have a lot of experience. Despite high employee turnover elsewhere in the garment industry, these factories were able to retain employees because they paid them fairly and treated them humanely. ’ Transparency is also important. In an effort to understand the social and environmental impacts of its supply chain, Patagonia launched its Footprint Chronicles , in which it traces the environmental and social impact of products from design through fibre creation to construc- tion to shipment to its warehouse.
✽ ✽ ✽ Operations principle Operations principle Operations principle
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CHAPTER 2 OPERATIONS PERFORMANCE 45
● Employment implications of outsourcing ● Repetitive or alienating work ● Staff safety and workplace stress ● Non-exploitation of developing country suppliers.
The environmental bottom line (Planet) – the environmental account, measured by environmental impact of the operation Environmental sustainability (according to the World Bank) means ‘ ensuring that the over- all productivity of accumulated human and physical capital resulting from development actions more than compensates for the direct or indirect loss or degradation of the environment ’. Put more directly, it is generally taken to mean the extent to which business activity negatively impacts the natural environment. It is clearly an important issue, not only because of the obvi- ous impact on the immediate environment of hazardous waste, air and even noise pollution, but also because of the less obvious, but potentially far more damaging, issues around global warming. Operations managers cannot avoid responsibility for environmental performance. It is often operational failures which are at the root of pollution disasters and operations deci- sions (such as product design) which impact on longer term environmental issues.
Some ways that operations can impact the environmental bottom line performance include the following:
● Recyclability of materials, energy consumption, waste material generation ● Reducing transport-related energy ● Noise pollution, fume and emission pollution ● Obsolescence and wastage ● Environmental impact of process failures ● Recovery to minimize impact of failures.
OPERATIONS IN PRACTICE
Holcim is a global company, based in Switzerland, and employs around 80,000 people, with production sites in around 70 countries. It is one of the world's leading man- ufacturers and distributors of cement and aggregates (for example, crushed stone, gravel and sand). It also supplies ready-mix concrete and asphalt as well as offering con- sulting, research, trading, engineering and other services. But, along with other companies in this sector, Holcim faces some considerable challenges in pursuing its sus- tainability objectives. After all, cement manufacture is an activity that has a significant impact on almost every aspect of sustainability and social responsibility. Concrete is the second most used resource in the world after water. As the chief ingredient in concrete, cement is therefore a key requirement of modern society, but its manufacture is a resource- and energy-intensive process. This possi- bly explains why Holcim put so much effort into its sus- tainable development strategies. It aspires, it says, ‘ to be the world's most respected and attractive company in our industry, creating value for all our stakeholders, by placing sustainable development at the core of our business strat- egy aims to enhance this value, safeguards our reputation
and contributes to continued success ’. Holcim's strategy and its approach to value creation attempts to integrate economic, environmental and social impacts using the ‘triple bottom line’ approach.
To achieve its triple bottom line business goals, Holcim has established a set of group-wide performance targets. But, before targets are met, the company aims to understand its current performance. Holcim does this
Holcim works with the ‘triple bottom line’ 4
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46 PART ONE DIRECTING THE OPERATION
The economic bottom line (Profit) – the economic account, measured by profitability, return on assets, etc., of the operation The organization’s top management represent the interests of the owners (or trustees, or electorate, etc.) and therefore are the direct custodians of the organization’s economic per- formance. Broadly this means that operations managers must use the operation’s resources effectively, and there are many ways of measuring this ‘economic bottom line’. Finance spe- cialists have devised various measures (such as return on assets etc.), that are beyond the scope of this book, to do this.
Some ways that operations can impact the financial bottom line performance include the following:
● Cost of producing products and services ● Revenue from the effects of quality, speed, dependability and flexibility ● Effectiveness of investment in operations resources ● Risk and resilience of supply ● Building capabilities for the future.
We will build on these ‘economic bottom line’ issues in the next section on judging opera- tions performance at a strategic level.
HOW IS OPERATIONS PERFORMANCE JUDGED AT A STRATEGIC LEVEL?
Many (although not all) of the activities of operations managers are operational in nature. That is, they deal with relatively immediate, detailed and local issues. However, it is a cen- tral idea in operations management that the type of decisions and activities that operations
by establishing consistent measurement and report- ing techniques, as well as implementing management systems to monitor progress toward its goals. Yet CSR- related performance measurement systems should not,
says Holcim, be separate from the more conventional business systems. To work effectively, CSR performance systems are integrated into overall business processes and supported by appropriate training.
Critical commentary
The dilemma with using this wide range of triple bottom line, stakeholders or CSR to judge operations performance is that organizations, particularly commercial companies, have to cope with the confl icting pressures of maximizing profi tability on the one hand, with the expectation that they will manage in the interests of (all or part of ) society in general with accountability and transparency, on the other. Even if a business wanted to refl ect aspects of performance beyond its own immediate interests, how is it to do it? According to Michael Jensen of Harvard Business School, ‘ At the economy-wide or social level, the issue is this: If we could dictate the criterion or objective function to be maximized by fi rms (and thus the performance criterion by which corporate executives choose among alternative policy options), what would it be? Or, to put the issue even more simply: How do we want the fi rms in our economy to measure their own performance? How do we want them to determine what is better versus worse? ' 5 He also holds that using stakeholder perspectives gives undue weight to narrow special interests who want to use the organization's resources for their own ends. The stakeholder perspective gives them a spurious legitimacy which ‘ undermines the foundations of value-seeking behaviour ’.
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CHAPTER 2 OPERATIONS PERFORMANCE 47
managers carry out can also have a significant strategic impact. Therefore, if one is assessing the performance of the operations function, it makes sense to ask how it impacts the organi- zation’s strategic ‘economic’ position. We will examine that in more detail the way that oper- ations management can think about the strategic role. But, at a strategic level, there are five aspects of operations performance that we identified as contributing to the ‘economic’ aspect of the triple bottom line that can have a significant impact, see Figure 2.4.
Let us start by looking at how operations affect profit. At a simple (and simplistic) level, profit is the difference between the costs of producing products and services and the reve- nue the organization secures from its customers in exchange. (In public sector operations an equivalent, although difficult to measure, performance metric could be ‘welfare per unit of expenditure’.)
Operations management affects costs It seems almost too obvious to state, but almost all the activities that operations managers regularly perform (and all the topics that are described in this book) will have an affect on the cost of producing products and services. Clearly the efficiency with which an operation pur- chases its transformed and transforming resources, and the efficiency with which it converts its transformed resources, will determine the cost of its products and services. And for many operations managers it is the most important aspect of how they judge their performance. Indeed, there cannot be many, if any, organizations that are indifferent to their costs.
Operations management affects revenue Yet cost is not necessarily always the most important strategic objective for operations manag- ers. Their activities also can have a huge effect on revenue. High-quality, error-free products and services, delivered fast and on time, where the operation has the flexibility to adapt to customers’ needs, are likely to command a higher price and sell more than those with lower levels of quality, delivery and flexibility. And operations managers are directly responsible for issues such as quality, speed of delivery, dependability and flexibility, as we will discuss later in the chapter.
Operations strategic contribution
Less failure, reduced errors, better resilience
Lower risk of operations
failure
High e�ciency, less waste
Enhanced service for customers
Higher revenue
Higher utilization of operations
capacity
Less capital required to
provide capacity
Operations build the capabilities that enable future innovation
Opportunities for process learning and improvement
Higher profitsLower operating costs
Figure 2.4 Operations can contribute to financial success through low costs, increasing revenue, lowering risk, making efficient use of capital, and building the capabilities for future innovation
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48 PART ONE DIRECTING THE OPERATION
The main point here is that operations activities can have a significant effect on, and there- fore should be judged on, the organization’s profitability. Moreover, even relatively small improvements on cost and revenue can have a proportionally even greater effect on profit- ability. For example, suppose a business has an annual revenue of €1,000,000 and annual costs of €900,000, and therefore a ‘profit’ of €100,000. Now suppose that, because of the excellence of its operations managers in enhancing quality and delivery, revenue increases by 5 per cent and costs reduce by 5 per cent. Revenue now is €1,050,000 and costs €855,000. So profit is now €195,000. In other words, a 5 per cent change in cost and revenue has improved profitability by 95 per cent. But profit is not the only aspect of strategic performance that is affected by operations activities.
Operations management affects the required level of investment How an operation manages the transforming resources that are necessary to produce the required type and quantity of its products and services will also have a strategic affect. If, for example, an operation increases its efficiency so that it can produce (say) 10 per cent more output, then it will not need to spend investment (sometimes called capital employed) to pro- duce 10 per cent more output. Producing more output with the same resources (or sometimes producing the same output with fewer resources) affects the required level of investment.
Operations management affects the risk of operational failure Well-designed and run operations should be less likely to fail. That is, they are more likely to operate at a predictable and acceptable rate without either letting customers down or incur-
ring excess costs. And if they ever do suffer failures, well-run opera- tions should be able to recover faster and with less disruption (this is called resilience).
Operations management affects the ability to build the capabilities on which future innovation is based Operations managers have a unique opportunity to learn from their experience of operating their processes in order to understand more about those processes. This accumulation of process knowledge can build into the skills, knowledge and experience that allow the
business to improve over time. But more than that, it can build into what are known as the ‘capabilities’ that allow the business to innovate in the future. We will examine this idea of operations capabilities in more detail in the next chapter.
HOW IS OPERATIONS PERFORMANCE JUDGED AT AN OPERATIONAL LEVEL?
Assessing performance at a societal level through the idea of the triple bottom line, and judg- ing how well an operation is contributing to its general strategic objectives, are clearly impor- tant, particularly in the longer term. Both these levels form the backdrop to all operations decision making. But running operations at an operational day-to-day level requires a more tightly defined set of objectives. These are called operations ‘performance objectives’. There are five of them and they apply to all types of operation. Imagine that you are an operations manager in any kind of business – a hospital administrator, for example, or a production man- ager in an automobile plant. What kinds of things are you likely to want to do in order to sat- isfy customers and contribute to competitiveness?
● You would want to do things right; that is, you would not want to make mistakes, and would want to satisfy your customers by providing error-free goods and services which are ‘fit for their purpose’. This is giving a quality advantage.
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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CHAPTER 2 OPERATIONS PERFORMANCE 49
● You would want to do things fast, minimizing the time between a customer asking for goods or services and the customer receiving them in full, thus increasing the availability of your goods and services and giving a speed advantage.
● You would want to do things on time, so as to keep the delivery promises you have made. If the operation can do this, it is giving a dependability advantage.
● You would want to be able to change what you do; that is, being able to vary or adapt the operation’s activities to cope with unexpected circumstances or to give customers individ- ual treatment. Being able to change far enough and fast enough to meet customer require- ments gives a flexibility advantage.
● You would want to do things cheaply; that is, produce goods and services at a cost which enables them to be priced appropriately for the market while still allowing for a return to the organization; or, in a not-for-profit organization, give good value to the taxpayers or whoever is funding the operation. When the organization is man- aging to do this, it is giving a cost advantage.
The next part of this chapter examines these five performance objectives in more detail by looking at what they mean for four different operations: a general hospital, an automobile factory, a city bus company and a supermarket chain.
Why is quality important? Quality is consistent conformance to customers’ expectations, in other words ‘doing things right’, but the things which the operation needs to do right will vary according to the kind of operation. All operations regard quality as a particularly important objective. In some ways quality is the most visible part of what an operation does. Furthermore, it is something that a customer finds relatively easy to judge about the operation. Is the product or service as it is supposed to be? Is it right or is it wrong? There is something fundamental about quality. Because of this, it is clearly a major influence on customer satisfaction or dissatisfaction. A customer perception of high-quality products and services means customer satisfaction and therefore the likelihood that the customer will return. Figure 2.5 illustrates how quality could be judged in four operations.
Quality inside the operation When quality means consistently producing services and products to specification it not only leads to external customer satisfaction, but makes life easier inside the operation as well.
Quality reduces costs The fewer mistakes made by each process in the operation, the less time will be needed to correct the mistakes and the less confusion and irritation will be spread. For example, if a supermarket’s regional warehouse sends the wrong goods to the supermarket, it will mean staff time, and therefore cost, being used to sort out the problem.
Quality increases dependability Increased costs are not the only consequence of poor quality. At the supermarket it could also mean that goods run out on the supermarket shelves with a resulting loss of revenue to the operation and irritation to the external customers. Sorting the problem out could also distract the supermarket man- agement from giving attention to the other parts of the supermarket operation. This in turn could result in further mistakes being made. So, quality (like the other performance objectives, as we will see) has both an external impact, which influences customer satisfaction, and an internal impact, which leads to stable and effi- cient processes.
✽ ✽ ✽ Operations principle Operations principle Operations principle
✽ ✽ ✽ Operations principle Operations principle Operations principle
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50 PART ONE DIRECTING THE OPERATION
Figure 2.5 Quality means different things in different operations
OPERATIONS IN PRACTICE
It has been a point of some debate for generations of children (and some adults): ‘ what is your favourite amongst the Quality Street assortment of chocolates? ’ The world-famous brand of assorted chocolates is made in the same area of the UK where John Mackintosh first made this new type of sweet by mixing hard and soft caramel in 1890. But it was John Mackintosh's son who conceived and developed Quality Street in 1936. His idea (novel at the time) was to wrap each individual sweet separately and package them in a tin to preserve their quality. And Nestlé, which has owned the brand since 1988, has maintained this emphasis on quality. In fact, like all Nestlé products, Quality Street is made under the strict quality standards enshrined in the com- pany's quality policy that outlines its commitment to ‘ build trust by offering products and services that match consumer expectation and preference ’. In other words, Nestlé understands that quality has a profound effect on how its products are viewed by consumers. As a food company (the largest in the world), it is also aware of its responsibility to comply with all food safety and regula- tory requirements. ‘ I don't think most people are aware
of the amount of work that goes into ensuring that the food they eat is safe ’, says John O'Brien, Head of the Food Safety and Integrity Research Programme at the Nestlé Research Center in Lausanne, Switzerland. ‘ It's only when something goes wrong that they sit up and take notice… Consumers rightly expect that the product they buy is safe to eat and contains what it says on the label ’, he said. ‘ But they also expect fewer preservatives on that label. ’ At Quality Street the sweets are free from artificial col- ours, flavourings and preservatives, and since 2009, the packaging has been completely recyclable. The coloured wrappers are biodegradable and can be composted with garden waste, while the foil wrappers and the tin container can be recycled in the same way as cans. Yet, while consumer perception and particularly safety is of paramount concern at Quality Street, high-quality operations also have an impact on costs. One of Nestlé's quality policy is to ‘ gain a zero-defect, no-waste attitude by everyone in our company ’. Their ‘Quality Management System’ is used globally to guarantee compliance with quality standards and to create value for consumers. It is audited and verified by independent certification
Quality at Quality Street 6
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CHAPTER 2 OPERATIONS PERFORMANCE 51
Why is speed important? Speed means the elapsed time between customers requesting products or services and their receiving them. Figure 2.6 illustrates what speed means for the four operations. The main benefit to the operation’s (external) customers of speedy delivery of goods and services is that the faster they can have the product or service, the more likely they are to buy it, or the more
bodies to prove conformity to internal standards, laws and regulatory requirements. And quality is a priority throughout the whole supply chain. ‘Quality by design’ is built in during product development and the compa- ny's ‘Supplier Code’ sets minimum standards that it asks its suppliers, employees, agents and subcontractors to respect and to adhere to at all times. In the factory it applies internationally recognized good manufacturing practices (GMP) that cover all aspects of manufacturing, including standard operating procedures, people man- agement and training, equipment maintenance, and handling of materials. Even when the chocolates get to the consumers, the company's worldwide consumer ser- vices organization allows them to respond immediately to any consumer enquiry, question or concern.
And the favourite Quality Street? Well several vari- ants have been and gone, including Malt Toffee, Fruits of the Forest Cream, Almond Octagon and Gooseberry
Cream. But of the 12 Quality Streets you will find in each tin today, one (admittedly unscientific) study claimed it was the Strawberry Cream.
Figure 2.6 Speed means different things in different operations
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52 PART ONE DIRECTING THE OPERATION
they will pay for it, or the greater the benefit they receive ( see the ‘Operations in practice’ case ‘In “The Golden Hour” even two minutes counts’).
Speed inside the operation Inside the operation, speed is also important. Fast response to external customers is greatly helped by speedy decision making and speedy movement of materials and information inside the operation. And there are other benefits.
Speed reduces inventories Take, for example, the automobile plant. Steel for the vehicle’s door panels is delivered to the press shop, pressed into shape, transported to the painting area, coated for colour and protection, and moved to the assembly line where it is fitted to the automobile. This is a simple three-stage process, but in practice material does not flow smoothly from one stage to the next. First, the steel is delivered as part of a far larger batch containing enough steel to make possibly several hundred products. Eventually it is taken to the press area, pressed into shape, and again waits to be transported to the paint area. It then waits to be painted, only to wait once more until it is transported to the assembly line. Yet again it waits by the trackside until it is eventually fitted to the automobile. The material’s journey time is far longer than the time needed to make and fit the product. It actually spends most of its time waiting as stocks (inventories) of parts and products. The longer items take to move through a process, the more time they will be waiting and the higher inventory will be. This is an important idea which will be explored in Chapter 15 on lean operations.
Speed reduces risks Forecasting tomorrow’s events is far less of a risk than forecasting next year’s. The further ahead companies forecast, the more likely they are to get it wrong. The faster the throughput time of a process, the later forecasting can be left. Consider the auto-
mobile plant again. If the total throughput time for the door panel is six weeks, door panels are being processed through their first opera- tion six weeks before they reach their final destination. The quantity of door panels being processed will be determined by the forecasts for demand six weeks ahead. If instead of six weeks, they take only one week to move through the plant, the door panels being processed through their first stage are intended to meet demand only one week
ahead. Under these circumstances it is far more likely that the number and type of door pan- els being processed are the number and type that eventually will be needed.
✽ ✽ ✽ Operations principle Operations principle Operations principle
OPERATIONS IN PRACTICE
It is often called ‘ The Golden Hour ’. It is the hour immediately following traumatic injury in which med- ical treatment to prevent irreversible internal damage and optimize the chance of survival is most effective. ‘ The Golden Hour ’ was first described by Dr R. Adams Cowley, at the University of Maryland Medical Center in Baltimore, from his personal experiences in Europe following the Second World War, and then in Baltimore in the 1960s, Dr Cowley recognized that the sooner trauma patients reached definitive care – particularly if they arrived within 60 minutes of being injured – the better their chance of survival. So of all the services that have to respond quickly to demand, few have more need of speed than the emergency services. In
responding to road accidents especially, every second is critical. Major trauma is the leading cause of death in those under 45 years of age and is also a major cause of debilitating long-term injuries. Making full use of ‘ The Golden Hour ’ means speeding up three elements of the total time to treatment: the time it takes for the emer- gency services to find out the details of the accident, the time it takes them to travel to the scene of the accident, and the time it takes to get the casualty to appropriate treatment. That is why the London Air Ambulance ser- vice was delighted when a new tablet app saved their emergency team two minutes in responding to emer- gencies. Rather than having to take all the details of an emergency before they rushed to their helicopter,
In ‘ The Golden Hour ’ even two minutes counts 7
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CHAPTER 2 OPERATIONS PERFORMANCE 53
Why is dependability important? Dependability means doing things in time for customers to receive products or services exactly when they are needed, or at least when they were promised. Figure 2.7 illustrates what dependability means in the four operations. Customers might only judge the depend- ability of an operation after the product or service has been delivered. Initially this may not affect the likelihood that customers will select the service – they have already ‘consumed’ it. Over time, however, dependability can override all other criteria. No matter how cheap or fast a bus service is, if the service is always late (or unpredictably early) or the buses are always full, then potential passengers will be better off calling a taxi.
Dependability inside the operation Inside the operation internal customers will judge each other’s performance partly by how reliable the other processes are in delivering material or information on time. Operations where internal dependability is high are more effective than those which are not, for a num- ber of reasons.
Dependability saves time Take, for example, the maintenance and repair centre for the city bus company. If the centre runs out of some crucial spare parts, the manager of the centre will need to spend time trying to arrange a special delivery of the required parts, and the resources allocated to service the buses will not be used as productively as they would have been without this disruption. More seriously, the fleet will be short of buses until they can be repaired and the fleet operations manager will have to spend time rescheduling services. So, entirely due to the one failure of dependability of supply, a significant part of the operation’s time has been wasted coping with the disruption.
Dependability saves money Ineffective use of time will translate into extra cost. The spare parts might cost more to be delivered at short notice and maintenance staff will expect to be paid even when there is no bus to work on. Nor will the fixed costs of the operation, such as heating and rent, be reduced because the buses are not being serviced. The reschedul- ing of buses will probably mean that some routes have inappropriately sized buses and some
the app together with enhanced mobile communica- tion allows them to set off immediately and receive the details on their tablet when they are in the air. But is getting airborne two minutes sooner really significant? It is, when one considers that, if starved of oxygen, a million brain cells can die every minute. It allows the service's advanced trauma doctors and paramedics to perform procedures to relieve pain, straighten broken limbs, even perform open-chest surgery to restart the heart, often within minutes of injury. Including trauma medics in the team, in effect, brings the hospital to the patient, wherever that may be. When most rescues are only a couple of minutes' flying time back to the hospi- tal, speed can really saves lives. However, it is not always possible to land a helicopter safely at night (because of possible overhead wires and other hazards) so conven- tional ambulances will always be needed, both to get paramedics quickly to accident victims and to speed them to hospital. The London Air Ambulance service team works alongside the conventional Ambulance Service to provide rapid, effective treatment as soon as
possible after injury. One increasingly common method of ensuring that ambulances arrive quickly at the acci- dent site is to position them, not at hospitals, but close to where accidents are likely to occur. Computer analy- sis of previous accident data helps to select the ambu- lance's waiting position, and global positioning systems help controllers to mobilize the nearest unit.
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54 PART ONE DIRECTING THE OPERATION
Figure 2.7 Dependability means different things in different operations
OPERATIONS IN PRACTICE
What do you do when it is coming up to the biggest gift-giving time of the year, you are responsible for deliv- ery and your aircraft that are vital for dependable deliv- ery are grounded by a freak snowstorm a continent away, or mechanical problems, or an air traffic controllers dis- pute in France, or whatever? That is the problem fac- ing all global parcel delivery companies; and it is made worse when customers blame you for any non-delivery. Generally freight operators have to absorb the cost when a delivery does not arrive on time, so weather, and other disruptions, directly affect their customer service, reputa- tion and, ultimately, profitability. UPS, the largest express carrier and package delivery company in the world, reck- ons that each late shipment will cost it between $5 and $30 in revenue. And with almost 16 million packages and documents delivered worldwide every day it only takes a fraction of a percentage point to be late for the total cost of any lack of dependability to be huge.
So what does UPS do to minimize disruption to its delivery network when it is coming up to a peak demand time like Christmas and there is a possibility of bad weather? The obvious thing is to keep a constant watch
How UPS maintains its dependability 8
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CHAPTER 2 OPERATIONS PERFORMANCE 55
services could have to be cancelled. This will result in empty bus seats (if too large a bus has to be used) or a loss of revenue (if potential passengers are not transported).
Dependability gives stability The disruption caused to oper- ations by a lack of dependability goes beyond time and cost. It affects the ‘quality’ of the operation’s time. If everything in an operation is always perfectly dependable, a level of trust will have built up between the different parts of the operation. There will be no ‘surprises’ and everything will be predictable. Under such circumstances, each part of the operation can concentrate on improving its own area of respon- sibility without having its attention continually diverted by a lack of dependable service from the other parts.
Why is flexibility important? Flexibility means being able to change the operation in some way. This may mean changing what the operation does, how it is doing it, or when it is doing it. Specifically, customers will need the operation to change so that it can provide four types of requirement:
● product/service flexibility – the operation’s ability to introduce new or modified products and services;
● mix flexibility – the operation’s ability to produce a wide range or mix of products and services;
● volume flexibility – the operation’s ability to change its level of output or activity to pro- duce different quantities or volumes of products and services over time;
● delivery flexibility – the operation’s ability to change the timing of the delivery of its ser- vices or products.
Figure 2.8 gives examples of what these different types of flexibility mean to the four dif- ferent operations.
Mass customization One of the beneficial external effects of flexibility is the increased ability of operations to do different things for different customers. So, high flexibility gives the ability to produce a high variety of products or services. Normally high variety means high cost (see Chapter 1 ) . Furthermore, high-variety operations do not usually produce in high volume. Some compa- nies have developed their flexibility in such a way that products and services are custom- ized for each individual customer. Yet they manage to produce them in a high volume, mass production manner which keeps costs down. This approach is called mass customization. Sometimes this is achieved through f lexibility in design. For example, Dell is one of the largest volume producers of personal computers in the world, yet allows each customer to ‘design’ (albeit in a limited sense) their own configuration. Sometimes flexible technology is used to achieve the same effect. Another example is Paris Miki, an upmarket eyewear retailer which has the largest number of eyewear stores in the world, which uses its own ‘Mikissimes Design System’ to capture a digital image of the customer and analyse facial characteristics. Together with a list of customers’ personal preferences, the system then rec- ommends a particular design and displays it on the image of the customer’s face. In consul- tation with the optician the customer can adjust shapes and sizes until the final design is
very carefully on the weather forecast, and indeed UPS does have meteorologists and other staff who do this. But it also builds in a buffer of extra operational capac- ity. At UPS headquarters a ‘hot status board’ on the wall identifies cities and regions where the company has spare
pilots and aircraft whose task is to ‘rescue volume’: that is, the spare resources are used to come to the aid of pack- ages stuck somewhere. UPS says that this ‘hot spares pro- gram’ rescues more than 1 million packages annually and saves the company more than $20 million in revenue.
✽ ✽ ✽ Operations principle Operations principle Operations principle
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56 PART ONE DIRECTING THE OPERATION
Figure 2.8 Flexibility means different things in different operations
OPERATIONS IN PRACTICE
The idea might sound somewhat unusual, but it has proved a great success. Three university students, Hubertus Bessau, Philipp Kraiss and Max Wittrock, in the small city of Passau, Germany, came up with the concept of mymuesli – the first web-based platform where you can mix your own organic muesli online, with a choice of 75 different ingredients. This makes it possible to create 566 quadrillion individual muesli mixes – and you can even name your own muesli. So, irrespective of whether you are a chocolate addict, a raisin hater or an athlete, this incredible variety will make it easy, says mymusli, for anyone to invent their all-time favourite muesli. ‘ We wanted to provide cus- tomers with nothing else but the perfect muesli ’, they say. ‘ Of course the idea of custom-mixing muesli online might sound wacky…but think about it – it's the break- fast you were always looking for .’ All muesli is mixed in the Passau production site according to strict quality standards and hygiene law requirements. Ingredients are strictly organic, without additional sugar, additives,
preservatives or artificial colours. On visiting the web- site customers first have to pick a muesli base (full nutri- tional information is provided). After this customers can add other basics and ingredients such as fruit, nuts and seeds and extras. And the company will deliver it direct by courier to your door! The name for the muesli
566 quadrillion individual muesli mixes –now that's fl exible 9
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CHAPTER 2 OPERATIONS PERFORMANCE 57
chosen. Within the store the frames are assembled from a range of pre-manufactured com- ponents and the lenses ground and fitted to the frames. The whole process takes around an hour. Another example is the mymuesli case.
Agility Judging operations in terms of their agility has become popular. Agility is really a combina- tion of all the five performance objectives but particularly flexibility and speed. In addition, agility implies that an operation and the supply chain of which it is a part (supply chains are described in Chapters 5 and 12) can respond to the uncertainty in the market. Agility means responding to market requirements by producing new and existing products and services fast and flexibly.
Flexibility inside the operation Developing a flexible operation can also have advantages to the internal customers within the operation.
Flexibility speeds up response Fast service often depends on the operation being flexible. For example, if the hospital has to cope with a sudden influx of patients from a road accident, it clearly needs to deal with injuries quickly. Under such circumstances a flexible hospital which can speedily transfer extra skilled staff and equipment to the accident and emergency department will provide the fast service which the patients need.
Flexibility saves time In many parts of the hospital, staff have to treat a wide variety of com- plaints. Fractures, cuts or drug overdoses do not come in batches. Each patient is an indi- vidual with individual needs. The hospital staff cannot take time to ‘get into the routine’ of treating a particular complaint; they must have the flexibility to adapt quickly. They must also have sufficiently flexible facilities and equipment so that time is not wasted waiting for equip- ment to be brought to the patient. The time of the hospital’s resources is being saved because they are flexible in ‘changing over’ from one task to the next.
Flexibility maintains dependability Internal flexibility can also help to keep the operation on schedule when unexpected events disrupt the operation’s plans. For example, if the sudden influx of patients to the hospital requires emergency surgical procedures, routine operations will be disrupted. This is likely to cause distress and considerable inconvenience. A flex- ible hospital might be able to minimize the disruption by possibly having reserved operating theatres for such an emergency, and being able to bring in medical staff quickly who are ‘on call’.
(chosen by the customer) is printed on the can to make it even more personal. Names chosen by customers for their individual muesli mixes include ‘reindeer food’, ‘donkey's breakfast’, ‘sweet dream’, ‘paradise meal’ and, rather charmingly, ‘darling's breakfast ’. The company purchases its ingredients from selected suppliers and dealers throughout the world. One of mymuesli's great assets is the multitude of eccentric and exotic ingredi- ents (from over 20 countries) included in the product range, like carrots, Tibetan goji-berries, cedar nuts or jelly babies. Philipp Kraiss, one of the company found- ers, is constantly on the lookout for ‘new, crazy and tasty ’ muesli ingredients. During its first year mymuesli
was awarded several business prizes (one of which was awarded by the Financial Times Germany), and has now grown to have annual sales worth over €1 million, with over 40 people working for the company. It has now expanded its operations to the UK. ‘ We seriously hope that mymuesli will find just as many friends here in the UK as in Germany and Austria ’, says Max Wittrock, another of the three founding members. ‘ And we are looking forward to a great deal of feedback, so we can continue to improve our products. Last year thousands of e-mails and user replies in Germany really have helped us immensely with the project. Because after all ’, Wittrock says, ‘ it is supposed to be a user-generated breakfast .’
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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Why is cost important? To the companies that compete directly on price, cost will clearly be their major operations objective. The lower the cost of producing their goods and services, the lower can be the price to their customers. Even those companies which do not compete on price will be interested in keeping costs low. Every euro or dollar removed from an operation’s cost base is a fur- ther euro or dollar added to its profits. Not surprisingly, low cost is a universally attractive
objective. The case on everyday low prices at Aldi describes how one retailer keeps its costs down.
The ways in which operations management can inf luence cost will depend largely on where the operation’s costs are incurred. The operation will spend its money on staff (the money spent on employ- ing people), facilities, technology and equipment (the money spent on buying, caring for, operating and replacing the operation’s ‘hard- ware’) and materials (the money spent on the ‘bought-in’ materials
consumed or transformed in the operation). Figure 2.9 shows typical cost breakdowns for the hospital, car plant, supermarket and bus company.
Keeping operations costs down All operations have an interest in keeping their costs as low as is compatible with the levels of quality, speed, dependability and flexibility that their customers require. The measure that this is most frequently used to indicate is productivity. Productivity is the ratio of what is produced by an operation (its output) to what is required to produce it (its input):
Productivity = Output from the operation
Input to the operation
Figure 2.9 Cost means different things in different operations
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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CHAPTER 2 OPERATIONS PERFORMANCE 59
Often partial measures of input or output are used so that comparisons can be made. So, for example, in the automobile industry productivity is sometimes measured in terms of the number of cars produced per year per employee. This is called a single-factor measure of productivity:
Single-factor productivity = Output from the operation
One input to the operation
This allows different operations to be compared excluding the effects of input costs. One operation may have high total costs per car but high productivity in terms of number of cars per employee per year. The difference between the two measures is explained in terms of the distinction between the cost of the inputs to the operation and the way the operation is man- aged to convert inputs into outputs. Input costs may be high, but the operation itself is good at converting them to goods and services. Single-factor productivity can include the effects of input costs if the single input factor is expressed in cost terms, such as ‘labour costs’. Total factor productivity is the measure that includes all input factors.
Multi-factor productivity = Output from the operation
All inputs to the operation
Improving productivity One obvious way of improving an operation’s productivity is to reduce the cost of its inputs while maintaining the level of its outputs. This means reduc- ing the costs of some or all of its transformed and transforming resource inputs. For exam- ple, a bank may choose to locate its call centres to a place where its facility-related costs (for
OPERATIONS IN PRACTICE
Aldi is an international ‘limited assortment’ supermar- ket specializing in ‘private label’, mainly food products. It has carefully focused its service concept and deliv- ery system to attract customers in a highly competitive market. The company believes that its unique approach to operations management makes it ‘ virtually impos- sible for competitors to match our combination of price and quality ’. And it has proved especially successful in meeting the increasingly price-conscious behaviour of customers. How has it done this? By challenging the norms of retail operations. They are deliberately sim- ple, using basic facilities to keep down overheads. Most stores stock only a limited range of goods (typically around 700 compared with 25,000 to 30,000 stocked by conventional supermarket chains). The private label approach means that the products have been pro- duced according to Aldi quality specifications and are only sold in Aldi stores. Without the high costs of brand marketing and advertising, and with Aldi's formidable purchasing power, prices can be 30 per cent below their branded equivalents. Other cost saving practices
include open-carton displays which eliminate the need for special shelving, no grocery bags to encourage recycling as well as saving costs, multiple bar codes on packages (to speed up scanning) and using a ‘cart rental’ system which requires customers to return the cart to the store to get their coin deposit back.
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60 PART ONE DIRECTING THE OPERATION
example, rent) are cheaper. A software developer may relocate its entire operation to India or China where skilled labour is available at rates significantly less than in European countries. A computer manufacturer may change the design of its products to allow the use of cheaper materials. Productivity can also be improved by making better use of the inputs to the oper- ation. For example, garment manufacturers attempt to cut out the various pieces of material that make up the garment by positioning each part on the strip of cloth so that material wast- age is minimized. All operations are increasingly concerned with cutting out waste, whether it is waste of materials, waste of staff time, or waste through the under-utilization of facilities.
Worked example
A health-check clinic has five employees and ‘processes’ 200 patients per week. Each employee works 35 hours per week. The clinic's total wage bill is £3,900 and its total overhead expenses are £2,000 per week. What is the clinic's single-factor labour productivity and its multi-factor productivity?
Labour productivity = 200 = 40 patients/employees/week 5
Labour productivity = 200 = 1.143 patients/labour hour 5 * 35
Multi-factor productivity = 200 = 0.0339 patients/£ (3,900 + 2,000)
OPERATIONS IN PRACTICE
There is a good reason why most electronic components are made in China. It is cheap. Companies such as Taiwan’s Foxconn, which produces many of the world’s computer, consumer electronics and communications products for customers such as Apple, Dell, Nokia and Sony, have per- fected the art and science of squeezing cost out of their operations processes. But, can cost cutting conflict with respect for people (in a triple bottom line sense, see ear- lier). Although Foxconn is known for having an obsession with cutting its costs and has moved much of its manu- facturing into China and other low-cost areas with plants in South-East Asia, Eastern Europe and Latin America, it has been criticized for pushing its workers too far. In the past there have been a cluster of suicides at its factories, with 18 workers throwing themselves from the tops of the company ’s buildings (14 people died) and violence between employees. The firm operates a huge industrial park, which it calls Foxconn City in Shenzhen, just across the border from Hong Kong, with 15 multi-storey manu- facturing buildings, each devoted to one customer. This
is where the suicides took place. It prompted Foxconn to install safety nets in some of its factories and hire counsel- lors to help its workers.
However, Boy Lüthje of the Institute of Social Research in Frankfurt says that conditions at the firm are actually not that bad when compared with many
Can cost cutting go too far? 11
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Cost reduction through internal effectiveness Our previous discussion distinguished between the benefits of each performance objective externally and internally. Each of the various performance objectives has several internal effects, but all of them affect cost, so one important way to improve cost performance is to improve the performance of the other oper- ations objectives ( see Fig. 2.10 ):
others. Food and lodging are free, as are extensive recre- ational facilities. But workers routinely put in overtime in excess of the 36 hours a month permitted under Chinese law and plenty of people seek jobs with the company. Moreover, the suicide rate at the company is lower than that among the general population in China. Yet the deaths raised questions about working conditions in electronics manufacturing in general and in particular at Foxconn. Nor was this the last time concern was raised over working conditions. In 2012 around 150 workers at Wuhan threatened to commit suicide by leaping from
their factory roof in protest at their working conditions. They were eventually coaxed down after two days on top of the three-floor plant by managers. ‘ We were put to work without any training, and paid piecemeal ’, said one of the protesting workers. ‘T he assembly line ran very fast and after just one morning we all had blisters and the skin on our hand was black. The factory was also really choked with dust and no one could bear it .’ Some reports indicate that Foxconn is more advanced in designing its processes than many of its competitors, but it is run in a regi- mented fashion that it not always popular with workers.
Figure 2.10 Performance objectives have both external and internal effects. Internally, cost is influenced by the other performance objectives
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62 PART ONE DIRECTING THE OPERATION
● High-quality operations do not waste time or effort having to redo things, nor are their internal customers inconvenienced by flawed service.
● Fast operations reduce the level of in-process inventory between micro operations, as well as reducing administrative overheads.
● Dependable operations do not spring any unwelcome surprises on their internal custom- ers. They can be relied on to deliver exactly as planned. This eliminates wasteful disruption and allows the other micro operations to operate efficiently.
● Flexible operations adapt to changing circumstances quickly and without disrupting the rest of the operation. Flexible micro operations can also change over between tasks quickly and without wasting time and capacity.
Worked example
Slap.com is an Internet retailer of speciality cosmetics. It orders products from a number of suppliers, stores them, packs them to customers’ orders, and then dispatches them using a distribution company. Although broadly successful, the business is very keen to reduce its operating costs. A number of suggestions have been made to do this. These are as follows:
● Make each packer responsible for his or her own quality. This could potentially reduce the percentage of mis-packed items from 0.25 per cent to near zero. Repacking an item that has been mis-packed costs €2 per item.
● Negotiate with suppliers to ensure that they respond to delivery requests faster. It is esti- mated that this would cut the value of inventories held by slap.com by €1,000,000.
● Institute a simple control system that would give early warning if the total number of orders that should be dispatched by the end of the day actually is dispatched in time. Currently 1 per cent of orders is not packed by the end of the day and therefore has to be sent by express courier the following day. This costs an extra €2 per item.
Because demand varies through the year, sometimes staff have to work overtime. Currently the overtime wage bill for the year is €150,000. The company ’s employees have indicated that they would be willing to adopt a flexible working scheme where extra hours could be worked when necessary in exchange for having the hours off at a less busy time and receiving some kind of extra payment. This extra payment is likely to total €50,000 per year.
If the company dispatch 5 million items every year and if the cost of holding inventory is 10 per cent of its value, how much cost will each of these suggestions save the company?
Analysis Eliminating mis-packing would result in an improvement in quality. Currently 0.25 per cent of 5 million items are mis-packed. This amounts to 12,500 items per year. At €2 repacking charge per item, this is a cost of €25,000 that would be saved.
Getting faster delivery from suppliers helps reduce the amount of inventory in stock by €1,000,000. If the company is paying 10 per cent of the value of stock for keeping it in storage the saving will be €1,000,000 * 0.1 = €100,000.
Ensuring that all orders are dispatched by the end of the day increases the dependability of the company ’s operations. Currently, 1 per cent are late; in other words, 50,000 items per year. This is costing €2 * 50,000 = €100,000 per year which would be saved by increasing dependability.
Changing to a flexible working hours system increases the flexibility of the operation and would cost €50,000 per year, but it saves €150,000 per year. Therefore, increasing flexibility could save €100,000 per year.
So, in total, by improving the operation’s quality, speed, dependability and flexibility, a total of €325,000 can be saved.
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The polar representation of performance objectives A useful way of representing the relative importance of performance objectives for a prod- uct or service is shown in Figure 2.11(a). This is called the polar representation because the scales which represent the importance of each performance objective have the same origin. A line describes the relative importance of each performance objective. The closer the line is to the common origin, the less important is the performance objective to the operation. Two services are shown, a taxi and a bus service. Each essentially provides the same basic service, but with different objectives. The differences between the two services are clearly shown by the diagram. Of course, the polar diagram can be adapted to accom- modate any number of different performance objectives. For example, Figure 2.11(b) shows a proposal for using a polar diagram to assess the relative performance of different police forces in the UK.12
HOW CAN OPERATIONS PERFORMANCE BE MEASURED?
Having defined the three levels of operations performance, any business will need to meas- ure how well, or badly, it is doing. This is performance measurement. It is the process of quantifying action, where measurement means the process of quantification and the per- formance of the operation is assumed to derive from actions taken by its management. Some kind of performance measurement is a prerequisite for judging whether an operation is good, bad or indifferent. Without performance measurement, it is impossible to exert any control over an operation on an ongoing basis, or to judge whether any improvement is being made.
Performance measurement, as we are treating it here, concerns three generic issues:
● What factors to include as performance measures? ● Which are the most important performance measures? ● What detailed measures to use?
What factors to include as performance measures? Earlier in this chapter we explained how operations performance could be described at three levels: the societal level that included consideration of social and environmental factors as well as economic ones, the strategic level that included consideration of risk, capital and
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Figure 2.11 Polar representations of (a) the relative importance of performance objectives for a taxi service and a bus service, and (b) a police force’s targets and performance
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64 PART ONE DIRECTING THE OPERATION
innovation capability issues as well as profitability, and the operational level that included the more directly operations-related factors of quality, speed, dependability, flexibility and cost. There are two important points to make here. First, sometimes these measures are aggregated into ‘composite’ measures that combine several measures, such as ‘customer satisfaction’, ‘overall service level’ or ‘operations agility’. These more aggregated ‘composite’ performance measures help to present a picture of the overall performance of a business, although they may include some influences outside those that operations performance improvement would normally address (customer satisfaction may partly be a function of how a service is adver- tised, for example). Second, all of the factors at each level can be broken down into more detailed measures. Figure 2.12 gives examples of this. These more detailed performance measures are usually monitored more closely and more often, and although, by themselves, they provide a limited view of an operation’s performance, taken together they do provide a more descriptive and complete picture of what should be and what is happening within the operation. In practice, most organizations will choose to use performance measures from all three levels.
Which are the most important performance measures? One of the problems of devising a useful performance measurement system is trying to achieve some balance between having a few key measures on the one hand (straightforward and simple, but may not reflect the full range of organizational objectives), or, on the other hand, having many detailed measures (complex and difficult to manage, but capable of con- veying many nuances of performance). Broadly, a compromise is often reached by making sure that there is a clear link between the operation’s overall strategy, the most important (or ‘key’) performance indicators (often called KPIs) that reflect strategic objectives, and the bundle of detailed measures that are used to ‘flesh out’ each key performance indicator. Obviously, unless strategy is well defined then it is difficult to ‘target’ a narrow range of key performance indicators.
Quality
Operational level
Strategic level
Societal level
For example … Defects per unit Customer complaints Scrap level Warranty costs
Social (People)
For example … Employee satisfaction Health and safety Community programmes Gender balance
Economic (Profit)
For example … Return on invested capital Share price Profitable growth
Environmental (Planet)
For example …. CO2 emissions Packaging waste Water usage Biodiversity
Speed
For example … Customer query time Order lead time Throughput time
Dependability
For example … Mean time between failures Lateness complaints
Flexibility
For example … Time to market Product range Customization
Cost
For example … Transaction costs Labour productivity Machine e�ciency Variance against budget
Risk and resilience
For example … Service interruptions Business continuity response
Capital utilization
For example … Return on assets Capacity utilization
Capability for innovation
For example … Revenue from new o�erings Pipeline of innovative o�erings
Service and revenue
For example … Profitability Welfare per unit of expenditure
E�ciency and cost
Figure 2.12 Performance measures at the three levels
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CHAPTER 2 OPERATIONS PERFORMANCE 65
What detailed measures to use? The five performance objectives – quality, speed, dependability, f lexibility and cost – are really composites of many smaller measures. For example, an operation’s cost is derived from many factors which could include the purchasing efficiency of the operation, the efficiency with which it converts materials, the productivity of its staff, the ratio of direct to indirect staff, and so on. All of these measures individually give a partial view of the operation’s cost performance, and many of them overlap in terms of the information they include. However, each of them does give a perspective on the cost performance of an operation that could be useful either to identify areas for improvement or to monitor the extent of improvement. If an organization regards its ‘cost’ performance as unsatisfac- tory, disaggregating it into ‘purchasing efficiency’, ‘operations efficiency’, ‘staff productiv- ity’, etc., might explain the root cause of the poor performance. The ‘operational’ level in Figure 2.12 shows some of the partial measures which can be used to judge an operation’s performance.
The balanced scorecard approach Arguably, the best-known performance measurement approach, and one used by many organizations, is the ‘balanced scorecard’ devised by Kaplan and Norton: ‘ The balanced score- card retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation. ’ 13
In the three-level framework used here, it lies across the strategic and operational levels. As well as including financial measures of performance, in the same way as traditional per- formance measurement systems, the balanced scorecard approach also attempts to provide the important information that is required to allow the overall strategy of an organization to be reflected adequately in specific performance measures. In addition to financial meas- ures of performance, it also includes more operational measures of customer satisfaction, internal processes, innovation and other improvement activities. In doing so it measures the factors behind financial performance which are seen as the key drivers of future financial success. In particular, it is argued that a balanced range of measures enables managers to address the following questions ( see Fig. 2.13 ):
● How do we look to our shareholders (financial perspective)? ● What must we excel at (internal process perspective)? ● How do our customers see us (the customer perspective)? ● How can we continue to improve and build capabilities (the learning and growth
perspective)?
The balanced scorecard attempts to bring together the elements that reflect a business’s strategic position, including product or service quality measures, product and service development times, customer complaints, labour productivity, and so on. At the same time it attempts to avoid perfor- mance reporting becoming unwieldy by restricting the number of measures and focusing especially on those seen to be essential. The advantages of the approach are that it presents an overall picture of the organization’s performance in a single report, and, by being com- prehensive in the measures of performance it uses, encourages com- panies to take decisions in the interests of the whole organization rather than sub-optimizing around narrow measures.
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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66 PART ONE DIRECTING THE OPERATION
HOW DO PERFORMANCE OBJECTIVES TRADE OFF AGAINST EACH OTHER?
Earlier we examined how improving the performance of one objective inside the operation could also improve other performance objectives. Most notably better quality, speed, depend- ability and flexibility can improve cost performance. But externally this is not always the case. In fact there may be a ‘trade-off’ between performance objectives. In other words, improving the performance of one performance objective might only be achieved by sacrificing perfor- mance in another. So, for example, an operation might wish to improve its cost efficiencies by reducing the variety of products or services that it offers to its customers. ‘ There is no such thing as a free lunch ’ could be taken as a summary of this approach. Probably the best-known sum- mary of the trade-off idea comes from Professor Wickham Skinner, who said: ‘ most managers will readily admit that there are compromises or trade-offs to be made in designing an airplane or truck. In the case of an airplane, trade-offs would involve matters such as cruising speed, take-off and landing distances, initial cost, maintenance, fuel consumption, passenger comfort and cargo or passenger capacity. For instance, no one today can design a 500-passenger plane that can land on an aircraft carrier and also break the sound barrier. Much the same thing is true in [operations]. ’ 14
But there are two views of trade-offs. The first emphasizes ‘reposi- tioning’ performance objectives by trading off improvements in some objectives for a reduction in performance in others. The other empha- sizes increasing the ‘effectiveness’ of the operation by overcoming trade-offs so that improvements in one or more aspects of performance can be achieved without any reduction in the performance of others. Most businesses at some time or other will adopt both approaches. This
is best illustrated through the concept of the ‘efficient frontier’ of operations performance.
Trade-offs and the efficient frontier Figure 2.14 (a) shows the relative performance of several companies in the same industry in terms of their cost efficiency and the variety of products or services that they offer to their customers. Presumably all the operations would ideally like to be able to offer very high
Overall strategic objectives
Customer performance measures
To achieve strategic impact, how should we be viewed by customers?
Internal process performance measures
To achieve strategic impact, what aspects of performance should business process excel at?
Financial performance measures
To achieve strategic impact, how should we be viewed by shareholders?
Learning and growth performance measures
To achieve strategic impact, how will we build capabilities over time?
Figure 2.13 The measures used in the balanced scorecard
✽ ✽ ✽ Operations principle Operations principle Operations principle
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CHAPTER 2 OPERATIONS PERFORMANCE 67
variety while still having very high levels of cost efficiency. However, the increased com- plexity that a high variety of product or service offerings brings will generally reduce the operation’s ability to operate efficiently. Conversely, one way of improving cost efficiency is to limit severely the variety on offer to customers. The spread of results in Figure 2.14 (a) is typical of an exercise such as this. Operations A, B, C, D all have chosen a different bal- ance between variety and cost efficiency. But none is dominated by any other operation in the sense that another operation necessarily has ‘superior’ performance. Operation X, how- ever, has an inferior performance because operation A is able to offer higher variety at the same level of cost efficiency and operation C offers the same variety but with better cost efficiency. The convex line on which operations A, B, C and D lie is known as the ‘efficient frontier’. They may choose to position themselves differently (presumably because of different market strategies) but they cannot be criticized for being ineffective. Of course any of these operations that lie on the efficient frontier may come to believe that the balance they have chosen between variety and cost efficiency is inappropriate. In these circumstances they may choose to reposition themselves at some other point along the efficient frontier. By contrast, operation X has also chosen to balance variety and cost efficiency in a particular way but is not doing so effectively. Operation B has the same ratio between the two performance objec- tives but is achieving them more effectively.
However, a strategy that emphasizes increasing effectiveness is not confined to those operations that are dominated, such as operation X. Those with a position on the efficient frontier will generally also want to improve their operations effectiveness by overcoming the trade-off that is implicit in the efficient frontier curve. For example, suppose operation B in Figure 2.14 (b) wants to improve both its variety and its cost efficiency simultaneously and move to position B1. It may be able to do this, but only if it adopts operations improvements that extend the efficient frontier. For example, one of the decisions that any supermarket manager has to make is how many checkout positions to open at any time. If too many check- outs are opened then there will be times when the checkout staff do not have any customers to serve and will be idle. The customers, however, will have excellent service in terms of little
Cost e�ciencyCost e�ciency
(b)(a)
DD
C C XX
B
B1A B
A
V ar
ie ty
V ar
ie ty
The new ‘e�cient frontier’
The ‘e�cient frontier’
Figure 2.14 The efficient frontier identifies operations with performances that dominate other operations’ performance
✽ ✽ ✽ Operations principle Operations principle Operations principle
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68 PART ONE DIRECTING THE OPERATION
or no waiting time. Conversely, if too few checkouts are opened, the staff will be working all the time but customers will have to wait in long queues. There seems to be a direct trade-off between staff utilization (and therefore cost) and customer waiting time (speed of service). Yet even the supermarket manager might, for example, allocate a number of ‘core’ staff to operate the checkouts but also arrange for those other staff who are performing other jobs in the supermarket to be trained and ‘on call’ should demand suddenly increase. If the manager
on duty sees a build-up of customers at the checkouts, these other staff could quickly be used to staff checkouts. By devising a flexible system of staff allocation, the manager can both improve customer service and keep staff utilization high.
This distinction between positioning on the efficient frontier and increasing operations effectiveness by extending the frontier is an important one. Any business must make clear the extent to which it is expecting the operation to reposition itself in terms of its perfor-
mance objectives and the extent to which it is expecting the operation to improve its effective- ness in several ways simultaneously.
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
❯ How is operations performance judged at a societal level?
● Operations decisions aff ect a variety of ‘stakeholders’. Stakeholders are the people and groups who have a legitimate interest in the operation’s activities.
● This idea that operations should take into account the impact on a broad mix of stakehold- ers is termed ‘corporate social responsibility ’ (CSR).
● Performance at the societal level often uses the idea of the triple bottom line (TBL, or 3BL, also known as ‘People, Planet and Profi t’). It includes the social bottom line, the environ- mental bottom line and the economic bottom line.
● The social bottom line incorporates the idea that businesses should accept that they bear some responsibility for the impact they have on society and balance the external ‘societal’ consequences of their actions with the more direct internal consequences, such as profit.
● The environmental bottom line incorporates the idea that operations should accept that they bear some responsibility for the impact they have on the natural environment.
● The economic bottom line incorporates the conventional fi nancial measures of perfor- mance derived from using the operation’s resources eff ectively.
● Operations management can either ‘make or break’ any business. In most businesses it represents the bulk of its assets.
● The positive eff ects of a well-run operation include a focus on improvement, the building of ‘diffi cult to imitate’ capabilities, and an understanding of the processes that are the build- ing blocks of all operations.
● The negative eff ects of a poorly run operation include failures that are obvious to custom- ers (and expensive for the organization), a complacency that leads to the failure to exploit opportunities for improvement.
❯ Why is operations performance vital in any organization?
SUMMARY ANSWERS TO KEY QUESTIONS
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CHAPTER 2 OPERATIONS PERFORMANCE 69
❯ How is operations performance judged at a strategic level?
● The type of decisions and activities that operations managers carry out can have a signifi- cant strategic impact.
● In particular, operations can affect economic performance in five ways:
● It can reduce the costs.
● It can achieve customer satisfaction through service.
● It can reduce the risk of operational failure.
● It can reduce the amount of investment that is necessary.
● It can provide the basis for future innovation.
❯ How is operations performance judged at an operational level?
● The five ‘performance objectives’ that are used to assess the performance of operations at an operational level are quality, speed, dependability, flexibility and cost.
● Quality is important because:
● By ‘doing things right’, operations seek to influence the quality of the company ’s goods and services.
● Externally, quality is an important aspect of customer satisfaction or dissatisfaction.
● Internally, quality operations both reduce costs and increase dependability.
● Speed is important because:
● By ‘doing things fast’, operations seek to influence the speed with which goods and ser- vices are delivered.
● Externally, speed is an important aspect of customer service.
● Internally, speed both reduces inventories by decreasing internal throughput time and reduces risks by delaying the commitment of resources.
● Dependability is important because:
● By ‘doing things on time’, operations seek to influence the dependability of the delivery of goods and services.
● Externally, dependability is an important aspect of customer service.
● Internally, dependability within operations increases operational reliability, thus saving the time and money that would otherwise be taken up in solving reliability problems and also giving stability to the operation.
● Flexibility is important because:
● By ‘changing what they do’, operations seek to influence the flexibility with which the company produces goods and services.
● Externally, flexibility can produce new products and services (product/service flexibility).
● Externally, flexibility can produce a wide range or mix of products and services (mix flex- ibility).
● Externally, flexibility can produce different quantities or volumes of products and ser- vices (volume flexibility).
● Externally, flexibility can produce products and services at different times (delivery flexi- bility).
● Internally, flexibility can help speed up response times, save time wasted in changeovers, and maintain dependability.
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70 PART ONE DIRECTING THE OPERATION
● Cost is important because:
● By ‘doing things cheaply ’, operations seek to infl uence the cost of the company ’s goods and services.
● Externally, low costs allow organizations to reduce their price in order to gain higher volumes or, alternatively, increase their profi tability on existing volume levels.
● Internally, cost performance is helped by good performance in the other performance objectives.
❯ How can operations performance be measured?
● It is unlikely that for any operation a single measure of performance will adequately refl ect the whole of a performance objective. Usually operations have to collect a whole bundle of partial measures of performance.
● The balanced scorecard (BSC) is a commonly used approach to performance measurement and incorporates measures related to:
● How do we look to our shareholders (fi nancial perspective)?
● What must we excel at (internal process perspective)?
● How do our customers see us (the customer perspective)?
● How can we continue to improve and build capabilities (the learning and growth perspective)?
❯ How do operations performance objectives trade off against each other?
● Trade-off s are the extent to which improvements in one performance objective can be achieved by sacrifi cing performance in others. The ‘effi cient frontier’ concept is a useful approach to articulating trade-off s and distinguishes between repositioning performance on the effi cient frontier and improving performance by overcoming trade-off s.
CASE STUDY Operations objectives at the Penang Mutiara 15
There are many luxurious hotels in the South-East Asia region but few can compare with the Penang Mutiara, a 440-room, top-of-the-market hotel which nestles in the lush greenery of Malaysia’s Indian Ocean coast. Owned by Pernas–OUE of Malaysia and managed by Singapore Mandarin International Hotels, the hotel’s general manager is under no illusions about the importance of running an effective operation. ‘ Managing a hotel of this size is an immensely complicated task ’, he says. ‘ Our customers have every right to be demanding. They expect first-class service and that’s what we have to give them. If we have any problems with managing this operation, the customer sees them immediately and that’s the biggest incentive for us to take operations performance seriously. Our quality of service just has to be impeccable. This means dealing
with the basics. For example, our staff must be courteous at all times and yet also friendly towards our guests. And of course they must have the knowledge to be able to answer guests’ questions. The building and equipment – in fact all the hard- ware of the operation – must support the luxury atmosphere which we have created in the hotel. Stylish design and top-class materials not only create the right impression but, if we choose them carefully, are also durable so the hotel still looks good over the years. Most of all, though, quality is about anticipating our guests’ needs, thinking ahead so you can identify what will delight or irritate a guest. ’
The hotel tries to anticipate guests’ needs in a number of ways. For example, if guests have been to the hotel before, staff avoid their having to repeat the information they gave on the
70 PART ONE DIRECTING THE OPERATION
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CHAPTER 2 OPERATIONS PERFORMANCE 71
previous visit. Reception staff simply check to see if guests have stayed before, retrieve the information and take them straight to their room without irritating delays. Quality of service also means helping guests sort out their own problems. If the air- line loses a guest’s luggage en route to the hotel, for example, he or she will arrive at the hotel understandably irritated. ‘ The fact that it is not us who have irritated them is not really the issue. It is our job to make them feel better. ’
Speed, in terms of fast response to customers’ requests is something else that is important. ‘ A guest just should not be kept waiting. If a guest has a request, he or she has that request now so it needs to be sorted out now. This is not always easy but we do our best. For example, if every guest in the hotel tonight decided to call room service and request a meal instead of going to the restaurants, our room service department would obviously be grossly overloaded and customers would have to wait an unacceptably long time before the meals were brought up to their rooms. We cope with this by keeping a close watch on how demand for room service is building up. If we think it’s going to get above the level where response time to custom- ers would become unacceptably long, we will call in staff from other restaurants in the hotel. Of course, to do this we have to make sure that our staff are multi-skilled. In fact we have a policy of making sure that restaurant staff can always do more than one job. It’s this kind of flexibility which allows us to maintain fast response to the customer. ’
Dependability is also a fundamental principle of a well-managed hotel. ‘ We must always keep our promises. For example, rooms must be ready on time and accounts must be ready for presentation when a guest departs; the guests expect a dependable service and anything less than full dependabil- ity is a legitimate cause for dissatisfaction. ’ It is on the grand occasions, however, when dependability is particularly important in the hotel. When staging a banquet, for exam- ple, everything has to be on time. Drinks, food, entertain- ment have to be available exactly as planned. Any deviation from the plan will very soon be noticed by customers. ‘ It is largely a matter of planning the details and anticipating what could go wrong. Once we’ve done the planning we can anticipate possible problems and plan how to cope with them, or better still, prevent them from occurring in the first place. ’
Flexibility means a number of things to the hotel. First of all it means that it should be able to meet a guest’s requests. ‘ We never like to say NO! For example, if a guest asks for some Camembert cheese and we don’t have it in stock, we will make sure that someone goes to the supermarket and tries to get it. If, in spite of our best efforts, we can’t get any we will negotiate an alternative solution with the guest. This has an important side-effect – it greatly helps us to maintain the motivation of our staff. We are constantly being asked to do the seemingly impossible – yet we do it, and our staff think it’s great. We all like to be part of an organization which is capable of achieving the very difficult, if not the impossible. ’ Flexibility in the hotel also means the ability to cope with the seasonal fluctuations in demand. The hotel achieves this partly by using tempo- rary part-time staff. In the back-office parts of the hotel this
is not a major problem. In the laundry, for example, it is rela- tively easy to put on an extra shift in busy periods by increas- ing staffing levels. However, this is more of a problem in the parts of the hotel that have direct contact with the customer. ‘ New temporary staff can’t be expected to have the same cus- tomer contact skills as our more regular staff. Our solution to this is to keep the temporary staff as far in the background as we possibly can and make sure that our skilled, well-trained staff are the ones who usually interact with the customer. So, for example, a waiter who would normally take orders, ser- vice the food, and take away the dirty plates would in peak times restrict his or her activities to taking orders and serving the food. The less skilled part of the job, taking away the plates, could be left to temporary staff. ’
As far as cost is concerned, around 60 per cent of the hotel’s total operating expenses go on food and beverages, so one obvious way of keeping costs down is by making sure that food is not wasted. Energy costs, at 6 per cent of total oper- ating costs, are also a potential source of saving. However, although cost savings are welcome, the hotel is very careful never to compromise the quality of its service in order to cut costs. ‘ It is impeccable customer service which gives us our com- petitive advantage, not price. Good service means that our guests return again and again. At times, around half our guests are peo- ple who have been before. The more guests we have, the higher is our utilization of rooms and restaurants, and this is what really keeps cost per guest down and profitability reasonable. So in the end we’ve come full circle: it’s the quality of our service which keeps our volumes high and our costs low. ’
QUESTIONS 1 Describe how you think the hotel’s manager will:
(a) make sure that the way he manages the hotel is appropriate to the way it competes for business;
(b) implement any change in strategy; (c) develop his operation so that it drives the long-
term strategy of the hotel.
2 The case describes how quality, speed, dependability, flexibility and cost impact the hotel’s external customers. Explain how each of these performance objectives might have internal benefits.
CHAPTER 2 OPERATIONS PERFORMANCE 71
So u
rc e:
A la
m y
Im ag
es : A
n d
re w
W o
o d
le y
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72 PART ONE DIRECTING THE OPERATION
1 The ‘forensic science’ service of a European country has traditionally been organized to pro- vide separate forensic science laboratories for each police force around the country. In order to save costs, the government has decided to centralize this service in one large central facility close to the country ’s capital. What do you think are the external advantages and disadvan- tages of this to the stakeholders of the operation? What do you think are the internal implica- tions to the new centralized operation that will provide this service?
2 The health clinic described in the worked example earlier in the chapter has expanded by hiring one extra employee and now has six employees. It has also leased some new health monitoring equipment which allows patients to be processed faster. This means that its total output is now 280 patients per week. Its wage costs have increased to £4,680 per week and its overhead costs to £3,000 per week. What are its single-factor labour productivity and its multi-factor productivity now?
3 A publishing company plans to replace its four proofreaders who look for errors in manu- scripts with a new scanning machine and one proofreader in case the machine breaks down. Currently the proofreaders check 15 manuscripts every week between them. Each is paid €80,000 per year. Hiring the new scanning machine will cost €5,000 each calendar month. How will this new system affect the proofreading department’s productivity?
4 Bongo’s Pizzas have a service guarantee that promises you will not pay for your pizza if it is delivered more than 30 minutes from the order being placed. An investigation shows that 10 per cent of all pizzas are delivered between 15 and 20 minutes from order, 40 per cent between 20 and 25 minutes from order, 40 per cent between 25 and 30 minutes from order, 5 per cent between 30 and 35 minutes from order, 3 per cent between 35 and 40 minutes from order, and 2 per cent over 40 minutes from order. If the average profit on each pizza delivered on time is €1 and the average cost of each pizza delivered is €5, is the fact that Bongo’s does not charge for 10 per cent of its pizzas a significant problem for the business? How much extra profit per pizza would be made if 5 minutes was cut from all deliveries?
5 Step 1 – Look again at the figures in the chapter which illustrate the meaning of each perfor- mance objective for the four operations. Consider the bus company and the supermarket, and in particular consider their external customers. Step 2 – Draw the relative required performance for both operations on a polar diagram. Step 3 – Consider the internal effects of each performance objective. For both operations, identify how quality, speed, dependability and flexibility can help to reduce the cost of pro- ducing their services.
6 Visit the websites of two or three large oil companies such as Exxon, BP, Shell, Total, etc. Examine how they describe their policies towards their customers, suppliers, shareholders, employees and society at large. Identify areas of the company ’s operations where there may be conflicts between the needs of these different stakeholder groups. Discuss or reflect on how (if at all) such companies try and reconcile these conflicts.
7 Devise a performance measurement scheme for the performance of the course you are following.
PROBLEMS AND APPLICATIONS
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CHAPTER 2 OPERATIONS PERFORMANCE 73
SELECTED FURTHER READING
Bourne, M., Kennerley, M. and Franco, M. (2005) Managing through measures: a study of the impact on performance, Journal of Manufacturing Technology Management, vol. 16, issue 4, 373–395.
What it says on the tin.
Kaplan, R.S. and Norton, D.P. (2005) The balanced scorecard: measures that drive performance, Harvard Business Review, July–August.
The latest pronouncements on the balanced scorecard approach.
Neely, A. (2012) Business Performance Measurement: Unifying Theory and Integrating Practice, Cambridge University Press, Cambridge.
A collection of papers on the details of measuring performance objectives.
Pine, B. J. (1993) Mass Customization, Harvard Business School Press, Boston, MA.
The first substantial work on the idea of mass customization. Still a classic.
Savitz, A.W. and Weber, K. (2006) The Triple Bottom Line: How Today’s Best-Run Companies Are Achieving Economic, Social and Environmental Success – and How You Can Too, Jossey-Bass, San Francisco.
Good on the triple bottom line.
Waddock, S. (2003) Stakeholder performance implications of corporate responsibility, International Journal of Business Performance Management, vol. 5, nos 2–3, 114–124.
An introduction to stakeholder analysis.
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Direct
Operations performance
The structure
and scope of operations
Operations strategy
Operations management
Product and service innovation
Topic covered in this chapter
Operations management
Direct
Design Develop
Deliver
Figure 3.1 This chapter examines operations strategy
INTRODUCTION No organization can plan in detail every aspect of its future actions; there is always some degree of uncertainty about what conditions will exist in the future. There will always have to be some adjustment to plans to accommodate circumstances. But simply always reacting to current, possibly short-term, issues can lead to constant changes in direction and the operation becoming volatile and unstable. That is why all organizations need the ‘backdrop’ of a well-understood strategic direction, so they know (at least, roughly) where they are heading and how they could get there. Once the operations function has understood its role in the business and after it has articulated its performance objectives, it needs to formulate a set of general principles which will guide its decision making. This is the operations strategy of the company. Yet the concept of ‘strategy ’ itself is not straightforward; neither is operations strategy. This chapter considers four perspectives, each of which goes partway to illustrating the forces that shape operations strategy. Figure 3.1 shows the position of the ideas described in this chapter in the general model of operations management.
Operations strategy
Key questions
❯ What is strategy and what is operations strategy?
❯ What is the difference between a ‘top-down’ and a ‘bottom-up’ view of operations strategy?
❯ What is the difference between a ‘market requirements’ and ‘operations resources’ view of operations strategy?
❯ How can operations strategy form the basis for operations improvement?
❯ How can an operations strategy be formulated? The process of operations strategy
3
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CHAPTER 3 OPERATIONS STRATEGY 75
OPERATIONS IN ACTION
You do not think of space satellites as cheap items, and of course they are not. They can be expensive – very expensive. And in the early days of space missions, this meant that only superpowers could afford to develop and launch them. The conventional wisdom was that space was such a hostile environment that satellites would have to be constructed using only specially developed components that could endure the severe conditions encountered in space. Satellites therefore would always be expensive items. Yet in the late 1970s this assumption was challenged by Sir Martin Sweeting, who then was studying for his PhD at the University of Surrey in the UK. The aerospace research team in the Electrical Engineering Department at the University of Surrey had built its first satellite (called UoSAT-1) using commercial off-the-shelf components. It was about as big as two microwave ovens, weighing in at 72 kg. By contrast, some of the huge satellites being launched by government space agencies were as large as a London double-decker bus. UoSAT-1 was launched in 1981 with the help of NASA, who had been persuaded to provide a free launch, piggybacking on the back of a mission to put a large scientific satellite into orbit. The team fol- lowed this up with a second satellite (UoSAT-2) built in just six months and launched in 1984. A year later Surrey Satellite Technology Limited (SSTL) was formed as a spinout company from the University of Surrey to transfer the results of its research into a commercial enterprise. The firm’s vision was to open up the mar- ket for space exploration by pioneering the use of small and relatively cheap, but reliable, satellites built from readily available off-the-shelf components – then a rev- olutionary idea. Now SSTL is the world’s leading small- satellite company and has delivered space missions for a whole range of applications including Earth observa- tion, science, communications and in-orbit technol- ogy demonstration. The company is at the forefront of space innovation, exploiting advances in technologies and challenging conventions to bring affordable space exploration to international customers. The company, which has launched over 40 satellites, is based across four sites in South-East England, and employs more than 500 staff. Since 2014 SSTL has been an independent company within the Airbus defence and space group.
As the market for satellites developed, scientific and technological innovations have led to what has been called a ‘democratisation’ of space, with SSTL main- taining what it says is a 40 per cent share of the global export market for small affordable satellites. How has it achieved this success from such small beginnings? Well,
partly because it was an early player in the market having the vision to see that there would be a market for small satellites that could serve the ambitions of smaller coun- tries, companies, research groups and even schools. As the company says, the small-satellite revolution started with SSTL. But in addition, it has always been innovative in finding ways of keeping the cost of building the satel- lites down to a minimum. SSTL pioneered the low-cost, low-risk approach to delivering operational satellite missions within short development timescales and with the capability that potential customers wanted. In the early 1980s, as the first microcomputers became com- mercially available, Sir Martin Sweeting speculated that it may be possible to use programmable technology to build small satellites that were ‘intelligent’ when com- pared with conventional large and expensive hard-wired satellites. It also would allow the satellite to be repro- grammed from the ground. Particularly important was the company ’s use of commercial off-the-shelf tech- nology. Combined with a determination to learn some- thing from each new project, a pragmatic approach to manufacture and low-cost operations, it enabled SSTL to keep costs as low as realistically possible. In effect, using industry-standard parts meant exploiting the (often enormous) investments by consumer electronics companies, auto part manufacturers and others who had developed complex components for their products. Even if this sometimes limited what a satellite could do, it provided the scale economies that would be impossi- ble if SSTL were designing and making customized com- ponents from scratch. ‘ We were being parasitic, if you like ’, admits Sir Martin.
However, not all commercially available compo- nents made for terrestrial use are up to coping with conditions in space, which is a hugely important issue. Reliability is essential in a satellite. (It is difficult to
Changing the economics of space exploration 1
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76 PART ONE DIRECTING THE OPERATION
repair them once in space.) And even though off-the- shelf components and systems have become increas- ing reliable, they must be rigorously tested to make sure that they are up to the severe conditions found in space. One of the key problems is how compo- nents react to the high levels of radiation in space. For example, different smartphone constituents (a regular source of components) react in different ways to radi- ation. Knowing which bits can be used and which can- not is an important piece of knowledge. Yet, although individual components and systems are often bought off the shelf, the company does most of its operations activities itself. This allows SSTL to provide a complete
in-house design, manufacture, launch and operation service as well as a range of advice, analysis and con- sultancy services. ‘ What distinguishes us is our vertically integrated capability, from design and research to man- ufacturing and operations ’, says Sir Martin. ‘ We don’t have to rely on suppliers, although of course we buy in components when that is advantageous. ’ And innova- tion? It is still as important as it was at the company ’s start. Surrey University has retained a 1 per cent stake in the company because ‘ we wanted to cement the very close relationship between company and university ’, says Sir Martin. ‘ We work together on a number of research projects and staff flow back and forth between us. ’
WHAT IS STRATEGY AND WHAT IS OPERATIONS STRATEGY?
Surprisingly, ‘strategy’ is not particularly easy to define. Linguistically the word derives from the Greek word strategos , meaning ‘leading an army’. And although there is no direct histori- cal link between Greek military practice and modern ideas of strategy, the military metaphor is powerful. Both military and business strategy can be described in similar ways, and include some of the following:
● Setting broad objectives that direct an enterprise towards its overall goal. ● Planning the path (in general rather than specific terms) that will achieve these goals. ● Stressing long-term rather than short-term objectives. ● Dealing with the total picture rather than stressing individual activities. ● Being detached from, and above, the confusion and distractions of day-to-day activities.
Here, by strategic decisions, we mean those decisions which: are widespread in their effect on the organization to which the strategy refers; define the position of the organization rela- tive to its environment; and move the organization closer to its long-term goals. But ‘strategy’ is more than a single decision; it is the total pattern of the decisions and actions that influence the long-term direction of the business. Thinking about strategy in this way helps us to discuss an organization’s strategy even when it has not been explicitly stated. Observing the total pattern of decisions gives an indication of the actual strategic behaviour.
Operations strategy Operations strategy concerns the pattern of strategic decisions and actions that set the role, objectives and activities of the operation. The term ‘operations strategy’ sounds at first like a contradiction. How can ‘operations’, a subject that is generally concerned with the day-to- day creation and delivery of goods and services, be strategic? ‘Strategy’ is usually regarded as the opposite of those day-to-day routine activities. But ‘ operations’ is not the same as ‘ operational ’. ‘Operations’ are the resources that create products and services. ‘Operational’ is the opposite of strategic, meaning day-to-day and detailed. So, one can examine both the operational and the strategic aspects of operations. It is also conventional to distinguish
between the ‘content’ and the ‘process’ of operations strategy. The content of operations strategy is the specific decisions and actions that set the operations role, objectives and activities. The process of operations strategy is the method that is used to make the specific ‘content’ decisions.
✽ Operations principle ‘Operations’ is not the same as ‘operational’; it does have a strategic role.
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CHAPTER 3 OPERATIONS STRATEGY 77
From implementing to supporting to driving strategy Most businesses expect their operations strategy to improve operations performance over time. In doing this they should be progressing from a state contributing very little to the com- petitive success of the business through to the point where they are directly responsible for its competitive success. This means that they should be able to, in turn, master the skills first to ‘implement’, then ‘support’ and then ‘drive’ operations strategy.
Implementing business strategy The most basic role of operations is to implement strategy. You cannot, after all, touch a strat- egy; you cannot even see it; all you can see is how the operation behaves in practice. For example, if an insurance company has a strategy of moving to an entirely online service, its operations function will have to supervise the design of all the processes which allow custom- ers to access online information, issue quotations, request further information, check credit details, send out documentation, and so on. Without effective implementation even the most original and brilliant strategy will be rendered totally ineffective.
Supporting business strategy Support strategy goes beyond simply implementing strategy. It means developing the capa- bilities which allow the organization to improve and refine its strategic goals. For example, a mobile phone manufacturer wants to be the first in the market with new product innovations, so its operations need to be capable of coping with constant innovation. It must develop pro- cesses flexible enough to make novel components, organize its staff to understand the new technologies, develop relationships with its suppliers which help them to respond quickly when supplying new parts, and so on.
Driving business strategy The third, and most difficult, role of operations is to drive strategy by giving it a unique and long-term advantage. For example, a specialist food-service company supplies restaurants with frozen fish and fish products. Over the years it has built up close relationships with its custom- ers (chefs) as well as with its suppliers around the world (fishing com- panies and fish farms). In addition it has its own small factory which develops and produces a continual stream of exciting new products. In fact the whole company’s success is based largely on these unique operations capabilities. The operation drives the company’s strategy.
Hayes and Wheelwright’s four stages of operations contribution The ability of any operation to play these roles within the organization can be judged by con- sidering the organizational aims or aspirations of the operations function. Professors Hayes and Wheelwright of Harvard University 2 developed a four-stage model which can be used to evaluate the role and contribution of the operations function. The model traces the progres- sion of the operations function from what is the largely negative role of stage 1 operations to its becoming the central element of competitive strategy in excellent stage 4 operations. Figure 3.2 illustrates the four stages.
Stage 1: Internal neutrality This is the very poorest level of contribution by the operations function. It is holding the company back from competing effectively. It is inward looking and, at best, reactive with very little positive to contribute towards competitive success. Paradoxically, its goal is ‘to be ignored’ (or, ‘internally neutral’). At least then it is not holding the company back in any way. It attempts to improve by ‘avoiding making mistakes’.
✽ Operations principle Operations should try, progressively, to implement, support and drive strategy.
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78 PART ONE DIRECTING THE OPERATION
Stage 2: External neutrality The first step of breaking out of stage 1 is for the operations function to begin comparing itself with similar companies or organizations in the outside market (being ‘externally neutral’). This may not immediately take it to the ‘first division’ of companies in the market, but at least it is measuring itself against its competitors’ performance and trying to implement ‘best practice’.
Stage 3: Internally supportive Stage 3 operations are among the best in their market. Yet, stage 3 operations still aspire to be clearly and unambiguously the very best in the market. They achieve this by gaining a clear view of the company’s competitive or strategic goals and supporting it by developing appro- priate operations resources. The operation is trying to be ‘internally supportive’ by providing a credible operations strategy.
Stage 4: Externally supportive Yet Hayes and Wheelwright suggest a further stage – stage 4 – where the company views the oper- ations function as providing the foundation for its competitive success. Operations look to the long term. It forecasts likely changes in markets and supply, and it develops the operations-based capabilities which will be required to compete in future market conditions. Stage 4 operations are innovative, creative and proactive and are driving the company’s strategy by being ‘one step ahead’ of competitors – what Hayes and Wheelwright call being ‘externally supportive’.
Figure 3.2 The four-stage model of operations contribution
Redefining industry expectations
Clearly the best in the industry
As good as competitors
Holding the organization back Implementing
strategy
In c
re a
si n
g s
tr a
te g
ic im
p a
c t
Increasing operations capabilities
Internally neutral
Externally neutral
Internally supportive
Externally supportive
Supporting strategy
Driving strategy
Stage 2 Adopt best
practice
Stage 1 Correct the
worst problems
Stage 4 Give an
operations advantage
Stage 3 Link strategy
with operations
Inc rea
sin g c
on trib
uti on
of op
era tio
ns
Critical commentary
The idea that operations can have a leading role in determining a company’s strategic direction is not universally supported. Both Hayes and Wheelwright’s stage 4 of their four- stage model and the concept of operations ‘driving’ strategy not only imply that it is possible
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CHAPTER 3 OPERATIONS STRATEGY 79
Perspectives on operations strategy Different authors have slightly different views and definitions of operations strategy. Between them, four ‘perspectives’ emerge: 3
● Operations strategy is a top-down reflection of what the whole group or business wants to do. ● Operations strategy is a bottom-up activity where operations improvements cumulatively
build strategy. ● Operations strategy involves translating market requirements into operations decisions
(sometimes called the ‘outside-in’ perspective). ● Operations strategy involves exploiting the capabilities of operations resources in chosen
markets (sometimes called the ‘inside-out’ perspective).
None of these four perspectives alone gives the full picture of what operations strategy is. But together they provide some idea of the pressures that go to form the content of operations strategy. First we will treat the top-down and bottom-up perspectives together, then the mar- ket requirements and operations resource perspectives together ( see Fig. 3.3 ).
for operations to take such a leading role, but are also explicit in seeing it as a ‘good thing’. A more traditional stance taken by some authorities is that the needs of the market will always be pre-eminent in shaping a company’s strategy. Therefore, operations should devote all their time to understanding the requirements of the market (as defi ned by the marketing function within the organization) and devote themselves to their main job of ensuring that operations processes can actually deliver what the market requires. Companies can only be successful, they argue, by positioning themselves in the market (through a combination of price, promotion, product design and managing how products and services are delivered to customers) with operations very much in a ‘supporting’ role. In eff ect, they say, Hayes and Wheelwright’s four-stage model should stop at stage 3. The issue of an ‘operations resource’ perspective on operations strategy is discussed later in the chapter.
Figure 3.3 The four perspectives on operations strategy
Market requirement perspective
What the market position requires operations to do
Operations resources
perspective
What operations resources can do
Top-down perspective
What the business wants operations
to do
What day-to-day experience suggests operations should do
Bottom-up perspective
Operations strategy
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80 PART ONE DIRECTING THE OPERATION
WHAT IS THE DIFFERENCE BETWEEN A ‘ TOP-DOWN’ AND ‘BOTTOM-UP’ VIEW OF OPERATIONS STRATEGY?
Top-down strategies A large corporation will need a strategy to position itself in its global, economic, political and social environment. This will consist of decisions about what types of business the group wants to be in, what parts of the world it wants to operate in, how to allocate its cash between its various businesses, and so on. Decisions such as these form the corporate strategy of the corporation. Each business unit within the corporate group will also need to put together its own business strategy which sets out its individual mission and objectives. This business strat- egy guides the business in relation to its customers, markets and competitors, and also the strategy of the corporate group of which it is a part. Similarly, within the business, functional strategies need to consider what part each function should play in contributing to the strate- gic objectives of the business.
So, one perspective on operations strategy is that it should take its place in this hierarchy of strategies. Its main influence, therefore, will be whatever the business sees as its strategic direction. For example, a printing services group has a company that prints packaging for consumer products. The group’s management figure that, in the long-term, only companies with significant market share will achieve substantial profitability. Its corporate objectives therefore stress market dominance. The consumer packaging company decides to achieve volume growth, even above short-term profitability or return on investment. The implication for operations strategy is that it needs to expand rapidly, investing in extra capacity (fac- tories, equipment and labour) even if it means some excess capacity in some areas. It also needs to establish new factories in all parts of its market to offer relatively fast delivery. The
important point here is that different business objectives would prob- ably result in a very different operations strategy. The role of opera- tions is therefore largely one of implementing or ‘operationalizing’ business strategy. Figure 3.4 illustrates this strategic hierarchy, with some of the decisions at each level and the main influences on the strategic decisions.
‘Bottom-up’ strategies The ‘top-down’ perspective provides an orthodox view of how functional strategies should be put together. But in fact the relationship between the levels in the strategy hierarchy is more complex than this. When any group is reviewing its corporate strategy, it will also take into account the circumstances, experiences and capabilities of the various businesses that form the group. Similarly, businesses, when reviewing their strategies, will consult the individual functions within the business about their constraints and capabilities. They may also incor- porate the ideas which come from each function’s day-to-day experience. Therefore an alter- native view to the top-down perspective is that many strategic ideas emerge over time from operational experience. Sometimes companies move in a particular strategic direction because the ongoing experience of providing products and services to customers at an operational level convinces them that it is the right thing to do. There may be no high-level decisions examin- ing alternative strategic options and choosing the one which provides the best way forward. Instead, a general consensus emerges from the operational level of the organization.
Suppose the printing services company described previously suc- ceeds in its expansion plans. However, in doing so it finds that hav- ing surplus capacity and a distributed network of factories allows it to offer an exceptionally fast service to customers. It also finds that some customers are willing to pay considerably higher prices for such a responsive service. Its experiences lead the company to set up
✽ Operations principle Operations strategies should reflect top-down corporate and/or business objectives.
✽ Operations principle Operations strategy should reflect bottom-up experience of operational reality.
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CHAPTER 3 OPERATIONS STRATEGY 81
Figure 3.4 The top-down perspective of operations strategy and its application to the printing services group
Corporate strategy decisions • What businesses to be in? • Allocation of cash to businesses? • How to manage the relationships between different businesses?
Business strategy decisions • Defining the mission of the business e.g. – growth targets – return on investment – profitability targets – cash generation • Setting competitive objectives
Functional strategy decisions • The role of the function • Translating business objectives into functional objectives • Allocation of resources so as to achieve functional objectives • Performance improvement priorities
Printing services group corporate strategy • Specialize in packaging businesses • Become a major player in all its markets
Consumer packaging business strategy • Rapid volume growth • Fast service • Economies of scale
Operations strategy • Capacity expansion • Tolerate some over-capacity in the short term • New locations established
a separate division dedicated to providing fast, high-margin printing services to those cus- tomers willing to pay. The strategic objectives of this new division are not concerned with high-volume growth but high profitability.
This idea of strategy being shaped by operational-level experience over time is some- times called the concept of emergent strategies4 (see Fig. 3.5). This view of operations strategy is perhaps more descriptive of how things really happen, but at first glance it seems less useful in providing a guide for specific decision making. Yet while emergent strategies are less easy to categorize, the principle governing a bottom-up perspective is clear: shape the operation’s objectives and action, at least partly, by the knowledge it gains from its day-to-day activities. The key virtues required for shaping strategy from the bot- tom up are an ability to learn from experience and a philosophy of continual and incre- mental improvement.
Top-down and bottom-up perspectives on operations strategy can reinforce each other The top-down and bottom-up perspectives are often seen as being diametrically opposite ways of looking at operations strategy, but they are not. In fact the two perspectives can be mutually reinforcing. This is how it can work. The top-down perspective sets the overall direction and objectives for operations decisions and activities. In fact, in order to imple- ment top-down strategy, the day-to-day activities of the operation must be aligned with the strategy. So a way of judging operational day-to-day activities of an operation is to
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82 PART ONE DIRECTING THE OPERATION
Figure 3.5 The ‘bottom-up’ perspective of operations strategy
Surplus capacity allows fast service
Offers option of faster service at premium price
New ‘fast service’ division established
Operational experience
Emergent sense of what the strategy should be
Operations strategy
Figure 3.6 Top-down and bottom-up perspectives on operations strategy can reinforce each other
Top-down Strategic intention
Bottom-up Operational day-to-day
experience
Operations-based capabilities can be exploited strategically
Day-to-day experience can be built into operations-
based capability
Operations processes can capture day-to-day
experience
Strategy needs to be implemented
Implementation involves aligning day-to-day operations
activities with strategy
Day-to-day operations should be run to reflect
strategic intention
check that they fully ref lect the overall top-down strategy of the organization. But as we indicated in the last paragraph, the experience gained from day-to-day activities can be accumulated and built into capabilities that an organization could possibly exploit stra- tegically. (We will expand this idea of ‘capabilities’ in the next section.) This idea of how top-down and bottom-up perspectives on operations strategy can reinforce each other is shown in Figure 3.6.
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CHAPTER 3 OPERATIONS STRATEGY 83
OPERATIONS IN PRACTICE
One of the principles of operations strategy is that what operations do ‘on the ground’ should be aligned with what a business is trying to achieve in its market. The way Apple designs and runs its retail operations is a good example of this. (Later in this chapter we will look at Apple’s sup- ply strategy.) However, Apple has not always had a retail operations strategy, because Apple has not always sold its products through its own shops. It was back in 1990 when the late Steve Jobs, then Apple’s boss, decided to build Apple Stores because conventional computer retail- ers were reluctant to stock his Mac computers. They said that the Apple brand was too weak (which, at the time, it was). The original Apple Stores were heavily influ- enced by Gap (the clothing retailer) and so many Gap employees moved to work for Apple that they joked about working for ‘Gapple’. Yet, even with the experienced Gap retailers, Apple wanted to develop its own ideas. Consequently it built a ‘prototype store’ near its Californian headquarters and tested its retail concepts for a year before opening the first Apple Stores. This early learning period was important. It allowed Apple to come to the conclusion that the two key issues for its retail operations strategy were store location and the experience that customers would have within the stores.
First, store location: Apple has stores in some of the highest profile locations on Earth. This is expensive, but the large number of customers it attracts together with the Apple range of products allow the company to pro- duce very high sales. In fact its sales productivity (sales per square metre) is above many luxury goods retailers such as Tiffany. Second, the customer experience: according to
Ron Johnson, who built up Apple’s shop network: ‘ People come to the Apple Store for the experience, and they’re will- ing to pay a premium for that. There are lots of components to that experience, but maybe the most important is that the staff isn’t focused on selling stuff, it’s focused on build- ing relationships and trying to make people’s lives better. The staff is exceptionally well trained, and they’re not on commission, so it makes no difference to them if they sell you an expensive new computer or help you make your old one run better so you’re happy with it. Their job is to figure out what you need and help you get it, even if it’s a prod- uct Apple doesn’t carry. Compare that with other retailers where the emphasis is on encouraging customers to buy more, even if they don’t want or need it. That doesn’t enrich their lives, and it doesn’t deepen the retailer’s relationship with them. It just makes their wallets lighter. ’ Yet creating the customer experience is not a matter of chance – it is carefully designed into Apple’s strategy. Employees are helped to cultivate their air of cool confidence through extensive training, and it is easier to be approacha- ble and calm when there is little pressure to push sales. Training emphasizes the importance of problem solving rather than selling and treating customers with courtesy. For example, staff have been told never to correct a cus- tomer’s mispronunciation of a product in case it is seen as patronizing. Of course, Apple’s products are attractive and Apple customers are famously passionate about the brand, but if Apple products were the only reason for the stores’ success, it is difficult to explain why customers flock to the stores to buy Apple products at full price when dis- count retailers sell them cheaper.
Apple’s retail operations strategy 5
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WHAT IS THE DIFFERENCE BETWEEN A ‘MARKET REQUIREMENTS’ AND AN ‘OPERATIONS RESOURCES’ VIEW OF OPERATIONS STRATEGY?
Market-requirements-based strategies No operation that continually fails to serve its markets adequately is likely to survive in the long term. Without an understanding of what markets require, it is impossible to ensure that the operation is achieving the right priority between its performance objectives (quality, speed, dependability, flexibility and cost).
The market influence on performance objectives Operations seek to satisfy customers through developing their five performance objectives. For example, if customers particularly value low-priced products or services, the operation will place emphasis on its cost performance. Alternatively, a customer emphasis on fast deliv- ery will make speed important to the operation. When it is important that products or services are delivered exactly when they are promised, the performance objective of dependability
will be essential for the operation. When customers value products or services that have been adapted or designed specifically for them, flexibility will be vital, and so on. This list is not exhaustive; the key point is that whatever competitive factors are important to customers should influence the priority of each performance objective.
Order-winning and qualifying objectives A particularly useful way of determining the relative importance of competitive factors is to distinguish between ‘order-winning’ and ‘qualifying’ factors. 6 Order-winning factors are those things which directly and significantly contribute to winning business. They are regarded by customers as key reasons for purchasing the product or service. Raising performance in an order-winning factor will either result in more business or improve the chances of gaining more business. Qualifying factors may not be the major competitive determinants of success, but are important in another way. They are those aspects of competitiveness where the oper- ation’s performance has to be above a particular level just to be considered by the customer. Performance below this ‘qualifying’ level of performance will possibly disqualify the company from being considered by many customers. But any further improvement above the qualifying level is unlikely to gain the company much competitive benefit. To order-winning and qualify- ing factors can be added less important factors which are neither order winning nor qualifying. They do not influence customers in any significant way. They are worth mentioning here only because they may be of importance in other parts of the operation’s activities.
Figure 3.7 shows the difference between order-winning, qualifying and less important fac- tors in terms of their utility or worth to the competitiveness of the organization. The curves illustrate the relative amount of competitiveness (or attractiveness to customers) as the oper-
ation’s performance at the factor varies. Order-winning factors show a steady and significant increase in their contribution to competitive- ness as the operation gets better at providing them. Qualifying factors are ‘givens’; they are expected by customers and can severely disad- vantage the competitive position of the operation if it cannot raise its
performance above the qualifying level. Less important objectives have little impact on cus- tomers no matter how well the operation performs in them.
If, as is likely, an operation produces goods or services for more than one customer group, it will need to determine the order-winning, qualifying and less important competitive factors for each group. For example, Table 3.1 shows two ‘product’ groups in the banking industry. Here the distinction is drawn between the customers who are looking for banking services for their private and domestic needs (current accounts, overdraft facilities, savings accounts,
✽ Operations principle Operations strategy should reflect the requirements of the business’s markets.
✽ Operations principle Competitive factors can be classified as order winners or qualifiers.
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CHAPTER 3 OPERATIONS STRATEGY 85
Figure 3.7 Order-winning, qualifying and less important competitive factors. Different customer needs imply different objectives
Table 3.1 Different banking services require different performance objectives
Retail banking Corporate banking
Products Personal financial services such as loans and credit cards
Special services for corporate customers
Customers Individuals Businesses
Range of services offered Medium but standardized, little need for special terms
Very wide range, many need to be customized
Changes to service design Occasional Continual
Delivery Fast decisions Dependable service
Quality Means error-free transactions Means close relationships
Volume per service type Most services are high volume Most services are low volume
Profit margins Most are low to medium, some high Medium to high
Competitive factors
Order winners Price Customization
Accessibility Quality of service
Ease of transaction Reliability/trust
Qualifiers Quality Ease of transaction
Range Price
Less important Accessibility
Internal performance Cost Flexibility
objectives Speed Quality
Quality Dependability
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86 PART ONE DIRECTING THE OPERATION
mortgage loans, etc.) and those corporate customers who need banking services for their (often large) organizations. These latter services would include such things as letters of credit, cash transfer services and commercial loans.
Worked example
‘ It is about four years now since we specialized in the small to medium firms’ market. Before that we also used to provide legal services for anyone who walked in the door. So now we have built up our legal skills in many areas of corporate and business law. However, within the firm, I think we could focus our activities even more. There seem to be two types of assignment that we are given. About forty per cent of our work is relatively routine. Typically these assignments are to do with things like property purchase and debt collection. Both these activities involve a relatively standard set of steps which can be automated or carried out by staff without full legal qualifications. Of course, a fully qualified lawyer is needed to make some decisions, however most work is fairly rou- tine. Customers expect us to be relatively inexpensive and fast in delivering the service. Nor do they expect us to make simple errors in our documentation, in fact if we did this too often we would lose business. Fortunately our customers know that they are buying a standard service and don’t expect it to be customized in any way. The problem here is that specialist agencies have been emerging over the last few years and they are starting to undercut us on price. Yet I still feel that we can oper- ate profitably in this market and anyway, we still need these capabilities to serve our other clients. The other sixty per cent of our work is for clients who require far more specialist services, such as assignments involving company merger deals or major company restructuring. These assignments are complex, large, take longer, and require significant legal skill and judgement. It is vital that clients respect and trust the advice we give them across a wide range of legal specialisms. Of course they assume that we will not be slow or unreliable in preparing advice, but mainly it’s trust in our legal judgement which is important to the client. This is popular work with our lawyers. It is both interesting and very profitable. But should I create two separate parts to our business: one to deal with routine services and the other to deal with specialist services? And, what aspects of operations performance should each part be aiming to excel at? ” (Managing Partner, Branton Legal Services)
Analysis Table 3.2 has used the information supplied above to identify the order winners, qualifiers and less important competitive factors for the two categories of service. As the Managing Partner suspects, the two types of service are very different. Routine services must be relatively inex- pensive and fast, whereas the clients for specialist services must trust the quality of advice and range of legal skills available in the firm. The customers for routine services do not expect errors and those for specialist services assume a basic level of dependability and speed. These are the qualifiers for the two categories of service. Note that qualifiers are not ‘unimportant’. On the contrary, failure to be ‘up to standard’ at them can lose the firm business. However, it is the order winner which attracts new business. Most significantly, the performance objectives which each operations partner should stress are very different. Therefore there does seem to be a case for separating the sets of resources (for example, lawyers and other staff ) and pro- cesses (information systems and procedures) that produce each type of service.
Table 3.2 Competitive factors and performance objectives for the legal firm
Service category Routine services Specialist services
Examples Property purchase Company merger deals
Debt collection Company restructuring
Order winner Price Quality of service
Speed Range of skills
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CHAPTER 3 OPERATIONS STRATEGY 87
The product/service life cycle influence on performance objectives One way of generalizing the behaviour of both customers and competitors is to link it to the life cycle of the products or services that the operation is producing. The exact form of product/service life cycles will vary, but generally they are shown as the sales volume passing through four stages: introduction, growth, maturity and decline. The implication of this for operations management is that products and services will require different operations strate- gies in each stage of their life cycle ( see Fig. 3.8 ).
Introduction stage When a product or service is first introduced, it is likely to be offering something new in terms of its design or performance, with few competitors offering the same product or service. The needs of customers are unlikely to be well understood, so operations management needs to develop the flexibility to cope with any changes and be able to give the quality to maintain product/service performance.
Service category Routine services Specialist services
Qualifi ers Quality (conformance) Dependability
Speed
Less important Customization Price
Operations partners Cost Quality of relationship
should stress Speed Legal skills
Quality Flexibility
Figure 3.8 The effects of the product/service life cycle on operations performance objectives
Dominant operations performance objectives
Likely qualifiers
Likely order winners
Competitors
Customers
Flexibility Quality
Quality Range
Product/service specification
Few/none
Innovators
Speed Dependability Quality
Price Range
Availability
Increasing numbers
Early adopters
Cost Dependability
Range Quality
Low price Dependable supply
Stable numbers
Bulk of market
Cost
Dependable supply
Low price
Declining number
Laggards
Introduction into market
Growth in market
acceptance Maturity of
market, sales level o�
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Decline as market
becomes saturated
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88 PART ONE DIRECTING THE OPERATION
Growth stage As volume grows, competitors may enter the growing market. Keeping up with demand could prove to be the main operations preoccupation. Rapid and dependable response to demand will help to keep demand buoyant, while quality levels must ensure that the company keeps its share of the market as competition starts to increase.
Maturity stage Demand starts to level off. Some early competitors may have left the market and the industry will probably be dominated by a few larger companies. So operations will be expected to get the costs down in order to maintain profits or to allow price cutting, or both. Because of this, cost and productivity issues, together with dependable supply, are likely to be the operation’s main concerns.
Decline stage After time, sales will decline with more competitors dropping out of the market. There might be a residual market, but unless a shortage of capacity develops, the market will continue to be dominated by price competition. Operations objectives continue to be dominated by cost.
The operations resources perspective The fourth and final perspective we will take on operations strategy is based on a particularly influential theory of business strategy – the resource-based view (RBV) of the firm. 7 Put sim- ply, the RBV holds that firms with an ‘above-average’ strategic performance are likely to have gained their sustainable competitive advantage because of the core competences (or capa- bilities) of their resources. This means that the way an organization inherits, or acquires, or develops its operations resources will, over the long term, have a significant impact on its stra- tegic success. Furthermore, the impact of its ‘operations resource’ capabilities will be at least as great, if not greater, than that which it gets from its market position. So understanding and developing the capabilities of operations resources, although often neglected, is a particularly important perspective on operations strategy.
Resource constraints and capabilities No organization can merely choose which part of the market it wants to be in without con- sidering its ability to produce services and products in a way that will satisfy that market. In other words, the constraints imposed by its operations must be taken into account. For example, a small translation company offers general translation services to a wide range of customers who wish documents such as sales brochures to be translated into another lan- guage. A small company, it operates an informal network of part-time translators who enable the company to offer translation into or from most of the major languages in the world. Some of the company’s largest customers want to purchase their sales brochures on a ‘one-stop shop’ basis and have asked the translation company whether it is willing to offer a full service, organizing the design and production, as well as the translation, of export brochures. This is a very profitable market opportunity, but the company does not have the resources, financial or physical, to take it up. From a market perspective, it is good business; from an operations resource perspective, it is not feasible.
However, the operations resource perspective is not always so negative. This perspective may identify constraints to satisfying some markets but it can also identify capabilities which can be exploited in other markets. For example, the same translation company has recently employed two new translators who have translation software skills, so now the company can offer a new ‘fast-response’ service which has been designed specifically to exploit the capabili- ties within the operations resources. Here the company has chosen to be driven by its resource capabilities rather than the obvious market opportunities.
✽ Operations principle Operations strategy objectives will change depending on the stage of the business’s services and products.
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CHAPTER 3 OPERATIONS STRATEGY 89
OPERATIONS IN ACTION
As a publicly stated ambitious target it takes some beat- ing: ‘ Amazon.com strives to be ’, it says, ‘ Earth’s most customer-centric company .’ Founded by Jeff Bezos in 1995, the Amazon.com website started as a place to buy books, giving its customers what at the time was a unique cus- tomer experience. Bezos believed that only the Internet could offer customers the convenience of browsing a selection of millions of book titles in a single sitting. During its first 30 days of business, Amazon.com fulfilled orders for customers in 45 countries – all shipped from Bezos’s Seattle-area garage. And that initial success has been fol- lowed by continued growth that is based on a clear strategy of technological innovation. Among its many technological innovations for customers, Amazon.com offers a personal- ized shopping experience for each customer, book discov- ery through ‘Search Inside The Book’, convenient checkout using ‘1-Click ® Shopping ’, and community features like Listmania and Wish Lists that help customers discover new products and make informed buying decisions. In addition Amazon operates retail websites and offers programs that enable other retailers and individual sellers to sell products on their websites. It may not be glamorous, but Amazon has focused on what have been called ‘the dull-but-difficult tasks’ such as tracking products, managing suppliers, stor- ing inventory and delivering boxes. Fulfilment By Amazon allows other companies to use Amazon’s logistics capabil- ity including the handling of returned items, and access to Amazon’s ‘back-end’ technology.
Amazon Web Services, its cloud computing busi- ness, provides the computing power for small and larger high-profile customers such as Spotify’s digital music ser- vice, and Netflix’s video streaming service. But, why should any business want to allow Amazon to have such control over its activities? Mainly because it allows entrepreneurs to create start-ups and established companies to expand their activities without the huge investment they would need to build appropriate infrastructure themselves. Amazon’s large and efficient operations are also better value that smaller companies could achieve. Now, many prominent retailers work with Amazon Services to power their e-commerce offerings from end to end, including technology services, merchandizing, customer service, and order fulfilment. Offering business-to-business ser- vices is also good for Amazon. The problem with online retailing, said Bezos, is its seasonality. At peak times, such as Christmas, Amazon has far more computing capac- ity than it needs for the rest of the year. At low points it may be using as little as 10 per cent of its total capacity. Hiring out that spare capacity is an obvious way to bring in extra revenue. Its EC2 (Elastic Compute Cloud) service provides resizable computing capacity ‘in the cloud’. It is designed, says Amazon, to make web-scale computing easier for developers: ‘ Amazon EC2’s simple web service interface allows you to obtain and configure capacity with minimal friction. It provides you with complete control of your computing resources and lets you run on Amazon’s
Amazon
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90 PART ONE DIRECTING THE OPERATION
proven computing environment. Amazon EC2 reduces the time required to obtain and boot new server instances to minutes, allowing you to quickly scale capacity, both up and down, as your computing requirements change. Amazon EC2 changes the economics of computing by allowing you to pay only for capacity that you actually use. Amazon EC2 provides developers the tools to build failure resilient appli- cations and isolate themselves from common failure scenar- ios. ’ Do not worry if you cannot follow the technicalities of Amazon’s statement, it is aimed at IT professionals. The important point is that it is a business-to-business service
based on the company’s core competence of leveraging its processes and technology that can make retail operations ultra- efficient. However, some observers immediately crit- icized Amazon’s apparent redefinition of its strategy. ‘ Why not ’, they said, ‘ stick to what you know, focus on your core competence of internet retailing? ’ Bezos’s response was clear: ‘ We are sticking to our core competence. The only thing that’s changed is that we are exposing it for (the benefit of) others .’ At least for Jeff Bezos, Amazon is not so much an Internet retailer as a provider of Internet-based technol- ogy and logistics services.
Intangible resources An operations resource perspective must start with an understanding of the resource capabil- ities and constraints within the operation. It must answer the simple questions: what do we have, and what can we do? An obvious starting point here is to examine the transforming and transformed resource inputs to the operation. These, after all, are the ‘building blocks’ of the operation. However, merely listing the type of resources an operation has does not give a com- plete picture of what it can do. Trying to understand an operation by listing its resources alone is like trying to understand an automobile by listing its component parts. To describe it more fully, we need to describe how the component parts form the internal mechanisms of the motor car. Within the operation, the equivalent of these mechanisms is its processes . Yet, even for an automobile, a technical explanation of its mechanisms still does not convey everything about its style or ‘personality’. Something more is needed to describe these. In the same way, an operation is not just the sum of its processes. In addition, the operation has some intan- gible resources. An operation’s intangible resources include such things as its relationship with suppliers, the reputation it has with its customers, its knowledge of its process technol- ogies and the way its staff can work together in new product and service development. These intangible resources may not always be obvious within the operation, but they are important and have real value. It is these intangible resources, as well as its tangible resources, that an operation needs to deploy in order to satisfy its markets. The central issue for operations management, therefore, is to ensure that its pattern of strategic decisions really does develop appropriate capabilities within its resources and processes.
Strategic resources and sustainable competitive advantage The ‘resource-based’ explanation of why some companies manage to gain sustainable com- petitive advantage is that they have accumulated better or more appropriate resources. Put simply, ‘above-average’ competitive performance is more likely to be the result of the core capabilities (or competences) inherent in a firm’s resources than its competitive positioning in its industry. And resources can have a particularly influential impact on strategic success if they exhibit some or all of the following properties: 8
● They are scarce – Unequal access to resources so that not all competing firms have scarce resources such as an ideal location, experienced engineers, proprietary software, etc., can strengthen competitive advantage. So, for example, if a firm did not have the good fore- sight (or luck) to acquire a strategic resource (such as a supply contract with a specialist supplier) when it was inexpensive, it will have to try and acquire it after it has become expensive (because other firms are also now wanting it).
● They are not very mobile – Some resources are difficult to move out of a firm. For exam- ple, if a new process is developed in a company’s Stockholm site and is based on the knowl- edge and experience of the Stockholm staff, the process will be difficult (although not totally impossible) to sell to another company based elsewhere in Europe (or even Sweden
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CHAPTER 3 OPERATIONS STRATEGY 91
if the staff do not want to move). As a result, the advantages that derive from the processes resources are more likely to be retained over time.
● They are difficult to imitate or substitute for – These two factors help define how eas- ily a resource-based advantage can be sustained over time. It is not enough only to have resources which are unique and immobile. If a competitor can copy these resources or, less predictably, replace them with alternative resources, then their value will quickly deteriorate. However, the less tangible are the resources and the more connected with the tacit knowledge embedded within the organization, the more diffi- cult they are for competitors to understand and to copy.
Structural and infrastructural decisions A distinction is often drawn between the strategic decisions which determine an operation’s structure and those which determine its infrastructure. An operation’s structural decisions are those which we have classed as primarily influencing design activities, while infrastructural decisions are those which influence the workforce organization and the planning and control, and improvement activities. This distinction in operations strategy has been compared with that between ‘hardware’ and ‘software’ in computer systems. The hardware of a computer sets limits to what it can do. In a similar way, investing in advanced technology and building more or better facilities can raise the potential of any type of operation. Within the limits which are imposed by the hardware of a computer, the software governs how effective the computer actually is in practice. The most powerful computer can only work to its full potential if its software is capable of exploiting its potential. The same principle applies with operations. The best and most costly facilities and technology will only be effective if the operation also has an appropriate infrastructure which governs the way it will work on a day-to-day basis. Figure 3.9 illustrates some typical structural and infrastructural decisions.
✽ Operations principle The long-term objective of operations strategy is to build operations-based capabilities.
Figure 3.9 Some typical structural and infrastructural operations strategy decisions
Typical structural decisions… Typical infrastructural decisions…
Which products or services should be developed?
What activities should be done internally, and what should be outsourced?
How many suppliers should we have?
How many sites should we have?
Where should sites be located?
What types of process technology should the operation be using?
What should be the capacity of each site?
How should the operations function be organized?
What skills should be developed in the operation’s sta�?
How should demand be forecast and monitored?
How should the operation adjust its activity levels in response to demand?
How should it develop supplier relationships?
How should the improvement process be managed?
How should performance be measured?
How should the operation allocate resources?
‘Structure’ – the ‘hardware’ of the operation
‘Infrastructure’ – the ‘software’ of the operation
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92 PART ONE DIRECTING THE OPERATION
OPERATIONS IN PRACTICE
Earlier in this chapter we looked at Apple’s retail opera- tions strategy. Here we move on to how Apple supplies those, and other, retail outlets.
Behind the impressive corporate facade of Apple’s Silicon Valley headquarters there are no factories churn- ing out the millions of products that Apple sells every year. Apple, like most of its competitors, outsources its production to supplier operations around the world, mainly in the manufacturing powerhouses of South-East Asia. So does this mean that Apple’s operations strategy is also outsourced along with its manufacturing? Not at all. What it does mean is that operations strategy for Apple is concerned with ‘supply ’. In other words, making sure that current products are always supplied fast enough to meet demand and new products always meet their launch dates. Over the years Apple has put together a remarkable supply network that is recognized as one of the most efficient in the world and, what is more impor- tant, gives them significant competitive advantage. The company ’s (outsourced) manufacturing, purchasing and supply logistics give it the ability to accomplish substan- tial new product launches without having to build up huge and expensive pre-launch stocks. In the words of Tim Cook, who developed Apple’s operations strategy, ‘ nobody wants to buy sour milk .
The way that Apple beats its competitors is to use its cash to secure exclusive deals on new component tech- nologies (touchscreens, chips, LED displays, etc.). When
a new component first comes out, it is usually very expensive to produce, and constructing a factory that can produce it in high volume is even more expensive. Combine this with the relatively small profit margin of many components and it becomes difficult for suppliers to make enough profit to guarantee that they can make an acceptable return on their investment. But, thanks to its successful stream of products, Apple can afford to pay for some or all of a supplier ’s construction cost of the new factory. In exchange the supplier gives exclusive rights to Apple for the new component over an agreed period. This has two advantages for Apple. First, it gives Apple access to new component technology months (or even years) before its rivals, allowing it to launch radi- cal new products that are literally impossible for com- petitors to duplicate. Second, even when the exclusive agreement expires, Apple will often have negotiated a discounted price. So it can source the component at a lower cost from the supplier that is now the most expe- rienced and skilled provider of those parts.
In summary, according to Marty Lariviere of Stanford University, ‘[Apple’s operations strategy is to] bet big on technology that lets them have distinctive products. With their limited product line and high volume, they can make commitments that other tech firms may shy away from. It also means that (if they are right) other firms are going to be hard pressed to catch up if Apple has locked up a large amount of supplier capacity. ’
Apple’s supply operations strategy 9
HOW CAN OPERATIONS STRATEGY FORM THE BASIS FOR OPERATIONS IMPROVEMENT?
An operations strategy is not just about checking that a business’s resources and processes are consistent with its overall strategy. As our earlier discussion of operations capabilities implied, it also can provide the foundation for improvement. And the objective of improvement is obvi- ous – it tries to make things better! But how much better does better mean? And does this mean better in every way or better in some specific manner? This is why, in this section, we look at two models that use the market requirements and operations capabilities perspectives that we discussed earlier, to help answer these questions. First we examine the concept of the ‘line of fit’, then the ‘importance–performance matrix’.
The ‘line of fit ’ between market requirements and operations capabilities At a strategic level, the whole purpose of operations improvement is to make operations per- formance better at serving its markets. In other words, there should be a fit between what an operation is trying to achieve in its markets (market requirements) and what it is good at doing (operations capabilities). Figure 3.10 (a) illustrates this idea by showing diagrammatically
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CHAPTER 3 OPERATIONS STRATEGY 93
the approximate alignment or ‘fit’ between an operation’s performance and the requirements of its markets. The vertical dimension represents the level of market requirements that reflect the intrinsic needs of customers or their expectations. Moving along this dimension indicates a broadly enhanced level of market performance. The horizontal scale represents the level of the organization’s operations capabilities. This includes such things as its ability to achieve its competitive objectives and the effectiveness with which it uses its resources. Moving along the dimension indicates a broadly enhanced level of operations capabilities and therefore operations performance. Be careful, however, in using this diagrammatic representation. It is a conceptual model rather than a practical tool. It is intended merely to illustrate some ideas around the concept of strategic improvement. In terms of the framework illustrated in Figure 3.10 (a), improvement means three things:
1 Achieving ‘alignment’ – This means achieving an approximate balance between ‘required market performance’ and ‘actual operations performance’. The diagonal line in Figure 3.10 (a) therefore represents a line of fit with market requirements and operations capabilities in balance.
2 Achieving ‘sustainable’ alignment – It is not enough to achieve some degree of align- ment to a single point in time. Equally important is whether operations processes could adapt to the new market conditions.
3 Improving overall performance – If the requirements placed on the organization by its mar- kets are relatively undemanding, then the corresponding level of operations capabilities will not need to be particularly high. The more demanding the level of market requirements, the greater will have to be the level of operations capabilities. But most firms would see their over- all strategic objectives as achieving alignment at a level that implies some degree of long-term competitive success. In Figure 3.10 (a) point A represents alignment at a low level, while point B represents alignment at a higher level. The assumption in most firms’ operations strategies is that point B is a more desirable position than point A because it is more likely to represent a financially successful position. High levels of market performance, achieved as a result of high levels of operations performance, being generally more difficult for competitors to match.
Figure 3.10 An operations improvement should achieve ‘fit’ between market requirements and operations performance, but deviation from the line of ‘fit’ between market requirements and operations performance can expose the operation to risk
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Level of operations capability
O� the line of fit – operations performance inadequate for market requirements
O� the line of fit – operations performance not exploited in the market
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✽ Operations principle Operations strategy should aim for alignment or ‘fit’ between an operation’s performance and the requirements of its markets.
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94 PART ONE DIRECTING THE OPERATION
Deviating from the line of fit During the improvement path (red dashed arrow) from A to B in Figure 3.10 (a) it may not be possible to maintain the balance between market requirements and operations perfor- mance. Sometimes the market may expect something that the operation cannot (temporarily) deliver. Sometimes operations may have capabilities that cannot be exploited in the market. At a strategic level, there are risks deriving from any deviation from the ‘line of fit’. For exam- ple, delays in the improvement to a new website could mean that customers do not receive the level of service they were promised. This is shown as position X in Figure 3.10 (b). Under these circumstances, the risk to the organization is that its reputation (or brand) will suffer because market expectations exceed the operation’s capability to perform at the appropriate level. At other times, the operation may make improvements before they can be fully exploited in the market. For example, the same online retailer may have improved its website so that it can offer extra services, such as the ability to customize products, before those products have been stocked in its distribution centre. This means that, although an improvement to its ordering processes has been made, problems elsewhere in the company prevent the improve- ment from giving value to the company. This is represented by point Y in Figure 3.10 (b). In both instances, improvement activity needs to move the operation back to the line of fit.
A strategic view of operations improvement priorities The idea of the line of fit is conceptually useful, but, as we mentioned earlier, not a practical tool. Yet one can use the idea of comparing market and operations perspectives to provide more direct guidance to operations managers. To do this we need to think about both market requirements and operations capabilities at a more focused and disaggregated level. So, rather than ask generally, ‘what are the market requirements for our products and/or ser- vices?’ one asks, ‘how important are the competitive factors that characterise a product or service?’ The intention is to gain an understanding of the relative importance to customers of the various competitive factors. For example, do customers for a particular product or service prefer low prices to a wide range? The needs and preferences of customers shape the impor- tance of operations objectives within the operation. Similarly, rather than ask generally, ‘what are our operations capabilities?’ one asks, ‘how good is our operation at providing the required level of performance in each of the competitive objectives?’ But how good is our performance against what criteria? Strategically the most revealing point of comparison is with competi- tors. Competitors are the points of comparison against which the operation can judge its per- formance. From a competitive viewpoint, as operations improve their performance, the improvement which matters most is that which takes the operation past the performance lev- els achieved by its competitors. The role of competitors then is in determining achieved per- formance . (In a not-for-profit context, ‘other similar operations’ can be substituted for ‘competitors’.)
Both importance and performance have to be brought together before any judgement can be made as to the relative priorities for improvement. Just because something is particularly
important to its customers does not mean that an operation should necessarily give it immediate priority for improvement. It may be that the operation is already considerably better than its competitors at serving customers in this respect. Similarly, just because an operation is not very good at something when compared with its competitors’ performance, it does not necessarily mean that it should be immedi- ately improved. Customers may not particularly value this aspect of
performance. Both importance and performance need to be viewed together to judge the pri- oritization of objectives:
● Judging importance to customers – Earlier we introduced the idea of order-winning, qualifying and less important competitive factors, and one could take these three catego- ries as an indication of the relative importance of each performance factor. But usually one
✽ Operations principle Improvement priorities are determined by importance for customers and performance against competitors or similar operations.
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CHAPTER 3 OPERATIONS STRATEGY 95
needs to use a slightly more discriminating scale. One way to do this is to take our three broad categories of competitive factors – order winning, qualifying and less important – and divide each category into three further points representing strong, medium and weak positions. Figure 3.11(a) illustrates such a scale.
● Judging performance against competitors – At its simplest, a competitive performance standard would consist merely of judging whether the achieved performance of an oper- ation is better than, the same or worse than that of its competitors. However, in much the same way as the nine-point importance scale was derived, we can derive a more discrimi- nating nine-point performance scale, as shown in Figure 3.11(b).
The priority for improvement that each competitive factor should be given can be assessed from a comparison of their importance and performance. This can be shown on an importance– performance matrix that, as its name implies, positions each competitive factor according to its scores or ratings on these criteria. Figure 3.12 shows an importance–performance matrix divided into zones of improvement priority. The first zone boundary is the ‘lower bound of acceptability’ shown as line AB in the figure. This is the boundary between acceptable and unacceptable performance. When a competitive factor is rated as relatively unimportant (8 or 9 on the importance scale), this boundary will in practice be low. Most operations are prepared to tolerate performance levels which are ‘in the same ball-park’ as their competitors (even at the bottom end of the rating) for unimportant competitive factors. They only become concerned when performance levels are clearly below those of their competitors. Conversely, when judging competitive factors that are rated highly (1 or 2 on the importance scale) they will be markedly less sanguine at poor or mediocre levels of performance. Minimum levels of acceptability for these competitive factors will usually be at the lower end of the ‘better than competitors’ class. Below this minimum bound of acceptability (AB) there is clearly a need for improvement; above this line there is no immediate urgency for any improvement. However, not all competitive factors falling below the minimum line will be seen as having
Figure 3.11 Nine-point scales for judging importance and performance; the importance–performance matrix
(a) Importance scale for competitive factors
Rating Description
1 Provides a crucial advantage to customers
High
Low
2 Provides an important advantage to customers
3 Provides a useful advantage to customers
4 Needs to be up to good industry standard
5 Needs to be up to median industry standard
6 Needs to be within close range of rest of industry
7 Not usually important but could become so
8 Very rarely considered by customers
9 Never considered by customers
(b) Performance scale for competitive factors
Rating Description
1 Considerably better than similar organizations
Good
Poor
2 Clearly better than similar organizations
3 Marginally better than similar organizations
4 Sometimes marginally better than similar organizations
5 About the same as similar organizations
6 Slightly worse than the average of similar organizations
7 Usually marginally worse than similar organizations
8 Generally worse than most similar organizations
9 Consistently worse than most similar organizations
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96 PART ONE DIRECTING THE OPERATION
the same degree of improvement priority. A boundary approximately represented by line CD represents a distinction between an urgent priority zone and a less urgent improvement zone. Similarly, above the line AB, not all competitive factors are regarded as having the same prior- ity. The line EF can be seen as the approximate boundary between performance levels which are regarded as ‘good’ or ‘appropriate’ on the one hand and those regarded as ‘too good’ or ‘excess’ on the other. Segregating the matrix in this way results in four zones which imply very different priorities:
● The ‘appropriate’ zone – Competitive factors in this area lie above the lower bound of acceptability and so should be considered satisfactory.
● The ‘improve’ zone – Lying below the lower bound of acceptability, any factors in this zone must be candidates for improvement.
● The ‘urgent-action’ zone – These factors are important to customers but performance is below that of competitors. The factors must be considered as candidates for immediate improvement.
● The ‘excess?’ zone – Factors in this area are ‘high performing’, but not important to cus- tomers. The question must be asked, therefore, whether the resources devoted to achiev- ing such a performance could be used better elsewhere.
Figure 3.12 Priority zones in the importance–performance matrix
Worked example
EXL Laboratories is a subsidiary of an electronics company. It carries out research and devel- opment as well as technical problem-solving work for a wide range of companies, includ- ing companies in its own group. It is particularly keen to improve the level of service which it gives to its customers. However, it needs to decide which aspect of its performance to improve first. It has devised a list of the most important aspects of its service:
● The quality of its technical solutions – the perceived appropriateness by customers. ● The quality of its communications with customers – the frequency and usefulness of
information.
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● The quality of post-project documentation – the usefulness of the documentation which goes with the final report.
● Delivery speed – the time between customer request and the delivery of the final report. ● Delivery dependability – the ability to deliver on the promised date. ● Delivery flexibility – the ability to deliver the report on a revised date. ● Specification flexibility – the ability to change the nature of the investigation. ● Price – the total charge to the customer.
EXL assigns a score to each of these factors using the 1–9 scale described in Figure 3.12 . After which EXL turned its attention to judging the laboratory ’s performance against compet- itor organizations. Although EXL has benchmarked information for some aspects of perfor- mance, it has to make estimates for the others. Both these scores are shown in Figure 3.13 .
EXL Laboratories plotted the importance and performance ratings it had given to each of its competitive factors on an importance–performance matrix. This is shown in Figure 3.14 . It shows that the most important aspect of competitiveness – the ability to deliver sound tech- nical solutions to its customers – falls comfortably within the appropriate zone. Specification flexibility and delivery flexibility are also in the appropriate zone, although only just. Both delivery speed and delivery dependability seem to be in need of improvement as each is below the minimum level of acceptability for their respective importance positions. However, two competitive factors, communications and cost/price, are clearly in need of immediate improvement. These two factors should therefore be assigned the most urgent priority for
Figure 3.13 Rating ‘importance to customers’ and ‘performance against competitors’ on the nine-point scales for EXL Laboratories
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improvement. The matrix also indicates that the company ’s documentation could almost be regarded as ‘too good’.
The matrix may not reveal any total surprises. The competitive factors in the ‘urgent- action’ zone may be known to be in need of improvement already. However, the exercise is useful for two reasons:
● It helps to discriminate between many factors which may be in need of improvement. ● It gives purpose and structure to the debate on improvement priorities.
Figure 3.14 The importance–performance matrix for EXL Laboratories
HOW CAN AN OPERATIONS STRATEGY BE PUT TOGETHER? THE PROCESS OF OPERATIONS STRATEGY
What is called the ‘process’ of strategy is concerned with ‘how’ strategies are put together. So the ‘process of operations strategy’ means the method that is used to determine what an operations strategy should be. It is not a simple task. Putting an operations strategy together and making it happen in practice is a complex and difficult thing to achieve. Even the most
sophisticated organizations would probably admit that they do not always get it right. And although any simple step-by-step model of how to ‘do’ operations strategy will inevitably be a simplification of a messy reality, we will use a four-stage model to illustrate some of the elements of ‘process’. This stage model is shown in Figure 3.15 . It divides the process of operations strategy into formulation, imple-
mentation, monitoring and control. 10 These four stages are shown in Figure 3.15 as a cycle. This is because, in practice, strategies may be revisited depending on the experience gained from trying to make them happen.
✽ Operations principle The process of operations strategy involves formulation, implementation, monitoring and control.
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Operations strategy formulation The formulation of operations strategy is the process of clarifying the various objectives and decisions that make up the strategy, and the links between them. Unlike day-to-day oper- ations management, formulating an operations strategy is likely to be only an occasional activity. Some firms will have a regular (for example, annual) planning cycle and operations strategy consideration may form part of this, but the extent of any changes made in each annual cycle is likely to be limited. In other words, the ‘complete’ process of formulating an entirely new operations strategy will be a relatively infrequent event. There are many ‘formu- lation processes’ which are, or can be, used to formulate operations strategies. Most consul- tancy companies have developed their own frameworks, as have several academics.
What should the formulation process be trying to achieve? Before putting an operations strategy together, it is necessary to ask the question ‘what should it be trying to achieve?’ Clearly, it should provide a set of actions that, with hindsight, have provided the ‘best’ outcome for the organization. But that really does not help us. What do we mean by ‘the best’, and what good is a judgement that can only be applied in hindsight? Yet, even if we cannot assess the ‘goodness’ of a strategy for certain in advance, we can check it out for some attributes that could stop it being a success, as follows:
● Is operations strategy comprehensive? In other words, does it include all important issues? Business history is littered with companies that simply failed to notice the poten- tial impact of, for instance, new process technology, or emerging changes in their supply network.
● Is operations strategy coherent? As a strategy evolves over time, tensions can emerge that threaten to pull the overall strategy in different directions. This can result in a loss of coherence. Coherence is when the choices made in each decision area all direct the operation in the same strategic direction, with all strategic decisions complementing and reinforcing each other in the promotion of performance objectives. For example, if new Internet-based remote diagnostic technology for heating systems is introduced which allows service engineers to customize their service advice to individual clients’ needs, it would be ‘incoherent’ not to devise a new operating process which did not enable service staff to exploit the technology’s potential, for example by emailing customers with service options before the service engineer visits.
● Does operations strategy have correspondence? The decisions pursued in each part of the strategy should correspond to the true priority of each performance objective. So, for example, if cost reduction is the main objective for an operation then its process tech- nology investment decisions might err towards the purchase of ‘off-the-shelf’ (as opposed
Figure 3.15 The stages of the process of operations strategy
Operations strategy formulation
Operations strategy implementation
Operations strategy control
Operations strategy monitoring
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to customized) equipment which would reduce the capital cost of the technology and may also imply lower maintenance and running costs. However, it is unlikely to be as flexible. Implicitly the strategy is accepting that cost is more important than flexibility. So, we would expect all other decisions to correspond with the same prioritization of objectives, for example: capacity strategies that exploit natural economies of scale; supply network strategies that reduce purchasing
costs; performance measurement systems that stress efficiency and productivity; continu- ous improvement strategies that emphasize continual cost reduction; and so on.
● Does operations strategy identify critical issues? The more critical the decision, the more attention it deserves. Although no strategic decision is unimportant, in practical terms some decisions are more critical than others. The judgement over exactly what decisions are par- ticularly critical is very much a pragmatic one which must be based on the particular cir- cumstances of an individual firm’s operations strategy. But they must be identified.
✽ Operations principle Operations strategies should be comprehensive, coherent, correspond to stated objectives and identify the critical issues.
OPERATIONS IN PRACTICE
Only a few years ago Nokia was the king of the mobile phone business – and it was a good business to be in, with double-digit growth year on year. Nokia was omni- present and all-powerful, a pioneer that had supplied the first mass wave of the expanding mobile phone indus- try. Nokia dominated the market in many parts of the world and the easily recognizable Nokia ring-tone ech- oed everywhere from boardrooms to shopping malls. So why did this, once-dominant, company eventually sink to the point where it was forced to sell its mobile com- munications business to Microsoft in 2013? The former Nokia CEO, Jormal Ollila, admitted that Nokia made sev- eral mistakes, but the exact nature of those mistakes is a point of debate among business commentators. Julian Birkinshaw, a professor at London Business School, dis- misses some of the most commonly cited reasons. Did Nokia lose touch with its customers? Well, yes, but by definition that must hold for any company whose sales drop so drastically in the face of thriving competitors. Did it fail to develop the necessary technologies? No. Nokia had a prototype touchscreen before the iPhone was launched, and its smartphones were technologi- cally superior to anything Apple, Samsung or Google had to offer for many years. Did it not recognize that the basis of competition was shifting from the hardware to the ecosystem? (A technology ecosystem in this case is a term used to describe the complex system of inter- dependent components that work together to enable mobile technology to operate successfully.) Not really. The ‘ecosystem’ battle began in the early 2000s, with Nokia joining forces with Ericsson, Motorola and Psion to create Symbian as a platform technology that would keep Microsoft at bay.
Where Nokia struggled was in relying on an opera- tions strategy that failed to allocate resources appro- priately and could not implement the changes that were necessary. As far as resource allocation was concerned, Nokia saw itself primarily as a hardware company rather than a software company. Its engi- neers were great at designing and producing hard- ware, but not the programs that drive the devices. They underestimated the importance of software (including, crucially, the apps that run on smart- phones). Largely it was hardware rather than software experts who controlled its development process. By contrast, Apple had always emphasized that hardware and software were equally important. Yet while it was losing its dominance, Nokia was well aware of most of the changes occurring in the mobile communica- tions market and the technology developments being actively pursued by competitors. Arguably, Nokia was
Nokia, a failure to change 11
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Operations strategy implementation Operations strategy implementation is the way that strategies are operationalized or exe- cuted. It means attempting to make sure that intended strategies are actually achieved. It is important because no matter how sophisticated the intellectual and analytical underpinnings of a strategy, it remains only a document until it has been implemented. But the way one implements any strategy will very much depend on the specific nature of the changes implied by that strategy and the organizational and environmental conditions that apply during its implementation. However, three issues are often mentioned by strategy practitioners as being important in achieving successful implementation:
● Clarity of strategic decisions – There is a strong relationship between the formulation stage and the implementation stage of operations strategy. The crucial attribute of the for- mulation stage is clarity. If a strategy is ambiguous it is difficult to translate strategic intent into specific actions. With clarity, however, it should be easier to define the intent behind the strategy, the few important issues that need to be developed to deliver the intent, the way that projects be led and resourced, who will be responsible for each task, and so on.
● Motivational leadership – Leadership that motivates, encourages and provides support is a huge advantage in dealing with the complexity of implementation. Leadership is needed to bring sense and meaning to strategic aspirations, maintain a sense of purpose over the implementation period, and, when necessary, modify the implementation plan in the light of experience.
● Project management – Implementation means breaking up a complex plan into a set of relatively distinct activities. Fortunately there is a well-understood collection of ideas of how to do this. It is called ‘project management’ and a whole chapter is devoted to this subject ( Chapter 19 ).
Operations strategy monitoring Especially in times when things are changing rapidly, as during strategic change, organiza- tions often want to track ongoing performance to make sure that the changes are proceeding as planned. Monitoring should be capable of providing early indications (or a ‘warning bell’ as some call it) by diagnosing data and triggering appropriate changes in how the operations strategy is being implemented. Having created a plan for the implementation, each part of it has to be monitored to ensure that planned activities are indeed happening. Any deviation from what should be happening (that is, its planned activities) can then be rectified through some kind of intervention in the operation.
Operations strategy control Strategic control involves the evaluation of the results from monitoring the implementation. Activities, plans and performance are assessed with the intention of correcting future action if that is required. In some ways this strategic view of control is similar to how it works opera- tionally (which is discussed in Chapter 10 ), but there are differences. At a strategic level, con- trol can be difficult because strategic objectives are not always clear and unambiguous. Ask
not short of awareness, but it did lack the capacity to convert awareness into action. ‘ The failure of big companies to adapt to changing circumstances is one of the fundamental puzzles in the world of business ’, says Professor Birkinshaw. Occasionally, a genuinely ‘ disruptive’ technology can wipe out an entire indus-
try. But usually the sources of failure are less dramatic. Often it is a failure to implement strategies or technol- ogies that have already been developed, an arrogant disregard for changing customer demands, or a com- placent attitude towards new competitors.
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any experienced managers; they will acknowledge that it is not always possible to articulate every aspect of a strategic decision in detail. Many strategies are just too complex for that. So, rather than adhering dogmatically to a predetermined plan, it may be better to adapt as cir- cumstances change. And the more uncertain the environment, the more an operation needs to emphasize this form of strategic flexibility and develop its ability to learn from events.
OPERATIONS IN PRACTICE
There is a famous story that illustrates the importance of having some kind of plan, even if hindsight proves it to be the wrong plan. During manoeuvres in the Alps, a detachment of Hungarian soldiers got lost. The weather was severe and the snow was deep. In these freezing conditions, after two days of wandering, the soldiers gave up hope and became reconciled to a frozen death on the mountains. Then, to their delight, one of the sol- diers discovered a map in his pocket. Much cheered by
this discovery, the soldiers were able to escape from the mountains. When they were safe back at their head- quarters, they discovered that the map was not of the Alps at all, but of the Pyrenees. What is the moral of the story? It is that a plan (or a map) may not be perfect but it gives a sense of purpose and a sense of direction. If the soldiers had waited for the right map they would have frozen to death. Yet their renewed confidence motivated them to get up and create opportunities.
Sometimes any plan is better than no plan 12
Critical commentary
The argument has been put forward that strategy does not lend itself to a simple ‘stage model’ analysis that guides managers in a step-by-step manner through to the eventual ‘answer’ that is a fi nal strategy. Therefore, the models put forward by consultants and academics are of very limited value. In reality, strategies (even those that are made deliberately, as opposed to those that simply ‘emerge’) are the result of very complex organizational forces. Even descriptive models such as the four-stage model described above in Figure 3.9 can do little more than sensitize managers to some of the key issues that they should be taking into account when devising strategies. In fact, they argue, it is the articulation of the ‘content’ of operation strategy that is more useful than adhering to some over-simplistic description of a strategy process.
● Strategy is the total pattern of decisions and actions that position the organization in its environment and that are intended to achieve its long-term goals.
● Operations strategy concerns the pattern of strategic decisions and actions which set the role, objectives and activities of the operation.
● Operations strategy has content and process. The content concerns the specifi c decisions which are taken to achieve specifi c objectives. The process is the procedure which is used within a business to formulate its strategy.
❯ What is strategy and what is operations strategy?
SUMMARY ANSWERS TO KEY QUESTIONS
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❯ What is the difference between a ‘top-down’ and a ‘bottom-up’ view of opera- tions strategy?
● The ‘top-down’ perspective views strategic decisions at a number of levels. Corporate strat- egy sets the objectives for the different businesses which make up a group of businesses. Business strategy sets the objectives for each individual business and how it positions itself in its marketplace. Functional strategies set the objectives for each function’s contribution to its business strategy.
● The ‘bottom-up’ view of operations strategy sees overall strategy as emerging from day-to- day operational experience.
❯ How can an operations strategy be formulated? The process of operations strategy
● Putting an operations strategy together is called ‘the process’ of operations strategy.
● There are four stages in the process of operations strategy, which can be viewed as a cycle:
● Formulation – which is the process of clarifying the various objectives and decisions that make up the strategy, and the links between them. This should produce strategies that are comprehensive, coherent, provide correspondence and prioritize the most critical activities or decisions.
❯ How can operations strategy form the basis for operations improvement?
● An operations strategy can provide the foundation for improvement by achieving a fit between an operation’s market requirements and its operations capabilities.
● A ‘line of fit’ diagram can illustrate this. It is a conceptual model intended to illustrate some ideas around the concept of strategic improvement.
● During improvement it may not be possible to maintain a balance between market require- ments and operations performance. When markets expect something that the operation cannot deliver, or when operations have capabilities that cannot be exploited in the mar- ket, there are strategic risks deriving from the deviation from the ‘line of fit’.
● The importance–performance matrix positions competitive factors according to their importance and the operation’s success at achieving them to determine relative improve- ment priorities.
❯ What is the difference between a ‘market requirements’ and an ‘operations resources’ view of operations strategy?
● A ‘market requirements’ perspective of operations strategy sees the main role of operations as satisfying markets. Operations performance objectives and operations decisions should be primarily influenced by a combination of customers’ needs and competitors’ actions. Both of these may be summarized in terms of the product/service life cycle.
● The ‘operations resources’ perspective of operations strategy is based on the resource-based view (RBV) of the firm and sees the operation’s core competences (or capabilities) as being the main influence on operations strategy. Operations capabilities are developed partly through the strategic decisions taken by the operation. Strategic decision areas in operations are usually divided into structural and infrastructural decisions. Structural decisions are those which define an operation’s shape and form. Infrastructural decisions are those which influ- ence the systems and procedures that determine how the operation will work in practice.
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● Implementation – the way that strategy is operationalized or executed. Three issues are often mentioned by strategy practitioners as being important in achieving successful implementation: the clarity of the strategy, the nature of the leadership provided by top management, and effective project management.
● Monitoring – involves tracking ongoing performance and diagnosing data to make sure that the changes are proceeding as planned and providing early indications of any devi- ation from the plan.
● Control – involves the evaluation of the results from monitoring the implementation so that activities, plans and performance can be assessed with the intention of correcting future action if that is required.
CASE STUDY McDonald’s: half a century of growth 13
It is loved and it is hated. It is a shining example of how good-value food can be brought to a mass market. It is a symbol of everything that is wrong with ‘industrialized’, cap- italist, bland, high-calorie and environmentally unfriendly commercialism. It is the best-known and most loved fast food brand in the world with more than 36,000 restau- rants in 117 countries, providing jobs for 1.7 million staff and feeding 69 million customers per day (yes, per day!). It is part of the homogenization of individual national cul- tures, filling the world with bland, identical, ‘cookie cutter’, Americanized and soulless operations that dehumanize its staff by forcing them to follow ridged and over-defined procedures. But whether you see it as friend, foe, or a bit of both, McDonald’s has revolutionized the food industry, affecting the lives of both the people who produce food and the people who eat it. It has also had its ups (mainly) and downs (occasionally) as markets, customers and economic circumstances change. Yet, even in the toughest times it has always displayed remarkable resilience. What follows is a brief (for such a large corporation) summary of its history.
Starting small Central to the development of McDonald’s is Ray Kroc, who by 1954 and at the age of 52 had been variously a piano player, a paper cup salesman and a multi-mixer salesman. He was surprised by a big order for eight multi-mixers from a restaurant in San Bernardino, California . When he visited the customer he found a small but successful restaurant run by two brothers Dick and Mac McDonald. They had opened their ‘Bar-B-Que’ restaurant 14 years earlier, and by the time Ray Kroc visited the brothers’ oper- ation it had a self-service drive-in format with a limited
menu of nine items. He was amazed by the effectiveness of their operation. Focusing on a limited menu including burgers, fries and beverages had allowed them to analyse every step of the process of producing and serving their food. Ray Kroc was so impressed that he persuaded the brothers to adopt his vision of creating McDonald’s res- taurants all over the USA, the first of which opened in Des Plaines, Illinois, in June 1955. However, later, Kroc and the McDonald brothers quarrelled, and Kroc bought them out. Now with exclusive rights to the McDonald’s name, the restaurants spread, and in five years there were 200 restaurants through the USA. Yet through this, and later, expansions, Ray Kroc insisted on maintaining the same principles that he had seen in the original operation: ‘ If I had a brick for every time I’ve repeated the phrase Quality, Service, Cleanliness and Value, I think I’d probably be able to bridge the Atlantic Ocean with them .’
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Priority to the process Ray Kroc had been attracted by the cleanliness, simplic- ity, efficiency and profitability of the McDonald brothers’ operation. They had stripped fast food delivery down to its essence and eliminated needless effort to make a swift assembly line for a meal at reasonable prices. Kroc wanted to build a process that would become famous for food of consistently high quality using uniform meth- ods of preparation. His burgers, buns, fries and bever- ages should taste just the same in Alaska as they did in Alabama. The answer was the ‘Speedee Service System’, a standardised process that prescribed exact preparation methods, specially designed equipment and strict prod- uct specifications. The emphasis on process standardiza- tion meant that customers could be assured of identical levels of food and service quality every time they visited any store, anywhere. Operating procedures were specified in minute detail. The first operations manual prescribed rigorous cooking instructions such as temperatures, cook- ing times and portions. Similarly, operating procedures were defined to ensure the required customer experience, for example no food items were to be held more than 10 minutes in the transfer bin between being cooked and being served. Technology was also automated. Specially designed equipment helped to guarantee consistency using ‘fool-proof ’ devices. For example, the ketchup was dispensed through a metered pump. Specially designed ‘clam shell’ grills cooked both sides of each meat patty simultaneously for a pre-set time. And when it became clear that the metal tongs used by staff to fill French-fry containers were awkward to use efficiently, McDonald’s engineers devised a simple aluminium scoop that made the job faster and easier.
For Kroc, the operating process was both his passion and the company ’s central philosophy. It was also the foundation of learning and improvement. The company ’s almost compulsive focus on process detail was not an end in itself. Rather it was to learn what contributed to con- sistent high-quality service in practice and what did not. McDonald’s always saw learning as important. It founded ‘Hamburger University ’, initially in the basement of a res- taurant in Elk Grove Village, Illinois. It had a research and development laboratory to develop new cooking, freez- ing, storing and serving methods. Also franchisees and operators were trained in the analytical techniques nec- essary to run a successful McDonald’s. It awarded degrees in ‘Hamburgerology ’. But learning was not just for head- quarters. The company also formed a ‘field service’ unit to appraise and help its restaurants by sending field service consultants to review their performance on a number of ‘dimensions’ including cleanliness, queuing, food quality and customer service. As Ray Kroc said, ‘ We take the ham- burger business more seriously than anyone else. What sets McDonald’s apart is the passion that we and our suppliers share around producing and delivering the highest-qual- ity beef patties. Rigorous food safety and quality standards
and practices are in place and executed at the highest levels every day.’
No story illustrates the company ’s philosophy of learn- ing and improvement better than its adoption of frozen fries. French-fried potatoes had always been important for McDonald’s. Initially, the company tried observing the tem- perature levels and cooking methods that produced the best fries. The problem was that the temperature during the cooking process was very much influenced by the temper- ature of the potatoes when they were placed in the cook- ing vat. So, unless the temperature of the potatoes before they were cooked was also controlled (not very practical) it was difficult to specify the exact time and temperature that would produce perfect fries. But McDonald’s researchers discovered that, irrespective of the temperature of the raw potatoes, fries were always at their best when the oil tem- perature in the cooking vat increased by 3 degrees above the low-temperature point after they were put in the vat. So by monitoring the temperature of the vat, perfect fries could be produced every time. But that was not the end of the story. The ideal potato for fries was the Idaho Russet, which was seasonal and not available in the summer months. At other times an alternative (inferior) potato was used. One grower, who, at the time, supplied a fifth of McDonald’s potatoes, suggested that he could put Idaho Russets into cold storage for supplying during the summer period. Unfortunately, all the stored potatoes rotted. Not to be beaten, he offered another suggestion. Why doesn’t McDonald’s consider switching to frozen potatoes? But the company was initially cautious about meddling with such an important menu item. However, there were other advantages in using frozen potatoes. Supplying fresh potatoes in perfect condition to McDonald’s rapidly expanding chain was increasingly dif- ficult. Frozen potatoes could actually increase the quality of the company ’s fries if a method of satisfactorily cooking them could be found. Once again McDonald’s developers came to the rescue. They developed a method of air- drying the raw fries, quick frying, and then freezing them. The sup- plier, who was a relatively small and local suppler when he first suggested storing Idaho Russets, grew his business to supply around half of McDonald’s US business.
Throughout its rapid expansion McDonald’s focused on four areas: improving the product; establishing strong supplier relationships; creating (largely customized) equip- ment; and developing franchise holders. But also it was its strict control of the menu that provided a platform of stabil- ity. Although its competitors offered a relatively wide vari- ety of menu items, McDonald’s limited its to 10 items. As one of McDonald’s senior managers at the time stressed, ‘It wasn’t because we were smarter. The fact that we were selling just ten items [and] had a facility that was small, and used a limited number of suppliers created an ideal environment.’ Capacity growth (through additional stores) was also man- aged carefully. Well-utilized stores were important to fran- chise holders, so franchise opportunities were located only where they would not seriously undercut existing stores.
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of tartar sauce, a fish fillet, and cheese on the bottom bun. But Kroc wanted to push his own meatless sandwich, called the hula burge – a cold bun with a piece of pineap- ple and cheese. Groen and Kroc competed on a Lenten Friday to see whose sandwich would sell more. Kroc’s hula burger failed, selling only six sandwiches all day while Groen sold 350 Filet-o-Fish. Similarly, the Egg McMuffin was introduced by franchisee Herb Peterson, who wanted to attract customers into his McDonald’s stores all through the day, not just at lunch and dinner. He came up with the idea for the signature McDonald’s breakfast item because he was reputedly ‘very partial to eggs Benedict and wanted to create something similar’.
Other innovations came from the company itself. When poultry became popular, Fred Turner, then the Chairman of McDonald’s, had an idea for a new meal: a chicken finger-food without bones, about the size of a thumb. After six months of research, the food technicians and scientists managed to reconstitute shreds of white chicken meat into small portions that could be breaded, fried, frozen and then reheated. Test marketing of the new product was pos- itive, and in 1983 they were launched under the name of Chicken McNuggets. These were so successful that within a month McDonald’s became the second largest purchaser of chicken in the USA. Some innovations came as a reac- tion to market conditions. Criticized by nutritionists who worried about calorie-rich burgers and shareholders who were alarmed by flattening sales, McDonald’s launched its biggest menu revolution in 30 years in 2003 when it entered the prepared salad market. McDonald’s offered a choice of dressings for its grilled chicken salad with Caesar dressing (and croutons) or the lighter option of a drizzle of balsamic dressing. Likewise, moves towards coffee sales were prompted by the ever-growing trend set by big coffee shops like Starbucks.
Problematic periods Food, like almost everything else, is subject to swings in fashion. Its is not surprising then that there have been periods when McDonald’s has had to adapt. The period from the early 1990s to the mid-2000s was difficult for parts of the McDonald’s Empire. Growth in some parts of the world stalled. Partly this was due to changes in food fashion, nutritional concerns and demographic changes. Partly it was because competitors were learning either to emulate McDonald’s operating system, or to focus on one aspect of the traditional ‘quick service’ offering, such as speed of service, range of menu items, (perceived) quality of food, or price. Burger King promoted itself on its ‘flame- grilled’ quality. Wendy ’s offered a fuller service level. Taco Bell undercut McDonald’s prices with its ‘value-pricing ’ promotions. Drive-through specialists speeded up service times. Also, ‘fast food’ was developing a poor reputation in some quarters, and as its iconic brand, McDonald’s was taking much of the heat. Similarly the company became a lightning rod for other questionable aspects of modern
Securing supply McDonald’s says that it has been the strength of the align- ment between the company, its franchisees and its suppli- ers (collectively referred to as the System) that has been the explanation for its success. But during the company ’s early years suppliers proved problematic. McDonald’s approached the major food suppliers, such as Kraft and Heinz, but without much success. Large and established suppliers were reluctant to conform to McDonald’s requirements, preferring to focus on retail sales. It was the relatively small companies who were willing to risk supplying what seemed then to be a risky venture. And as McDonald’s grew, so did its suppliers, who also valued the company ’s less adversarial relationship. One supplier is quoted as saying, ‘Other chains would walk away from you for half a cent. McDonald’s was more concerned with getting quality. McDonald’s always treated me with respect even when they became much bigger and didn’t have to.’ Furthermore, suppliers were always seen as a source if innovation. For example, one of McDonald’s meat sup- pliers, Keystone Foods, developed a novel quick- freezing process that captured the fresh taste and texture of beef patties. This meant that every patty could retain its con- sistent quality until it hit the grill. Keystone shared its technology with other McDonald’s meat suppliers for McDonald’s, and today the process is an industry standard. Yet, supplier relationships were also rigorously controlled. McDonald’s routinely analysed its suppliers’ products.
Fostering franchisees McDonald’s revenues consisted of sales by company- operated restaurants and fees from restaurants operated by franchisees. McDonald’s views itself primarily as a fran- chisor and believe franchising is ‘important to delivering great, locally-relevant customer experiences and driving profitability’. However, it also believes that directly operat- ing restaurants is essential to providing the company with real operations experience. Of the 36,000 restaurants in 117 countries, approximately 80 per cent were operated by franchisees. But where some restaurant chains concen- trated on recruiting franchisees that were then left to them- selves, McDonald’s expected its franchisees to contribute their experiences for the benefit of all. Ray Kroc’s original concept was that franchisees would make money before the company did, so he made sure that the revenues that went to McDonald’s came from the success of the restau- rants themselves rather from initial franchise fees.
Initiating innovation Ideas for new menu items have often come from fran- chisees. For example, Lou Groen, a Cincinnati franchise holder, had noticed that in Lent (a 40-day period when some Christians give up eating red meat on Fridays and instead eat only fish or no meat at all) some customers avoided the traditional hamburger. He went to Ray Kroc with his idea for a ‘Filet-o-Fish’, a steamed bun with a shot
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1 Explain how the four perspectives of operations strategy would apply to SSTL (see the ‘Operations in action’ case at the start of this chapter).
2 Compare the operations strategies of a low-cost airline, such as Ryanair, and a full-service airline such as British Airways or KLM.
3 What do you think are the qualifying and order-winning factors for (a) a top of the range Ferrari, and (b) a Renault Clio?
4 What do you think are the qualifying or order-winning factors for Pret A Manger described in Chapter 1 ?
5 Search the Internet site of Intel, the best-known microchip manufacturer, and identify what appear to be its main structural and infrastructural decisions in its operations strategy.
6 (Advanced) A gliding club has a current membership of over 100 pilots, many of whom have their own gliders. In addition the club has a fleet of six gliders available to its members. The club also offers trial flights to members of the public – ‘casual flyers’ who can book flights in advance or just turn up and fly on a first-come, first-served basis. The club sells trial flight gift vouchers that are popular as birthday and Christmas presents. If the conditions are right the customer may get a longer flight, although at busy times the instructors feel under pressure to return to the ground to give another lesson. If the weather is poor the instructors still do their best to get people airborne, but they are restricted to a short two-minute flight. Club members are expected to stay all day to help each other and any casual flyers get airborne
PROBLEMS AND APPLICATIONS
McDonald’s Chief Executive Officer, Steve Easterbrook, when he was head of the company ’s UK operation, where he redesigned the outlets to make them more modern, introduced coffee and cappuccinos, worked with farmers to raise standards and increased transparency about its supply chain. At the same time he participated fully and forcefully with the company ’s critics in the debate over fast food health concerns. But some analysts believe that the ‘burger and fries’ market is in terminal decline, and the McDonalds’s brand is so closely associated with that mar- ket that further growth will be difficult.
QUESTIONS 1 How has competition to McDonald’s changed over its
existence?
2 What are the main operations performance objectives for McDonald’s?
3 What are the most important structural and infrastructural decisions in McDonald’s operations strategy, and how do they influence its main performance objectives?
life that it was held to promote, from cultural imperialism, low-skilled jobs (called ‘McJobs’ by some critics), abuse of animals and the use of hormone-enhanced beef, to an attack on traditional (French) values (in France). A French farmer called Jose Bové (who was briefly imprisoned) got other farmers to drive their tractors through, and wreck, a half-built McDonald’s.
Similarly, in 2015 McDonald’s closed more stores in its US home market than it opened – for the first time in its 60-year history. Partly this was a result of the increase in so-called ‘fast casual’ dining, a trend that combined the convenience of traditional McDonald’s-style service with food that was seen as more healthy, even if it was more expensive. Smaller rivals, such as Chipotle and Shake Shack, had started to take domestic market share.
Surviving strategies Over recent years the company ’s strategy has been to become ‘ better, not just bigger ’, focusing on ‘ restaurant execution ’, with the goal of ‘ improving the overall experi- ence for our customers ’. In particular it has, according to some analysts, ‘gone back to basics’, a strategy used by
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while they wait their turn to fly. Casual flyers might have to stand and wait for some time until a club member has time to find out what they want. Even when a flight has been pre-booked casual flyers may then be kept waiting, on the exposed and often windy airfield, for up to two hours before their flight, depending on how many club members are present. Income from the casual flyers is small compared with membership income, but the club views casual flying as a ‘loss leader’ to generate club memberships. There is also some pressure from members to end trial flights because they reduce the number of flights members can have in a day. Some members have complained that they sometimes spend most of their day working to get casual flyers into the air and miss out on flying themselves. (a) Evaluate the service to club members and casual flyers by completing a table similar to
Table 3.1. (b) Chart the five performance objectives to show the differing expectations of club mem-
bers and casual flyers and compare these with the actual service delivered. (c) What advice would you give to the club?
SELECTED FURTHER READING
Boyer, K.K., Swink, M. and Rosenzweig, E.D. (2006) Operations strategy research in the POMS journal, Production and Operations Management, vol. 14, issue 4, 442–449.
A survey of recent research in the area.
Braithwaite, A. and Christopher, M. (2015) Business Operations Models: Becoming a Disruptive Competitor, Kogan Page, London.
Aimed at practitioners, but authoritative and interesting.
Hayes, R.H., Pisano, G.P., Upton, D.M. and Wheelwright, S.C. (2005) Pursuing the Competitive Edge, Wiley, Hoboken, NJ.
The gospel according to the Harvard school of operations strategy. Articulate, interesting and informative.
Hill, A . and Hill, T. (2009) Manufacturing Operations Strategy: Texts and Cases, Palgrave Macmillan, Basingstoke.
Biased towards manufacturing, but well structured and readable.
Slack, N. and Lewis, M. (2015) Operations Strategy, 4th edn, Pearson, Harlow.
What can we say – just brilliant, it will change your life!
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IntrODUCtIOn new product and service innovation is concerned with putting new ideas into practice by embedding them in services and products. innovation is the act of introducing new ideas, design is about making those ideas practical. this is why the activity of product and service innovation and the activity of design are so closely linked. Both are important because products and services are often the first thing that customers see of a company. so they should have an impact. and although operations managers may not always have full responsibility for service and product innovation, they always have some kind of responsibility, if only to provide the information and advice upon which successful product or service development depends. But increasingly operations mangers are expected to take a greater and more active part in product and service innovation. unless a service, however well conceived, can be implemented, and unless a product, however well designed, can be produced to a high standard, they can never bring their full benefits. Figure 4.1 shows where this chapter fits into the overall operations model.
product and service innovation 4
Direct
Operations performance
The structure
and scope of operations
Operations strategy
Operations management
Product and service innovation
Topic covered in this chapter
Operations management
Direct
Design Develop
Deliver
Figure 4.1 this chapter examines product and service innovation
❯ What is product and service innovation?
❯ What is the strategic role of product and service innovation?
❯ What are the stages of product and service innovation?
❯ What are the benefits of interactive product and service innovation?
Key questions
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110 PART ONE DIRECTING THE OPERATION
WHAT IS PRODUCT AND SERVICE INNOVATION?
There are a number of terms that we will use in this chapter that have similar meanings, and are defined by different authorities in different ways, or overlap to some extent, and yet are related to each other. For example, what is ‘innovation’? Is it the same as ‘creativity’? How does ‘design’ relate to both terms? So a sensible first step might be to establish how we will be using these terms.
Innovation, design and creativity Given that this chapter is about product and service innovation, we will start with what exactly we mean by ‘innovation’. In fact there are many definitions. The term is notoriously ambiguous and lacks either a single definition or measure. It is ‘ a new method, idea, product, etc. ’ ( Oxford English Dictionary ), ‘ change that creates a new dimension of performance ’ (Peter Drucker, a well-known management writer), ‘ the act of introducing something new ’ ( American Heritage Dictionary ), ‘ a new idea, method or device ’ (Webster Online Dictionary), ‘ new knowledge incor- porated in products, processes and services ’. 1 What runs through all these definitions is the idea of novelty and change. Innovation is simply about doing something new. But it is worth noting that the idea of innovation is both broader and more complete than that of ‘invention’. An ‘invention’ is also something that is novel or unique (usually applied to a device or method), but it does not necessarily imply that the novel device or method has the potential to be practical, economic or capable of being developed commercially. Innovation goes further than ‘invention’. It implies not just the novel idea, but also the process of transforming the idea into something that provides a return for an organization’s customers, owners, or both. The study of innovation, what influ- ences it, and how to manage it, is a huge subject and beyond the scope of this book. However, there is one particular attribute that is central to innovation – creativity. ‘Creativity’ is the ability to move beyond conventional ideas, rules or assumptions, in order to generate significant new ideas. It is a vital ingredient in innovation. It is seen as essential not just in product and ser- vice innovation, but also in the design and management of operations processes more generally.
Partly because of the fast-changing nature of many industries, a lack of creativity (and consequently of innovation) is seen as a major risk.
So, if creativity is an essential ingredient of innovation, and innova- tion implies making novel ideas into practical, commercial form, what is the process that transforms innovative ideas into something more concrete? It is ‘design’. Innovation creates the novel idea; design makes
it work in practice. Design is to ‘ conceive the looks, arrangement, and workings of something. A design 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 (we will observe this later in this chapter when we examine the process of product and service design, and when we look at process design in Chapter 6 ). Figure 4.2 illustrates the relationship between creativity, innovation and design as we use the terms here. These concepts are intimately related, which is why we treat them in the same chapter. First we will look at some of the basic ideas that help to understand innovation.
✽ ✽ ✽ Operations principle Operations principle Operations principle
Is an essential ingredient of…
That defines the characteristics of…
That is transformed into a practical proposition by…
The use of imagination or original ideas
Doing something
new
Defining the looks, arrangement and
workings of something
The nature and characteristics of the
organization’s o�erings
Creativity Innovation Design Products and services
Figure 4.2 The relationship between creativity, innovation, and design
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CHAPTER 4 PRODUCT AND SERVICE INNOVATION 111
OPERATIONS IN PRACTICE
When Apple introduced the original iPhone, the world of smartphones was changed for ever. It was arguably one of the most influential products ever to be launched in the consumer technology market and set the bench- mark for the (many) smartphones that came after it. It sold millions worldwide and helped to make Apple into the world’s most valuable company. Yet how Apple and its visionary then leader, Steve Jobs, managed the inno- vation process remained something of a secret for years after the product’s launch. Originally visualized as a tab- let computer, work on the iPhone was initiated partly because of the success of the firm’s earlier product, the iPod music player. It was the profound effect that the iPod had on the music industry that encouraged Apple to consider what other markets it could challenge. Yet, it was a technological breakthrough, the multi-touch dis- play , which allowed the company to change course. As Steve Jobs said later, ‘ I had this idea about having a glass display, a multi-touch display you could type on. I asked our people about it. And six months later they came back with this amazing display. [When] we got inertial scroll- ing working and some other things, I thought, “my God, we can build a phone with this” and we put the tablet aside, and we went to work on the phone. ’ But making the multi-touch display a working proposition was challeng- ing for Apple’s engineering team. The team had to create an entirely new way in which users could interact with their phones. There were many novel unsolved prob- lems to overcome. Every single part of the design had to be rethought to adapt to touch. For example, engi- neers had to make scrolling work on the iPhone not only when a user’s finger moved up and down, but also when a user ’s thumb moved in an arc across the screen. And there were many other obstacles to overcome, some which seemed almost insurmountable. Sir Jonathan Ive, Senior Vice-President of Design at Apple, has admitted that issues with the touchscreen were so difficult that it brought the project to the brink of being aborted. ‘ There were multiple times when we nearly shelved it because there were fundamental problems that we couldn't solve ’, said Sir Jonathan. ‘ I would put the phone to my ear and my ear dialled a number. The challenge is that you have to then detect all sorts of ear shapes, chin shapes, skin col- our and hairdos. We had to develop technology, basically a number of sensors, to inform the phone that “this is now going up to an ear, please deactivate the touchscreen”. ’
Security during development was obsessively tight. For example, the senior Apple executive in charge of developing what would later become known as the iOS operating system was told that he could choose anyone
he wanted from within Apple to join the embryonic iPhone team, but he was not allowed to hire anybody from outside the company. He could not even convey to potential team members exactly what they would be working on, just that it was a new and exciting project and that they would have to ‘ work hard, give up nights, and work weekends for years ’. When the development team formed, it was located on a separate and secured floor on Apple’s campus. The development area was ‘locked down’ with extensive use of badge readers and cameras. Team members might have to show their badges five or six times to gain access. Within Apple, the code name for the iPhone project was ‘Project Purple’ with the devel- opment area itself called the ‘purple dorm’ because the team worked continuously and so closely together that it felt ‘like a college dorm’. It smelled like pizza.
The aesthetics of the iPhone were treated as being just as important as the iPhone technology. This was the responsibility of Apple’s secretive industrial design group. Apple designer Christopher Stringer said that their objective was to create a ‘ new, original, and beau- tiful object [that was] so wonderful that you couldn't imagine how you'd follow it ’ . The design group, Stringer explained, was composed of 16 ‘maniacal’ individuals who shared one singular purpose – to ‘ imagine prod- ucts that don't exist and guide them to life ’. Team mem- bers worked closely together, often gathering around a ‘kitchen table’ where they exchanged ideas, often in a ‘brutally honest’ way. To the designers, even the tiniest
How the iPhone disrupted the smartphone market 2
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The innovation S-curve When new ideas are introduced in services, products or processes, they rarely have an impact that increases uniformly over time. Usually performance follows an S-shaped progression. So, in the early stages of the introduction of new ideas, although (often large) amounts of resources, time and effort are needed to introduce the idea, relatively small performance improvements are experienced. However, with time, as experience and knowledge about the new idea grow, performance increases. But as the idea becomes established, extending its performance further becomes increasingly difficult, see Figure 4.3 (a). But when one idea reaches its mature, ‘levelling-off’ period, it is vulnerable to a further new idea being intro- duced which, in turn, moves through its own S-shaped progression. This is how innovation works, the limits of one idea being reached which prompts a newer, better idea, with each new S-curve requiring some degree of redesign, see Figure 4.3 (b).
Incremental or radical innovation An obvious difference between how the pattern of new ideas emerges in different operations or industries is the rate and scale of innovation. Some industries, such as telecommunica- tions, enjoy frequent and often significant innovations. Others, such as house building, do have innovations, but they are usually less dramatic. So some innovation is radical, result- ing in discontinuous, ‘breakthrough’ change, while other innovations are more incremental leading to smaller, continuous changes. Radical innovation often includes large technolog- ical advancements which may require completely new knowledge and/or resources making existing services and products obsolete and therefore non-competitive. Incremental innova- tion, by contrast, is more likely to involve relatively modest technological changes, built upon existing knowledge and/or resources so existing products and services are not fundamentally
of details were important. They often would create up to 50 designs of a single component before moving on to computer-aided design modelling and the creation of physical mock-ups.
The fact that the Apple designers overcame several technology and production bugs during its development is partly a testament to the design team’s belief, both in their technological skills and in their understanding of what people will buy. Yet Apple avoids conducting
market research when designing its products, a policy introduced by Steve Jobs, its late chief executive. ‘ We absolutely don't do focus groups ’, said Ive. ‘ That’s designers and leaders abdicating responsibility. That’s them looking for an insurance policy, so if something goes wrong, they can say, well this focus group says that only 30 per cent of people are offended by this and, look, 40 per cent think it’s OK. What a focus group does is that it will guarantee mediocrity. ’
P er
fo rm
an ce
Time
Slow introduction Obstacles to
further development
overcome
Idea approaches its natural limits
P er
fo rm
an ce
Time
Progressive introduction
of new innovative
ideas
(a) The basic S-shaped improvement in performance (b) Innovation following multiple S-shaped curves
Figure 4.3 The S-shaped curve of innovation
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CHAPTER 4 PRODUCT AND SERVICE INNOVATION 113
changed. This is why established companies may favour incremental innovation because they have the experience of building up a significant pool of knowledge (on which incremental innovation is based). In addition, established companies are more likely to have a mindset that emphasizes continuity, perhaps not even recognizing potential innovative opportunities (see the ‘Operations in practice’ case on Kodak). New entrants to markets, however, have no established position to lose, nor do they have a vast pool of experience. They may be more likely to try for more radical innovation.
The Henderson–Clark model Although distinguishing between incremental and radical innovation is useful, it does not fully make clear why some companies succeed or fail at innovation. Two researchers, Henderson and Clark,3 looked at the question of why some established companies sometimes fail to exploit seemingly obvious incremental innovations. They answered this question by dividing the technological knowledge required to develop new products and services into ‘knowledge of the components of knowledge’ and ‘knowledge of how the components of knowledge link together’. They called this latter knowledge ‘architectural knowledge’. Figure 4.4 shows what has become known as the Henderson–Clark model. It refines the simpler idea of the split between incremental and radical innovation. In this model incremental innovation is built upon existing component and architectural knowledge, whereas radical innovation changes both component and architectural knowledge. Modular innovation is built on exist- ing architectural knowledge, but requires new knowledge for one or more components. By contrast, architectural innovation will have a great impact upon the linkage of components (or the architecture), but the knowledge of single components is unchanged.
So, for example, in healthcare services, simple (but useful and possibly novel at the time) innovations in a primary-care (general practitioner) doctors’ clinic, such as online appoint- ment websites, would be classed as incremental innovation because neither any elements nor the relationship between them are changed. If the practice invests in a new diagnostic heart scanner, that element of their diagnosis task has been changed and will probably need new knowledge, but the overall architecture of the service has not been changed. This innovation
High impact on architectural knowledge
Low impact on architectural knowledge
High impact on component knowledge
Low impact on component knowledge
Radical innovation
Architectural innovation
Modular innovation
Incremental innovation
New scanner Walk-in service
Primary healthcare example
Direct call-up service
Telemedicine
Figure 4.4 The Henderson–Clark model
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would be classed as ‘modular’. An example of architectural innovation would be the practice providing ‘walk-in’ facilities in the local city cen- tre. It would provide more or less the same service as the regular sur- gery (no new components), but the relationship between the service and patients has changed. Finally, if the practice adopted some of the ‘telemedicine’ technology that monitors patient signs and can react to significant changes in patient condition, then this would be radi- cal innovation. The components are novel (monitors) as is the overall architecture of the service (distance diagnosis).
WHAT IS THE STRATEGIC ROLE OF PRODUCT AND SERVICE INNOVATION?
Innovation is a risky business. Not every idea is transformed, or is capable of being incorpo- rated into the design of a successful product or service. Sometimes this is because an inno- vative idea is just too challenging, at least with realistically available technology, or under prevailing market conditions. Sometimes the development cost is out of the reach of the busi- ness that had the original idea. Ideas may be abundant, but resources are limited. Yet despite the obstacles to successful innovation, almost all firms strive to be innovative. The reason is that there is overwhelming evidence that innovation can generate significant payback for the organizations that manage the incorporation of innovative ideas in the design of their prod- ucts and services. What matters is the ability to identify the innovations and manage their transformation into effective designs so that they can sustain competitive advantage and/or generate social payback.
Design makes innovative ideas useful It is worth repeating why design is so important. Good design takes innovative ideas and makes them practical. Good design also communicates the purpose of the product or ser- vice to its market, and brings financial rewards to the business. Product and service design, therefore, can be seen as starting and ending with the customer. So the design activity has one overriding objective: to provide products, services and processes which will satisfy the operation’s customers. Product designers try to achieve aesthetically pleasing designs which meet or exceed customers’ expectations. They also try to design a product which performs well and is reliable during its lifetime. Further, they should design the product so that it can be manufactured easily and quickly. Similarly, service designers try to put together a service which meets, or even exceeds, customer expectations. Yet at the same time the service must be within the capabilities of the operation and be delivered at reasonable cost.
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
Critical commentary
Remember that not all new services and products are created in response to a clear and articulated customer need. While this is usually the case, especially for products and services that are similar to (but presumably better than) their predecessors, more radical innovations are often brought about by the innovation itself creating demand. Customers do not usually know that they need something radical. For example, in the late 1970s people were not asking for microprocessors – they did not even know what they were. They were improvised by an engineer in the USA for a Japanese customer who made calculators. Only later did they become the enabling technology for the PC and after that the innumerable devices that now dominate our lives.
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CHAPTER 4 PRODUCT AND SERVICE INNOVATION 115
Design pays for itself 4 There is an increasingly common acceptance that design can add very significant value to all types of organization. A growing number of books, articles, reports and blogs have looked at companies and the benefits that they have gained by taking the design process seriously. This interest in design is partly because of the success of companies like Apple (see the ‘Operations in practice’ case earlier in this chapter), which are regarded as excellent at design. Numerous authors have confirmed the impact of design on performance. One report from the Design Council in the UK has shown that, on average, for every £1 businesses invest in design, they gain over £4 net operating profit, over £20 net turnover and over £5 net exports. 5
Design can add value to any organization. In particular, good design practice can:
● drive and operationalize innovation, increasing market share and opening up new markets; ● differentiate products and services, making them more attractive to customers, while
increasing consistency in the company’s range, and helping to ensure successful product launches;
● strengthen branding, so that products and services embody a company’s values; ● reduce the overall costs associated with innovation, through more efficient use of
resources, reduced project failure rate and faster time to market.
All of these benefits are strategic in that they very significantly affect the future of a busi- ness. As one company boss said, ‘ design is everything, because without it we have no business… There is intense competition, and anybody can design a decent product. They can't all design out- standing products. So, design is the differentiator .’
OPERATIONS IN PRACTICE
The once mighty Eastman Kodak Company dominated the pho- tographic and film markets for decades. But no longer: 30 years ago it employed over 140,000 people and made substantial profits; by 2010 it had shrunk to around 19,000, with regular quar- terly losses. This dramatic fall from grace is usually put down to the company ’s failure to see the approach of digital photography or fully appreciate how it would totally undermine Kodak’s traditional products. Yet, ironically, Kodak was more than ahead of its com- petitors than most people outside the company realized. It actually invented the digital camera. Sadly, though, it lacked the foresight to make the most of it. For years the company had, as one insider put it, ‘ too much technology in its labs rather than in the market ’.
It was back in 1975 when a newly hired scientist at Kodak, Steve Sasson, was given the task of research- ing how to build a camera using a comparatively new type of electronic sensor – the charged-coupled device (CCD). He found little previous research so he used the lens from a Kodak motion-picture camera, an ana-
logue-to-digital converter, some CCD chips and some digital cir- cuitry that he made himself. By December 1975 he had an oper- ational prototype. Yet the advance was largely, although not com- pletely, ignored inside the com- pany. ‘ Some people talked about reasons it would never happen, while others looked at it and real- ized it was important ’, he says. He
also decided not to use the word ‘digital’ to describe his trial product. ‘ I proposed it as filmless photography, an electronic stills camera. Calling it “digital” would not have been an advantage. Back then “digital” was not a good term. It meant new, esoteric technology. ’ Some resistance came from genuine, if mistaken, technical reservations. But others feared the magnitude of the changes that digital photography could bring. Objections ‘ were com- ing from the gut: a realization that [digital] would change everything – and threaten the company’s entire film-based business model ’ . Some see Kodak’s reluctance to aban- don its traditional product range as understandable. It was making vast profits and as late as 1999 it was making over $3 billion from film sales. Todd Gustavson, Curator
The sad tale of Kodak and its digital camera 6
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The design activity is itself a process Producing design innovations for products and services is itself a process that conforms to the input–transformation–output model described in Chapter 1 . Although organizations will have their own particular ways of managing innovation and design, the design process itself is essen-
tially very similar across a whole range of industries. It therefore has to be designed and managed like any other process. Broadly, the better the design process is managed, the better the products and service offering. Figure 4.5 illustrates the design activity as an input–transformation– output diagram. The transformed resource inputs will consist mainly of information in the form of market forecasts, market preferences, techni- cal data, potential design ideas, and so on. It is these ideas and informa-
tion that will be transformed in the design process into the final design. Transforming resource inputs includes the operations and design managers who manage the process, together with specialist technical staff with the specific knowledge necessary to solve design problems. They also may include suppliers, other collaborators, and even especially interested customer groups (sometimes called ‘lead users’) who are brought in to provide their expertise. Transforming resources may also include computer-aided design (CAD) equipment and software.
Design process objectives The performance of the design process can be assessed in much the same way as we would consider the products and services that result from it, namely in terms of quality, speed, dependability, f lexibility and cost. Here we also include ‘sustainability’ as a design objective. It is, of course, included as part of the ‘triple bottom line’ objectives, as explained in Chapter 2 , but because product and service design has
such an influence on sustainability, we include it alongside our normal operational-level objectives. These performance objectives have just as much relevance for innovation as they do for the ongoing delivery of offerings once they are introduced to the market.
of Technology at the George Eastman House Museum, says that ‘ Kodak was almost recession-proof until the rise of digital. A film-coating machine was like a device
that printed money. ’ So Kodak’s first digital camera, the Quicktake, was licensed to and sold by Apple in 1994.
In 2012 Kodak filed for bankruptcy protection.
OutputsInputs
Transformed resources, e.g. • Technical information • Market information • Time information • Design ideas
Transforming resources, e.g. • Test and design equipment • Design and technical sta� • Lead user (customer) feedback • Supplier advice • Collaborators
Designs produced to appropriate standards of… • Quality • Speed • Dependability • Flexibility • Cost • Sustainability
The product/service design innovation
process
Figure 4.5 The design activity is itself a process
✽ ✽ ✽ Operations principle Operations principle Operations principle
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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CHAPTER 4 PRODUCT AND SERVICE INNOVATION 117
What does quality mean for the design process? Design quality is not always easy to define precisely, especially if customers are relatively sat- isfied with existing product and service offerings. Many software companies talk about the ‘I don't know what I want, but I'll know when I see it’ syndrome, meaning that only when customers use the software are they in a position to articulate what they do or do not require. Nevertheless, it is possible to distinguish high- and low-quality designs (although this is easier to do in hindsight) by judging them in terms of their ability to meet market requirements. In doing this, the distinction between the specification quality and the conformance quality of designs is important. No business would want a design process that was indifferent to ‘errors’ in its designs, yet some are more tolerant than others. For example, in pharmaceutical devel- opment the potential for harm is particularly high because drugs directly affect our health. This is why the authorities insist on such a prolonged and thorough ‘design’ process (more usually called ‘development’ in that industry). Although withdrawing a drug from the market is unusual, it does occasionally occur. Far more frequent are the ‘product recalls’ that are rela- tively common in, for example, the automotive industry. Many of these are design related and the result of ‘conformance’ failures in the design process. The ‘specification’ quality of design is different. It means the degree of functionality, or experience, or aesthetics, or whatever the product or service is primarily competing on. Some businesses require product or service designs that are relatively basic (although free from errors), while others require designs that are clearly special in terms of the customer response they hope to elicit.
What does speed mean for the design process? The speed of design matters more to some industries than others. For example, design inno- vation in construction and aerospace happens at a much slower pace than in clothing or microelectronics. However, rapid design innovation or ‘time-based competition’ has become the norm for an increasing number of industries. Sometimes this is the result of fast- changing consumer fashion. Sometimes a rapidly changing technology base forces it. Telecoms, for example, are updated frequently because their underlying technology is constantly improv- ing. Yet, no matter what the motivation, fast design brings a number of advantages:
● Early market launch – an ability to innovate speedily is that product and service offerings can be introduced to the market earlier and thus earn revenue for longer, and may com- mand price premiums.
● Starting design late – alternatively, starting the design process later may have advantages, especially where either the nature of customer demand or the availability of technology is uncertain and dynamic, so fast design allows design decisions to be made closer to the time when product and service offerings are introduced to the market.
● Frequent market stimulation – rapid innovations allow frequent new or updated offerings to be introduced into the market.
What does dependability mean for the design process? Rapid design processes that cannot be relied on to deliver dependably are, in reality, not fast at all. Design schedule slippage can extend design times, but, worse, a lack of dependability adds to the uncertainty surrounding the innovation process. Conversely, processes that are dependable minimize design uncertainty. Unexpected technical difficulties, such as suppliers who themselves do not deliver solutions on time, customers or markets that change during the innovation process itself, and so on, all contribute to an uncertain and ambiguous design environment. Professional project management (see Chapter 19) of the innovation process can help to reduce uncertainty and prevent (or give early warning of) missed deadlines, pro- cess bottlenecks and resource shortages. However, external disturbances to the innovation process will remain. These may be minimized through close liaison with suppliers as well as market or environmental monitoring. Nevertheless, unexpected disruptions will always occur and the more innovative the design, the more likely they are to occur. This is why flexibility
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within the innovation process is one of the most important ways in which dependable deliv- ery of new product and service offerings can be ensured.
What does flexibility mean for the design process? Flexibility in the innovation process is the ability to cope with external or internal change. The most common reason for external change is because markets, or specific customers, change their requirements. Although flexibility may not be needed in relatively predictable markets, it is clearly valuable in more fast-moving and volatile markets, where one’s own cus- tomers and markets change, or where the designs of competitors’ offerings dictate a matching or leapfrogging move. Internal changes include the emergence of superior technical solu- tions. In addition, the increasing complexity and interconnectedness of product and service components in an offering may require flexibility. A bank, for example, may bundle together a number of separate services for one particular segment of its market. Privileged account hold- ers may obtain special deposit rates, premium credit cards, insurance offers, travel facilities, and so on, together in the same package. Changing one aspect of this package may require changes to be made in other elements. So extending the credit card benefits to include extra travel insurance may also mean the redesign of the separate insurance element of the pack- age. One way of measuring innovation flexibility is to compare the cost of modifying a design in response to such changes against the consequences to profitability if no changes are made. The lower the cost of modifying an offering in response to a given change, the higher is the level of flexibility.
What does cost mean for the design process? The cost of innovation is usually analysed in a similar way to the ongoing cost of delivering offerings to customers. These cost factors are split up into three categories: the cost of buying the inputs to the process, the cost of providing the labour in the process, and the other general overhead costs of running the process. In most in-house innovation processes the latter two costs outweigh the former.
One way of thinking about the effect of the other innovation performance objectives on cost is shown in Figure 4.6. Whether caused by quality errors, an intrinsically slow innovation process, a lack of project dependability, or delays caused through inflexibility, the end result is that the design is late. Delayed completion of the design results in both more expenditure on the design and delayed (and probably reduced) revenue. The combination of these effects usually means that the financial break-even point for a new offering is delayed far more than the original delay in its launch.
What does sustainability mean for the design process? The sustainability of a design innovation is the extent to which it benefits the ‘triple bot- tom line’ – people, planet and profit. When organizations carry out their design innova- tion activities, they should consider their objectives in relation to this triple bottom line. The design innovation process is particularly important in ultimately impacting the ethical, environmental and economic well-being of stakeholders. And incorporating sustainability criteria in the design process is increasingly common. Sometimes this is because of exter- nal pressures, such as new legislation, sometimes because of changing customer attitudes. For example, some innovation activity is particularly focused on the ethical dimension of sustainability. Banks have moved to offer customers ethical investments that seek to maxi- mize social benefit as well as financial returns. Such investments tend to avoid businesses involved in weaponry, gambling, alcohol and tobacco, for example, and favour those pro- moting worker education, environmental stewardship and consumer protection. Other examples of ethically focused innovations include the development of ‘fair-trade’ products. Similarly, garment manufacturers may establish ethical trading initiatives with suppliers; supermarkets may ensure animal welfare for meat and dairy products; online companies may institute customer complaint charters.
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Design innovation may also focus on the environmental dimension of sustainability. Critically examining the components of products towards a change of materials in the design could significantly reduce the environmental burden. Examples include the use of organic cotton or bamboo in clothing; wood or paper from managed forests used in garden furniture, stationery and f looring; recycled materials for carrier bags; and natural dyes in clothing, curtains and upholstery. Other innovations may be more focused on the use stage of an offering. The MacBook Air, for example, introduced an advanced power management system that reduced its power requirements. In the detergent industr y, Unilever and Proctor & Gamble have developed products that allow clothes to be washed at much lower temperatures. Architecture firms are increasingly designing houses that can operate with minimal energy or use sustainable sources of energy such as solar pan- els. Some innovations focus on making product components within an offering easier to recycle or remanufacture once they have reached the end of their life. For example, some food packaging has been designed to break down easily when disposed of, allowing its conversion into high-quality compost. Mobile phones are often designed to be taken apart at the end of their life, so valuable raw materials can be reused. In the automotive indus- try, over 75 per cent of materials are recycled.
WHAT ARE THE STAGES OF PRODUCT AND SERVICE INNOVATION?
Fully specified designs rarely spring, fully formed, from a designer’s imagination. The design activity will generally pass through several key stages. These form the sequence shown in Figure 4.7 , although in practice designers will often recycle or backtrack through the stages. Nor is this sequence of stages descriptive of the stages used by all
Delay in time to market
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Figure 4.6 Delay in time to market of new innovations not only reduces and delays revenues, but also increases the costs of development. The combination of both of these effects usually delays the financial break-even point far more than the delay in the launch
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companies, yet most will use some stage model similar to this one. It moves from the concept generation stage to a screening stage, a preliminary design stage that produces a design to be evaluated and prototyped before reaching the final design.
Concept generation This is where innovative ideas become the inspiration for new service or product concepts. And innovation can come from many different sources:
● Ideas from customers – Marketing, the function generally responsible for identifying new service or product opportunities, may use market research tools for gathering data from customers in a structured way to test out ideas or check services or products against prede- termined criteria.
● Listening to customers – Ideas may come from customers on a day-to-day basis; from complaints, or from everyday transactions. Although some organizations may not see gathering this information as important (and may not even have mechanisms in place to facilitate it), it is an important potential source of ideas.
● Ideas from competitor activity – Most organizations follow the activities of their compet- itors. A new idea from a competitor may be worth imitating or, better still, improved upon. Taking apart a competitor’s product or service to explore potential new ideas is called ‘reverse engineering’. Some aspects of services may be difficult to reverse-engineer (espe- cially ‘back-office’ services) as they are less transparent to competitors.
● Ideas from staff – The contact staff in a service organization or the salesperson in a product-oriented organization could meet customers every day. These staff may have good ideas about what customers like and do not like. They may have gathered suggestions from customers or have ideas of their own. One well-known example – which may be urban myth – is that an employee at Swan Vestas, the matchmaker, suggested having one instead of two sandpaper strips on the matchbox. It saved a fortune!
● Ideas from research and development – Many organizations have a formal research and development (R&D) function. As its name implies, its role is twofold. Research devel- ops new knowledge and ideas in order to solve a particular problem or to grasp an oppor- tunity. Development utilizes and operationalizes the ideas that come from research. And although ‘development’ may not sound as exciting as ‘research’, it often requires as much creativity and even more persistence. One product has commemorated the persistence of its development engineers in its company name. Back in 1953 the Rocket Chemical Company set out to create a rust-prevention solvent and degreaser to be used in the aero- space industry. It took them 40 attempts to get the water-displacing formula worked out. So that is what they called the product. WD-40 literally stands for Water Displacement, 40th attempt.
Open sourcing – using a ‘development community’7
Not all ‘products’ or services are created by professional, employed designers for com- mercial purposes. Many of the software applications that we all use, for example, are developed by an open community, including the people who use the products. If you use Google, the Internet search facility, or use Wikipedia, the online encyclopaedia, or shop at
Concept generation
Concept screening
Preliminary design
Evaluation and
improvement
Prototyping and final design
Figure 4.7 The stages of product/service design innovation
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Amazon, you are using open-source software. The basic concept of open-source software is extremely simple. Large communities of people around the world, who have the abil- ity to write software code, come together and produce a software product. The finished product is not only available to be used by anyone or any organization for free, but also regularly updated to ensure it keeps pace with the necessary improvements. The produc- tion of open-source software is very well organized and, like its commercial equivalent, is continuously supported and maintained. However, unlike its commercial equivalent, it is absolutely free to use. Over the last few years the growth of open source has been phenomenal, with many organizations transitioning over to using this stable, robust and secure software. With the maturity that open-source software now has to offer, organ- izations have seen the true benefits of using free software to drive down costs and to establish themselves on a secure and stable platform. Open source has been the biggest change in software development for decades and is setting new open standards in the way software is used. The open nature of this type of development also encourages com- patibility between products. BMW, for example, was reported to be developing an open- source platform for vehicle electronics. Using an open-source approach, rather than using proprietary software, BMW can allow providers of ‘infotainment’ services to develop com- patible, plug-and-play applications.
Crowdsourcing8
Closely related to the open sourcing idea is that of ‘crowdsourcing’. Crowdsourcing is the process of getting work or funding, or ideas (usually online), from a crowd of people. Although in essence it is not a totally new idea, it has become a valuable source of ideas largely through the use of the Internet and social networking. For example, Procter & Gamble, the consumer products company, asked amateur scientists to explore ideas for a detergent dye whose colour changes when enough has been added to dishwater. Other uses of the idea involve government agencies asking citizens to prioritize spending (or cutting spending) projects.
Parallel-path approach Because the likelihood of successful innovation coming from a single source of ideas is highly uncertain, it has been argued that firms could improve the odds of innovation success by using what is sometimes termed a ‘parallel-path strategy’. This simply means utilizing a vari- ety of different sources and approaches to generating ideas.
Traditionally, it was assumed that there was a trade-off between the depth and breadth of the usefulness of the ideas that can come from various sources. One could pursue a few sources of ideas in depth or a wide range of sources in a relatively shallow manner. In addition, the marginal cost of exploring a new source may increase as the number of sources examined increases. So, the breadth of knowledge sources also may be subject to diminishing marginal returns. However, more recent research9 suggests that firms also may improve their odds of successful innovation by accessing a large number of knowl- edge sources.
Ideas management Obtaining new product or service ideas (or indeed any innovative ideas) from employ- ees was traditionally done through the use of paper-based ‘suggestion schemes’ where employees placed their ideas in a ‘suggestion box’. Such schemes were often only partly effective, yielding few, low-quality ideas. Unless the running of the scheme was well resourced it could be difficult to guarantee that all ideas were evaluated consistently and quickly. Also, the scheme could lose credibility unless employees could track their ideas to confirm that they ‘didn't just disappear’. However, the advent of ‘idea management’ soft- ware tools has overcome some of these difficulties. Ideas management systems are a type of enterprise software (often web-based) that can help operations to collect ideas from
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employees, assess them and, if appropriate, implement them quickly and efficiently. Such systems can track ideas all the way though from inception to implementation, making it much easier to understand important performance measures such as where ideas are being generated, how many ideas submitted are actually implemented, the estimated cost savings from submitted ideas and any new revenues generated by implemented ideas. Often ideas management systems are used to focus ideas on specific organizational tar- gets and objectives, which it is claimed improved both the quality and quantity of ideas, when compared with ‘open’ suggestion schemes.
Concept screening Not all concepts which are generated will necessarily be capable of further development into products and services. Designers need to be selective as to which concepts they progress to the next design stage. The purpose of the concept-screening stage is to evaluate concepts by assessing the worth or value of design options. This involves assessing each concept or option against a number of design criteria. While the criteria used in any particular design exercise will depend on the nature and circumstances of the exercise, it is useful to think in terms of three broad categories of design criteria:
● The feasibility of the design option – can we do it? ● Do we have the skills (quality of resources)? ● Do we have the organizational capacity (quantity of resources)? ● Do we have the financial resources to cope with this option?
OPERATIONS IN PRACTICE
It sounds like a joke, but it is a genuine product innovation motivated by a market need. It is green, square and comes originally from Japan. It is a square watermelon! Why square? Because Japanese grocery stores are not large and space cannot be wasted. Similarly a round water- melon does not fit into a refrigerator very conveniently. There is also the problem of trying to cut the fruit when it keeps rolling around. So an innovative farmer from Japan’s south-western island of Shikoku solved the problem with the idea of making a cube-shaped watermelon which could easily be packed and stored. But there is no genetic modification or clever science involved in growing water- melons. It simply involves placing the young fruit into wooden boxes with clear sides. During its growth, the fruit naturally swells to fill the surrounding shape. Now the idea has spread from Japan. ‘ Melons are among the most delicious and refreshing fruit around but some people find them a problem to store in their fridge or to cut because they roll around ’, said Damien Sutherland, the exotic fruit buyer from Tesco, the UK supermarket. ‘ We've seen sam- ples of these watermelons and they literally stop you in their tracks because they are so eye-catching. These square mel- ons will make it easier than ever to eat because they can be served in long strips rather than in the crescent shape .’ But
Square watermelons! 10
not everyone liked the idea. Comments on news websites included: ‘ where will engineering every day things for our own unreasonable convenience stop? I prefer melons to be the shape of melons! ’; ‘ they are probably working on straight bananas next! ’; and ‘ I would like to buy square sausages then they would be easier to turn over in the frying pan. Round sausages are hard to keep cooked all over .’
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● The acceptability of the design option – do we want to do it? ● Does the option satisfy the performance criteria which the design is trying to achieve?
(These will differ for different designs.) ● Will our customers want it? ● Does the option give a satisfactory financial return?
● The vulnerability of each design option – do we want to take the risk? That is: ● Do we understand the full consequences of adopting the option? ● Being pessimistic, what could go wrong if we adopt the option?
What would be the consequences of everything going wrong? (This is called the ‘downside risk’ of an option.)
The design ‘funnel’ Applying these evaluation criteria progressively reduces the number of options which will be available further along in the design activity. For example, deciding to make the outside casing of a camera case from aluminium rather than plastic limits later decisions, such as the overall size and shape of the case. This means that the uncertainty surrounding the design reduces as the number of alternative designs being considered decreases. Figure 4.8 shows what is sometimes called ‘the design funnel’, depicting the progressive reduction of design options from many to one. But reducing design uncertainty also impacts the cost of chang- ing one’s mind on some detail of the design. In most stages of design the cost of changing a decision is bound to incur some sort of rethinking and recalculation of costs. Early on in the design activity, before too many fundamental decisions have been made, the costs of change are relatively low. However, as the design progresses the interrelated and cumulative deci- sions already made become increasingly expensive to change.
Preliminary design Having generated an acceptable, feasible and viable product or service concept the next stage is to create a preliminary design. The objective of this stage is to have a first attempt at specify- ing the individual components or elements of the products and services, and the relationship between them, which will constitute the final offering.
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Figure 4.8 The design funnel – progressively reducing the number of possibilities until the final design is reached
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124 PART ONE DIRECTING THE OPERATION
Specifying the components of the design The first task in this stage of design is to define exactly what will go into the product or service. This will require the collection of information about such things as the constituent component parts which make up the product or service package and the component (or product) structure, the order in which the component parts of the package have to be put together. For example, the components for a remote ‘presentation’ mouse may include the presentation mouse itself, a receiver unit and packaging. All these three items are made up of components, which are, in turn, made up of other components, and so on. A ‘component structure’ is the diagram that shows how these components all fit together to make the final product ( see Fig. 4.9 ).
Reducing design complexity Simplicity is usually seen as a virtue among designers of products and services. The most elegant design solutions are often the simplest. However, when an operation produces a variety of products or services (as most do) the range of products and services consid- ered as a whole can become complex, which, in turn, increases costs. Designers adopt a number of approaches to reducing the inherent complexity in the design of their prod-
ucts or service range. Here we describe three common approaches to complexity reduction: standardization, commonality and modularization.
Standardization Operations sometimes attempt to overcome the cost penalties of high variety by standardizing their products, services or processes. This allows them to restrict variety to that which has real value for
the end customer. Often it is the operation’s outputs which are standardized. Examples of this are fast food restaurants, discount supermarkets or telephone-based insurance companies. Perhaps the most common example of standardization is the clothes which most us of buy. Although everybody’s body shape is different, garment manufacturers produce clothes in only a limited number of sizes. The range of sizes is chosen to give a reasonable fit for most body shapes. To suit all their potential customers and/or to ensure a perfect fit, garment manufacturers would have to provide an unfeasibly large range of sizes. Alternatively, they would need to provide a customized service. Both solutions
Critical commentary
Not everyone agrees with the concept of the design funnel. For some it is just too neat and ordered an idea to reflect accurately the creativity, arguments and chaos that sometimes characterize the design activity. First, they argue, managers do not start out with an infinite number of options. No one could process that amount of information – and, anyway, designers often have some set solutions in mind, looking for an opportunity to be used. Second, the number of options being considered often increases as time goes by. This may actually be a good thing, especially if the activity was unimaginatively specified in the first place. Third, the real process of design often involves cycling back, often many times, as potential design solutions raise fresh questions or become dead ends. In summary, the idea of the design funnel does not describe what actually happens in the design activity. Neither does it necessarily even describe what should happen.
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CHAPTER 4 PRODUCT AND SERVICE INNOVATION 125
would have a significant impact on cost. This control of variety is an important issue with most companies. A danger facing established operations is that they allow variety to grow excessively. They are then faced with the task of variety reduction, often by assessing the real profit or contribution of each service or product. Many organizations have signif- icantly improved their profitability by careful variety reduction. In order to overcome loss of business, customers may be offered alternative products or services which provide similar value.
Commonality Using common elements within a product or service product can also simplify design com- plexity. Using the same components across a range of automobiles is a common practice. Likewise, standardizing the format of information inputs to a process can be achieved by using appropriately designed forms or screen formats. The more different product and services can be based on common components, the less complex it is to produce them. For example, the European aircraft maker, Airbus, has designed its aircraft with a high degree of commonality. This meant that 10 aircraft models ranging from the 100-seat A318 through to the world’s largest aircraft, the A380 with over 500 seats, feature vir- tually identical f light decks, common systems and similar handling characteristics. In some cases, such as the entire A320 family, the aircraft even share the same ‘pilot-type rating’, which enables pilots with a single licence to f ly any of them. The advantages of commonality for the airline operators include a much shorter training time for pilots and engineers when they move from one aircraft to another. This offers pilots the possibility of f lying a wide range of routes from short haul to ultra-long haul and leads to greater efficiencies because common maintenance procedures can be designed with maintenance teams capable of servicing any aircraft in the same family. Also, when up to 90 per cent of all parts are common within a range of aircraft, there is a reduced need to carry a wide range of spare parts.
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Receiver unit Packing
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Figure 4.9 The component structure of a remote mouse
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126 PART ONE DIRECTING THE OPERATION
Modularization The use of modular design principles involves designing standardized ‘sub-components’ of a product or service which can be put together in different ways. It is possible to create wide choice through the fully interchangeable assembly of various combinations of a smaller number of standard sub-assemblies; computers are designed in this way, for example. These standardized modules, or sub-assemblies, can be produced in higher volume, thereby reduc- ing their cost. Similarly, the package holiday industry can assemble holidays to meet a specific customer requirement, from pre-designed and purchased air travel, accommodation, insur- ance, and so on. In education also there is an increasing use of modular courses which allow ‘customers’ choice but permit each module to have economical volumes of students.
OPERATIONS IN PRACTICE
In 1907 a janitor called Murray Spangler put together a pillowcase, a fan, an old biscuit tin, and a broom han- dle. It was a great innovation – the world’s first vacuum cleaner – but not one that he ever capitalized on. One year later he had sold his patented idea to William Hoover whose company went on to dominate the vac- uum cleaner market for decades, especially in its US homeland. Yet when Hoover ’s market share dropped significantly, it was because a futuristic looking and com- paratively expensive rival product, the Dyson vacuum cleaner, had jumped from nothing to a position where it dominated the market. The product may have been new, but the company was not. The Dyson product dates back to 1978 when James (now Sir James) Dyson noticed how the air filter in the spray-finishing room of a com- pany where he had been working was constantly clog- ging with power particles ( just like a vacuum cleaner bag clogs with dust). So he designed and built an industrial cyclone tower, which removed the powder particles by exerting centrifugal forces. The question intriguing him was: ‘ Could the same principle work in a domestic vacuum cleaner? ’ Five years and five thousand prototypes later he had a working design, since praised for its ‘uniqueness and functionality ’. However, existing vacuum cleaner manufacturers were not as impressed – two rejected the design outright. So Dyson started making his new design himself. Within a few years Dyson cleaners were, in the UK, outselling the rivals who had once rejected them. The aesthetics and functionality of the design help to keep sales growing in spite of a higher retail price. To Dyson, good ‘ is about looking at everyday things with new eyes and working out how they can be made bet- ter. It’s about challenging existing technology. ’ Then the Dyson engineers took the technology one stage further and developed core separator technology to capture even more microscopic dirt. Dirt now goes through three stages of separation. First, dirt is drawn into a pow- erful outer cyclone. Centrifugal forces fling larger debris
such as pet hair and dust particles into the clear bin at 500 g (the maximum g -force the human body can take is 8 g ). Second, a further cyclonic stage, the core separa- tor, removes dust particles as small as 0.5 microns from the airflow – particles so small you could fit 200 of them on this full stop. Finally, a cluster of smaller, even faster cyclones generates centrifugal forces of up to 150,000 g , extracting particles as small as mould and bacteria.
Other innovations followed. The Dyson Airblade is an electric hand dryer that dries hands quicker (around 10 seconds) and uses less electricity than conventional hand
Innovative design from Dyson 11
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Design evaluation and improvement The purpose of this stage in the design innovation activity is to take the preliminary design and subject it to a series of evaluations to see if it can be improved before the service or prod- uct is tested in the market. There are a number of techniques that can be employed at this stage to evaluate and improve the preliminary design. Perhaps the best known is quality func- tion deployment (QFD).
Quality function deployment The key purpose of QFD is to try to ensure that the eventual innovation actually meets the needs of its customers. It is a technique that was developed in Japan at Mitsubishi’s Kobe shipyard and used extensively by Toyota, the motor vehicle manufacturer, and its suppliers. It is also known as the ‘house of quality’ (because of its shape) and the ‘voice of the customer’ (because of its purpose). The technique tries to capture what the customer needs and how it might be achieved. Figure 4.10 shows a simple QFD matrix used in the design of a promo- tional USB data storage pen. The QFD matrix is a formal articulation of how the company sees the relationship between the requirements of the customer (the whats ) and the design characteristics of the new product (the hows ):
● The whats , or ‘customer requirements’, are the list of competitive factors which customers find significant. Their relative importance is scored, in this case on a 10-point scale, with price scoring the highest.
● The competitive scores indicate the relative performance of the product, in this case on a 1 to 5 scale. Also indicated are the performances of two competitor products.
● The hows , or ‘design characteristics’ of the product, are the various ‘dimensions’ of the design, which will operationalize customer requirements within the product or service.
● The central matrix (sometimes called the relationship matrix) represents a view of the inter- relationship between the whats and the hows . This is often based on value judgements made by the design team. The symbols indicate the strength of the relationship. All the relation- ships are studied, but in many cases, where the cell of the matrix is blank, there is none.
● The bottom box of the matrix is a technical assessment of the product. This contains the absolute importance of each design characteristic.
● The triangular ‘roof’ of the ‘house’ captures any information the team has about the corre- lations (positive or negative) between the various design characteristics
Prototyping and final design At around this stage in the design activity it is necessary to turn the improved design into a prototype so that it can be tested. It may be too risky to launch a product or service before testing it out, so it is usually more appropriate to create a ‘prototype’ (in the case of a product) or ‘trial’ (in the case of a service). Product prototypes include everything from clay models to computer simulations. Service trials may also include computer simulations but also the actual implementation of the service on a pilot basis. Many retailing organizations pilot new products and services in a small number of stores in order to test customers’ reaction to them.
dryers. Then came the Dyson Air Multiplier™: fans and fan heaters that work very differently to conventional fans and electric heaters. They do not have fast- spinning blades that chop the air and cause uncomfortable buf- feting. Instead, they use Air Multiplier™ technology to draw in air and amplify it up to 18 times, producing an uninterrupted stream of smooth air. Sir James, who remains chief engineer and sole shareholder in Dyson,
said the heater was part of the company ’s effort to turn itself into a ‘ broad-line technology company ’ rather than being seen as only an appliance maker. ‘ I would not limit the company to particular areas of technology or markets. We are developing a range of technologies to improve both industrial and consumer products so that the people using them get a better experience than with the compa- rable items that currently exist. ’
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Virtual reality-based simulations allow businesses to test new products and services as well as visualize and plan the processes that will produce them. Individual component parts can be positioned together virtually and tested for fit or interference. Even virtual workers can be introduced into the prototyping system to check for ease of assembly or operation.
Computer-aided design (CAD) CAD systems provide the computer-aided ability to create and modify product drawings. These systems allow conventionally used shapes such as points, lines, arcs, circles and text to be added to a computer-based representation of the product. Once incorporated into the design, these entities can be copied, moved about, rotated through angles, magnified or deleted. The designs thus created can be saved in the memory of the system and retrieved for later use. This enables a library of standardized drawings of parts and components to be built up. The most obvious advantage of CAD systems is that their ability to store and retrieve design data quickly, as well as their ability to manipulate design details, can considerably increase the productivity of the design activity. In addition to this, however, because changes can be made rapidly to designs, CAD systems can considerably enhance the flexibility of the design activity, enabling modifications to be made much more rapidly. Further, the use of standardized libraries of shapes and entities can reduce the possibility of errors in the design.
Alpha and beta testing A distinction that originated in the software development industry, but has spread into other areas, is that between the alpha and beta testing of a product or service. Most software prod- ucts include both alpha and beta test phases, both of which are intended to uncover ‘bugs’
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Figure 4.10 QFD matrix for a promotional USB data storage stick
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(errors) in the product. Not surprisingly alpha testing comes before beta testing. Alpha testing is essentially an internal process where the developers or manufacturers (or sometimes an outside agency that they have commissioned) examine the product for errors. Generally, it is also a private process, not open to the market or potential customers. Although it is intended to look for errors that otherwise would emerge when the product is in use, it is in effect per- formed in a virtual or simulated environment, rather than in ‘the real world’. After alpha test- ing, the product is released for beta testing. Beta testing is when the product is released for testing by selected customers. It is an external ‘pilot test’ that takes place in the ‘real world’ (or near real world, because it is still a relatively small, and short, sample) before commercial production. By the time a product gets to the beta stage most of the worst defects should have been removed, but the product may still have some minor problems that may only become evident with user participation. This is why beta testing is almost always performed at the user’s premises without any of the development team present. Beta testing is also sometimes called ‘field testing’, pre-release testing, customer validation, customer acceptance testing, or user acceptance testing.
OPERATIONS IN PRACTICE
Design innovation is not just confined to the initial conception of a product; it also applies to the end of its life. This idea is often called ‘designing for the circu- lar economy ’. The ‘circular economy ’ is proposed as an alternative to the traditional linear economy (or make– use–dispose as it is termed). The idea is to keep products in use for as long as possible, extract the maximum value from them while in use, and then recover and regener- ate products and materials at the end of their service life. But the circular economy is much more than a concern for recycling as opposed to disposal. The circular econ- omy examines what can be done right along the supply and use chain so that as few resources as possible are used, then (and this is the important bit) recover and regenerate products at the end of their conventional life. This means designing products for longevity, reparability, ease of dismantling and recycling.
Typical of the companies that have either adopted this idea, or been set up specially to promote it, is Newlife Paints, based on the south coast of England. It ‘remanufactures’ waste water-based paint back into a premium-grade emulsion. All products in the com- pany ’s paint range guarantee a minimum 50 per cent recycled content, made up from waste paint diverted from landfill or incineration. The idea for the company began to take root in the mind of an industrial chemist, Keith Harrison. His garage was becoming a little unruly, after many years of do-it-yourself projects. Encouraged by his wife to clear out the mess, he realized that the stacked-up tins of paint represented a shocking waste. It was then that his search began for a sensible and envi- ronmentally responsible solution to waste paint. ‘ I kept
thinking I could do something with it, the paint had an intrinsic value. It would have been a huge waste just to throw it away ’, said the former industrial chemist. Keith thought somebody must be recycling it, but no one was, and he set about finding a way to reprocess waste paint back to a superior-grade emulsion. After two years of research, he successfully developed his technology, which involves removing leftover paint from tins that have been diverted from landfill, and blending and fil- tering them to produce colour-matched new paints. The company has also launched a premium brand, aimed at affluent customers with a green conscience, called Reborn Paints, the development of which was partly funded by Akzo Nobel, maker of Dulux Paints. Although Keith started small (in his garage) he now licenses his technology to companies such as the giant waste com- pany Veolia. ‘ By licensing we can have more impact and spread internationally ’, he says. He also points out that manufacturers could plan more imaginatively for the
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WHAT ARE THE BENEFITS OF INTERACTIVE PRODUCT AND SERVICE INNOVATION?
Treating each stage of design innovation as totally separate and sequential activities (as we have just done) is a little misleading. As we said earlier, it is common for companies to cycle back through stages, sometimes several times. Also it is increasingly common to break down the once ridged boundaries between each stage in the design innovation process. This applies especially to the boundary between the design of the product or service and the design of the process that will produce it.
It is generally considered a mistake to separate product and service design from process design. Operations managers should have some involvement from the initial evaluation of the concept right through to the production of the product or service and its introduction to the market. Merging the stages of the design innovation process is sometimes called ‘interactive design’. The main benefit of merging stages is seen to be a reduction in the elapsed time for the whole design innovation activity, from concept through to market introduction. This is often called the time to market (TTM). The argument in favour of reducing time to market is that doing so gives increased competitive advantage. For example, if it takes a company five years to develop a product from concept to market, with a given set of resources, it can intro- duce a new product only once every five years. If its rival can develop products in three years, it can introduce its new product, together with its (presumably) improved performance, once every three years. This means that the rival company does not have to make such radical improvements in performance each time it introduces a new product, because it is introduc- ing its new products more frequently. In other words, shorter TTM means that companies get more opportunities to improve the performance of their services or products.
Three factors in particular have been suggested which can significantly reduce time to market for a service or product:
● Simultaneous development of the various stages in the overall process. ● An early resolution of design conflict and uncertainty. ● An organizational structure which reflects the development project.
Simultaneous development We described the design innovation process as essentially a set of individual, predetermined stages, each with a clear starting and an ending point. The implicit assumption is that one stage is completed before the next one commences. Indeed, this step-by-step, or sequential, approach has traditionally been the typical form of product/service development. It has some advantages. The process is easy to manage and control because each stage is clearly defined. In addition, each stage is completed before the next stage is begun, so each stage can focus its skills and expertise on a limited set of tasks. However, the main problem of the sequential approach is that it is both time consuming and costly. When each stage is separate, with a clearly defined set of tasks, any difficulties encountered during the design at one stage might necessitate the design being halted while responsibility moves back to the previous stage. This sequential approach is shown in Figure 4.11 (a).
Yet often there is really little need to wait until the absolute finalization of one stage before starting the next. For example, perhaps while generating the concept, the evaluation activity
afterlife of their products. For example, simply adding more symbols to packs to assist sorting waste paints into types would help. ‘ At the moment we're fighting fires,
because the paints we pull out of the waste stream today were manufactured five or so years ago, when the circular economy was barely on the horizon ’, he says.
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of screening and selection could be started. It is likely that some con- cepts could be judged as ‘non-starters’ relatively early on in the pro- cess of idea generation. Similarly, during the screening stage, it is likely that some aspects of the design will become obvious before the phase is finally complete. Therefore, the preliminary work on these parts of the design could be commenced at that point. This principle can be taken right through all the stages, one stage commencing before the previous one has finished, so there is simultaneous or concurrent work on the stages ( see Fig. 4.11 (b)). (Note that simultaneous development is often called simultaneous (or concurrent) engineering in manufacturing operations.)
First stage in the innovation activity
Second stage in the innovation activity
Third stage in the innovation activity
(b) Simultaneous arrangement of the stages in the innovation activity
(a) Sequential arrangement of the stages in the innovation activity
etc.
etc.
= Communication between stages
First stage in the innovation activity
Second stage in the innovation activity
Third stage in the innovation activity
Figure 4.11 (a) Sequential arrangement of the stages in the design activity; (b) simultaneous arrangement of the stages in the design activity
✽ ✽ ✽ Operations principle Operations principle Operations principle
OPERATIONS IN PRACTICE
Most companies are obsessed with reducing the time to market (TTM) of their design process. Short TTM means lower development costs and more opportunities to hit the market with new designs. Some automobile com- panies have reduced the design time for their products to less than three years, while a new smartphone (a far
more dynamic market) can be developed in as little as six months. So why does IKEA, the most successful homeware retailer ever, take five years to design its kitchens? Because, with the huge volumes that IKEA sells, development costs are small compared with the savings that can result from product designs that bring down the final price in its stores.
IKEA’s slow development process 13
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Early conflict resolution Characterizing the design innovation activity as a whole series of decisions is a useful way of thinking about design. However, a decision, once made, need not totally and utterly com- mit the organization. For example, if a design team is designing a new vacuum cleaner, the decision to adopt a particular style and type of electric motor might have seemed sensible at the time the decision was made but might have to be changed later, in the light of new information. It could be that a new electric motor becomes available which is clearly superior to the one initially selected. Under those circumstances the designers might very well want to change their decision.
There are other, more avoidable, reasons for designers changing their minds during the design activity, however. Perhaps one of the initial design decisions was made without suf- ficient discussion among those in the organization who have a valid contribution to make. It may even be that when the decision was made there was insufficient agreement to for- malize it, and the design team decided to carry on without formally making the decision. Yet subsequent decisions might be made as though the decision had been formalized. For
example, suppose the company could not agree on the correct size of electric motor to put into its vacuum cleaner. It might well carry on with the rest of the design work while further discussions and inves- tigations take place on what kind of electric motor to incorporate in the design. Yet much of the rest of the product’s design is likely to depend on the choice of the electric motor. The plastic housings, the bearings, the sizes of various apertures, and so on, could all be affected by this decision. Failure to resolve these conf licts and/or
decisions early on in the process can prolong the degree of uncertainty in the total design activity. In addition, if a decision is made (even implicitly) and then changed later on in the process, the costs of that change can be very large. However, if the design team manages to resolve conflict early in the design activity, this will reduce the degree of uncertainty within the project and reduce the extra cost and, most significantly, time associated with either managing this uncertainty or changing decisions already made. Figure 4.12 illustrates two patterns of design changes through the life of the total design, which imply different time- to-market performances.
‘I t’s five years of work into finding ways to engineer cost out of the system, to improve the functionality ’, IKEA’s new Chief Executive, Peter Agnefjäll, said of the company ’s ‘Metod’ kitchen (which means ‘Method’ in English). Metod is a complex product. It has over a thousand different components. The kitchen is a product of IKEA’s ‘democratic design’ process that ensures designs that will work in homes anywhere in the world – an important consideration when you sell about 1 million kitchens a year. Also, unlike some big- ticket purchases, consumer taste in home furnishing does not shift rapidly. ‘ We still hang paintings above the sofa and tend to have a TV in the corner ’, says IKEA Creative Director Mia Lundström. But even if trends do not materialize overnight, it is still important to spot emerging consumer preferences. A research team vis- its thousands of homes annually and compiles reports that look as far as a decade into the future. So with- out the imperative to change the product designs too
frequently, product cost becomes a key driver. Rather than buy prefabricated components from outside sources, IKEA will develop its own if it keep costs down. For example, IKEA’s designers created its own LED light- ing system to light one of the kitchen drawers.
✽ ✽ ✽ Operations principle Operations principle Operations principle
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Project-based organizational structures The total process of developing concepts through to market will almost certainly involve personnel from several different areas of the organization. To continue the vacuum cleaner example, it is likely that the vacuum cleaner company would involve staff from its research and development department, engineering, production management, marketing and finance. All these different functions will have some part to play in making the decisions which will shape the final design. Yet any design project will also have an existence of its own. It will have a project name, an individual manager or group of staff who are championing the pro- ject, a budget and, hopefully, a clear strategic purpose in the organization. The organizational question is which of these two ideas – the various organizational functions which contribute to the design or the design project itself – should dominate the way in which the design activ- ity is managed?
Before answering this, it is useful to look at the range of organizational structures which are available – from pure functional to pure project forms. In a pure functional organization, all staff associated with the design project are based unambiguously in their functional groups. There is no project-based group at all. They may be working full-time on the project but all communications and liaisons are carried out through their functional manager. The project exists because of agreement between these functional managers. At the other extreme, all the individual members of staff from each function who are involved in the project could be moved out of their functions and perhaps even physically relocated to a task force dedicated solely to the project. The task force could be led by a project manager who might hold the entire budget allocated to the design project. Not all members of the task force necessarily have to stay in the team throughout the development period, but a substantial core might see the project through from start to finish. Some members of a design team may even be from other companies. In between these two extremes there are various types of matrix organiza- tion with varying emphasis on these two aspects of the organization (see Fig. 4.13). Although the ‘task force’ type of organization, especially for small projects, can sometimes be a little cumbersome, it seems to be generally agreed that, for substantial projects at least, it is more effective at reducing overall time to market.
Skunkworks14 Encouraging creativity in design, while at the same time recognizing the constraints of everyday business life, has always been one of the great challenges of indus- trial design. One well-known organizational structure that is claimed to release the design and development creativity of a group has been called ‘a Skunkworks’. It is usually taken to mean a small team who are taken out of their normal work environment and granted freedom
Figure 4.12 Sorting out problems early saves greater disruption later in the design activity
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134 PART ONE DIRECTING THE OPERATION
from their normal management activities and constraints – what we have called here a pure ‘project-based’ structure. It was an idea that originated in the Lockheed Aircraft Company in the 1940s, where designers were set up outside the normal organizational structure and given the task of designing a high-speed fighter. The experiment was so successful that the company continued with it to develop other innovative products. Since that time many other companies have used a similar approach, although ‘Skunk Works’ is a registered trademark of Lockheed Martin Corporation.
PM
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Pure functional organization
Pure project organization
Lightweight project managers
FM FM FM
PM
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Heavyweight project managers
Balanced matrix organization
FM FM FMFM FM FM
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FM FM FM
FM = Functional manager PM = Project manager
Figure 4.13 Organizational structures for the design innovation process
● Innovation is the act of introducing something new. Design is to ‘conceive the looks, arrangement, and workings of something ’. Creativity is the ability to move beyond conven- tional ideas, rules or assumptions, in order to generate signifi cant new ideas. These three concepts are intimately related.
● The innovation S-curve describes the impact of an innovation over time, slow at fi rst, increasing in impact, then slowing down before levelling off .
❯ What is product and service innovation?
SUMMARY ANSWERS TO KEY QUESTIONS
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● Incremental and radical innovations differ in how they use knowledge. Radical innova- tion often requires completely new knowledge and/or resources making existing products and services obsolete. Incremental innovation builds upon existing knowledge and/or resources.
● The Henderson–Clark model goes further by distinguishing between ‘knowledge of the components of innovation’ and ‘knowledge of how the components of innovation link together’ (called architectural knowledge).
❯ What is the strategic role of product and service innovation?
❯ What are the stages of product and service innovation?
● Good design takes innovative ideas and makes them practical.
● There is an increasingly common acceptance that design can add very significant value to all types of organization.
● Producing design innovations for products and services is itself a process that conforms to the input–transformation–output model described in Chapter 1.
● The performance of the design process can be assessed in the same way as any process, namely in terms of quality, speed, dependability, flexibility, cost and ‘sustainability ’.
● Concept generation transforms an idea for a product or service into a concept which cap- tures the nature of the product or service and provides an overall specification for its design.
● Screening the concept involves examining its feasibility, acceptability and vulnerability in broad terms to ensure that it is a sensible addition to the company ’s service or product portfolio.
● Preliminary design involves the identification of all the component parts of the product or service and the way they fit together. Typical tools used during this phase include compo- nent structures and flow charts.
● Design evaluation and improvement involve re-examining the design to see if it can be done in a better way, more cheaply or more easily. A typical technique used here is quality func- tion deployment.
● Prototyping and final design involve providing the final details which allow the product or service to be produced. The outcome of this stage is a fully developed specification for the package of products and services, as well as a specification for the processes that will make and deliver them to customers.
❯ What are the benefits of interactive product and service innovation?
● Looking at the stages of design together can improve the quality of both product and ser- vice design and process design. It helps a design ‘break even’ on its investment earlier than would otherwise have been the case. It is particularly effective if managers:
● Employ simultaneous development where design decisions are taken as early as they can be, without necessarily waiting for a whole design phase to be completed.
● Ensure early conflict resolution which allows contentious decisions to be resolved early in the design process, thereby not allowing them to cause far more delay and confusion if they emerge later in the process.
● Use a project-based organizational structure which can ensure that a focused and coher- ent team of designers is dedicated to a single design or group of design projects.
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‘ Most people see the snack market as dynamic and innova- tive, but actually it is surprisingly conservative. Most of what passes for innovation is in fact tinkering with our marketing approach, things like special offers, promotion tie-ins and so on. We occasionally put new packs round our existing prod- ucts and even more occasionally we introduce new flavors in existing ranges. Rarely though does anyone in this industry introduce something radically different. That is why “Project Orlando” is both exciting and scary. ’
Monica Allen, the Technical Vice-President of PJT’s Snack Division, was commenting on a new product to be mar- keted under PJT ’s best-known brand ‘Dreddo Dan’s Surfer Snacks’. The Dreddo Dan’s brand made use of surfing and outdoor ‘action-oriented youth’ imagery, but in fact was aimed at a slightly older generation who, although aspir- ing to such a lifestyle, had more discretionary spend for the premium snacks in which the brand specialized. Current products marketed under the brand included both fried and baked snacks in a range of exotic flavours. The project, internally known as Project Orlando, was a baked product that had been ‘in development’ for almost three years but had hitherto been seen very much as a long-term devel- opment, with no guarantee of it ever making it through to market launch. PJT had several of these long-term projects running at any time. They were allocated a development budget, but usually no dedicated resources were associated with the project. Less than half of these long-term projects ever even reached the stage of being test marketed. Around 20 per cent never got past the concept stage, and less than 20 per cent ever went into production. However, the com- pany viewed the development effort put into these ‘failed’ products as being worthwhile because it often led to ‘spin- off ’ developments and ideas that could be used elsewhere. Up to this point ‘Orlando’ had been seen as unlikely ever to reach the test marketing stage, but that had now changed dramatically.
‘Orlando’ was a concept for a range of snack foods, described within the company as ‘savory potato cookies’. Essentially they were 1½ inch discs of crisp, fried potato with a soft dairy-cheese-like filling. The idea of incorpo- rating dairy fillings in snacks had been discussed within the industry for some time, but the problems of manufactur- ing such a product were formidable. Keeping the product crisp on the outside yet soft in the middle, while at the same time ensuring microbiological safety, would not be easy. Moreover, such a product would have to be capable of being stored at ambient temperatures, maintain its physical robustness and have a shelf life of at least three months.
Bringing Orlando products to market involved over- coming three types of technical problem. First, the formu-
lation and ingredient mix for the product had to maintain the required texture yet be capable of being baked on the company ’s existing baking lines. The risk of developing an entirely new production technology for the offering was considered too great. Second, extruding the mixture into baking moulds while maintaining microbiological integrity (dairy products are difficult to handle) would require new extrusion technology. Third, the product would need to be packaged in a material that both reflected its brand image and kept the product fresh through its shelf life. Existing packaging materials were unlikely to provide sufficient shelf life. The first of these problems had, more or less, been solved in PJT ’s development laboratories. The second two problems now seemed less formidable because of a num- ber of recent technological breakthroughs made by equip- ment suppliers and packaging manufacturers. This had convinced the company that Orlando was worth significant investment and it had been given priority development sta- tus by the company ’s board. Even so, it was not expected to come to the market for another two years and was seen by some as potentially the most important new product devel- opment in the company ’s history.
The project team Immediately after the board’s decision, Monica had accepted responsibility to move the development forward. She decided to put together a dedicated project team to oversee the development. ‘ It is important to have represent- atives from all relevant parts of the company. Although the team will carry out much of the work themselves, they will still need the cooperation and the resources of their own depart- ments. So, as well as being part of the team, they are also gateways to expertise around the company. ’ The team con- sisted of representatives from marketing, the development
CASE STUDY Developing ‘Savory Rosti-crisps’ at Dreddo Dan's
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kitchens (laboratories), PGT’s technology centre (a develop- ment facility that served the whole group, not just the snack division), packaging engineers, and representative from the division’s two manufacturing plants. All but the manufactur- ing representatives were allocated to the project team on a full-time basis. Unfortunately, manufacturing had no one who had sufficient process knowledge and who could be spared from their day-to-day activities.
Development objectives Monica had tried to set the objectives for the project in her opening remarks to the project team members when they had first come together. ‘We have a real chance here to develop an offering that not only will have major mar- ket impact, but will also give us a sustainable competitive advantage. We need to make this project work in such a way that competitors will find it difficult to copy what we do. The formulation is a real success for our development people, and as long as we figure out how to use the new extrusion method and packaging material, we should be difficult to beat. The success of Orlando in the marketplace will depend on our ability to operationalize and integrate the various technical solutions that we now have access to. The main problem with this type of offering is that it will be expensive to develop and yet, once our competitors realize what we are doing, they will come in fast to try and out-innovate us. Whatever else we do we must ensure that there is sufficient flexibility in the project to allow us to respond quickly when competitors follow us into the mar- ket with their own ‘me-too’ products. We are not racing against the clock to get this to market , but once we do make a decision to launch we will have to move fast and hit the launch date reliably. Perhaps most important, we must ensure that the crisps are 200 per cent safe. We have no experience in dealing with the microbiological testing which dairy-based food manufacture requires. Other divi- sions of PJT do have this experience and I guess we will be relying heavily on them.’
Monica, who had been tasked with managing the (now much expanded) development process, had already drawn up a list of key decisions she would have to take:
● How to resource the innovation project – The division had a small development staff, some of whom had been working on Project Orlando, but a project of this size would require extra staff amounting to about twice the current number of people dedicated to the innovation process.
● Whether to invest in a pilot plant – The process technology required for the new project would be unlike any of the division’s current technology. Similar technology was used by some companies in the frozen food industry and one option would be to carry out trials at these (non-competitor) companies’ sites. Alternatively, the Orlando team could build its own pilot plant which would enable it to experiment in-house. As well as the significant expense involve,
this would raise the problem of whether any process innovations would work when scaled up to full size. However, it would be far more convenient for the project team and allow its members to ‘make their mistakes’ in private.
● How much development to outsource – Because of the size of the project, Monica had considered outsourcing some of the innovation activities. Other divisions within the company might be able to under- take some of the development work and there were also specialist consultancies that operated in the food processing industries. The division had never used any of these consultancies before but other divisions had occasionally done so.
● How to organize the innovation activities – Current- ly the small development function had been organized around loose functional specialisms. Monica wondered whether this project warranted the creation of a sepa- rate department independent of the current structure. This might signal the importance of this innovation project to the whole division.
Fixing the budget The budget to develop Project Orlando through to launch had been set at $30 million. This made provision to increase the size of the existing innovation team by 70 per cent over a 20-month period (for launch two years later). It also included enough funding to build a pilot plant which would allow the team the flexibility to develop responses to potential competitor reaction after the launch. So, of the $30m, around $18m was for extra staff and contracted- out innovation work, $7.5m for the pilot plant and $4.5m for one-off costs (such as the purchase of test equipment etc.). Monica was unsure whether the budget would be big enough. ‘I know everyone in my position wants more money, but it is important not to under fund a project like this. Increasing our development staff by 70% is not really enough. In my opinion we need an increase of at least 90% to make sure that we can launch when we want. This would need another $5m, spread over the next 20 months. We could get this by not building the pilot plant I suppose, but I am reluc- tant to give that up. It would mean begging for test capacity on other companies’ plants, which is never satisfactory from a knowledge-building viewpoint. Also it would compromise security. Knowledge of what we were doing could easily leak to competitors. Alternatively we could subcontract more of the research which may be less expensive, especially in the long run, but I doubt if it would save the full $5m we need. More important, I am not sure that we should subcontract anything which would compromise safety, and increasing the amount of work we send out may do that. No, it’s got to be the extra cash or the project could overrun. The profit projections for the Orlando products look great [see Table 4.1], but delay or our inability to respond to competitor pressures would depress those figures significantly. Our competitors could get into the market only a little after us. Word has is that Marketing’s
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138 PART ONE DIRECTING THE OPERATION
calculations indicate a delay of only six months could not only delay the profit stream by the six months but also cut it by up to 30%. '
Monica was keen to explain two issues to the man- agement committee when it met to consider her request for extra funding. First, that there was a coherent and well-thought-out strategy for the innovation project over the next two years. Second, that saving $5m on Project Orlando’s budget would be a false economy.
QUESTIONS 1 How would you rank the innovation objectives for the
project?
2 What are the key issues in resourcing this innovation process?
3 What are the main factors influencing the resourcing decisions?
4 What advice would you give Monica?
Table 4.1 Preliminary ‘profit stream’ projections for the Project Orlando offering, assuming launch in 24 months’ time
Time period * 1 2 3 4 5 6 7
Profi t fl ow ($m) 10 20 50 90 120 130 135
*Six-month periods.
PROBLEMS AND APPLICATIONS
1 How would you go about evaluating the design of this book?
2 A company is developing a new app that will allow customers to track the progress of their orders. The website developers charge €10,000 for every development week and it is esti- mated that the design will take 10 weeks from the start of the design project to the launch of the website. Once launched, it is estimated that the new site will attract extra business that will generate profits of €5,000 per week. However, if the website is delayed by more than five weeks, the extra profit generated would reduce to €2,000 per week. How will a delay of five weeks affect the time when the design will break even in terms of cash flow?
3 How can the concept of modularization be applied to package holidays sold through an online travel agent?
4 One product where a very wide range of product types is valued by customers is that of domestic paint. Most people like to express their creativity in the choice of paints and other home decorating products that they use in their homes. Clearly, offering a wide range of paint must have serious cost implications for the companies which manufacture, distribute and sell the product. Visit a store which sells paint and get an idea of the range of products available on the market. How do you think paint manufacturers and retailers manage to design their services and products so as to maintain high variety but keep costs under control?
5 Some firms specialize in helping clients to innovate and design their products and services. One of the best known of these is IDEO ( ideo.com ). Look at the website and: (a) Identify the stages of design innovation that the firm goes through with its clients. (b) Assess its approach to design innovation. What does the firm believe are the most impor-
tant aspects of successful new product and service development? (c) Why do you think IDEO is so willing to tell everyone how to go about the design innova-
tion process? Isn’t that giving away the firm’s expertise for free?
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SELECTED FURTHER READING
Bangle, C. (2001) The ultimate creativity machine: how BMW turns art into profit, Harvard Business Review, January, 47–55.
A good description of how good aesthetic design translates into business success.
Bruce, M. and Bessant, J. (2002) Design In Business: Strategic innovation through design, Financial Times Prentice Hall and The Design Council, Harlow.
Probably one of the best overviews of design in a business context available today.
Christensen, C. (1997) The Innovator’s Dilemma, Harvard Business School Press, Boston, MA, 1997; Harper Business, New York, 2000.
A major influence on innovation theory.
Dyson, J. (1997) Against the Odds: An autobiography, Orion Business Books, London.
One of Europe’s most famous designers gives his philosophy.
Kelly, T. (2002) The Art Of Innovation: Success Through Innovation the IDEO Way, Profile Books, London.
Ideas from IDEO, the best-known design and innovation consultancy.
Nambison, S. and Sawhney, M. (2007) A buyer ’s guide to the innovation bazaar, Harvard Business Review, June.
Provocative innovation ideas.
Rose, D. (2015) Enchanted Objects: Innovation, Design, and the Future of Technology, Scribner, New York.
An interesting look at how technology is (and will) impact on design.
Tidd, J. and Bessant, J. (2013) Managing Innovation: Integrating Technological, Market and Organizational Change, 5th edn, Wiley, Chichester.
The definitive textbook in the area.
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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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CHAPTER 5 THE STRUCTURE AND SCOPE OF OPERATIONS 147
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
Retailer
Dyadic interaction
(a) Dyadic relationships in a simple supply network and example (b) Triadic relationship and example
Dyadic interaction
Triadic interaction
Supplier Focal
operation Supplier Customer
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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CHAPTER 5 THE STRUCTURE AND SCOPE OF OPERATIONS 149
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:
✽ ✽ ✽ Operations principle Operations principle Operations principle
✽ ✽ ✽ Operations principle Operations principle Operations principle Operations principle Operations principle Operations principle
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150 PART ONE DIRECTING THE OPERATION
● 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 10- bay centre
‘Economy of scale’ curve for service centre capacity Economies
of scale Diseconomies
of scale
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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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 ser vice 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 ser vice 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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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 expand
Upstream 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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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 ser vices 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
Changi Airport 1
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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
Fast (but not too fast) food drive-throughs 3
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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
Ecover's ethical operations design 5
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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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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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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 f low of items through the process, the layout of its resources, the technology it uses, and the design of jobs are all strongly inf luenced 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 f lexible 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,
so high cost
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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 inf lexible for their volume–variety position. This lack of f lexibility 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 f lexible 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 var y 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 super visor would sur vey 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 t hose customers wit h t he 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 sur vey 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 f lexibility 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
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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’ leaf let 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.
✽ ✽ ✽ Operations principle Operations principle Operations principle
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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
Confirm to
supplier
Call customer
Kit wagon to store
Assemble kit
Check equipment
Repair
Stored equip.
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Needs attention?
Deliver to customer
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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
check’
The operation of supplying and installing lighting equipment The outline process of supplying
and installing lighting equipment
The detailed process of the ‘Install and test’ activity
To customer
site Safety check
Compliant?
Rectify in time?
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Rectify in time?
Rectify
File failure note
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Install Routine control check
Job sign-o�
Return to base
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Rectify Call for
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Figure 6.8 The ‘supply and install’ operations process mapped at three levels
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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
Check it worked
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Call customer to agree
terms
Worked OK?
Did it work OK?
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High visibility
Medium visibility
Back o�ce – low
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Take out equipment
To site
Amend usage
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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
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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.
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Worked example
Mike was totally confident in his judgement: ‘ You'll never get them back in time ’, he said. ‘ They aren't just wasting time, the process won't allow them to all have their coffee and get back for 11 o'clock. ’ Looking outside the lecture theatre, Mike and his colleague Dick were watching the 20 business people who were attending the seminar queuing to be served coffee and 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
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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
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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
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( m
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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 f lexibility . 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
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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
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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.
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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. ’
‘Factory fl ow ’ helps surgery productivity 2
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Figure 7.3 ‘Assembly line’ surgery
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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.
Microfiche room
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Work room
Books
Books
Books
BooksBooks
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Copy room A/V
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Director’s o�ce
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Periodicals
Computer learning lab
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 f loor 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
E ntrance
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 f low 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 inf luence 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
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Regular flow becomes more important
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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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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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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 f low are usually shown on a f low 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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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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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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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 other wise 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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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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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 f low 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 f lexibility 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 f lexibility will also be poorer than was previously the case, for the same reason. Volume (and perhaps delivery) f lexibility, 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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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 implem
