Rochem LTD case study, Operation management 9th edition

Ninth edition

Ninth edition

Nigel Slack Alistair Brandon-Jones

What makes Operations Management, 9th edition work so well? ● Clear structure (thanks to the ‘4 Ds’ model of operations management) ● Real-life examples provided in ‘operations in practice’ boxes and case studies ● Worked examples blend qualitative and quantitative perspectives ● Critical commentaries pose alternative views where appropriate ● Summary answers to key questions presented as practical bullet points

N i n t h e d i t i o nN i n t h e d i t i o n

OPERATIONS MANAGEMENT OPERATIONS

Nigel Slack • Alistair Brandon-Jones

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OPERATIONS MANAGEMENT

OPERATIONS M ANAGEM

ENT

Operations may not run the world, but it makes the world run!

To truly understand the way a business operates, you need to get your hands dirty – that’s how you get to appreciate what’s actually happening within an organization. Looking inside for the answers is what Operations Management is all about.

Learn from world-leading experts Nigel Slack and Alistair Brandon-Jones and benefi t from their wealth of experience, helping improve businesses of all shapes and sizes. Strategic in its perspective, the book o� ers a comprehensive and practical way to explore key concepts and see them into action through a plethora of international examples.

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.

Alistair Brandon-Jones is a Full Chaired Professor in Operations and Supply Management at the University of Bath, Adjunct Professor at Hult International Business School and at DTU Copenhagen.

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OPER ATIONS M ANAGEMENT

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OPER ATIONS M ANAGEMENT

Nigel Slack Alistair Brandon-Jones

NINTH EDITION NINTH EDITION NINTH EDITION

Harlow, England • London • New York • Boston • San Francisco • Toronto • Sydney • Dubai • Singapore • Hong Kong Tokyo • Seoul • Taipei • New Delhi • Cape Town • São Paulo • Mexico City • Madrid • Amsterdam • Munich • Paris • Milan

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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 2016 (print and electronic) Ninth edition 2019 (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) © Nigel Slack and Alistair Brandon-Jones 2019 (print and electronic)

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ISBN: 978-1-292-25396-1 (print) 978-1-292-25399-2 (PDF) 978-1-292-25398-5 (ePub)

British Library Cataloguing-in-Publication Data A catalogue record for the print edition is available from the British Library

Library of Congress Cataloging-in-Publication Data Names: Slack, Nigel, author. | Brandon-Jones, Alistair. Title: Operations management / Nigel Slack, Alistair Brandon-Jones. Description: Ninth edition. | Harlow, England; New York: Pearson, 2019. Identifiers: LCCN 2018059217| ISBN 9781292253961 (print) | ISBN 9781292253992  (pdf ) | ISBN 9781292253985 (epub) Subjects: LCSH: Production management. | Manufacturing processes. | Industrial management. Classification: LCC TS155 .S562 2019 | DDC 658.5—dc23LC record available at https://urldefense.

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NOTE THAT ANY PAGE CROSS REFERENCES REFER TO THE PRINT EDITION

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Guide to ‘operations in practice’, examples, short cases and case studies x Preface xv To the instructor… xvii To the student… xviii Ten steps to getting a better grade in operations management xix About the authors xx Acknowledgements xxi Publisher’s acknowledgements xxiii

PART ONE Directing the operation

1 Operations management 4 2 Operations performance 38 3 Operations strategy 72 4 Managing product and service innovation 109 5 The structure and scope of operations 142

PART TWO Designing the operation

6 Process design 176 7 The layout and look of facilities 214 8 Process technology 246 9 People in operations 276 Supplement to Chapter 9 — Work study 308

PART THREE Deliver

10 Planning and control 318 11 Capacity management 355 Supplement to Chapter 11 —

Analytical queueing models 402 12 Supply chain management 409 13 Inventory management 445 14 Planning and control systems 485 Supplement to Chapter 14 —

Materials requirements planning (MRP) 508

15 Lean operations 515

PART FOUR Development

16 Operations improvement 548 17 Quality management 589 Supplement to Chapter 17 — Statistical

process control (SPC) 623 18 Managing risk and recovery 636 19 Project management 667

Notes on chapters 703 Glossary 710 Index 725

BRIEF CONTENTS

v

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vi

How is operations performance judged at an operational level? 47

How can operations performance be measured? 60

How do performance objectives trade off against each other? 63

Summary answers to key questions 65 Case study: IKEA looks to the future 67 Problems and applications 70 Selected further reading 71

3 Operations strategy 72 Introduction 72 What is strategy and what is operations strategy? 74 How does operations strategy align with business

strategy (top-down)? 78 How does operations strategy align with market

requirements (outside-in)? 81 How does operations strategy align with

operational experience (bottom-up)? 86 How does operations strategy align with operations

resources (inside-out)? 88 How are the four perspectives of operations

strategy reconciled? 90 How can the process of operations strategy be

organized? 97 Summary answers to key questions 101 Case study: McDonald’s: half a century of growth 103 Problems and applications 106 Selected further reading 108

4 Managing product and service innovation 109 Introduction 109 What is product and service innovation? 110 What is the strategic role of product and service

innovation? 113 What are the stages of product and service

innovation? 119 How should product and service innovation be

resourced? 128 Summary answers to key questions 135

Guide to ‘operations in practice’, examples, short cases and case studies x Preface xv To the instructor… xvii To the student… xviii Ten steps to getting a better grade in operations management xix About the authors xx Acknowledgements xxi Publisher’s acknowledgements xxiii

PART ONE

DIRECTING THE OPERATION 2

1 Operations management 4 Introduction 4 What is operations management? 5 Why is operations management important in

all types of organization? 7 What is the input–transformation–output process? 14 What is the process hierarchy? 18 How do operations and processes differ? 23 What do operations managers do? 27 Summary answers to key questions 31 Case study: Design house partnerships at Concept

Design Services 32 Problems and applications 35 Selected further reading 37

2 Operations performance 38 Introduction 38 Why is operations performance vital in any

organization? 39 How is operations performance judged at a

societal level? 40 How is operations performance judged at a

strategic level? 45

CONTENTS

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CONTENTS vii

Summary answers to key questions 238 Case study: The event hub 240 Problems and applications 243 Selected further reading 245

8 Process technology 246 Introduction 246 What is process technology and why is it getting

more important? 247 Understanding the potential of new process

technology 251 How can new process technologies be evaluated? 258 How are new process technologies developed

and implemented? 265 Summary answers to key questions 270 Case study: Rochem Ltd 272 Problems and applications 274 Selected further reading 275

9 People in operations 276 Introduction 276 Why are people so important in operations

management? 277 How can the operations function be organized? 279 How do we go about designing jobs? 284 How are work times allocated? 299 Summary answers to key questions 302 Case study: Grace faces (three) problems 303 Problems and applications 305 Selected further reading 307

Supplement to Chapter 9 Work study 308 Introduction 308 Method study in job design 308 Work measurement in job design 310

PART THREE

DELIVER 316

10 Planning and control 318 Introduction 318 What is planning and control? 319 How do supply and demand affect planning and

control? 322 What are planning and control activities? 328 Summary answers to key questions 347

Case study: Developing ‘Savory Rosti-crisps’ at Dreddo Dan’s 137

Problems and applications 140 Selected further reading 141

5 The structure and scope of operations 142 Introduction 142 What is the structure and scope of operations? 143 How should the network be configured? 147 How much capacity should operations have? 151 Where should operations be located? 154 How vertically integrated should an operation’s

network be? 158 What activities should be in-house and what

should be outsourced? 163 Summary answers to key questions 168 Case study: Aarens Electronic 170 Problems and applications 172 Selected further reading 173

PART TWO

DESIGNING THE OPERATION 174

6 Process design 176 Introduction 176 What is process design? 177 What should be the objectives of process design? 179 How do volume and variety affect process design? 183 How are processes designed in detail? 190 Summary answers to key questions 209 Case study: The Action Response Applications

Processing Unit (ARAPU) 210 Problems and applications 212 Selected further reading 213

7 The layout and look of facilities 214 Introduction 214 How can the layout and look of facilities influence

performance? 215 What are the basic layout types used in operations

and how do they affect performance? 218 How does the appearance of an operation’s

facilities affect its performance? 228 What information and analysis is

needed to design the layout and look of facilities? 232

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viii CONTENTS

Case study: subText Studios Singapore 349 Problems and applications 351 Selected further reading 354

11 Capacity management 355 Introduction 355 What is capacity management? 356 How is demand measured? 359 How is capacity measured? 368 How is the demand side managed? 375 How is the supply side managed? 378 How can operations understand the consequences

of their capacity management decisions? 382 Summary answers to key questions 393 Case study: Blackberry Hill Farm 395 Problems and applications 400 Selected further reading 401

Supplement to Chapter 11: Analytical queueing models 402 Introduction 402 Notation 402 Variability 403 Incorporating Little’s law 404 Types of queueing system 404

12 Supply chain management 409 Introduction 409 What is supply chain management? 410 How should supply chains compete? 412 How should relationships in supply chains

be managed? 417 How should the supply side be managed? 421 How should the demand side be managed? 427 What are the dynamics of supply chains? 432 Summary answers to key questions 438 Case study: Supplying fast fashion 440 Problems and applications 443 Selected further reading 444

13 Inventory management 445 Introduction 445 What is inventory? 446 Why should there be any inventory? 449 How much to order? The volume decision 455 When to place an order? The timing decision 468 How can inventory be controlled? 473 Summary answers to key questions 479 Case study: Supplies4medics.com 481 Problems and applications 482 Selected further reading 483

14 Planning and control systems 485 Introduction 485 What are planning and control systems? 486 What is enterprise resource planning and how

did it develop into the most common planning and control system? 492

How should planning and control systems be implemented? 500

Summary answers to key questions 503 Case study: Psycho Sports Ltd 504 Problems and applications 506 Selected further reading 507

Supplement to Chapter 14: Materials requirements planning (MRP) 508 Introduction 508 Master production schedule 508 The bill of materials (BOM) 509 Inventory records 510 The MRP netting process 511 MRP capacity checks 514 Summary 514

15 Lean operations 515 Introduction 515 What is lean? 516 How does lean eliminate waste? 522 How does lean apply throughout the

supply network? 536 How does lean compare with other approaches? 538 Summary answers to key questions 541 Case study: Saint Bridget’s Hospital 542 Problems and applications 544 Selected further reading 545

PART FOUR

DEVELOPMENT 546

16 Operations improvement 548 Introduction 548 Why is improvement so important in operations

management? 549 What are the key elements of operations

improvement? 554 What are the broad approaches to improvement? 561 What techniques can be used for improvement? 569 How can the improvement process be managed? 574 Summary answers to key questions 581

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CONTENTS ix

Case study: Ferndale Sands Conference Centre 583 Problems and applications 586 Selected further reading 588

17 Quality management 589 Introduction 589 What is quality and why is it so important? 590 What steps lead towards conformance to

specification? 598 What is total quality management (TQM)? 604 Summary answers to key questions 616 Case study: Turnaround at the Preston plant 618 Problems and applications 620 Selected further reading 622

Supplement to Chapter 17: Statistical process control (SPC) 623 Introduction 623 Control charts 623 Variation in process quality 624 Control charts for attributes 629 Control chart for variables 631 Process control, learning and knowledge 634 Summary of supplement 635 Selected further reading 635

18 Managing risk and recovery 636 Introduction 636 What is risk management? 637

How can operations assess the potential causes and consequences of failure? 639

How can failures be prevented? 650 How can operations mitigate the effects

of failure? 656 How can operations recover from the effects

of failure? 658 Summary answers to key questions 660 Case study: Slagelse Industrial Services (SIS) 662 Problems and applications 663 Selected further reading 666

19 Project management 667 Introduction 667 What are projects? 668 What is project management? 673 How is the project environment understood? 674 How are projects defined? 678 How are projects planned? 680 How are projects controlled and learnt from? 689 Summary answers to key questions 694 Case study: United Photonics Malaysia

Sdn Bhd 696 Problems and applications 700 Selected further reading 702

Notes on chapters 703 Glossary 710 Index 725

Companion Website For open-access student resources to complement this textbook and support your learning, please visit www.pearsoned.co.uk/slack

Lecturer Resources For password-protected online resources tailored to support the use of this textbook in teaching, please visit www.pearsoned.co.uk/slack

ON THE WEBSITE

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x

Chapter Location Company/example Region Sector/activity Company size

1 Operations management

Pret a Manger Torchbox MSF Adidas Ski Verbier Exclusive Hewlett Packard To be a great operations manager… Concept Design Services

Global UK Global

Europe

Global

General

Hospitality Web design Charity

Hospitality Manufacturing N/A

Design/ manufacturing/ distribution

Medium Small Large

Small Large N/A

Medium

2 Operations performance

Novozymes Patagonia Quality Street The Golden Hour Travelling by rail Mymuesli Aldi The Penang Mutiara IKEA

Europe Global Global General

German Europe Malaysia

Pharmaceutical Garments Confectionery Healthcare

Web retail Retail Hospitality

Large Large Large N/A

Small Large Medium

3 Operations strategy

Dow Corning SSTL Micraytech – Part 1 Micraytech – Part 2 Tesco Micraytech – Part 3 Amazon Micraytech – Part 4 Nokia McDonald’s

UK/Space

Global

Global Global

Aerospace

Web retail

Telecomm Hospitality

Medium

Large

Large Large

4 Product and service innovation

Dyson Auto industry IKEA The circular economy Apple iPhone Toyota Dreddo Dan’s

Global Global Global Global

Design/retail Sustainability Design Snack food

Large Various Large Large

Guide to ‘operations in practice’, examples, short cases and case studies

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GUIDE TO ‘OPERATIONS IN PRACTICE’, EXAMPLES, SHORT CASES AND CASE STUDIES xi

Chapter Location Company/example Region Sector/activity Company size

5 The struc- ture and scope of operations

Aalsmeer flower auction Hollywood studios Dubai airport Rolls-Royce Rana Plaza ARM and Intel

Samsung Surgery and shipping

USA

Global

India/ Global

Creative

Design and Design/ manufacturing Healthcare/ transportation

Large

Large

Large

6 Process design

Changi airport Fast food Ecover Sands Film Studio Space4 housing London Underground Sainsbury’s Action Response

Singapore Global Europe UK UK

UK UK

Air travel Hospitality Manufacturing Creative Construction

Retail Charity

Large Large Large Small Medium

Large Small

7 The layout and look of facilities

Ducati Quiet and interaction in laboratory layout Factory flow helps surgery Supermarket layout Customer flow in retail operations Office cubicles The event hub

UK

Various UK

Healthcare

Design Policing

Medium

Various Medium

8 Process technology

Technology or people? Go figure Marmite Legacy versus fintech UK mail Rampaging robots Rochem

Various

UK

UK

Various

Food

Food processing

Various

Large

Medium

9 People in operations

W. L. Gore Exoskeleton device Michelin High customer contact jobs Music while you work Technology and surveillance at work Grace faces (three) problems

Global

Global

UK

Manufacturing

Various

Legal

Large

Various

Medium

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xii GUIDE TO ‘OPERATIONS IN PRACTICE’, EXAMPLES, SHORT CASES AND CASE STUDIES

Chapter Location Company/example Region Sector/activity Company size

10 Planning and control

Joanne manages the schedule Operations control at Air France Can airline passengers be sequenced? The hospital triage system Sequencing and scheduling at London’s Heathrow airport The life and times of a chicken sandwich (Part 1) Ryanair subtext Studios Singapore

UK

Global

General

Global

UK

Retail

Airline

Airports

Healthcare

Food processing

Medium

Large

Various Various

Medium

11 Capacity management

Rise of the gig economy Demand forecasting in baseball Signal technology Surge pricing Demand management United Airlines Heathrow

12 Supply chain management

Apple The North Face The tsunami effect Levi Strauss KFC Wimbledon Maersk and IBM Supplying fast fashion

Global Global Asia Global

Global

Technology Garment manufacture Various Garment manufacture

Garment design/ manufacture/retail

Large Large Various Large

Large

13 Inventory management

National Health Service Blood and Transplant service Energy inventory Cost of too much stock Mountains of grit Flame electrical Mr Ruben’s bakery Amazon Toilet roll delay Supplies4medics

UK Global

South Africa

Global

Europe

Public sector Power generation

Wholesale

Retail

Retail

Large Large

Small

Large

Medium

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GUIDE TO ‘OPERATIONS IN PRACTICE’, EXAMPLES, SHORT CASES AND CASE STUDIES xiii

Chapter Location Company/example Region Sector/activity Company size

14 Planning and control systems

Butcher’s pet care SAP and its partners The life and times of a chicken salad sandwich (Part 2) What a waste Psycho Sports

UK Global UK

USA N/A

(Dog) food production Systems developers Food production

Recycling Manufacturing

Medium

Medium

Large Small

15 Lean operations

Lean construction

Toyota Autonomy at Amazon Pixar adopts lean Waste reduction in airline maintenance KONKEPT Boeing and Airbus Jamie’s ‘lean’ cooking

Global

USA N/A

UK

Domestic food preparation Auto production

Creative Air transport

Domestic food preparation

N/A

Large

Large N/A

Large

16 Improvement

Sonae Corporation The checklist manifesto 6Wonderkinder Improvement at Heineken SixSigma at Wipro Triumph motorcycles Learning from Formula 1 Schlumberger’s InTouch technology Ferndale Sands Conference Centre

Portugal N/A Germany Netherlands India

UK

Retail Healthcare App developer Brewer Outsourcers

Transport

Large Various Small Large Large

Various

17 Quality management

TNT Express Victorinox Four Seasons Virgin Atlantic Magic Moments Testing cars (close) to destruction What a giveaway IKEA Ryanair Fat finger syndrome Deliberate defectives Quality systems Preston plant

Global Switzerland Global

UK

Europe Global Canada

Canada

Transport Manufacturing Hospitality

Photography

Airline Finance Manufacturing

Manufacturing

Large Large Large

Small

Large Various Large

Medium

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xiv GUIDE TO ‘OPERATIONS IN PRACTICE’, EXAMPLES, SHORT CASES AND CASE STUDIES

Chapter Location Company/example Region Sector/activity Company size

18 Managing risk and recovery

<644> Merlin <648> Internet of Things <652> It’s the exception that proves the rule The rise of the MicroMort <660> OVH Slagelse Industrial Services

N/A

Denmark

Various

Manufacturing

Various

Medium

19 Project management

Crossrail Ocado Halting the growth of malaria Vasa’s first and last voyage Berlin Brandenburg Airport The BBC’s DMI The Scottish Parliament Building United Photonics

Global Sweden

UK Malaysia

Healthcare Military

Construction Development

Large N/A

Large Large

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xv

PREFACE

Operations may not run the world, but it makes the world run

Operations management is everywhere. Every time you experience a service and every time you buy a product, you are benefiting from the accomplishments of the operations managers who created them. Operations management 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. And, if you are a manager, remember that operations management is not confined to the operations function. All managers, whether they are called Operations or Marketing or Human Resources or Finance, or whatever, manage processes and serve customers (internal or external). This makes at least part of their activities ‘operations’.

Operations management is also important. Thank- fully, most companies have now come to understand the importance of operations. This is because they have realized that, in the short term, effective operations management gives the potential to improve both effi- ciency and customer service simultaneously. Even more important, operations management can provide the capabilities that ensure the survival and success of an enterprise in the long term.

Operations management is also exciting. It is at the centre of many of the changes affecting the business world – changes in customer preference, changes in sup- ply networks, changes in how we see the environmental and social responsibilities of enterprises, profound changes in technologies, changes in what we want to do at work, how we want to work, where we want to work, and so on. There has rarely been a time when operations management was more topical or more at the heart of business and cultural shifts.

Operations management is also challenging. Pro- moting 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 challenges, the pressures to be socially responsible, the increasing globalization of markets and the diffi- cult-to-define areas of knowledge management.

The aim of this book This book provides a clear, authoritative, well-struc- tured and interesting treatment of operations man- agement as it applies to a variety of businesses and organizations. The text provides both a logical path through the activities 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 120 descriptions of operations practice from all over the world.

▶ Balanced in its treatment. This means we reflect the balance of economic activity between service and manufacturing operations. Around 75 per cent of examples are from organizations that deal primarily in services and 25 per cent from those that are pri- marily manufacturing.

Who should use this book? This book is for anyone who is interested in how ser- vices 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).

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xvi PREFACE

▶ 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.

Distinctive features Clear structure The structure of the book uses the ‘4 Ds’ model of operations management that distinguishes between the strategic 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 delivery 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 short ‘Operations in practice’ cases that explain some of the issues faced by real operations.

Worked examples Operations management is a subject that blends qualitative 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 within operations management. This is why we have included ‘critical commentaries’ that pose alternative views to the one being expressed in the main flow of the text.

Summary answers to key questions Each chapter is summarized in the form of a list of bullet points. These extract the essential points 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 piece of further reading is also explained.

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xvii

TO THE INSTRUCTOR…

Teaching and learning resources for the ninth edition

New for the ninth edition In the 9th edition we have retained the extensive set of changes that we made in the 8th edition. In addition, we have retained the ‘4Ds’ structure (direction, design, delivery and development) that has proved to be excep- tionally popular. 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 9th edition includes the following key changes:

▶ An extended and refreshed set of ‘Problems and applications’ questions that will help you practise analysing operations. They can be answered by reading the chapter. Model answers for the first two questions can be found on the companion website for this book. Answers to all questions are available to tutors adopting the text.

▶ The long-standing case study in Chapter    2 on the Mutiara Hotel has been replaced by a new case that examines some of the innovative changes at Ikea as it faces challenges to its traditional operating practices.

▶ The process technology chapter has been re-de- signed to reflect the ongoing rapid development of new technologies that are having an often significant impact on all types of operation. In addition, most chapters have new ‘Operations in practice’ examples of the application of new technologies.

▶ We have extended and refreshed the popular ‘Oper- ations in practice’ examples throughout the book.

There are now more than 130 of the examples, over 40 per cent of which are new to this book.

▶ We have strengthened even further 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 surge pricing, digital twins, servitization, B2B and B2C relationships, line of sight in internal process networks, Net Promoter Scores, process mining, the Gartner hype cycle and primary capability analysis for new technologies, work–life balance, the use of blockchain in supply chains, human and system planning and control sys- tem integration, knowledge management, the circular economy, quality of experience, service guarantees and cyber security. However, we have retained the emphasis on the foundations of the subject.

▶ The book has been visually redesigned to aid learning.

▶ A completely new instructor’s manual is available to lecturers adopting this textbook, together with PowerPoint presentations for each chapter and a Test- bank of assessment questions. Visit www.pearsoned. co.uk/slack to access these. Most importantly, a set of online resources to enable students to check their understanding, practise key techniques and improve their problem-solving skills now accompanies the book. Please see below for details of MyLab Opera- tions Management.

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xviii

Making the most of this book 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 which in reality are closely related, in order to study them. For example, technology choice impacts on job design, which 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 examples and illustrations that can be found in all oper- ations. Many of these were provided by our contacts in companies, but many also come from journals, mag- azines and newspapers. So if you want to understand the importance 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 management issues of all the operations for which you are a customer.

The case exercises and study activities are there to provide an opportunity for you to think further about the ideas discussed in the chapters. Study activities can be used to test out your understanding of the specific points and issues discussed in the chapter and discuss them as a group, if you choose. If you cannot answer these, you should revisit the relevant parts of the chapter. 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 anal- ysis with other course members. Most important of all, every time you analyse one of the case exercises (or any other case or example in operations management) start off your analysis with the two fundamental questions:

▶ How is this organization trying to compete (or satisfy its strategic objectives if a not-for-profit organization)?

▶ What can the operation do to help the organization compete more effectively?

TO THE STUDENT…

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We could say that the best rule for getting a better grade is to be good. We mean really, really good! But, there are plenty of us who, while fairly good, don’t get as good a grade as we really deserve. So, if you are studying oper- ations management, and you want a really good grade, try following these simple steps:

Step 1 Practise, practise, practise. Use the ‘Key ques- tions’ and the ‘Problems and applications’ to check your understanding. Use the ‘Study plan’ feature in MyLab Operations Management and practice to master the top- ics that you find difficult.

Step 2 Remember a few key models, and apply them wherever you can. Use the diagrams and models to describe some of the examples that are contained within the chapter. You can also use the revision pod casts on MyLab Operations Management.

Step 3 Remember to use both quantitative and qualitative analysis. You’ll get more credit for appropriately mixing your methods: use a quantitative model to answer a quan- titative question and vice versa, but qualify this with a few well-chosen sentences. Both the chapters of the book, and the exercises on MyLab Operations Management, incor- porate qualitative and quantitative material.

Step 4 There’s always a strategic objective behind any operational issue. Ask yourself, ‘Would a similar opera- tion with a different strategy do things differently?’ Look at the ‘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 and on MyLab Operations Manage- ment. You’ll get more credit for using references that come from genuine academic sources.

Step 6 Use your own experience. Every day, you’re experi- encing 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 scenes of your favourite restaurant? Use the videos on MyLab Operations Management to look further at operations in practice.

Step 7 Always answer the question. Think ‘what is really being asked here? What topic or topics does this question cover?’ Find the relevant chapter or chapters, and search the key questions at the beginning of each chapter and the summary at the end of each chapter to get you started.

Step 8 Take account of the three tiers of accumulating marks for your answers.

(a) First, demonstrate your knowledge and understand- ing. Make full use of the text and MyLab Opera- tions Management 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, combined with those on MyLab Operations Management, give you hundreds of dif- ferent 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 alternative viewpoints.

Generally, if you can do (a), you will pass; if you can do (a) and (b), you will pass well; and if you can do all three, you will pass with flying colours!

Step 9 Remember not only what the issue is about, but also understand why! Read the text and apply your knowledge on MyLab Operations Management until you really understand why the concepts and techniques of operations management are important, and what they contribute to an organisation’s success. Your new-found knowledge will stick in your mem- ory, allow you to develop ideas, and enable you to get better grades.

Step 10 Start now! Don’t wait until two weeks before an assignment is due. Log on (www.pearson.com/mylab/ operations-management), read on, and GOOD LUCK!

Nigel Slack and Alistair Brandon-Jones

Ten steps to getting a better grade in operations management

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Nigel Slack is an Emeritus Professor of Operations Management and Strategy at Warwick University, and an Honorary Professor at Bath 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 engineering. 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), Making Management Decisions (1991) published by Prentice Hall, Service Superiority (with Robert Johnston, 1993) published by EUROMA, The Blackwell Encyclopedic Dictionary of Opera- tions Management (with Michael Lewis) published by Blackwell, Operations Strategy, now in its fifth edition (with Michael Lewis, 2017) published by Pearson, Per- spectives in Operations Management (Volumes I to IV with Michael Lewis, 2003) published by Routledge, Operations and Process Management, now in its fifth edition (with Alistair Brandon-Jones, 2018) published by Pearson, Essentials of Operations Management, now in its second edition (with Alistair Brandon-Jones, 2018) also published by Pearson, and The Operations Advan- tage published by Kogan Page (2017). 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 manufacturing. His research is in the operations and manufacturing flexibility and operations strategy areas.

Alistair Brandon-Jones is a Full (Chaired) Professor in Operations and Supply Management at the University of Bath School of Management, Visiting Professor at

Hult International Business School, DTU in Denmark, and NOVA in Portugal. Between 2014 and 2017, he was Associate Dean for Post-Experience Education, responsible for MBA, EMBA, EngDoc, DBA and DBA South Africa. He was formerly a Reader at Manchester Business School, an Assistant and Associate Professor at Bath School of Management, and a  Teaching Fellow at Warwick Business School. He holds a Bachelor’s degree in Management Science (2000) and a PhD (2006) from Warwick Business School. In addition to Operations Management, his other books include Operations and Process Management (with Nigel Slack), the fifth edi- tion published in 2018, Essentials of Operations (with Nigel Slack), the second edition published in 2018, and Quantitative Analysis in Operations Management (with Nigel Slack), published in 2008, alongside a number of translations and adaptations of these books around the world. Alistair is an active empirical researcher, focus- ing on e-enabled operations and supply, professional service operations, and healthcare operations, and sup- ported by funding from the Design Council, Economic and Social Research Council (ESRC), Engineering and Physical Sciences Research Council (EPSRC), Welsh Assembly Government and Local Government Asso- ciation. He has published this research extensively in world-leading journals including Journal of Opera- tions Management, International Journal of Operations and Production Management, International Journal of Production Economics and International Journal of Production Research. He  has also disseminated his research through various practitioner publications, con- ferences, workshops and white papers. Alistair has consulting and executive development experience with organizations around the world, in various sectors includ- ing petrochemicals, health, financial services, manufac- turing, defence and government. In addition, he has won numerous prizes for teaching excellence and contributions to pedagogy, including from Times Higher Education, Association of MBAs (AMBA), Production Operations Management Society (POMS), University of Bath, Uni- versity of Manchester and University of Warwick.

ABOUT THE AUTHORS

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During the preparation of the ninth edition of this book (and previous editions) we have received an immense amount of help from friends and colleagues in the Oper- ations Management community. In particular everybody who has attended one of the regular ‘faculty workshops’ deserves thanks for the many useful comments. The generous sharing of ideas from these sessions has influ- enced this and all the other OM books that we prepare. Our thanks go to everyone who attended these sessions and other colleagues who have helped us. 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, Erica Ballantyne of Sheffield University, Yongmei Bentley of the University of Bedfordshire, Helen Benton of Anglia Ruskin University, Ran Bhamra of Loughborough University, Tony Birch of Birmingham City University, Abhijeet Ghadge of Heriot Watt University, Eamonn Ambrose of University College Dublin, Andrea Benn of the University of Brighton, Briony Boydell of the Uni- versity of Portsmouth, John K. Christiansen of Copen- hagen Business School, Philippa Collins of Heriot-Watt University, Paul Coughlan of Trinity College Dublin, Stephen Disney of Cardiff University, Doug Davies of the University of Technology, Sydney, Tony Dromgoole of the Irish Management Institute, J.A.C. de Haan of Tilburg University, Ioannis Dermitzakis of Anglia Ruskin University, Carsten Dittrich of the University of Southern Denmark, David Evans of Middlesex Uni- versity, Ian Evans of Sunderland University, Margaret Farrell of Dublin Institute of Technology, Andrea Foley of Portsmouth University, Paul Forrester of Keele Uni- versity, Andrew Gough of Northampton University, Ian Graham of Edinburgh University, Alan Harle of Sun- derland University, Catherine Hart of Loughborough Business School, Graeme Heron of Newcastle Business School, Steve Hickman of the University of Exeter, Chris Hillam of Sunderland University, Ian Holden of Bristol Business School, 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, Xiaohong Li of Sheffield Hallam University, John Maguire of the University of Sunderland, Charles Marais of the Uni- versity of Pretoria, Peter McCullen of the University of Brighton, Roger Maull of Exeter University, Bart McCarthy of Nottingham University, Lynne Marshall of Nottingham Trent University, John Meredith Smith of EAP, Oxford, Joe Miemczyk of ESCP Business School Europe, Michael Milgate of Macquarie University, Keith Millar of Ulster University, Keith Moreton of Staffordshire University, Phil Morgan of Oxford Brooks University, Adrian Morris of Sunderland University, Nana Nyarko of Sheffield Hallam University, John Pal of Manchester Metropolitan University, Gary Priddis of University of Brighton, Sofia Salgado Pinto of the Católica Porto Business School, Gary Ramsden of the University of Lincoln, Steve Robinson of Southamp- ton Solent University, James Rowell of the University of Buckingham, Frank Rowbotham of the University of Birmingham, Hamid Salimian of the University of Brighton, Sarah Schiffling of the University of Lincoln, Andi Smart of Exeter University, Nigel Spinks of the University of Reading, Rui Soucasaux Sousa of the Católica Porto Business School, Alex Skedd of North- umbria Business School, Martin Spring of Lancaster University, Dr Ebrahim Soltani of the University of Kent, R. Stratton of Nottingham Trent University, Ali Taghizadegan of the University of Liverpool, Dr Nelson Tang of the University of Leicester, Meinwen Taylor of South Wales University, David Twigg of Sussex University, Helen Valentine of the University of the West of England, Arvind Upadhyay of the University of Brighton, Andy Vassallo of the University of East Anglia, Vessela Warren of the University of Worcester, Linda Whicker of Hull University, John Whiteley of Greenwich University, Bill Wright of BPP Professional, Ying Xie of Anglia Ruskin University, Maggie Zeng of the University of Gloucestershire and Li Zhou of the University of Greenwich.

Our academic colleagues in the Operations Man- agement Group at Warwick Business School, Bath University also helped, both by contributing ideas and

ACKNOWLEDGEMENTS

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by creating a lively and stimulating work environment. At Warwick, thanks go to, Vikki Abusidualghoul, Hayley Beer, Nicola Burgess, Mehmet Chakkol, Max Finne, Emily Jamieson, Mark Johnson, Pietro Micheli, Giovanni Radaelli, Ross Ritchie, Rhian Silvestro and Chris Voss. At Bath, thanks go to Maria Battarra, Emma Brandon-Jones, Emily Collins, Gunes Erdo- gan, Emmanuel Fragniere, Vaggelis Giannikas, Andrew Graves, Joanne Hinds, Jooyoung Jeon, Adam Joinson, Jas Kalra, Richard Kamm, Ana Levordashka, Michael Lewis, Sheik Meeran, Kate Muir, Ibrahim Muter, Fotios Petropoulos, Lukasz Piwek, Jens Roehrich, Brian Squire, Tommy Van Steen, Christos Vasilakis, Baris Yal- abik and Dimitris Zisis.

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 professional and friendly assistance from a great publishing team. Especial thanks to Catherine Yates, Carole Drummond, Natalia Jaszczuk and Rufus Curnow.

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 and Alistair Brandon-Jones

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Images (key: b-bottom; c-centre; l-left; r-right; t-top) 5 Alamy: P. T. Photography/Alamy Stock Photo; 8 Shutterstock: (tl)Jenson/Shutterstock; (tl2)Alexander Raths /Shutterstock; (bl2) ESBProfessional/Shutterstock 8 123RF: (cl)Hongqi Zhang; 8 Alamy: (bl1)MARKA/ Alamy Stock Photo; 10 Alamy: Laura Beach/Cultura Creative (RF)/Alamy Stock Photo; 11 Alamy: André Quillien/Alamy Stock Photo; 12 Alamy: (bl)Jemastock/ Alamy Stock Vector; 12 Alamy: (bc)Frank Nikol. DieKleinert/Alamy Stock Photo; 12 Shutterstock: (br) Studio_G/Shutterstock; 13 Alamy: Suzanne Plunkett/ Alamy Stock Photo; 24 Shutterstock: Haveseen/Shutter- stock; 25 Getty Images: Alain LE BOT/Gamma-Rapho/ Getty Images 28 123RF: Pablo Hidalgo/123RF; 32 123RF: Guasor/123RF; 40 Shutterstock: Francis J Dean/Shutterstock; 43 Getty Images: George Frey/Getty Images News/Getty Images; 48 Shutterstock: (bl1) Hadrian/Shutterstock; Blaz Kure/Shutterstock; 48 Shut- terstock: (br1)Blaz Kure/Shutterstock; 48 Shutterstock: (bl2)Michael Rolands/Shutterstock; 48 Shutterstock: (br2)Buruhtan/Shutterstock; 49 Alamy: Urbanbuzz/ Alamy Stock Photo; 51 Shutterstock: JaneHYork/Shut- terstock; 53 Shutterstock: Blend Images/Shutterstock; 55 Shutterstock: CKP1001/Shutterstock; 57 Alamy: Quantum Images/Alamy Stock Photo; 67 Shutterstock: Cate_89/Shutterstock; 73 Shutterstock: Yuriy Golub/ Shutterstock; 123RF: Andrey Armyagov/123RF; 80 Shutterstock: AC Rider/Shutterstock; 84 Alamy: World History Archive/Alamy Stock Photo; 85 Shutterstock: Alastair Wallace/Shutterstock; 87 Shutterstock: Dai- nis Derics/Shutterstock; 89 Shutterstock: Eric Broder Van Dyke/Shutterstock; 91 123RF: Anzebizjan/123RF; 95 Alamy: Frank Sorge/Agencja Fotograficzna Caro/ Alamy Stock Photo; 103 Alamy: Rafael Ben Ari/Alamy Stock photo; 111 Getty Images: Rachel Murray/Getty Images Entertainment/Getty Images; 113 Shutterstock: Zavatskiy Aleksandr/Shutterstock; 116 Shutterstock: Anton_Ivanov/Shutterstock; 119 Shutterstock: Jim Holden/Shutterstock; 120 Shutterstock: Denys Pryk- hodov/Shutterstock; 132 Getty Images: Junko Kimura. Staff/Getty Images AsiaPac/Getty Images; 137 123RF: Ivan Traimak/123RF; 145 Shutterstock: Twobee/Shut- terstock; 148 123RF: Ktsdesign/123RF; 153 123RF: Jakub Gojda/123RF; 156 Shutterstock: Matheus Obst/

Shutterstock; 159 Alamy: Zakir Hossain Chowdhury/ NurPhoto/ZUMA Press, Inc/Alamy Stock Photo; 162 Shutterstock: Scorpp/Shutterstock; 166 Shutterstock: Andrey_Popov/Shutterstock; 170 Shutterstock: Zivica Kerkez/Shutterstock; 178 Alamy: Urbanmyth/Alamy Stock Photo; 181 Shutterstock: Jax10289/Shutterstock; 183 Alamy: Ed Brown/Alamy Stock Photo; 184 123RF: Dinis Tolipov/123RF; 185 123RF: Belchonock/123RF; 185 Getty Images: (bc) Lionel Bonaventure/Afp/Getty Images; 186 Shutterstock: (tl) Supergenijalac/Shutter- stock; 186 Shutterstock: (cl) Liunian/Shutterstock; 186 Shutterstock: (bl) Jacob Lund/Shutterstock; 187 123RF: (tl) Lightfieldstudios/123RF; 187 123RF: (bl) Iakov Filimonov/123RF; 191 Shutterstock: Dobrovizcki/Shut- terstock; 201 Alamy: Ellen Isaacs/Alamy Stock Photo; 210 123RF: Julief514/123RF; 216 Alamy: (tr)Fiorani Fabio/Agenzia Sintesi/Alamy Stock Photo; 216 Shut- terstock: (br) Colormaker/Shutterstock; 227 123RF: Tele52/123RF; 230 Getty Images: Monkeybusinessim- ages/iStock/Getty Images; 231: UNP: Jon Super/UNP; 237 Shutterstock: Vs148/Shutterstock; 240 Shutter- stock: Graham Taylor/Shutterstock; 249 Shutterstock: Shevs/Shutterstock; 254 123RF: Nataliya Dvukhimen- na/123RF; 264 Shutterstock: TippaPatt/Shutterstock; 266 Alamy: TomBham/Alamy Stock Photo; 269 Shut- terstock: Alexander Limbach/Shutterstock; 272 Shut- terstock: Eckehard Schulz/Shutterstock; 278 Alamy: (tr) Ashley Cooper/Alamy Stock Photo; 278 Getty Images: (br) Manfred Segerer/Ullstein Bild/Getty Images; 288 Lockheed Martin Corporation: Lockheed Martin Corporation; 291 Alamy: (br)Dpa picture alliance archive/Alamy Stock Photo; 291 Shutterstock: (cr)Mau- ritz Antin/Epa/Shutterstock; 292 Shutterstock: Jason Salmon/Shutterstock; 296 Getty Images: Emmanuel Aguirre/Photographer’s Choice RF/Getty Images; 298 123RF: Dmitriy Shironosov/123RF; 300 Shutterstock: Africa Studio/Shutterstock; 303 Shutterstock: Stock- Lite/Shutterstock; 319 Getty Images: Dasril Roszandi/ NurPhoto/Getty Images; 323 Alamy: David Kilpatrick/ Alamy Stock Photo; 331 Shutterstock: 06Photo/Shut- terstock; 333 Getty Images: Rick Madonik/Toronto Star/Getty Images; 336 Shutterstock: A Periam Pho- tography/Shutterstock; 339 Shutterstock: ProKasia/ Shutterstock; 349 Shutterstock: Dragon Images/Shut- terstock; 357 123RF: DaisyDaisy/123RF; 366 123RF: Levgen Onyshchenko/123RF; 369 Shutterstock:

PUBLISHER’S ACKNOWLEDGEMENTS

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Ssuaphotos/Shutterstock; 376 123RF: Aleksandr Kha- kimullin/123RF; 377 Alamy: Hendrik Holler/LOOK Die Bildagentur der Fotografen GmbH/Alamy Stock Photo; 378 Shutterstock: Vytautas Kielaitis/Shutter- stock; 381 NATS: Hannah Heggarty on behalf of NATS; 395 Shutterstock: Karel Gallas/Shutterstock; 410 123RF: Vasin leenanuruksa/123RF; 414 Shut- terstock: CL-Medien/Shutterstock; 425 Shutterstock: Andronos Haris/Shutterstock; 428 Shutterstock: Nor Gal/Shutterstock; 430 Shutterstock: Matthew Chattle/ Shutterstock; 437 Alamy: Michael Kooren/Reuters/ Alamy Stock Photo; 440 Shutterstock: Zoriana Zaitseva/ Shutterstock;446 123RF: Elnur Amikishiyev/123RF; 449 123RF: Fanjianhua/123RF; 454 Shutterstock: Tupungato/Shutterstock; 456 Shutterstock: Ververidis Vasilis/Shutterstock; 466 Shutterstock: DK Samco/ Shutterstock; 467 123RF: Mitarart/123RF; 473 Shut- terstock: Derner/Action Press/Shutterstock; 478 123RF: Teerawut Masawat/123RF; 481 Shutterstock: Africa Studio/Shutterstock; 487 Nigel Slack: Nigel Slack; 495 Shutterstock: Drserg/Shutterstock; 496 Shutterstock: ProKasia/Shutterstock; 502 Shutterstock: Picsfive/Shut- terstock; 504 123RF: Luo Hongzhi/123RF; 516 123RF: Yuttana jeenamool/123RF; 518 Shutterstock: Jenson/ Shutterstock; 522 Shutterstock: Sea Rick1/Shutterstock 523 Alamy: A.F Archive/Alamy Stock Photo; 526 Getty Images: Monty Rakusen/Cultura/Getty Images; 529 123RF: Lim Yong Tick/123RF; 532 Shutterstock: Rawpixel.com/Shutterstock; 535 Getty Images: Paul Zimmerman/Getty Images Entertainment/Getty Images; 550 Getty Images: THEGIFT777/istock/Getty Images; 555 Shutterstock: 360b/Shutterstock; 559 Shutter- stock: Oradige59/Shutterstock; 567 Alamy: Gautam Singh/India Picture/Alamy Stock Photo; 577 Shut- terstock: EvrenKalinbacak/Shutterstock; 579 Shutter- stock: Natursports/Shutterstock; 581 Alamy: Robert Evans/Alamy Stock Photo; 583 Alamy: Martin Berry/ Alamy Stock Photo; 591 Alamy: Andree Kaiser/Agencja Fotograficzna Caro/Alamy Stock Photo; 592 Shutter- stock: Palace Lee/Shutterstock; 597 Shutterstock: Song_ about_summer/Shutterstock; 599 123RF: Gennadii Chebeliaev/123RF; 602 Getty Images: Fstop/Photodisc/ Getty Images; 603 Shutterstock: Avatar_023/Shutter- stock; 605 Shutterstock: Zapp2Photo/Shutterstock; 607 Getty Images: Pier Marco Tacca/Getty Images News/Getty Images; 609 123RF: Dotshock/123RF; 611 123RF: Tostphoto/123RF; 614 Shutterstock: Aflo/ Shutterstock; 619 Alamy: industryview/Alamy Stock Photo; 640 Alamy: Chuck Eckert/Alamy Stock Photo; 645 123RF: Frank Peters/123RF; 651 123RF: Sergiy Tryapitsyn/123RF; 656 123RF: Dotshock/Shutterstock; 664 Shutterstock: Saia/Shutterstock; 671 Getty Images: Peter Macdiarmid/Getty Images News/Getty Images; 674 Alamy: Julian Stratenschulte/Dpa picture alliance/

Alamy Stock Photo; 676 123RF: Vasuta Thitayar- ak/123RF; 679 Alamy: Wenn Rights Ltd/Alamy Stock Photo; 682 Alamy: Iain Masterton/Alamy Stock Photo; 685 Shutterstock: Agsandrew/Shutterstock; 693 Shut- terstock: Angelina Dimitrova/Shutterstock; 698 123RF: Scyther5/123RF.

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PUBLISHER’S ACKNOWLEDGEMENTS xxv

257 Unilever UK: Unilever UK, Reproduced with kind permission of Unilever PLC and group companies; 289 University of California Press : Hackman, J. Richard, Greg R. Oldham, Robert Janson, and Kenneth Purdy, A new strategy for job enrichment, California Manage- ment Review, Vol. 17 (3), republished with permission of University of California Press. Permission conveyed through Copyright Clearance Center, Inc., © 1975, University of California Press; 296, 297 Elsevier Inc.: Republished with permission of Elsevier, from Beaure- gard, T. Alexandra and Henry, Lesley C. (2009) Mak- ing the link between work-life balance practices and organizational performance. Human Resource Manage- ment Review, 19. pp. 9–22.; 311 Southern Management Association Annual: Barnes, Frank C. (1983) ‘Prin- ciples of Motion Economy: Revisited, Reviewed, and Restored’, Proceedings of the Southern Management Association Annual Meeting (Atlanta, GA 1983), p 298. © 1983, Southern Management Association Annual; 415 Crown copyright: The UK government Department for Environment, Food and Rural Affairs, Procuring the Future Sustainable Procurement National Action Plan: Recommendations from the Sustainable Procurement Task Force, 2006. Contains public sector information licensed under the Open Government Licence v3.0. © 2006 Crown copyright; 417 Harvard Business Publishing: Fisher, Marshall, What is the right supply chain for your product? Harvard Business Review, March–April, pp. 105–116, reprinted by permission of Harvard Business Review. © 1997, Harvard Business Publishing; 423 Harvard Business Publishing: Kraljic Peter, Purchasing must become supply management, Harvard Business Review, September 1983, reprinted by permission of Harvard Business Review. © 1983, Harvard Business Publishing; 432 Warwick Business School: Professor Mark Johnson, Warwick Business School, The 50,000-mile journey of Wimbledon’s tennis balls, 3 July 2017. © 2017, Warwick Business School; 473 Times Newspapers Limited: Murad Ahmed, Ama- zon knows what you want, The Times, 28 January 2004. © 2004, Times Newspapers Limited; 487 The Institution of Engineering and Technology: Allan K., My way – IT at Butcher’s Pet Care, The Institution of Engineering and Technology © 2009; 501 Emerald Group Publishing Limited: Republished with permis- sion of Emerald Group Publishing Limited from Sherry Finney and Martin Corbett (2007) ERP implemen- tation: a compilation and analysis of critical success factors, Business Process Management Journal, vol. 13 no. 3, 2007, pp. 329–347.; 502 IDG Communications,

Inc.: Kanaracus, Chris, Waste Management sues SAP over ERP implementation, in InfoWorld From IDG, MAR 27, © 2008, IDG Communications, Inc.; 502: Turbit Neville (2005) ERP Implementation – The Traps, The Project Perfect White Paper Collection, www.projectperfect.com.au. Retrieved from: http:// www.projectperfect.com.au/downloads/Info/info_erp_ imp.pdf; 527 McKinsey & Company: Applying Lean in Offices, Hospitals, Planes and Trains, Presentation at The Lean Services Summit, Amsterdam, 24 June (2004) p. 30, McKinsey & Company, www.mckinsey. com. © 2004 McKinsey & Company; 535 Stockholm School of Economics: Example written and supplied by Janina Aarts and Mattia Bianchi, Department of Management and Organization, Stockholm School of Economics; 539 Sergio Rattner: Rattner, Sergio, what is the Theory of Constraints, and How Does it Com- pare to Lean Thinking? The Lean Enterprise Institute, 2009. © 1999 Sergio Rattner; 540 Springer: C.A. Voss and A. Harrison, Strategies for implementing JIT, in, Just-in-Time Manufacture, IFS/Springer-Verlag (Voss, C.A. (ed.) 1987) Copyright © 1987 Springer; 550 Católica Porto Business School: Case by Professors Rui Soucasaux Sousa and Sofia Salgado Pinto, Católica Porto Business School, Portugal, Adapted, with per- mission. © Católica Porto Business School; 555 The Financial Times Ltd: Vasagar, Jeevan, Experiment with a bit of anarchy, 28 January 2014. © 2014, The Financial Times Ltd; 578 Oxford University Press: “Definition of knowledge in English” OED Online, Oxford University Press, December 2018, https:// en.oxforddictionaries.com/definition/knowledge, Accessed 12 February 2019; 591: The Institution of Engineering and Technology: Adapted from Vitaliev V (2009) The much-loved knife, The Institution of Engineering and Technology © 2009; 594, American Marketing Association: Parasuraman, A., Zeithaml, V.A. and Berry, L.B., A conceptual model of service quality and implications for future research, Journal of Marketing, Vol. 49, Fall, pp. 41–50, © 1985, American Marketing Association; 615 EFQM: The EFQM Excel- lence Model, retrieved from: http://www.efqmmid- dleeast.org/efqm-model.html. Used with permission. © 2018, EFQM; 678 Routledge: D’Herbemont, O. and César, B., Managing sensitive projects: A lateral approach, English version by Cutrin, T. and Etcheber, P. © 1998, Routledge; 679 Mattia Bianchi: Example written and supplied by Mattia Bianchi, Department of Management and Organization, Stockholm School of Economics.

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2

Directing the operation

PART ONE

Transformed resources • Materials • Information • Customers

Transforming resources • Facilities • Sta

Input resources

Output products and services

Operations management

Develop mproving 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

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3

T his 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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4

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 managers. 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 Figure 1.1).

Operations management1

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?

Figure 1.1 This chapter examines operations management

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

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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 services and products. The operations function is the part of the organization that is responsible for this activity. Every organization has an operations function because every organization creates some type of services and/or products. However, not all types of organization will necessarily call the operations function by this name. (Note in addition that we also use the shorter terms ‘the operation’ or ‘ operations’ interchange- ably with the ‘operations function’.) Operations managers are the people who have particular responsibility for managing some, or all, of the resources that comprise the operations func- tion. 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 All organizations have ‘operations’ that produce some mix of services and products.

O P E R AT I O N S I N P R AC T I C E

Described by the press as having ‘revolutionized the con- cept of sandwich making and eating’, Pret a Manger opened its first shop in London. Now it has over 440 shops: most in the UK, but also in the US, Hong Kong, France, China and Dubai. It says that its secret is to focus continually on the quality of its food and of its service, avoiding the chemicals and preservatives common in most ‘fast’ food. Pret says that it sells food that can’t be beaten for freshness. At the end of the day, it gives almost everything it hasn't sold to charity. The Pret Foundation Trust works with home- less charities to ensure that its unsold sandwiches go to people who need them, rather than to waste, with 87 per cent of its unsold food being re-distributed. Pret a Manger shops have their own kitchens where fresh ingredients are delivered every morning, with food prepared throughout the day. The team members who are serving on the tills at lunchtime will have been making sandwiches in the kitchen that morning. This flexibility helps to level out workloads throughout the day. But it does require staff who can make the switch between preparation and service smoothly. ‘We

are determined never to forget that our hardworking people make all the difference. They are our heart and soul’, says Pret. ‘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 !’ Pret also invests heavily in training through its ‘Pret Academies’ and its online training resources.

Keeping staff committed is important to a company like Pret that takes pride in 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 !’ More formally, customer feedback is a key ingredient of weekly manage- ment meetings. Staff are rewarded for being nice to customers ; they collect bonuses for delivering outstand- ing customer service. Each Pret outlet is regularly visited by a secret shopper who scores the shop on such perfor- mance measures as speed of service, product availability and cleanliness. In addition, the mystery shopper rates the ‘engagement level’ of the staff. At a more strategic level, environmental sustainability issues have always been important to Pret. Its sustainability strategy has five key elements : using fewer resources, sustainable farming, healthy food, a positive contribution to society and embedding an awareness of sustainability within its values.

Pret a Manger1

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6 PART ONE DIRECTING THE OPERATION

If you want a flavour of some of the issues involved in managing a modern successful operation, look at the ‘Operations in practice’ example on Pret a Manger. It illustrates how important the opera- tions function is for any company whose reputation depends on creating high-quality, sustainable and profitable products and services. Its operations, like its products and services, are innovative, it focuses very much on customer satisfaction, it invests in the development of its staff, and it plays a positive role in fulfilling its social and environmental responsibilities. All of these issues are (or should be) high on the agenda of any operations manager in any operation. Of course, exactly what is involved in producing and delivering products and services will depend to some extent on the type of organization. Table  1.1 shows just 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:

▶ the marketing (including sales) function – which is responsible for communicating the organiza- tion’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 although different organi- zations may call their support functions by different names, almost all organizations will have the three core functions.

In practice, however, there is not always a clear division between 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 develop- ment, technical and information systems activities and some of the human resource, marketing, and accounting and finance activities as coming within the sphere of operations management. We view the operations function as comprising all the activities necessary for the day-to-day ful- filment 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.

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 finished products ▶ Deliver products to customers ▶ Reduce environmental impact of products and processes

Table 1.1 Some activities of the operations function in various organizations

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CHAPTER 1 OPERATIONS MANAGEMENT 7

Figure 1.2 illustrates some of the relationships between opera- tions and other functions in terms of the flow of information between them. Although not comprehensive, it gives an idea of the nature of each relationship. Note that the support functions have a different relationship with operations than the core functions. Operations management’s responsibility to support functions is primarily to make sure that they understand operations’ needs and help them to satisfy these needs. The relationship with the other two core functions is more equal – less of ‘this is what we want’ and more ‘this is what we can do currently – how do we reconcile this with broader business needs?’

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 automobile assembly line. But what about an advertising agency? We know vaguely what they do – they create the advertisements that we see on the web, 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

Operations principle Operations managers need to cooperate with other functions to ensure effective organizational performance.

Figure 1.2 The relationship between the operations function and other core and support functions of the organization

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

Communicating 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

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8 PART ONE DIRECTING THE OPERATION

have an operations activity. Also, the automobile plant and the adver- tising 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 operations management does in five very different organizations and some common themes emerge.

Operations principle The economic sector of an operation is less important in determining how it should be managed than its intrinsic characteristics’.

Automobile assembly factory – Operations management uses machines to efficiently assemble products that satisfy current customer demands

Physician (general practitioner) – Operations management uses knowledge to effectively diagnose conditions in order to treat real and perceived patient concerns

Disaster relief charity – Operations management uses our and our partners’ resources to speedily provide the supplies and services that relieve community suffering

Management consultant – Operations management uses people to effectively create the services that will address current and potential client needs

Advertising agency – Operations management uses our staff’s knowledge and experience to creatively present ideas that delight clients and address their real needs

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CHAPTER 1 OPERATIONS MANAGEMENT 9

Start with the statement from the ‘easy to visualize’ automobile plant. Its summary of what oper- ations management does is: ‘Operations management uses machines to efficiently assemble products that satisfy current customer demands’. The statements from the other organizations are similar, but use slightly different language. Operations management uses, not just machines but also ‘knowledge’, ‘people’, ‘our and our partners’ resources’ and ‘our staff’s knowledge and experience’, 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).

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 management uses ‘resources to appropriately create outputs that fulfill defined market requirements’ (see Figure  1.3). However, although the essential nature and purpose of operations management is the same in any type of organization, there are some special issues to consider, particularly in smaller organizations and those whose purpose is to maximize something other than profit.

Operations management in the smaller organization Operations management is just as important in small organizations as it is in large ones. Irrespective of their size, all companies need to create and deliver their service and products efficiently and effectively. However, in practice, managing operations in a small or medium-size organization has its own set of problems. Large companies may have the resources to dedicate individuals to special- ized tasks but smaller companies often cannot, so people may have to do different jobs as the need arises. Such an informal structure can allow the company to respond quickly as opportunities or problems present themselves. But decision making can also become confused as individuals’ roles overlap. Small companies may have exactly the same operations management issues as large ones but they can be more difficult to separate from the mass of other issues in the organization. How- ever, small operations can also have significant advantages; the ‘Operations in practice’ example on Torchbox illustrates this.

Figure 1.3 Operations management uses resources to appropriately create outputs that fulfil defined market requirements.

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

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10 PART ONE DIRECTING THE OPERATION

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 organi- zations whose purpose is not primarily to earn profits. Managing 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 objectives. Because of this there may be a greater chance of operations decisions being made under conditions of conflicting objectives. So, for example, it is the operations staff in a children’s welfare department who have to face the conflict between the cost of providing extra social workers and the risk of a child not receiving adequate protection. Nevertheless, the vast majority of the topics covered in this book have relevance to all types of organization, including non-profit, even if the context is different and some terms may have to be adapted.

O P E R AT I O N S I N P R AC T I C E

We may take it for granted, yet browsing websites, as part of your studies, your job, or your leisure, is an activity that we all do – probably every day, probably many times each day. All organizations need to have a web presence if they want to sell products and services, interact with their customers, or promote their cause. And, not surprisingly, there is a whole industry devoted to designing websites. In fact, taken over the years, web development has been one of the fastest growing industries in the world. But it’s also a tough industry. Not every web design company thrives, or even survives beyond a couple of years. To succeed, web designers need technology skills, design capabilities, business awareness and operational professionalism. One that has succeeded is Torchbox, an independently-owned web design and development company based in Oxfordshire. Employing around 50 people, it provides ‘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 develop- ments. ‘There are a number of advantages about being a relatively small operation’, he says. ‘We can be hugely flex- ible and agile, in what is still a dynamic market. 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 gen- eral 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 com- mitment 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, operational effectiveness is also essential to Torchbox’s business. ‘We know how to make sure that our projects run not only on time and to budget’, says Olly Willans, 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, per- formance 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.’ Torchbox uses a ‘kanban’ approach (fully explained in Chapter 15) to control its operations. ‘Using sound opera- tions 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 con- trolling work helps ensure that every hour we work produces an hour’s worth of value for our clients and for us.’

Torchbox: award-winning web designers2

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CHAPTER 1 OPERATIONS MANAGEMENT 11

O P E R AT I O N S I N P R AC T I C E

Médecins Sans Frontières (MSF) is an independent humanitarian organization providing ‘medical aid where it is most needed, regardless of race, religion, politics or gender and raising awareness of the plight of the people we help in countries around the world’. Its core work takes place in crisis situations – armed conflicts, epidemics, fam- ines and natural disasters such as floods and earthquakes. Its teams deliver both medical aid (including consultations with a doctor, hospital care, nutritional care, vaccinations, surgery, obstetrics and psychological care) and material aid (including food, shelter, blankets, etc.). Each year, MSF sends doctors, nurses, logisticians, water-and-sanitation experts, administrators and other professionals to work alongside locally hired staff. It is one of the most admired and effective relief organizations in the world. But no amount of fine intentions can translate into effective action without superior operations management. As MSF says, it must be able to react to any crisis with ‘fast

response, efficient logistics systems, and efficient project management’.

Its response procedures are continuously being devel- oped 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 possible mission can come from governments, humanitarian organizations, or MSF teams already present in the region. Once the infor- mation has been checked and validated, MSF sends a team of medical and logistics experts to the crisis area to carry out a quick evaluation. When approved, MSF staff start the process of selecting personnel, organising mate- rials and resources and securing project funds. Initiating a project involves sending technical equipment and resources to the area. Thanks to its pre-planned processes, specialised kits and the emergency stores, MSF can dis- tribute material and equipment within 48 hours, ready for the response team to start work as soon as they arrive. Once the critical medical needs have been met, MSF begins to close the project with a gradual withdrawal of staff and equipment. At this stage, the project closes or is passed onto 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, or a long-running programme, everything MSF does on the ground depends on efficient logistics. Often, aircraft can be loaded and flown into crisis areas within 24 hours. But, if it is not a dire emergency, MSF reduces its costs by shipping the majority of material and drugs by sea.

MSF operations provide medical aid to people in danger3

The new operations agenda Changes in the business environment have had a significant impact on the challenges faced by oper- ations managers. Some of them are in response to changes in the nature of demand. Many (although not all) industries have experienced increased cost-based competition while simultaneously their customers’ expectations of quality and variety have increased. What is technological possible is also changing rapidly, as are customers’ attitude to social and environmental issues. At the same time, political, legal and regulatory structures have changed. In response, operations managers have had to adjust their activities to cope, especially in the following areas:

▶ New technologies – In both manufacturing and service industries, process technologies are chang- ing so fast that it is difficult to predict exactly what their effect will be, only a few years in the future. Certainly, they are likely to have a dramatic effect, radically altering the operating practices of almost all types of operation.

▶ Different supply arrangements – Markets have become more global, often meaning a demand for a higher variety, or customized products and services. Also, globalized supply markets are opening up

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12 PART ONE DIRECTING THE OPERATION

new options in how operations source input goods and services. Very few businesses have not considered purchasing from outside 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.

▶ Increased emphasis on social and environmental issues – Generally, customers have been devel- oping an increased ethical and environmental sensitivity. This is leading to operations having to change the way they create their products and services, and be more transparent about it. Similarly, there is a greater expectation about the ethical treatment of all an operation’s stakeholders, includ- ing customers, the workforce, suppliers and society in general.

Figure  1.4 identifies just some of the operations responses in these three areas. (If you don’t recognize some of the terms in Figure  1.4 , don’t worry, we will explain them throughout the book.) These responses form a major part of a new agenda for operations. Of course, the issues in Figure  1.4 are not compre- hensive, nor are they universal. But very few operations func- tions will be unaffected by at least some of them. Also, you will

find ‘Operations in practice’ examples at several points in this book that look at various aspects of these three areas.

Operations principle Operations management is at the forefront of coping with, and exploiting, developments in business and technology.

Figure 1.4 Changes in the business environment are shaping a new operations agenda

Adoption of new technologies,

for example:

• Internet

• Algorithmic decision making

• Artificial intelligence

• 3D printing

• Robotics

• ‘Big data’ analysis

Adoption of di�erent supply arrangements, for example: 

• Global operations networks

• Partnership relationships

• Business ecosystem 

analysis

• Reputational risk management 

Increased emphasis on social and environmental issues, for

example:

• Triple bottom line performance 

Environmentally sensitive design 

Flexible working patterns

Energy saving

•

•

•

• The business and competitive environment

• Technological possibilities

• Social and environmental attitudes 

• Global political environment 

• Regulatory and legal environment

Developments in:

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CHAPTER 1 OPERATIONS MANAGEMENT 13

O P E R AT I O N S I N P R AC T I C E

There is a vast industry involved in designing, making and distributing trainers (sneakers). It is an industry where sup- ply chains are complex, and involve an extensive network of specialized operations, each focusing on the individual components that make up the shoes. A single part could have crossed back and forwards between several different countries before being assembled into the finished prod- uct, usually by hand. Most of the making is done in Asia, where labour costs are low compared with Western coun- tries and where there is an immense and interconnected network of specialist manufacturers employing thousands of people. Most well-known brands have tended to con- centrate on the design, marketing and distribution. Adidas, like most of its rivals, subcontracted the ‘making’ part of the total process (it had not run or owned its own manu- facturing operations since the 1990s) but the network of suppliers it employs spreads over more than 1,000 facilities in 63 countries. Yet, like other similar companies, Adidas faces some problems with its Asian outsourcing model. First, growing affluence in the area has resulted in rising costs. Second, the longer and more complex a supply net- work, the more difficult it is to oversee every single oper- ation that contributes to the finished shoe, which opens any company to reputational damage if a supplier employs unacceptable working practices (although Adidas has a particularly thorough set of ‘workplace standards’ to which

all suppliers must conform). Finally, this globalised and complex supply chain means a long lead-time between conceiving a new trainer and it eventually arriving in the shops. And it is this last point that can be the most prob- lematic, particularly for fashionable trainers with a short ‘fashion life’. From the initial design for a new trainer, through prototype creating and testing, to placing orders on suppliers, setting up the production process, ramping up production, and finally sending the trainers to the shops, can take as long as 18 months. Even orders to replenish stocks can take two to three months. But fashion cycles for trainers are getting shorter, with some designs lasting only one to three years.

Faced with this tension between slow lead-times on one hand and short fashion cycles on the other, Adidas developed its ‘Speedfactory’ operation, the first one of which was located in Ansbach, Germany, halfway between Munich and Frankfurt (the second one is near Atlanta in the US). The Speedfactory is totally automated, and designed to be able to accommodate new technologies, such as 3D printing, as they become appropriate. And because almost all the stages of manufacturing are done on the same site, it makes Adidas considerably faster and more flexible, especially in producing limited runs of fash- ionable products. Speedfactory can produce shoes in days, which also gives the company the ability to replenish the fastest selling products during the same season. Each Speedfactory can make around 500,000 pairs of trainers a year (small compared to over 400 million that Adidas makes using its traditional supply chain). But Speedfac- tory is not intended to compete with its Asian subcontrac- tors ; it complements them. For shoe designs with relatively high and predictable volumes, the traditional Asian supply networks still dominate. But for local (Euro- pean and US) markets with high-end, fashion-oriented trainers for environmentally sensitive customers, the Speedfactory is a fast and flexible addition to Adidas’ tra- ditional supply.

How Adidas coped with shrinking fashion cycles

Note how the ‘Operations in practice’ example of Adidas demonstrates how one company is being innovative in tackling the challenges inherent in the ‘new operations agenda’ that we identified earlier in the chapter. It is an example of how changes in market requirements prompted a response that involves new technologies (including automation and 3D printing), a rethinking of how supply was to be organised (bringing some, albeit limited, work back to Europe and the US), and consid- eration of environmental sustainability issues (reduced transportation and less waste from 3D printing).

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14 PART ONE DIRECTING THE OPERATION

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 process model that is the basis of all operations. Put simply, operations are processes that take in a set of input resources which are used to transform something, or are transformed themselves, into outputs of services and products. And although all operations conform to this general input–transformation– output model, they differ in the nature of their specific inputs and outputs. For example, if you stand far enough away from a hospital or a car plant, they might look very similar, but move closer and clear differences do start to emerge. One is a service operation delivering ‘services’ that change the physiological or psychological condition of patients; the other is a 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 vehicle plant contains metal forming

machinery and assembly processes. Perhaps the most important differ- ence 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, plastic, cloth, tyres and other materials into vehicles.

Inputs to the process One set of inputs to any operation’s processes are transformed resources. These are the resources that are treated, transformed or converted in the process. They are usually a mixture 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 opera- tions process materials to change their location (parcel delivery companies, for example). Some, like retail operations, do so to change the possession of the materials. Finally, some operations store materials, such as warehouses.

▶ Information – operations which process information could do so to transform their informational properties (that is, the purpose or form of the information); accountants do this. Some change the possession of the information: for example, market research companies sell information. Some store the information, such as archives and libraries. Finally, some operations, such as telecom- munication companies, change the location of the information.

Operations principle All processes have inputs of transforming and transformed resources that they use to create products and services.

Figure 1.5 All operations are input–transformation–output processes

Input resources

Output products and services

Value- added for customers

THE TRANSFORMATION

PROCESS

Transformed resources • Materials • Information • Customers

Transforming resources

• Facilities • Sta�

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CHAPTER 1 OPERATIONS MANAGEMENT 15

▶ 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. Air- lines, mass rapid transport systems and bus companies transform the location of their customers, while hospitals transform their physiological state. Some are concerned with transforming their psychological state: for example, most entertainment services such as music, theatre, television, radio and theme parks. But cus- tomers are not always simple ‘passive’ items to be processed. They can also play a more active part in many operations and processes. For example, they create the atmosphere in a restaurant; they provide the stimulating environment in learning groups in education, they provide informa- tion 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 pro- cessing inputs of material, but no one would claim that a bank is a printer. The bank also is concerned with processing inputs of customers at its branches and contact centres. However, most of the bank’s activities are concerned with processing inputs of information about its customers’ financial affairs. As customers, we may be unhappy with badly printed statements and we may be unhappy if we are not treated appropriately in the bank. But if the bank makes errors in our financial transactions, we suffer in a far more fundamental way. Table 1.2 gives examples of operations with their dominant transformed resources.

The other set of inputs to any operations process are transforming resources. These are the resources which act upon the transformed resources. There are two types which form the ‘building blocks’ of all operations:

▶ facilities – the buildings, equipment, plant and process technology of the operation; ▶ staff – the people who operate, maintain, plan and manage the operation. (Note we use the term

‘staff’ to describe all the people in the operation, at any level.)

The exact nature of both facilities and staff will differ between operations. To a five-star hotel, its facilities consist mainly of ‘low-tech’ buildings, furniture and fittings. To a nuclear-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 refrigera- tors may not need a very high level of technical skill. In contrast, most staff employed by an account- ing company are, hopefully, highly skilled in their own particular ‘technical’ skill (accounting). Yet

Operations principle Transformed resource inputs to a process are materials, information or customers.

Predominantly processing inputs of materials

Predominantly processing inputs of information

Predominantly processing inputs of customers

▶ All manufacturing operations ▶ Mining companies ▶ Retail operations ▶ Warehouses ▶ Postal services ▶ Container shipping line ▶ Trucking companies

▶ Accountants ▶ Bank headquarters ▶ Market research companies ▶ Financial analysts ▶ News services ▶ University research units ▶ Telecoms companyies

▶ Hairdressers ▶ Hotels ▶ Hospitals ▶ Mass rapid transports ▶ Theatres ▶ Theme parks ▶ Dentists

Table 1.2 Dominant transformed resource inputs of various operations

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16 PART ONE DIRECTING THE OPERATION

although skills vary, all staff can make a contribution. An assembly worker who consistently misassembles refrigerators will dissatisfy customers and increase costs just as surely as an accountant who cannot add up. The balance between facilities and staff also varies. A computer chip manufactur- ing 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 opera- tions management is largely concerned with the development and deployment of consultant skills and knowledge.

Outputs from the process Operations create products and services. Products and services are different. Products are usually tangible things whereas services are activities or processes. A car or a newspaper or a restaurant meal is a product, whereas a service is the activity of the customer using or consuming that product. Some services do not involve products. Consultancy advice or a haircut is a process (although 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, accom- modation in an hotel room for example will perish if it is not sold that night, a restaurant 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 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 pro- duces reports and documents, would see itself primarily as a service provider. Finally, pure services solely create and deliver services, such as a psychotherapy clinic. Of the ‘Operations in practice’ examples in this chapter, Adidas produces tangible products. Pret a Manger both creates and ‘serves’ its products. Médecins Sans Frontières supplies physical aid in emergencies,

but also intangible advice and medical help. Hotels such as For- mule 1 and especially Ski Verbier Exclusive are close to being pure services, although they both have some tangible elements such as food. Torchbox’s customers receive no physical product but are paying for the design and functionality of the website designs

Product or service? Increasingly the distinction between services and products is difficult to define. Nor is it particularly useful. Not only do most businesses produce a combination of products and services, but also the out- puts from their operations are increasingly seen as a combined ‘package’. One buys a vehicle from a motor dealer (a product), but part of the decision to buy that vehicle could have been based on the ongoing (at least for a few years) servicing and financing deal. This idea of thinking about integrated

Operations principle All processes have transforming resources of facilities (equipment, technology, etc.) and people.

✔

Operations principle Most operations produce a mixture of tangible products and intangible services.

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CHAPTER 1 OPERATIONS MANAGEMENT 17

products and services (often termed simply ‘offerings’) is powerful. 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 management is important to all organizations. Whether they see themselves as manufacturers or service providers is very much a secondary issue.

Servitization A term that is often used to indicate how operations, which once considered themselves exclusively producers of products, are becoming more service-conscious is ‘servitization’ (or servitisa- tion). Servitization involves (often manufacturing) firms develop- ing the capabilities they need to provide services and solutions that supplement their traditional product offerings.4 The best-known example of how servitization works was when Rolls-Royce, the aero engine manufacturer, rather than selling individual engines, offered the option of customers being able to buy ‘power-by-the- hour’. What this meant was that many of its customers in effect bought the power the aero engine delivers, with Rolls-Royce pro- viding both the physical engines and all of the support (including maintenance, training, updates and so on) to ensure that they could continue to deliver power. This may sound like a small change, but the effects were important. First, Rolls-Royce became a provider of service (the power to make the aircraft fly) as opposed to a manufacturer of technically complex products. Second, it means that what customers really want (the reliable provision of power) and the objectives of the company are more closely aligned. Third, it provides an opportunity for companies to earn additional revenue from new services.

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 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

Adidas

Médecins Sans Frontières

Pret a Manger

Formule 1 / Ski Exclusive

Torchbox

Operations principle Whether an operation produces tangible products or intangible services is becoming increasingly irrelevant. In a sense, all operations produce service for their customers.

Operations principle Servitization involves firms developing the capabilities to provide services and solutions that supplement their traditional product offerings.

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18 PART ONE DIRECTING THE OPERATION

Subscription services A further development to the idea that all outputs from operations can be seen as services is the concept of the ‘subscription model’. Using this model, an operation’s customers pay a (usually) fixed amount each agreed time period, usually a month or year, for which they receive a pre-agreed service. It is not a new idea. For example, magazines have been sold in this way for many years, as have some services such as mobile (cell) phone contracts, gym memberships, etc. More recently, consumer offer- ings, from razors to vegetable boxes, have been sold this way. Software provides an example of how offerings have developed. It has moved from being primarily a product (sold on a disk) to an intan- gible download when sold over the Internet to an even less tangible rental or subscription service based ‘in the cloud’. The implication for operations management is that such services move from ‘one off’ supply to ongoing supply, similar to how utilities (electricity, gas, water, etc.) are delivered.

Customers Any discussion about the nature of outputs from operations must involve consideration of the cus- tomers for whom they are intended. Remember that although customers may also be an input to many operations (see earlier), they are also the reason for their existence. Nor should ‘customers’ be seen as a homogeneous group. Marketing professionals spend much of their effort in trying to understand how customers can be usefully grouped together, the better to understand their various needs. This is called ‘market segmentation’, and is beyond the scope of this book. However, the implications of it are very important for operations managers. In essence, it means that different customer groups may want different things from an operation, even if they want the same product or service. We shall discuss this issue further in Chapter 3.

B2B and B2C

One distinction between different types of customer is worth describing at this point, because we shall be using the terminology at other points in the book. That is between Business to Business (B2B) and Business to Consumer (B2C) operations. B2B operations are those that provide their products or services to other businesses. B2C operations provide their products or services direct to the consumers who (generally) are the ultimate users of the outputs from the operation. Serving individual customers and serving other businesses are very different. This means that the operations serving these two types of customer will be faced with different kinds of concerns, and probably be organised in different ways. Yet an understanding of customers is always important (whether

business customers, or consumers). Without them, there would be no operation. 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.

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 sandwich shop, the web designer, the disaster relief operation and the sports shoe manufacturer. But look inside any of these operations. One will see that all operations consist of a collection of processes (although 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 it forms 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 satisfy (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,

Operations principle An understanding of customer needs is always important, whether customers are individuals or businesses.

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CHAPTER 1 OPERATIONS MANAGEMENT 19

Operation Some of the operation’s processes

Airline Passenger check-in assistance, baggage drop, security / seat check, board passengers, fly passengers and freight around the world, flight scheduling, in-flight 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, output quality checks, finished goods inventory, etc.

Table 1.3 Some operations described in terms of their processes

at the same time, an internal supplier and an internal customer for other processes. This ‘internal customer’ concept provides a model to analyse the internal activities of an operation. It is also a useful reminder that, by treating internal customers with the same degree of care as external customers, the effectiveness of the whole oper- ation 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 individ- ual 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 trans- forming resource. 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 and several customers, and may be in competition with other operations creating similar services or products to itself. This network of operations is called the ‘supply net- work’. 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’ or the ‘process hierarchy’, and is illustrated for a business that makes television programmes and videos in Figure 1.7. It has inputs of production, technical and administrative staff, cameras, lighting, sound and recording equipment, and so on.

Operations principle A process perspective can be used at three levels: the level of the operation itself, the level of the supply network, and the level of individual processes.

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20 PART ONE DIRECTING THE OPERATION

Figure 1.7 Operations and process management requires analysis at three levels: the supply network, the operation and the process

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

Programe/ 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

It transforms these into finished programmes, promotional music videos, etc. At a more macro level, the business itself is part of a whole supply network, acquiring services from creative agen- cies, casting agencies and studios, liaising with promotion agencies, and serving its broadcasting company customers. At a more micro level within this overall operation there are many individual processes; workshops manufacturing the sets; marketing processes that liaise with potential cus- tomers; maintenance and repair processes that care for, modify and design technical 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.

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CHAPTER 1 OPERATIONS MANAGEMENT 21

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 pro- cesses; all functions manage processes. For example, the marketing function will have processes that create demand forecasts, processes that create advertising campaigns and processes that create marketing plans. These processes in the other functions also need managing, using similar principles to those within the operations function. Each function will have its ‘technical’ knowledge. In marketing, this is the expertise in designing and 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, policies, reports and services. The implications of this are very important. Because all managers have some responsibility for managing pro- cesses, 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 management. 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 organiza- tion’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 cus- tomer needs. For example, the television programme and video production company, described previously, creates and delivers two types of ‘product’. Both of these involve a slightly different mix of processes within the company. The company decides to re-organize 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

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 significantly more complex than that between commercial entities. One cannot treat internal customers and suppliers exactly as we do external customers and suppliers. External customers and suppliers usually operate in a free market. If an organization believes that in the long run it can get a better deal by purchasing services and products from another supplier, it will do so. But internal customers and suppliers are not in a ‘free market’. They cannot usually look outside either to purchase input resources or to sell their output services and products (although some organizations are moving this way). Rather than take the ‘economic’ perspective of external commercial relationships, models from organizational behaviour, it is argued, are more appropriate.

Operations principle All parts of the business manage processes, so all parts of the business have an operations role and need to understand operations management principles.

Operations principle Processes are defined by how the organization chooses to draw process boundaries.

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22 PART ONE DIRECTING THE OPERATION

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 ▶ Confirmed orders

▶ Senior management ▶ Sales staff, planners, operations ▶ Operations, finance

Finance and accounting ▶ Budgeting process ▶ Capital approval processes ▶ Invoicing processes

▶ Budgets ▶ Capital request evaluations ▶ Invoices

▶ Everyone ▶ Senior management, requesters ▶ External customers

Human resources management

▶ Payroll processes ▶ Recruitment processes ▶ Training processes

▶ Salary statements ▶ New hires ▶ Trained employees

▶ Employees ▶ All other processes

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

Table 1.4 Some examples of processes in non-operations functions

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

Programme set and props manufacture

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

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CHAPTER 1 OPERATIONS MANAGEMENT 23

within what is called an ‘end-to-end’ business process. These often cut across conventional organiza- tional boundaries. Reorganizing (or ‘re-engineering’) process boundaries and organizational respon- sibilities around these business 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 that the creation of their output has for customers.

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 important implications for the way McDonald’s operations are organized. The first thing you notice is the repeatability of the tasks people are doing and the systemization of the work, where standard procedures are set down specifying how each part of the job should be carried out. Also, because tasks are systematized and repeated, it is worthwhile developing specialized fryers and ovens. All this gives low unit costs. Now consider a small local cafeteria serving a few ‘short order’ dishes. The range of items on the menu may be similar to the larger operation, 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 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. Driv- ers 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 custom- ized form of transport such as a bus service. Although both provide the same basic service (transpor- tation), 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, 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 of operation compared 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

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24 PART ONE DIRECTING THE OPERATION

can be bought and rooms can be cleaned in a routine and predictable manner. This results in a high utilization 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 custom- ers. Generally, customer-processing operations are more exposed to their customers than material- or information-processing operations. But even customer-processing operations have some choice as

to how visible they wish their operations to be. For example, a retailer could operate as a high-visibility ‘bricks and mortar’, or a lower visibility web-based operation. In the ‘bricks and mortar’, high-visibility operation, customers will directly experience most of its ‘value-adding’ activities. Customers will have a relatively short waiting tolerance, and may walk out if not served in a rea- sonable time. Customers’ perceptions, rather than objective crite-

ria, 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 standardized by staff who need few customer contact skills. Also, there can be relatively high staff utilization. The web-based organization can also centralize its operation on one (physical) site, whereas the ‘bricks and mortar’ shop needs many shops close to centres of demand. Therefore, the low-visibility web-based operation will have lower costs than the shop.

Operations principle The way in which processes need to be managed is influenced by volume, variety, variation and visibility.

O P E R AT I O N S I N P R AC T I C E

Ski Verbier Exclusive5 It is the name of the company that gives it away; Ski Verbier Exclusive Ltd is a provider of ‘up-market’ ski holidays in the

Swiss winter sports resort of Verbier. With 23 years’ experi- ence of organising holidays , it looks after luxury properties 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 recon- figure the rooms to cater for the varying requirements of client groups is important. ‘We are very careful to cultivate as good a relationship with the owners, as we are with our clients that use our holiday service’, says Tom Avery, joint founder and director of the company. ‘We have built the business on developing 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

Two very different hospitality operations

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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 information desks answering people’s queries. These staff operate in what is termed a ‘front-office environment’. Other parts of the airport have little, if any, customer ‘visibility’, such as the baggage handlers. These rarely seen staff perform the vital but low-contact tasks, in the back-office part of the operation.

the journey home. What counts is experi- ence, expertise, obsessive eye for detail and the understated luxury of our chalets com- bined with our ability to customise client experience.’ And client requests can be any- thing from organizing a special mountain picnic 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 organizing airport transfers to booking a private ski instructor, from arranging private jet or hel- icopter flights to Verbier’s local airport, to making lunch reservations in the best mountain 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 properties 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 rela- tionship 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-inten- sive and have to cope with a range of customers, each with a variety of needs and expectations. So, how can a highly successful chain of affordable hotels avoid the crip- pling costs of high customer contact? Formule 1, a sub- sidiary 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 volu- metric prefabrications. The prefabricated units are arranged in various configurations to suit the characteris- tics of each individual site. All rooms are 9 square metres in area, and are designed to be attractive, functional, com- fortable and soundproof. Most important, they are designed to be easy to clean and maintain. All have the same fittings, including a double bed, an additional bunk- type bed, a wash basin, a storage area, a working table with seat, a wardrobe and a television set. The reception of a Formule 1 hotel is staffed only from 6.30 am to 10.00 am and from 5.00 pm to 10.00 pm. Outside these times an automatic machine sells rooms to credit card users, pro- vides 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 ele- ments 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 !

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26 PART ONE DIRECTING 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 (see Figure 1.9). Put simply, high volume, low variety, low variation and low customer contact all help to keep processing costs down. Conversely, low volume, high variety, high variation and high customer

contact generally carry some kind of cost penalty for the operation. This is why the volume dimension is drawn with its ‘low’ end on the left, unlike the other dimensions, to keep all the ‘low cost’ implica- tions on the right. To some extent the position of an operation on the four dimensions is determined by the demand of the market it is serving. However, most operations have some discretion in mov- ing themselves on the dimensions. Figure 1.9 summarizes the impli- cations of such positioning.

Figure 1.9 A typology of operations

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

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’ example on ‘Two very different hospitality operations’). 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.

Operations principle Operations and processes can (other things being equal) reduce their costs by increasing volume, reducing variety, reducing variation and reducing visibility.

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CHAPTER 1 OPERATIONS MANAGEMENT 27

What do operations managers do? The exact details of what operations managers do will, to some extent, depend on the way an organ- ization defines the boundaries of the function. Yet there are some general classes of activities that apply to all types of operation irrespective of whether they are service, manufacturing, private or public sector, and no matter how the operations function is defined. We classify operations manage- ment activities under the four headings: direct, design, deliver and develop.

▶ Directing the overall strategy of the operation. A general understanding of operations and pro- cesses and their strategic purpose and performance, together with an appreciation of how strategic purpose is translated into reality, is a prerequisite to the detailed design of operations and process. This is treated in Chapters 1 to 5.

▶ Designing the operation’s services, products and processes. Design is the activity of determining the physical form, shape and composition of operations and processes together with the services and products that they create. This is treated in Chapters 6 to 9.

▶ Planning and control process delivery. After being designed, the delivery of services and products from suppliers and through the total operation to customers must be planned and controlled. This is treated in Chapters 10 to 15.

▶ Developing process performance. Increasingly it is recognized that in operations, 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.

Variation is high with four months of 100 per cent occupancy, followed by a far quieter period. Customer contact, and therefore visibility, is also very high (in order to ascertain customers’ require- ments 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 service, 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.

Figure 1.10 The four Vs profiles of two very different hospitality operations

Ski Verbier Exclusive

The Formule 1 hotel brand

Visibility

Variation

Variety

VolumeLow

High

High

High

High

Low

Low

Low

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28 PART ONE DIRECTING THE OPERATION

Operations management impacts environmental sustainability

Earlier, we identified the importance of sustainability on operations management practice. It is worth re-emphasizing that many of the activities of operations managers have a huge impact on their organi- zation’s environmental sustainability. Environmental sustainability 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 on the natural environment. It is clearly an important issue, not only because of the obvious impact on the immediate environment of hazardous waste, air, and even noise, pollution, but also because of the less obvious, but potentially far more 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 some- thing in common. They were all the result of an operations-based fail- ure. 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 pro-

cesses 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 signifi- cantly affect the utilization of materials both in the short term as well as 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 material wastage (packaging 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 environmental 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

Operations principle Operations management activities will have a significant effect on the sustainability performance of any type of enterprise.

O P E R AT I O N S I N P R AC T I C E

HP (Hewlett Packard) began recycling hardware as far back as 1987, when it was the only major computer man- ufacturer to operate its own recycling facility. Since then it has recovered over billions of kilograms of products for reuse or recycling. Its recycling programme seeks to reduce the environmental impact of its products, mini- mizing waste going to landfills by helping customers discard products conveniently in an environmentally sound manner. Recovered materials, after recycling, have been used to make 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 hardware

HP’s recycling activities6

Operations principle Operations management activities can be grouped into four broad categories: directing the overall strategy of the operation, designing the operation’s products, services and processes, planning and controlling delivery, and developing performance.

▼

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 Inkjet cartridges and 24 per cent of its LaserJet toner cartridges are manufactured with what is known as ‘closed loop’ recycled plastic. This

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CHAPTER 1 OPERATIONS MANAGEMENT 29

indicates that Inkjet cartridges that include recycled plas- tic will contain 50–70 per cent recycled plastic and Laser- Jet toner cartridges that include recycled plastic will contain 10–20 per cent recycled plastic. HP sees its recy- cling service as providing an easy way to recycle. Its spe- cially developed state-of-the-art processes are designed to make sure that computer hardware, empty HP

printing supplies and other items are recycled responsi- bly. The HP recycling programme includes such custom- er-friendly features as recycling HP Inkjet and LaserJet cartridges for free, recycling any brand of computer hard- ware, being able to use their online ordering tool to request recycling services, and recycling HP Large Format and Banner Media for free.

Figure 1.11 A general model of operations management

Transformed resources

• Materials • Information • Customers

Transforming resources

• Facilities • Staff

Input resources

Output products and services

Value added for customers

Operations management

Develop – improving the operation’s capabilities

Direct – steering operations

and processes

Design – shaping processes,

products and services

Deliver – planning and

controlling ongoing operations

Chapter 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

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. Fig- ure 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 operations and processes.

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30 PART ONE DIRECTING THE OPERATION

To be a great operations manager you need to . . .  So, you are considering a career in operations management, and you want to know, ‘is it for you?’ What skills and per- sonal qualities will you need to make a success of the job as well as enjoying yourself as you progress in the profession? Well, the first thing to recognize is that there are many different roles encompassed within the general category of ‘operations management’. Someone who makes a great risk control system designer in an investment bank may not thrive as a site manager in a copper mine. A video game project manager has a different set of day-to-day tasks when compared with a purchasing manager for a hospital. So, the first skill you need is to understand the range of opera- tions-related responsibilities that exist in various industries; and there is no better way to do this than by reading this book! However, there are also some generic skills that an effective operations manager must possess. Here are some of them. How many of them do you share?

▶ Enjoys getting things done – Operations management is about doing things. It takes energy and/or commitment to finishing tasks. It means hitting deadlines and not letting down customers, whether they are internal or external.

▶ Understands customer needs – Operations management is about adding value for customers. This means fully understanding what ‘value’ means for customers. It means ‘putting yourself in the customer’s place’; knowing what it is like to be the customer, and knowing how to ensure that your services or products make the customer’s life better.

▶ Communicates and motivates – Operations management is about directing resources to produce services or products in an efficient and effective manner. This means articulating what is required and persuading people to do it. Inter- personal skills are vital. Operations managers must be ‘people people’.

▶ Learns all the time – Every time an operations manager initiates an action (of any kind) there is an opportunity to learn from the result. Operations management is about learning, because without learning there can be no improve- ment, and improvement is an imperative for all operations.

▶ Committed to innovation – Operations management is always seeking to do things better. This means creating new ways of doing things, being creative, imaginative and (sometimes) unconventional.

▶ Knows their contribution – Operations management may be the central function in any organization, but it is not the only one. It is important that operations managers know how they can contribute to the effective working of other functions.

▶ Capable of analysis – Operations management is about making decisions. Each decision needs to be evaluated (sometimes with very little time). This involves looking at both the quantitative and the qualitative aspects of the decision. Operations managers do not necessarily have to be mathematical geniuses, but they should not be afraid of numbers!

▶ Keeps cool under pressure – Operations managers often work in pressured situations. They need to be able to remain calm no matter what problems occur.

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 and depersonalizes or takes the ‘humanity’ out of the way in which we think of the organization. This point is often raised in not-for-profit 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’.

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CHAPTER 1 OPERATIONS MANAGEMENT 31

Summary answers to key questions

What is operations management?

▶ Operations management is the activity of managing the resources that 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.

Why is operations management important in all types of organization?

▶ Operations management uses the organization’s resources to create outputs that fulfil defined market requirements. This is the fundamental activity of any type of enterprise.

▶ Operations management is increasingly important because today’s changing business environment requires new thinking from operations managers, especially in the areas of new technology, supply networks and environmental sustainability.

What is the input–transformation–output process?

▶ All operations can be modelled as input–transformation–output processes. They all have inputs of transforming resources, which are usually divided into ‘facilities’ and ‘staff’, and transformed resources, which are some mixture of materials, information and customers.

▶ Most operations create and deliver a combination of services and products, rather than being a ‘pure’ service or product operation.

What is the process hierarchy?

▶ All operations are part of a larger supply network which, through the individual contributions 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?

▶ Operations and processes differ in terms of the volume of their outputs, the variety of outputs, 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.

What do operations managers do?

▶ Responsibilities can be classed in four categories – direct, design, deliver and develop. — Direct includes understanding relevant performance objectives and setting an operations strategy. — Design includes the design of the operation and its processes and the design of its services and products. — Delivery includes the planning and controlling of the activities of the operation. — Develop includes the improvement of the operation over time.

▶ Increasingly operations managers have a responsibility for an operations environmental performance.

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32 PART ONE DIRECTING THE OPERATION

‘I can’t believe how much we have changed in a relatively short time. From being an inward- looking manufacturer, we became a customer- focused ‘design and make’ operation. Now we are an integrated service provider. Most of our new business comes from the partnerships we have formed with design houses. In effect, we design products jointly with spe- cialist design houses that have a well-known brand, and offer them a complete service of manufacturing and distribution. In many ways we are now a ‘business-to-business’ company rather than a ‘business-to-consumer’ company.’ (Jim Thomp- son, CEO, Concept Design Services (CDS))

CDS had become one of Europe’s most profitable home- ware businesses. Originally founded in the 1960s, the company had moved from making industrial mouldings, mainly in the aerospace sector, and some cheap ‘home- ware’ 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 master- minded by Linda Fleet, CDS’s marketing director, who had previously worked for a large retail chain of paint and wallpa- per 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 coordinated range of such items, and to open up a new distribution network for them to serve up-market stores, kitchen equipment and specialty retailers. Within a year of launching our first new range of kitchen homeware under the Concept brand name, we had over 3,000 retail out- lets signed up, provided with point-of-sale display facilities. Press coverage generated an enormous interest which was reinforced by the product placement 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, manufac- turing and distributing products for some of the more pres- tigious design houses. This sort of business is likely to grow, especially in Europe where the design houses appreciate our ability to offer a full service. We can design products in con- junction 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 tai- lored to their needs. From the customer’s point of view the distribution arrangements appear to belong to the design house itself. In fact they are based exclusively on our own call centre, warehouse and distribution resources.’

The most successful collaboration was with Villessi, the Italian designers. Generally it was CDS’s design expertise which was attractive to ‘design house’ partners. Not only did CDS employ professionally respected designers, they had also acquired a reputation for being able to translate difficult technical designs into manufacturable and saleable 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 manu- facturing competence.’ (Linda Fleet, Marketing Director)

Design house partnerships at Concept Design Services

C A S E ST U DY

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Manufacturing operations All manufacturing was carried out in a facility located 20 km from Head Office. Its moulding area housed large injec- tion-moulding machines ; most with robotic material han- dling capabilities. Products and components passed to the packing hall, where they were assembled and inspected. The newer, more complex products often had to move from moulding to assembly and then back again for further moulding. All products followed the same broad process route but with more products needing several progressive moulding and assembly stages, there was an increase in ‘pro- cess flow re-cycling’ which was adding complexity. One idea was to devote a separate cell to the newer and more complex products until they had ‘bedded in’. This cell could also be used for testing new moulds. However, it would need invest- ment in extra capacity that would not always be fully uti- lized. After manufacture, products were packed and stored in the adjacent distribution centre.

‘When we moved into making the higher margin Concept products, we disposed of most of our older, small injection-moulding machines. Having all larger machines allowed us to use large multi-cavity moulds. This increased productivity by allowing us to produce several products, or components, each machine cycle. It also allowed us to use high- quality and complex moulds which, although cumbersome and more difficult to change over, gave a very high-quality product. For example, with the same labour we could make three items per minute on the old machines, and 18 items per minute on the modern ones using multi moulds. That’s a 600 per cent increase in productivity. We also achieved high dimensional accuracy, excellent surface finish, and extreme consistency of colour. We could do this because of our expertise derived from years making aerospace products. Also, by 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, 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 “teeth- ing problems”. Coordinating the production schedules is cur- rently a problem, as is agreeing quality standards. To some extent it’s our own fault. We didn’t realise that subcontract- ing was a skill in its own right. And although we have got over some of the problems, we still do not have a satisfactory relationship with all of our subcontractors.’ (Grant Williams, Operations Manager)

Planning and distribution services The distribution services department of the company was regarded as being at the heart of the company’s customer service drive. Its purpose was to integrate the efforts of design, manufacturing and sales by planning the flow of products from production, through the distribution 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 inven- tory 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 utilization. Often, we can’t stick to schedules. Short-term changes are inevitable in a fashion market. Certainly, better forecasts would help  .  .  .  but even our own promotions are some- times organized at such short notice that we often get caught with stock-outs. New products in particular are dif- ficult 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, Planning Manager)

Customer orders for Concept and design house partner- ship products were taken by the company’s sales call centre located next to the warehouse. The individual orders would then be dispatched using the company’s own fleet of medium and small distribution vehicles for UK orders, but using carriers for the continental European market. A stand- ard delivery timetable was used and an ‘express delivery’ service was offered for those customers prepared to pay a small delivery premium. However, a recent study had shown that almost 40 per cent of express deliveries were initiated by the company rather than customers. Typically, this would be to fulfil deliveries of orders containing products out of stock at the time of ordering. The express delivery service was not required for Focus products because almost all deliveries were to five large customers. The size of each order was usually very large, with deliveries to customers’ own distribution depots. However, although the organiza- tion of Focus delivery was relatively straightforward, the consequences of failure were large. Missing a delivery meant upsetting a large customer.

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34 PART ONE DIRECTING THE OPERATION

for every week and every product is almost impossible to do accurately. Sorry, that’s just the nature of the business we’re in. In fact, although Grant complains about our lack of fore- cast accuracy, he always does a great job in responding to unexpected customer demand.’

Jim Thompson 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’. (Jim Thompson, CEO)

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 consumer desires through the medium of providing good service to retailers. The new partnership arrangements put us more into the “business to business” sector. I don’t have any problem with this in principle, but I’m a little anxious as to how much it gets us into areas of business beyond our core expertise.’ (Linda Fleet, Marketing Director)

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 partnerships we did so because we had a set of designers who could command respect from the world-class design houses with whom we formed partner- ships. So what is the next move for us? Do we expand glob- ally? We are strong in Europe but nowhere else in the world. Do we extend our design scope into other markets, such as furniture? If so, that would take us into areas where we have no manufacturing expertise. We are great at plastic injection moulding, but if we tried any other manufacturing processes, we would be no better than, and probably worse than, other firms with more experience. So what’s the future for us?’ (Jim Thompson, CEO).

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 for your advice in improving its operations?

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 influ- ence 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 both the size and the influence of the design department, which reported to Linda Fleet.

‘Building up and retaining design expertise will be the key to our future. Most of our growth is going to come from the business which will be brought in through the creativity and flair of our designers. Those who can combine creativity with an understanding of our partners’ 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, Marketing Director)

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 manufac- turing 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 seriously they don’t really understand that we could actually 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, Operations Manager)

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 custom- ers’ 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.’ (Grant Williams, Operations Manager)

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 fore- cast accurately. In terms of month-by-month sales volumes we are in fact pretty accurate, but trying to make a forecast

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Problems and applications

All chapters have ‘Problems and applications’ questions that will help you practise analysing operations. They can be answered by reading the chapter. Model answers for the first two questions can be found on the companion website for this book.

1 Quentin Cakes make about 20,000 cakes per year in two sizes, both based on the same recipe. Sales peak at Christmas time when demand is about 50 per cent higher than in the quieter summer period. Its customers (the stores that stock its products) order its cakes in advance through a simple Inter- net-based ordering system. Knowing that Quentin Cakes some surplus capacity, one of its customers has approached the company with two potential new orders.

The Custom Cake option – this would involve making cakes in different sizes where consumers could specify a message or greeting to be ‘iced’ on top of the cake. The consumer would give the inscription to the store, which would e-mail it through to the factory. The customer thought that demand would be around 1,000 cakes per year, mostly at celebration times such as Valentine’s Day and Christmas.

The Individual Cake option – this option involves Quentin Cakes introducing a new line of about 10–15 types of very small cakes intended for individual consumption. Demand for this individual- sized cake was forecast to be around 4,000 per year, with demand likely to be more evenly distributed throughout the year than its existing products.

The total revenue from both options is likely to be roughly the same and the company has only capacity to adopt one of the ideas. But which one should it be?

2 Re-read the ‘Operations in practice’ example on Pret a Manger. (a) Do you think Pret a Manger fully understands the importance of its operations management? (b) What kind of operations manage- ment activities at Pret a Manger might come under the four headings of direct, design, deliver and develop?

3 Here are two examples of how operations try to reduce the negative effects of having to cope with high levels of variety. Research each of them (there is plenty of information on the web) and answer the following questions. (a) What are the common features of these two examples? (b) What other examples of standardization in transport operations can you think of?

Example 1 – The Bombay Tiffin Box Suppliers Association (search under dabbawalas) operates a service to transport home-cooked food from workers’ homes to office locations in downtown Bom- bay. Workers from residential districts must ride commuter trains to work. They can be conservative diners, who may also be constrained by cultural taboos on food handling by caste. Their workers, known as dabbawalas, pick up the food in the morning in a regulation tin ‘tiffin’ box, deposited at the office at lunch time, and returned to the home in the afternoon. The dabbawalas take advantage of public transport to carry the tins, usually using otherwise under-utilized capacity on commuter trains in the mid-morning and afternoon. Different colours and markings are used to indicate to the (sometimes illiterate) dabbawalas the process route for each tin.

Example 2 – Ports have had to handle an infinite variety of ships and cargoes with widely different contents, sizes and weights, and, while in transit or in storage, protect them from weather and pil- ferage. Then the transportation industries, in conjunction with the International Standards Organi- zation (ISO), developed a standard shipping container design. Almost overnight the problems of security and weather protection were solved. Anyone wanting to ship goods in volume only had to seal them into a container and they could be signed over to the shipping company. Ports could standardize handling equipment and dispense with warehouses (containers could be stacked in the rain if required). Railways and trucking companies could develop trailers to accommodate the new containers.

4 ‘My flight to Stockholm would be late landing. We were in a “stack” of planes circling above Brussels. Air traffic control had closed the runways for a short period at dawn, because of snow. Flights from

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all over the world were now being allocated new landing slots. After a 20-minute delay, we landed on a recently cleared runway. Even then there was a further ‘hold’ on a taxiway while de-icing of the apron was being completed. All around the airport I could see the flashing beacons of the snow-clear- ing vehicles, catering suppliers’ vans, aviation fuel trucks, baggage trailers, buses transporting crews and passengers, security police cars, and an assortment of other vehicles. Brussels airport always looks busy, with over 10 million passengers a year, but this morning the complexity and scale of the operations were particularly evident. About an hour late, we pulled up to the gate, and we disem- barked into an icy-cold air bridge, leaving behind a particularly litter-strewn cabin. The team of cleaners and maintenance staff waiting just outside will have a hard time, with more mess and less time than usual to deal with it, as the airline will want a quick turnaround to get back on to schedule. We could just hear the sound of baggage and cargo being unloaded, catering vehicles arriving, fuel being loaded, and technicians checking over the engines. From the air bridge, we walked past the crowded seating areas, where groups were awaiting the signal from the gate staff to board their delayed flights. Anxious to get ahead of the crowd, we ran past the rows of cafés, bars and shops, hoping to avoid the morning queue for Passport Control. However, my next journey was to the First Aid room! I had apparently slipped on some spilt coffee that had not been cleaned up in the haste of the morning, and had fallen awkwardly, straining my ankle and smashing my duty-free brandy.

Suitably patched up, I hobbled with my colleagues and joined the queue for Passport Control, and eventually through to Baggage Reclaim. Passengers usually get there first, but the accident had changed all that. The video screens showed no reference to our flight arrival; the remaining bags had apparently been removed from the carousel and were being stored in an adjacent office. But we were reunited with our belongings, and hastened (slowly in my case) to the taxi rank. Yet there was no quick ride to the city because of a long queue, so we went to the station below, where a dedicated ‘City Express’ train departs every 20 minutes for the city.

After a successful day at our Brussels office, a taxi was called, and we were back at the airport in the evening rush hour. The departures check-in area has a huge electronic display which lists all departures. No queue at the check-in desk, so we had our boarding passes in only a couple of min- utes. By this time, my injured leg was throbbing painfully, so the check-in staff arranged for a wheel- chair and attendant to take me through Border Control and security checks. While my colleagues used the escalator, I took the slower route by lift, meeting outside the duty-free shops. We bought some Belgian chocolates and headed for a café-bar. After a welcome glass of specialty beer, we headed for the airline’s executive lounge. De-icing crews were working on the parked aircraft and others were treating the runways. Concerned that we might be delayed and miss our connection, we checked with staff at the information desk. They confirmed that, although there could be some delays, our connecting flights would be held.’

(a) Identify all the processes and their activities which are mentioned. Classify them in accordance with their type. (b) Which of these processes were most affected by the severe weather? (c) Approx- imately how many different organizations are involved in delivering the goods and services described in this question? What are the implications of this?

5 Not all surgery conforms to our preconceptions of the individual ‘super-craftsperson’, aided by her back-up team, performing the whole operation from first incision to final stitch. Many surgical pro- cedures are fairly routine. An example is the process that was adopted by one Russian eye surgeon. The surgical procedure in which he specializes is a revolutionary treatment for myopia (short-sight- edness) called ‘radial keratotomy’. In the process eight patients lie on moving tables arranged like the spokes of a wheel around its central axis, with only their eyes uncovered. Six surgeons, each with his or her ‘station’, are positioned around the rim of the wheel so that they can access the patients’ eyes. After the surgeons have completed their own particular portion of the whole procedure, the wheel indexes round to take patients to the next stage of their treatment. The surgeons check to make sure that the previous stage of the operation was performed correctly and then go on to per- form their own task. Each surgeon’s activity is monitored on TV screens overhead and the surgeons talk to each other through miniature microphones and headsets. (a) Compare this approach to eye surgery with a more conventional approach. (b) What do you think are the advantages and disad- vantages of this approach to eye surgery?

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6 Write down five services that you have ‘consumed’ in the last week. Try and make these as varied as possible. Examples could include public transport, a bank, any shop or supermarket, attendance at an education course, a cinema, a restaurant, etc. Try and identify how these services are different and how they are similar.

Selected further reading

Anupindi, R. and Chopra, S. (2013) Managing Business Process Flows, 3rd edn, Pearson, Harlow. Takes a ‘process’ view of operations, it’s mathematical but rewarding.

Barnes, D. (2007) Operations Management: An international perspective, Cengage Learning. A text that is similar in outlook to this one, but with more of a (useful) international perspective.

Hall, J.M. and Johnson, M.E. (2009) When should a process be art, not science? Harvard Business Review, March. One of the few articles that looks at the boundaries of conventional process theory.

Hammer, M. and Stanton, S. (1999) How process enterprises really work, Harvard Business Review, 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 view, although 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. (2017) The Operations Advantage, Kogan Page, London. More of a practical treatment of how operations management can contribute to strategic success. Aimed at practising managers.

Slack, N. and Lewis, M.A. (2017) Operations Strategy, 5th edn, Pearson, Harlow. A more strategic coverage of operations management.

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38

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. 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 performance2

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?

Figure 2.1 This chapter examines operations performance

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

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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, represents 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 developing the capabilities that will keep it ahead of its competitors in the future. But when things go wrong in operations, the repu- tational damage can last for years. We will deal with the nature of operations failures in Chapter 18, but the first point to make is that when operations do go wrong it is often the direct result of poor operations management. From parcel delivery failures that inconvenience an operation’s customers, to air crashes that kill them, operations failures are both obvious and serious. Not that all operations failures have to be dramatic. One could argue that simply doing what has always been done is a failure to exploit opportunities to do things better. However, do not think that operations management is just about avoiding failure – its contribution to an organization’s overall success is far greater than that.

Operations management can ‘make’ the organization in several ways. First, operations manage- ment 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 improve- ment 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, but also more generally as their economic, social, political and technological environment changes. Many of these decisions and challenges seem largely economic in nature. 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 and social aspect to them. Will a new product feature make end-of-life recycling more difficult? How do we make sure that suppliers treat their staff well, but still make a profit? And this is the great dilemma – how do operations managers try to be, simultaneously, economically viable while being socially and environmentally responsible?

Operations principle Good operations performance is fundamental to the sustainable success of any organization.

✔

O P E R AT I O N S I N P R AC T I C E

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 proteins 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 laundry

Novozymes1 ▼

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Performance at three levels Looking at the example of how Novozymes monitors and reports its performance demonstrates that ‘performance’ is not a straightforward concept. First, it is multi-faceted in the sense that a single meas- ure can never fully communicate the success, or otherwise, of something as complex as an operation. Second, performance can be assessed at different levels, from the broad, long-term, societal level of Novozymes’ environmental monitoring, for example, to its more operational-level concerns over how it improves day-to-day efficiency and serves its individual customers. In the rest of this chapter we will look at how operations can judge its performance at three levels, illustrated in Figure 2.2.

▶ 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’.

How is operations performance judged at a societal level? The decisions that are made within any operation and the way it goes about its day-to-day activities will affect a whole variety of ‘stakeholders’. Stakeholders are the people and groups who have a legitimate interest in the operation’s activities. Some stakeholders are internal, for example the

and dishwashing detergents, bread, beer and wine production, animal feed and biofuels.

How does Novozymes judge its own perfor- mance? It is a commercial company with investors who expect a return on their investment, but the company also strives to balance this with its environ- mental and social impact. 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 company conducts peer-reviewed life cycle assess- ment (LCA) studies to document the environmental impact of its biosolutions for its customers and advise them on ways to reduce their CO2 emissions. As regards its own operations, Novozymes attempts to reduce the consumption of natural resources (including water usage) every year and mitigate the negative environ- mental impact of its production processes. Likewise, the improvement in energy efficiency is driven by continuous process optimizations and the implementation of energy- saving projects at its global production sites. But all production processes produce waste and by-products, so Novozymes seeks continual improvement in the amount of waste and by-products that is sent for landfill or incin- eration. This has the double effect of reducing the cost of waste treatment as well as minimizing the company’s envi- ronmental footprint. As a result of these efforts, the Dow Jones Sustainability Index, a global sustainability bench- mark, has ranked Novozymes among the top 3 per cent of companies in the chemical industry sector.

The company also track several aspects of its social perfor- mance. These include : employee satisfaction and

development, diversity and equal opportunities, occupa- tional health and safety, compliance with human rights and labour standards, corporate citizenship efforts and business integrity. Perhaps most impressively, 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 conventionally through the rate of sales growth, profitability and the return on invested capital. But Novozymes also has a number of 5-year ‘impact targets’: for example, to reach 6 billion people, especially in emerging markets, with its prod- ucts that enhance sustainability; to educate by providing knowledge of the potential of biology to 1 million people by training in factories, local-community outreach and involve- ment with universities and business schools; and to save the world 100 million tons of CO2 a year through customers applying its products.

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CHAPTER 2 OPERATIONS PERFORMANCE 41

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 customers; others do not, for example industry regulators. In not-for-profit operations, these stakeholder groups can overlap. So, voluntary workers in a charity may be employees, shareholders and customers all at once. However, in any kind of organization, it is a responsibility of the operations function to understand the (sometimes conflicting) objectives of its stakeholders and set its objectives accordingly. Figure  2.3 illustrates just some of the stakeholder groups who would have an interest in how an organization’s operations function performs. But although each of these groups, to different extents, will be interested in operations performance, they are likely to have very different views of which aspect of 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.

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 minimizing the downsides . . . Specifically, we see CSR as the voluntary actions that business can take, over and above compliance with minimum legal requirements, to address both its own competitive interests and the interests of wider society’. 2 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

Figure 2.2 Three levels of operations performance

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

Operations principle All operations decisions should reflect the interests of stakeholder groups.

✔

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42 PART ONE DIRECTING THE OPERATION

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 back- bone of our approach to CSR’.3

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 organization’s performance is the ‘triple bottom line’4 (TBL, or 3BL), also known as ‘people, planet and profit’. Essen- tially, it is a straightforward idea: simply that organizations should measure themselves not just on the traditional economic profit that they generate for their owners, but also on the impact their operations have on society (broadly, in the sense of communities, and individually, for example in terms of their employees) and the ecological impact on the environment. 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 interests. This gives the organization its ‘licence to operate’ in society. The assumption

underlying the triple bottom line (which is not universally accepted) is that a sustainable business is more likely to remain successful in the long term than one which focuses on economic goals alone. Only a company that produces a balanced TBL is really accounting for the total cost of running its operations.

Figure 2.3 Stakeholder groups with typical operations objectives

Customers • ccepta le price • ood service • uality o erings

Shareholders • eturn on investment • Sta ility of earnings • i uidity of investment

Government • Conformance to legal re uirements • Contri ution to economy

Regulatory bodies • Conformance to regulations • Feed ac on e ectiveness of regulations

Lobby groups • lignment of the organization s activities with whatever the groups are promoting

Suppliers • Early notice of re uirements • ong term orders • Fair price • On time payment

‘Society’ • inimize negative e ects from the operation noise tra c etc • a imize positive e ects o s local sponsorship etc

Top management • ccepta le profit • eturn on investment • ow ris of failure • Future innovation

Sta� • Fair wages • ood wor ing conditions • Personal/career development

Sta� representative bodies • Conformance with national agreements • Consultation

Operations principle Operations should judge themselves on the triple bottom line principle of people, planet and profit.

✔

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CHAPTER 2 OPERATIONS PERFORMANCE 43

O P E R AT I O N S I N P R AC T I C E

In 2012, Yvon Chouinard – founder and owner of Patago- nia 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 concentrating on maximizing profits. According to Mr Chouinard, Patagonia is one of the new ‘benefit corporations’ (usually called ‘B Corps’). To meet the criteria as a B Corp, a firm should have a clear and unequivocal social and/or environmental mission, and a legal responsibility to respect the interests of workers, the community and the environment as well as its shareholders. In other words, Patagonia is operating according to triple bottom line principles. 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 environmental crisis’. The company uses environmentally sensitive materials (organic cotton, recycled and recyclable polyester, and hemp among them) and both sponsors and participates in a host of envi- ronmental initiatives that range from promoting wildlife corridors to combating genetic engineering. The company tries to persuade its customers to give their used products charity or sell them. It even encourages customers to think carefully before purchasing a new garment. It once paid for a full-page advert in the New York Times showing a picture of its best-selling fleece jacket, with the headline, ‘Don’t Buy This Jacket.’ The advert pointed out the cost to the environment of making the jacket and asked customers whether they really needed it.

Its employees enjoy generous healthcare, subsidized day care, flexible work schedules and paid time off for environmental internships. Many share the company’s values and are active in environmental and community causes. And, like most clothing companies, Patagonia outsources its production. But it is important, it says, to work with suppliers ‘that share our values of integrity and environmentalism. 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 envi- ronmental impacts of its supply chain, Patagonia launched its Footprint Chronicles, in which it traces the environmen- tal and social impact of products from design through fibre creation to construction to shipment to its warehouse.

Patagonia and the triple bottom line5

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 performance means devising jobs and work patterns which allow individuals to contribute their talents without undue stress. At a group level, it means recognizing and dealing honestly with employee representatives. In addition, businesses are also a part of the larger community and, it is argued, should be recognizing their responsibility to local communities by helping to promote their economic and social well-being. 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

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▶ 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 overall produc- tivity of accumulated human and physical capital resulting from development actions more than compensates for the direct or indirect loss or degradation of the environment’.6 Put more directly, it is generally taken to mean the extent to which business activity negatively impacts the natural envi- ronment. 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. Operations managers cannot avoid responsibility for environmental performance. It is often operational failures which are at the root of pollution disasters and operations decisions (such as product design) which impact on longer-term environmental issues. Some ways that operations can impact the environmental bottom line perfor- mance 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.

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 performance. Broadly this means that operations managers must use the operation’s resources effectively, and there are many ways of measuring this ‘economic bottom line’. Finance specialists have devised various measures (such as return on assets etc.), which are beyond the scope of this book, to do this.

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 operations performance at a strategic level.

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 conflicting pressures of maximizing profitability, on the one hand, and the expectation that they will manage in the interests of (all or part of ) society in general with accountability and

▼

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CHAPTER 2 OPERATIONS PERFORMANCE 45

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 central idea in opera- tions management that the type of decisions and activities that operations managers carry out can also have a significant strategic impact. Therefore, if one is assessing the performance of the opera- tions function, it makes sense to ask how it impacts the organization’s strategic ‘economic’ position. We will examine in more detail the way that operations 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 revenue 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’.)

transparency, on the other. Even if a business wants to reflect aspects of performance beyond its own immediate interests, how is it to do it? According to Michael Jensen of Harvard Business School, ‘At the economy-wide or social level, the issue is this: If we could dictate the criterion or objective function to be maximized by firms (and thus the performance criterion by which corporate executives choose among alternative policy options), what would it be? Or, to put the issue even more simply: How do we want the firms in our economy to measure their own performance? How do we want them to determine what is better versus worse?’7 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’.

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

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

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46 PART ONE DIRECTING THE OPERATION

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 effect on the cost of producing products and services. Clearly the efficiency with which an operation purchases 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, organ- izations that are indifferent to their costs.

Operations management affects revenue Yet cost is not necessarily always the most important strategic objective for operations managers. 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.

The main point here is that operations activities can have a significant effect on, and therefore should be judged on, the organization’s profitability. Moreover, even relatively small improvements in cost and revenue can have a proportionally even greater effect on profitability. 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. Reve- nue is now €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.

Net promoter score (NPS) One popular method of measuring the underlying levels of customer satisfaction (an important factor in determining revenue) is the ‘net promoter score’ (NPS). This is computed by surveying customers and asking them how likely they are to recommend a company, service or product (on a scale of 1 to 10, where 1 = not at all likely, and 10 = extremely likely). Customers giving a score of 1 to 6 are called ‘detractors’, those giving a score of 9 or 10 are called ‘promotors’, those giving a score of 7 or 8 are called ‘passives’. The NPS is calculated by ignoring passives and subtracting the number of detractors from the number of promoters. So, if 200 customers are surveyed, and 60 are promotors, 110 passives and 30 detractors, the NPS is calculated as follows:

NPS = 60 - 30 = 30

What is considered an acceptable NPS varies, depending on the sector and nature of competition, but as a minimum target, a positive (70) score might be regarded as (just) acceptable. NPS is a simple metric that is quick and easy to calculate, but some see that as its main weakness. It is without any sophisticated scientific basis, nor does it provide an accurate picture of customer behaviour. For example, if the survey mentioned above had resulted in 115 promotors, 0 passives and 85 detractors, it would still give an NPS of 30. Yet here, customers are far more polarised. However, notwithstanding its failings, using NPS over time can be used to detect possible changes in customer attitudes.

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 effect. 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 produce 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.

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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 incurring excess costs. And if they ever do suffer failures, well-run operations should be able to recover faster and with less disruption (this is called resilience). This is fully treated in Chapter 18.

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 knowl- edge 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, and judging how well an operation contributes to strategic objectives, are clearly important, particularly in the longer term, and form the backdrop to all oper- ations 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 manager in an automobile plant. What kinds of things are you likely to want to do in order to satisfy customers and contribute to competitiveness?

▶ You would want to do things right; that is, you would not want to make mistakes, and would want to satisfy your customers by providing error-free goods and services which are ‘fit for their purpose’. This is giving a quality advantage.

▶ You would want to do things fast, minimizing the time between a customer asking for goods or services and the customer receiving them in full, thus increasing the availability of your goods and services and giving a speed advantage.

▶ You would want to do things on time, so as to keep the delivery promises you have made. If the operation can do this, it is giving a dependability advantage.

▶ You would want to be able to change what you do; that is, being able to vary or adapt the oper- ation’s activities to cope with unexpected circumstances or to give customers individual treatment. Being able to change far enough and fast enough to meet customer requirements gives a flexibility advantage.

▶ You would want to do things cheaply; that is, produce goods and services at a cost which enables them to be priced appropriately for the market while still allowing for a return to the organization; or, in a not-for-profit organization, give good value to the taxpayers or whoever is funding the operation. When the organization is managing to do this, it is giving a cost advantage.

The next part of this chapter examines these five performance objectives in more detail by looking at what they mean for four different operations: a general hospital, an automobile factory, a city bus company and a supermarket chain.

Operations principle All operations should be expected to contribute to their business at a strategic level by controlling costs, increasing revenue, making investment more effective, reducing risks, and growing long-term capabilities.

Operations principle Operations performance objectives can be grouped together as quality, speed, dependability, flexibility and cost.

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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 management from giving attention to the other parts of the supermarket

operation. This in turn could result in further mistakes being made. So, quality (like the other performance objectives, as we will see) has both an external impact, which influences customer satisfaction, and an internal impact, which leads to stable and efficient processes.

Operations principle Quality can give the potential for better services and products, and save costs.

✔

Figure 2.5 Quality means different things in different operations

Quality could mean . . .

Hospital

Patients receive the most appropriate treatment Treatment is carried out in the correct manner Patients are consulted and kept informed Sta are courteous, friendly and helpful

Bus company

Sta are courteous, friendly and helpful

The buses are clean and tidy The buses are quiet and fume-free The timetable is accurate and user-friendly

Supermarket

Sta are courteous, friendly and helpful

Goods are in good condition The store is clean and tidy Décor is appropriate and attractive

Automobile plant

The product is attractive and blemish-free

All parts are made to specification All assembly is to specification The product is reliable

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O P E R AT I O N S I N P R AC T I C E

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 now owns the brand, has maintained this emphasis on quality. In fact, like all Nestlé products, Quality Street is made under the strict quality standards enshrined in the company’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 responsi- bility to comply with all food safety and regulatory 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. ‘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.’ Quality Street are free from artificial colours, flavourings and preserva- tives, 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. Nestlé’s quality policy is to gain a zero-defect,

no-waste attitude by everyone in the company’. Its ‘Qual- ity 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 bodies to prove conformity to internal stand- ards, laws and regulatory requirements. ‘Quality by design’ is built in during product development and the company’s ‘Supplier Code’ sets minimum standards that it asks its suppliers, employees, agents and subcontractors to respect at all times. In the factory, it applies interna- tionally recognized good manufacturing practices (GMP) that cover all aspects of manufacturing, including stand- ard operating procedures, people management and training , equipment maintenance and handling of materials.

And the favourite Quality Street? Well several variants 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.

Quality at Quality Street8

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 oper- ation’s (external) customers of speedy delivery of goods and services is that the faster they can have the product or service, the more likely they are to buy it, or the more they will pay for it, or the greater the benefit they receive (see the ‘Operations in practice’ case ‘App saves two minutes of the “The Golden Hour”’).

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50 PART ONE DIRECTING THE OPERATION

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 deliv- ered 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 Chap- ter  15 on lean operations.

Speed reduces risks Forecasting tomorrow’s events is far less of a risk than forecasting next year’s. The further ahead companies forecast, the more likely they are to get it wrong. The faster the throughput time of a process, the later forecasting can be left. Consider the automobile plant again. If the total throughput time for the door panel is six weeks, door panels are being processed through their first operation six weeks before they reach their final destination. The quantity of door panels being processed

will be determined by the forecasts for demand six weeks ahead. If instead of six weeks, they take only one week to move through the plant, the door panels being processed through their first stage are intended to meet demand only one week ahead. Under these circumstances it is far more likely that the number and type of door panels being processed are the number and type that eventually will be needed.

Figure 2.6 Speed means different things in different operations

Speed could mean . . .

Hospital

The time between a customer setting out on the journey and reaching his or her destination kept to a minimum

The time between requiring treatment and receiving treatment kept to a minimum The time for test results, X-rays, etc. to be returned kept to a minimum

Bus company Supermarket

Automobile plant

The time between dealers requesting a vehicle of a particular specification and receiving it kept to a minimum The time to deliver spares to service centres kept to a minimum

The immediate availability of goods

The time taken for the total transaction of going to the supermarket, making the purchases and returning kept to a minimum

Operations principle Speed can give the potential for faster delivery of services and products, and save costs.

✔

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O P E R AT I O N S I N P R AC T I C E

It is often called ‘The Golden Hour’. It is the hour imme- diately following traumatic injury in which medical 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, who 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, few services have more need of speed than the emergency services. In responding to road accidents especially, every second is critical. 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 service was delighted when a new tablet app saved its emer- gency team two minutes in responding to emergencies. Rather than having to take all the details of an emergency before they rushed to their helicopter, the app together with enhanced mobile communication 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 consid- ers 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 hospital, speed can really save lives. However, it is not always possible to land a helicopter safely at night (because of possible overhead wires and other hazards), so conventional ambulances will always be needed, both to get paramedics quickly to accident victims and to speed them to hospital.

App saves two minutes of the ‘The Golden Hour’9

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 dependability of an operation after the product or service has been delivered. Initially this may not affect the likelihood that customers will select the service – they have already ‘consumed’ it. Over time, however, dependability can override all other criteria. No matter how cheap or fast a bus service is, if the service is always late (or unpredictably early) or the buses are always full, then potential passengers will be better off calling a taxi.

Dependability inside the operation Inside the operation internal customers will judge each other’s performance partly by how reliable the other processes are in delivering material or information on time. Operations where internal dependability is high are more effective than those which are not, for a number of reasons.

Dependability saves time Take, for example, the maintenance and repair centre for the city bus company. If the centre runs out of some crucial spare parts, the manager of the centre will need to spend time trying to arrange a special delivery of the required parts, and the resources allocated to service the buses will not be used as productively as they would have been without this disruption. More seriously, the fleet will be short of buses until they can be repaired and the fleet operations

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52 PART ONE DIRECTING THE OPERATION

manager will have to spend time rescheduling services. So, entirely due to the one failure of depend- ability 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 rescheduling of buses will probably mean that some routes have inappropriately sized buses and some services could have to be cancelled. This will result in empty bus seats (if too large a bus has to be used) or a loss of revenue (if potential passengers are not transported).

Figure 2.7 Dependability means different things in different operations

Dependability could mean . . .

Hospital

Proportion of appointments wihich are cancelled kept to a minimum Keeping to appointment times Test results, X-rays, etc. returned as promised

On-time delivery of vehicles to dealers On-time delivery of spares to service centres

Predictability of opening hours Proportion of goods out of stock kept to a minimum

Bus company

Constant availability of seats for passengers

Keeping to the published timetable at all points on the route

Supermarket

Constant availability of parking Keeping to reasonable queuing times

Automobile plant

O P E R AT I O N S I N P R AC T I C E

When the operator of a private railway firm that serves the Tokyo suburbs issued an apology after one of its trains departed 20 seconds ahead of schedule, it made headlines around the world. Passengers on the 9.44.40 am Tsukuba Express from Minami Nagareyama station, just north of Tokyo, were oblivious to the 20 second early departure when the train (which had arrived on time) pulled away at 9.44.20 am. In most parts of the world such a small error would not be any cause for comment (except perhaps to congratulate the company for being so close to the sched- uled time), but the company that operates the Tokyo

service clearly felt different. In a formal statement they said that they ‘deeply apologise for the severe inconvenience imposed upon our customers.’ They said that the conduc- tor on the train had not properly checked the train’s timetable. In future, they said, the crew had been instructed to ‘strictly follow procedure to prevent a recurrence’. But what about any passengers who may have missed the train because it left 20 seconds early? Not to worry – another train arrived 4 minutes later (and left on time).

The story prompted news outlets to focus on how rail services in various countries performed in terms of their

What does dependability mean when travelling by rail? 10

▼

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Dependability gives stability The disruption caused to operations by a lack of dependability goes beyond time and cost. It affects the ‘quality’ of the operation’s time. If everything in an operation is always perfectly dependable, a level of trust will have built up between the different parts of the operation. There will be no ‘surprises’ and everything will be predictable. Under such circumstances, each part of the operation can concentrate on improving its own area of responsibility without having its attention continually diverted by a lack of dependable service from the other parts.

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 produce

different quantities or volumes of products and services over time; ▶ delivery flexibility – the operation’s ability to change the timing of the delivery of its services or

products.

Figure 2.8 gives examples of what these different types of flexibility mean to the four different operations.

Mass customization One of the beneficial external effects of flexibility is the increased ability of operations to do differ- ent things for different customers. So, high flexibility gives the ability to produce a high variety of products or services. Normally high variety means high cost (see Chapter 1). Furthermore, high- variety operations do not usually produce in high volume. Some companies have developed their

dependability (punctuality, as it would usually be called by rail operators). Japan is indeed one of the best on-time perform- ing countries. The Japanese high-speed bullet train arrives a mere 54 seconds behind schedule on average. If a Japanese train is five minutes late or more, passengers are given a certif- icate that they can give to their boss or teacher as an excuse for being late. Perhaps predictably for a country famous for its clocks and watches, the Swiss operator SBB rates as among the most punctual in Europe with 88.8 per cent of all passen- gers arriving on time and customer satisfaction surpassing the company’s target of 75 per cent. Other national rail networks with good dependability records include Sweden, Denmark, Germany and France. But comparisons are complicated by different definitions of exactly what ‘on time’ means. A Swiss train is late if it arrives more than three minutes after the advertised time. But, in the UK it can be up to five minutes late (10 minutes if it’s a longer journey) and still be recorded as ‘on time’. In fact, there are a wide range of ‘lateness’ stand- ards used throughout the world. In Ireland, a train is ‘on time’ if it’s less than 10 minutes late (or five minutes for Dublin’s Dart network). Trains in the USA are allowed 10 minutes’ leeway for journeys up to 250 miles, and up to 30 minutes for

journeys of more than 550 miles. In Australia, each rail company has its own definitions of punctuality. In Victoria, trains have between five and 11 minutes’ flexibility. Queens- land’s trains have either four or six minutes, depending on the route. Also, countries measure different types of punctuality. In the UK punctuality is measured when the train arrives at its final destination. In Switzerland, they monitor the punctuality of individuals (how late did each passenger arrive at which- ever station they wanted to get off?).

Operations principle Dependability can give the potential for more reliable delivery of services and products, and save costs.

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flexibility in such a way that products and services are customized for each individual customer. Yet they manage to produce them in a high-volume, mass production manner which keeps costs down. This approach is called mass customization. Sometimes this is achieved through flexibility in design. For example, Dell is one of the largest volume producers of personal computers in the world, yet allows each customer to ‘design’ (albeit in a limited sense) their own configuration. Sometimes flexible technology is used to achieve the same effect. 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 recommends a particular design and displays it on the image of the customer’s face. In consultation with the optician the customer can adjust shapes and sizes until the final design is chosen. Within the store the frames are assembled from a range of pre-manufactured components and the lenses ground and fitted to the frames. The whole process takes around an hour. Another example is the mymuesli case.

Figure 2.8 Flexibility means different things in different operations

Flexiblity could mean . . .

Hospital

Product/service flexibility – the introduction of new types of treatment Mix flexibility – a wide range of available treatments Volume flexibility – the ability to adjust the number of patients treated Delivery flexibility – the ability to reschedule appointments

Product/service flexibility – the introduction of new models Mix flexibility – a wide range of options available Volume flexibility – the ability to adjust the number of vehicles manufactured Delivery flexibility – the ability to reschedule manufacturing priorities

Product/service flexibility – the introduction of new routes or excursions Mix flexibility – a large number of locations served Volume flexibility – the ability to adjust the frequency of services Delivery flexibility – the ability to reschedule trips

Product/service flexibility – the introduction of new goods or promotions Mix flexibility – a wide range of goods stocked Volume flexibility – the ability to adjust the number of customers served Delivery flexibility – the ability to obtain out-of-stock items (very occasionally)

Bus company Supermarket

Automobile plant

▼

O P E R AT I O N S I N P R AC T I C E

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 mix. ‘ We wanted to provide customers with nothing else

566 quadrillion individual muesli mixes –now that’s flexible 11

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Agility Judging operations in terms of their agility has become popular. Agility is really a combination 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. The term is particularly common in software development, where it indicates the ability to produce working, quality software in short, fast incre- ments with development teams able to accept and implement fast, changing requirements. Used more generally, 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 complaints. Fractures, cuts or drug overdoses do not come in batches. Each patient is an individual with individual needs. The hospital staff cannot take time to ‘get into the routine’ of treating a particular complaint; they must have the flexibility to adapt quickly. They must also have sufficiently flexible facilities and equipment so that time is not wasted waiting for equipment to be brought to the patient. The hospital’s time is being saved because it is flexible in ‘changing over’ from one task to the next.

Flexibility maintains dependability Internal flexibility can also help to keep the operation on schedule when unexpected events disrupt the operation’s plans. For example, if the sudden influx of patients to the hospital requires emergency surgical procedures, routine operations will be disrupted. This is likely to cause distress and considerable inconvenience. A flexible hospital might be able to minimize the disruption by possibly having reserved operating theatres for such an emergency, and being able to bring in medical staff quickly who are ‘on call’.

but the perfect muesli’, they say. ‘Of course, the idea of custom-mixing muesli online might sound wacky . . . but think about it – it’s the breakfast you were always looking for.’ All muesli is mixed in the Passau production site according to strict quality standards and hygiene law requirements. Ingredients are strictly organic, without additional sugar, additives, preservatives or artificial colours. On visiting the website customers first have to pick a muesli base. After this, they 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 chosen name is printed on the can to make it even more personal. One of mymuesli’s great assets is the multitude of eccentric and exotic ingredients sourced from around the world. Philipp Kraiss, one of the company founders, is constantly on the lookout for ‘new, crazy and tasty’ muesli ingredients. The company 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.

Operations principle Flexibility can give the potential to create new, wider variety, differing volumes and differing delivery dates of services and products, and save costs.

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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 further 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 influence cost will depend largely on where the operation’s costs are incurred. The operation will spend its money on staff (the money spent on employing people), facilities, technology and equipment (the money spent on buying, caring for, operating and replacing the operation’s ‘hardware’) and materials (the money spent on the ‘bought-in’ materials consumed or transformed in the operation). Figure  2.9 shows typical cost breakdowns for

the hospital, car plant, 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

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

Operations principle Cost is always an important objective for operations management, even if the organization does not compete directly on price.

✔

Figure 2.9 Cost means different things in different operations

Cost could mean . . .

Hospital

Bus company Supermarket

Automobile plant

Technology and facilities costs

Technology and facilities costs

Technology and facilities costs

Technology and facilities costs

Sta� costs

Bought-in materials

and services

Bought-in materials

and services

Bought-in materials

and services

Bought-in materials

and services

Sta� costs

Sta� costs

Sta� costs

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This allows different operations to be compared excluding the effects of input costs. One operation may have high total costs per car but high productivity in terms of number of cars per employee per year. The difference between the two measures is explained in terms of the distinction between the cost of the inputs to the operation and the way the operation is managed to convert inputs into outputs. Input costs may be high, but the operation itself is good at converting them to goods and services. Single-factor productivity can include the effects of input costs if the single input factor is expressed in cost terms, such as ‘labour costs’. Total factor productivity is the measure that includes all input factors.

Multi@factor productivity = Output from the operation All inputs to the operation

Improving productivity One obvious way of improving an operation’s productivity is to reduce the cost of its inputs while maintaining the level of its outputs. This means reducing the costs of some or all of its transformed and transforming resource inputs. For example, a bank may choose to relocate its call centres to a place where its facility-related costs (for example, rent) are cheaper. A software developer may relocate its entire operation to India or China where skilled labour is available at rates significantly less than in European countries. A computer manufacturer may change the design of its products to allow the use of cheaper materials. Productivity can also be improved by making better use of the inputs to the operation. For example, garment manufacturers attempt to cut out the various pieces of material that make up the garment by positioning each part on the strip of cloth so that material wastage is minimized. All 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.

O P E R AT I O N S I N P R AC T I C E

Aldi is an international ‘limited assortment’ supermarket specializing in ‘private label’, mainly food products. It has carefully focused its service concept and delivery system to attract customers in a highly competitive market. The company believes that its unique approach to operations management makes it ‘virtually impossible for competitors to match our combination of price and quality’. And it has proved especially successful in meeting the increas- ingly price-conscious behaviour of customers. How has it done this? By chal- lenging the norms of retail operations. Its operations are kept deliberately simple, using basic facilities to keep down over- heads. Most stores stock only a limited range of goods (typically around 700 compared with 25,000 to 30,000 stocked by conventional supermarket chains). The private label approach means that the products have been produced according to Aldi quality specifications and are only sold in Aldi stores. Without the high costs of brand marketing and advertising, and 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.

Everyday low prices at Aldi

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Worked example

A health-check clinic has five employees and ‘processes’ 200 patients per week. Each employee works 35 hours per week. The clinic’s total wage bill is £3,900 and its total overhead expenses are £2,000 per week. What is the clinic’s single factor labour productivity and its multi-factor productivity?

Labour productivity = 200 50

= 40 patients/employee/week

Labour productivity = 200

5 * 35 = 1.143 patients/labour hour

Multi@factor productivity = 200

(3,900 + 2,000) = 0.0339 patients/£

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 operations objectives (see Figure 2.10):

Figure 2.10 Performance objectives have both external and internal effects. Internally, cost is influenced by the other performance objectives

Internal e�ects of the five performance

objectives

External e�ects of the five performance objectives

Short delivery lead time

Fast throughput

On-specification products/services

QUALITY FLEXIBILITY

DEPENDABILITY

COST

SPEED

Volume and delivery adjusments

Frequent new products/services

Low price, high margin,

or both

High total productivity

Reliable processes

Error-free processes

Ability to change

Dependable delivery

Wide product/service range

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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 estimated 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 dispatches 5 million items every year and if the cost of holding inventory is 10 per cent of its value, how much cost will each of these suggestions save the company?

Analysis Eliminating mis-packing would result in an improvement in quality. Currently 0.25 per cent of 5 million items are mis-packed. This amounts to 12,500 items per year. At €2 repacking charge per item, this is a cost of €25,000 that would be saved.

Getting faster delivery from suppliers helps reduce the amount of inventory in stock by €1,000,000. If the company is paying 10 per cent of the value of stock for keeping it in storage, the saving will be €1,000,000 * 0.1 = €100,000.

Ensuring that all orders are dispatched by the end of the day increases the dependability of the company’s operations. Currently, 1 per cent are late; in other words, 50,000 items per year. This is costing €2 * 50,000 = €100,000 per year which would be saved by increasing dependability.

Changing to a flexible working hours system increases the flexibility of the operation and would cost €50,000 per year, but it saves €150,000 per year. Therefore, increasing flexibility could save €100,000 per year.

So, in total, by improving the operation’s quality, speed, dependability and flexibility, a total of €325,000 can be saved.

▶ High-quality operations do not waste time or effort having to 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 customers. They can be relied on to deliver exactly as planned. This eliminates wasteful disruption and allows the other micro operations to operate efficiently.

▶ Flexible operations adapt to changing circumstances quickly and without disrupting the rest of the operation. Flexible micro operations can also change over between tasks quickly and without wasting time and capacity.

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The polar representation of performance objectives A useful way of representing the relative importance of performance objectives for a product or service is shown in Figure 2.11(a). This is called the polar representation because the scales which represent the importance of each performance objective have the same origin. A line describes the relative importance of each performance objective. The closer the line is to the common origin, the less important is the performance objective to the operation. Two services are shown, a taxi and a bus service. Each essentially provides the same basic service, but with different objectives. The differ- ences between the two services are clearly shown by the diagram. Of course, the polar diagram can be adapted to accommodate any number of different performance objectives. For example, Figure 2.11(b) shows a proposal for using a polar diagram to assess the relative performance of different police forces in the UK.12

How can operations performance be measured? Having defined the three levels of operations performance, any business will need to measure 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 performance 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 should be included as performance measures? ▶ Which are the most important performance measures? ▶ What detailed measures should be use?

What factors should be included 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 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

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

(a) (b)

Flexibility

Dependability E�ciency

Reassurance

Working with Criminal justice

agencies

Crime detection

Crime reduction

Quality

Cost

Speed

Taxi service Required

performance

Bus service Actual

performance

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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 advertised, 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 meas- ures 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 conveying many nuances of performance). Broadly, a compromise is often reached by making sure that there is a clear link between the opera- tion’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.

What detailed measures should be used? The five performance objectives – quality, speed, dependability, flexibility 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

Figure 2.12 Performance measures at the three levels

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

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62 PART ONE DIRECTING THE OPERATION

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 unsatis- factory, disaggregating it into ‘purchasing efficiency’, ‘operations efficiency’, ‘staff productivity’, 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 scorecard 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 performance meas- urement 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 measures of performance, it also includes more oper- ational 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 Figure 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 productiv- ity, and so on. At the same time, it attempts to avoid performance reporting becoming unwieldy by restricting the

Figure 2.13 The measures used in the balanced scorecard

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?

Operations principle Multi-dimensioned performance measurement approaches, such as the balanced scorecard, give a broader indication of overall performance.

✔

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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 comprehensive in the measures of performance it uses, encourages companies to take decisions in the interests of the whole organization rather than sub-optimizing around narrow measures.

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, dependability 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 perfor- mance of one performance objective might only be achieved by sacrificing performance in another. So, for example, an operation might wish to improve its cost efficiencies by reducing the variety of products or services that it offers to its customers. ‘There is no such thing as a free lunch’ could be taken as a summary of this approach. Probably the best-known summary of the trade-off idea comes from Professor Wickham Skinner, who said: ‘most managers will readily admit that there are compromises or trade-offs to be made in designing an airplane or truck. In the case of an airplane, trade-offs would involve matters such as cruising speed, take-off and landing distances, initial cost, maintenance, fuel 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 ‘repositioning’ performance objectives by trading off improvements in some objectives for a reduction in performance in others. The other emphasizes increasing the ‘effectiveness’ of the operation by over- coming trade-offs so that improvements in one or more aspects of performance can be achieved without any reduction in the perfor- mance 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. Presum- ably all the operations would ideally like to be able to offer very high variety while still having very high levels of cost efficiency. However, the increased complexity that a high variety of product or service offerings brings will generally reduce the operation’s ability to operate efficiently. Conversely, one way of improving cost efficiency is to 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 have all chosen a different balance between variety and cost efficiency. But none is dominated by any other operation in the sense that another operation necessarily has ‘superior’ performance. Operation X, however, has an inferior performance because operation A is able to offer higher variety at the same level of cost efficiency and operation C offers the same variety but with better cost efficiency. The convex line on which operations A, B, C and D lie is known as the ‘effi- cient 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

Operations principle In the short term, operations cannot achieve outstanding performance in all their operations objectives.

Operations principle Operations that lie on the ‘efficient frontier’ have performance levels that dominate those which do not.

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64 PART ONE DIRECTING THE OPERATION

efficiency is inappropriate. In these circumstances, they may choose to reposition themselves at some other point along the efficient frontier. By contrast, operation X has also chosen to balance variety and cost efficiency in a particular way but is not doing so effectively. Operation B has the same ratio between the two performance objectives but is achieving them more effectively.

However, a strategy that emphasizes increasing effectiveness is not confined to those oper- ations 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 checkouts are opened then

there will be times when the checkout staff do not have any customers to serve and will be idle. The customers, however, will have excellent service in terms of little or no waiting time. Conversely, if too few checkouts are opened, the staff will be working all the time but customers will have to wait in long queues. There seems to be a direct trade-off between staff utilization (and therefore cost) and customer waiting time (speed of service). Yet even the supermarket manager

might, for example, allocate a number of ‘core’ staff to operate the checkouts but also arrange for those other staff who are performing other jobs in the supermarket to be trained and ‘on call’ should demand suddenly increase. If the 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 effective- ness by extending the frontier is an important one. Any business must make clear the extent to which it is expecting the operation to reposition itself in terms of its performance objectives and the extent to which it is expecting the operation to improve its effectiveness in several ways simultaneously.

Figure 2.14 The efficient frontier identifies operations with performances that dominate other operations’ performance

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’

Operations principle An operation’s strategy improvement path can be described in terms of repositioning and/or overcoming its performance trade-offs.

✔

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Summary answers to key questions

Why is operations performance vital in any organization?

▶ Operations management can either ‘make or break’ any business. In most businesses, it represents the bulk of its assets.

▶ The positive effects of a well-run operation include a focus on improvement, the building of ‘difficult to imitate’ capabilities, and an understanding of the processes that are the building blocks of all operations.

▶ The negative e®ects of a poorly run operation include failures that are obvious to customers (and expensive for the organization), a complacency that leads to the failure to exploit opportunities for improvement.

How is operations performance judged at a societal level?

▶ Operations decisions affect 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 stakeholders 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 profit’). It includes the social bottom line, the environmental 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 financial measures of performance derived from using the operation’s resources effectively.

How is operations performance judged at a strategic level?

▶ The type of decisions and activities that operations managers carry out can have a significant 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.

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▶ 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 services are delivered. Externally, speed is an important aspect of customer service. Internally, speed both reduces inventories by decreasing internal throughput time and reduces risks by delaying the commitment of resources.

▶ 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), produce a wide range or mix of products and services (mix flexibility), produce different quantities or volumes of products and services (volume flexibility), produce products and services at different times (delivery flexibility). Internally, flexibility can help speed up response times, save time wasted in changeovers, and maintain dependability.

▶ Cost is important because : By ‘doing things cheaply’, operations seek to influence the cost of the company’s goods and services. Externally, low costs allow organizations to reduce their price in order to gain higher volumes or, alternatively, increase their profitability on existing volume levels. Internally, cost performance is helped by good performance in the other performance objectives.

How can operations performance be measured?

▶ It is unlikely that for any operation a single measure of performance will adequately reflect 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 (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)?

How do operations performance objectives trade off against each other?

▶ Trade-offs are the extent to which improvements in one performance objective can be achieved by sacrificing performance in others. The ‘efficient frontier’ concept is a useful approach to articulating trade-offs and distinguishes between repositioning performance on the efficient frontier and improving performance by overcoming trade-offs.

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IKEA looks to the future15C A S E ST U DY

For decades, IKEA has been one of the most successful retail operations in the world, with much of its success founded on how it organizes its design, supply and retail service oper- ations. With over 400 giant stores in 49 countries, IKEA has managed to develop its own standardized way of selling furniture. Its so-called ‘big box’ formula has driven IKEA to the global No. 1 position in furniture retailing. ‘Big box’ because the traditional IKEA store is a vast blue-and-yellow maze of a showroom (on average around 25,000 square metres) where custom- ers often spend around two hours – far longer than in rival furniture retailers. This is because of the way it organizes its store operations. IKEA’s philosophy goes back to the original business, started in the 1950s in Sweden by the late Ingvar Kamprad. He was selling furniture, through a catalogue operation, and because customers wanted to see some of his furniture, he built a showroom on the outskirts of Stockholm and set the furni- ture out as it would be in a domestic setting. Also, instead of moving the furniture from the warehouse to the show- room area, he asked customers to pick the furniture up themselves from the warehouse, an approach that became fundamental to IKEA’s ethos ; what has been called the ‘we do our part, you do yours’ approach.

IKEA’s ‘big box’ stores IKEA offers a wide range of Scandinavian designs at afforda- ble prices, usually stored and sold as a ‘flat pack’ which the customer assembles at home. ‘It was an entirely new concept, and it drove the firm’s success’, says Patrick O’Brien, Retail Research Director at retail consultancy GlobalData. ‘But it wasn’t just what IKEA was selling that was different, but how it was selling it.’ The stores were located and designed around one simple idea – that finding the store, parking, moving through the store itself, and ordering and picking up goods should be simple, smooth and prob- lem-free. Catalogues are available at the entrance to each store showing product details and illustrations. For young children, there is a supervised children’s play area, a small cinema, a parent and baby room and toilets, so parents can leave their children in the supervised play area for a time. Parents are recalled via the loudspeaker system if the child

has any problems. Customers may also borrow pushchairs to keep their children with them.

Parts of the showroom are set out in ‘room settings’, while other parts show similar products together, so that customers can make comparisons. Given the volume of customers, there are relatively few staff in the stores. IKEA say they like to allow customers to make up their minds. If advice is needed, ‘information points’ have staff who can help. Every piece of furniture carries a ticket indicating its location in the warehouse from where it can be collected. Customers then pass into an area where smaller items are displayed that can be picked directly, after which they pass through the self-service warehouse where they can pick up the items they viewed in the showroom. Finally, customers pay at the checkouts, where a conveyor belt moves purchases up to the checkout staff. The exit area has service points and a large loading area allowing customers to bring their cars from the car park and load their purchases. Within the store a restaurant serves, among other things, IKEA’s famous Swedish meatballs. IKEA’s fans say they can make a visit to the store a real ‘day out’.

But not everyone is a fan Yet not all customers (even those who come back time after time) are entirely happy with the traditional IKEA retail expe- rience. Complaints include:

▶ It can be a long drive to reach one of their stores (unless you are ‘lucky’ enough to live near one).

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68 PART ONE DIRECTING THE OPERATION

relevant we need to have a proposition that fits around the customer’ (Gillian Drakeford).

IKEA was also realising that its ‘big box’ stores were under threat from a decline in car ownership (in 1994, 75 per cent of 21–29-year-olds held driving licences in the UK; by 2017 that had dropped to 66 per cent). Also, customers were increasingly wanting their flat-pack furniture to be delivered, rather than having to drive to an IKEA store to collect it. Ideally, they also wanted to order it online. IKEA did have an online presence, but compared with its competitors it was relatively underdeveloped. Not only that, but not all custom- ers wanted to assemble their own furniture.

‘The entire premise that IKEA developed was that consumers would be willing to drive their cars 50 kilometres to save some money on something that looks amazing,’ said Ray Gaul, a retail analyst at Kantar Retail. ‘Young people like IKEA, but they can’t or don’t want to drive to IKEA.’ However, the traditional ‘big box’ strategy was still popular with many customers, and sales from its stores continued to grow. Yet, in most markets, there were plenty of potential customers who could not reach an IKEA store within a reasonable drive (assumed to be around two-and-a-half hours). And some degree of rethinking IKEA’s operating model seemed to be required. Torbjorn Loof, chief executive of Inter IKEA (who manage the IKEA concept) summarised their commitment to a rethink. ‘We have been successful on a long journey. But it is clear that one era is ending and another beginning.’

Smaller stores to complement the larger ones From 2015, IKEA opened several smaller-footprint stores in Europe, Canada, China, and Japan. But not all were the same. As a deliberate strategy, each was slightly different. This allowed the company to test alternative ways of locating, designing and managing its new ventures. Should they have cafés? How big should they be? Should they carry a range of products, or focus on a single category? Should they be located in shopping malls or on the high street? So, a ‘pop- up’ IKEA store in central Madrid offered only bedroom furnishings. A store in Stockholm focused on kitchens. It allowed customers to cook in the store, and book a 90-minute consultation to plan their kitchen. A small store in London stocked a range of product categories, but had no café (only a coffee machine), and in place of a supervised kids’ play area, computer games were provided. Other new stores were, in some ways, similar to traditional stores, but smaller, with fewer car parking spaces and less inventory, and acted as order-and-collection points. In some, customers could get expert advice on larger purchases, such as kitchens or bath- rooms. Often in the smaller stores, only a few items could be purchased and taken home instantly. Rather, customers could use touchscreens to order products and arrange for delivery or pickup at a convenient time. ‘For me, it’s a test

▶ The long ‘maze-like’ journey that customers are ‘encouraged’ to take through the store is too prescriptive.

▶ There are too few customer-facing staff in the store. ▶ There are long queues at some points in the store,

especially at checkouts, and at busy times such as weekends.

▶ Customers have to locate, pick off the shelves, and transport, sometimes heavy, products to the checkouts.

▶ IKEA designs can be ‘bland’ (or ‘clean and aesthetically pleasing’, depending on your taste).

▶ The furniture has to be assembled once you get it home, and the instructions are confusing.

Although many are However, the impressive growth and success of IKEA over the years indicates that the company is doing many things right. The reasons customers give for shopping at IKEA include the following.

▶ Everything is available under one roof (albeit a very big roof ).

▶ The range of furniture is far greater than at other stores.

▶ The products are displayed both by category (e.g. all chairs together) and in a room setting.

▶ Availability is immediate (competitors often quote several weeks for delivery).

▶ There is a kids’ area and a restaurant so visiting the store is ‘an event for all the family’.

▶ The design of furniture is ‘modern, clean and inoffensive’ – they fit anywhere.

▶ For the quality and design, the products are very good ‘value for money’.

Was a new approach needed? For decades, IKEA’s unique retailing operations, combined with an excellent supply network and a customer-focused design philosophy, was an effective driver of healthy growth. However, there were indications that the company was start- ing to ask itself how it could solve some of the criticisms of its retail operations. ‘We had to move away from conversations that began, “I love IKEA, but shopping at an IKEA store is not how I want to spend my time”’ (Gillian Drakeford, IKEA’s UK boss). It needed to counter the complaints by some customers that its stores were understaffed, that the navigation of stores was too prescriptive, and that queues were too long. ‘We have had a great proposition for 60 years, but the customer had to fit around it. But the world has changed and to remain

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lab for penetrating city centres,’ said one senior IKEA exec- utive. ‘About 70 per cent of the people shopping there wouldn’t go to a [traditional IKEA] store.’

TaskRabbit In 2017 IKEA bought TaskRabbit, whose app was one of the leaders in what was becoming known as the ‘gig’ economy. Using its app, over 60,000 independent workers or ‘taskers’ (at the time of acquisition) offered their services to customers wanting to hire someone to do tasks such as moving or assem- bling furniture. ‘In a fast-changing retail environment, we continuously strive to develop new and improved products and services to make our customers’ lives a little bit easier. Entering the on-demand, sharing economy enables us to support that,’ IKEA chief Jesper Brodin said in a statement. ‘We will be able to learn from TaskRabbit’s digital expertise, while also providing IKEA customers additional ways to access flexible and afforda- ble service solutions to meet the needs of today’s customer.’

Web-based retailing Arguably, the most significant retailing development in this period was the growth in online shopping. However, IKEA was slow to move online. Partly, this was because there was internal reluctance to interfere with its successful ‘big box’ retail operations that encouraged customers to spend a long time in store and make impulse-purchases. However, it became clear that the company needed to become fully committed to ‘multi-channel’ retail operations, including online sales. But it was also clear that there would not be a total shift to online sales. The idea was to offer both physical and digital options for customers who wanted to use both channels, and to win new customers online who would never make the journey to its ‘big box’ superstores. Some retail experts warned that the new strategy carried the same risks faced by all firms going online. According to Marc-An- dré Kamel of consultants Bain & Company, ‘customers are not shifting entirely to e-commerce, but wish to mix and match channels’. And, although IKEA had little choice but to invest in online channels, the danger was that it could raise costs, especially as the company was also planning significant bricks-and-mortar expansion in new markets such as India, South America and South-East Asia.

Third-party sales Another break with traditional IKEA practice came when it announced that it would consider selling its products through independent ‘third-party’ online retailers. Torbjörn Lööf, CEO of Inter IKEA, said the decision to supply online retailers was an important part of the broader overhaul of their operations. ‘[It] is the biggest development in how consumers meet Ikea since the concept was founded’, he told the Financial Times.

Sustainability IKEA was among the world’s biggest users of wood (esti- mated as around 1 per cent of all wood used), and some environmental groups condemned what they saw as the ‘disposable’ nature of its furniture. Responding to this criti- cism, IKEA appointed a Chief Sustainability Officer – the first time that sustainability was directly represented in the senior management team, and a recognition of the growing role of sustainability in determining how IKEA was perceived. It also recognized the ability of sustainability to drive business inno- vation. IKEA, like an increasing number of companies, accepted that they lived in a world of finite resources and recognise that consumption needed to reflect this. Because of this realisation, IKEA, were seeking new ways to meet people's needs and aspirations whilst staying within the limits of our planet. They saw the emerging circular-economy business model as a great opportunity to develop their business further. This was preferable to viewing sustainability as a risk to their business. Sooner or later, other companies would start creat- ing business models that disrupted the IKEA way of selling home furnishings. In one initiative in Belgium IKEA offered their customers five options to give furniture a second life : selling old IKEA-furniture in the store (at the price paid to the customer who supplied it), renewing it by repainting or reas- sembling, repairing by offering replacement parts, returning old furniture through their transport service, and donating it to social organisations. Some commentators questioned the idea of selling longer-lasting products and trading pre-owned items without a mark-up, as being bad for business. However, IKEA disagreed on the grounds that people may sometimes come to IKEA with a bit of a guilty conscience, wanting to buy stuff, but unable to completely forget the consequences. In fact, they believed that their actively welcomed the move. When they started buying back our furniture at Aalborg they actually saw an increase in revenue.

QUESTIONS 1 In the traditional IKEA ‘big box’ stores, what is the

relative importance of the operational performance objectives (quality, speed, dependability, flexibility, cost), compared with a conventional high-street furniture store?

2 What trade-offs are customers who go to these big stores making?

3 How does the strategy of increasing IKEA’s online presence impact on these trade-offs?

4 An IKEA executive was reported as saying that in some parts of the world ‘we have reached the point of “peak stuff”’. It was interpreted by some as a warning that consumer appetite for home furnishings had reached a crucial turning point. What are the implications of this for IKEA?

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Problems and applications

All chapters have Problems and applications’ questions that will help you practise analysing operations. They can be answered by reading the chapter. Model answers for the first two questions can be found on the companion website for this book.

1 The environmental services department of a city has two recycling services – newspaper collection (NC) and general recycling (GR). The NC service is a door-to-door collection service that, at a fixed time every week, collects old newspapers that householders have placed in reusable plastic bags at their gate. An empty bag is left for the householders to use for the next collection. The value of the newspapers collected is relatively small ; the service is offered mainly for reasons of environ- mental responsibility. By contrast the GR service is more commercial. Companies and private individuals can request a collection of materials to be disposed of, using either the telephone or the internet. The GR service guarantees to collect the material within 24 hours unless the customer prefers to specify a more convenient time. Any kind of material can be collected and a charge is made depending on the volume of material. This service makes a small profit because the revenue both from customer charges and from some of the more valuable recycled materials exceeds the operation’s running costs. How would you describe the differences between the performance objectives of the two services?

2 Xexon7 is a specialist artificial intelligence (AI) development firm that develops algorithms for various online services. As part of its client service it has a small (10-person) help-desk call centre to answer client queries. Clients could contact them from anywhere in the world at any time of the day or night with a query. Demand at any point in time was fairly predictable, especially during the (European) daytime. Demand during the night hours (Asia and the Americas) was considerably lower than in the daytime and also less predictable. ‘Most of the time we forecast demand pretty accurately and so we can schedule the correct number of employees to staff the work stations. There is still some risk, of course. Scheduling too many staff at any point in time will waste money and increase our costs, while scheduling too few will reduce the quality and response of the service we give’ (Peter Fisher, Help Desk Manager). Peter was, overall, pleased with the way in which his operation worked. However, he felt that a more systematic approach could be taken to identifying improvement oppor- tunities. ‘I need to develop a logical approach to identifying how we can invest into improving things like sophisticated diagnostic systems. We need to both reduce our operating costs and maintain, and even improve, our customer service.’ What are the trade-offs that must be managed in this type of call centre?

3 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 produc- tivity now?

4 A publishing company plans to replace its four proof-readers who look for errors in manuscripts with a new scanning machine and one proof-reader in case the machine breaks down. Currently the proof-readers 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? (Proof-readers work 45 weeks per year.)

5 Look again at the figures in the chapter which illustrate the meaning of each performance objec- tive for the four operations. Consider the bus company and the supermarket, and in particular consider their external customers. Draw the relative required performance for both operations

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on a polar diagram. Consider the internal effects of each performance objective. For both oper- ations, identify how quality, speed, dependability and flexibility can help to reduce the cost of producing their services.

6 Visit the websites of two or three large oil companies such as Exxon, BP, Shell or Total. Examine how they describe their policies towards their customers, suppliers, shareholders, employees and society at large. Identify areas of the company’s operations where there may be conflicts between the needs of these different stakeholder groups. Discuss or reflect on how (if at all) such companies try and reconcile these conflicts.

Selected further reading

Bourne, M., Kennerley, M. and Franco, M. (2005) Managing through measures: a study of the impact on performance, Journal of Manufacturing Technology Management, vol. 16, issue 4, 373–395. What it says on the tin.

Gray, D., Micheli, P. and Pavlov, A. (2015) Measurement Madness, Wiley, New York. Lots of examples of how companies can misuse performance measurement.

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 Jour- nal of Business Performance Management, vol. 5, nos 2–3, 114–124. An introduction to stakeholder analysis.

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72

INTRODUCTION

In the long term, the major (and some would argue, only) objective of operations is to provide the organization with some form of strategic advantage. That is the reason why the management of processes, operations and supply networks must be aligned with overall strategy. While it will always be necessary to make adjustments to accommodate circumstances, simply 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 that will guide its decision-making. This is the operations strategy of the company. Many enduringly remarkable enterprises, from Apple to Zara, use their operations resources to gain long-term strategic success. Such firms have found that it is the way they manage their operations that sets them apart from their competitors. Yet, the concept of ‘strategy’ itself is not straightforward and neither is operations strategy. This chapter considers four perspectives, each of which goes partway to illustrating the forces that shape operations strategy. It then examines how these perspectives can be reconciled and how the process of operations strategy can be organized effectively. Figure 3.1 shows the position of the ideas described in this chapter in the general model of operations management.

Operations strategy3

KEY QUESTIONS

What is strategy and operations strategy?

How does operations strategy align with business strategy (top-down)?

How does operations strategy align with market requirements (outside-in)?

How does operations strategy align with operational experience (bottom-up)?

How does operations strategy align with operations resources (inside-out)?

How are the four perspectives of operations strategy reconciled?

How can the process of operations strategy be organized?

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

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O P E R AT I O N S I N P R AC T I C E

For years, Dow Corning was a silicon business with a market position built on service and technical excellence. Customers had been willing to pay top prices for pioneer- ing technology, premium products and customized service. Yet, as the market matured it became clear that some customers were becoming increasingly price sensi- tive. The premium price strategy was under attack both from large competitors that had driven down costs and from smaller competitors, with lower overheads. Dow Corning was ‘stuck in the middle’. In response, Dow Corn- ing decided to undertake detailed analysis of its market and segment customers based on the key factors motivat- ing them to make purchases. Its work revealed four key groups of customers:

▶ Innovative solution seekers – customers who wanted innovative silicone-based products.

▶ Proven solution seekers – customers needing advice on existing proven products.

▶ Cost-effective solution seekers – customers who may even pay premium prices for a product, if it could take costs out of their business by improving their productivity.

▶ Price seekers – experienced purchasers of commonly used silicone materials wanting low prices and an easy way of doing business with their supplier.

Each of these segments held a distinct message for Dow Corning’s operations. For innovative solution seekers, there was a need to collaborate more closely with custom- ers’ R&D personnel in order to develop new products. To target proven solution seekers, the operations function took a more internal approach, working closely with the Dow Corning sales team. The aim was to help them under- stand its product range in more detail to improve conversion in the sales process. For cost-effective solution seekers, the focus was once again on working closely with the sales staff, but in this case the knowledge transfer was more bi-directional. The key was to build a stronger under- standing of customers’ processes and help better match their requirements with appropriate offerings. Finally, for the price seeker segment the focus was firmly on bringing down the costs of manufacturing and delivery. This last group was the most challenging for Dow Corning. Its sales to this segment were small and declining, but the segment represented around 30 per cent of the total market for silicones and was expected to grow significantly. Dow Corning’s solution? Create a new offering, called Xiameter. This was a ‘no-frills’, low-price, restricted-range, minimum-

order-quantity service, without any technical advice, that could only be accessed on the web (drastically cutting the costs of selling). Delivery times were sufficiently long to fit individual orders into the operation’s existing manufac- turing schedule.

The development of the Xiameter offering provides a good example of the sequence that organizations can follow in seeking to align the requirements of the market with the capabilities of its operations. The sequence looks something like this:

▶ Segment the market: This allowed Dow Corning to identify the differing requirements of different customer groups.

▶ Assess current performance : Dow Corning reviewed its performance for each market segment before making any decisions about how it might change direction.

▶ Decide which segments to serve: Dow Corning decided that, while it was weak in the price seeker segment, it was worth pursuing ways in which it might compete.

▶ Determine what is necessary for the business to compete: For price seekers, Dow Corning would need to supply at low cost, and abandon its technical advice service, because most customers in this segment were not willing to pay for it.

▶ Determine what operations has to do: For Xiameter to be successful, it would need to emphasize its ‘no frills’ service (hence the new Xiameter brand), and reduce excess sales overheads (hence web-based sales). Most critically, for this high-volume, low-variety operation to work, custom- ers would need to be prevented from asking for anything that would increase costs (hence limited product range, minimum order quantities and delivery times that do not disrupt production schedules).

Dow Corning’s operations strategy1

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74 PART ONE DIRECTING THE OPERATION

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 historical 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.

From this perspective, strategic decisions are those that are widespread in their effect on the organ- ization, define the position of the organization relative to its environment, and move the organization closer to its long-term goals. But ‘strategy’ is more than a single decision; it is the total pattern of the decisions and actions that influence the long-term direction of the business. Thinking about strategy in this way helps us to discuss an organization’s strategy even when it has not been explicitly stated. Observing the total pattern of decisions gives an indication of the actual strategic behaviour.

These points relating to strategy apply equally to operations strategy. Operations strategy is defined as the ‘pattern of decisions and actions that shape the long-term vision, objectives and capa- bilities of the operation and its contribution to the overall strategy of the business’.2 At first, the term ‘operations strategy’ sounds like a contradiction. How can ‘operations’, a subject that is generally concerned with the day-to-day creation and delivery of products and services, be strategic? ‘Strategy’ is usually regarded as the opposite of those day-to-day routine activities. But, as we have indicated previously, ‘operations’ is not the same as ‘operational’. ‘Operations’ are the resources that create products and services, and it is clear that they can have a real strategic impact. ‘Operational’ is the opposite of strategic, meaning day-to-day, detailed and often localized. 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.

Using operations strategy to articulate a vision for the contribution of operations Most businesses expect their operations strategy to improve operations performance over time. In doing this, operations should be progressing from a state where they contribute very little to the competitive success of the business through to the point where they are directly responsible for its competitive success. The ‘vision’ of an operation is a clear statement of how operations intend to contribute value for the business. It is not a statement of what the operation wants to achieve (those are its objectives), but rather an idea of what it must become and what contribution it should make. A common approach to summa-

rizing operations contribution is the seminal Hayes and Wheelwright four-stage model.3 The model traces the progression of the operations function from what is the largely negative role in ‘stage 1’ operations to a position where it is the central element of competitive strategy in ‘stage 4’. Figure 3.2 illustrates the four steps involved in moving from stage 1 to stage 4.

Stage 1: Internal neutrality This is the very poorest level of contribution by the operations function and the effect is to harm the organization’s ability to compete effectively. In stage 1, the operations function is inward-looking and, at best, reactive with very little positive to contribute towards competitive success. Its vision is

Operations principle Operations is not the same as operational; it does have a strategic role.

Operations principle Operations strategy should articulate a ‘vision’ for the operations function's contribution to overall strategy.

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to be ‘internally neutral’, so as to stop holding the organization back in any way. It attempts to achieve this by ‘avoiding making mistakes’.

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. 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’. In stage 2, the vision of the operations function is to become ‘externally neutral’ with operations in the industry.

Stage 3: Internally supportive Stage 3 operations have typically reached the ‘first division’ of their markets. For such operations, the vision becomes to be clearly and unambiguously the very best in the market. They achieve this by gaining a clear view of the company’s competitive or strategic goals and supporting it by developing appropriate operations resources. The operation is trying to be ‘internally supportive’ by providing a credible operations strategy.

Stage 4: Externally supportive Stage 3 used to be viewed as the limit of the operations function’s contribution. Yet the model captures the growing importance of operations management by suggesting a further stage. The difference between stages 3 and 4 is subtle, but important. A stage 4 operations function is one that is providing the foundation for an organization’s competitive success. It is forecasting likely changes in markets and supply, and it is developing 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’.

The four perspectives on operations strategy Different authors have slightly differing views and definitions of operations strategy. However, between them, four ‘perspectives’ emerge as shown in Figure 3.3.4

Figure 3.2 Hayes and Wheelwright’s four-stage model of operations contribution sees operations as moving from implementation of strategy, through to supporting strategy, and finally to driving strategy

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

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76 PART ONE DIRECTING THE OPERATION

▶ Operation strategy should align with what the whole group or business wants – sometimes called the ‘top-down’ perspective.

▶ Operations strategy should translate the enterprise’s intended market position so as to provide the required objectives for operations decisions – sometimes called the ‘outside-in’ perspective.

▶ Operations strategy should learn from day-to-day activities so as to cumulatively build strategic capabilities – sometimes called the ‘bottom-up’ perspective.

▶ Operations strategy should develop the business’s resources and processes so that its capabilities can be exploited in its chosen markets – sometimes called the ‘inside-out’ perspective.

None of these four perspectives alone gives a comprehensive picture, but together they provide some idea of the pressures that go into forming the content of an operations strategy. In the next four sections of this chapter, we will treat each perspective in turn, before examining how these can be reconciled effectively.

Critical commentary

The idea that operations can have a leading role in determining a company’s strategic direction is not universally accepted. Both stage 4 of Hayes and Wheelwright’s four-stage model and the concept of operations ‘driving’ strategy not only imply that it is possible for operations to take such a leading role, but are explicit in seeing it as a ‘good thing’. A more traditional stance taken by some authorities is that the needs of the market will always be pre-eminent in shaping a company’s strategy. Therefore, operations should devote all their time to understanding the requirements of the market (often defined by the marketing function within the organization) and devote themselves to their main job of ensuring that operations processes can actually deliver what the market requires. Companies can only be successful, they argue, by positioning themselves in the market (through a combination of price, promotion, product design and managing how products and services are delivered to customers) with operations very much in a ‘supporting’ role. In effect, they say, Hayes and Wheelwright’s 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

Top–down perspective

Reflect what the whole group or business

wants to do

Learn from day-to-day activities so as to cumulatively build

strategic capabilities

Bottom-up perspective

Outside-in perspective

Translate intended market position so as to

provide the required objectives for

operations decisions

Operations strategy

Inside-out perspective

Develop resources and processes so that their capabilities can be exploited in their chosen markets

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O P E R AT I O N S I N P R AC T I C E

You don’t think of space satellites as cheap items ; and of course, they aren’t. They are usually extremely expensive. 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. Yet in the late 1970s this assump- tion 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 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. It was launched in 1981 with the help of NASA, which had been persuaded to provide a free launch, piggybacking on a mission to put a large scientific satellite into orbit. The team followed this up with a second satellite (UoSAT-2) that they built in just six months and launched in 1984. A year later Surrey Satellite Technology Limited (SSTL) was formed as a spin-out company from the university to transfer the results of its research into a commercial enterprise. The firm’s vision was to open up the market for space exploration by pioneering the use of small and relatively cheap, but reliable, satellites built from readily available off-the-shelf components, at the time a revolutionary idea. Now, SSLT is the world’s leading small satellite company. Its 500 staff have launched over 40 satellites.

It achieved this success partly because it was an early player in the market, having the vision to see that there would be a market for small satellites. However, in addi- tion, it developed an operations strategy that was innovative in finding ways of keeping the cost of building the satellites down to a minimum. SSTL pioneered the low-cost, low-risk approach to delivering operational satel- lite missions within short development timescales and with the capability that potential customers wanted. In the early 1980s, Sir Martin Sweeting speculated that it would

be possible to use programmable technology to build small satellites that were ‘intelligent’ when compared with conventional large and expensive hard-wired satellites. This allowed the satellite to be reprogrammed from the ground. Particularly important was the company’s use of commer- cial off-the-shelf technology. It enabled SSTL to keep costs as low as realistically possible by, in effect, exploiting the, often enormous, investments by consumer-electronics companies and others who had developed the complex components for their products. Even if this sometimes limited what a satellite could do, it provided the scale econ- omies that would be impossible if they were designing and making customized components from scratch. ‘We were being parasitic, if you like,’ admitted Sir Martin.

However, not all commercially available components made for terrestrial use were up to coping with conditions in space. Reliability is essential in a satellite. Even though off-the-shelf components and systems became increasing reliable, they were rigorously tested to make sure that they were up to the severe conditions found in space. Knowing which components can be used and which cannot 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, manu- facture, launch and operation service as well as a range of advice, analysis and consultancy services. ‘What distin- guishes us is our vertically integrated capability, from design and research to manufacturing and operations,’ says Sir Martin. ‘We don’t have to rely on suppliers, although of course we buy in components when that is advantageous.’

Changing the economics of space exploration5

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78 PART ONE DIRECTING THE OPERATION

How does operations strategy align with business strategy (top-down)? A top-down perspective often identifies three related levels of strategy – corporate, business and functional.

▶ A corporate strategy should position the corporation 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 busi- nesses, and so on.

▶ 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 strategy guides the business in relation to its customers, markets and competitors, and also the strategy of the corpo- rate group of which it is a part.

▶ The operations, marketing, product/service development and other functions will then need to consider how best they should organize themselves to support the business’s objectives. These func- tional strategies need to consider what part each function should play in contributing to the strategic objectives of the business.

So, the ‘top-down’ perspective on operations strategy is that it should take its place in this ‘hier- archy of strategies’. As such, the role of operations is largely one of implementing or ‘operationalizing’ higher-level strategy. For example, a Printing Services Group has a company that prints packaging for consumer products. The group’s management figures that, in the long term, only companies with

significant market share will achieve substantial profitability. Its corporate objectives therefore stress market dominance. The 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 (factories, equipment and

labour) even if it means excess capacity in some areas. It also needs to establish new factories in all parts of its market to offer relatively fast delivery. The important point here is that different business objectives would probably result in a very different operations strategy. Figure 3.4 illustrates this strategic hierarchy, with some of the decisions at each level and the main influences on the strategic decisions.

Although this rather neat relationship between the levels of corporate, business and operations strat- egy may seem a little ‘theoretical’, it is still a powerful idea. What it is saying is that in order to understand strategy at any level, one has to place it in the context of what it is trying to do (the level above) and how it is trying to do it (the level below). At any level, a good top-down perspective should provide clarity and connection. It should clarify what an operations strategy should be prioritizing, and give some guidance on the strategy to be achieved.

Correspondence and coherence Developing a functional strategy from a business strategy is not always straightforward. There are ambi- guities to clarify and conflicts to be reconciled. Inevitably, business strategy consists of aggregated and approximate objectives. It cannot spell out every detail of how a function should interpret its objectives. Yet there should be a clear, explicit and logical connection between each functional strategy and the business strategy. Moreover, there should also be a clear, explicit and logical connection between a func- tional strategy and the decisions taken within the function. In other words, there should be correspondence between different levels of strategy. But correspondence is not all that is required. Operations strategy must also be coherent, both with other functional strategies and within itself. Coherence means that the choices that are made across or within functions should not pull it in different directions. All decisions should complement and reinforce each other in the promotion of the business’s and the operation’s objectives. Figure 3.5 illustrates these two ideas of correspondence and coherence.6

Operations principle Operations strategies should reflect top-down corporate and/or business objectives.

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The concepts of the ‘business model’ and the ‘operating model’ Two concepts have emerged over the last few years that are useful in understanding the top-down perspective on operations strategy – the ‘business model’ and the ‘operating model’. The relationship between these two concepts is shown in Figure 3.6.

A business model is the plan that is implemented by a company to generate revenue and make a profit (or fulfil its social objectives if a not-for-profit enterprise). It includes the various parts and organ- izational functions of the business, as well as the revenues it generates and the expenses it incurs. In other words, what a company does and how it makes money from doing it. It often includes such elements a:7 the value proposition of what is offered to the market, the target customer segments addressed by the value proposition, the distribution channels to reach customers, the core capabilities needed to make the business model possible and the revenue streams generated by the business model. The idea of the business model is broadly analogous to the idea of a ‘business strategy’, but implies more of an emphasis on how to achieve an intended strategy as well as exactly what that strategy should be.

In contrast, the concept of an operating model is more operational in nature and there is no univer- sally agreed definition. Here, we define it as a ‘high-level design of the organization that defines the structure and style which enables it to meet its business objectives’.8 Ideally, an operating model should provide a clear, ‘big picture’ description of what the organization does and how it does it. It defines how the critical work of an organization is carried out. It should provide a way to examine the business in terms of the key relationships between business functions, processes and structures that are required for the organization to fulfil its mission. It can include such elements as: key perfor- mance indicators (KPIs), with an indication of the relative importance of performance objectives, new investments and intended cash flows; who is responsible for products, geographies, assets, specific processes, systems and technologies etc; and the structure of the organization.

Note that an operating model reflects the idea that we proposed in Chapter 1 – that all managers are operations managers and all functions can be considered as operations because they comprise

Corporate strategy decisions • hat usinesses to e in • llocation of cash to usinesses • How to manage the relationships etween different usinesses

Business strategy decisions • efining the mission of the usiness e g growth targets return on investment profita ility targets cash generation • Setting competitive o ectives

Functional strategy decisions • The role of the function • Translating usiness o ectives into functional o ectives • llocation of resources so as to achieve functional o ectives • Performance improvement priorities

Printing services group corporate strategy • Specialize in pac aging usinesses • ecome a ma or player in all its mar ets

Consumer packaging business strategy • apid volume growth • Fast service • Economies of scale

Operations strategy • Capacity e pansion • Tolerate some over capacity in the short term • ew locations esta lished

Figure 3.4 The top-down perspective of operations strategy and its application to the Printing Services Group

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O P E R AT I O N S I N P R AC T I C E

Micraytech is a metrology systems company that develops integrated measurement systems for large international clients in several industries, and is part of the Micray Group that includes several high-tech companies. It has grown through a strategy of providing products with a high degree of technical excellence and innovation together with an ability to customize its systems and offer technical advice to its clients. The Group has set ambitious growth targets for the company over the next five years and has relaxed its normal ‘return on sales’ targets to help it achieve this. As part of this strategy, Micraytech attempted to be the first in the market with all appropriate new technical innovations. From a top-down perspective, its operations function, therefore, needed to be capable of coping with the changes which constant product innovation would bring. It developed processes that were flexible enough to develop and assemble novel components and systems while integrating them with software innovations.

The company’s operations function realized that they needed to organize and train their staff to understand the way technology is developing so that they could put in place the necessary changes to the operation. It also needed to

develop relationships with both existing and potentially new suppliers who could respond quickly when supplying new components. So, the top-down logic here is that everything about the operation – its processes, staff, systems and procedures – must, in the short term, do nothing to inhibit and, in the long term, actively develop the company’s competitive strategy of growth through innovation.

Innovation at Micraytech9 (Part 1, top-down)

Business strategy

Process design

Supply chain management

Capacity management

Operations structure and

scope

Product/service innovation … etc.

Operations Finance ITMarketingHR … etc.

Correspondence between operations strategy and operations decisions

Correspondence between business and operations strategy

Coherence across functional strategies

Coherence within operations strategy

Figure 3.5 Correspondence and coherence are the two requirements of the top-down perspective of operations strategy

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processes that deliver some kind of service. An operating model is like an operations strategy, but applied across all functions and domains of the organization. Also, there are clear overlaps between the ‘business model’ and the ‘operating model’, although an operating model focuses more on how an overall business strategy is to be achieved.

How does operations strategy align with market requirements (outside-in)? Any operations strategy should reflect the intended market position of the business. No operation that continually fails to serve its markets adequately is likely to survive in the long term. Organizations compete in different ways, so the operations function should therefore respond by providing the ability to perform in a manner that is appropriate for the intended market position. This is called a market (or outside-in) perspective on operations strategy.

How market requirements influence operations strategy performance objectives Operations adds value for customers and contributes to competitiveness by being able to satisfy the requirements of its customers. The most useful way to do this is to ensure that operations is achieving the right priority between its ‘operational’ performance objectives, discussed in the previous chapter – quality, speed, dependability, flexibility and cost. Whatever competitive factors are important to customers should influence the priority of each performance objective. For example, a customer emphasis on fast delivery will make speed important to the operation. When it is important that products or services are delivered exactly when they are promised, the

Marketing strategy

Operations strategy

Finance strategy

Technology strategy

Operational operations

Operational finance

Operational marketing

Operational technology

Functional strategies

Business strategy

The operating model

determines how the

business model will be achieved

The business model

sets the overall purpose and

objectives for the operating model

Performance measures?

Business processes?

Responsibilities?People skills and capabilities?

Resources?

The business model

The operating model

Systems and technology?

Figure 3.6 The concepts of the ‘business model’ and the ‘operating model’ overlap – with the operating model indicating how processes, resources, technology, people, measures and responsibilities are to be organized to support the business model

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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.

Order winners, qualifiers and less important factors A particularly useful way of determining the relative importance of competitive factors is to distin- guish between ‘order winning’, ‘order qualifying’ and ‘less important’ factors. Figure 3.7 illustrates their relative effects on competitiveness (or attractiveness to customers).

Order winners are those things that directly and significantly contribute to winning business. Customers regard them as key reasons for buying the product or service. Raising performance in an order-winning factor will either result in more business or at least improve the chances of gaining more business.

Order qualifiers may not be the major competitive determinants of success, but are important in another way. They are factors where the operation’s performance has to be above a particular level just to be considered by the customer. Performance below this ‘qualifying’ level of perfor- mance often disqualifies the organization from being considered by many customers. Conversely, further improvement above the qualifying level is unlikely to gain the company much compet-

itive benefit.

Less important factors are neither order winning nor qualifying. They do not influence customers in any significant way. They are worth including in any analysis only because they may be of importance in other parts of the operation’s activities.

The impact of product/service differentiation on market requirements If, as is likely, an operation differentiates its services based on different customer segments, it will need to determine the performance objective for each segment. For example, Table 3.1 shows two customer segments in the banking industry. Here the distinction is drawn between the customers who are looking for banking services for their private and domestic needs (current accounts, overdraft facilities, savings accounts, mortgage loans, etc.) and those corporate customers who need banking services for their (often large) organizations. These latter services would include such things as letters of credit, cash transfer services and commercial loans.

Operations principle The relative importance of the five performance objectives depends on how the business competes in its market.

Figure 3.7 Order-winning, qualifying and less important competitive factors

Competitive benefit

+ve

–ve

Neutral

+ve

–ve

Neutral

+ve

–ve

Neutral

Competitive benefit

Performance Performance

Qualifying level

Performance

Competitive benefit

Order-winning factors Qualifying factors Less important factors

Operations principle Competitive factors can be classified as ‘order winners’, ‘qualifiers’ or ‘less important’.

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CHAPTER 3 OPERATIONS STRATEGY 83

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 objectives

Cost Flexibility

Speed Quality

Quality Dependability

Table 3.1 Different banking services require different performance objectives

The impact of product/service life cycle on market requirements 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 strategies in each stage of their life cycle, as shown in Figure 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 thing. 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.

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 maintaining quality levels can ensure that the company keeps its share of the market as competition starts to increase.

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O P E R AT I O N S I N P R AC T I C E

The Micray Group saw a major growth opportunity for Micraytech by continually incorporating technological innovations in its product offerings. However, Micraytech’s Marketing management knew that this could be achieved by focusing on one or both of two distinct markets. The first is the market for ‘individual metrology devices’. These are ‘stand-alone’ pieces of equipment bought by all types of industrial customers and had traditionally been the company’s main market. The second market was for ‘integrated metrology systems’. These were larger, more complex, more expensive (and higher margin) offerings that were customized to individual customers’ requirements. The two types of offering had overlapping, but different characteristics. ‘Individual metrology devices’ competed on their technical performance and reliability, together with relatively short delivery times compared with competitors. The ‘integrated metrology systems’ offerings currently accounted for only a small part of the company’s sales, but it was a market that was forecast to grow substantially. The customers for these systems were larger manufacturers that were investing in more automated

technologies and required metrology systems that could be integrated into their processes. From an ‘outside-in’ perspective, if it was to take advantage of this emerging market, Micraytech would have to learn how to work more closely with both its direct customers and the firms that were supplying its customers with the automated technologies. In addition to Micraytech’s traditional technical skills, it would have to increase its software development, data exchange and client liaison skills.

Innovation at Micraytech (Part 2, outside-in)

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 numbers

Laggards

Introduction into market

Growth in market

acceptance Maturity of

market, sales level o�

S a

le s

vo lu

m e

Decline as market

becomes saturated

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CHAPTER 3 OPERATIONS STRATEGY 85

Maturity stage As demand starts to level off, some early competitors may have left the market and the industry may 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. 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 domi- nated by price competition. So, operations objectives continue to be dominated by cost.

O P E R AT I O N S I N P R AC T I C E

When market conditions change, it usually means that oper- ations strategy should change. But it can take time before changes become obvious, and even longer to react. This was a lesson that Tesco, the UK’s biggest, and one of its most successful, retailers learned, when, by 2014, it had slumped to a £6.4bn loss. Although it was still comfortably the market leader in grocery sales, its lead over rivals had wors- ened. Like-for-like sales (sales in its stores and online, while removing the effect of new stores opening) were down nearly 4 per cent; significant in the retail world. Tesco had not seen numbers this bad for 20 years. Why, asked its detractors, had the company not realized that its strategy was failing? One critic described Tesco as being ‘like a juggernaut with a puncture and a worrying rattle in the engine’. Some of Tesco’s problems at this time were beyond its control and a result of competitor activity. Waitrose (an up-market supermarket, with a good reputation for quality) was serving the top end of the market, while German discount stores Aldi and Lidl were attracting more cost- conscious customers. However, some problems were of Tesco’s own making, caused by its operations strategy failing to respond fast enough to market requirements. The strat- egy of building large, out-of-town superstores was continued, even though a sharper monitoring of consumer behaviour would have revealed that such large-capacity units had lost their attraction as families cut down on weekly trips to the supermarket and opted instead for home deliveries, and topping up their groceries with trips to local stores. In fact, Philip Clarke, then Tesco’s chief executive, admitted that he ought to have moved faster to cut back on planned superstore openings in response to clear radical

changes in shopping habits. ‘ Hindsight is a wonderful thing. It’s never really there when you need it’, said Mr Clarke. ‘I probably should have stopped more quickly that [super- store] expansion, I probably should have made the reallocation [to small, local stores] faster’.

This episode in Tesco’s (largely successful) history provided important lessons. Making significant changes in operations strategy can be extremely disruptive and costly in the short run, but necessary in the long run, even when the long-term consequences of a major change are unknowable (although better demand forecasting, can help – see Chapter 11). Understandable then that in the face of such uncertainty, organizations, especially those with large inflexible investments, often delay change. However, having made major changes in its corporate, business and functional strategies, Tesco did recover in terms of like-for-like sales.

Tesco learns the hard way10

Operations principle Operations strategy objectives will change depending on the stage of the business’s services and products.

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How does operations strategy align with operational experience (bottom-up)? The ‘top-down’ perspective provides an orthodox view of how functional strategies should be formu- lated. However, while it is a convenient way of thinking about strategy, it does not represent the way strategies are formulated in most cases. When any group is reviewing its corporate strategy, it will take into account the circumstances, experiences and capabilities of the various businesses that form the group. Similarly, when reviewing their strategies, organizations will consult the indi- vidual functions about their capabilities and constraints and incorporate the ideas that come from each function’s day-to-day experience. This is the bottom-up perspective, illustrated in Figure 3.9.

The bottom-up perspective accounts for the fact that in many cases organizations move in a particular strategic direction because their on-going experience at an operational level convinces them that it is the right thing to do. The ‘high level’ strategic decision making, if it occurs at all, may simply confirm the general consensus around a given strategic direction and provide the resources to make

it happen effectively. This is sometimes called the concept of ‘emer- gent strategies’.11 It sees strategy making, at least partly, as a relatively unstructured and fragmented process to reflect the fact that the future is at least partially unknown and unpredictable.

For example, suppose the printing services company described previously succeeds in its expansion plans. However, in doing so it

finds that having surplus capacity and a distributed network of factories allows it to offer an excep- tionally fast service to customers. It also finds that some customers are willing to pay considerably higher prices for such a responsive service. Its experiences lead the company to set up a separate division dedicated to providing fast, high-margin printing services to those customers willing to pay. The strategic objectives of this new division are not concerned with high-volume growth but with high profitability.

The reinforcing effect of top-down and bottom-up perspectives on operations strategy The top-down and bottom-up perspectives are often seen as being diametrically opposite ways of look- ing at operations strategy, but they are not. In fact, the two perspectives can be mutually reinforcing.

Figure 3.9 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

Operations principle Operations strategy should reflect bottom-up experience of operational reality.

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O P E R AT I O N S I N P R AC T I C E

Over time, as its operations strategy developed, Micraytech discovered that continual product and system innovation was having the effect of dramatically increasing its costs. Although it was not competing on low prices, and nor was it under pressure from the Group to achieved high rates of return on sales, its rising costs were impacting profitability to an unacceptable degree. In addition, there was some evidence that continual updating of product and system specifications was confusing some customers. Partially in response to customer requests, the company’s system designers started to work out a way of ‘modularizing’ their system and product designs. This allowed one part of the system to be updated for those customers who valued the functionality that the innovation could bring, without interfering with the overall design of the main body of the system of which the module was a part. Over time, this approach became standard design practice within the company. Customers appreciated the extra customization, and modularization reduced operations costs. Note that this strategy emerged from the company’s experience and

was therefore an example of a pure ‘bottom-up’ approach. Initially, no top-level board decision was taken to initiate this practice. Nevertheless, it emerged as the way in which the company’s design engineers learned from their experi- ence and used that learning to build their knowledge of how to lower some of the costs of innovation.

Innovation at Micraytech (Part 3, bottom-up)

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

Figure 3.10 Top-down and bottom-up perspectives on operations strategy can reinforce each other

Figure  3.10 shows how this can work. The top-down perspective sets the overall direction and objectives for operations decisions and activities. In order to implement 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 check that they fully reflect the overall top-down strategy of the organ- ization. But, as we have illustrated earlier, the experience gained from day-to-day activities can be

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accumulated and built into capabilities that an organization could possibly exploit strategically. (We will expand this idea of ‘capabilities’ in the next section.)

How does operations strategy align with operations resources (inside-out)? The final perspective of operations strategy is the operations resources (or ‘inside-out’) perspective. Its fundamental idea is that long-term competitive advantage can come from the capabilities of the operation’s resources and processes, and these should be developed over the long term to provide the business with a set of capabilities or competences (we use the two words interchangeably).12 So, the way an organization inherits, acquires or develops its operations resources will, over the long term, have a significant impact on its strategic success. They can form the basis of the businesse’s

ability to engage in unique and/or ‘difficult to imitate’ activities. Further- more, the impact of an organization’s ‘operations resource’ capabilities will be at least as great as, 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 impor- tant perspective on operations strategy.

Strategic resources and sustainable competitive advantage The idea that building operations capabilities is a particularly important objective of operations strat- egy is closely linked with the ‘resource-based view’ (RBV) of the firm.13 This holds that organizations with ‘above-average’ strategic performance are likely to have gained their sustainable competitive advantage because of their core competences (or capabilities). This means that the way an organization inherits, or acquires, or develops its operations resources will, over the long term, have a significant impact on its strategic success. The RBV differs in its approach from the more traditional view of strategy that sees companies as seeking to protect their competitive advantage through their control of the market. For example, they may do this by creating barriers to entry through product differen- tiation, or making it difficult for customers to switch to competitors, or controlling the access to distribution channels (a major barrier to entry in gasoline retailing, for example, where oil companies own their own retail stations). By contrast, the RBV sees firms being able to protect their competitive advantage through barriers to imitation: that is, by building up ‘difficult-to-imitate’ resources.

Understanding existing capabilities and constraints An operations resource perspective must start with an understanding of the resource capabilities 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. However, trying to understand an operation by listing its resources alone is like trying to understand an automobile by listing its component parts. To understand the automobile, we need to describe how the component parts form its internal mechanisms. Within the operation, the equivalents of these mechanisms are its processes. Yet, even a technical explanation of the mech- anisms does not convey 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; it also has intangible resources. An oper- ation’s intangible resources include such things as:

▶ its relationship with suppliers and the reputation it has with its customers; ▶ its knowledge of and experience in handling its process technologies; ▶ the way its staff can work together in new product and service development; ▶ the way it integrates all its processes into a mutually supporting whole.

These intangible resources may not be as evident within an operation, but they are important and often have real value. And both tangible and intangible resources and processes shape its capabilities.

Operations principle The long-term objective of operations strategy is to build operations-based capabilities.

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The central issue for operations management, therefore, is to ensure that its pattern of strategic deci- sions really does develop appropriate capabilities.

Developing operations strategy from a resource-based perspective isn’t just about understanding capa- bilities, it also requires the identification of constraints. No organization can merely choose which part of the market it wants to be in without considering its ability to deliver services and products in a way that will satisfy that market. For example, a small translation company offers general translation services to a wide range of customers who wish documents such as sales brochures to be translated into another language. It operates an informal network of part-time translators who enable the company to offer trans- lation 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; however, the company does not have the resources, financial or physical, to take it up. From a market perspective, it is good business, but from an operations resource perspective, it is not feasible.

While the operations resource perspective may identify constraints to satisfying some markets, it can also identify capabilities that 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 capabilities within its operations resources. Here, the company has chosen to be driven by its resource capabilities rather than the obvious market opportunities.

Strategic resources and sustainable competitive advantage The ‘resource-based’ explanation of why some companies manage to gain sustainable competitive advan- tage 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.14

Operations principle Resource-based thinking requires identification of both operations capabilities and constraints.

O P E R AT I O N S I N P R AC T I C E

As a publicly stated ambitious target it takes some beating – ‘Amazon.com strives to be the Earth’s most customer-centric company’. Founded by Jeff Bezos, the Amazon.com website started as a place to buy books, giving its customers what at the time was a unique customer expe- rience. Its initial success was followed by continued growth, based on a clear strategy of technological innovation. It may not be glamorous, but Amazon focused on what have been called ‘the dull-but-difficult tasks’ such as tracking products, managing suppliers, storing inventory and delivering boxes. ‘Fulfilment By Amazon’ allows other companies to use Amazon’s logistics capability, including the handling of returned items, and gives them access to Amazon’s ‘back- end’ technology. But perhaps the most revealing insight into Amazon’s ability to dominate its markets is illustrated by the success of Amazon Web Services (AWS).

AWS is Amazon’s cloud computing business, providing cloud-based, on-demand computing power for small and

larger high-profile customers such as Spotify’s digital music service and Netflix’s video streaming service. AWS’s large and efficient operations can be better value than smaller

Amazon’s operations capabilities

▼

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▶ 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 foresight (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 example, if a new process is developed in a company’s Stockholm site and is based on the knowledge and experience of the Stockholm staff, the process will be difficult (although not totally impossible) to sell to another company based elsewhere in Europe (or even Sweden if the staff do not want to move). As a result, the advantages that derive from the process’s resources are more likely to be retained over time.

▶ They are difficult to imitate or substitute for – These two factors help define how easily a resource- based advantage can be sustained over time. It is not enough only to have resources which are unique and immobile. If a competitor can copy these resources or, less predictably, replace them with alternative resources, then their value will quickly deteriorate. However, the less tangible the resources are and the more connected with the tacit knowledge embedded within the organization, the more difficult 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 infra- structural decisions are those which influence the workforce organization and the planning and control, and improvement activities. This distinction in operations strategy has been compared to that between ‘hardware’ and ‘software’ in computer systems. The hardware of a computer sets limits to what it can do. In a

similar way, investing in advanced technology and building more or better facilities can raise the potential of any type of operation. Within the limits that are imposed by the hardware of a computer, the software governs how effective the computer actually is in practice. The same principle applies with operations. The best and most costly facilities and technology will only be effective if the oper- ation also has an appropriate infrastructure which governs the way it will work on a day-to-day basis. Figure 3.11 illustrates some typical structural and infrastructural decisions.

How are the four perspectives of operations strategy reconciled? As we stressed earlier, none of the four perspectives alone can give a full picture of any organization’s operations strategy. But together they do provide a good idea of how its operations are contributing strategically. Figure 3.12 shows how the four perspectives can be brought together, using the example

Operations principle The long-term objective of operation strategy is to build operations-based capabilities.

companies could achieve, which is why prominent retailers work with AWS to power their e-commerce offerings. Offering business-to-business services is also good for Amazon. The problem with online retailing, said Bezos, is its seasonality. To deal with peak times, such as Christmas, Amazon has far more computing capacity than it needs for the rest of the year. At low points, it may be using only a fraction of its total capacity. Hiring out that spare capacity is an obvious way to bring in extra revenue. However, Amazon soon realized that its experience of operating cloud computing services was, in itself, a capability upon which services could be sold. The important point is that

AWS provides business-to-business services that can make its customers’ operations ultra-efficient. And this is based on the company’s core competence of leveraging its processes and technology. However, some observers imme- diately criticized 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 technology and logistics services.

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Figure 3.11 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

O P E R AT I O N S I N P R AC T I C E

The modular approach to product design (described in Part 3) proved to be a big success for Micraytech. However, it posed two challenges for the company’s operations. First, the technical aspects of integrating some of the more sophis- ticated modules proved difficult. This only affected a small proportion of customers, but they were the ones that were willing to pay premium prices for their systems. The only potential solution was to attempt to develop the interface modules that would allow previously incompatible modules to be integrated. When this solution was first proposed the relevant skills were not present in the company. It had to recruit specialist engineers to start on the design of the inter- faces. During this design process, the company realized that it could potentially open up a new market. As the firm’s Chief Operating Officer (COO) put it, ‘If we designed the interfaces carefully, we could not only integrate all of our own in-house modules, we could also integrate other firms’ instruments into our systems.’ This led to the second set of challenges; to develop relationships with possible suppliers, who might very well be competitors in some markets, so that they were willing to supply their equipment for inclusion in Micraytech’s systems. Not only this, but also the firm had to ensure that the internal processes of its sales engineers consulting with clients, its design department designing the system to meet clients’ needs, and its procurement managers

negotiating with equipment suppliers, all operated seam- lessly. ‘The success that we have enjoyed can be put down to two key capabilities. The first was to buy in the engineering skills to create technically difficult interfaces. That led to us understanding the value that could be gained from a seam- less internal and external supply chain. Both of these capabilities are not totally impossible for other firms to copy, but they would be very difficult for them to get to our level of excellence’ (COO, Micraytech). Here, we see a clear exam- ple of the operations-resource perspective dominating the direction of Micraytech’s overall business strategy.

Innovation at Micraytech (Part 4, inside out)

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of Micraytech operations strategy that we have covered across this chapter. In this case, the four perspectives seem to be reasonably compatible, with its operations strategy fitting together from whichever perspective is chosen. In other words, each perspective is ‘reconciled’ with the others. This is one of the conditions for an effective operations strategy – the four perspectives must be reconciled. Here, we look at three models that can help this reconciliation – the operations strategy matrix, the ‘line of fit’ and the importance–performance matrix.

The operations strategy matrix The operations strategy matrix is one method of checking the reconciliation between the inside-out and outside-in perspectives. It brings together (a) market requirements and (b) operations resources to form the two dimensions of a matrix. It describes operations strategy as the intersection of a company’s performance objectives and the strategic decisions that it makes. In fact, there are several intersections between each performance objective and each decision area (however one wishes to define them). If a business thinks that it has an operations strategy, then it should have a coherent

explanation for each of the cells in the matrix. That is, it should be able to explain and reconcile the intended links between each performance objective and each decision area. The process of reconciliation takes place between what is required from the oper- ations function (performance objectives) and how the operation tries to achieve this through the set of choices made (and the capa- bilities that have been developed) in each decision area.

Figure 3.13 shows a simplified example of how the operations strategy matrix can be used. A parcel courier service competes primarily on its quality and dependability of service, with price (cost) and innovation also being fairly important. The range of services offered is not unimportant, but not of prime concern. The company believes its quality of service is going to be influenced largely by invest- ment in ‘track and trace’ technology and its knowledge management system (that allows improvements in its processes to be recorded and shared). Other key intersections are as illustrated in the figure.

Group building corporate capability in high- technology products and services

Micraytech business grows through systems-based innovations

Experiment with ‘modular’ design of key products and components

Customers seem to be confused by continual system innovation, also costs increasing

Top-down

Bottom-up

Growth market is

in ‘integrated metrology systems’

Maintain technical

skills, increase software

development, data

exchange and client

liaison, skills.

Maintain position in ‘individual metrology devices’

Outside-in Inside-out

Not all modules can be integrated

Need to buy in technical

capabilities for interface

modules

Develop supply

capability to include suppliers’

equipment to client needs

Operations develops modular-based hi- tech systems that provide highly

customised flexibility and innovation at relatively low cost through close

relationships with both clients and suppliers

Operations principle An operation’s strategy should articulate the relationship between operations objectives and the means of achieving them.

Figure 3.12 Top-down, outside-in, bottom-up, and inside-out perspectives of the Micraytech operations strategy

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CHAPTER 3 OPERATIONS STRATEGY 93

Note that not all cells are occupied. This is not because there is no relationship between the perfor- mance objectives and the decisions that these cells represent; it is that the decisions are not seen as being particularly important in the context of the whole strategy.

The ‘line of fit’ between market requirements and operations capabilities The operations strategy matrix is a good model for testing whether market requirements and the opera- tions capability perspectives fit together. It makes explicit the specific aspects of market requirements (quality, speed, dependability, flexibility, cost, etc.) and the decisions that support operations capability (design, delivery and development). The disadvantage is that it gives little sense of the dynamics of recon- ciliation – how the balance between market requirements and the operations capability changes over time. This is where the ‘line of fit’ model is useful. It is based on the idea that, ideally, there should be a reasonable degree of alignment, or ‘fit’, between the requirements of the market and the capabilities of the operation. Figure 3.14 illustrates the concept of fit diagrammatically. The vertical dimension represents the (outside-in) nature of market requirements that reflect the intrinsic needs of customers or their expectations. This includes such factors as the strength of the brand or reputation, the degree of differentiation and the extent of market promises. Moving along this dimension indicates a broadly enhanced level of market performance. The horizontal scale repre- sents the level of the organization’s operations capabilities. This includes its ability to achieve its competitive objectives and the effec- tiveness with which it uses its resources. Moving along the dimension indicates a broadly enhanced level of operations capabilities and therefore operations performance.

While the line of fit model is conceptual rather than a practical tool, it does illustrate some ideas around the concept of strategic improvement. In terms of the framework illustrated in Figure 3.14(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 3.14(a) therefore represents a ‘line of fit’ with market requirements and operations capabilities in balance.

H o w

m ar

ke t

re q u ir

em en

ts a

re m

etQuality of service Track and trace technology

Knowledge management system

Vehicle maintenance programme

Customer service centre feedback

Location

Sorting systems, Variety of vehicles

Demand–capacity management

Route scheduling system

Process standardization

Location of depots

Range of services

Delivery dependability

Innovation

CostO p er

at io

n s

p er

fo rm

an ce

o b je

ct iv

es

Strategic ‘design’ decisions

How operations resources are used

Strategic ‘delivery’ decisions

Operations strategy decisions

Strategic ‘development’ decisions

Figure 3.13 The operations strategy matrix defines operations strategy by the intersections of performance objectives and operations decisions – in this case for a parcel delivery courier

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

2 Achieving ‘sustainable’ alignment – It is not enough to achieve some degree of alignment to a single point in time. Equally important is whether operations processes can adapt to new market conditions.

3 Improving overall performance – If the requirements placed on the organization by its markets are relatively undemanding, then the corresponding level of operations capabilities will not need to be particularly high. However, the more demanding the level of market requirements, the greater will have to be the level of operations capabilities. In Figure 3.14(a) point A represents alignment at a low level, while point B represents alignment at a higher level. The assumption in most firms’ oper- ations 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, are generally more difficult for competitors to match.

Deviating from the line of fit During the improvement path (red dashed arrow) from A to B in Figure 3.14(a) it may not be possible to maintain the balance between market requirements and operations performance. At a strategic level, there are risks deriving from any deviation from the ‘line of fit’. For example, 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 3.14(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 could 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 prod- ucts 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 improvement from giving value to the company. This is represented by point Y on Figure 3.14(b).

Using the importance–performance matrix to determine operations strategy improvement priorities One can use the idea of comparing market and operations perspectives at a more focused and disaggregated level to provide direct guidance to operations managers. So, rather than ask generally, ‘what are the market requirements for our products and/or services?’ one asks ‘how important are

Figure 3.14 In operations improvement, there should be ‘fit’ between market requirements and operations performance. Deviation from the line of ‘fit’ can expose the operation to risk

C u rr

en t

re q

u ir em

en ts

In te

n d

ed re

q u ir em

en ts

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

A

X Y

B

(b)

L ev

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ar ke

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Current capability Level of operations capability

Intended capability

A

B

(a)

L ev

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Li ne

o f fi

t

capability change

Extent of operations

re q

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c h an

g e

E xt

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o f

m ar

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O P E R AT I O N S I N P R AC T I C E

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. The company was omni- present and extremely powerful, a pioneer that had supplied the first mass wave of the expanding mobile phone industry. It dominated the market in many parts of the world and the easily recognizable Nokia ring-tone echoed everywhere from boardrooms to shopping malls. So why did this, once domi- nant, company eventually sink to the point where it was forced to sell its mobile communications business to Micro- soft? The former Nokia CEO, Jormal Ollila, admitted that Nokia made several mistakes, but the exact nature of those mistakes is a point of debate among business commenta- tors. Julian Birkinshaw, a Professor at London Business School, dismisses some of the most commonly cited reasons. Did it lose touch with its customers? Well, yes, but by defi- nition 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 proto- type touchscreen before the iPhone was launched, and its smartphones were technologically 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 ecosys- tem in this case is a term used to describe the complex system of interdependent 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 operations strategy that failed to allocate resources appropriately 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 engineers were great at designing and producing hardware, but not the programs that drive the devices. They underestimated the importance of software (including, crucially, the apps that run on smartphones). 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 communications market and the technology developments being actively pursued by competitors. Arguably, it was 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.

Nokia’s failure to adapt15

the competitive factors that characterize a product or service?’ The intention is to gain an under- standing 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 importance of operations objectives within the operation. Simi- larly, 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 factors?’ But how good is our performance against what criteria? Strategically the most revealing point of comparison is with competitors. Competitors are the points of comparison against which the oper- ation can judge its performance. From a competitive viewpoint, as operations improves its performance, the improvement which matters most is that which takes the operation past the performance levels achieved by its competitors. The role of competitors then is in determining achieved performance. (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

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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 immediately improved. Customers may not particularly value this aspect of performance.

▶ Judging importance to customers – Earlier, we introduced the idea of order winning, qualifying and less important competitive factors, and one could take these three categories as an indication of the relative importance of each performance factor. But usually one 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 to divide each category into three further points representing strong, medium and weak positions. Figure 3.15(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 operation is better than, the same as, 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 discriminating nine-point performance scale, as shown in Figure 3.15(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 3.16 shows an importance–performance matrix divided into zones of improvement priority (see later).

The first zone boundary is the ‘lower bound of acceptability’, shown as line AB in Figure 3.16. 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

Figure 3.15 Nine-point scales for judging importance and performance

(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

Operations principle Improvement priorities are determined by importance for customers and performance against competitors or similar operations.

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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, 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 the same degree of improvement priority. A boundary approxi- mately 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 priority. 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. They must be considered as candidates for immediate improvement.

▶ The ‘excess?’ zone – factors in this area are ‘high performing’, but not important to customers. The question must be asked, therefore, whether the resources devoted to achieving such perfor- mance could be used better elsewhere.

How can the process of operations strategy be organized? An operations strategy is the starting point for operations improvement. It sets the direction in which the operation will change over time. It is implicit that the business will want operations to change for the better. However, unless an operations strategy gives some idea as to how improvement will happen, it is not fulfilling its main purpose. This is where considering the process of operations strategy comes in. It is concerned with the method that is used to determine what an operations strategy should be and how it should be

Better than

Worse than

Less important Qualifying

Order winning

HighLow

Same as

G o

o d

B ad

Appropriate

Lowe r bou

nd of acce

ptabi lity

Excess?

E

A

F

B

D

Importance for

customers

Improve

6 4 1235789 9

1

2

3

4

5

6

7

8 Urgent action

P er

fo rm

an ce

ag ai

n st

co m

p et

ito rs

Figure 3.16 Priority zones in the importance–performance matrix

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98 PART ONE DIRECTING THE OPERATION

Worked example

EXL Laboratories is a subsidiary of an electronics company. It carries out research and development as well as technical problem-solving work for a wide range of companies, including companies in its own group. It is particularly keen to improve the level of service which it gives to its customers. However, it needs to decide which aspect of its performance to improve first. It has devised a list of the most important aspects of its service:

▶ The quality of its technical solutions – the perceived appropriateness by customers. ▶ The quality of its communications with customers – the frequency and usefulness of information. ▶ 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 assigned a score to each of these factors using the 1–9 scale that we described in Figure 3.15. After this EXL turned its attention to judging the laboratory’s performance against competitor organizations. Although it has bench- marked information for some aspects of performance, it has to make estimates for the others. Both these importance and performance scores are shown in Figure 3.17.

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 3.18. It shows that the most important aspect of competitiveness – the ability to deliver sound technical 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 depend- ability 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. The matrix also indicates that the company’s docu- mentation 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. ▶ The exercise gives purpose and structure to the debate on improvement priorities.

Figure 3.17 Rating ‘importance to customers’ and ‘performance against competitors’ on the nine-point scales for EXL Laboratories

Importance/performance scale

1 98765432

1 98765432

Key

Technical solution

Documentation Delivery speed

Delivery dependability Delivery flexibility

Specification flexibility Price/cost

Communications

Importance rating Performance rating

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CHAPTER 3 OPERATIONS STRATEGY 99

implemented. This is a complex and difficult thing to achieve in prac- tice. And although any simple step-by-step model of how to ‘do’ operations strategy will inevitably be a simplification of a messy real- ity, we shall use a four-stage model to illustrate some of the elements of ‘process’. This stage model is shown in Figure 3.19 and divides the process of operations strategy into formulation, implementation, monitoring and control.16 The four stages are shown as a cycle because strategies may be revisited depending on the experience gained from trying to make them happen.

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 operations management, formulating an operations strategy is likely to be only an occasional activity. Some firms will have a regular (e.g. annual) planning cycle and operations strategy consideration may form part of this. However, the extent of any changes made in each annual cycle is likely to be limited. In other words, the ‘complete’ process of formulating an entirely new operations strategy will be a relatively infrequent event. There are many ‘formulation processes’ which are, or can be, used to formulate operations strat- egies. Most consultancy companies have developed their own frameworks, as have several academics.

Figure 3.18 The importance–performance matrix for EXL Laboratories

Documentation 2

3

3 2 1

4

4

5

5

6

6

7

7

8

8 9

9

1

Specification flexibility

Delivery dependability

Cost

Delivery flexibility

Delivery speed

Low

Less important

Worse than

Same as

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G o

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B ad

Qualifying Order

winning High

Communications

Importance for

customers

P er

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p et

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rs

Technical solution

Figure 3.19 The stages of the process of operations strategy

Operations strategy formulation

Operations strategy implementation

Operations strategy control

Operations strategy monitoring

Operations principle The process of operations strategy involves formulation, implementation, monitoring and control.

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100 PART ONE DIRECTING THE OPERATION

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 ‘the best’ is a judgement that can only be applied in hindsight. Yet, even if we cannot assess the ‘goodness’ of a strategy 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? Busi- ness history is littered with companies that simply failed to notice the potential impact of, for instance, new process technology, or emerging changes in their supply network.

▶ Is operations strategy coherent? – As we discussed earlier, 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.

▶ Does operations strategy have correspondence? – Again, as we discussed earlier, correspondence is when the strategies pursued correspond to the true priority of each performance objective.

▶ Does operations strategy identify critical issues? – The more critical the decision, the more atten- tion it deserves. Although no strategic decision is unimportant, in practical terms some decisions are more critical than others. The judgement over exactly which decisions are particularly critical is very much a pragmatic one that must be based on the particular circumstances of an individual firm’s operations strategy. However, the key is that they must be identified.

Operations strategy implementation Operations strategy implementation is the way that strategies are operationalized or executed. 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, strategy practitioners typically point to three key issues that are important in achieving successful implementation.

▶ Clarity of strategic decisions – There is a strong relationship between the formulation stage and the implementation stage of operations strategy. The crucial attribute of the formulation stage is clarity. If a strategy is ambiguous it is difficult to translate strategic intent into specific actions. With clarity, however, it should be easier to define the intent behind the strategy, the few important issues that need to be developed to deliver the intent, the way that projects should be led and resourced, who will be responsible for each task, and so on.

▶ Motivational leadership – Leadership that motivates, encourages and provides support is a huge advantage in dealing with the complexity of implementation. Leadership is needed to bring sense and meaning to strategic aspirations, maintain a sense of purpose over the implementation period, and, when necessary, modify the implementation plan in the light of experience.

▶ Project management – Implementation means breaking a complex plan into a set of 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 is the case during strategic change, organi- zations often want to track ongoing performance to make sure that the changes are proceeding as planned. Monitoring should be capable of providing early indications (or a ‘warning bell’ as some call it) by diagnosing data and triggering appropriate changes in how the operations strategy is being implemented. Having created a plan for the implementation, each part of it has to be monitored to ensure that planned activities are indeed happening. Any deviation from what should be happening (that is, its plans) can then be rectified through some kind of intervention in the operation.

Operations principle Operations strategies should be comprehensive, coherent, correspond to stated objectives and identify the critical issues.

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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 operationally (which is discussed in Chapter 10), but there are differences. At a strategic level, control can be difficult because strategic objec- tives are not always clear and unambiguous. Ask any experienced managers and they will acknowledge that it is not always possible to articulate every aspect of a strategic decision in detail. Many strategies are just too complex for that. So, rather than adhering dogmatically to a predetermined plan, it may be better to adapt as circumstances change. And, the more uncertain the environment, the more an operation needs to emphasize this form of strategic flexibility and develop its ability to learn from events.

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 final 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 3.19 can do little more than sensitize managers to some of the key issues that they should be taking into account when devising strategies. In fact, they argue, it is the articulation of the ‘content’ of operations strategy that is more useful than adhering to some over-simplistic description of a strategy process.

Summary answers to key questions

What is strategy and operations strategy?

▶ 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 that set the role, objectives and activities of the operation. It can be used to articulate a vision for the (potential) contribution of operations to organizational success (i.e. moving from stage 1 to stage 4 of the Hayes and Wheelwright model of operations contribution).

▶ Operations strategy has content and process. The content concerns the specific decisions that are taken to achieve specific objectives. The process is the procedure that is used within a business to formulate its strategy.

▶ There are four key perspectives on operations strategy – the ‘top-down’, market requirement (‘outside-in’), ‘bottom-up’ and operations resources (‘inside-out’).

▶ It is important to engage with a wide range of stakeholders, within and outside of the organization, when developing operations strategy.

How does operations strategy align with business strategy (top-down)?

▶ The ‘top-down’ perspective views strategic decisions at a number of levels. Corporate strategy sets the objectives for the different businesses that 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.

▶ It is important to consider correspondence between these different levels of strategy and coherence both with other functional strategies and within itself.

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▶ The concepts of the ‘business model’ and ‘operating model’ are useful in understanding the top-down perspective on operations strategy.

How does operations strategy align with market requirements (outside-in)?

▶ A ‘market requirements’ (outside-in) perspective of operations strategy sees the main role of operations as satisfying markets. From this perspective, operations performance objectives and operations decisions should be primarily influenced by a combination of customers’ needs and competitors’ actions.

▶ Market requirements are influenced by product/service differentiation and the stage that a product or service is within its lifecycle.

How does operations strategy align with operational experience (bottom-up)?

▶ The ‘bottom-up’ view of operations strategy emphasizes the ‘emergent’ view of strategy development based on day-to-day operational experience. While the ‘top-down’ perspective may describe how operations strategy (and other function strategies) should be developed, it often doesn’t describe how it is developed.

▶ Top-down and bottom-up perspectives are in fact complementary. In one direction, top-down perspectives can be used to judge the extent to which operational day-to-day activities reflect the higher-level strategies. In the other direction, experience gained from day-to-day activities can be accumulated and built into capabilities that can then be exploited strategically.

How does operations strategy align with operations resources (inside-out)?

▶ The ‘operations resource’ perspective (inside-out) 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.

▶ An operations resource perspective should start by understanding existing capabilities and constraints within the operation.

▶ Identifying strategic decision areas can help support capability building for operations and their extended supply networks.

▶ Strategic resources (also called capabilities or competences) are critical in generating sustainable competitive advantage. These resources are valuable, rare, costly to imitate and organized in a way to allow the organization to capture their value.

How are the four perspectives of operations strategy reconciled?

▶ Combined, the four perspectives give a good idea of how the content of operations strategy is developed and how operations excellence can act as a key source of competitive advantage. Among the models to support this activity are the operations strategy matrix, the ‘line of fit’ and the importance–performance matrix.

How can the process of operations strategy be organized?

▶ Formulating operations strategy is often called ‘the process’ of operations strategy and is made up of four stages – formulation, implementation, monitoring and control.

▶ Formulation is the process of clarifying the various objectives and decisions that make up the strategy, and the links between them. Implementation is the way that strategy is operationalized. Monitoring involves tracking on-going performance and diagnosing data to make sure that the changes are proceeding as planned and providing early indications of any deviation from plan. Control involves the evaluation of the results from monitoring so that activities, plans and performance can be assessed with the intention of correcting future action if required.

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Priority to the process Ray Kroc had been attracted by the cleanliness, simplicity, effi- ciency 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 methods of preparation. His burgers, buns, fries and beverages should taste just the same in Alaska as they did in Alabama. The answer was the ‘Speedee Service System’; a  standardized process that prescribed exact preparation methods, specially designed equipment and strict product specifications. The emphasis on process standardization 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. Its first operations manual prescribed rigorous cooking instructions such as temperatures, cooking 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 consist- ency 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 simultane- ously 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 compul- sive focus on process detail was not an end in itself. Rather it was to learn what contributed to consistent high-quality

It’s loved and it’s 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 ‘industrial- ized’, capitalist, bland, high-calorie and environmentally unfriendly commercialism. It is the best-known and most loved fast food brand in the world with more than 37,000 restaurants in 119 countries, providing jobs for 1.7 million staff and feeding 69 million customers per day (yes, per day !) or nearly 1 per cent of the entire world’s population. It is part of the homogenization of individual national cultures, filling the world with bland, identical, ‘cookie cutter’, Americanized and soulless operations that dehumanize its staff by forcing them to follow rigid 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 both of the people who produce food and of the people who eat it. It has also had its ups (mainly) and downs (occasionally) as markets, customers and economic circumstances have changed. 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’ operation 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 produc- ing and serving their food. Ray Kroc was so impressed that he persuaded the brothers to adopt his vision of creating McDon- ald’s restaurants 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 the brothers 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, 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’ (Ray Kroc).

C A S E ST U DY McDonald’s: half a century of growth17

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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 it was strict control of the menu that provided a platform of stability. Although its competitors offered a relatively wide variety of menu items, McDonald’s limited itself to ten 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 managed carefully. Well-utilized stores were important to franchise holders, so franchise opportunities were located only where they would not seriously undercut existing stores.

Securing supply McDonald’s says that it has been the strength of the alignment between the company, its franchisees and its suppliers (collec- tively 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 that 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, suppli- ers were always seen as a source of innovation. For example, one of McDonald’s meat suppliers, 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 consistent quality until it hit the grill. Keystone shared its technology with other McDonald’s meat suppliers 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-oper- ated restaurants and fees from restaurants operated by franchisees. McDonald’s views itself primarily as a franchisor and believes franchising is ‘important to delivering great, locally- relevant customer experiences and driving profitabil- ity’. However, it also believes that directly operating restaurants is essential to providing the company with real operations experience. Of the 36,000 restaurants in 117 coun- tries, approximately 80 per cent were operated by franchisees. But where some restaurant chains concentrated on recruiting franchisees that were then left to themselves, McDonald’s

service in practice and what did not. McDonald’s always saw learning as important. It founded ‘Hamburger University’, initially in the basement of a restaurant in Elk Grove Village, Illinois. It had a research and development laboratory to develop new cooking, freezing, storing and serving methods. Also, franchisees and operators were trained in the analytical techniques necessary to run a successful McDonald’s. It awarded degrees in ‘Hamburgerology’. But learning was not just for headquarters. 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 hamburger 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-quality beef patties. Rigorous food safety and quality standards and prac- tices are in place and executed at the highest levels every day.’

No story illustrates the company’s philosophy of learning and improvement better than its adoption of frozen fries. French fried potatoes had always been important. Initially, the company tried observing the temperature levels and cooking methods that produced the best fries. The problem was that the temperature during the cooking process was very much influ- enced by the temperature of the potatoes when they were placed into the cooking 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 temper- ature 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 temperature in the cooking vat increased by three 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 don’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 difficult. 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 devel- oped a method of air-drying the raw fries, quick frying and then freezing them. The supplier, who was a relatively small and local suppler when he first suggested storing Idaho Russets, grew its business to supply around half of McDonald’s US business.

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concerns and demographic changes. Partly it was because competitors were learning to either emulate McDonald’s operating system, or 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 sped up service times. Also, ‘fast food’ was devel- oping 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 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-en- hanced 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 healthier, 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 experience for our customers’. In particular it has, according to some analysts, ‘gone back to basics’, a strategy used by McDonald’s Chief Executive Officer, Steve Easterbrook, when he was head of the company’s British 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 the 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 termi- nal decline, and the McDonald’s brand is so closely associated with that market 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?

expected its franchisees to contribute their experiences for the benefit of all. Ray Kroc’s original concept was that fran- chisees 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 restaurants themselves rather from initial franchise fees.

Initiating innovation Ideas for new menu items have often come from franchisees. 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 of tartar sauce, a fish fillet and cheese on the bottom bun. But Kroc wanted to push his own meatless sand- wich, called the hula burger: a cold bun with a piece of pineapple and cheese. Groen and Kroc competed on a Lenten Friday to see whose sandwich would sell more. Kroc’s hula burger failed, sell- ing 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 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 then reheated. Test-marketing the new product was positive, and in 1983 they were launched under the name Chicken McNug- gets. 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 reaction 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. It offered a choice of dressings for its grilled chicken salad with Caesar dressing (and croutons) or the lighter option of a driz- zle 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 fash- ion. 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 McDon- ald’s Empire. Growth in some parts of the world stalled. Partly this was due to changes in food fashion, nutritional

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Problems and applications

All chapters have ‘Problems and applications’ questions that will help you practise analysing operations. They can be answered by reading the chapter. Model answers for the first two questions can be found on the companion website for this book.

1 ZNR Financial, a large accountancy corporation, is looking to assess the operations functions in three of its locations around the world. The ZNR Malaysia operations is marginally better than the opera- tions of many of its competitors in the region, but still behind the very best players. The function is also viewed positively by other functions in the organization and its ‘voice is heard’ when it comes to strategy conversations. Arguably, ZNR Japan operations continues to provide the basis on which ZNR Japan competes – it recently developed advanced AI software to enable the company to access new larger corporate clients who, in addition to basic accountancy services, value the customer intelligence that working with ZNR Japan can offer them. ZNR Hong Kong operations is now clearly better than most of its competitors and has an active voice in the strategic direction of the firm. Recently, the operations team worked closely with marketing to respond to a key client’s request to develop more automated processing of high-volume, low-variety work on its behalf. The initiative has proved successful, so marketing is becoming increasingly keen to build on this internal ‘win-win’ relationship. Where would you position the three ZNR operations functions on the Hayes and Wheelwright model of operations contribution?

2 Giordano is one of the most widespread clothes retailers. It is based in Hong Kong and employs more than 8,000 staff in over 2,000 shops. But when it was founded, up-market shops sold high-quality products and gave good service. Cheaper clothes were piled high and sold by sales assistants more concerned with taking the cash than smiling at customers. The company questioned why they could not offer value and service, together with low prices. To do this, they raised the wages of their sales- people by over 30 per cent, and gave all employees 60 hours of training. New staff were allocated a ‘big brother’ or ‘big sister’ from experienced staff to help them develop their service quality skills. Even more startling by the standards of their competitors, they brought in a ‘no-questions asked’ exchange policy irrespective of how long ago the garment had been purchased. Staff were trained to talk to customers and seek their opinion on products and the type of service they would like. This was fed back to the company’s designers for incorporation into their new products. Their operating principles were summarized in its ‘QKISS’ list. Quality (do things right), Knowledge (keep experience up-to-date and share knowledge), Innovation (think ‘outside of the box’), Simplicity (less is more), Service (exceed customers’ expectations). (a) In what way did an appreciation of competitors affect the market position of the Giordano operation? (b) What are the advantages of sales staff talking to the customers?

3 Carry out an importance–performance analysis for an amusement park. In doing this, think about the competitive factors (i.e. the key ingredients) for this offering, their level of importance and their performance using the scale shown in Figure 3.15. Then map these onto an importance–performance matrix, as shown in Figure 3.16.

4 The Managing Partner of The Branding Partnership (TBP) was describing her business. ‘It is about four years now since we specialized in the small to medium firms’ market. Before that we also used to provide brand consultancy services for anyone who walked in the door. However, within the firm, I think we could focus our activities even more. There seem to be two types of assignment that we are given. About 40 per cent is relatively routine. Typically, these assignments are conventional market research and focus group exercises. These activities involve a relatively standard set of steps that can be carried out by relatively junior staff. Of course, an experienced consultant is needed to make some decisions. Customers expect us to be relatively inexpensive and fast in delivering the service. Nor do

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they expect us to make simple errors; if we did this too often we would lose business. Fortunately, our customers know that they are buying a “standard package”. However, specialist agencies have been emerging over the last few years and they are undercutting us on price. Yet I still feel that we can operate profitably in this market. The other 60 per cent of our work is for clients who require more specialist services, such as assignments involving major brand reshaping. These assignments are complex, large, take longer and require significant branding skill and judgement. It is vital that clients respect and trust the advice we give them in all “brand associated” areas such as product development, promotion, pricing and so on. Of course, they assume that we will not be slow or unreliable, but mainly it’s trust in our judgement backed up by hard statistics that is important to the client. This is popular work with our staff. It is both interesting and very profitable.’ (a) How different are the two types of business described? (b) It has been proposed that she split the firm into two separate busi- nesses: one to deal with routine services and the other to deal with more complex services. What would be the advantages and disadvantages of doing this?

5 DSD designs, makes and supplies medical equipment to hospitals and clinics. Its success was based on its research and development culture. Around 50 per cent of manufacturing was done in-house. Its products were relatively highly priced, but customers were willing to pay for its technical excel- lence and willingness to customize equipment. Around 70 per cent of all orders involved some form of customization from standard ‘base models’. Manufacturing could take three months from receiv- ing the specification to completing assembly, but customers were more interested in equipment being delivered on time rather than immediate availability. According to its CEO, ‘manufacturing is really a large laboratory. The laboratory-like culture helps us to maintain our superiority in leading edge product technology and customization. It also means that we can call upon our technicians to pull out all the stops in order to maintain delivery promises. However, I’m not sure how manufactur- ing, or indeed the rest of the company, will deal with the new markets and products which we are getting into.’ The new products were ‘small black box’ products that the company had developed. These were devices that could be attached to patients, or implanted. They took advantage of sophis- ticated electronics and could be promoted directly to consumers as well as to hospitals and clinics. The CEO knew their significance. ‘Although expensive, we have to persuade health care and insurance companies to encourage these new devices. More problematic is our ability to cope with these new products and new markets. We are moving towards being a consumer company, making and deliv- ering a higher volume of more standardized products where the underlying technology is changing fast. We must become faster in our product development. Also, for the first time, we need some kind of logistics capability. I’m not sure whether we should deliver products ourselves or subcontract this. Manufacturing faces a similar dilemma. On one hand, it is important to maintain control over production to ensure high quality and reliability; on the other hand, investing in the process technol- ogy to make the products will be very expensive. There are subcontractors who could manufacture the products, they have experience in this kind of manufacturing but not in maintaining the levels of quality we will require. We will also have to develop a “demand fulfilment” capability to deliver products at short notice. It is unlikely that customers would be willing to wait the three months our current customers tolerate. Nor are we sure of how demand might grow. I’m confident that growth will be fast but we will have to have sufficient capacity in place not to disappoint our new customers. We must develop a clear understanding of the new capabilities that we will have to develop if we are to take advantage of this wonderful market opportunity.’ What advice would you give DSD? Consider the operational implications of entering this new market.

6 During manoeuvres in the Alps, a detachment of soldiers got lost. The weather was severe and the snow was deep. In these freezing conditions, after two days of wandering, the soldiers gave up hope and became reconciled to a frozen death on the mountains. Then, to their delight, one of the soldiers 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 headquarters, they discovered that the map was not of the Alps at all, but of the Pyrenees. What is the relevance of this story to operations strategy?

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Selected further reading

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.

Slack, N. (2017) The Operations Advantage, Kogan Page, London. Apologies for self-referencing again! This book is written specifically for practitioners wanting to improve their own operations – short and to the point.

Slack, N. and Lewis, M. (2017) Operations Strategy, 5th edn, Pearson Education, Harlow. A book that takes a really deep dive into all aspects of operations strategy, with lots of cases and practical guidance.

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INTRODUCTION

Customers value innovation, and the businesses that provide it can succeed to a greater degree than their competitors which are content to provide the same offerings to their customers, created in the same old way. Companies such as Google, Amazon, Netflix, Nike, Airbnb, Apple and Dropbox have all been successful because they challenged the idea of what their markets wanted. Their products and services have been continually updated, altered and modified. Some changes are small, incremental adaptations to existing ways of doing things. Others are radical, major departures from anything that has gone before. The innovation activity is about successfully delivering change in its many different forms. Being good at innovation has always been important, but what has changed in recent years is the sheer speed and scale of innovation in industries all over the world. Innovation processes are also increasingly complex, with inputs from different individuals and departments within an organization, and a wide variety of external sources.

While operations managers may not always have full responsibility for service and product innovation, they’re always involved in some way, if only to provide the information and advice upon which successful service or product development depends. However, increasingly operations managers are expected to take a greater and more active part in product and service innovation. Unless a product, however well designed, can be produced to a high standard, and unless a service, however well conceived, can be

Managing product and service innovation4

Figure 4.1 This chapter examines product and service innovation

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

KEY QUESTIONS

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?

How should product and service innovation be resourced?

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implemented, they will never generate full benefits. In this chapter, we examine what is meant by product and service innovation ; the strategic role of innovation ; the key stages in the innovation process ; and aspects of resources that must be considered to support innovation. Figure 4.1 shows where this chapter fits into the overall operations model.

What is product and service innovation? There are a number of terms that we shall 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. Specifically, we explore three related terms of creativity, innovation and design.

Creativity, innovation and design The study of product and service innovation, what influences it and how to manage it, is a huge sub- ject. However, a repeating theme in most innovation research is ‘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 service 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.

The term ‘innovation’ 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’ (the American Heritage Dictionary), or ‘a new idea, method or device’ (Webster Online Dictionary). What runs through all these definitions is the idea of novelty and change. Inno- vation goes further than ‘creativity’ or ‘invention’ as it implies the process of transforming ideas into something that is not simply novel, but also has the potential to be practical and provide a commer- cial return.

‘Design’ is the process that transforms innovative ideas into something more concrete. Inno- vation creates the novel idea; design makes it work in practice. A design must deliver a solution

that will work in practice and is an activity that can be approached at different levels of detail. 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.

The innovation S-curve When new ideas are introduced in services, products or processes, they rarely have an impact that increases uniformly over time. Usually performance follows an S-shaped progress, as illus- trated in Figure 4.3. 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 per- formance improvements are experienced. However, with time, as experience and knowledge about the new idea grows, performance increases. As the idea becomes established, extending its performance further becomes increasingly difficult (Figure  4.3(a)). When an idea reaches its mature, ‘levelling-off’ period, it is vulnerable to new ideas being introduced which, in turn, move through their own S-shaped progression. This is how innovation works; the limits of one idea being reached prompt newer, better ideas, with each new S-curve requiring some degree of re-design (see Figure 4.3(b)).

Operations principle The product and service innovation process must consider three related issues of creativity, innovation and design.

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Figure 4.2 The relationship between creativity, innovation and design

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 4.3 The S-shaped curve of innovation

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

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O P E R AT I O N S I N P R AC T I C E

In 2016, Dyson, the technology company, released its latest product – the Dyson Supersonic, a £299 hairdryer that marked the company’s first move into the beauty sector and a major departure from its current range of products. Sir James Dyson’s ‘labour of love’ took four years and cost £50 million to develop. The price of the product was significantly more than other high-end hair- dryers and yet it was a phenomenal success, blitzing demand forecasts. According to Dyson, the priority was to ‘alleviate the frustrations with conventional hairdryers which are unwieldy, tend to have weak airflow, and have the ability to damage your hair’. The product was much lighter than traditional models, largely because the motor used in the Dyson product was so much smaller than traditional hairdryers. Steve Courtney, the project’s senior engineer commented that ‘bulky motors have held back hairdryer design. Developing our smallest, lightest digital motor meant we could change that.’ In addition, the new product overcame the issues of hair damage caused by

Dyson Innovation blows (and sucks) away the opposition1

high temperatures of many traditional hairdryers. The Dyson Supersonic operated at a maximum temperature of 150 degrees compared to around 230 degrees for its

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Incremental or radical innovation An obvious difference in how the pattern of new ideas emerges in different operations or indus- tries is the rate and scale of innovation. Some industries, such as telecommunications, enjoy frequent and often significant innovations. Others, such as house building, do have innova- tions, but they are usually less dramatic. So, some innovation is radical, resulting in discontin- uous, ‘breakthrough’ change, while other innovations are more incremental, leading to smaller, continuous changes. Radical innovation often includes large technological advancements that may require completely new knowledge and/or resources, making existing services and products obsolete and therefore non-competitive. Incremental innovation, by contrast, is more likely to involve relatively modest technological changes and to build upon existing knowledge and/ or resources, so existing services and products are not fundamentally changed. This is why established companies may favour incremental innovation: because they have the experience to have built up a significant pool of knowledge (on which incremental innovation is based). In addition, established companies are more likely to have a mindset that emphasizes continu- ity, perhaps not even recognizing potential innovative opportunities. New entrants to markets, however, have no established position to lose, nor do they have a vast pool of experience. As such, they may be more likely to try for more radical innovation.

leading competitors. In addition, Dyson’s team of aero-acoustic engineers reduced the sound of the haird- ryer significantly by pushing one of the key motor tones beyond the audible range for humans.

Whilst Dyson’s products may seem diverse (vacuum cleaners, hand dryers, fans, hairdryers, heaters and humid- ifiers), they share similarities in terms of the technology use to generate airflow. And this technological innovation started its journey back in 1978, when a young James Dyson noticed how the air filter in the spray-finishing room of a company where he had been working was constantly clogging with power 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 ques- tion 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 the product himself. Over the years, Dyson engi- neers have taken their vacuum technology further, developing core separator technology to capture even more microscopic dirt. Dirt now goes through three stages of separation. Firstly, dirt is drawn into a powerful outer cyclone. Centrifugal forces fling larger debris such as pet hair and dust particles into the clear bin at 500g (the maximum g-force the human body can take is 8g). Second, a further cyclonic stage, the core separator, removes dust particles as small as 0.5 microns from the airflow – parti- cles so small you could fit 200 of them on this full stop. Finally, a cluster of smaller, even faster cyclones generate centrifugal forces of up to 150,000g – extracting particles

as small as mould and bacteria. Dyson cleaners now outsell the rivals who once rejected them.

Other designs, like the Dyson Supersonic, built on these early innovations. The Dyson Airblade is an electric hand dryer that dries hands quicker (around 10 seconds) and uses less electricity than conventional hand dryers. The Dyson Air Multipliers are a range of fans and fan heaters that work very differently to conventional fans and electric heaters. They don’t have fast-spinning blades that chop the air and cause uncomfortable buffeting. Instead, they use Air Multiplier™ technology to draw in air and amplify it up to 18 times, producing an uninter- rupted stream of smooth air. Sir James 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 devel- oping a range of technologies to improve both industrial and consumer products so that the people using them get a better experience than with the comparable items that currently exist.’

Alongside the success of the Dyson Supersonic, the company also saw an explosion in revenues from China (244 per cent), South Korea (100 per cent) and Japan (30 per cent), driven largely by sales of its cordless vacuum cleaners. The firm also announced a £330 million invest- ment into its operations in Singapore aimed at improving both manufacturing and R&D capabilities, and opened a technology laboratory in China. Its biggest surprise, though, was its announcement in 2018 of a £2.8 billion investment in the development of three electric vehicles – a venture that auto industry commentators agreed was significant largely because of Dyson’s proven success in its innovation processes.

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What is the strategic role of product and service innovation? Product and service innovation is a risky business. Not every idea is transformed, or is capable of being incorporated, into the design of a successful product or service. Sometimes this is because an innovative 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 business 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 organ- izations that manage the incorporation of innovative ideas in the design of their products 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 pay- back. As such, good design takes innovative ideas and makes them practical. So the design activ- ity has one overriding objective: to provide products, services and processes which will satisfy the operation’s customers. Remember, an organization’s products and services are how markets judge it – they are its ‘public face’. Product designers try to achieve aesthetically pleasing designs that exceed customers’ expectations. They also try to design a product that performs well and is reliable during its lifetime. Further, they should design the product so that it can be manufac- tured easily and quickly. Similarly, service designers try to put together a service that exceeds customer expectations. Yet at the same time the service must be within the capabilities of the operation and be delivered at reasonable cost. Effective product and service innovation processes add value to any organization by:

▶ driving and operationalizing innovation, increasing market share and opening up new markets; ▶ differentiating products and services, making them more attractive to customers, while increasing

consistency in the company’s range, and helping to ensure successful product launches; ▶ strengthening branding, so that products and services embody a company’s values; ▶ reducing the overall costs associated with innovation, through more efficient use of resources,

reduced project failure rate and faster time to market.

O P E R AT I O N S I N P R AC T I C E

Innovation alliances and shared products are becoming increasingly common in the auto industry, mainly to keep down escalating development costs and to share the considerable investment needed to meet new regulatory requirements for carbon dioxide emissions and safety standards. BMW and Toyota are one such example, with a technology development partnership for a variety of projects including fuel cell systems, powertrain electrifica- tion, lightweight materials, and a joint sports car vehicle platform used for the BMW Z4 Roadster and Toyota Supra. The collaborative undertaking was designed to bring together the development expertise, knowledge and finan- cial resources of two of the most successful automobile companies in what they called ‘a mid-to-long-term collab- oration on next-generation environment-friendly technologies’. BMW’s chairman at the time, Norbert Reithofer, emphasized the strategic importance of the

partnership: ‘Toyota is the leading provider of environment- friendly technology in the volume segment and the BMW Group is the most innovative and sustainable

Innovation partnerships in the auto industry2

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manufacturer of premium automobiles. We are now joining forces to further develop environment-friendly technologies and to expand our innovation leadership in each of our segments.’ Akio Toyoda, president of Toyota, said the deal was ‘a great joy and a thrill’ and that he looked forward to allying his company to one that ‘makes cars that are fun to drive. Both companies will bring their wide-ranging knowl- edge, starting with that concerning environmental technologies, to the table and make ever-better cars.’ The new sports car platform brings together Toyota’s world- class manufacturing expertise and BMW’s engineering talents and understanding of high-performance engines. ‘We could do a sports car by ourselves. But if you look at the whole package . . . it makes sense. Both companies can have benefits. Sports cars are all about volumes because they can be relatively small’, said Herbert Diess, BMW board member and head of development.

However, not all alliances have been successful. Two years before the announcement of the Toyota–BMW deal, a partnership between VW and Suzuki broke up acrimoniously. The original intention was for the largest European carmaker, VW, to share development of a small car with Suzuki – the fourth player in the Japanese

market. The jointly developed model was supposed to be aimed at growing markets such as India through Suzuki’s leading position in that country. However, the deal fell apart. There were claims, which it denied, that VW was not doing as much sharing of its technology as Suzuki had envisaged, while VW argued that a deal between Suzuki and Fiat for diesel engines was a contractual breach. Suzuki had formed an alliance with Fiat some years earlier to make diesel engines in Asia and then extended the deal by sourcing diesel engines from Fiat for cars built in Hungary (Suzuki denied that the deal broke the agreement). After the break-up, industry analysts said the partnership had failed to benefit either company. Part of the problem seemed to be a lack of strategic fit. Volkswagen was a very big company trying to become the world’s biggest auto company, while Suzuki was a relatively small company trying to focus on specific regional markets. But there were also different, and contrasting, corporate cultures that inhibited coop- eration. Some saw Volkswagen as wanting to be the lead player in the partnership and Suzuki, with a reputation for valuing its independence, refusing to play the role of junior partner.

The process of design At its most basic level, the innovation activity is a process that involves many of the same design issues common to other operations processes. As such, it is 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 essentially very similar across a whole range of industries. In general, the better the design process is managed, the better the service and product offering. Figure  4.4 illustrates the design activity as an input– transformation–output diagram. The transformed resource inputs will consist mainly of information in the form of market forecasts, market preferences, technical data and potential design ideas. It is these ideas and information that will be transformed in the design process into the final design. The process of 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. It 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.

Performance objectives for the product and service innovation process The performance of the design process can be assessed in much the same way as we would con- sider the products and services that result from it, namely in terms of quality, speed, dependability, flexibility and cost. 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 on-going delivery of offerings once they are introduced to the market.

Operations principle

The design activity is a process that can be managed using the same principles as other processes.

✔

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Figure 4.4 The product and service design innovation activity as a process

OutputsInputs

Transformed resources, e.g. • Technical information • ar et information • Time information • esign ideas

Transforming resources, e.g. • Test and design e uipment • esign and technical sta • ead user customer feed ac • Supplier advice • Colla orators

Designs produced to appropriate standards of … • Quality • Speed • ependa ility • Fle i ility • Cost • Sustaina ility

The product/service design innovation

process

What does quality mean for the innovation process? Design quality is not always easy to define precisely, especially if customers are relatively satisfied with existing service and product 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 soft- ware are they in a position to articulate what they do or don’t 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 development the potential for harm is particularly high because drugs directly affect our health. This is why the authorities insist on such a pro- longed and thorough ‘design’ process (more usually called ‘devel- opment’ 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 relatively 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 dif- ferent. It means the degree of functionality, or experience, or aesthetics, or whatever the product or service is primarily competing on.

What does speed mean for the innovation process? The speed of design matters more to some industries than others. For example, design innovation in construction and aerospace happens at a much slower pace than in clothing or microelectronics. However, rapid product or service 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. Yet, no matter what the motivation, fast design brings a number of advantages.

▶ Early market launch – an ability to innovate speedily means that service and product offerings can be introduced to the market earlier and thus earn revenue for longer, and may command 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 service and product offerings are introduced to the market.

Operations principle Innovation processes can be judged in terms of their levels of quality, speed, dependability, flexibility, cost and sustainability.

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▶ Frequent market stimulation – rapid innovations allow frequent new or updated offerings to be introduced into the market.

Delays in the speed of the design result 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 (see Figure 4.5).

Figure 4.5 Delay in time to market of new innovations not only reduces and delays revenues, it 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

Delay in time to market

Cash

Delay in financial

break-even

Sales revenue

Cash flow

Delayed sales revenue

Delayed cash flow

Development costs

Development costs of delayed project

Time

O P E R AT I O N S I N P R AC T I C E

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 auto companies 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 their stores.

IKEA’s slow development process3 ▼

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What does dependability mean for the innovation process? Rapid innovation processes that cannot be relied on to deliver dependably create significant chal- lenges for organizations. Design schedule slippage can extend design times (speed effects), but worse, a lack of dependability adds to the uncertainty surrounding the innovation process. Unexpected technical difficulties, such as suppliers who themselves do not deliver solutions on time, or markets that change during the innovation process itself, 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, process bottlenecks and resource shortages. Disturbances to the innovation process may be minimized through close liaison with suppliers as well as market or environmental monitoring. Nevertheless, unexpected disruptions will always occur, especially for the most innovative product and service designs. This is why flexibility within the innovation process is one of the most important ways in which dependable delivery of new service and product offerings can be ensured.

What does flexibility mean for the innovation process? Flexibility in the innovation process is the ability to cope with external or internal change. The most common reason for external change is that markets, or specific customers, change their require- ments. Although flexibility may not be needed in relatively predictable markets, it is clearly valu- able in more fast-moving and volatile markets, where one’s own customers and markets change, or where the designs of competitors’ offerings dictate a matching or leapfrogging move. Internal changes include the emergence of superior technical solutions. In addition, the increasing complexity and interconnectedness of service and product 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 holders 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 bene- fits to include extra travel insurance may also mean the redesign of the separate insurance element of the package. One way of measuring innovation flexibility is to compare the cost of modifying a design in response to such changes against the consequences for 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 innovation process? The cost of innovation is usually analysed in a similar way to the on-going cost of delivering offer- ings 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.

‘It’s five years of work into finding ways to engineer cost out of the system, to improve the functionality,’ IKEA’s 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 prod- uct 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 one 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 visits thousands of homes annually and compiles reports that look as far as a decade into the future. So without the imperative to change its designs too frequently, product cost becomes a key driver. Rather than buy prefabricated components from outside sources, IKEA will develop its own if it will keep costs down.

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What does sustainability mean for the innovation process? The sustainability of a product or service is the extent to which it benefits the ‘triple bottom line’ – people, planet and profit. The design innovation process is particularly important in ultimately impacting on the ethical, environmental and economic wellbeing of stakeholders. Organizations increasingly consider sustainability in the design process. For example, some innovation activity is particularly focused on the ethical dimension of sustainability. Banks have moved to offer cus- tomers ethical investments that seek to maximize 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 promoting 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; and online companies may institute customer complaint charters.

Product or service 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 flooring; 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 industry, Unilever and Procter & 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 panels. Some innova- tions focus on making product components within an offering easier to recycle or re-manufacture 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 re-used. For example, in 2018 Apple debuted a new robot, named Daisy, capable of disassembling 200 iPhones per hour in order to recover the various precious materials contained within. In the automotive industry, over 75 per cent of materials are now recycled.

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 circular economy’. The circular economy (also called closed-loop or take-back 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 regenerate 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 economy examines what can be done right along the supply and use chain so that as few resources as possible are used, then products are recovered and regenerated at the end of their conventional life. This means designing products for longevity, reparability, ease of dismantling and recycling.

O P E R AT I O N S I N P R AC T I C E

Typical of the companies that have adopted the idea of the circular economy is Newlife Paints. It ‘remanufactures’ waste water-based paint back into a premium grade emul- sion. All products in its 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 industrial

chemist, Keith Harrison. His garage was becoming a little unruly, after many years of do-it-yourself projects. Encour- aged 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 environ- mentally responsible solution to waste paint. ‘I kept thinking I could do something with it, the paint had an

Product innovation for the circular economy4

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intrinsic value. It would have been a huge waste just to throw it away.’ Keith thought somebody must be recycling it, but no one was, and he set about finding a way to repro- cess waste paint back to a superior grade emulsion. After two years of research, Keith successfully developed his tech- nology, which involves removing leftover paint from tins and blending and filtering 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, he now licenses his technology to companies such as the giant French transnational waste company Veolia. ‘By licensing we can have more impact and spread internationally,’ he says.

Figure 4.6 The stages of product/service design innovation

Concept generation

Concept screening

Preliminary design

Evaluation and

improvement

Prototyping and final design

What are the stages of product and service innovation? Fully specified designs rarely spring, fully formed, from a designer’s imagination. The design activ- ity will generally pass through several key stages. It moves from the concept generation stage, to a screening stage, to a preliminary design stage that produces a design to be evaluated and prototyped before reaching the final design.

To create a fully specified service or product offering, potential designs tend to pass through a sequence of stages in the innovation process, shown in Figure 4.6. Although in practice designers will often recycle or backtrack through the stages and the sequence of stages will differ to some extent, most will use a stage model similar to this one. The innovation process starts with a general idea or ‘concept’ and progresses through to a fully defined specification for the offering incorporating various service and product compo- nents. In between these two states, the offering may pass through stages such as concept screening, preliminary design (including consideration of standardization, commonality, modularization and mass customization), evaluation and improvement, prototyp- ing and final design.

Concept generation Concept generation is where innovative ideas become the inspiration for new service or product concepts. And innovation can come from many different sources, both from within the organization and from outside.

Operations principle Design processes involve a number of stages that move an innovation from a concept to a fully specified state.

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O P E R AT I O N S I N P R AC T I C E

When Apple introduced its first-generation iPhone, the world of smartphones was changed forever. It was argu- ably one of the most influential products ever to be launched in the consumer technology market and set the benchmark for smartphones that came after it. Millions of iPhones have been sold over the last decade, making Apple one of the world’s most valuable companies. However, the way that Apple managed the innovation process for its iPhone remained something of a secret for years after the product’s launch. Originally visualized as a tablet 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, multi-touch display, 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 scrolling 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 challenging for Apple’s engineering team. They had to create an entirely new way in which users could interact with their phones. There were many novel unsolved problems to overcome. Every single part of the design had to be rethought to adapt to

touch. For example, engineers 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 of 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 fundamen- tal 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 colour and hairdos. We had to develop technology, basically a number of

How the iPhone disrupted the smartphone market5

Ideas from research and development – Many organizations have a formal research and development (R&D) function. As its name implies, its role is twofold. Research develops new knowledge and ideas in order to solve a particular problem or to grasp an opportunity. Develop- ment 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 persis- tence. One product has commemorated the persistence of its development engineers in the product’s name. Back in 1953 the Rocket Chemical Company set out to create a rust-prevention solvent and degreaser to be used in the aerospace industry. It took them 40 attempts to get the water displacing formula worked out. So that is what they called the product. WD-40 literally stands for Water Displacement, 40th attempt.

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 SwanVestas, the matchmaker, suggested having one instead of two sandpaper strips on the matchbox. It saved a fortune!

▼

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Ideas from competitor activity – Most organizations follow the activities of their competitors. A new idea from a competitor may be worth imitating, or better still, improving upon. Taking apart a competitor’s service or product to explore potential new ideas is called ‘reverse engineering’. Some aspects of services may be difficult to reverse engineer (especially ‘back-office’ services), as they are less transparent to competitors.

Ideas from customers – Marketing, the function generally responsible for identifying new service or product opportunities, may use market research tools for gathering data from customers in a structured way to test out ideas or check services or products against predetermined criteria. Ideas may also come from customers on a day-to-day basis; from complaints, or from every-day transac- tions. Organizations are increasingly developing mechanisms to facilitate the collection of this form of information. At a group level, crowdsourcing is the process of getting work or funding, or ideas (usually online) from a crowd of people.

Open sourcing – using a development community Not all ‘products’ or services are created by professional, employed designers for commercial purposes. An open community, including the people who use the products, develops many of the software applications that we all use. If you use Google, Wikipedia or Amazon, you are using open-source software. The basic concept of open source software is simple. Large commu- nities of people around the world, who have the ability to write software code, come together and produce a software product. The finished product is not only available to be used by anyone or any organization for free, but is regularly updated to ensure it keeps pace with the necessary improvements. The production of open source software is very well organized and, like its commercial equivalent, is continuously supported and maintained. However, unlike its com- mercial equivalent, it is absolutely free to use. Over the last decade, the growth of open source has been phenomenal with many organizations transitioning over to using this stable, robust and secure software. 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

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, they were located on a separate and secured floor on Apple’s campus. The devel- opment 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.

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 objec- tive was to create a ‘new, original, and beautiful object [that was] so wonderful that you couldn’t imagine how

you’d follow it’. The design group, Stringer explained, comprised 16 ’maniacal’ individuals who shared one singu- lar purpose – to ‘imagine products that don’t exist and guide them to life’. They worked closely together, often gathering around a ‘kitchen table’ where team members exchanged ideas, often in a ‘brutally honest’ way. To the designers, even the tiniest 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 tech- nology and production bugs during the iPhone’s development is partly a testament to its design team’s belief, both in their technological skills and in their under- standing of what people will buy. Apple avoids conducting market research when designing its products, a policy intro- duced 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 insur- ance 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.’

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type of development also encourages compatibility between products. BMW, for example, was reported to be developing an open-source platform for vehicle electronics. Using an open-source approach, rather than using proprietary software, BMW can allow providers of ‘infotainment’ services to develop compatible, plug-and-play applications.

Crowdsourcing 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 changed when enough has been added to dishwater. Other uses of the idea involve government agencies asking citizens to prioritize spending (or cutting spending) projects.

‘Lead users’ and ‘harbingers of failure’ Although the marketing function is generally responsible for identifying new service or product opportunities, often using formal structured market research tools, ideas may come less formally: for example, listening to customers on a day-to-day basis from everyday transactions or from complaints. A particularly useful source of customer-inspired innovation, especially for products and services subject to rapid change, is so-called ‘lead users’. Lead users are users who are ahead of the majority of the market on a major market trend, and who also have a high incentive to innovate. Producers seeking user innovations to manufacture try to source innovations from lead users – because these will be most profitable to manufacture. These are the customers who, unlike most customers, have the real-world experience needed to problem solve and provide accurate data to inquiring market researchers. As these lead users will be familiar with both the positives and negatives of the early versions of products and services, they are a particularly valuable source of potentially innovative ideas.

By contrast, another category of customer may be valuable because of their ability to consistently make bad purchase decisions. One study claims that the same group of consumers has a tendency to purchase all kinds of failed products, time after time, flop after flop. These are the ‘harbingers of failure’. As one of the authors of the study put it, ‘These harbingers of failure have the unusual prop- erty that they keep on buying products that are taken from the shelves. These star-crossed consumers can sniff out flop-worthy products of all kinds. If you’re the kind of person who bought something that really didn’t resonate with the market, say, coffee-flavoured Coca-Cola, then that also means you’re more likely to buy a type of toothpaste or laundry detergent that fails to resonate with the market.’

Concept screening Concept screening is the first stage of implementation where potential innovations are considered for further development against key criteria. It is not possible to translate all concepts into viable product or service packages. Organizations need to be selective. For example, DuPont estimates that the ratio of concepts to marketable offerings is around 250-to-1. In the pharmaceuticals industry, the ratio is closer to 10,000-to-1. The purpose of concept screening is to take initial concepts and evaluate them for their feasibility (can we do it?), acceptability (do we want to do it?) and vulnera- bility (what are the risks of doing it?). Concepts may have to pass through many different screens,

and several functions might be involved. Table 4.1 gives typical feasibility, acceptability and vulnerability questions for market- ing, operations and finance functions.

During concept screening a key issue to consider is deciding how big the innovation should be and where it should focus – innovation to the customer offering as opposed to innovation to the process of

Operations principle The screening of designs should include feasibility, acceptability and vulnerability criteria.

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delivery. The vast majority of innovation is continuous or incremental in nature. Here the emphasis is on steady improvement to existing offerings and to the processes that deliver them. This kind of approach to innovation is very much reflected in the lean and total quality management perspectives. On the other hand, some innovation is discontinuous and involves radical change that is ‘new to the world’. Discontinuous innovation is relatively rare – perhaps 5–10 per cent of all innovations could be classified as such – but creates major challenges for existing players within a market. This is because organizations are often unwilling to disrupt current modes of working in the face of a barely emerging market, but by the time the threat has emerged more fully it may be too late to respond. Clayton Chris- tensen refers to this problem as the Innovator’s Dilemma,6 which supports the ideas of the renowned economist Joseph Schumpeter that innovation should be a process of ‘creative destruction’.

The design funnel Applying these evaluation criteria progressively reduces the number of options which will be avail- able 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 4.7 shows what is sometimes called the design funnel, depicting the progressive reduction of design options from many to one. But reducing design uncertainty also impacts on the cost of changing one’s mind on some detail of the design. In most stages of design, 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 decisions already made become increasingly expensive to change.

Preliminary design Having generated an acceptable, feasible and viable service or product concept, the next stage is to create a preliminary design. The first task in this stage of design is to define exactly what will go into the service or product. For service-dominant offerings this may involve documentation in the form of job instructions or ‘service blueprints’. For product-dominant offerings, preliminary design involves defining product specifications (McDonald’s has over 50 specifications for the potatoes used for its fries) and the bill of materials, which details all the components needed for a single product. 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’, shown in Figure 4.8, is the diagram that shows how these components all fit together to make the final product.

At this stage, there are significant opportunities to reduce cost through design simplification. The most elegant product and service innovations are often the simplest. However, when an operation delivers a variety of services or products (as most do) the range can become complex, which in turn

Evaluation criteria Marketing Operations Finance

Feasibility Is the market likely to be big enough?

Do we have the capabilities to deliver it?

Do we have access to finance to develop and launch it?

Acceptability How much market share could it gain?

How much will we have to reorganize our activities to deliver it?

How much financial return will there be on our investment?

Vulnerability What is the risk of it failing in the marketplace?

What is the risk of our being unable to deliver it acceptably?

How much money could we lose if things do not go to plan?

Table 4.1 Some typical evaluation questions for marketing, operations and finance

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Critical commentary

The whole process-based approach to innovation could be interpreted as implying that all new offerings are created in response to a clear and articulated customer need. While this is usually the case, especially for services and products that are similar to (but presumably better than) their predecessors, more radical innovations are often brought about by the innovation itself creating demand. Customers don’t usually know that they need something radical. For example, in the late 1970s people were not asking for microprocessors, they did not even know what they were. An engineer in the USA improvised them 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. Similarly, fly-by-wire, digital cameras, Maersk’s super-slow container ships, sushi on conveyor belts and the iPad are all examples of innovations that have been ‘pushed’ by firms rather than ‘pulled’ by pre-existing customer demand.

Nor does everyone agree with the dominant rational model in which possible design options are progressively reduced stage by stage through the optimization of known constraints and objectives. For some this neat model of the innovation, which underlies much business and engineering design literature, fails to accurately reflect the creativity, arguments and chaos that sometimes characterize real innovation projects. 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 their mind, looking for an opportunity to be used. Second, the number of options being considered often increases as time goes by. This may actually be a good thing, especially if the activity was unimaginatively specified in the first place. Third, the real process of innovation involves cycling back, often many times, as potential solutions raise fresh questions or become dead ends, and as requirements and constraints evolve. In summary, the idea of the design funnel does not describe the process of innovation nor does it necessarily even describe what should happen. The action-centric or co-evolution perspective of innovation represents the antithesis of the rational model. It posits that offerings are designed through a combination of emotion and creativity ; that the process by which this is done is generally improvised; and that the sequencing of innovation stages is in no way universal.

Figure 4.7 The design funnel – progressively reducing the number of possibilities until the final design is reached

Choice and evaluation screens

Large number of design options

One design

T im

e

Certainty regarding the final design

Uncertainty regarding the final design

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increases costs. Designers adopt a number of approaches to reduce design complexity. These include standardization, commonality, modularization and mass customization.

Standardization Operations sometimes attempt to overcome the cost penalties of high variety by standardizing their products, services or processes. Often it is the operation’s outputs that are standardized. Examples of this are fast-food restaurants, discount supermarkets or telephone-based insurance companies. Perhaps the most com- mon 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. Many organizations have significantly improved their profitability by careful variety reduction aimed at offering choice only where it is really valued by the end customer.

Commonality Using common elements within a service or product can also simplify design complexity. Standardizing the format of information inputs to a process can be achieved by using appropriately designed forms or screen formats. The more different services and products can be based on com- mon 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, feature virtually identical flight 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 fly any of them. The advantages of commonality for the airline opera- tors include a much shorter training time for pilots and engineers when they move from one aircraft to another. In addition, 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.

Figure 4.8 Component structure of a remote mouse

Level 3

Level 4

Level 2

Level 1

Remote presentation mouse

Receiver unit Packing

R/C unit

USB connector

LeafletOuter

LogoMoulding Control unitMoulding

TransmitterButton

Upper cover Main

assembly

Presentation mouse

Level 0

Operations principle A key objective in preliminary design should be simplification through standardization, commonality, modularization and mass customization.

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Modularization The use of modular design principles, seen in computers for example, involves designing standard- ized ‘sub-components’ of a service or product, which can be put together in different ways. These standardized modules, or sub-assemblies, can be produced in higher volume, thereby reducing their cost. The package holiday industry can assemble holidays to meet a specific customer requirement, including pre-designed and purchased air travel, accommodation, insurance and so on. Similarly, in education there is an increasing use of modular courses, which allow ‘customers’ choice but ensure each module has economical student volumes.

Mass customization Flexibility in design can allow the ability to offer different things to different customers. Normally high variety means high cost, but some companies have developed their flexibility in such a way that customized offerings are produced using high-volume processes and thus costs are minimized. This approach is called mass customization. For example, Paris Miki, an up-market eyewear retailer that has the largest number of eyewear stores in the world, uses its own ‘Mikissimes Design System’ to capture a digital image of the customer and analyse facial characteristics. Together with a list of customers’ personal preferences, the system then recommends a particular design and displays it on the image of the customer’s face. In consultation with the optician, the customer can adjust shapes and sizes until the final design is chosen. Within the store the frames are assembled from a range of pre-manufactured components and the lenses ground and fitted to the frames. The whole process takes around an hour.

Design evaluation and improvement The purpose of this stage in the innovation process 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 product is tested in the mar- ket. 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 function 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 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 4.9 shows a simple QFD matrix used in the design of a promotional USB data storage stick. The QFD matrix is a formal articu- lation 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 performance 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 service or product.

▶ The central matrix (sometimes called the relationship matrix) represents a view of the interrela- tionship 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 relationships 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 correlations (positive or negative) between the various design characteristics.

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Prototyping and final design At around this stage in the design activity it is necessary to turn the improved design into a proto- type 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 include computer simulations but also the actual implementation of the service on a pilot basis. Many retailing organizations pilot new services and products in a small number of stores in order to test customers’ reaction to them. Virtual reality-based simulations allow businesses to test new services and products 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.

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 products include both alpha and beta test phases, both of which are intended to uncover ‘bugs’ (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 commis- sioned) 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 performed in a virtual or simulated environment, rather than in ‘the real world’. After alpha testing, 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 short trial with a small sample) before

Figure 4.9 QFD matrix for a promotional USB data storage stick

C o

n n ec

to r

Hows

W h

a ts

Competitive score

5 = Maximum

1 = Minimum

‘Hows’ vs ‘Hows’

Strong positive

Positive

Negative

Strong negative1 2 3 4 5

Technical evaluation (5 is best)

F in

is h

P ro

fil e

F la

sh c

h ip

C as

in g

m at

l.

Im p

o rt

an ce

t o

cu st

o m

er s‘Whats’ vs ‘Hows’

Strong relationship

Medium relationship

Weak relationship

1 2 3 4 5

4

3

2

7

6

10

Size

Robustness

Attach to key ring

Capacity

Print logo

Price

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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 evi- dent with user participation. This is why beta testing is almost always performed at the user’s prem- ises 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.

How should product and service innovation be resourced? As is the case with any type of process, for a product or service innovation process to function effectively, it must be appropriately designed and resourced. In this section, we examine five key questions that should be considered in resourcing the innovation process:

▶ What are the capacity requirements for innovation? ▶ Should innovation be carried out in-house or out

sourced? ▶ What technology can be used to support the

innovation process? ▶ What organizational structure is most suitable

for the innovation process? ▶ How can the innovation process be compressed?

Understanding capacity requirements for innovation activities In general, capacity management involves deciding on the appropriate level of capacity needed by a process and how it can be adjusted to respond to changes in demand. In the case of innovation, demand is the number of new designs needed by the business. The chief difficulty is that, even in very large companies, the rate of new innovation is not constant. This means that product and ser- vice design processes are subjected to uneven internal ‘demand’ for designs, possibly with several new offerings being introduced to the market close together, while at other times little innovation is needed. This poses a resourcing problem because the capacity of an innovation activity is often difficult to flex. The expertise necessary for innovation is embedded within designers, technologists, market analysts and so on. Some expertise may be able to be hired in as and when it is needed, but much design resource is, in effect, fixed.

Such a combination of varying demand and relatively fixed design capacity means some organiza- tions are reluctant to invest in innovation processes because they see them as an under-utilized resource. A vicious cycle can develop in which companies fail to invest in innovation resources because many skilled design staff cannot simply be hired in the short term, resulting in innovation projects overrun- ning or failing to deliver appropriate solutions. This in turn may lead to the company losing business or otherwise suffering in the market place, which makes the company even less willing to invest in innovation resources.

Understanding whether innovation activities should be outsourced Just as there are supply networks that deliver services and products, there are also networks that connect suppliers and customers in the innovation process. These networks are sometimes called ‘design (or development) networks’. Innovation processes can adopt any position on a continuum of varying degrees of design engagement with suppliers, from retaining all the innovation capabil- ities in-house, to outsourcing all the innovation work. Between these extremes are varying degrees of internal and external capability. Figure  4.10 shows some of the more important factors that will vary depending on where an innovation process is on the continuum. Resources will be easily controlled if they are kept in-house because they are closely aligned with the company’s normal organizational structures, but control should be relatively loose because of the extra trust present in

Operations principle For innovation processes to be effective they must be adequately resourced.

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working with familiar colleagues. Outsourced innovation work often involves greater control, with penalty clauses for delays often used in contracts.

The overall cost of in-house versus outsourced innovation will vary, depending on the firm and the project. An important difference, however, is that external innovation tends to be regarded as a variable cost. The more external resources are used, the more these variable costs will be. In-house innovation is more of a fixed cost. Indeed a shift to outsourcing may occur because fixed design costs are viewed as too great. From an open innovation perspective (discussed earlier in the chapter), it is argued that firms should be willing to buy in or license inventions for other organizations, rather than relying solely on innovations generated internally. Similarly, it may be beneficial to give access to under-used proprietary innovations through joint ventures, licensing, or spin-offs. However, a major inhibitor to open innovation is the fear of knowledge leakage. Firms become concerned that experi- ence gained through collaboration with a supplier of design expertise may be transferred to competitors. There is a paradox here. Businesses usually outsource design primarily because of the supplier’s capabilities, which are themselves an accumulation of specialist knowledge from working with a variety of customers. Without such knowledge ‘leakage’, the benefits of the supplier’s accu- mulated innovation capabilities would not even exist.

Understanding what technologies to use in the innovation process Technology has become increasingly important in innovation activities. Simulation software, for example, is now common in the design of everything from transportation services through to chem- ical factories. These allow developers to make design decisions in advance of the actual product or service being created. They allow designers to work through the experience of using the service or product and learn more about how it might operate in practice. They can explore possibilities, gain insights and, most importantly, explore the consequences of their decisions. Innovation technologies are particularly useful when the design task is highly complex, because they allow developers to reduce their own uncertainty of how services or products will work in practice. Technologies also consolidate information on what is happening in the innovation process, thus presenting a more comprehensive vision within the organization.

Computer-aided design The best-known innovation technology is computer-aided design (CAD). CAD systems store and categorize component information and allow designs to be built up on screen, often performing basic engineering calculations to test the appropriateness of proposed design solutions. They provide

Figure 4.10 Implications of innovation in-house–outsourced continuum

In-house innovation capability

Outsourced innovation capability

Close, but loose

Control of resource Distant, through contracts

Strong Weak in the short term, potentially stronger in the long term

Familiarity

High Low/limited Accessibility

Fixed Variable Cost

Small Great (potentially) Risk of knowledge leakage

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the computer-aided ability to create a modified product drawing and allow conventionally used shapes to be added swiftly to the computer-based representation of a product. Designs created on screen can be saved and retrieved for later use that enables a library of standardized parts and com- ponents to be built up. Not only can this dramatically increase the productivity of the innovation process, it also aids the standardization of parts in the design activity.

Design for manufacture and assembly (DFMA) software is an extension of CAD that allows those involved in the innovation process to integrate their designs prior to manufacture. One example is 3-D object modelling, a rapid prototyping technique aimed at reducing the time taken to create phys- ical models of products. Designs from CAD are created using machines that build models by layering up extremely thin (usually 0.05 mm) layers of photopolymer resin. An alternative to 3-D modelling is the use of virtual reality technologies. Here CAD information is converted into virtual images that can be viewed using 3-D glasses. This form of technology is more interactive than traditional CAD as designers (or customers) can ‘walk around’ a design and get a better sense of what it looks and feels like. This means virtual reality technology is especially useful for designs that customers would be inside, such as sports venues, aeroplanes, buildings and amusement parks, for example.

Digital twins Michael Grieves of Florida Institute of Technology’s Centre for Lifecycle and Innovation Management popularized the term ‘digital twin’. It is the combination of data and intelligence that represents the structure, context and behaviour of a physical system of any type, offering an interface that allows one to understand past and present operations, and make predictions about the future.7 In other words, digital twins are powerful digital ‘replicas’ that can be used instead of the physical reality of a product. Using the digital twin rather than the real product can significantly improve its operational performance without the expense of working on the real thing.8 Not only that, but the use of the digital twin can extend throughout the product’s life to provide valuable information to its user and evidence on how it is actually performing. So, for example, digital twins could monitor and simulate possible future scenarios and predict the need for repairs and other problems before they occur. This allows design improvements to be made before a product is used by customers as well as during its life.

Knowledge management technologies In many professional service firms, such as management consultancies, design involves the evalua- tion of concepts and frameworks that can be used in client organizations to diagnose problems, ana- lyse performance and construct possible solutions. They may include ideas of industry best practice, benchmarks of performance within an industry and ideas that can be transported across industry boundaries. However, such firms are often geographically dispersed and staff may spend most of their time in client organizations. This creates a risk for such companies of ‘reinventing the wheel’ continually. Most consultancy companies attempt to tackle this risk by using knowledge manage- ment routines based on their intranet capabilities. This allows consultants to put their experience into a common pool, contact other staff within the company who have skills relevant to a current assignment, and identify previous similar assignments. In this way information is integrated into the on-going knowledge innovation process within the company and can be tapped by those charged with developing new innovations.

Understanding what organizational structure to use in the innovation process The total process of developing concepts through to market will almost certainly involve person- nel from several different areas of the organization. Different functions will all have some part to play in making the decisions that shape the final design. Yet any product or service innovation 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 project, a budget and, hopefully, a clear strategic purpose. The organizational question is which of these two ideas – the various organizational

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functions that contribute or the innovation project itself – should dominate the way in which the innovation activity is managed?

Figure  4.11 illustrates the various alternative organizational structures for innovation processes.

▶ Functional organization – The innovation project is divided into segments and assigned to relevant functional areas and/or groups within functional areas. The project is coordinated by functional and senior management.

▶ Functional matrix (or lightweight project manager) – A person is formally designated to oversee the project across different functional areas. This person may have limited authority over the functional staff involved and serves primarily to plan and coordinate the project. Functional managers retain primary responsibility for their specific segments of the project.

▶ Balanced matrix – A person is assigned to oversee the project and interacts on an equal basis with functional managers. This person and the functional managers work together to direct innovation activities and approve technical and operational decisions.

▶ Project matrix (or heavyweight project manager) – A manager is assigned to oversee the project and is responsible for its completion. Functional managers’ involvement is limited to assigning personnel as needed and providing advisory expertise.

▶ Project team (or tiger team) – A manager is given responsibility of a project team composed of a core group of personnel from several functional areas assigned on a full-time basis. The functional managers have no formal involvement.

Although there is no clear ‘winner’ among the alternative organizational structures, there is increas- ing support for structures towards the project rather than functional end of the continuum. Some authorities argue that heavyweight project manager structures and dedicated project teams are the

Figure 4.11 Organization structures for innovation processes

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O P E R AT I O N S I N P R AC T I C E

Like many aspects of its business, Toyota’s approach to organizing its product and service innovation goes against the project matrix and project (tiger) team forms of coordination that are seen as best-practice by many other multi- national firms. Instead, Toyota has retained a strong functionally based organization to develop its offerings. It adopts highly formalized devel- opment procedures to communicate between functions and places strict limits on the use of cross-functional teams. But what is really different is its approach to devising an organizational structure for innovation that is appropriate for Toyota. The argument that most companies have adopted to justify cross-functional project teams goes something like this : ‘Problems with communication between traditional functions have been the main reasons for failing to deliver new innovation ideas to specification, on time and to budget. Therefore let us break down the walls between the functions and organize resources around the individual development projects. This will ensure good communication and a

market-oriented culture.’ Toyota and similar companies, on the other hand, have taken a different approach. Their argument goes something like this : ‘The problem

Toyota’s approach to organizing innovation

most efficient forms of organization in driving competitiveness, shorter lead-times and technical efficiency.

Perhaps of more interest is the suitability of the alternative structures for different types of inno- vation. Matrix structures are generally deemed to be appropriate for both simple and highly complex projects. Dedicated project teams, on the other hand, are seen as appropriate for projects with a high degree of uncertainty, where their flexibility becomes valuable. Functionally based structures, with resources clustered around a functional specialism, help the development of technical knowledge. Some organizations do manage to capture the deep technological and skills development advantages of functional structures, while at the same time coordinating between the functions so as to ensure satisfactory delivery of new service and product ideas.

Understanding how to compress the innovation process Every product and service innovation has, eventually, to be cre- ated. This is why it is a mistake to separate the design of services and products from the design of the processes that will deliver them. Merging these two processes is usually called simultaneous (or interactive) design. Its key benefit is to reduce the time taken for the whole innovation activity. As noted earlier, reducing time to market (TTM) can give an important competitive advantage.

Here, we examine three key methods that can significantly reduce time to market for innovations:

▶ integrating the design of the offering and the design of the process,

Operations principle Effective simultaneous innovation reduces time to market.

▼

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with cross-functional teams is that they can dissipate the carefully nurtured knowledge that exists within special- ist functions. The real problem is how to retain this knowledge on which our future innovation depends, while overcoming some of the traditional functional

barriers that have inhibited communication between the functions.’ The solution therefore, is not to destroy the function but to devise the organizational mechanisms to ensure close control and integrative leadership that will make the functional organization work.

▶ simultaneous development of the various stages in the overall process, ▶ early resolution of design conflict and uncertainty.

Integrating the design of the offering and design of the process What looks like an elegant offering on paper may prove difficult to create and deliver on an on- going basis. Conversely, a process designed for one set of services or products may be incapable of creating different ones. It clearly makes sense to design offerings and operations processes together. For services, organizations have little choice but to do this because the process of delivery is usually part of the offering. However, it is useful to integrate the design of the offering and the process regardless of the kind of organization. The fact that many businesses do not do this is only partly because of their ignorance or incompetence. There are real barriers to doing it. First, the time scales involved can be very different. Offerings may be modified, or even redesigned, relatively frequently. The processes that will be used to create and deliver an offering may be far too expensive to mod- ify every time the offering changes. Second, the people involved with the innovation on one hand, and on-going process design on the other, are likely to be organizationally separate. Finally, it is sometimes not possible to design an on-going process for the creation and delivery of services and products until they are fully defined.

Yet none of these barriers is insurmountable. Although on-going processes may not be able to be changed every time there is a change to the offering, they can be designed to cope with a range of potential services and products. The fact that design staff and operations staff are often organization- ally separate can also be overcome. Even if it is not sensible to merge the two functions, there are communication and organizational mechanisms to encourage the two functions to work together. Even the claim that on-going processes cannot be designed until the nature of the offering is known is not entirely true. There can be sufficient clues emerging from innovation activities for process design staff to consider how they might modify on-going processes. This is a fundamental principle of simul- taneous design, considered next.

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 4.12(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 of screening and selection could be started. It is likely that some concepts could be judged as ‘non-starters’ relatively early on in

Operations principle Effective simultaneous development reduces time to market.

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the process 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 simul- taneous or concurrent work on the stages (see Figure 4.12(b)). (Note that simultaneous development is often called simultaneous (or concurrent) engineering in manufacturing operations.)

Early resolution of design conflict and uncertainty Characterizing product or service innovation as a whole series of decisions is a useful perspective. Importantly, a design decision, once made, need not irrevocably shape the final offering. In some cases, changing designs makes sense: for example, as new information emerges suggesting a better alternative. In addition, early decisions are often the most difficult to make because of the high level of uncertainty surrounding what may or may not work as a final design. This is why the level of debate, and even disagreement, over the characteristics of an offering can be at its most heated in the early stages of the process. One approach is to delay decision making in the hope that an obvious ‘answer’ will emerge. The problem with this is that, if decisions to change are made later in the inno- vation process, these changes will be more disruptive than if they are made earlier. Conversely, 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  4.13 illustrates two patterns of design changes through the life of the total design, which imply different time-to-market performances.

Figure 4.12 (a) Sequential arrangement of the stages in the design activity (b) Simultaneous arrangement of the stages in the design activity

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

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Third stage in the innovation activity

Operations principle The design process requires strategic attention early, when there is most potential to affect design decisions.

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There are two key implications of this. First, it is worth trying to reach consensus in the early stages of the innovation process even if this seems to be delaying the total process in the short term. Second, strategic intervention into the innovation process by senior management is particu- larly needed during these early stages. Unfortunately, there is a tendency for senior managers, after setting the initial objectives of the innovation process, to ‘leave the details’ to the technical experts. They may only become engaged with the process again in the later stages as problems start to emerge that need reconciliation or extra resources.

Summary answers to key questions

What is product and service innovation?

▶ We explore three related terms of ‘creativity’, ‘innovation’ and ‘design’. ‘Creativity’ is the ability to move beyond conventional ideas, rules or assumptions, in order to generate significant new ideas. ‘Innovation’ is the act of introducing something new with potential to be practical and give commercial return. ‘Design’ is the process that transforms innovative ideas into something more concrete. A design delivers a solution that will work in practice.

▶ The innovation S-curve describes the impact of an innovation over time, slow at first, increasing in impact, then slowing down before levelling off.

▶ Incremental and radical innovations differ in how they use knowledge. Radical innovation often requires completely new knowledge and/or resources, making existing services and products obso- lete. Incremental innovation builds upon existing knowledge and/or resources.

What is the strategic role of product and service innovation?

▶ Despite the obstacles to successful innovation, almost all firms strive to be innovative given the significant payback for the organizations that manage to incorporate innovative ideas in the design of their products and services.

▶ The innovation activity is a process that involves many of the same design issues common to other operations processes. As such, it is a process that conforms to the input–transformation–output model described in Chapter 1.

Figure 4.13 Early conflict resolution saves greater disruption later in the innovation process

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▶ The performance of the innovation process can be assessed in the same way as any process, namely in terms of quality, speed, dependability, flexibility, cost and, more broadly, sustainability.

What are the stages in service and product design?

▶ Concept generation is where innovative ideas become the inspiration for new service or product concepts. Ideas come from inside R&D, staff, competitor activity, customers, open sourcing, crowdsourcing and lead users.

▶ Concept screening 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 service or product and the way they fit together. Designers adopt a number of approaches to reduce design complexity, including standardization, commonality, modularization and mass customization.

▶ Design evaluation and improvement involves re-examining the design to see if it can be done in a better way, more cheaply or more easily. The best-known tool for this is quality function deployment (QFD).

▶ Prototyping and final design involves providing the final details which allow the service or product to be created or delivered. The outcome of this stage is a fully developed specification for the package of services and products, as well as a specification for the processes that will make and deliver them to customers.

How should product and service innovation be resourced?

▶ To be effective, the innovation process must be appropriately resourced. Issues to consider include understanding capacity requirements, deciding how much of the innovation process to outsource, and determining technology needs, organizational structure and methods to compress the innovation process.

▶ Organizations must understand the demand for innovation (i.e. number of new designs in a given period) and match this with their capacity for innovation.

▶ Organizations must determine whether all innovation activity should take place in-house or whether there are benefits in outsourcing some or all this activity to a third party.

▶ There are many technologies available to support the innovation process, including computer-aided design (CAD); design for manufacture and assembly (DFMA) software, such as 3-D modelling and virtual reality; digital twins; and knowledge management technologies.

▶ Selecting an appropriate organizational structure can support the innovation process. Typically, structures towards the project rather than functional end of the continuum (project matrix or project team) are seen as beneficial.

▶ The innovation process can often be compressed by integrating the design of the offering and the design of the process; adopting simultaneous development of the various stages in the overall process; and early resolution of design conflict and uncertainty.

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137

viewed the development effort put into these ‘failed’ prod- ucts 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 ‘savoury potato cookies’. Essentially they were inch discs of crisp, fried potato with a soft dairy cheese-like filling. The idea of incorporating dairy fillings in snacks had been discussed within the industry for some time but the problems of manufacturing such a prod- uct were formidable. Keeping the product crisp on the outside yet soft in the middle, while at the same time ensur- ing microbiological safety, would not be easy. Moreover, such a product would have to be capable of being stored at ambi- ent temperatures, maintain its physical robustness and have a shelf life of at least three months.

Bringing Orlando products to market involved overcom- ing three types of technical problem. First, the formulation and ingredient mix for the product had to maintain the required texture yet be capable of being baked on the

‘Most people see the snack market as dynamic and innovative, but actu- ally it is surprisingly conservative. Most of what passes for innova- tion is in fact tinkering w i t h o u r m a r ke t i n g approach, things like special offers, promotion tie-ins and so on. We occasionally put new packs round our existing products and even more occasionally we introduce new flavours in existing ranges. Rarely though does anyone in this indus- try 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 marketed 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 aspiring to such a life style, 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 hith- erto been seen very much as a long-term development, 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 company

Developing ‘Savory Rosti-crisps’ at Dreddo Dan’sC A S E ST U DY

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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 techni- cal solutions that we now have access to. The main problem with this type of offering is that it will be expen- sive to develop and yet, once our competitors realize what we are doing, they will come in fast to try and out-inno- vate 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 market 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 Allen)

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 their own pilot plant which would enable them to experiment in-house. As well as the significant expense involved, 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 them to ‘make their mistakes’ in private.

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 but also 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 number of recent technological breakthroughs made by equipment suppliers and packaging manufacturers. This had convinced the company that Orlando was worth significant investment and it had been given priority development status 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 development 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 repre- sentatives 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 departments. So, as well as being part of the team, they are also gateways to expertise around the company.’ The team consisted of representatives from marketing, the development kitchens (laboratories), PGT’s technology centre (a development facility that served the whole group, not just the snack division), packaging engineers, and representatives from the division’s two manufacturing plants. All but the manufacturing representatives were allo- cated 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 when they had first come together.

‘We have a real chance here to develop an offering that not only will have major market impact, but will also give

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▶ 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 undertake 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 – Currently the small development function had been organized around loose functional specialisms. Monica wondered whether this project warranted the creation of a separate 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 2 years from now). It also included enough funding to build a pilot plant which would allow the team the flexibility to develop responses to poten- tial competitor reaction after the launch. So, of the $30m around $18m was for extra staff and contracted-out innova- tion 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 per cent is not really enough. In my opinion we need an increase of at least 90 per cent 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 reluctant to give that up. It would mean begging for test capacity in 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 4.2], 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 it that Marketing’s 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 manage- ment 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?

Time period* 1 2 3 4 5 6 7

Profit flow ($ million)

???10 ???20 50 90 120 130 135

*6-month periods

Table 4.2 Preliminary ‘profit stream’ projections for the Project Orlando offering, assuming launch in 24 months’ time

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140 PART ONE DIRECTING THE OPERATION

Problems and applications

All chapters have ‘Problems and applications’ questions that will help you practise analysing operations. They can be answered by reading the chapter. Model answers for the first two questions can be found on the companion website for this book.

1 One product where customers value a very wide range of product types is 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 implica- tions for the companies that manufacture, distribute and sell the product. Visit a store that sells paint and get an idea of the range of products available on the market. How do you think paint manufac- turers and retailers could innovate so as to increase variety but minimize costs?

2 ‘We have to get this new product and fast’, said the Operations Director. ‘Our competitors are close behind us and I believe their products will be almost as good as ours when they launch them’. She was talking about a new product that the company hoped would establish them as the leader in the market. The company had put together a special development team together with their own devel- opment laboratory. They had spent £10,000 on equipping the laboratory and the cost of the development engineers would be £20,000 per quarter. It was expected that the new product would be fully developed and ready for launch within six quarters. It would be sold through a specialist agency that charged £10,000 per quarter and would need to be in place two quarters prior to the launch. If the company met its launch date, it was expected that it could charge a premium price that would result in profits of approximately £50,000 per quarter. Any delay in the launch would result in profits being reduced to £40,000 per quarter. If this development project were delayed by two quarters, how far would the break-even point for the project be pushed back?

3 Innovation becomes particularly important at the interface between offerings and the people who use them. Consider two types of website: (a) those which are trying to sell something, such as Amazon.com, and (b) those which are primarily concerned with giving information, for example reuters.com or

nytimes.com What constitutes good innovation for these two types of website? Find examples of particularly good and particularly poor web design and explain the issues you’ve considered in making the distinction between them.

4 According to the Ellen MacArthur Foundation, a circular economy is ‘one that is restorative and regenerative by design, and which aims to keep products, components and materials at their highest utility and value at all times, distinguishing between technical and biological cycles’. Also see the example earlier in this chapter. What do you see as the main barriers to a more widespread adoption of the idea?

5 A janitor called Murray Spangler invented the vacuum cleaner in 1907. One year later he sold his patented idea to William Hoover, whose company went on to dominate the market. Now, the Dyson vacuum cleaner has jumped from nothing to a position where it dominates the market. The Dyson product dates back to 1978 when James Dyson designed a cyclone-based cleaner. It took 5 years and 5,000 prototypes before he had a working design. 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 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

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price. To Dyson, good design ‘is about looking at everyday things with new eyes and working out how they can be made better. It’s about challenging existing technology.’ (a) What was Spangler’s mistake? (b) What do you think makes ‘good design’ in markets such as the domestic appliance market? (c) Why do you think the two major vacuum cleaner manufacturers rejected Dyson’s ideas? (d) How did design make Dyson a success?

6 It sounds like a joke, but it is a genuine product innovation. It’s green, it’s square and it comes orig- inally from Japan. It’s a square watermelon. Why square? Because Japanese grocery stores are not large and space cannot be wasted. Similarly, a round watermelon 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 Japanese farmer solved the problem with the idea of making a cube-shaped watermelon that could easily be packed and stored. There is no genetic modification or clever science involved in growing watermelons. 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. (a) Why is a square water- melon an advantage? (b) What does this example tell us about product design?

Selected further reading

Christensen, C.M. (1997) The Innovator’s Dilemma. Boston, MA: Harvard Business School Press. Ground-breaking booking on disruptive innovation that has had a major influence on innovation theory over the last 20 years.

Kahney, L. (2014) Jony Ive: The Genius Behind Apple’s Greatest Products, Penguin, London. Inside the mind of one of the world’s great designers.

Reason, B., Løvlie, L. and Brand Flu, M. (2016) Service Design for Business: A Practical Guide to Optimizing the Customer Experience, John Wiley & Sons, Chichester. A book that looks at the ‘entire service experience’ and is very readable.

Rose, D. (2015) Enchanted Objects : Innovation, Design, and the Future of Technology, Scribner Book Company, New York. An interesting book examining how technology is and will continue impact on design.

Tidd, J. and Bessant, J. (2013) Managing Innovation: Integrating Technological, Market and Organizational Change, 5th edn, John Wiley & Sons, Chichester. The definitive textbook in the area of innovation.

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142

INTRODUCTION

No operation exists in isolation – it is part of a larger and interconnected network of other operations, referred to as the 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 both the structure and scope of these supply networks. Structure decisions involve deciding the overall configuration of the supply network, the amount of capacity needed within the network and where operations should be located. Scope decisions involve deciding the extent to which an operation does the activities performed by the network itself, as opposed to requesting a supplier do them on its behalf. The structure and scope of an operation’s supply network is critical because it helps in understanding competitiveness, identifies of significant links in the network, and support is a longer-term perspective on operations issues. Figure 5.1 places the structure and scope of operations in the overall model of operations management.

The structure and scope of operations5

KEY QUESTIONS

What is the structure and scope of operations?

How should the network be configured?

How much capacity should operations have?

Where should operations be located?

How vertically integrated should the network be?

What activities should be in-house and what should be outsourced?

Figure 5.1 This chapter examines the structure and scope of operations

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

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CHAPTER 5 THE STRUCTURE AND SCOPE OF OPERATIONS 143

What is the structure and scope of operations? The structure of an operation’s supply network relates to its shape and form. The scope of an oper- ation’s supply network relates to the extent to which an operation decides to do the activities per- formed by the network itself, as opposed to requesting a supplier to do them. So, before we examine these two elements, first we need to establish what we mean by ‘supply network’ and why it is important that operations understands its position within it.

Supply networks The supply network includes the chains of suppliers providing inputs to the operation, the chains of customers who receive outputs from the operation, and sometimes other operations that may at times compete and other times cooperate. Materials, parts, 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 first-tier suppliers of parts, or information, or services. These suppliers them- selves have their own suppliers (second-tier suppliers) who in turn could also have suppliers, and so on. However, some second-tier suppliers may also supply an operation directly, thus missing out a link in the network. On the demand side of the network, ‘first-tier’ customers are the main customer group for the operation. These customers might not be the final consumers of the operation’s products or services; they might have their own set of customers (‘second-tier’ customers). 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. Along with the forward flow of transformed resources (materials, information and customers) in the network, each customer–supplier linkage will feed back orders and information. For example, when stocks run low, retailers place orders with distributors, which likewise place orders with the manufacturer, which will in turn place orders with its suppliers, which will replenish their own stocks from their own suppliers. So flow is a two-way process with items flowing one way and information flowing the other.

Figure  5.2 illustrates the total supply network for two different operations. First is a plastic homeware (kitchen bowls, etc.) manufacturer. On the demand side it supplies products to whole- salers which 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 customers, orders and information flow the other way from customers to suppliers. Yet it is not only manufacturers that are part of a supply network. The flow of physical materials may be easier to visualize, but service operations also sit within supply networks. One way to visualize the supply networks of some service operations is to consider the downstream flow of information that passes between operations. Most financial service supply networks can be thought about like this. However, not all service supply networks deal primarily in information. For example, the second illustration in Figure  5.2 shows the supply network centred on a shopping mall. It has suppliers that provide security services, cleaning services, maintenance services and so on. These first-tier suppliers will themselves receive services from recruitment agencies, consultants, etc. First-tier customers of the shopping mall are the retailers that lease retail space within the mall, who themselves serve retail customers. This is a supply network like any other. What is being exchanged between operations is the quality, speed, dependability, flexibility and cost of the services each operation supplies to its customers. In other words, there is a flow of ‘operations performance’ through the network. And although visualizing the flow of ‘performance’ through supply networks is an abstract approach to visualizing supply networks, it is a unifying concept. Broadly speaking, all types of supply network exist to facilitate the flow of ‘operations performance’.

The importance of a supply network perspective Understanding the nature of the supply network and the operations role within it is critical in under- standing competiveness, identifying significant links in the network, and shifting towards a longer-term perspective.

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144 PART ONE DIRECTING THE OPERATION

Understanding 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., which form the links in the network between the company and its end customers. Alternatively, it can look beyond its immediate customers and suppliers. 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.

Identifying 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 operations 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 that contribute most to end-customer service. For example, the important end customers for domestic plumbing parts and appliances are the installers and service companies that 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’ compet- itiveness 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.

First-tier suppliers

Plastic stockist

Packaging supplier

Security services

Wholesaler

Retailer

Retailer

Second-tier customers

First-tier customers

Plastic homeware

manufacturer

Recruitment agency

Cleaning materials supplier

Equipment supplier

Flow of service Flow of information

Cleaning services

Maintenance services

Retailers Shopping

mall Retail

customers

Second-tier suppliers

Chemical company

Paper and cardboard supplier

Ink supplier

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

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O P E R AT I O N S I N P R AC T I C E

Located around 10 miles from Amsterdam in a small town called Aalsmeer is the flower capital of the world and home to the world’s largest flower auction. Aalsmeer started trad- ing flowers around 1880 and in 1912 two auction houses were developed to cater for the increasing trade in flowers. As the flower market boomed, fuelled largely by significant increases in exports, Aalsmeer found it needed somewhere much bigger to sort, store, sell and export its plants and flow- ers. So, in 1968 the Central Aalsmeer Auction merged with Bloemenlust Auction to form the Aalsmeer Flower Auction (Bloemenveiling Aalsmeer), which has continued to expand to the present day. At the Aalsmeer Flower Auction, every day, from 4 till 11 in the morning, over 40 million flowers and plants from across the globe – Europe, Kenya, Columbia, Ethiopia, Ecuador and others – are traded in a space covering 10.6 million square feet (the second largest building in the world). Annually, the Aalsmeer Flower Auction sells around 12.5 billion items, representing over 50 per cent of world trade in flowers, and has an annual turnover of €4.6 billion.

At first sight, the operations appear to be extraordinarily complex. There are around 20,000 species of plants and flowers from classic Dutch tulips to more exotic plants such as kangaroo paws, birds of paradise and rare orchids. Within the building, small ‘trains’ of crates containing these prod- ucts are driven (or increasingly cycled for improved worker health) between quality check, sorting, auction rooms and despatch in a dizzying display where crashes seem inevitable but rarely happen. Within the auction rooms, there is similar frenzied activity where 120,000 transactions take place in a matter of hours each day from when trading starts at 7 am. Products are then shipped via lorry for local markets and airfreight for markets worldwide via the nearby Schiphol Airport within 24 hours. Of course, there is method in the madness! The processes within the Aalsmeer Flower Auction and across its network of operations are carefully coordi- nated. Given the criticality of speed and quality in delivering competitive advantage, this is vital. For example, standard- ization of containers that hold the wide variety of flowers and plants has dramatically reduced operational variety while still allowing for a huge range of products to flow through the giant floral hub. Similarly, simplification of the auction process, which uses a ‘Dutch reverse auction’ whereby the prices start from high to low, allowing for a single bid as opposed to multiple ‘bidding-up’, not only

speeds up the trading activity but also reduces any variabil- ity in this process stage.

Looking beyond the auction itself, Royal Flora Holland, which operates the Aalsmeer Flower Auction, plays an extremely active role in coordinating its network of operations. Partnership agreements with suppliers, sharing of information (including more accurate demand forecasts), live tracking of products and their condition during transportation, training of farmers around new methods to improve product quality, shared R&D, and visits to both suppliers and buyers are all used to continually improve the competitiveness of Royal Flora Holland’s entire network. However, as with all dominant play- ers in markets, things change. Increasing costs of transportation, concerns over the sustainability of shipping flowers around the world, increased use of direct shipping from suppliers to key customers (an example of disintermedi- ation covered later in this chapter), and the move of many growers from Europe to warmer and lower-cost climates in Africa over the last decade have all placed pressures on Royal Flora Holland’s network. To counter these challenges, the organization has successfully expanded its customer markets in Russia and Eastern Europe, expanded its work on sustaina- bility initiatives such as the Netherlands’ Green Ports and further increased the level of value-added services offered to its members, such as market intelligence, training and IT support. In addition, it now manages direct shipment for some of its products (for example, roses from Kenya) on behalf of some large clients, such as the German discount chain Lidl and UK supermarket Tesco, using fixed price contracts rather than the daily price fluctuations of the auction clock.

Flower the world – Aalsmeer Flower Auction1

Taking a longer-term perspective There are times when circumstances render parts of a supply network weaker than its adjacent links. High street music stores, for example, have been largely displaced by music streaming and downloading services. A long-term supply network view would

Operations principle A supply network perspective helps to make sense of competitive, relationship and longer-term operations issues.

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146 PART ONE DIRECTING THE OPERATION

involve constantly examining technology and market changes to see how each operation in the supply network 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 alternatives. Option 1 is to switch suppliers and award the security contract to a competitor of the current security services supplier. Option 2 is to accept an offer from the company that supplies 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 2 changes the structure of the supply network (the mall now has only two suppliers, the combined 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 struc- ture 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).

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 actually comprise 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.

▶ How should the network be configured? ▶ What physical capacity should each part of the network have? – The long-term capacity

decision. ▶ 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.

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

The final point to make here is that structure and scope decisions are undeniably strategic. Different approaches to the structure and scope of operations define how different organizations do business

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

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

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CHAPTER 5 THE STRUCTURE AND SCOPE OF OPERATIONS 147

even when they are in 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 structure and scope in Chapter 12 on supply chain management.

How should the network be configured? Configuring a supply network means determining its overall pattern, shape or arrangement of the various operations that make up the supply 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 so as to change the nature of the relationships. 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. A number of trends are reshaping networks in many industries. The most common example of network reconfiguration is the trend over the last decade to reduce the number of direct suppliers that organ- izations work with. The complexity of dealing with many hundreds of suppliers is both expensive and can prevent operations from developing close relationships with its suppliers. Other configuration trends include the disintermediation of some parts of the network, and a greater tolerance of other operations being both competitors and complementors at different times (co-opetition), the develop- ment of business ecosystems and the increasing use of a triadic as opposed to dyadic perspective in supply networks.

Disintermediation One 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’ suppliers. ‘Cutting out the middle men’ in this way is called disintermediation. An obvious example of this is the way the Internet has allowed some suppliers to ‘disintermediate’ traditional 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 extremely easy for consumers. Of course, they may still wish to purchase a service package

Operations structure and scope

The structure of the operation’s supply network

The scope of the operation’s supply

network

Configuring of supply network

Location of supply network

operations

Extent of vertical integration

Extent of outsourcing

Capacity of supply network

operations

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

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148 PART ONE DIRECTING THE OPERATION

O P E R AT I O N S I N P R AC T I C E

Could that most ephemeral of all industries, Hollywood’s film making business, hold messages about scope and structure for even the soberest of operations? It is an indus- try 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 under- stand . . . 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 create a market for its prod- ucts, with the efficiency and tight operations practices which get films made and distributed 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 carpen- ters, 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 restric- tive. The finished products were rolls of film that had to be mass produced and physically distributed to the cinemas of the world. No longer. Studios now deal almost exclu- sively in ideas. They buy and sell concepts, they arrange finance, they cut marketing 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, technical 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 cinema attendance, returns are lower than at many times in the past. This opens opportunities for the smaller, independent studies. One way to keep costs low is by using inexpensive, new talent. Technology could also help this process. Digital processes allow easier customization of the ‘product’ and also mean that movies can be streamed direct to cinemas and direct to individual consumers’ homes.

Virtually like Hollywood

from travel agents, which can have the advantage of convenience. Nevertheless the process of disin- termediation has developed new linkages in the supply network.

Co-opetition One approach to thinking about supply networks sees any business as being surrounded by four types of players: suppliers, customers, competitors and complementors. Complementors enable one’s prod- ucts 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 service 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 themselves 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. Would that customer have come to this part of town unless there was more than one restaurant to choose from? Restaurants, theatres, art galleries and tourist attractions generally all cluster together in a form of cooperation to increase the total size of their joint market. It is important to distinguish between the way companies cooperate 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

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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 customers. 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 capture this idea is ‘co-opetition’.

Business ecosystems An idea that is closely related to that of co-opetition in supply networks is that of the ‘business ecosystem’. Like supply networks, business ecosystems include suppliers and customers. However, they also include stakeholders that may have little or no direct relationship with the main supply network yet interact with it by 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 cooperative networks. For example, the app developers that develop applications for particular operating system platforms may not be ‘suppliers’ 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 product can increase its value to the end customer and by doing so increase 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 used to describe business ecosystems is 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, business must be flexible, adaptable and preferably innovative. For an ecosystem to thrive, the different 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 ecosystem is also important because it emphasizes that the relation- ships between things matter and that, to some extent, everything in a supply network touches everything else.

The triadic perspective on supply networks The supply networks that were illustrated in Figure 5.2 are of course huge simplifications compared to reality. 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

Critical commentary

The idea of widening the discussion of supply networks to include the ‘business ecosystem’ concept, described earlier, is also not without its critics. Some see it as simply another management ‘buzzword’, indistinguishable from the longer-established idea of the supply network. Other critics believe that the ecosystem metaphor is just a way for business to appear ‘green’. They claim that the metaphor is used to suggest that the commercial relationships, on which almost all supply networks are based, have developed and are run using ‘natural’ values and therefore should be left to operate free from societal or government interference.

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150 PART ONE DIRECTING THE OPERATION

operations are referred to as a ‘dyad’. So if one wanted to examine the interactions that a focal oper- ation 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 matter 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 increasingly outsourcing the delivery of some aspects of their service to specialist providers, which deal directly with customers on behalf of the focal firm (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 impor- tant. First, it emphasizes the dependence of organizations on their suppliers’ 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, products or services in triadic relationships bypass the buying organi- zation 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 gradually transferring over time from the buying organization to the supplier that provides the service. Fourth, it becomes increasingly difficult for the buying organization to understand what

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

Dyadic interaction

Dyadic interaction

Triadic interaction

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

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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. In academia, this is referred to as the principal–agent problem, where the principal here is the buyer and the agent is the supplier. 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 manufacturer has outsourced the maintenance of its equipment to a specialist provider of maintenance services. This reduces the ability of the equipment manufacturer to understand how its customers are using the equipment, how the equipment was performing under various conditions, how customers would like to see the equipment improved, and so on. The equipment manufacturer may have 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 have? The next set of ‘structure’ decisions concerns the size or capacity of each part of the supply network. Here we 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 amount of capacity an organization will have depends on its view of current and future demand. 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 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.

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 capacities. The effective cost of running each centre will depend on the average service bay occupancy. 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, increases, the cost per customer will reduce.

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 capacity 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, econo- mies of scale do not go on forever. 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 communi- cations and coordination 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 opera- tions that process physical items is transportation 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.

Operations principle Most operations exhibit economy of scale effects where operating costs reduce as the scale of capacity increases.

Operations principle Diseconomies of scale increase operating costs above a certain level of capacity, resulting in a minimum cost level of capacity.

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152 PART ONE DIRECTING THE OPERATION

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 their nominal capacity. For example, long periods of overtime may reduce productivity 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 that is often lower than the theoretical capacity of the operation. In addition, while large-scale oper- ations usually have a cost advantage over smaller units, there are potentially significant advantages that can be exploited by small-scale operations. These include:

▶ more responsive to change and an ability to act more like entrepreneurs in launching new products and services;

▶ more flexibility in decision making, with greater levels of autonomy granted to individuals than in most large-scale operations;

▶ greater market sensing given proximity to changing markets with more, but smaller, units of capacity.

Timing changes in capacity 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 manufac- turer’s new product. In deciding when new capacity is to be introduced the company can mix the three strategies.

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

▶ Capacity is introduced to generally 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 requirement 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.

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

5 10 15 Average service bay occupancy

R ea

l c o

st p

er b

ay o

cc u p

ie d

Cost curve for 5- bay centre

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

Operations principle Capacity-leading strategies increase opportunities to meet demand. Capacity- lagging strategies increase capacity utilization.

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O P E R AT I O N S I N P R AC T I C E

Dubai International Airport is now the world’s busiest airport in terms of international travellers with 88.2 million passengers in 2017. It is also the third busiest overall, only behind Beijing Capital and Hartsfield-Jackson Atlanta. The United Arab Emirates (UAE) acts a key hub in international travel, with over 125 million passengers going through its three main airports – Dubai, Abu Dhabi and Sharjah. The story of Dubai International Airport started in 1959, when the then-ruler of Dubai, Sheikh Rashid bin Saeed Al Maktoum, ordered its construction. Like many others in the country, he believed that strengthening the aviation sector was essential in supporting sustainable development for the UAE. Just one year later the first flights were landing, albeit on a runway of compacted sand, followed soon after by a new asphalt runway and numerous extensions to the termi- nal facilities. As successive governments invested heavily in the airport, it became increasingly attractive to international carriers, fuelling the growth in passengers numbers. In 1990 there were 4.35 million passenger movements, by 2002 this figure had reached 15.9 million, by 2010 it had risen to 47.1 million, and this figure has been nearly doubled to the pres- ent day. The economy of scale effects are evident – more passengers lead to more investment (take the recent announcement of a major technology investment to support ‘seamless’ transfer and dramatically reduce waiting at passport control), while more investment leads to increased numbers of passengers wanting to use the airport, either point-to-point or as a hub for an onward destination. This virtuous cycle continues, at least for now. Emirates Airlines, Dubai Airport’s main carrier, now operates the world’s largest fleet of Airbus A380s, with over 100 of the world’s biggest passenger planes (seating capacity 555–868 passengers depending on the configuration). Much of the reason it was able to justify such a large invest- ment – each plane costs around $300–$400 million and the improvements to existing facilities to accommodate the

A380s were around $3.5 billion – is the now huge scale of its operations out of Dubai International. Qantas Airlines also flies A380s daily from Sydney and Melbourne to London via Dubai.

Dubai International Airport’s success has driven the addi- tion of new routes by home carriers Emirates and flydubai as well as increased frequency on existing routes. Alongside this ‘home-grown’ expansion, new carriers from around the globe continue to join Dubai International Airport, as it becomes an increasingly attractive destination and hub option. Further investments are intended in both process and technology to support growth up to 118 million in the coming years – clearly the Dubai government doesn’t feel it has reached a point where diseconomies of scale are at play just yet! And Dubai International Airport isn’t just interested in passengers – it is currently in the process of developing a major centre to handle imports and exports of flowers and plants. When completed, it will run a fully automated operation, capable of processing around 300,000 tonnes of product per annum whilst maintaining ambient temperatures of 2 to 4°C. For Royal Flora Holland (see earlier ‘Operations in practice’ exam- ple), this could be a major new threat to its dominance in the world trade of flowers and plants.

Dubai International Airport2

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 capacity 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 profitable 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 unprofitable in some stages of its expansion.

Operations principle Using inventories to overcome demand – capacity imbalance tends to increase working capital requirements.

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154 PART ONE DIRECTING THE OPERATION

Time (a) (b)

Time

Forecast demand

V o

lu m

e/ ca

p ac

ity

V o

lu m

e/ ca

p ac

ity

Forecast demand

Capacity lags demand

Capacity sometimes leads, sometimes lags

demand

Capacity leads

demand

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

Advantages Disadvantages

Capacity-leading strategies

Always sufficient capacity to meet demand, therefore revenue is maximized and customers satisfied

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

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

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

Any critical start-up problems with new operations are less likely to affect supply

Capital spending on capacity will be early

Capacity-lagging strategies

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

Insufficient capacity to meet demand fully, therefore reduced revenue and dissatisfied customers

Over-capacity problems are minimized if forecasts prove optimistic No ability to exploit short-term increases in demand

Capital spending on the operation is delayed Under-supply position even worse if there are start-up problems with the new operations

Smoothing with inventory strategies

All demand is satisfied, therefore customers are satisfied and revenue is maximized

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

Utilization of capacity is high and therefore costs are low Risks of product deterioration and obsolescence

Very short-term surges in demand can be met from inventories

Table 5.1 Arguments for and against leading, lagging and smoothing capacity strategies

Where should operations be located? The location of each operation in a supply network is both a key element in defining its structure, and also will have an impact on how the network operates in practice. If any operation in a supply network gets the location wrong, it can have a significant impact, not just on its own 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 its performance, and the service it gives its customers.

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Volume of output

Fixed-cost breaks

Revenue

Total costs

C as

h

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. The machines 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 the company 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 – the profit in the second year will be lower because of the extra fixed costs associated with the investment in the two extra machines.

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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 operation can be hugely expensive and the risks of inconveniencing custom- ers 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 historical reasons. Yet even the operations that are ‘there because they’re there’ are implicitly making a decision not to move. When operations do change their location, it is usually because of changes in demand and/or changes in supply, and an assumption that the potential benefits of a new location will outweigh any cost and disruption involved in the change.

Changes in demand Customer demand shifting may prompt a change in location. For example, as garment manufacturers moved to Asia, suppliers of zips, threads, etc. started to follow. 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 additional operation; the last two options will involve a location decision. High-visibility operations 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 conven- ient, 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 availability, 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 lower-cost staff.

O P E R AT I O N S I N P R AC T I C E

When the aero engine manufacturer Rolls-Royce chose Seletar in Singapore to host its almost £400 million Asian expansion it did so for a number of reasons. First, the loca- tion had access to the skills and infrastructure to support technically complex manufacturing. Second, the company was no stranger to the region; it already serviced Singapore Airlines’ engines at a special plant near Changi airport. Third, Asia is where the demand is. The world’s fastest- growing airlines are in China, Singapore, Indonesia, India and the Gulf. Fourth, the generous tax incentives offered by the Singaporean government played a part, as did the construction of a road from Seletar to Changi airport so that engines could be loaded on to the cargo planes that fly them to Rolls-Royce’s customers in Toulouse and Seattle. Yet, says the company, although important, these incen- tives were not as important as the ‘soft’ factors that make

Singapore so attractive: in particular, the City State’s univer- sities and colleges, which produce the highly skilled scientists, engineers and staff who are vital to producing

Rolls-Royce in Singapore3

▼

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Evaluating potential changes in location Evaluating possible locations is almost always a complex task because the number of location options, the criteria against which they could be evaluated and the comparative rarity of a single location that clearly dominates all others, make the decision stra- tegically sensitive. Furthermore, the decision often involves high levels of uncertainty. Neither the relocation activity itself nor the operating characteristics of the new site might be as assumed when the decision was originally made. Because of this, it is useful to be systematic in terms of (a) identifying alternative options, and (b) evaluating each option against a set of rational criteria.

Identify alternative location options The first relocation option to consider is not to. Sometimes relocation is inevitable, but often staying put is a viable option. Even if seeking a new location seems the obvious way forward, it is worth evaluating the ‘do nothing’ option, if only to provide a ‘base case’ against which to compare other options. In addi- tion to the ‘do nothing’ option, there should be a number of alternative location options. It is a mistake to consider only one location, but seeking out possible locations can be a time-consuming activity. Increasingly, for larger companies, the whole world offers possible locations. The implication of the globalization of the location decision has been to increase both the number of options and the degree of uncertainty in their relative merits. The sheer number of possibilities makes the location decision impos- sible to ‘optimize’. Rather, the process of identifying location options usually involves selecting a limited number of sites that represent different attributes. For example, a distribution centre, while always needing to be close to transport links, could be located in any of several regions and could be either close to popu- lation centres, or in a more rural location. The options may be chosen to reflect a range of both these factors. However, this assumes that the ‘supply’ of location options is relatively large, which is not always the case. In many retail location decisions, there are a limited number of High Street locations that become available at any point in time. Often, a retailer will wait until a feasible location becomes available and then decide whether to either take up that option or wait and take the chance that a better location becomes available soon. In effect, the location decision here is a sequence of ‘take or wait’ decisions.

Set location evaluation criteria Although the criteria against which alternative locations can be evaluated will depend on circum- stances, the following five broad categories are typical.

▶ Capital requirements – The capital or leasing cost of a site is usually a significant factor. This will probably be a function of the location of the site and its characteristics. For example, the shape of the site and its soil composition can limit the nature of any buildings erected there. Access to the site is also likely to be important, as are the availability of utilities, etc. In addition, the cost of the move itself may depend on which site is eventually chosen.

▶ Market factors – Location can affect how the market (in general or an individual customer) perceives an operation. Locating a general hospital in the middle of the countryside may have many

products that cannot be allowed to fail. Says Jonathan Asherson, ‘We think that the focus in Asia, from an educa- tion and training perspective, will continue to be in areas of technology and engineering. The talent pipeline that we need as an industry and company will remain solid. That will influence the thinking around our investments. You need to develop technologies and business models that adapt to increasing pressure on costs, increasing pressure on

reliability and the environment. We’ve worked with govern- ment agencies around developing work skills, qualifications, and developing curricula for the polytechnics and universi- ties, where we work with them to predict the requirement and work on how that pipeline of talent can be built. Singapore is quite flexible and nimble where they see the high multiplier effect of, for example, high-value-added manufacturing.’

Operations principle An operation should only change its location if the benefits of moving outweigh the costs of operating in the new location plus the cost of the move itself.

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158 PART ONE DIRECTING THE OPERATION

advantages for its staff, but it clearly would be very inconvenient for its patients. Likewise, restau- rants, stores, banks, petrol filling stations and many other high-visibility operations must all evaluate how alternative locations will determine their image and the level of service they can give. The same arguments apply to labour markets. Location may affect the attractiveness of the opera- tion in terms of staff recruitment and retention. For example, ‘science parks’ are usually located close to universities because they hope to attract companies that are interested in using the skills available at the university. But not all locations necessarily have appropriate skills available imme- diately. Staff at a remote call centre in the western islands of Scotland, used to a calm and tranquil life, were stunned by the aggressive nature of many callers to the call centre, some being reduced to tears by bullying customers. They had to be given assertiveness training by the call centre management.

▶ Cost factors – Two major categories of cost are affected by location. The first is the costs of produc- ing products or services. For example, labour costs can vary between different areas in any country, but are likely to be a far more significant factor when international comparisons are made, when they can exert a major influence on the location decision, especially in some industries such as clothing, where labour costs as a proportion of total costs are relatively high. Other cost factors, known as community factors, derive from the social, political and economic environment of the site. These include such factors as local tax rates, capital movement restrictions, government finan- cial assistance, political stability, local attitudes to ‘inward investment’, language, local amenities (schools, theatres, shops, etc.), the availability of support services, the history of labour relations and behaviour, environmental restrictions and planning procedures. The second category of costs relate to both the cost of transporting inputs from their source to the location of the operation and the cost of transporting products and services from the location to customers. Whereas almost all operations are concerned to some extent with the former, not all operations are concerned with the latter, either because customers come to them (for example, hotels), or because their services can be ‘transported’ at virtually no cost (for example, some technology help desks). For supply networks that process physical items, however, transportation costs can be very significant.

▶ Future flexibility – Because operations rarely change their location, any new location must be capable of being acceptable, not only under current circumstances, but also under possible future circumstances. The problem is that no one knows exactly what the future holds. Nevertheless, especially in uncertain environments, any evaluation of alternative locations should include some kind of scenario planning that considers the robustness of each in coping with a range of possible futures. Two types of flexibility of any location could be evaluated. The most common is to consider the potential of the location for expansion to cope with increased activity levels. The second is the ability to adapt to changes in input or output factors. For example, suppliers or customers may themselves relocate in the future. If so, could the location still operate economically?

▶ Risk factors – Closely related to the concept of future flexibility is the idea of evaluating the risk factors associated with possible locations. The risk criteria can be divided into ‘transition risk’ and ‘long-term risk’. Transition risk is simply the risk that something goes wrong during the relocation process. Some possible locations might be intrinsically more difficult to move to than others. For example, moving to an already congested location could pose higher risks to being able to move as planned than moving to a more accessible location. Long-tem risks could again include damag- ing changes in input factors such as exchange rates or labour costs, but can also include more fundamental security risks to staff or property.

How vertically integrated should an operation’s network be? The scope of an operation’s control of 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 inte- gration’ 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 ‘outsourcing’ decision in the next section. The virtual integration decision involves an organization assessing the wisdom of acquiring suppliers

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or customers, as well as 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 that business.

In reality, 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

O P E R AT I O N S I N P R AC T I C E

Many firms have shrunk their ‘span of ownership’ within their supply network. This is why the idea of ‘outsourcing’ non-core activities has been so well accepted over the last few decades. Focusing on a relatively narrow range of activ- ities clearly has advantages. However, outsourcing activities also carries risks, often linked to a loss of control over suppli- ers. The Rana Plaza disaster provides an appalling example of the effect of this. On 24 April 2013 the Rana Plaza cloth- ing factory near Dhaka in Bangladesh collapsed, killing at least 1,100 people. Many well-known clothing brands were sourcing products, either directly or indirectly, from the factory. It was claimed that local police and an industry asso- ciation had issued a warning that the building was unsafe, but the owners had responded by threatening to fire people who refused to carry on working as usual. Understandably, there was an immediate call for tighter regulation and over- sight by the Bangladeshi authorities and for the predominantly western retailers who sourced from the Rana Plaza, and similar unsafe factories, to accept some of the responsibility for the disaster and change their buying poli- cies. Campaigning organizations including ‘Labour Behind the Label’, ‘War on Want’ and ‘Made in Europe’ urged retailers to be more transparent about their supply chains. They also called for compensation to be paid. But a year after the tragedy the compensation initiative that intended to raise $40m had raised only $15m, despite being backed by the UN’s International Labour Organisation. Less than half the brands linked to clothes making at the building had made donations. Benetton and Matalan said they preferred to support other funds that assisted victims, while the French retailer Auchan claimed that it had no official production taking place in the building when it collapsed so it did not need to contribute towards compensation. Other contributions were relatively small. Walmart, the largest retailer in the world, offered to contribute about $1m compared to more than $8m from the far smaller Primark. The Bangladeshi authorities also came in for international criticism. For years they had made only relatively weak attempts to enforce national building regulations, especially

if the landlords involved were politically well connected. After the disaster, they promised to apply the laws more rigorously, but such promises had been made before.

So, what are the options for western retailers? One option is to carry on as before and simply source garments from wherever is cheapest. Doing so would obviously be ethically questionable, but would it also carry a reputa- tional cost? Or would consumers not enquire too deeply about where garments came from if they were cheap enough? Alternatively, retailers could quit sourcing from Bangladesh until its standards improve. But that may be difficult to enforce unless they took on the responsibility to police the whole supply chain right back to the cotton growers. It would also damage all Bangladeshi firms, even those that try to abide by safety rules. This in turn could also be damaging to the retailers’ reputations. The third option is to stay and try to change how things are done in the country. Even before the Rana Plaza disaster retailers had met with some interested parties and governments to develop a strategy to improve safety in Bangladesh’s 5,000 factories. Also some individual retailers had launched initi- atives. Walmart had launched a fire-safety training academy and Gap had announced a plan to help factory owners upgrade their plants. However, individual initiatives are no substitute for properly coordinated safety improvements.

The Rana Plaza disaster4

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160 PART ONE DIRECTING THE OPERATION

company and component. The three companies illustrated in Figure 5.9 have all chosen different vertical integration strategies. 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 manufacture of the nacelle parts, tower and blades).

An organization’s vertical integration strategy should consider three key elements – the direction of integration, the extent of integration and the balance amoung vertically integrated stages. Figure 5.10 illustrates these three aspects of vertical integration.

The direction of integration If a company decides that it should control more of its network, 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 called backward or ‘upstream’ vertical integration and expanding on the demand side is called forward or ‘downstream’ vertical integration. Backward vertical integration, 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 to make contact directly with its customers, and possibly sell complementary products and services.

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 the crude oil into a consumable product – gasoline. It also has operations that distribute and retail the gasoline (and many other products) to the final customer.

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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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.

Advantages of vertical integration Although extensive vertical integration is no longer as popular as it once was, there are still companies that 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 integrate? Most justifications for vertical integration fall under four categories. These are:

▶ 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. In some cases there may not even be sufficient capacity in the supply market to satisfy the company. It therefore has little 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 network model that integrates hardware and software, with both its hardware and soft- ware 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 rolling 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

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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162 PART ONE DIRECTING THE OPERATION

‘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. However, if transaction costs can be lowered to the point where the purchase price plus trans- action 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 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. For example, Dyson controls the majority of its value stream in developing, manufacturing and distributing its highly innovative vacuum clean- ers, dryers, fans and, more recently, hairdryers. The main reason cited by its owner, Sir James Dyson, is to protect as much intellectual property as possible.

▶ It helps in understanding other activities in the supply network – Some companies, even those which 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?

O P E R AT I O N S I N P R AC T I C E

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, 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 different companies, with different approaches to the structure and scope of their operations and, some claim, very different prospects for their future. They are certainly of a different size. In reve- nue terms Intel is 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, developing intellectual property. It then licenses its processor designs to manufacturers such as Samsung, which in turn rely on sub-contracting ‘chip foundry’ companies to do the actual manufacturing (iron- ically, including Intel).

Intel’s integrated supply network monitors and controls all stages of production, from the original design concept right through to manufacturing. Keeping on top of fast - changing and hugely expensive operations requires very large investments (it can cost around $5 billion to build a new chip-making plant). It is Intel’s near-monopoly (there- fore 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 technol- ogy is important, as 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 manu- facturing research and development. Everyone else – including all the ARM licensees – have to make do with shared manufacturing, mainstream technology, and less-aggres- sive physics.’

By contrast, ARM’s supply network strategy was a direct result of its early lack of cash. It did not have the money to invest in in its own manufacturing facilities (or to take the risk of subcontracting manufacturing), so it

Contrasting strategies on structure and scope: ARM versus Intel5

▼

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Disadvantages of vertical integration The arguments against vertical integration tend to cluster around a number of observed disadvantages 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 press- ing need to do so. Internal supply is subject to reduced competitive 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 organ- ization 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 suppli- ers that 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 tech- nologies necessary to create 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 powerful, 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. 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 important things.

What activities should be in-house and what should be outsourced? Outsourcing is the activity of taking activities that could or have been carried out in-house and moving them to outsourced suppliers. Theoretically, ‘vertical integration’ and ‘outsourcing’ are almost the same thing, with the difference between them one of scale. 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

focused on licensing its ‘reference designs’. Reference designs provide the ‘technical blueprint’ of a microproces- sor 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 ‘eco-system’ of tools

has emerged to help developers build applications around the ARM design architecture. The importance of ARM’s supply ‘eco-system’ 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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specialist servicing company that can do the job better, is a vertical integration 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.

Outsourcing (also known as the ‘do-or-buy’ or ‘make-or-buy’ decision) 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 are now being bought from suppliers. In addition, 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 outsourcing some of their more routine back-office processes. In a similar way many processes within the Human Resource function, from simple 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 signif- icant gains in the quality and flexibility of service offered.

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 particular set of circumstances

give the appropriate performance objectives that the operation requires to compete more effectively in its markets?’ For exam- ple, if the main performance objectives for an operation are dependable delivery and meeting short-term changes in custom- ers’ delivery requirements, the key question should be: ‘How does in-house supply or outsourcing give better dependability and delivery flexibility performance?’ This means judging two

sets of opposing factors – those that give the potential to improve performance, and those that 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 objectives 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 to a company, it is unlikely to outsource it. For example, 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 sophis- ticated laser drives. This capability may allow it to introduce product or process 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 operation’s perfor- mance is already superior to any potential supplier, it would be unlikely to outsource the activity. But also even if its performance is currently below that of potential suppliers, it may not outsource the activity if it feels that it could significantly improve its performance. Figure 5.11 illustrates this decision logic.

Operations principle Assessing the advisability of outsourcing should include how it impacts on relevant performance objectives.

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

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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, also may be motivated through market pressures, but communication more difficult.

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 significant 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 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 and have wider capabilities than in-house suppliers and more ability to respond to changes, but may have to balance conflicting needs of different customers.

Cost In-house operations do not have to make the margin required by outside suppliers, so the business can capture the profits which would otherwise be given to the supplier, but relatively low volumes may mean that it is difficult to gain economies of scale or the benefits 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 these directly impact on their profits, but transaction costs of working with a supplier need to be taken into account.

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

Figure 5.11 The decision logic of outsourcing

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

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 perform the activities in-house. Offshoring means obtaining products and services from 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 that has greater expertise or scale or both.

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O P E R AT I O N S I N P R AC T I C E

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 business. Although Japanese domestic appliance manufacturers, such as Matsushita and Sanyo, domi- nated 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, it 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 relatively 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 that was already selling very simple (and very cheap) models in the USA. GE decided to continue making the top of the range models itself, subcontract its cheaper models to Matsushita, but also place a small order of 15,000 units of its cheaper models to the Korean company, partly to see whether they could cope with the order. Of course it also made sense for GE to send their own engineers to help the Korean company and ensure that quality standards would be maintained. The GE engineers found that, although the Korean company had little knowledge, it was very willing to learn. Eventually the Koreans’

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, which found that it was making more profit from the Korean- sourced products than those coming out of its own plant in the USA. 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 manufacturer of microwave ovens.

Samsung’s subcontracted success

Outsourcing

Domestic supplier delivers products and/or services

Offshore outsourcing

Overseas supplier delivers products and/or services

Domestic operations

Focal operation performs activities itself

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

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Globalization, ‘re-shoring’ and technology Almost since the start of the industrial revolution, businesses across the world have been forging ever-closer relationships. Especially in the last few decades, the use of geographically dispersed suppliers to outsource at least some activities has become routine. This has been driven partly by labour cost differentials, partly by cheap and efficient IT connecting businesses, partly by trade deals, and partly by reduced transport costs. This is ‘globalization’, where products, raw materials, money, technology and ideas move (relatively) smoothly across national boundaries. Apple and others can design their products in California and assemble them in China. A French aerospace company can direct the activities of its Brazilian suppliers almost as effectively as if they were in the next town. Bill Clinton, the ex-president of the USA called globalization ‘the economic equiv- alent of a force of nature, like wind or water. It pushes countries to specialize and swap, making them richer, and the world smaller.’

But increasingly some economists and business commentators question whether the boom in globalized operations is over. Some cite protectionist pressures in some developed countries. Others see rising wages in (previously) less developed countries as reducing cost differentials. In addition, the operations-related advantages of sourcing from suppliers closer to home can be significant. Reducing reliance on complicated international supply chains can save transport and inventory costs, is less polluting, and is potentially less prone to reputational risk if far-off suppliers misbehave. It can also increase supply flexibility. For example, the Spanish fast fashion brand, Zara, manufactures some of its ‘steady selling’ items in low-cost factories in Asia, but makes the vast majority of its (less predict- able demand) garments closer to its markets so that it can respond quickly to changing fashions (see the case study at the end of Chapter 12). Developments in technology could reinforce this so-called ‘re-shoring’ (also referred to as ‘back-shoring’, ‘home-shoring’ and ‘on-shoring’) process. Automation may encourage a trend towards ‘radical insourcing’ where developed countries no longer need to outsource production to countries where wages are low (see the ‘Operations in practice’ example on Adidas in Chapter 1).

In other cases, problems with poor quality and unreliable delivery have led companies to re-think their geographically dispersed supply networks, including General Electric, Caterpillar, Ford and Apple. In services, customer frustrations based on perceived communication problems have led a number of companies to reverse off shoring decisions for their call centres, including United Utilities, British

Critical commentary

Probably the most controversial issue in supply network design is that of outsourcing. In many instances there has been fierce 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, reduce working conditions, or both. Furthermore, they say, flexibility is only achieved by reducing job security. Employees who were once part of a large and secure corporation could find 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 significant obstacles, including understandable resistance from staff who find 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 first 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.

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Telecom, Santander Bank and PowerGen. It also appears that, in many case, shareholders approve of such re-shoring decisions. A recent study analysing the stock price effects of re-shoring announcements by US firms,6 showed an average 0.45 per cent uplift in stock returns in the aftermath of an announce- ment – for the firms in the study, that represents an average increased market value of $322.57 million!

Summary answers to key questions

What is the structure and scope of operations?

▶ A supply network includes the chains of suppliers providing inputs to the operation and the chains of customers who receive outputs from the operation

▶ Understanding the nature of the supply network and the operations role within it is critical in understanding competiveness, identifying significant links in the network, and shifting towards a longer-term perspective.

▶ The ‘structure’ of an operation’s supply network relates to the shape and form of the network. It involves decisions around network configuration, capacity levels for each part of the network, and the location of each part 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. This involves deciding the extent of vertical integration and the degree of outsourcing.

How should the network be configured?

▶ Configuring a supply network means determining its overall pattern, shape or arrangement of the various operations that make up the supply network.

▶ Changing the shape of the supply network may involves reducing the number of suppliers to the operation so as to develop closer relationships, and bypassing or disintermediation of operations within the network.

▶ 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 capture this idea is ‘co-opetition’.

▶ An idea that is closely related to that of co-opetition is that of the ‘business ecosystem’. Like supply networks, business ecosystems include suppliers and customers, but they also include stakeholders that have little direct relationship with the main network, yet interact by complementing or contributing significant components of value for end customers.

▶ Operations are increasingly outsourcing the delivery of some aspects of their service to specialist providers, which deal directly with customers on behalf of the focal firm. This marks a shift from a ‘dyadic’ perspective to a ‘triadic’ perspective.

How much capacity should operations have?

▶ The amount of capacity an organization will have depends on its view of current and future demand. Key long-term capacity decisions include choosing the optimum capacity for each site and timing the changes in the capacity increase (or decrease) of each part of the network.

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▶ When deciding the optimum capacity level, the concepts of economy and diseconomy of scale are critical.

▶ When deciding the timing of capacity change, organizations can consider a mix of three strategies – capacity introduced to lead demand, capacity introduced to lag demand and capacity smoothing, where inventory is used in lead periods to meet demand in lag periods.

Where should operations be located?

▶ The location of each operation in a supply network is both a key element in defining its structure, and also will have an impact on how the network operates in practice.

▶ Key reasons for location decisions include changes in demand and/or changes in supply. ▶ Evaluating potential changes in location involves two key steps:

— identifying alternative location options; — setting location evaluation criteria, including capital requirements, market factors, cost factors,

future flexibility and risk factors.

How vertically integrated should the network be?

▶ The scope of an operation’s control of its supply network is the extent to which it does things itself as opposed to relying 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.

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

▶ Advantages of vertical integration may include securing access to supply or markets ; reducing costs ; improving product or service quality ; and improved understanding of supply network activities.

▶ Disadvantages of vertical integration may include the creation of an internal monopoly; lack of economies of scale; potential loss of flexibility; and isolation from innovation.

What activities should be in-house and what should be outsourced?

▶ Outsourcing is the activity of taking activities that could be or have been carried out in-house and moving them to outsourced suppliers. It is also known as the ‘do-or-buy’ or ‘make-or-buy’ decision.

▶ Making the outsourcing decision involves comparing the relative impact on key performance objectives of doing an activity in-house versus using an outsourced supplier. It also requires incorporation of other strategic factors, such as long-term competitive advantage and risk.

▶ There is a key difference between outsourcing and off shoring. Outsourcing means deciding to buy in products or services rather than perform the activities in-house. Off-shoring means obtaining products and services from operations that are based outside one’s own country.

▶ While globalization is a key trend that has led to geographically dispersed networks of operations, the last decade has seen some reversing of this trend, often referred to as re-shoring.

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C A S E ST U DY

costs that, if there were overcapacity in the industry, 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 underlying all the team’s discussions – how flexible should the process be? Should the team assume that they were designing an opera- tion that would be dedicated exclusively to the manufacture of photoresist imaging film, and ruthlessly cut out any tech- nological options that would enable it to manufacture other products, or should they design a more general-purpose oper- ation that was suitable for photoresist imaging film, but could 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 years’ time’ (Frank Jansen). But the advantages of a totally dedicated operation were less obvious, although there was a general agreement that both costs and quality could be supe- rior in an operation dedicated to one product.

Eventually the team decided to focus on a relatively 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 consen- sus for focus but it was certainly one of the toughest decisions we ever made’ (Frank Janssen). 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 signifi- cant cost savings to us it made it a lot easier to identify the root

Just outside Rotterdam in the Netherlands, Frank Jansen, the Chief Operating Officer of Aarens Electronic (AE) was justifiably 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 absolute cleanliness and precision’ and ‘a quantum leap in harnessing 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. The company offered precision custom coating and laminating services to a wide range of customers, among the most important being Phanchem, to which it supplied dry photoresist imaging films, a critical step in the manufacturing 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 AE 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 the most expensive at around €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 specialized areas of business. So we went for it’ (Frank Jansen). The option of a very large, ultra clean, state-of-the-art facility also had a further advantage – it could change the economics of the photoresist imaging industry. In fact, global demand and capacity did not immediately justify investing in such a large increase in capacity. There was probably some overcapacity in the industry. But a large-capacity, ultra-clean type operation could provide a level of quality at such low

Aarens Electronic

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▶ 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 compa- nies, the option of ‘doing nothing’ by staying in Frankfurt was discounted. Phanchem wanted to sell its valuable site in the centre of Frankfurt. The advantages of some kind of move were significant. The option of Phanchem moving to 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 oper- ating 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 offering quality film at attractive prices, thus increasing volume for AE. The managers at the Rotterdam plant also looked forward to an even closer oper- ational 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 imagin- ing them on the same site took some thinking about. It was a matter of getting use to the idea, taking one step at a time’ (Frank Janssen).

The customer becomes a paying guest However, when Frank and the Rotterdam managers presented 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 Janssen). 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 cooperation. 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?

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 responsibil- ities here – we’re either making it or we’re not’ (Frank Janssen).

When the Rotterdam operation started producing, the team had tweaked the design to bring the capacity at start-up to 32 MSM per year. Notwithstanding some initial teething troubles it was, from the start, a technical and commercial success. Within six months a contract was signed with Phanchem to supply 100 per cent of its needs for the next ten 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 Janssen. ‘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, products produced in Rotterdam were shipped to Phanchem’s facility near Frankfurt, Germany, almost 500 km away. This distance caused a number of problems includ- ing some damage in transit and delays in delivery. However, the relationship between AE and Phanchem remained sound helped by the two companies’ cooperation 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 Janssen). The close- ness 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 Janssen said, ‘partly because we worked together on vari- ous problems the relationship has grown stronger and stronger’.

In particular the idea of a physically closer relationship between AE and Phanchem was explored. ‘During the negoti- ations with Phanchem for our 100 per cent contract there had been some talk about co-location but I don’t think anyone took it particularly seriously. Nevertheless there was general agree- ment 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 market – what was good for Phanchem was good for AE’ (Frank Janssen). Several options were discussed within and between the two compa- nies. 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.

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Problems and applications

All chapters have ‘Problems and applications’ questions that will help you practise analysing operations. They can be answered by reading the chapter. Model answers for the first two questions can be found on the companion website for this book.

1 Consider the music business as a supply network. How did music downloads and streaming affect each artist’s sales? What implications has online music transmission had for traditional music retailers?

2 A data centre is ‘a facility composed of networked computers and storage that businesses or other organizations use to organize, process, store and disseminate large amounts of data. A business typi- cally relies heavily upon the applications, services and data contained within a data centre, making it a focal point and critical asset for everyday operations’.7 These facilities can contain network equipment, servers, data storage and back-up facilities, software applications for large companies, and more. Very few businesses (or people) do not rely on them. And determining their location is a crucial decision for those operations running them. In fact such businesses usually have a set method for choosing data centre location.

Visit the websites of the types of business that run data centres (such as Intel, Cisco or SAP) and devise a set of criteria that could be used to evaluate potential sites.

3 A company that produces concrete paving slabs is introducing a new range of ‘textured’ non-slip products. To do this it must invest in a new machine. Demand is forecast to be around 10,000 units per month for the first year and approximately 24,000 units per month after that. The machines that produce these products have a capacity of 10,000 units per month. They have a fixed cost of £20,000 per month and a variable cost of processing of £1 per unit. The company has forecast that it will be able to charge £4 per unit. It has been suggested that it would make higher profits if sales were restricted to 20,000 units per month in the second year. Is this true?

4 The Fast and Efficient (FAC) transport group is reviewing its fleet maintenance operations. ‘Our lease on our current maintenance and repair facilities site will expire in a year, and we need to decide how to operate in the future. Currently we have the one site with 5 repair bays. This can cope with our fleet of 40 trucks. But demand is growing and within two or three years we hope to be operating around 55–60 trucks. So we will have to choose a site (or sites) that allows for this increase. And that leads me to the next issue – should we stick to operating one central site, or should we plan to have two sites, one for the North and one for the South of our region?’

As far as FAC’s operations managers could forecast, the costs of having one or two sites would be as follows.

One site - Fixed cost of establishing the site = €300,000 Variable cost of servicing trucks = €14,000 per truck per year

Two sites - Fixed cost of establishing the sites (for both) = €500,000 Variable cost of servicing trucks = €10,000 per truck per year

(they will be out of action for less time because sites would be closer) At what level of demand (in terms of the number of trucks operated by the company) will the

two-site proposal be cheaper?

5 How could universities adopt the practice of outsourcing more?

6 ‘Globalization is very much a “mixed blessing”. There is little doubt that it has lifted millions out of poverty, but it has also led to the destruction of traditional cultures in developing countries and many jobs in the developed world.’ Draw up lists of what you see as the advantages and disadvantages of globalization.

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CHAPTER 5 THE STRUCTURE AND SCOPE OF OPERATIONS 173

Selected further reading

Chopra, S. and Meindl, P. (2014) Supply Chain Management: Strategy, planning and operations, 6th edn, Prentice Hall, NJ. A good textbook that goes into more detail on the strategic structure and scope issues covered in this chapter and the more operational issues covered in the supply chain management chapter.

Cullen, S.K., Lacity, M. and Willcocks L.P. (2014) Outsourcing – All You Need To Know, White Plume Publishing, Boston, MA. A practical guide to outsourcing, with lots of examples across sectors and countries, from an experienced team of authors

Kim, Y., Yi-Su, C. and Linderman, K. (2015) Supply network disruption and resilience: A network struc- tural perspective, Journal of Operations Management, vol. 33–34, January, pp. 43–59. A more in-depth article examining the effect of different structural networks on the likelihood of disruptions.

Moore, J.F. (2013) Shared Purpose : A Thousand Business Ecosystems, A Connected Community, and the Future, CreateSpace Independent Publishing Platform, California. A short but sweet progress report on a study of ARM Holdings (see example in the chapter) and its 1,000-plus community of partners from the founder of the business ecosystems idea.

Oshri, I., Kotlarsky, J. and Willcocks, L.P. (2015) The Handbook of Global Outsourcing and Offshoring, 3rd edn, Palgrave Macmillan, Basingstoke. A clear and applied guide to the key steps in outsourcing and off shoring decisions

Steger, M.B. (2017) Globalization: A Very Short Introduction, OUP, Oxford. A very good overview of globalization and its effects. It covers not only business issues, but also political, cultural, ideological and environmental perspectives.

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PART TWO

Designing the operation

174

Topic covered in this chapter

Operations management

Direct

Design Develop

Deliver

Design

Layout and flow

Process design

Process technology

People in operations

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T his part of the book looks at how the resources and processes of operations are designed. By ‘design’ we mean how the overall form, arrangement and nature of transforming resources impact on the flow of transformed resources as they move through the operation. 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 The layout and look of facilities 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.

175

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176

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 process, 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 design6

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?

Figure 6.1 This chapter examines process design

Topic covered in this chapter

Operations management

Direct

Design Develop

Deliver

Design

Layout and flow

Process design

Process technology

People in operations

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CHAPTER 6 PROCESS DESIGN 177

What is process design? To ‘design’ 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 prac- tice. 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 under- stand the design objectives, especially when the overall shape and nature of the process is being decided. The most common way of doing this is by positioning it according to its volume and variety characteristics. Eventually the details of the process must be analysed to ensure that it fulfils its 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 don’t think of this as a simple sequential process. There may be aspects concerned with the objectives, or the broad positioning, of the process that will need to be modified following its more detailed analysis.

Process design and product/service design are interrelated Often we will treat the design of services and products, 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 consider- ation of how it is to be produced. Small changes in the design of products and services can have pro- found implications for the way the operation eventually has to produce them. Similarly, the design of a process can constrain the freedom of product and service designers to operate as they would wish (see Figure  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 product and process design has implications for the organization of the design activity, as we discussed in Chapter  4 . Certainly, when product designers also have to make or use the things that they design, it can concentrate their minds on what is important. For example, in the early days of flight, the engi- neers 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.

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

Processes should be designed so they can

create all products and services which the

operation is likely to introduce

Designing the process

Designing the product or

service

Product/ service

design has an impact on process design and vice versa

Products and services should be designed in such a way that they can

be created e�ectively

Operations principle The design of processes cannot be done independently of the services and/or products that are being created.

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178 PART TWO DESIGNING THE OPERATION

O P E R AT I O N S I N P R AC T I C E

Airports are complex operations – really complex. Their processes handle passengers, aircraft, crew, baggage, commercial cargo, food, security, restaurants and numerous customer services. The operations managers, who oversee the daily operations of an airport, must cope with Aviation Administration rules and regulations, a huge number of airport service contracts, usually thousands of staff with a wide variety of specialisms, airlines with sometimes compet- ing claims to service priority, and customers, some of whom fly every week and others who are a family of seven with two baby strollers who fly once a decade. Also, their processes are vulnerable to disruptions from late arrivals, aircraft malfunction, weather, the industrial action of work- ers two continents away, conflicts, terrorism and exploding volcanoes in Iceland. Designing the processes that can oper- ate under these conditions must be one of the most challenging operations tasks. So, to win prizes for ‘Best Airport’ customer service and operating efficiency year after year has 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’s roughly 10 times the size of Singapore’s population). A flight takes off or lands at Changi roughly once every 90 seconds.

When Changi opened its new Terminal 4, it increased the airport’s annual passenger handling capacity to around 82 million. Every stage of the customers’ journey through the terminal was designed to be as smooth as possible. The aim of all the processes within and around the terminal was to provide fast, smooth and seamless flow for passengers. Each stage in the customer journey was provided with enough capacity to cope with anticipated demand. A new overhead bridge was built across the airport boulevard connecting T4 with Singapore’s highway system to enable the movement of cars, buses and airside vehicles. Two new car parks accommodate up to 1,500 vehicles. The terminal was connected to the new car parks via sheltered links. Once passengers arrive at the two-storey terminal building they pass through kiosks and automated options for self-check-in, self-bag tagging and self-bag-drops. Their bags are trans- ported to the aircraft via an advanced and automated baggage handling system. Similarly, automated options,

including face recognition technology, are used at immigra- tion counters and departure-gates. Biometric technology and ‘fast and seamless travel’ (FAST) services help to speed passenger throughput and increase efficiency. After security checks, passengers find themselves in 15,000 m2 of shop- ping, dining and other retail spaces, featuring local, cultural and heritage-theme restaurants. This space also features a 300-metre-long Central Galleria, which is 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 considered important. It already boasts a butterfly garden, orchid and sunflower gardens as well as a koi pond.

The feelings of passengers using the terminal were an important part of its design. Architecturally, the design of T4 aimed to be functional, and yet have its own distinct character, while ensuring that the design and layout are passenger-centric and user-friendly. And with so many different companies involved in the day-to-day operation of the airport it was vital to include as many stakeholders as possible during the design. Workshops were conducted with various stake- holders, 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 could deliver a seamless and refreshing experience for travellers, and also be a place where staff would feel proud and motivated to work.

Changi airport

Process networks In Chapter 1 we used the ‘hierarchy of networks’ to illustrate how any operation is both made up of networks (of processes) and a part of networks (of other operations). This idea is of more than

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CHAPTER 6 PROCESS DESIGN 179

academic interest. It is essential in making all networks, including process networks, work effec- tively. Figure  6.3 shows a simplified internal process network for one business. It has many processes that transform items and transfer them to other internal processes. Through this network there are many ‘process chains’: that is, threads of processes within the network. And thinking about processes as part of a network has a number of advantages. First, understanding how and where a process fits into the internal network helps to establish appropriate objectives for the process. Second, one can check to make sure that everyone in a process has a clear ‘line of sight’ forward through to end customers, so that the people working in each process have a better chance of seeing how they contribute to satisfying the operation’s customers. Even more important, one can ask the question, ‘how can each process help the intermediate processes that lie between them and the customer, to operate effectively?’ Third, a clear ‘line of sight’ backwards through to the operation’s suppliers makes the role and importance of suppliers easier to understand. Finally, reversing the question, not understanding how process chains interact can reduce the effectiveness of the whole operation, and increase the risk of disruption spreading. Process chains can become channels for disruption when things go wrong.

What should be the objectives of process design? The whole point of process design is to make sure that the performance of the process is appropriate for whatever it is trying to achieve. For example, if an operation competes primarily on its ability to respond quickly to customer requests, its processes will need to be designed to give fast throughput times. This would minimize the time between customers requesting a product or service and them receiving it. Similarly, if an operation competes on low price, cost-related objectives are likely to dominate its process design. In other words, some kind of logic should link what the operation as a whole is attempting to achieve, and the performance objectives of its individual processes. As when we examined product and service design innovation in Chapter 4, we will include ‘sustainability’ as an operational objec- tive of process design, even though it is really a far broader soci- etal issue that is part of the organization’s ‘triple bottom line’ (see Chapter 2). This is illustrated in Table 6.1.

Figure 6.3 A process network within an operation showing an internal ‘process chain’

E xt

e rn

a l c

u st

o m

e rs

E xt

e rn

a l s

u p

p lie

rs

An internal ‘process chain’

Individual processes in the internal ‘process network’

The operation

Operations principle The design of any process should be judged on its quality, speed, dependability, flexibility, cost and sustainability performance.

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180 PART TWO DESIGNING THE OPERATION

Operations performance objective

Typical process design objectives Some benefits of good process design

Quality ▶ Provide appropriate resources, capable of achieving the specification of products or services ▶ Error-free processing

▶ Products and services produced ‘on-specification’ ▶ Less recycling and wasted effort within the process

Speed ▶ Minimum throughput time ▶ Output rate appropriate for demand

▶ Short customer waiting time ▶ Low in-process inventory

Dependability ▶ Provide dependable process resources ▶ Reliable process output timing and volume

▶ On-time deliveries of products and services ▶ Less disruption, confusion and rescheduling within the process

Flexibility ▶ Provide resources with an appropriate range of capabilities ▶ Change easily between processing states (what, how, or how much is being processed?)

▶ Ability to process a wide range of products and services ▶ Low cost/fast product and service change ▶ Low cost/fast volume and timing changes ▶ Ability to cope with unexpected events (e.g. supply or a processing failure)

Cost ▶ Appropriate capacity to meet demand ▶ Eliminate process waste in terms of:

▶ excess capacity ▶ excess process capability ▶ in-process delays ▶ in-process errors ▶ inappropriate process inputs

▶ Low processing costs ▶ Low resource costs (capital costs) ▶ Low delay/inventory costs (working capital costs)

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

▶ Lower negative environmental and societal impact

Table 6.1 The impact of strategic performance objectives on process design objectives and performance

‘Micro’ process objectives 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 concerned with flow through the process. When whatever is being ‘processed’ enters a process, it will progress through a series of activities where it 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 trans- forming 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

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CHAPTER 6 PROCESS DESIGN 181

Table 6.1 The impact of strategic performance objectives on process design objectives and performance process. It is common for more ‘micro’ performance flow objectives to be used that describe process flow performance. For example:

▶ Throughput rate (or flow rate) is the rate at which items emerge from the process, i.e. the number of items passing through the process per unit of time.

▶ Cycle time 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.1

▶ Throughput time is the average elapsed time taken for inputs to move through the process and become outputs.

▶ ‘Work-in-progress’ or process inventory is the number of items in the process, as an average over a period of time.

▶ The utilization of process resources is the proportion of availa- ble time that the resources within the process are performing useful work.

Operations principle Process flow objectives should include throughput rate, throughput time, work- in-progress and resource utilization, all of which are interrelated.

O P E R AT I O N S I N P R AC T I C E

There is some dispute about who established the first drive- through (or drive-thru, if you prefer). Some claim it was the In-N-Out in California. Other claimants include the Pig Stand restaurant in Los Angeles, where Royce Hailey first promoted the drive-through service, allowing customers to simply drive by the back door of the restaurant where the chef would come out and deliver the restaurant’s famous ‘Barbequed Pig’ sandwiches, and Red’s Giant Hamburg in Springfield, Missouri. What became apparent though, as the drive-through idea began to spread (and include services other than fast food such as banks), was that their design could have a huge impact on their efficiency and profitabil- ity. Today, drive-through processes are slicker, and far, far, faster, although most stick to a proven formula with orders generally placed by the customer using a microphone and picked up at a window. It is a system that allows drive- throughs to provide fast and dependable service. In fact, there is strong competition between drive-throughs to design the fastest and most reliable process. For example, some Starbucks drive-throughs have strategically placed cameras at the order boards so that servers can recognize regular customers and start making their order – even before it’s placed. Other drive-throughs have experimented with simpler menu boards and see-through food bags to ensure greater accuracy. There is no point in being fast if you don’t deliver what the customer ordered. These details matter. It has been estimated that sales increase 1 per cent for every six seconds saved at a drive-through. One experiment in making drive-through process times slicker was carried out by a group of McDonald’s restaurants. On California’s central coast 150 miles from Los Angeles, a call centre took orders remotely from 40 McDonald’s outlets around the

country. The orders were then sent back to the restaurants and the food was assembled only a few metres from where the order was placed. Although saving only a few seconds on each order, it could add up to extra sales at busy times of the day. A good drive-through process should also help customers to contribute to speeding things up. So, for exam- ple, menu items must be easy to read and understand.

This is why what are often called ‘combo meals’ (burger, fries and a cola) can save time at the ordering stage. By contrast, complex individual items or meals that require customization can slow down the process. This can become an issue for drive-through operators when fashion moves towards customized salads and sandwiches. Yet there are signs that above a certain speed of service, other aspects of process performance become more important. As one drive- through chief operations manager points out, ‘you can get really fast but ruin the overall experience, because now you’re not friendly’.

Fast (but not too fast) food drive-throughs

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182 PART TWO DESIGNING THE OPERATION

Standardization of processes One of the most important process design objectives, especially in large organizations, concerns 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 organizations because, very often, different ways of carrying out similar or identical tasks emerge over time in the various parts of the organization. But, why not allow many different ways of doing the same thing? That would give a degree of autonomy and freedom for individuals and teams to exercise their discre- tion. The problem is that allowing numerous ways of doing things causes confusion, misunderstandings 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.2 This leads to confusion, they 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. They recommended that there should be just one chart and one process for all staff who check on patients’ conditions. Professor Derek Bell said: ‘Developing and adopting a standardized early

warning system will be one of the most significant developments in healthcare in the next decade.’

Standardization is also an important objective in the design of some services and products, for similar reasons (see Chapter 4). The practical dillema for most organizations is how to draw the line between processes that are required to be standardized, and those that are allowed to be different.

Environmentally sensitive process design With the issues of environmental protection becoming more important, process designers have to take account of ‘green’ (sustainability) issues. In many developed countries, legislation has already provided some basic standards. Interest has focused on some fundamental issues:

▶ The sources of inputs to a product or service. (Will they damage rainforests? Will they use up scarce minerals? Will they exploit the poor or use child labour?)

▶ Quantities and sources of energy consumed in the process. (Do plastic beverage bottles use more energy than glass ones? Should waste heat be recovered and used in fish farming?)

▶ The amounts and type of waste material that are created in the manufacturing processes. (Can this waste be recycled efficiently, or must it be burnt or buried in landfill sites?)

▶ The life of the product itself. If a product has a long useful life, will it consume fewer resources than a short-life product?

▶ The end-of-life of the product. (Will the redundant product be difficult to dispose of in an envi- ronmentally friendly way?)

Designers are faced with complex trade-offs between these factors, although it is not always easy to obtain all the information that is needed to make the ‘best’ choices. To help make more rational decisions in the design activity, some industries are experimenting with 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 service or product’s creation, beginning with the extraction or farming of the basic raw materials. The short case ‘Ecover’s ethical oper- ation design’ demonstrates that it is possible to include ecological considerations in all aspects of product and process design.

Operations principle The design of any process should include consideration of ethical and environmental issues.

Operations principle Standardizing processes can give some significant advantages, but not every process can be standardized.

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O P E R AT I O N S I N P R AC T I C E

Ecover cleaning products, such as washing liquid, are famously ecological. 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 isn’t just the company’s products that are based on an ecologically sustainable foundation. Ecover’s ecological factories in France and Belgium also embody the company’s commitment to sustainability. Whether it is the factory roof, the 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 environmental impact. For example, the Ecover factory operates entirely on green electricity – the type produced by wind generators, tidal generators and other natural sources. What is more, it 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 it uses in the factories is standard for the industry, it keeps its energy and water consumption down by choosing low-speed appliances that can multi-task and don’t require water to clean them. For example, the motors on its mixing machines can mix 25 tonnes of Ecover liquid while ‘consum- ing no more electricity than a few flat irons’. And it 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 say that they ‘hate waste, so we’re big on recycling. We keep the amount of packaging used in our prod- ucts 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 process of improvement; in fact, we’ve recently devel- oped a new kind of green plastic we like to call “Plant-astic” that’s 100% renewable, reusable and recyclable – and made from sugarcane.’

Even the building is ecological. It is cleverly designed to follow the movement of the sun from east to west, so that production takes place with the maximum amount of natural daylight (good for saving power and good for working conditions). The factory’s frame is built from pine rather than more precious timbers and the walls are constructed using bricks that are made from clay, wood pulp and mineral waste. They require less energy to bake, yet they’re light, porous and insulate well. The 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’s so effective, that they don’t need heating or air conditioning – the temperature never drops below 4°C and never rises above 26°C.

Ecover’s ethical operation design3

How do volume and variety affect process design? In Chapter 1 we saw how processes range from those producing at high volume (for example, credit card transaction processing) to a low volume (for example, funding a large complex take-over 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 variety of products and services, and high-volume 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 oper- ation 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 trans- plant surgery where the treatment is designed specifically to meet the needs of one person. In other words, no one type of process design is best for all types of requirement in all circumstances – different products or services with different volume–variety posi- tions require different processes.

Operations principle The design of any process should be governed by the volume and variety it is required to produce.

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184 PART TWO DESIGNING THE OPERATION

Figure 6.4 Different process types imply different volume–variety characteristics for the process

Repeated/ divided

Process tasks

Process flow

Continuous

Diverse/ complex

Intermittent

Low High Low

Low Low

High High

HighVolume Volume Variety Variety

Manufacturing process types Service process types

Project

Continuous

Mass

Batch

Jobbing

processes Professional

shops

Mass

Services

services

services

processes

processes

processes

processes

Process types The position of a process on the volume–variety continuum shapes its overall design and the gen- eral 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 ‘manufacturing’ terms used in service industries. Figure  6.4 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 relatively long time-scale 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 production, most construction work and large fabrication operations such as those manufacturing turbo generators.

The major construction site shown in the picture is a project process. Each ‘item’ (building) is different and poses different challenges to those running the process (civil engineers).

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CHAPTER 6 PROCESS DESIGN 185

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 process 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, jobbing 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 the work of made-to-measure tailors, many precision engi- neers such as specialist toolmakers, furniture restorers, and the printer who produces tickets for the local social event.

Batch processes Batch processes may look like jobbing processes, but do not have the same degree of variety. As the name implies, 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 component parts which go into mass-pro- duced 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 different dish.

This craftsperson is using general purpose wood- cutting technology to make a product for an individual customer. The next product made will be different (although maybe similar) for a different customer.

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186 PART TWO DESIGNING THE OPERATION

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 thousands 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 and television factories.

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

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

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 processing, petrochemical refineries, electricity utilities, steel making and some paper making.

Professional services Professional services are high-contact processes where customers spend a considerable time in the service process. They can provide high levels of customization (the process being highly adaptable in order to meet individual customer needs). Professional services tend to be people-based rather than equipment-based, and usually staff are given considerable discretion in servicing customers. Professional services include management consultants, lawyers’ practices, architects, doctors’ surger- ies, auditors, health and safety inspectors and some computer field service operations.

Here consultants are preparing to start a consultancy assignment. They are discussing how they might approach the various stages of the assignment, from understanding the real nature of the problem through to the implementation of their recommended solu- tions. This is a process map, although a very high level one. It guides the nature and sequence of the consult- ants’ activities.

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CHAPTER 6 PROCESS DESIGN 187

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 paragraph). 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 restaurants, hotels and travel agents.

The health club shown in the picture has front-office staff who can give advice on exercise programmes and other treatments. Although every client has a unique fitness programme, certain activities (for example, safety issues) have to follow defined processes.

This is the ‘back office’ of part of a retail bank (the type that we all use). It is a call centre that deals with many thousands of calls every day. Staff are required to follow defined processes (scripts) to make sure customers receive a standard service.

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 6.5. Often called the ‘product–process’ matrix,5 it can in fact be used for any type of process, whether producing products or services. The underlying idea of the product–process matrix is that many of the more important elements of process design are strongly related to the volume–variety position of the process. So, for any pro- cess, the tasks that it undertakes, the flow of items through the process, the layout of its resources, the technology it uses, and the design of jobs, are all strongly influenced by its volume–variety position. This means that most processes should lie close to the diagonal of the matrix that rep- resents the ‘fit’ between the process and its volume–variety position. This is called the ‘natural’ diagonal, or the ‘line of fit’.

Mass services Mass services have many customer transactions, involving limited contact time and little customization. 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 example, one of the most common types of mass service are the call centres used by almost all companies that deal directly with consumers. Coping with a very high volume of enquiries requires some kind of structuring of the process of commu- nicating with customers. This is often achieved by using a carefully designed enquiry process (sometimes known as a script).

Operations principle Process types indicate the position of processes on the volume–variety spectrum.

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188 PART TWO DESIGNING THE OPERATION

O P E R AT I O N S I N P R AC T I C E

Every film or television programme that is set in any period, other than the present day, needs costumes for its actors. And most films have a lot of characters, so that means a lot of costumes. Look at Sands Film Studios 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 companies, each of which has different requirements 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 providing 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, and varied specialist services such as corset and crinoline making as well as millenary (hats). During the design and making process actors often visit the work- shop, 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 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 timing have been agreed, the designer can start to present ideas and finished designs to the workshop. And although the processes in the workshop are well established, each costume requires different skills and so has a different route through the stages.

Sands Film Studio, jobbing costume makers4

Critical commentary

Although the idea of process types can be useful, it is in many ways simplistic. In reality, there is no clear boundary between process types. For example, many processed foods are manufactured using mass production processes but in batches. So, a ‘batch’ of one type of cake (say) can be followed by a ‘batch’ of a marginally different cake (perhaps with different packaging), followed by yet another, etc. Essentially this is still a mass process, but not quite as pure a version of mass processing as a manufacturing process that only 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 adopts this approach.

Moving off the natural diagonal A process lying on the natural diagonal of the matrix shown in Figure 6.5 will normally have lower operating costs than one with the same volume–variety position that lies off the diagonal. This is because the diagonal represents the most appropriate process design for any volume–variety position. Processes that are on the right of the ‘natural’ diagonal would normally be associated with lower volumes and higher variety. This means that they are likely to be more flexible than seems to be warranted by their actual volume–variety position. That is, they are not taking advantage of their ability to standardize their activities. Because of this, their costs are likely to be higher than they would be with a process that was closer to the diagonal. Conversely, processes that are on the left of the diagonal have adopted a position that would normally be used for higher volume and lower variety processes. Processes will therefore be ‘over-standardized’ and probably too inflexible for their

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CHAPTER 6 PROCESS DESIGN 189

volume–variety position. This lack of flexibility can also lead to high costs because the process will not be able to change from one activity to another as readily as a more flexible process.6 So, a first step in examining the design of an existing process is to check if it is on the natural diagonal of the product–process matrix. The volume–variety position of the process may have changed without any corresponding change in its design. Alternatively, design changes may have been introduced without considering their suit- ability for the processes volume–variety position.

Example The ‘meter installation’ unit of a water utility company installed and repaired water meters. Each installation job could vary significantly because the requirements of each customer varied and because meters had to be fitted into different water pipe systems. When a customer requested an installation, a supervisor would survey the customer’s water system and inform the installation team. An appointment would then be made for an installer to visit the customer’s location and install the meter. Then the company decided to install a new ‘standard’ remote-reading meter to replace the wide range of existing meters. This new meter was designed to make installation easier by including universal quick-fit joints that reduced pipe cutting and jointing during installation. As a pilot, it was also decided to prioritize those customers with the oldest meters and conduct trials of how the new meter worked in practice. All other aspects of the installation process were left as they were. However, after the new meters were introduced the costs of installation were far higher than forecast and the installers were frustrated at the waste of their time and the now relatively stand- ardized installation job. So the company decided to change its process. It cut out the survey stage

Figure 6.5 Deviating from the ‘natural’ diagonal on the product–process matrix has consequences for cost and flexibility Source: Based on Hayes and Wheelwright

Manufacturing operations

process types

Service operations

process types

Low volume High variety

High volume Low variety

Product/service characteristics

C o

st F

le xi

b ili

ty P

ro ce

ss p

er fo

rm an

ce c

h ar

ac te

ri st

ic s

Project

Jobbing

Batch

Mass

Continuous

Professional service

More process flexibility than is needed,

so high cost

Less process flexibility than is needed,

so high cost

Service shop

Mass service

The ‘natural’ diagonal or ‘line of fit’

Operations principle Moving off the ‘natural diagonal’ of the product–process matrix will incur excess cost.

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190 PART TWO DESIGNING THE OPERATION

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 6.6. The initial position of the installation process 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 reducing 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 6.6. It was off the diagonal, with unnec- essary flexibility and high operating costs. Redesigning the process to take advantage of the reduced variety and complexity of the job (position C on Figure 6.6) 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 activ- ities are to be performed and who is going to do them. There will, of course, be some constraints to this. Some activities must be carried out before others and certain people or equipment can only do some activities. Nevertheless, for a process of any reasonable size, the number of alternative pro- cess designs is usually large. Because of this, process design is often done using some simple visual approach such as process mapping.

Figure 6.6 A product–process matrix with process positions from the water meter example

The ‘natural’ diagonal or ‘line of fit’

New service, old process, so excess process flexibility and

high cost A B

C

Original service with appropriate process

characteristics

New service with new process

having appropriate process

characteristics

Low volume High variety

High volume Low variety

Product/service characteristics

C o

st F

le x ib

ili ty

P ro

c es

s p

er fo

rm an

c e

c ha

ra c

te ris

ti c

s

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O P E R AT I O N S I N P R AC T I C E

Productivity in house building is a problem. While most industries have made, sometimes spectacu- lar, productivity gains, house building has actually been getting less productive. To add to the prob- lem, a combination of population growth and rapid urbanization means that in many countries, demand for housing is rising rapidly. But some companies are trying to remedy this by adopting new production methods. Space4 is one of these. It is a division of Persimmon, which is 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 oper- ators, 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 oper- ations are timely and accurate. There is a direct link between the computer-aided design (CAD) systems that design the houses and the manufacturing processes that make them, reducing the time between design and manu- facture. The machinery itself incorporates automatic predictive and preventative maintenance routines that minimize the chances of unexpected breakdowns. But not everything about the process relies on automation. Because of their previous automobile assembly experience, staff are used to the just-in-time, high-efficiency culture of modern mass production. After production, the completed panels

are stacked in 3-metre piles and are then fork lifted into trucks where they are dispatched to building sites across the UK. Once the panels arrive at the building site, the construction workforce can assemble the exterior of a 1,200 sq ft (average size) new home in a single day. Because the external structure of a house can be built in a few hours, and enclosed in a weatherproof covering, staff working on the internal fittings of the house, such as plumbers and electricians, can have a secure and dry envi- ronment in which to work, irrespective of external conditions. Furthermore, the automated production 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.

Space4 housing processes7

Process mapping Process mapping simply involves describing processes in terms of how the activities within the pro- cess relate to each other. There are many techniques which can be used for process mapping (or pro- cess 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’ management around a

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192 PART TWO DESIGNING THE OPERATION

century ago (see Chapter 9) or, more recently, from information system flowcharting. Figure 6.7 shows the symbols we shall use here.

These symbols can be arranged in order, and in series or in parallel, to describe any process. For example, Figure 6.8 shows one of the processes used in a theatre lighting operation. The company hires out lighting and stage effects equipment to theatrical companies and event organizers. Customers’ calls are routed to the store technician. After discussing their requirements, the technician checks the

Figure 6.7 Some common process mapping symbols

Storage (deliberate storage, as opposed to a delay)

Delay (a wait, e.g. for materials)

Transport (a movement of something)

Inspection (a check of some sort)

Operation (an activity that directly adds value)

Beginning or end of process

Process mapping symbols derived from system analysis

Process mapping symbols derived from scientific management

Activity

Direction of flow

Decision (exercising discretion)

Input or output from the process

Figure 6.8 Process map for ‘enquire to delivery’ process at stage lighting operation

Check availability

file

Confirm to

supplier

Call customer

Kit wagon to store

Assemble kit

Check equipment

Repair

Stored equip.

Y

N

Y Y

Y

N N

N Kit to workshop

Supplier’s equipment to

store

Supplier

Find supplier?Search

Send customer

guide

Customer request

Customer wants

search?

Supply from stock?

Pack for delivery

Needs attention?

Deliver to customer

Reserve on

availability file

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equipment availability file to see if the equipment can be supplied from the company’s own stock on the required dates. If the equipment cannot be supplied in-house, customers may be asked whether they want the company to try and obtain it from other possible suppliers. This offer depends on how busy and how helpful individual technicians are. Sometimes customers decline the offer and a ‘Guide to Customers’ leaflet is sent to the customer. If the customer does want a search, the technician will call potential suppliers in an attempt to find available equipment. If this is not successful the customer is informed, but if suitable equipment is located it is reserved for delivery to the company’s site. If equipment can be supplied from the company’s own stores, it is reserved on the equipment availability file and the day before it is required a ‘kit wagon’ is taken to the store where all the required equipment is assembled, taken back to the workshop, 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.

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 6.9 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–transfor- mation–output process with materials 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

Operations principle Process mapping is needed to expose the reality of process behaviour.

Figure 6.9 The ‘supply and install’ operations process mapped at three levels

‘Install and test’

‘Collect and

check’

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

and installing lighting equipment

The detailed process of the ‘Install and test’ activity

To customer

site Safety check

Compliant?

Rectify in time?

Pass check?

Rectify in time?

Rectify

File failure note

Inform customer

Install Routine control check

Job sign-o�

Return to base

Y

N

N

N

N

YY

Y

‘Enquire to

delivery’

Rectify Call for

help

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194 PART TWO DESIGNING THE OPERATION

in Figure 6.8 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 6.9, an even more micro set of process activities could be mapped within each of the detailed process activities. Such a micro detailed process map could specify every single motion involved in each activity. Some quick service restaurants, for example, do exactly that. In the lighting hire company example, most activities would not be mapped in any more detail than that shown in Figure 6.9. Some activities, such as ‘return to base’, are probably too straightforward to be worth mapping any further. Other activities, such as ‘rectify faulty equipment’, may rely on the technician’s skills and discretion to the extent that the activity has too much variation and is too complex to map in detail. Some activities however may need mapping in more detail to ensure quality or to protect the company’s interests. For example, the activity of safety checking the customer’s site to ensure that it is compliant with safety regulations will need specifying in some detail to ensure that the company can prove it exercised its legal responsibilities.

Mapping visibility in process design Processes with a high level of customer ‘visibility’ cannot be designed in the same way as pro- cesses that deal with inanimate materials or information. ‘Processing’ people is different. As we discussed in Chapter 1, operations and processes that primarily ‘transform’ people present a par- ticular set of issues. Material and information are processed, but customers experience the pro- cess. In processes where customers see, at least, part of the process, it is sometimes useful to map them 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 6.10 shows yet another part of the lighting equipment company’s operation: ‘the collect and check’ process. 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 they couldn’t. The boundary between these two categories is often called the ‘line of

Figure 6.10 The ‘collect and check’ process mapped to show different levels of process visibility

Line of interaction

Agree report

Check it worked

OK

Y

To base

Check and clean equipment

Call customer to agree

terms

Worked OK?

Did it work OK?

Y

Prepare report

N

Very high visibility

High visibility

Medium visibility

Back o�ce – low

visibility

Line of visibility

N

Take out equipment

To site

Amend usage

records

Equipment to store

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visibility’. In Figure 6.10 three categories of visibility are shown. At the very highest level of vis- ibility, 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 imme- diate customer.

Visibility, customer experience and emotional mapping When customers experience a process, it results in the customer feeling emotions, not all of which are necessarily rational. Most of us have been made happy, angry, frustrated, surprised, reassured or furious as customers in a process. Nor is the idea of considering how processes affect customer emotions confined to those processes that are intended to engage the emotions: for example, enter- tainment-type organizations such as theme parks. Any high customer contact product (or more likely, service) always creates an experience for the customer. Moreover, customer experience will affect customer satisfaction, and therefore has the potential to produce customer loyalty, influence expectations and create emotional bonds with customers. This is why many service organizations are seeing how customers experience their processes (the so-called ‘customer journey’) at the core of their process design.

Designing processes with a significant experience content requires the systematic consideration of how customers may react to the experiences that the process exposes them to. This will include the sights, sounds, smells, atmosphere and general ‘feeling’ of the service. The concept of a ‘servicescape’, which is discussed in the next chapter, is strongly related to consideration of engaging customers so that they connect with the process in a personal way. One of the most common methods of designing such processes is to consider what are commonly called ‘touch- points’. These have been described as, ‘Everything the consumer uses to verify their service’s effectiveness’.8 They are the points of contact between a process and customers, and there might be many different touch-points during the customer journey. It is the accumulation of all the experiences from every touch-point interaction that shapes customers’ judgement of the process. The features of a process at the touch-points are sometimes called ‘clues’ (or ‘cues’): these are the messages that customers receive or experience as they progress through the process. The emotions that result from these cues contain the messages that the customer will receive and therefore influence how a customer will judge the process. When designing processes, managers need to be concerned to ensure that all the messages coming from the clues at each stage of the process are consistent with the emotions that they want the customers to experience and do not give her wrong or misleading messages about the process. In the same way as process mapping indicates the sequence and relationship between activities, so emotional mapping can indicate the type of emotions engendered in the customer’s mind as they experienced the process. Figure 6.11 is a simplified version of how this can work for a visit to an X-ray clinic for a simple medical investigation. There are many ways that emotions can be mapped and different diagrammatic representations can be used. In this case a simple scoring system has been used ranging from +3 (very positive) to -3 (very negative). At each stage, the reasons for the score are briefly noted.

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 perspective. And the first stage is to understand the nature of, and relationship between throughput time,

Operations principle The design of processes that deal with customers should consider the emotions engendered at each stage of the process.

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196 PART TWO DESIGNING THE OPERATION

cycle time and work-in-progress. As a reminder, throughput time is the elapsed time between an item entering the process and leaving it, cycle time is the average time between items being processed and work-in-progress is the number of items within the process at any point in time. In addition, the work content for each item will also be important for some analysis. It is the total amount of work required to produce a unit of output. For example, suppose that in an assemble-to-order sandwich shop, the time to assemble and sell a sandwich (the work content) is two minutes and that two peo- ple are staffing the process. Each member of staff will serve a customer every two minutes; therefore, every two minutes, two customers are being served and so on average a customer is emerging from

the process every minute (the cycle time of the process). When customers join the queue in the process they become work-in- progress (sometimes written as WIP). If the queue is ten people long (including that customer) when the customer joins it, he or she will have to wait ten minutes to emerge from the process. Or put more succinctly:

Throughput time = Work@in@progress * Cycle time

In this case: 10 minutes’ wait = 10 people in the system * 1 minute per person

Little’s law This mathematical relationship (throughput time = work@in@progress * cycle time) is called Little’s law. It is simple but very useful, and it works for any stable process. Little’s law states that the average number of things in the system is the product of the average rate at which things leave the system and average time each one spends in the system. Or, put another way, the average number of objects in a queue is the product of the entry rate and the average 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 ten and the maximum time a customer is in

Figure 6.11 Customer experience map of a visit for an X-ray investigation

Park car Check in Wait X-ray Wait for result

Results explained

Irritated, not enough

spaces

–3

–2

–1

0

1

2

3

Pleased, expected

and welcomed

Annoyed, overtaken by later clients

Pleased, fast, polite,

informed service

Frustrated, wait longer than

expected

Informed, options

discussed

Operations principle Process analysis derives from an understanding of the required process cycle time.

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CHAPTER 6 PROCESS DESIGN 197

the process should be on average four minutes. If the time to assemble and sell a sandwich (from customer request to the customer leaving the process) in the new process has been reduced to 1.2 minutes, how many staff should be serving?

Putting this into Little’s law:

Throughput time = 4 minutes

Work@in@progress, WIP = 10

So, since: Throughput time = WIP * cycle time

Cycle time = Throughput time

WIP

The cycle time for the process = 4 10

= 0.4 minutes

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 0.4

= 3

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

Operations principle Little’s law states that throughput time = work@in@progress * cycle time.

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 and Dick knew that unless they were all back in the lecture theatre at 11 o’clock there was no hope of finishing his presentation before lunch. ‘I’m not sure why you’re so pessimis- tic,’ said Dick. ‘They seem to be interested in what I have to say and I think they will want to get back to hear how operations management will change their lives.’ Mike shook his head. ‘I’m not questioning their motivation,’ he said, ‘I’m questioning the ability of the process out there to get through them all in time. I have been timing how long it takes to serve the coffee and biscuits. Each coffee is being made fresh and the time between the server asking each customer what they want and them walking away with their coffee and biscuits is 48 seconds. Remember that, according to Little’s law, throughput equals work-in-process multiplied by cycle time. If the work-in-process is the 20 managers in the queue and cycle time is 48 seconds, the total throughput time is going to be 20 multiplied by 0.8 minutes which equals 16 minutes. Add to that sufficient time for the last person to drink their coffee and you must expect a total throughput time of a bit over 20 minutes. You just haven’t allowed long enough for the process.’ Dick was impressed. ‘Err . . . what did you say that law was called again?’ ‘Little’s law,’ said Mike.

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198 PART TWO DESIGNING THE OPERATION

Worked example

Every year it was the same. All the workstations in the building had to be renovated (tested, new software installed, etc.) and there was only one week in which to do it. The one week fell in the middle of the August vacation period when the renovation process would cause minimum disrup- tion 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 only take on average 1.5 hours instead of 2 hours. How many technicians will be needed this year to complete the renovation processes 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) = 0.5 hours per technician

= 0.5N

where N = number of technicians

Little’s law: WIP = Tt * Tr

500 = 40 * 0.5N

N = 500

40 * 0.5

= 25 technicians

This year:

Work@in@progress(WIP) = 530 workstations

Time available = 40 hours

Average time to renovate = 1.5 hours

Throughput rate(Tr) = 1/1.5 per technician

= 0.67N

where N = number of technicians

Little’s law: WIP = Tt * Tr

530 = 40 * 0.67N

N = 530

40 * 0.67

= 19.88 (say 20) technicians

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CHAPTER 6 PROCESS DESIGN 199

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 progressing through the process. In the case of the simple example of the sandwich process described earlier, customer throughput time is restricted to 4 minutes, but the work content of the task (serving the customer) is only 1.2 minutes. So, the item being processed (the customer) is only being ‘worked on’ for 1.2/4 = 30 per cent of its time. This is called the throughput efficiency of the process.

Percentage throughput efficiency = Work content

Throughput time * 100

In this case the throughput efficiency is very high, relative to most processes, perhaps because the ‘items’ being processed are customers who react badly to waiting. In most material and information transforming processes, throughput efficiency is far lower, usually in single percentage figures.

Value-added throughput efficiency The approach to calculating throughput efficiency that is described above assumes that all the ‘work content’ is actually needed. Yet we have already seen from the Intel expense report example that changing a process can significantly reduce the time that is needed to complete the task. Therefore, work content is actually dependent upon the methods and technology used to perform the task. It may

Worked example

A vehicle licensing centre receives application documents, keys in details, checks the information provided on the application, classifies the application according to the type of licence required, confirms payment and then issues and mails the licence. It is currently processing an average of 5,000 licences every 8-hour day. A recent spot check found 15,000 applications that were ‘in progress’ or waiting to be processed. The sum of all activities that are required to process an appli- cation is 25 minutes. What is the throughput efficiency of the process?

Work@in@progress = 15,000 applications

Cycle time = time producing

Time producing

Number produced =

8 hours 5,000

= 480 minutes

5,000 = 0.096 minutes

From Little’s law, throughput time = WIP * cycle time

Throughput time = 15,000 * 0.096

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

Throughput efficiency = Work content

Throughput time =

25 1,440

= 1.74 per cent

Although the process is achieving a throughput time of 3 days (which seems reasonable for this kind of process) the applications are only being worked on for 1.7 per cent of the time they are in the process.

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be also that individual elements of a task may not be considered ‘value-added’. In the Intel expense report example the new method eliminated some steps because they were ‘not worth it’: that is, they were not seen as adding value. 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

1,440 = 1.39 per cent

Workflow When the transformed resource in a process is information (or documents containing information), and when information technology is used to move, store and manage the information, process design is sometimes called ‘workflow’ or ‘workflow management’. It is defined as ‘the automation of proce- dures where documents, information or tasks are passed between participants according to a defined set of rules to achieve, or contribute to, an overall business 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 Chapter 1 and Chapter 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

Process bottlenecks A bottleneck in a process is the activity or stage where congestion occurs because the workload placed is greater than the capacity to cope with it. In other words, it is the most overloaded 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 6.12. It has four stages and the total time 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 allo- cated between the four stages, each having 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 pro- cess is 2.5 minutes. In the second case (b) the work has not been allocated evenly. In fact this is usu- ally the case because usually it is difficult (actually 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 underloaded. 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 allo- cated, as illustrated, the time invested is 4 * 3.0 = 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’.

Operations principle Allocating work equally to each stage in a process (balancing) smooths flow and avoids bottlenecks.

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CHAPTER 6 PROCESS DESIGN 201

Figure 6.12 The bottleneck is that part of the process that is the most overloaded relative to its capacity

3

2

1

0

3

2

1

0L o

a d

(m in

u te

s) L

o a

d (m

in u

te s)

2.3 2.5 2.2 3.0

Cycle time = 3.0 min

(b) Work unequally allocated between stages

Work allocated to stage

Stage 1 Stage 2 Stage 3 Stage 4

Idle time

2.52.5 2.5 2.5

Cycle time = 2.5 min

(a) Work equally allocated between stages

O P E R AT I O N S I N P R AC T I C E

Anyone who has travelled on a busy mass transport system like the London Underground knows how busy it can be, often with queues of passengers building up at various points as they move to or from their trains. One potential bottleneck for passengers on London Underground is the escalators. Traditionally, in London, passengers stand on the right side of the escalator, leaving the left side free for those who want to walk up or down. But in an attempt to reduce the bottleneck at the escalators, Transport for London, which runs the system, trialled a new arrange- ment that it believed would increase the capacity of its escalator at the Holborn station. Building new stations is expensive, so any way of increasing the capacity of existing ones is going to be attractive, and Holborn is a particularly busy station. The new (and radical, for Londoners) arrangement was to instruct passengers at peak times, not to walk, but to stand on both sides of the escalator. The decision was partly based on the fact that the escalators at Holborn are over 24 metres high. Apparently, height makes

a big difference to the willingness of passengers to walk up escalators. When they are only a few metres high, most people will walk up them. At  30  metres, only the very energetic walk. As shown in Figure  6.13, the trial was successful in that capacity increased significantly. However, experts warned that the increase in capacity would be far smaller at less busy times.

London Underground tackles a bottleneck

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 prece- dence is by using a ‘precedence diagram’. This is a representation of the

Operations principle Process design must respect task precedence.

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202 PART TWO DESIGNING THE OPERATION

Figure 6.13 Requiring passengers to stand on both sides of the escalator makes it less of a bottleneck

Traditional arrangement with standing on right and walking on left

New arrangement with no walking,

everyone standing on right and left

Traditional arrangement

capacity approximately 115 people per minute at peak

times

New arrangement

capacity approximately 150 people per minute at peak

times

Traditional arrangement queuing can lead to

confusion with standers and walkers mixed

together

New arrangement

results in more orderly

queueing

ordering of the elements, where individual tasks are represented by circles connected by arrows, which signify the ordering of the tasks. Figure 6.14 in the following worked example illustrates how precedence diagrams can be used.

Arranging the stages All the stages necessary to fulfil the requirements of the process may not be arranged in a sequen- tial ‘single line’. For example, suppose a mortgage application process requires four stages work- ing 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 sequentially, 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. 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  6.15 shows these options.

This is a simplified example, but it represents a genuine issue. Should the process be organized as a single ‘long thin’, sequential arrangement, or as several ‘short fat’, parallel arrangements, or some- where 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 technical constraints which limit

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CHAPTER 6 PROCESS DESIGN 203

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 6.14 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 hrs * 60 mins

5,000 = 0.48 mins

The required number of stages = 1.68 mins (the total work content) 0.48 mins (the required cycle time)

= 3.5 stages 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 dotted lines in Figure 6.14 show the final allocation of tasks to each of the four stages.

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

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

Figure 6.14 Precedence diagram for Karlstad Kakes with allocation of tasks to each stage

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

L o

a d

( m

in u

te s)

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

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204 PART TWO DESIGNING THE OPERATION

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 true if the items being processed are heavy, large or difficult 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 only performing a small part of the total job, the person at the stage will have a higher proportion of direct productive work as opposed to the non- productive parts of the job, such as picking up tools and materials.

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

The advantages of the short fat arrangement include:

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

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

Figure 6.15 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 205

▶ 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 repeat- ing their tasks only every hour; in the long thin arrangement, it is every 15 minutes.

Low volume–high variety processes Many of the ideas and analytical approaches described in this chapter derive largely from high volume–low variety processes. This does not mean that they cannot be used in low volume–high variety process design, but they often have to be modified or adapted in some way. For example, splitting activities into very small increments so that work can be balanced between stages (see ear- lier) is often neither possible or desirable when the variety of activities is very wide. This does not mean that trying to allocate work equally between work groups is not important, just that it will need to be done in a more approximate way. Even process mapping can be problematic. Some low volume–high variety processes are intrinsically difficult to describe as simple step-by-step sequential activities. There may be many alternative routes through a process than can be taken by whatever is being processed. Decisions about how to treat whatever is being processed may be a matter of judgement. The exact circumstances associated with processing something may not have occurred before. If it is information that is being processed, the information may be partial, uncertain or ambiguous.

From data mining to process mining If a process has all or any of these conditions described above – in other words, if it is at the ‘high variety–low volume’ end of the volume–variety spectrum – one of the issues that process designers face is understanding exactly what really happens in the process. Not what is supposed to happen, but what actually happens in practice. This is where the (relatively) new technique of ‘process mining’ can be useful. Process mining is a combination of process analysis and data mining. It is often used where any official description of the process is questionable, over-simplified, or ambiguous (see Figure 6.16).

Data mining emerged as computer systems became common in business processes. It meant that individual companies began to store increasing amounts of data on their various transactions. As the volume of stored data grew, it became evident that within such vast data sets, it could be possible to discover potentially insightful connections and associations. The process of discovering interesting

Discovers potentially insightful connections and associations by

examining what actually happens

Applies rigorous analysis to determine how a process should be

designed to achieve operational e�ectiveness

Process mining contrasts actual process behaviour and the formal model or description of a process

Data mining

Process mining

Process analysis

Figure 6.16 Process mining bridges the gap between conventional process analysis and data-centric analysis techniques

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206 PART TWO DESIGNING THE OPERATION

and useful patterns and relationships in large sets of raw data is called data mining (also called data discovery and knowledge discovery). It uses statistical analysis, algorithms and increasingly artificial intelligence tools together with database management to explore large databases. It is widely used in businesses that have frequent transactions with outside entities such as customers or suppliers (for example, credit-card-fraud detection analyses consumers’ purchasing behaviour to detect anomalous, possibly fraudulent, behaviour).

Process mining has been described as the missing link between model-based process analysis (of the type treated elsewhere in this chapter) and the data-oriented analysis techniques used in data mining. Its objective is to understand how a process is actually performed. Operations managers may have a theoretical understanding of a process, but when there are a large number of possible condi- tions, and people in the process have some degree of discretion, actual behaviour may not be known with confidence. It is based on the use of ‘event logs’. These are the basic records (or audit trail) that capture what happens in the use of an information system. They are like system files that are written within a program that reveal the nature, sequence and timing of events. After the data from these event logs have been cleaned and reformatted, they are subjected to a process-mining tool that can display (visually or otherwise) the process as it is actually performed in whatever detail is required. For example, suppose a customer calls an insurance help line to enquire about the progress of a claim. The call centre agent records the call, takes further details, and promises to get back to the customer after checking with colleagues. Other agents, perhaps from other departments, may also call the customer to gather further details. Eventually, after discussing the case, some kind of decision is made. Process mining can analyse the logs for this and other cases, and reveal how the process actually works. This can be used for further analysis, if required.

The effects of process variability So far in our treatment of process design we have assumed that there is no significant variability either in the demand to which the process is expected to respond, or in the time taken for the process to perform its various activities. Clearly, this is not the case in reality. So, it is important to look at the variability that can affect processes and take 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.

Critical commentary

Some commentators are critics of the very idea of thinking in terms of ‘processes’. They claim that defining jobs as processes incites managers to look on all activities as a machine-like set of routine activities, verging on the mindless. At best, it encourages going through the stages in a process without thinking about what is really involved (what is known as ‘box ticking’). At worst, defining all activities into the straitjacket of ‘process’ kills the essential humanity of working life. The counter argument is that this is a misunderstanding of what is (or should be) meant by a ‘process’. A process is simply a framework, around which you can think about who should do what, and when. It simply means that one has thought about, and described, how to do something. Processes need not necessarily be formal, highly constrained or detailed – though they might be. When a process is seen as being too rigid, it is usually because it has been designed inappropriately for its volume– variety position.

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CHAPTER 6 PROCESS DESIGN 207

▶ Variability in the demand for processing at an individual stage within the process, usually expressed in terms of variation in the inter-arrival times of items to be processed.

▶ Variation in the time taken to perform the activities (i.e. process a unit) at each stage.

To understand the effect of arrival variability on process performance it is first useful to examine what happens to process performance in a very simple process as arrival time changes under conditions of no variability. For example, the simple process shown in Figure 6.17 comprises one stage that performs exactly 10 minutes of work. Items arrive at the process at a constant and predictable rate. If the arrival rate is one unit every 30 minutes, then the process will be utilized for only 33.33 percent of the time, and the items will never have to wait to be processed. This is shown as point A on Figure  6.17. If the arrival rate increases to one arrival every 20 minutes, the utilization increases to 50 per cent, and again the items will not have to wait to be processed. This is point B on Figure 6.17. 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 on Figure 6.17. 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 6.17. So, in a perfectly constant and predictable world, the rela- tionship between process waiting time and utilization is a rectangular function as shown by the red line in Figure 6.17.

However, when arrival and process times are variable, then sometimes the process will have items waiting to be processed, while at other times the process will be idle, waiting for items to arrive. Therefore, the process will have both a ‘non-zero’ average queue and be underutilized in the same period. So, a more realistic point is that shown as point X in Figure 6.17. If the average arrival time

Operations principle Variability in a process acts to reduce its efficiency.

Figure 6.17 The relationship between process utilization and number of items waiting to be processed for constant, and variable, arrival and process times

Utilization

0 10 20 30 40 50 60 70 80 90 100

C

X

D

BA

U n its

w ai

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t o

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ed

Arrival time of units Activity time

Units waiting to be processed

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208 PART TWO DESIGNING THE OPERATION

were to be changed with the same variability, the blue line in Figure 6.17 would show the relationship between average waiting time and process utilization. As the process moves closer to 100 per cent utilization, the average waiting time will become longer. Or, to put it another way, the only way to guarantee very low waiting times for the items is to suffer low process utilization.

The greater the variability in the process, the more the waiting time–utilization relationship devi- ates from the simple rectangular function of the ‘no variability’ conditions that was shown in Figure 6.17. A set of curves for a typical process is shown in Figure 6.18(a). This phenomenon has important implications for the design of processes. In effect, it presents three options to process designers wishing to improve the waiting time or utilization performance of their processes, as shown in Figure 6.18(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 utilization 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 6.17 and 6.18 as some minor techni- cal phenomenon. It is far more than this. It identifies an important choice in process design that could have strategic implications.

Figure 6.18 The relationship between process utilization and number of items waiting to be processed for variable arrival and activity times

Utilization 0 20 50 60 70 80 90 100403010 0 20 50 60 70 80 90 100403010

A ve

ra g

e n u m

b er

o f

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w ai

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A ve

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(b) Managing process capacity and/or variability(a) Decreasing variability allows higher utilization without long waiting times

Decreasing variability

Utilization

High utilization but long waiting time

Reduction in process variability

Short waiting time but low

utilization

Which is more important to a business, fast throughput time or high utilization of its resources? The only way to have both of these simultaneously is to reduce 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

Operations principle Process variability results in simultaneous waiting and resource under-utilization.

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CHAPTER 6 PROCESS DESIGN 209

way to absolutely guarantee 100 per cent utilization of resources is to accept an infinite amount of work-in-progress and/or waiting time.

Summary answers to key questions

What is process design?

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

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

What should be the objectives of process design?

▶ The overall purpose of process design is to meet the needs of customers through achieving appropriate levels of quality, speed, dependability, flexibility and cost.

▶ The design activity must also take account of environmental issues. These include examination of the source and suitability of materials, the sources and quantities of energy consumed, the amount and type of waste material, the life of the product itself and the end-of-life state of the product.

How do volume and variety affect process design?

▶ The overall nature of any process is strongly influenced by the volume and variety of what it has to process.

▶ The concept of process types summarizes how volume and variety affect overall process design. ▶ In manufacturing, these process types are (in order of increasing volume and decreasing variety) pro-

ject, jobbing, batch, mass and continuous processes. In service operations, although there is less con- sensus on the terminology, the terms often used (again in order of increasing volume and decreasing variety) are professional services, service shops and mass services.

How are processes designed in detail?

▶ Processes are designed initially by breaking them down into their individual activities. Often common symbols are used to represent types of activity. The sequence of activities in a process is then indicated by the sequence of symbols representing activities. This is called ‘process mapping’. Alternative process designs can be compared using process maps and improved processes considered in terms of their operations performance objectives.

▶ The throughput time, work-in-progress and cycle time aspects of process performance are related by a formula known as Little’s law : throughput time equals work-in-progress multiplied by cycle time.

▶ Variability has a significant effect on the performance of processes, particularly the relationship between waiting time and utilization.

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210 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 they could obtain funding from larger donors. The charity receives requests for cash aid usually from an interme- diary 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 appli- cations thoroughly, funds may go to the “wrong” place and if the newspapers gets hold of the story we would run a real risk of losing the goodwill, and therefore the funds, from our many supporters.’

Susan held regular meetings with key stakeholders. One charity that handled a large number of applications for people in Nigeria told her of frequent complaints about the delays over the processing of the applications. A second charity representative complained that when he

The Action Response Applications Processing Unit (ARAPU)

C A S E ST U DY

telephoned 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 relation- ship 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 flexi- ble than most charities. If there a need and if they need support until one of the larger charities can step in, then we will always consider a request for aid. I would not like to see any move towards high process efficiency harming our ability to be open-minded and consider requests that might seem a little unusual at first’ (Jacqueline Horton, Applications Assessor).

Others saw the charity as performing an important coun- selling role. ‘Remember that we have gained a lot of experience in this kind of short-term aid. We are often the first people that are in a position to advise on how to apply for larger and longer-term funding. If we developed this aspect of our work, we would again be fulfilling a need that is not adequately supplied at the moment’ (Stephen Nyquist, Applications Assessor).

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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 is can help the applicant to complete the form. The application is sent to ARAPU, usually by fax or post (some are submitted online, but few communities have this facility).

ARAPU employs seven applications assessors with support 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, provid- ing an update on the number of applications received, approved and 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 thoroughly assessed to ensure that all the relevant data were collected before the applications were processed. Productivity seemed high and there was always plenty of work waiting for process- ing at each section with the exception that the ‘completers’ were sometimes waiting for work to come from the commit- tee on a Thursday. Susan had conducted an inspection of all sections’ in-trays that had revealed a rather shocking total of about 2,000 files waiting within the process, not counting those waiting for further information.

Processing applications The processing of applications is a lengthy procedure requiring careful examination by applications assessors 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 necessary forms have been included in the applica- tion ; the receipt clerks take about 10 minutes per application. These are then sent to the coding staff, in batches twice a day. The five coding 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 assessors’ secretary’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’ ‘scanning’ because the infor- mation 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) requesting additional information, and return the file to the ‘receipt’ clerks who ‘store’ the file until the further information even- tually arrives (usually between 1 and 8 weeks). When it does arrive, the file enters the process and progresses through the same stages again. Of the applications that require no further information, around half (150) are accepted and half (150) declined. On average, those applications that are not ‘recy- cled’ take around 60 minutes to assess.

All the applications, whether approved or declined, are stored prior to ratification. Every Thursday the Committee of Trustees meets to formally approve the applications assessors’ decisions. The committee’s role is to sample the decisions to ensure that the guidelines of the charity are upheld. In addition, they will review any particularly unusual 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 appli- cation failed and offering, if possible, 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 instructions are given to the bank. This usually takes around 50 minutes, including dealing with any queries from the bank about payment details. Finally, the paperwork itself is sent, with the rest of the file, to two ‘dispatch’ clerks who complete the documents and mail them to the applicant. The dispatch activity takes, on average, 10 minutes for each application.

The feeling among the staff was generally good. When Susan consulted the team, they said their work was clear and routine, but their life was made difficult by charities that rang in expecting them to be able to tell them the status of an application they had submitted. It could take them hours, sometimes days, to find any individual file. Indeed, two of the ‘receipt’ clerks now were working almost full time on this activity. They also said that charities frequently 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

process? 3 How could the ARAPU process be improved?

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212 PART TWO DESIGNING THE OPERATION

All chapters have ‘Problems and application’ questions that will help you practise analysing operations. They can be answered by reading the chapter. Model answers for the first two questions can be found on the companion website for this book.

1 Visit a branch of a retail bank and consider the following questions: (a) What categories of service does the bank seem to offer? (b) To what extent does the bank design separate processes for each of its types of service? (c) What are the different process design objectives for each category of service?

2 Revisit the ‘Operations in practice’ example that examines some of the principles behind supermarket process design. Then 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 attention to the products. (You may have to exercise some discretion when doing this; people generally don’t like to be stalked round the supermarket too obviously.) Try and verify, as far as you can, some of the principles that were outlined in the box. (a) What layout type is a conventional supermarket and how does it differ from a manufacturing operation using the same layout type? (b) What are the benefits of using customer tracking technology that traces the flow of customers through the shop?

3 One of the examples at the beginning of the chapter described ‘drive-through’ fast food processes. Think about (or better still, visit) a drive-through service and try mapping what you can see of the process (plus what you can infer from what may be happening ‘behind the scenes’).

4 ‘It is a real problem for us’, said Angnyeta Larson. ‘We now have only ten working days between all the expense claims coming from the departmental coordinators and authorizing payments on the next month’s payroll. This really is not long enough and we are already having problems during peak times.’ Angnyeta was the department head of the internal financial control department of a metropolitan authority in southern Sweden. Part of her department’s responsibilities included checking and process- ing expense claims from staff throughout the metropolitan authority and authorizing payment to the salaries payroll section. She had 12 staff who were trained to check expense claims and all of them were devoted full-time to processing the claims in the two weeks (10 working days) prior to the deadline for informing the salaries section. The number of claims submitted over the year averaged around 3,200, but this could vary between 1,000 during the quiet summer months up to 4,300 in peak months. Processing claims involved checking receipts, checking that claims met with the strict financial allow- ances for different types of expenditure, checking all calculations, obtaining more data from the claimant if necessary, and (eventually) sending an approval notification to salaries. The total processing took on average 20 minutes per claim. (a) How many staff does the process need on average, for the lowest demand, and for the highest demand? (b) If a more automated process involving electronic submission of claims could reduce the average processing time to 15 minutes, what effect would this have on the required staffing levels? (c) If department coordinators could be persuaded to submit their batched claims earlier (not always possible for all departments) so that the average time between submission of the claims to the finance department and the deadline for informing the salaries section was increased to 15 working days, what effect would this have?

5 The headquarters of a major creative agency offered a service to all its global subsidiaries that included the preparation of a budget estimate that was submitted to potential clients when making a ‘pitch’ for new work. This service had been offered previously only to a few of the group’s subsid- iary companies. Now that it was to be offered worldwide, it was deemed appropriate to organize the process of compiling budget estimates on a more systematic basis. It was estimated that the worldwide demand for this service would be around 20 budget estimates per week, and that, on average, the staff who would put together these estimates would be working a 35-hour week. The elements within the total task of compiling a budget estimate are shown in Table 6.3. (a) What is the required cycle time for this process? (b) How many people will the process require to meet the anticipated demand of 20 estimates per week? (c) Assuming that the process is to be designed on a ‘long thin’ basis, what elements would each stage be responsible for completing? And what would be the balancing loss for this process? (d) Assuming that instead of the long thin design, two parallel

Problems and applications

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CHAPTER 6 PROCESS DESIGN 213

processes are to be designed, each with half the number of stations of the long thin design, what now would be the balancing loss?

6 At the theatre, the interval during a performance of King Lear lasts for 20 minutes and in that time 86 people need to use the toilet cubicles. On average, a person spends 3 minutes in the cubicle. There are 10 cubicles available. (a) Does the theatre have enough toilets to deal with the demand? (b) If there are not enough cubicles, how long should the interval be to cope with demand?

7 A gourmet burger shop has a daily demand for 250 burgers and operates for 10 hours. (a) What is the required cycle time in minutes? (b) Assuming that each burger has 7.2 minutes of work required, how many servers are required? (c) If the burger shop has a three-stage process for making burgers, stage 1 takes 2.0 minutes, stage 2 takes 3.0 minutes and stage 3 takes 2.2 minutes, what is the balancing loss for the process?

Selected further reading Damelio, R. (2011) The Basics of Process Mapping, 2nd edn, Productivity Press, New York. A practitioner book that is both very comprehensive and up-to-date.

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.

Harrington, H.J. (2011) Streamlined Process Improvement, McGraw Hill Professional, New York. Practical and insightful.

Harvard Business Review (2011) Improving Business Processes (Harvard Pocket Mentor) Harvard Business School Press, Boston, MA. A collection of HBR papers.

Hopp, W.J. and Spearman, M.L. (2011) Factory Physics, 3rd edn, Waveland Press Inc., Illinois. Very technical so don’t bother with it if you aren’t prepared to get into the maths. However, some fascinating analysis, especially concerning Little’s law.

Ramaswamy, R. (1996) Design and Management of Service Processes, Addison-Wesley Longman, Reading, MA. A relatively technical approach to process design in a service environment.

Slack, N. (2017) The Operations Advantage, Kogan Page, London. The chapter on ‘internal processes’ expands on some of the issues discussed here.

Sparks, W. (2016) Process Mapping Road Trip: Improve Organizational Workflow in Five Steps, Promptitude Publishing, Washington DC. A practitioners’ guide – straightforward and sensible.

Element Time (mins) What element(s) must be done prior to this one?

A – obtain time estimate from creatives 20 None

B – obtain account handler’s deadlines 15 None

C – obtain production artwork estimate 80 None

D – preliminary budget calculations 65 A, B, and C

E – check on client budget 20 D

F – check on resource availability and adjust estimate 80 D

G – complete final budget estimate 80 E and F

Table 6.3 The elements within the total task of compiling a budget estimate

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214

INTRODUCTION

The layout and look of an operation’s facilities determines their physical positioning relative to each other and their aesthetic appearance. It involves deciding where to put all the facilities, desks, machines and equipment in the operation. Because people and facilities work together in most operations, this also impacts on how, and where, staff operate within the operation. It is also concerned with the physical appearance of an operation in a broader sense – an issue that is seen as increasingly important, given the effect it has on the people working in the operation and any customers who ‘experience’ the operation. Both the layout and look of facilities govern how safe, how attractive, how flexible and how efficient an operation is. They also determine how transformed resources – materials, information and customers – flow through an operation. For all these reasons, it is an important activity. It is it the first thing that most of us notice when we enter an operation. Also, relatively small changes – moving displays in a supermarket, the décor of a restaurant, the changing rooms in a sports centre, or the position of a machine in a factory – can affect 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.

The layout and look of facilities7

KEY QUESTIONS

How can the layout and look of facilities influence performance?

What are the basic layout types and how do they affect performance?

How does the appearance of an operation’s facilities affect its performance?

What information and analysis is needed to design the layout and look of facilities?

Figure 7.1 This chapter examines layout and flow

Design

Layout and flow

Process design

Process technology

People in operations

Topic covered in this chapter

Operations management

Direct

Design Develop

Deliver

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CHAPTER 7 THE LAYOUT AND LOOK OF FACILITIES 215

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 change the layout or look of their transforming resources. Second, we describe a number of recognized ‘layout types’. These are derived largely from manufacturing, but we shall 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 the information needed to decide on facilities’ layout and look.

How can the layout and look of facilities influence performance? The ‘layout and look’ of an operation or process means how its facilities are positioned relative to each other and how their general appearance is designed. These decisions will dictate the pattern and nature of how transformed resources progress through the operation or process. They also affect how both the people who staff the operation and, in high-visibility operations (where customers form part of the transformed resource), how customers judge their experience of being in the oper- ation. Figure 7.2 shows how both layout and look of facilities affect some of the factors on which operations facilities are judged.

Layout and look are important decisions. If done badly, they can lead to over-long or confused flow patterns, long process times, inflexible operations, unpredictable flow, high costs, frustration for the people working in the operation and, in high-visibility operations, a poor customer experience. Nor are they always easy to change. A radical re-layout can cause disruption to on-going operations. So, operations managers can be reluctant to do it too often.

Figure 7.2 The layout and look of facilities involves the relative positioning of transforming resources within operations and processes, and their general appearance, which together dictate the nature and pattern of the flow of transformed resources and the experience of staff and, in high-visibility operations, customers

Flow of transformed resources

Flow e�ciency

Clarity of flow

Customer experience

Sta� experience

Flow flexibility

Interaction between parts of the process

Fixed position layout

Functional layout

Cell layout

Line (product) layout

Space utilization

Sta� e�ectiveness

Communication

Emotional response

Layout and look decisions

A�ect flow, interaction and experience

Which a�ect operations performance

Layout – the relative positioning

of facilities

Look – the appearance of

facilities

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216 PART TWO DESIGNING THE OPERATION

O P E R AT I O N S I N P R AC T I C E

Don’t be tempted to think that the principles of design that govern the layout and look of an engineering factory and the Head Office of a global high-tech company should be very different. Where facilities are located within the operation, and what they look like are important for both. Here are the two examples.

The Ducati factory in Bologna Motorcycles have been built by Ducati at its current factory in Bologna continuously since 1946. But now, as well as producing 350 bikes every day in the busy season, the factory hosts visitors keen to see how the famous motorcycles are made. The assembly process starts in the ‘supermarket’ area of the factory. Each of the models made by Ducati has its own ‘supermarket’ zone. Here manufacturing trays are put together with exactly the right parts that will be needed for each of the subsequent stages in the assembly process. Because these ‘kits’ of parts exactly match the require- ments for each product, any parts left in the tray at the end of assembly are an indication that something has gone wrong. Livio Lodi, who has worked in the Ducati factory for more than 26 years, is the official historian and curator of the Ducati museum on the site. He explain: ‘With this new style of just-in-time production, we have been able to reduce over 85 per cent of the defects in the final product. Porsche engineers came to us here and explained the way to set up the production in a just-in-time philosophy which they got from Toyota originally.’

The factory has also become a tourist attraction thanks to the regular and popular factory tours. Partly it is a customer relations and marketing device as well as a production plant. So, the facilities have to be designed to accommodate visitors as well as motorcycle parts. Reviewers of the tour enthuse about the ‘fantastic factory tour with wonderful friendly guides’, and how it was ‘very informative and knowledgeable’, and ‘interesting to see all aspects of the assembly of the wonderful Ducati motorcycle’; they mention how ‘the museum was great and historic with some beautiful old bikes and some up to date winners’. Many visi- tors are Ducati owners, but the company shows the factory and the museum to everybody. Ducati say that they don’t care which kind of motorcycle you have. But, if you ride a Ducati there, you can leave your bike inside the gates. If you don’t ride a Ducati, you can leave it outside the entrance.

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 actually work in offices. Financial services, Government, call centres and all 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, although it is admittedly difficult to check.) So the layout of offices can affect operations performance for these industries just as much as layout 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 productivity. In fact, Google is famous for its innovative use of its workspaces. This is because Google thrives on creativity and it believes that the designs of its offices will provide every employee with a space that will encourage creativity. Google puts a lot of time and money into designing what it believes is the perfect work

Ducati factory or Google office, they have to look good1

▼

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CHAPTER 7 THE LAYOUT AND LOOK OF FACILITIES 217

What makes a good layout? As with most operations design decisions, what constitutes a ‘good’ design will depend partly on the strategic objectives of the operation. But whatever ‘good’ is for any specific operation, it will usually be judged against a common set of criteria, as indicated in Figure 7.2. These are:

▶ The flow of transformed resources – The route taken by transformed resources as they progress through an operation or process is governed by how its transforming resources are positioned relative to each other. Often the objective is to achieve high flow efficiency that minimizes distance travelled. But not always. For some customer transforming operations, supermarkets for example, layout objectives can include encouraging customers to ‘flow’ in particular ways that maximize sales. However, sometimes high flow efficiency can be achieved only by sacrificing flow flexibility – the ability of transformed resources to take many different routes. Additional objectives can include the clarity of the flow of materials and/or customers and an effective use of the space available in the operation.

▶ The interaction between parts of the process – The individual facilities or parts of a process can suffer or benefit from being positioned close to each other. Dirty processes should not be located near to other parts of the process where their pollution could reduce its effectiveness. Noisy processes should not be located near processes that require concentration (see the ‘Operations in practice’ example, ‘Reconciling quiet and interaction in laboratory layout’). Conversely there may be a positive effect of locating parts of an operation close to each other, for example to encourage communication between staff (see the ‘Operations in practice’ example of Google’s office layout).

▶ Staff experience – An obvious prerequisite for any layout in any type of operation is that it should not constitute any physical or emotional danger to staff. So, ‘fire exits should be clearly marked with uninhibited access’, ‘pathways should be clearly defined and not cluttered’, etc. Unnecessary movement, caused by poor layout, will take productive time away from value-adding tasks. But just as important is the ‘look, touch, taste, smell and feel’ of an operation that will influence the ‘employee experience’ and hence staff productivity and morale.2

environment – 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 whom they meet and talk to are vital pieces of information that should contribute to any design. The information needs of the processes underlying activi- ties are clearly an important driver of where the various departments of an organization are located. However, people sometimes are not fully aware how they are inter- acting 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 size every year and building new locations everywhere’,

he says. ‘There was so much concern about what the ingredients of the offices should be and how they would all fit together cohesively for a consistent employee expe- rience. 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 kitch- ens 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 you 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-technology 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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218 PART TWO DESIGNING THE OPERATION

▶ Customer experience – In high-visibility operations such as retail shops or bank branches, the layout and particularly the look of an operation can help to shape its image and the general experience of customers. Layout and look can be used as a deliberate attempt to establish a company’s brand.

Reconciling objectives As one can see, there are many and various objectives to attempt to achieve during the layout activity. Some, such as safety, secu-

rity 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 having both processes using it could mean longer and/or more confused process routes. Buying two pieces of equipment would underutilize them, but give shorter distance trav- elled. The ‘Operations in practice’ example ‘Reconciling quiet and interaction in laboratory lay- out’ is an example of how objectives have to be reconciled.

What are the basic layout types used in operations and how do they affect performance? 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 indi- cates, 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 transformed resources flowing through an operation, the recipient of the processing is stationary and the facilities and people who do the

Operations principle The layout and look of operations and processes is important because it affects their flow characteristics, the interaction between parts of the process and the experience of staff and customers.

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

Functional layout Cell layouts

Service shop

Batch Functional layout Cell layout

Mass Cell layout Product layout Cell layout

Product layout Mass service

Continuous Product layout

Table 7.1 Alternative layout types for each process type

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CHAPTER 7 THE LAYOUT AND LOOK OF FACILITIES 219

O P E R AT I O N S I N P R AC T I C E

The layout of scientific laboratories is rarely straightfor- ward. Not only can different areas of a laboratory require very different service needs (temperature, extraction, lack of vibration, etc.) but also two types of work in which all scientists engage can have different and opposing needs. On one hand, the development of new ideas is encouraged by free, and sometimes random, meetings between researchers. On the other hand, there are times when quiet reflection is vital to work through the implications of those same ideas. Moreover, different individuals have different preferred working patterns. The conversations, discussion and, sometimes noisy, debate between some researchers can both irritate and distract other staff who prefer quiet

to think and write up their work. Even in prestigious and high-profile research operations, this conflict can be diffi- cult to reconcile. For example, some of the researchers working at the Francis Crick laboratory in central London complained that its open-plan layout, designed to encour- age collaboration, made it difficult to concentrate on their work. Some people like the background noise, which can be similar to working in a café, while others prefer total silence, although many agree that the layout has been extremely successful in terms of promoting ad hoc meet- ings and has created new collaborations. Professor Alan Penn, who has been investigating how open-plan layouts (for example, those in advertising agencies or science

Reconciling quiet and interaction in laboratory layout 3

Figure 7.3 Example of an improved laboratory layout that reduces the degree of interference between different types of work (conversations and writing)

Original layout for laboratory

Quite area for

writing

Scientists working by

window

Work bench

Scientists move round lab next to quiet area

Main corridor

Conversations between scientists tend to occur close to the ‘quiet area’,

interfering with colleagues’ work

Work bench

Work bench

Work bench

Quite area for

writing

Scientists working by

window

Work bench

Main corridor

Conversations now tend to occur

close to the entrance, without

interfering with colleagues

Work bench

Work bench

Work bench

Improved laboratory layout with less disturbance

Scientists move round lab away from quiet area

▼

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220 PART TWO DESIGNING THE OPERATION

processing move as necessary. This could be because the transformed resources are too large, too delicate or too inconvenient to move; 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.

laboratories) affect behaviour, points out how designing laboratories with busy circulation spaces allows scientists from different research groups to effectively share ideas. People walking around can stop and join a conversation in the door of a laboratory. Conversations inside the labora- tory, when they are next to where the relatively high-flow movement along the corridor occurs, lead to discussions between research groups.

Figure  7.3 illustrates how laboratory design can, to some extent, reduce the conflict between the benefits of interaction and the need for quiet. The conventional layout on the left allows potentially disruptive conversa- tions to interfere with quiet areas. The marginally modified layout on the right encourages conversations to happen closer to the entrance, without interfering with colleagues.

O P E R AT I O N S I N P R AC T I C E

Normally patients undergoing surgery remain stationary with surgeons and other theatre staff performing their tasks around the patient. But this idea has been challenged by John Petri, a French consultant orthopaedic surgeon at a hospital in Norfolk in the UK. Frustrated by spending

time drinking tea while patients were prepared for surgery, he redesigned the process so now he moves continually between two theatres (see Figure 7.4). While he is operat- ing on a patient in one theatre, his anaesthetist colleagues are preparing a patient for surgery in another theatre.

‘Factory flow’ helps surgery productivity4

Figure 7.4 Space utilization traded off to achieve flow efficiency

TH EA

TR E O

NE

TH EA

T R E

TW O

Anaesthetist

SurgeonAnaesthetist prepares patient for surgery in theatre one

7.20 am

8.00 am Surgeon begins first hip operation in theatre one

8.20 am Halfway through first operation another anaesthetist prepares second patient in theatre two

9.00 am Surgeon finishes first operation, scrubs up and starts operating in theatre two

9.20 am Halfway through second operation third patient prepared in theatre one

1

2 3

4

5

▼

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CHAPTER 7 THE LAYOUT AND LOOK OF FACILITIES 221

Functional layout In functional layout, similar transforming resources are located together. This may be because it is con- venient to group them together, or because their utilization is improved. It means that when transform- ing resources flow through the operation, 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 (e.g. X-ray machines and laboratories) are required by several types of patient; some processes (e.g. general wards) can achieve high staff and bed utilization.

▶ 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 technology of freezer cabi- nets. Others, such as the areas holding fresh vegetables, might be together because that way they can be made to look attractive to customers.

▶ Machining the parts which go into aircraft engines – some processes (e.g. heat treatment) need specialist support (heat and fume extraction); some processes (e.g. machining centres) require the same technical support from specialist setter–operators, or need high utilization.

Like most functional layouts, a library has different types of user with different traffic patterns. The college library in Figure 7.5 has put its users into three categories, as follows (in fact very similar to the categories used by retail customers).5

▶ 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.

Based on studies tracking these different types of customer, the library derived the following guide rules 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 maximum convenience for the user, such as reference books.

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

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 operating theatre and the third patient is prepared. This method of overlap- ping operations in different theatres allows him to work for five hours at a time rather than the previous standard three and a half hour session. ‘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 on hip and knee replacements, this layout would not be suitable for all surgical procedures. But since its introduction the surgeon’s waiting list has fallen to zero and his productiv- ity has doubled. ‘For a small increase in running costs [reduced space utilization] we are able to treat many more patients [increased flow efficiency]’, said a spokes- person for the hospital management. ‘What is important is that clinicians  .  .  .  produce innovative ideas and we demonstrate that they are effective’.

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222 PART TWO DESIGNING THE OPERATION

▶ The rear of the library should house items for which user motivation is strong, such as classroom-assigned materials and meeting rooms, or those 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:

▶ ‘Lunch’ products area in a supermarket – some customers use the supermarket just to purchase sandwiches, savoury snacks, cool drinks, yoghurt, etc. for their lunch. These products 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.

▶ 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.

Although the idea of cell layout is often associated with manufacturing, the same principle can be, and is, used in services. In Figure 7.6 the ground floor of a department store is shown, the predominant layout of which is a functional layout, with separate areas devoted to selling each type of goods. The exception is the ‘shop-within-a-shop’ area that is devoted to many goods that have a common sporting theme (sports clothes, sports shoes, sports bags, sports magazines, sports books, sports equipment, etc). They have been located in the ‘cell’ not because they are similar

Figure 7.5 An example of a functional layout in a library

Microfiche room

R es

er ve

co lle

ct io

n

Catalogue station

Display area

Circulation desk

Main entrance

R ef

er en

ce

To study area

Work room

Books

Books

Books

BooksBooks

Books

Copy room A/V

room

Director’s o�ce

Work room

Periodicals

Computer learning lab

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CHAPTER 7 THE LAYOUT AND LOOK OF FACILITIES 223

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 calculates that enough customers come to the store to buy ‘sports goods’ in particular to devote an area specifically to them.

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 required corresponds to the sequence in which facilities have been located. The transformed resources ‘flow’ along a ‘line’ 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:

▶ Mass-immunization programme – all customers require the same sequence of clerical, medical 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 customer flow.

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

But don’t think that line layouts are not changing. Even Toyota, the best known of all auto- mobile companies, which routinely uses 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 is still wants to manufacture in Japan, cost savings have to be made. Figure  7.7 shows just two of the ideas that Toyota is employing at its Miyagi factory in Japan to make assembly lines even more efficient. The top illustration shows how Toyota has positioned vehicles sideways rather than the conventional lengthways positioning. This is a simple idea, but it has the advantage of

Figure 7.6 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

Sports shop

Men’s clothes

Entrance

Luggage and gifts Women’s clothes Perfume and

jewellery

Escalators

Magazines, books and stationery

Footwear

E ntrance

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224 PART TWO DESIGNING THE OPERATION

shortening the line by 35 per cent (which increases space utilization) and shortening the distance that workers have to walk between cars (which increases flow efficiency). The bottom illustration shows how, instead of the vehicle chassis hanging 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.

Mixed layouts Many operations either design hybrid layouts that combine elements of some or all of the basic lay- out types, or use the ‘pure’ basic layout types in different parts of the operation. For example, a hos- pital would normally be arranged on functional layout principles – each department representing a particular type of function (the X-ray department, the surgical theatres, the blood-processing labora-

tory, and so on). Yet within each department, quite different lay- outs could be 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 product layout.

Another example is shown in Figure  7.8. 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 func- tional layout, with the various processes (food storage, food preparation, cooking processes, etc.) grouped together. The tradi-

tional service restaurant is arranged in a fixed-position layout. The customers stay at their tables while the food is brought to (and sometimes 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

Figure 7.7 Contrasting arrangements in product (line) layout for automobile assembly plants

Conventional lengthways assembly line

New Toyota sideways line

New Toyota elevated platform

Conventional overhead chassis frame

Ceiling heights

Operations principle There are four basic layout types, fixed position, functional, cell and line, although layouts can combine elements of more than one of these.

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CHAPTER 7 THE LAYOUT AND LOOK OF FACILITIES 225

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.

What type of layout should an operation choose? The importance of flow to an operation will depend on its volume and variety characteristics. When volume is very low and variety is relatively high, ‘flow’ is not a major issue. For example, in telecom- munications 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 there will be different flow patterns. For example, the library in Figure 7.5 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 minor- ity). When the variety of products or services reduces to the point where a distinct ‘category’ with similar requirements becomes evi- dent but variety is still not small, cell layout could become appro- priate, as in the sports goods cell in Figure  7.6. When variety is relatively small and volume is high, flow can become regularized and a line layout is likely to be appropriate, as in an assembly plant (see Figure 7.9).

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 7.10. However, the type of operation will also influence the relative importance of these advantages and disad- vantages. 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 primar- ily because of the way it ‘controls’ customer flow.

Figure 7.8 A restaurant complex with all four basic layout types

Fixed- position service

restaurant

Functional layout kitchen

Cell layout bu�et

Line layout cafeteria

Cool room Freezer

Preparation Grill

Service line Main course

bu�et

D e ss

e rt

b u

� e t

S ta

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b u

� e t

O ve

n

Operations principle Resources in low volume–high variety processes should be arranged to cope with irregular flow.

Operations principle Resources in high volume–low variety processes should be arranged to cope with smooth, regular flow.

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226 PART TWO DESIGNING THE OPERATION

Figure 7.10 Some advantages and disadvantages of layout types

Advantages Fixed-position layout

Functional layout

Disadvantages

• ery high mi and product e i ility • Product or customer not moved or distur ed • High variety of tas s for sta

• ery high unit costs • Scheduling of space and activities can e di cult • Can mean much movement of e uipment and sta

• ow unit costs for high volume • ives opportunities for specialization of e uipment • aterials or customer movement is convenient

• Can have low mi e i ility • ot very ro ust if there is disruption • or can e very repetitive

• High mi and product e i ility • elatively ro ust in the case of disruptions • elatively easy supervision of transforming resources

• ow facilities utilization • Can have very high wor in progress or customer ueuing • Comple ow can e di cult to control

Cell layout

Line layout

• ives a compromise etween cost and e i ility for relatively high variety operations • Fast throughput • Potential good sta motivation

• Can e costly to rearrange e isting layout • Can re uire more e uipment • Can give lower e uipment utilization

Figure 7.9 Different process layouts are appropriate for different volume–variety combinations

Volume

Fixed-position layout

Functional layout

Cell layout

Line layout

Low High

V ar

ie ty

Regular flow becomes more important

R eg

u la

r flo

w b

ec o

m es

m o

re f

ea si

b le

H ig

h Lo

w

Flow becomes continuous

Flow is intermittent

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CHAPTER 7 THE LAYOUT AND LOOK OF FACILITIES 227

Cost analysis Of all the characteristics of the various layout types, perhaps the most generally significant are the unit cost implications of layout choice. This is best understood by distinguishing between the fixed and vari- able 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 pro- ducing the same product or service. However, the variable costs of producing each individual product or service are relatively high compared to 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 7.11(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 operating 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 Figure 7.11(b)). The dis- crimination between the different layout types is now far less clear. There are ranges of volume for which any of two or three layout

O P E R AT I O N S I N P R AC T I C E

Successful supermarkets know that the design and layout of their stores has a huge impact on their profitability. This is why all big supermarket chains conduct extensive research into the most effective ways of laying out each part of their supermar- kets and how best to position specific items. They must maximize their revenue per square metre and minimize the costs of operating the store, while keeping customers happy. At a basic level, supermarkets have to get the amount of space allocated to the different areas right and provide appro- priate display and storage facilities. But it is not just the needs of the products that are being sold that are important; the layout must also take into consideration the psychological effect that the layout has on their customers. Aisles are made wide to ensure a relatively slow flow of trolleys so that customers pay more attention to the products on display (and buy more). However, wide aisles can come at the expense of reduced shelf space that would allow a wider range of prod- ucts to be stocked. The actual location of all the products is a

critical decision, directly affecting the convenience to custom- ers, their level of spontaneous purchase, and the cost of filling the shelves. Although the majority of supermarket sales are packaged tinned or frozen goods, the displays of fruit and vegetables are usually located adjacent to the main entrance, as a signal of freshness and wholesomeness, providing an attractive and welcoming point of entry. Basic products that figure on most people’s shopping lists, such as flour, meat sugar and bread, may be spread out towards the back of the store and apart from each other so that customers have to walk along more aisles, passing higher-margin items as they search. High-margin items are usually put at eye level on shelves (where they are more likely to be seen) and low- margin products lower down or higher up. Some customers also go a few paces up an aisle before they start looking for what they need. Some supermarkets call the shelves occupy- ing the first metre of an aisle ‘dead space’, not a place to put impulse-bought goods. But the prime site in a supermarket is the ‘gondola-end’, the shelves at the end of the aisle. Moving products to this location can increase sales 200 or 300 per cent. It is not surprising that suppliers are willing to pay for their products to be located here. The circulation of customers through the store must also be right, but this can vary depending on which country you live in. In the USA shoppers like to work their way through a supermarket anti-clockwise. By contrast, shoppers in the UK like to shop clockwise. The reason for this is a bit of a mystery. Some put it down to the different driving patterns of each country.

Supermarket layout

Operations principle Different layout types have different fixed and variable costs which determine the appropriateness of layout for varying volume–variety characteristics.

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228 PART TWO DESIGNING THE OPERATION

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 probable costs of adopting a particular layout need to be set in the broader context of advantages and disadvantages shown in Figure 7.10.

How does the appearance of an operation’s facilities affect its performance? Traditionally, operations managers have focused on the more evident ‘pattern of flow’ issues associated with facilities layout. Yet the aesthetics of a layout (in other words, what it looks and feels like) are also important and are increasingly seen as being within the scope of what operations management should be concerned with. Organizations with high-visibility operations such as retailers, hospitals, or hotels have always understood that the look of their operations will affect customers’ experience. Now, operations in most industries have come to understand the importance of aesthetics. Partly, this is because of the accumulating research evidence that the aesthetics of an operation can evoke positive or negative emotional response in people (whether they be customers or staff), and therefore affect their behaviour and well-being. Partly also, the approach of those technology compa- nies that pioneered more relaxed and fluid working settings with the intention of encouraging casual encounters has started to influence other, less glamourous industries (see the ‘Operations in practice’ example on Ducati and Google earlier in the chapter).

The effect of workplace design on staff There are some obvious and basic aspects of workplace design that will affect anyone working there. These are such things as: is it warm enough? Too warm? Sufficiently well lit to see adequately? Not too noisy? These are all factors that deal with the physiological aspects of working – how we fit in

Figure 7.11 (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

Costs Costs

(a) (b)

Fixed-position Fixed-position

Functional Functional

Cell

Line Cell Line

Use line

Use line

Use cell

Use functional

Volume

Use fixed-

position

Volume

Use functional or cell or line

Use functional or cell Use functional

Use fixed-position Use fixed-position or functional

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CHAPTER 7 THE LAYOUT AND LOOK OF FACILITIES 229

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, par- ticularly well. We look at these issues in Chapter 9 when we consider ‘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 furniture, 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 generally it is taken to mean what it feels like to be part of an organization, ‘the organization’s climate’.6) Therefore, they argue, the appearance of a workplace should reflect the organization’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.7 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.

However, the proponents of improving the appearance of the working environment say that the idea is not simply to ‘change the décor and therefore change the culture’. Workplace aesthetics is subtler than that. 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 furni- ture 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 Miller8 (an office furniture manufacturer) identified seven workspace attributes that people value and which contribute to their satisfac- tion 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’.

Critical commentary

The question of how much difference the aesthetics and components of the working environment make is not uncontentious. In fact, according to Thomas Davenport, an expert in ‘knowledge 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.’9 There is also some evidence that open plan workplaces, casual meeting rooms, and more ‘living-room-like spaces’ are not universally popular with staff. Gensler, a design firm, surveyed more than 90,000 people across ten industries about their views on ‘fluid’, ‘open-plan’ working. It found a surprising amount of opposition, with many staff claiming that open-plan offices, in particular, make it difficult to concentrate because of excessive noise. What they actually valued were as few distractions as possible so that they could focus on their jobs.10

Operations principle Layout should take into consideration the aesthetic appearance of the workplace and type of facilities available to staff.

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230 PART TWO DESIGNING THE OPERATION

The Allen curve Arranging the facilities in any workplace will directly influence how physically close individuals are to each other. And this, in turn, influences the likelihood of communication between individ-

uals. So, what effects 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 estab- lished how communication dropped off with increased distance. In 1984 his book, Managing the Flow of Technology, presented what has become known as the ‘Allen curve’. It showed a pow- erful negative correlation between the physical distance between

Operations principle The likelihood of communication between people in their workplace falls off significantly as the distance between them increases. This is called the Allen curve.

O P E R AT I O N S I N P R AC T I C E

Some people love them, many people loath 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 addi- tion, 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 120º angles. However, to his disappointment, office designers realized that they could squash more people into the available space if they arranged the ‘walls’ at 90º to form the classic cubicle. 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 work- ers to move about and encourage ‘meaningful traffic’.

But cubicles were not universally popular. The unadorned 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 researchers at Cornell University, who found that employees in cubicles were more likely than those in open-plan offices to have loud (and long) conversations with visiting colleagues. This, they say, is possibly because cubicles ‘mask the social cues such as facial expressions and body language that influence social interactions’. They also it easier to consume an antiso- cially smelly lunch or have loud conversations on the phone, oblivious to their colleagues’ reactions. But cubi- cles 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 people personalize their cubicles with, amongst other things, pictures, flowers and rugs, even in some cases, curtains at the entrance, wallpaper, fairy lights and chandeliers.

Where did the office cubicle come from?11

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colleagues and their frequency of communication. The ‘Allen curve’ estimated that we are four times as likely to communicate regularly with a colleague sitting two metres away from us as with someone 20 metres away (for example, separate floors marks a cut-off point for the regular exchange of certain types of technical information). As some experts have pointed out, the office is no longer just a physical place; email, remote conferencing and collabora- tion tools mean that colleagues can communicate without ever seeing each other. However, one study12 showed that so-called distance-shrinking technology actually makes close proximity more important, with both face-to-face and digital communications following the Allen curve. Another 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 collabo- rate closely, closely located colleagues e-mailed each other four times as frequently as colleagues in different locations.

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 shaping customers’ views.13 The gen- eral idea is that ambient conditions, space factors and signs and symbols in a service operation will create an ‘environmen- tal experience’ both for employees and for customers; and this environmental experience should support the service concept.

Operations principle Layout should include consideration of the look and feel of the operation to customers and/or staff.

Although there is something of a question mark over the future of retail banks (several banks are axing many of their branches), they are keen to make sure that those that do remain have a warm and friendly feeling. This is why they pay so much attention to the décor and design of their branches. This even extends to their smell. When custom- ers visit one South London branch of Lloyds Bank they are

greeted by an attractive aroma. It is the fragrance of ‘white tea and thyme’, a scent carefully chosen to conjure up the right feeling in the bank’s customers. Says the building’s designer, Sarah Harrison, ‘It gives that inviting feel, that welcoming feel. You can smell it on the High Street when the wind’s blowing in the right direction.’ But Lloyds is not only experimenting with perfume; there are other oppor- tunities for ‘designing’ sensory experience. In one of its branches (in Manchester, UK) the impression has been described as of being in a ‘high-tech giant’s headquarters’. The traditional utilitarian furniture found in many tradi- tional bank branches has been thrown out in favour of cool armchairs and free Wi-Fi. The branch also has its own coffee shop (partly because the aroma of coffee seems to lure potential new customers), stylish ‘breakout pods’ and the newest biometric technology. Lloyds’ objective is to blend new technology with more traditional face-to-face expertise, so that their customers will find all they need in a bank, but in a reimagined setting.

Servicescapes in bank branchesO P E R AT I O N S I N P R AC T I C E

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232 PART TWO DESIGNING THE OPERATION

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 bodies experience).

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

What information and analysis is needed to design the layout and look of facilities? Designing the layout and look of any operation’s facilities will eventually move onto considering the details of the design. This means operationalizing the broad principles that governed the choice of whichever basic layout type was chosen and whatever aesthetic effect is wanted. But any detailed design should be based on the collection and manipulation of information regarding the nature and volume of the flow that the layout must accommodate, and the behaviour and preferences of staff and (if appropriate) customers.

Information for flow analysis of layouts At a detailed level, layout can be complex. Often there are very many alternative ways to position facilities relative to each other. 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 six 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) * c (1)

So, for a relatively simple layout with, say, 20 work centres, there are 20! = 2.433 * 1018 ways of arranging the operation. This is called ‘combinatorial complexity’ and it makes optimal layout solutions difficult to achieve in practice. Most layouts are designed by a combination of intuition, common sense, and systematic trial and error, a process that can be supported by using comput- er-aided design (CAD) software. Some of these treat the combinatorial complexity issue by using heuristic procedures. 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 suboptimal solution. However, both the information that is required, and how it is used, depends on the basic layout type that has been chosen.

Operations principle Layouts are often combinatorially complex; there are many alternative layouts.

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CHAPTER 7 THE LAYOUT AND LOOK OF FACILITIES 233

Information and analysis for the design of fixed-position layouts 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 themselves. The objective of the detailed design of fixed-position layouts is to achieve a layout for the operation which allows all the transforming resources to maximize their contribution 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, espe- cially if the planned schedule of activities is changed frequently. Imagine the chaos on a construc- tion 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 which help to locate resources on fixed-position layouts, they are not widely used.

Information and analysis for the design of functional layout 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 journeys,

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

The degree and direction of flow are usually shown on a flow record chart like that shown in Figure 7.12 in the worked example. This information could be gathered from routing 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 minimizing the total dis- tance travelled in the operation, 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 = ΣFij Dij for all i ≠ j

where

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

Dij = 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: Rotterdam Educational Group.

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234 PART TWO DESIGNING THE OPERATION

Worked example

Rotterdam Educational Group (REG) is a company which commissions, designs and manufactures 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 moving into the new building it has 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 depart- ments 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 represent 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 the centroids of

Figure 7.12 Flow information for Rotterdam Educational Group

DEPARTMENT AREA (m2)

CODE

Reception 85 A 40

100

80

5

55

25

20 15

80 100

70

15

8

40

12 10

30

40

120 B

C

D

E

F

G

H

I

J

K

160

100

225

200

200

120

160

200

100

75

Meeting room

Layout and design

Editorial

Printing

Cutting

Receiving and shipping

Binding

Video production

Packing

Audio production

Dimensions of the building = 30 metres × 60 metres

▼

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CHAPTER 7 THE LAYOUT AND LOOK OF FACILITIES 235

Figure 7.14 Final layout of building

Printing

PackingBinding

60 metres

3 0 m

e tr

e s

Corridor Reception

Meeting room

Editorial Layout

and design

Video production

Audio production

Cutting

Receiving and

shipping

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.

Information and analysis for the design of 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.

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

100 100

(a) (b)

100 100

10 10

30 30

20 20

25

25

12

12

15 15

8 8

5 515

15

D D

B

B

A A

K K

I

I J

J G

G

H

H

E E

F

F

120 120

40

40 40 40

40 40

70 70

55

55

80 80

80

80 C C

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236 PART TWO DESIGNING THE OPERATION

Production flow analysis14 The detailed design of cellular layouts is difficult, partly because the idea of a cell is itself a compro- mise between process and product layout. To simplify the task, it is useful to concentrate on either the process or product aspects of cell layout. If cell designers choose to concentrate on processes, they could use cluster analysis to find which processes group naturally together. This involves exam- ining 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 operation 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 natural 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.

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

Component families Component families

M a c h

in e s

M a c h

in e s

1 2

(a) (b)

3 4 5 6 7 8 3

4

1

6

3

8

2

5

7

6 8 5 2

Cell A

Cell B

Cell C

4 1 7

1

2

3

4

5

6

7

8

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

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CHAPTER 7 THE LAYOUT AND LOOK OF FACILITIES 237

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 processing by machines 3 and 8 which have been allocated to cell B. There are some partial solutions 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 simplification 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.

Information and analysis for the design of 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’, it is concerned more with ‘what to place where’. Locations are frequently decided upon and then work tasks are allocated to each location. 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? ▶ How should the stages be arranged (‘long thin’ layout to ‘short fat’ layout)?

Information and analysis for the design of the appearance of facilities Traditionally, survey questionnaires and interviews have been used to assess both staff and customers’ reaction to current and potential future workplace designs. Generally, indicators are developed for the questionnaires or interviews about both the level of satisfaction and the

O P E R AT I O N S I N P R AC T I C E

Information is important to large retail operations. For years loyalty cards have been used to build profiles of shopper behaviour and preferences. Now technology is being used to refine the design and layout of shop- ping areas. Humans (known as ‘trackers’) are still used by some retail- ers to follow customers (discreetly) through stores to see how they flow between the various parts of a store, but it is technology that provides the greatest potential for understanding in-store flows. These technologies can include video surveillance, thermal sensing, lasers, face recognition and so-called device-based solutions.

Technology tracks customer flow in retail operations

▼

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238 PART TWO DESIGNING THE OPERATION

level of dissatisfaction. This is necessary because high levels of satisfaction do not automatically mean a low level of dissatisfaction. Different staff and/or customers can hold very different views about the positioning and appearance of layouts. More recently, some organizations have used remote recording to understand customers’ and (sometimes) their staff’s reaction to the layout and look of their operations.

Increasingly, it is tracking technology that is being used to collect data on customer movement (see the ‘Operations in practice’ example on ‘Technology tracks customer flow in retail operations’). Using technology to monitor staff reaction has even more implications, especially ethically. It is treated in Chapter 9, People in operations.

Summary answers to key questions

How can the layout and look of facilities influence performance?

▶ The ‘layout and look’ of an operation or process means how its facilities are positioned relative to each other and how their general appearance is designed.

▶ These decisions will dictate the pattern and nature of the flow of transformed resources as they progress through the operation or process. They also affect how both the people who staff the operation and, in high-visibility operations (where customers form part of the transformed resource), how customers judge their experience of being in the operation.

▶ The objectives of layout include: minimizing (or sometimes maximizing) the flow of transformed resources, minimizing or maximizing aspects of the interaction between parts of the process, and enhancing the experience of both staff and, where appropriate, customers.

What are the basic layout types and how do they affect performance?

▶ There are four basic layout types. They are fixed-position layout, functional layout, cell layout and line layout.

Some of these technologies are sophisticated, but still being developed, such as face recognition linked with advanced artificial intelligence (AI) analysis. Others are more common with a proven track record, such as thermal imaging, which detects emissions from moving objects, and because it is not sensitive to light, can work in any space, no matter how well lit. But the technology that has, arguably, the most potential for capturing customer move- ment data is the use of sensors that pick up the unique identifier signals emitted by mobile phones as they auto- matically seek for Wi-Fi networks that they can join. (Bluetooth signals can also be used, but the advantage of Wi-Fi is that smartphones leave it on.) Data can be extracted from smartphone accelerometers, which can indicate where or when customers become engrossed in a

display (because movement stops) or are checking out prices (phones are used frequently). However, some find the use of technology in this way a little creepy, and there are important issues of privacy involved in such customer surveillance. Data protection campaigners have warned that retailers could use phone tracking to identify and manipulate individual customers (to target ads at them, for example) without their knowledge – an issue that would be of interest to data privacy authorities. One privacy campaign group points out that the main problem is that people do not know that their phone is being used to monitor them. But others argue that if the data are used to generate only aggregated statistics, for example about surges in visitor numbers, it could be done in a privacy- friendly manner.

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CHAPTER 7 THE LAYOUT AND LOOK OF FACILITIES 239

▶ Partly the type of layout an operation chooses is influenced 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 flexibility are particularly affected by the layout decision.

▶ The fixed and variable costs implied by each layout differ such that, in theory, one particular lay- out will have the minimum costs for a particular volume level. However, in practice, uncertainty over the real costs involved in layout make it difficult to be precise about which is the mini- mum-cost layout.

How does the appearance of an operation’s facilities affect its performance?

▶ The general appearance and aesthetics of a layout affects how staff view the operation in 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 influenced by the feel and general impression of the layout design, this is often called the ‘servicescape’ of the operation.

What information and analysis are needed to design the layout and look of facilities?

▶ In fixed-position layout, techniques are rarely used, but some, such as resource location analysis, bring a systematic approach to minimizing the costs and inconvenience of flow at a fixed-position location.

▶ In functional layout 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-aided methods can be used to devise the detailed design.

▶ In cell layout the detailed design task is to group the products or customer types such that convenient cells can be designed around their needs. Techniques such as production flow analysis can be used to allocate products to cells.

▶ In line layout, 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.

▶ Gathering information as the basis for the analysis of the appearance of facilities usually uses survey questionnaires and interviews to assess both staff and customers’ reaction to current and potential future workplace designs. More recently, some operations have used remote recording to understand customers’ and (sometimes) their staff’s reaction to the layout and look of their operations.

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240 PART TWO DESIGNING THE OPERATION

The event hubC A S E ST U DY

By Ross Richie, Warwick University The ‘event hub’ was new, shiny and fitted with the latest equipment. Chief Superintendent Janice Walker was looking 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 occa- sions, ranging from the management of a football match, a public protest or a Royal Wedding through to a critical inci- dent 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 interest 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 ambu- lances you may see outside a football match or the lines of police officers escorting a demonstration. These OTG services have localized commanders, who have delegated tactical responsibility. They are called Bronze Commanders regardless of whether they belong to the ambulance, police or fire service, or any other body. Bronze Commanders all report to the Silver Commander.

The command hub All of the OTG services and commanders report back into a centralized intelligence and decision-making command hub. It is often located away from the event, coordinated through a vast array of visual and audio communication networks. Within the hub there are representatives from each of the Bronze command units providing direct commu- nication and command links to each of the OTG resources. Also in the hub, there is the single strategic commander – the ‘Silver Commander’. In larger events, there may be as many as 80 different personnel in the command hub, coor- dinating 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 deci- sions 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 legisla- tive constraints.’

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

▶ The Bronze command representatives ▶ Their communications officer (who summarizes radio

communications) ▶ 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 opera- tional 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 representation 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 varying requirements. For example, some of the intelligence func- tions 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

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CHAPTER 7 THE LAYOUT AND LOOK OF FACILITIES 241

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 it being hectic during the march. The first 2 hours of the protest went according to plan with good coordination 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 near- est hospital (difficult in the crowds). Third, an unexpected (and unauthorized), 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 situ- ation. All of this resulted in an intense period of decision making and information gathering. Janice found herself continually moving between her office, their command

also need to get operational updates from the ambulance service and local authority to direct their intelligence gather- ing efforts. Janice was worried that, because of this, there would be a high degree of travelling between different func- tions 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- geographic infor- mation 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 consider his or her decisions and take confidential guidance from advisors.

Prior to the event, Janice had planned for ‘update meet- ings’ in the meeting room with 12 of her key personnel every 2 or 3 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 functions. 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 information leakage.

Figure 7.17 The chain of command for the event

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

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242 PART TWO DESIGNING THE OPERATION

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 incidents, and with the operation 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.

teams and the screens, never spending more than a couple of minutes in one place. She was often followed by the 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 aban- doned her office and moved her chair over alongside 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 disturbing others in the room.

The move had a positive effect of unifying Janice and her team. However, now there was 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 Janice moving around the room. She also made a further decision, which was not to consult with 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

Figure 7.18 The layout of the command hub

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

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CHAPTER 7 THE LAYOUT AND LOOK OF FACILITIES 243

Problems and applications

All chapters have ‘Problems and applications’ questions that will help you practise analysing operations. They can be answered by reading the chapter. Model answers for the first two questions can be found on the companion website for this book.

1 Revisit the ‘Operations in practice’ example ‘Technology tracks customer flow in retail operations’. Then 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 attention to the products. (You may have to exercise some discretion when doing this; people generally don’t like to be stalked round the supermarket too obviously.) Try and verify, as far as you can, some of the principles that were outlined in the box. (a) What layout type is a conventional supermarket and how does it differ from a manufacturing operation using the same layout type? (b) Some supermar- kets are using customer tracking technology that traces the flow of customers through the shop. What are the benefits of using this type of technology for supermarkets?

2 In an assembly operation for customized laboratory equipment the flow of materials through eight departments is as 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.

From . . . . . . . .

To . 

. .  . 

. .  

Dept 1 Dept 2 Dept 3 Dept 4 Dept 5 Dept 6 Dept 7 Dept 8

Dept 1 30

Dept 2 10 15 10

Dept 3 5 12 2 15

Dept 4 6 10 10

Dept 5 8 8 10 12

Dept 6 2 30

Dept 7 13 2

Dept 8 10 6 15

Table 7.2 Flow of materials between departments in standard container loads per day

3 The assembler of customised laboratory equipment negotiates a long-term arrangement to supply a simplified standard product to be sold to forensic laboratories worldwide. This product requires an assembly sequence that takes it, in order, from Departments 2 to 4 to 8 to 5. Estimates of demand indicate that the new product would account for 30 standard container loads per day. If this new product came to be seen as a permanent addition to the operation’s work, how might the layout need to be changed?

4 A company that produces a wide range of specialist educational kits for 5–10-year-olds is based in an industrial unit arranged in a simple layout of six departments, each performing a separate task. The layout is shown in Figure 7.19, together with the results of an investigation of the flow of parts and products between each department. However, the company plans to revamp its product range. ‘This new range will totally replace our existing products, and although I believe our existing layout is fine for the current product range, I think that we will need to reconfigure

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244 PART TWO DESIGNING THE OPERATION

Figure 7.19 (a) The current layout of the educational kits producer, and (b) the current interdepartmental flow of parts and products (in pallet loads)

Department A

Department B

Department C

Department D

Department E

Department F

Dept A

Dept B

Dept C

Dept D

Dept E

Dept F

24 27

25

30

24

32 24

20

22

4

11 12 7

4

8

(a) (b)

Figure 7.20 Estimated interdepartmental flow when the new product range is introduced

Dept A

Dept B

Dept C

Dept D

Dept E

Dept F

34 2

5

15

2

32 2

5

9

4

5 5 28

40

3

our layout when we make the transition to the new product range’ (COO of the company). The estimate for the flow between the departments when the new product range is introduced is shown in Figure  7.20. (a) Is the COO right in thinking that the current layout is right for the current product range? (b) Assuming that the estimate of future interdepartmental flow is correct, how would you rearrange the factory?

5 A computer games developer is moving into new offices. The new office has a floor space of approx- imately 300 square metres in the form 20 metres by 15 metres. The company has six departments, as identified in Figure 7.21. This also shows the approximate area required by each department and the degree of closeness required between each department.

6 The operations manager of a specialist company assembling seabed monitors that record pollution levels had a dilemma. ‘At the moment, we are producing around 40 seabed monitoring stations per year using what is basically a fixed-position layout. However, as volume increases over the next few years, we could move over to using a cell layout with two cells, one for use assembling monitors for tropical waters and one for colder waters. We know that the fixed costs associated with our current layout are €20,000 per year and the variable cost is €380 per unit. Using a cell layout, we think that the fixed cost per year will be €35,000 per year, but it could be as high as €40,000 or as low as €30,000 per year. We are clearer on

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CHAPTER 7 THE LAYOUT AND LOOK OF FACILITIES 245

Figure 7.21 The required areas and closeness for the six departments of the computer games developer

Code Degree of closeness

A Essential

E Very important

I Important

O Neutral

U Unimportant

X Not desirable

A

E O

U

A

U

U I

O

U

A

I

O U

X

Administration

Social media

Planning

Developers

IT and software

Lounge and co�ee area

Approximate area (sq. mtrs.)

35

35

45

80

60

45

Department

Administration

Social media

Planning

Developers

IT and software

Lounge and co�ee area

the variable cost, which we are fairly sure will be €60 per unit.’ How much would the company’s volume need to increase to be certain that the cell layout would be less costly?

Selected further reading

This is a relatively technical chapter and, as you would expect, most books on the subject are technical. 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. 1, 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.

Plunkett, D. and Reid, O. (2014) Detail in Contemporary Office Design (Detailing for Interior Design), Laurence King, London. An interior designer’s take on how offices can look.

Rosenbaum, M.S. and Massiah, C. (2011) An expanded servicescape perspective, Journal of Service Management, vol. 22, no. 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. Jnr 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.

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246

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, in fact in many ways it is speeding up. This has important implications for operations managers because all operations use some kind of process technology, whether it is a simple cloud computing service or the most complex and sophisticated artificial intelligence driven automated factory. But this chapter is not particularly about specific technologies ; there are too many of them, and they are changing too fast. Rather it is concerned with the questions that operations managers will need to ask, whatever the technology they are dealing with. All operations managers need to understand, in broad terms, what emerging technologies can do, 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 technology8

KEY QUESTIONS

What is process technology and why is it getting more important?

How can one understand the potential of new process technology?

How can new process technologies be evaluated?

How are new process technologies developed and implemented?

Figure 8.1 This chapter examines process technology

Operations management

Direct

Design Develop

Deliver

Design

Layout and flow

Process design

Process technology

People in operations

Topic covered in this chapter

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CHAPTER 8 PROCESS TECHNOLOGY 247

What is process technology and why is it getting more important? The idea of harnessing technology to make operations more effective is not new. For example, the use of some form of automation to replace human work activities has been happening for at least the past 300 hundred years. What is new, is the sheer scope, sophistication and combination of technologies that are being deployed or developed to be part of operations activities in almost all parts of the economy. This has important implications, not only for how technology will be applied, but also for how operations are organized to make the most of new technologies’ emerging capabili- ties. But even more important, some commentators argue, will be the rate and extent of change that operations managers will have to cope with. How operations managers deal with process technol- ogy is now one of the most important decisions that will shape the capabilities of operations.

Process technology versus product technology Although the word ‘technology’ is frequently used in managerial conversation, what does this term actually mean? The Oxford Dictionary defines it as: ‘The application of scientific knowledge for practical purposes, especially in industry.’ In this chapter, we shall focus upon process technology as distinct from product or service technology. In manufacturing operations, it is a relatively simple matter to separate the two. For example, the product technology of a computer is embodied in its hardware and software. But the process technology that manufactured the computer is the tech- nology that made and assembled all the different components. In service operations, it can be far more difficult to distinguish process from product/service technology. For example, theme parks such as Disney World use flight simulator technologies in some of their rides. These are large rooms mounted on a moveable hydraulic platform that, when combined with wide-screen projection, give a realistic experience of, say, space flight. But is it product/service or process technology? It clearly processes Disney’s customers, yet the technology is also part of the product – the customers’ experi- ence. Product/service and process technologies are, in effect, the same thing.

The formal definition of process technology that we shall use here is ‘the machines, equipment, and devices that create and/or deliver products and services’. Process technologies range from milking machines to exam marking software, from body scanners to bread ovens, from mobile phones to milling machines. In fact, process technology is pervasive in all types of operations. Without it, many of the products and services we all purchase 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 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 their material, infor- mation or customers.

It is worth noting, however, that the distinction between what is a ‘product/service’ technology and what is a ‘process’ technology can depend on context. What is one business’s product/service technology is another’s process technology. For example, the product/service technology that software firms embed in their planning and control systems is their customers’ (indirect) process technology. Fanuc, the Japanese robot manufacturer, has a factory in Oshino, Japan, where its own industrial robots themselves produce industrial robots, supervised by a staff of only four workers per shift. The robots could be classed as both product and process technology.

Operations principle Process technology is the machines, equipment and devices that create and/or deliver products and services.

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What is ‘new’ in new technologies? Why is new process technology becoming so important? Is process technology, and the way opera- tions managers deal with it, really a more significant issue than it has always been? One can argue that it is, mainly for two reasons. The first is that most new process technologies have a greater capability than what they are replacing; in other words, new process technologies are capable of doing things that older technologies could not do, or do as well. Second, these increased capabilities have a greater scope of application; they can be applied in sectors of the economy, and in types of operation, where process technology used to be far less important.

New technologies often have increased capabilities Even technologies, such as robots, that have become common place in many operations are becom- ing cheaper, more proficient and more adaptable. Algorithms used, for example, by banks to carry out routine transactions, or by parcel delivery companies to plan routes, can outperform human decision making. And when combined with artificial intelligence (AI) they can perform activities, such as medical diagnostics, previously presumed to require expert human judgement. At the same time, some technologies are becoming less expensive. Over a 20-year period, the cost of industrial robots has dropped by half while the cost of labour in developed economies has risen over 100 per cent. It is not surprising, then, that labour substitution accounts for some of the motive for adopting new technologies. But do not assume that it is always the main driver. Other performance benefits can be even more important, as we shall discuss later.

New technologies can increasingly be applied in all types of operation The role and application of technology has always has been important for some 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 oper- ations. But this is no longer true, and arguably has not been true for decades. High-volume services have for years understood the value of process technology. Online transactions for retail and other services are vital for their success. But now the scope and capabilities of so many technologies have expanded to the point where there are very few, if any, types of enterprise that are not actively using some kind of technology to support their operations processes. For example, in an airport, we check in and scan our passports using automated machines, progress through security with our bags (and sometimes ourselves) having been subjected to (semi-) automatic scanning, and obtain access

to the gate by scanning our boarding card or phone image. Even when on the flight, the pilots may actively steer aircraft only for a few minutes before the autopilot takes over for the rest of the journey. But even relatively low-volume, high-variety professional services such as legal and medical services can benefit from new and value-adding technologies.

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 operations (robots, 3D printing, computer integrated manufacturing systems and so on), 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

Operations principle New process technologies can have increased capabilities and greater scope of application.

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In his book, The Power of Habit, Charles Duhigg2 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 apologized profusely. ‘It 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 apologize. His daughter was indeed pregnant and due to give birth 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 experi- ence. Moreover, technology can often do those tasks better. A piece of software has replaced the marketing team trying to guess whom to sell baby clothes to. So tech- nology is not only replacing people, but it is 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 busi- nesses, 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 account- ing processes that pay invoices, have been overtaken by the ‘the robot and the spreadsheet’. Yet the type of work that is more difficult to break down into a set of stand- ardized elements is less prone to being displaced by technology. The obvious examples of work that is difficult to automate are the type of management tasks that involve decision-making based on judgement 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. However, the extent to which such automation will take hold is disputed. 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 getting cleverer; in addition, it can exploit the capability to access to far more data. Frey and Osborne even 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). Amongst 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). Yet another study by the OECD (a group of relatively rich countries) claims these forecasts are too gloomy, and fewer people’s jobs are likely to be destroyed by artificial intelligence and robots than has been suggested. However, many people will face a future in which their jobs may change signifi- cantly as technology affects the way processes are designed.

Technology or people? The future of jobs1

initial forming and shaping of materials at the start, and the handling and movement through the supply network that has been most affected by technology advances. Assembling parts to make products, although far more automated that once it was, presents more technical challenges.

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Information-processing technology Information-processing technology, or just information technology (IT), is the most common sin- gle type of technology within operations, and includes any device which collects, manipulates, stores or distributes information. Initially, it was the use of Internet-based technology that had the most obvious impact on operations – especially those that are concerned with buying and selling activity. 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). Subsequently, other types of information-processing technologies came to provide oppor- tunities for process innovation, particularly those involving some form of analytical capability, such as algorithmic decision making, artificial intelligence (AI) and data mining, those involving communication or connectivity, such as blockchain, and those capable of processing visual infor- mation, such as augmented reality (AU).

Customer-processing technology Although customer-processing operations were once seen as ‘low-technology’, now process tech- nology is very much in evidence in many services. Increasingly the human element of service is being reduced with customer-processing technology being used to give an acceptable level of ser- vice while significantly reducing costs. There are three types of customer-processing technologies. The first category includes active interaction technology such as automobiles, online shopping, fitness equipment and self-checkout stations. In all of these customers themselves are using the technology to create the service. By contrast, aircraft, mass transport systems, moving walkways, elevators, cinemas, ‘fitness’ monitors and most theme park rides are passive interactive technol- ogies; they ‘process’ (and sometimes control) customers (or aspects of a customer) in some way, but do not expect the customer to take a direct part in the interaction. Some customer-processing technology is ‘aware’ of customers but not the other way around: for example, security moni- toring, or face recognition technologies in shopping malls or at national frontier customs areas. The 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, and/or are combinations of other technologies. These technologies are called ‘integrating technologies’. For example, electronic point of sale (EPOS) technology integrates scanning and information technologies and processes shoppers, products and information. Perhaps the most-discussed of the more recent integrating tech- nologies is ‘industry 4.0’. This is the term for the automation and integration of manufacturing technologies. It is explained in more detail later.

How should operations managers manage process technology? So, what are the responsibilities of operations managers as regards the management of process tech- nology? It has always been an important issue to them because they are continually involved in the choice, installation and management of process technology. Now, with the increased potential of new technologies, how do operations managers decide on the best way of enabling their use, especially in circumstances where such technologies have not previously been appropriate? They should be able to do three things.

▶ First, they need to understand the technology to the extent that they are able to articulate what it should be able to do; not in the sense that they need to be experts in whatever constitutes the core science of the technology, but enough to understand its implications.

▶ Second, they should be able to evaluate alternative technologies, particularly as they affect the operations they manage, and share in the decisions of which technology to choose.

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▶ Third, they must be able to manage – that is, develop, plan and 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 rest of this chapter deals with. They are illustrated in Figure 8.2.

Understanding the potential of new process technology The first responsibility of operations managers is to gain an understanding of what a process tech- nology can do. But ‘understanding process technology’ does not (necessarily) mean knowing the details of the science and engineering embedded in the technology. It means 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 simi- lar 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, look at the worked example on QB House to think through these four key questions.

Emerging technologies – understand their primary capabilities The four questions listed above are universal, in the sense that they can help to understand the impli- cations for operations management of any new or emerging technology. But operations managers are not immune from more general public perceptions of the importance of new technologies, which is why it is worthwhile considering how technologies are seen.

Operations principle Operations managers need to be able to understand, evaluate and manage new process technologies.

Operations principle Operations managers should understand enough about process technology to evaluate alternatives.

Figure 8.2 The three stages of process technology management

Understand the potential of new

technology

Evaluate the impact of new technology

on performance

Develop and implement new

technology

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

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

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

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Worked example3

One day, in Japan, Kuniyoshi Konishi became so frustrated at having to wait to get his hair cut and then pay over 3,000 yen for the privilege, he decided that there must be a better way to offer this kind of service. ‘Why not’, he said, ‘create a no-frills barber shop where the customer could get a haircut in ten minutes at a cost of 1,000 yen (€7)?’ He realized that a combination of technology and process design could eliminate all non-essential elements from the basic task of cutting hair. He achieved this in his chain of barbers called QB House. How is it done? 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 don’t even have telephones. Therefore, no receptionist is needed, or anyone to schedule appointments. Third, QB House developed 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 different 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 its customers 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 customer’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 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. 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 service) 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 in which customers need to know what to expect and how to use it.

General perceptions of new technologies Sometimes it is difficult to separate the reality of a new technology from the publicity and spec- ulation that surrounds it, especially when its potential is not yet fully understood. One attempt to illustrate how perceptions of a technology’s usefulness develop over time is the ‘Gartner hype cycle’ created by Gartner, the information technology research and consultancy company. It has five sequential (but sometimes overlapping) stages.

▶ Stage 1 – ‘technology trigger’: The early stages of a technology; it probably exists in a theoretical or prototype stage (which has aroused media interest), but there are no working practical demonstrations.

▶ Stage 2 – ‘peak of inflated expectations’: The technology has developed to the point where it is implemented by some more adventurous ‘early adopter’ operations. There is press coverage describing both successful and unsuccessful experiences.

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▶ Stage 3 – ‘trough of disillusionment’: The difficulties of using the technology in practical situations start to demonstrate its shortcomings. This results in something of a backlash, leading to disap- pointment and disillusionment with the technology.

▶ Stage 4 – ‘slope of enlightenment’: Problems with the technology are slowly solved and its potential becomes more realistically understood. It is adopted by an increasing number of operations that learn how to implement it in their context.

▶ Stage 5 – ‘plateau of productivity’: The technology, in its developed form, becomes widely adopted, probably with technical standards being shared by users and suppliers.

Classifying technologies by their primary capabilities Any in-depth understanding of a technology calls for a knowledge of what, in general terms, it actu- ally does. In other words, what is its ‘primary capability? What is it better at than the technology that it replaces? Figure 8.3 shows some technologies that, at the time of writing, were new(ish). This is certainly not a fully comprehensive list. Some technologies are specialist, in the sense that their application is limited to one type of operation. Other technologies are (again, at the time of writing) still very much in their development stage. 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 ‘behind’ the technology in order to start to understand what it is intended to do. The figure positions the technologies relative to five ‘primary capabilities’:

Figure 8.3 New and emerging technologies positioned relative to five ‘primary capabilities’: thinking/ reasoning, seeing/sensing, communicating/connecting, moving physical objects, processing materials

Industry 4.0

3 D printing

Materials analysis

Face recognition

Drones

Robotics

Blockchain

Artificial intelligence

Internet of things

Big data

RFID Condition sensors

Information systems

Cloud computing

Augmented reality

Virtual reality

Algorithmic decision making

‘Seeing’/ sensing

Moving physical objects

Communicating/ connecting

Thinking / reasoning

Materials processing

AGVs

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▶ Technologies that can think, or reason ▶ Technologies that can see, or sense ▶ Technologies that can communicate, or connect ▶ Technologies that can move physical objects ▶ Technologies that can process materials

Technologies that can think, or reason The best-known class of technology that attempts to replicate (and even surpass) human thinking is artificial intelligence (AI).

This is an ‘area of computer science that emphasizes the creation of intelligent machines that work and react like humans. Some of the activities computers with artificial intelligence are designed for include, speech recognition, learning, planning, and problem solving’.4 Since computers were devel- oped, people have worked with, and been augmented by them. AI challenges this relationship as computers improve their capabilities to take more control. Somewhat less sophisticated, but more widely used (currently) in operations management is algorithmic decision making. An algorithm is a predefined sequence of instructions, or rules. Many of the models used in this book are algo- rithms that could be incorporated into decision-making routines. Algorithmic decision making may be combined with large data sets (often called ‘big data’).

Big data is a large volume of both structured and unstructured data whose analysis can reveal hidden patterns, correlations and other insights. Looking for relevant or pertinent information in big data sets is called data mining.

O P E R AT I O N S I N P R AC T I C E

It was a significant event in the development of artificial intelligence (AI). Between 9 and 15 March 2016 a five-game match was played in the South Korean capital Seoul between arguably the best professional Go player called Lee Sedol and AlphaGo, a computer Go program developed by Google DeepMind. AlphaGo won the contest by 4 games to 1. Some commentators saw the event as a continuation of the ‘man versus machine’ chess battles that started when chess master Garry Kasparov lost to a computer named Deep Blue in a six-game match played in 1997. In fact, games like chess are a handy way to gauge a computer’s evolution towards genuine arti- ficial intelligence. This is where Go comes in. Although seemingly simple, it is a far more complex game than chess. Played all over East Asia, it is particularly popular with AI researchers in particular, for whom the idea of truly

mastering Go has become something of an obsession. Why? Because compared with Go, teaching computers to master chess is easy. The size of a Go board means that the number of games that can be played on it is colossal : probably around 10170, which is almost 100 orders of magnitude greater than the number of atoms in the observable universe

▼

Go figure5

Operations principle The primary capability of process technologies can be one or more of: thinking/reasoning, seeing/sensing, communicating/connecting, material processing, and moving physical objects.

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Technologies that can see, or sense Some technologies exploit their ability to manipulate computer-generated or computer aug- mented visual information. For example, augmented reality technologies show an enhanced ver- sion of reality where live views of physical real-world environments are augmented with overlaid computer- generated images, thus supplementing one’s perception of reality. Virtual reality goes further by using entirely computer-generated simulations, with which humans can interact in a seemingly real manner using special helmets and gloves fitted with sensors. Although both aug- mented and virtual reality technologies are used in entertainment operations, they are also valu- able in surgery training, maintenance planning and process design. Both of these involve people using technology to view objects. Face recognition is the reverse of this. It uses still or video images of a scene to identify or verify one or more individuals using a stored database of faces, so that those people can be identified for (say) automatic charging for a service, or for security or advertising purposes. Condition sensor technologies are more intimate. They sense characteris- tics of people (e.g. fitness monitors), or materials (e.g. quality control sensors).

Technologies that can communicate, or connect Arguably, the most significant capability that is increasingly built into many process technologies is the ability to network, connect or communicate with other elements in an operations process. For example, cloud computing applications allow dispersed groups of people to collaborate virtually, using shared information (in real time) and shared storage of information. Blockchain technology also relies on connected networks, but rather than ‘share’ it uses distributed databases in such a way that they maintain a shared list of records (called blocks), where each encrypted block of code contains the history of every block that came before it, with each transaction ‘timestamped’. There is transparency within the network, but no single point where records could be hacked or corrupted. At a more technical level, communication between physical objects has been made significantly more effective through the use of RFID technologies. These devices use radio waves to automatically identify objects, collect data about them, and communicate it into information systems (integrated sets of components for collecting, storing and processing data, and for providing information and knowledge).

(estimated to be around 1080). As one of DeepMind’s crea- tors, Dr Demis Hassabis, points out, simply using raw computing power cannot master Go. Much more than chess, Go involves recognizing patterns that result from groups of stones surrounding empty spaces. Players can refer to seemingly vague notions such as ‘light’ and ‘heavy’ patterns of stones. ‘Professional Go players talk a lot about general principles, or even intuition’, says Dr Hassabis, ‘whereas if you talk to professional chess players they can often do a much better job of explaining exactly why they made a specific move.’

However, ideas such as ‘intuition’ are much harder to describe algorithmically than the formal rules of any game. That’s why, before AlphaGo was developed, the best Go programs were little better than a skilled amateur. The breakthrough of AlphaGo was to combine some of the same ideas as the older programs with new approaches that focused on how the computer could develop its own ‘instinct’ about the best moves to play. It uses a technique that its makers have called ‘deep learning’ that allows the

computer to develop an understanding of the instinctive rules of the game that experienced players can understand but cannot fully explain. It develops this learning by play- ing games against itself (or a slightly different version of itself ) and analysing the vast amounts of data to sort out these ‘intuitive’ rules. However, as well as masses of data ‘deep learning’ also requires plenty of processing power. Yet it is the ‘deep learning’ that was being seen as the exciting development that would lead to further applica- tions. Such an approach could help computers to do complex tasks like accurate face recognition or translate subtleties of meaning from one language to another. But, although the techniques used by AlphaGo are an impor- tant step in the progress to what in Dr Hassabis’s view is the ‘same sort of broad, fluid intelligence as a human being’, they still lack some of the abilities that humans take for granted. Possibly the most important of these is the ability to apply lessons learned in one situation in another, what AI researchers call ‘reasoning by analogy’ or ‘transfer learning’.

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Technologies that can move physical objects Robots are often credited with almost human-like abilities, but in fact are primarily used for han- dling materials, such as loading 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. A close relation of a robot is an automated guided vehicle (AGV). This is a materials-handling system that uses auto- mated vehicles that are programmed to move between different stations (usually in a manufacturing or warehouse setting) without a driver. On a more airborne level, aerial drones, both guided and autonomous, are increasingly used in industrial applications. Non-military uses include safety and quality inspection, filming and journalism, search and rescue, precision agriculture and short-haul delivery.

Technologies that can process materials The various developments in materials-processing technology tend to be too specialized and tech- nical to grab popular attention. Nevertheless, plenty of new (or newish) processes are having a  sometimes-significant effect on the economics and practice of materials-processing operations. Everything from miniaturization, to the use of lasers, to the creation of products with complex shapes and multi-functional materials, has opened novel processing opportunities. One technology that has received publicity is 3D printing, also known as additive manufacturing. A 3D printer pro- duces a three-dimensional object by laying down layer upon layer of material until the final form is obtained. But 3D printing is not a new technology as such. Since the 1990s it has been used to make prototype products quickly and cheaply prior to full production. Now it is increasingly used for fin- ished products for real customers. Importantly, 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.

Technologies with more than one primary capability Some of the technologies described above have more than one primary capability, even if one of them is dominant. Virtual reality, for example, is a visual technology, but could not work with- out a relatively powerful thinking/reasoning capability. Automatic guided vehicles are concerned primarily with moving physical objects, but can frequently communicate, ‘see’ where they are going, and reason to work out alternative routes. Other important technologies combine even more primary capabilities. The internet of things (IoT) exploits the potential of RFID technology with its sensors and actuators, connects them using wireless networks and allows information systems and physical networks to merge. SAP, the developer of Enterprise Resource systems, describes the internet of things as: ‘A world where physical objects are seamlessly integrated into the information network, and where the physical objects can become active participants 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.’6

Perhaps the most developed of these technologies that combine several primary capabilities has become known as Industry 4.0. The name derives from the contention that there have been four industrial revolutions: first, mechanization through water and steam power; second, mass production and assembly lines powered by electricity; third, computerization and automation; and finally, fourth, smart factories combining digital, virtual and physical systems. The name Industry 4.0 was first publicly used in 2011 as ‘Industrie 4.0’ by a group of business people, political representatives and academics, meeting as an initiative to improve German manufacturing competitiveness. The German federal government formed a working group that published a vision for Industry 4.0 as: ‘these Cyber- Physical Systems comprise smart machines, storage systems and production facilities capable of autonomously exchanging information, triggering actions and controlling each other independently. This facilitates fundamental improvements to the industrial processes involved in manufacturing, engineering, material usage and supply chain and life cycle management.’

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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 sandwich, on toast, bread or even as a cooking 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 into 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 contains microbes that feed on the waste. As they do this, they release methane, which is burned in a boiler that is 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.

Unilever publishes its performance as falling into three categories. The first is ‘areas where we are making genu- inely good progress’. These include sustainable sourcing, nutrition and eco-efficiency (including the Marmite project). The second category is ‘areas where we have had to consider carefully how to reach our targets but are now ready to scale up’, such a programme to increase the recycling rates of aerosols, encouraging more local coun- cils to collect aerosols kerbside. ‘However’, the report admitted, ‘we have more to do, working in partnership 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

Love it or hate it, Marmite’s energy recycling technology7

Figure 8.4 Waste product recycling at Marmite

▼

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.

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258 PART TWO DESIGNING THE OPERATION

How can new process technologies be evaluated? The most common technology-related decision for operations managers is likely to be whether to adopt an alternative technology to whatever is currently being used. 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. Yet, with the emergence of so many new process technologies with sometimes ambiguous capabilities, the evaluation pro-

cess becomes both more difficult and more important. Added to this are new types of technological risk – security, obsolescence, implementation problems and the tendency of some organiza- tions to get carried away with new technology for its own sake. But, whatever the difficulties, evaluation is necessary, so the characteristics of alternative technologies need to be evaluated so that they can be compared. Here we use three sets of criteria for evaluation.

▶ Does the technology fit the volume–variety characteristics of the task for which it is intended? ▶ What aspects of the operation’s performance does the technology improve? ▶ Does the technology give an acceptable financial return?

Does the process technology fit the volume–variety characteristics of the 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 different 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 processing activities that high variety demands. High volume–low vari- ety processes can use technology that is more dedicated to its narrower range of processing requirements. Within 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 dimensions 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 oper- ates the technology may be the entire ‘brains’ of the process, for example the surgeon using key- hole surgery techniques. The ratio of technological to human effort it employs is sometimes called

need to work with others to find solutions’. This includes targets that require consumer behaviour change, such as encouraging people to eat foods with lower salt levels or reducing the use of heated water in showering and wash- ing clothes.

Amanda Sourry, Unilever UK and Ireland Chairman, said: ‘The old view of growth at any cost is unacceptable; 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 forward, 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.’

Operations principle Process technologies can be evaluated in terms of their fit with process tasks, their effect on performance and their financial impact.

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the capital intensity of the process technology. Generally, processes that have high variety and low volume will employ process technology with lower degrees of automation than those with higher volume and lower variety. For example, investment banks trade in highly complex and sophis- ticated 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-of- fice staff are making the decisions rather than the technology. Contrast this with higher-volume, low-variety products, such as straightforward equity (stock) trades. Most of these products are simple and straightforward and are processed in very high volumes 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 operation’s var- ious 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 more cheaply 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 the nimbleness and flexibil- ity that is suited to high-variety, lower-volume processing. 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 5.

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 so much as it is influenced by the same volume–variety characteristics. IT scalability relies on consistent IT platform architecture and

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

Low Low

Low Low High

High

High High

Broad/ unconstrained

Narrow/ constrained

Automated, dedicated, large- scale, relatively

inflexible technology

Manual, general- purpose, small- scale, flexible technology

Variety Volume

Automation Scale/

scalability Coupling/

connectivity

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260 PART TWO DESIGNING THE OPERATION

the high process standardization that is usually associated with high-volume and low-variety operations.

The coupling/connectivity of the technology Coupling means the linking together of separate activities within a single piece of process technology to form an interconnected processing system. Tight coupling usually gives fast process throughput. For example, in an automated manufacturing system, products flow quickly without delays between stages, and inventory will be lower – it can’t 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 vulnerable (a failure in one part of an interconnected sys-

tem can affect the whole system). The fully integrated manufac- turing system constrains 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 relatively low variety and high volume. Higher variety processing generally requires a more open and unconstrained level of cou- pling because different products and services will require a wider range of processing activities.

How does the technology improve the operation’s performance? In Chapter  2, we identified the five operations performance objectives, on which an operation or process can be judged. So, a sensible starting point for evaluating the impact of any process technology on an operation is to assess how it affects its quality, speed, dependability, flexibility and cost performance. However, two refinements are necessary to the normal list of performance objectives. First, given that some process technologies can perform totally novel tasks (for exam- ple, 3D printing can create shapes and use materials in a novel manner), it is worth splitting the criterion of ‘quality’ into ‘specification quality’ (what can the technology do?) and ‘conformance quality’ (can it do it in an error-free manner?). Similarly, when considering the flexibility of tech- nology, it is worth distinguishing between response flexibility (how easy is it to switch between tasks?) and range flexibility (how many different tasks can it perform?). In addition, again given the increased capabilities of some new process technologies, other criteria are worth including in any evaluation.

These assessment questions can be viewed as a starting point. The criteria should be adjusted depending on the operation for which the technology is intended. They are:

▶ What can the technology do? – Is it capable of doing something (or some things) that the previous technology could not do?

▶ How well can the technology do things? – Is it capable of doing things in an error-free manner? ▶ How fast can the technology do things? – Is it capable of doing things more rapidly? ▶ How reliably can the technology do things? – Is it capable of doing things with greater

dependability? ▶ How flexibly (response) can the technology do things? – Is it capable of switching easily between

tasks? ▶ What range of things can the technology do? – How many different tasks can it perform? ▶ How sustainable is the technology? – Does it have a positive environmental impact? (for example,

see the ‘Operations in practice’ example on Marmite’s energy recycling technology) ▶ Where can the technology do it? – Can it perform its tasks in alternative locations (for example,

is it portable)? ▶ How safely can the technology do it? – Can it perform its tasks without harming people?

Operations principle Process technology in high-volume, low- variety processes is relatively automated, large-scale and closely coupled when compared to that in low-volume, high- variety processes.

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▶ How connectedly can the technology do it? – Can it communicate or connect with other technologies?

▶ How securely can the technology do it? – Is it vulnerable to interference or hacking?

These criteria are shown on a ‘polar’ representation (see Chapter 2) in Figure 8.6. A technology being evaluated can be mapped on this type of diagram. In this representation, the evaluations are classed as ‘worse than’ (red), ‘about the same’ (orange), and ‘better than’ (green) compared with what the technology is replacing. It shows two examples of this. The first examines the QB House technol- ogy, described earlier. This shows that QB House has two advantages over conventional haircutting – it is (usually) faster and it is cheaper. However, there are fewer locations (‘where can it be done?’), and the waiting time may be marginally less reliable. On all other criteria, it performs at more or less the same level as conventional hairdressers.

The second example shows the evaluation of a 3D printer to be used to produce prototype designs of biodegradable semi-rigid plastic packaging moulds. The performance of the proposed 3D printer is compared with the current method of producing the moulds using conventional machining techniques. It indicates that the new 3D tech- nology would be superior in almost all respects, particularly in terms of its speed, flexibility, range, sustainability (because it wastes far less material), and its ability to connect with other technologies (particu- larly, in this case, the design system). However, this connectivity would make it less difficult to steal and replicate designs.

Figure 8.6 Assessing the impact of a processing technology on operations performance

3D printer

QB hair

What it can do? How well can it do it? (quality)

How flexibly (response) can

it do it?

How fast can it do it? (speed)

How reliably can it do it?

(dependability)

How sustainably can it do it?

What range of things can it do?

How safely can it do it?

Where can it be done?

How cheaply can it do it?

How connectedly can it do it?

How securely can it do it?

Superior to existing technology

About the same as existing technology

Worse than existing technology

Operations principle Process technology needs to be evaluated on a range of criteria that include its impact on the performance of the operation in which the technology will be used.

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Does the technology give an acceptable financial return? Assessing the financial value of investing in process technology is in itself a specialized subject. 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.8 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

(1.10) = €909.10

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

(1.10) *

1 (1.10)

= €1,000 * 1

(1.10)2 = €826.50

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:

3*4 x (1 + r/100)

n

Worked example

A warehouse stores and distributes spare parts. It is considering investing in a new ‘retrieval and packing’ system which converts sales orders into ‘retrieval lists’ and uses materials-handling equipment to automatically pick up the goods from its shelves and bring them to the packing area. 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.

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:

The total cash flow (sum of all the cash flows) = €1.38 million

However, the 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 any alternative, tables

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

P = DF * FV

▼

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CHAPTER 8 PROCESS TECHNOLOGY 263

where DF = the discount factor from Table 8.3 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.

Year 0 1 2 3 4 5 6 7

Cash flow (€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

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

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

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

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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 8.3), 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, the new system will cover its costs, and will be (just) profitable for the clinic.

Year Cash flow 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.

O P E R AT I O N S I N P R AC T I C E

Fintech is the term that commentators in the financial service sector use to refer to innovation in all types of finan- cial services. As Carolyn Wilkins, Senior Deputy Governor of the Bank of Canada announced, ‘It is no exaggeration to say that we are in the midst of a defining moment for innovation in financial services. Some expect that new technology will cause a complete disruption of traditional financial institutions, giving businesses and households access to more convenient and customized services. Entrepreneurs are also finding applications well beyond finance, and these new technologies could transform other fields, such as humanitarian aid.’ Yet, arguably, what is more surprising is that this type of process technology was not embraced faster by the financial services industry. As one commentator put it, ‘After all, money is mostly repre- sented as an entry on a computer. It can be moved rapidly

from one account to another with virtually no cost.’ Moreover, finance firms as a whole spend more on IT, as a proportion of their revenues, than any other sector. ▼

Legacy versus fintech in financial services9

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CHAPTER 8 PROCESS TECHNOLOGY 265

Three issues have (at the time of writing) inhibited the adoption of new fintech process technologies. And they all could apply to any ‘disruptive’ and industry-wide process technologies. The first is the traditional structure of the industry. According to Andrew Haldane, the Bank of England’s chief economist, the international payments system still looks like a ‘spaghetti junction’, with money passing through several hands on the way from payer to recipient. Nor is it necessarily in the existing firm’s interests to change the system. Each year huge revenues are earned by processing payments (around $1.7 trillion). The second reason is ‘legacy’. IT systems in banks have grown for the most part incrementally, with updates and modifications over the years often ‘patched’ onto existing systems until

a large part of firms’ annual technology budget is consumed by maintaining, rather than re-designing, exist- ing systems. The third issue is risk. Understandably, financial services firms are very much concerned with the reliability of any new technology, and new technologies are often unproven. A good example is distributed ledger technology (DLT) – the ‘blockchain’ technology behind the Bitcoin, the digital currency. Although many technology experts regarded a distributed ledger as being more secure (any hacker would have to crack several sites rather than a single, central register), doubts were expressed over the technology’s ability to cope with the hundreds of thou- sands of transactions every second that the financial system needed to process.

How are new process technologies developed and implemented? Developing and 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 con- text dependent. That is, the way one implements any technology will very much depend on its the specific nature, the changes implied by the technology and the organizational 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 roadmapping. 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 originally developed the approach in the 1970s so that it could support the development of its products and their support- ing 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 knowledge and imagination of the brightest drivers of change in that field’. A TRM is essentially a process that supports tech- nology development by facilitating collaboration between the various activities that contribute to technology strategy. It allows technology managers to define their firm’s technological evolu- tion 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  8.7 shows the generic form of technology

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266 PART TWO DESIGNING THE OPERATION

O P E R AT I O N S I N P R AC T I C E

It was intended to be an investment in a ‘trans- forming technology’. When UK Mail unveiled its £20 million investment in its new fully-automated sorting facility in Coventry in the Midlands of the UK, it expected that it would give it an edge over its competitors. Guy Buswell, the Chief Executive of UK Mail, said that the new hub would play a crucial role in the company’s network. Aided by its new technology, the company, which competes with Royal Mail for parcel delivery business, had been expected to make healthy pre-tax profits. But that was before the new technology was brought into operation. In practice, the new state- of-the-art sorting equipment struggled to cope with the volume of ‘irregular-shaped parcels’ it was expected to process. This resulted in the operation having to divert a larger than expected proportion of its sorting to a manual process, which incurred extra operating costs. The setback was ‘clearly very disappointing’, admitted

Guy Buswell, when the company announced its second profit warning in four months. The problems also hit the company’s share price. The following year UK Mail announced that it would be acquired by Deutsche Post DHL Group.

‘Wrong-shaped’ parcels post a problem for UK Mail10

roadmaps, while Figure 8.8 shows an example of a technology road map for the development of products/services, technologies and processes for a facilities management service.

The benefits of TRM are mainly associated with the way they bring together the significant stake- holders involved in technology strategy and various (and often differing) perspectives they have. The

Figure 8.7 The generic form of technology roadmaps (TRMs)

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

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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 out tech- nology? 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 technolog- ical 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 opera- tion. 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 analysing change and learning from mistakes. Those implementa- tions which involve relatively little process or resource ‘distance’ provide an ideal opportunity for organizational learning. As in any classic scientific 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’ means that nearly everything is ‘up for grabs’, it becomes difficult to know what has worked and what

Figure 8.8 Simplified example of a technology roadmap for the development of products/services, technologies and processes for a facilities management service

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

Operations principle The difficulty of process technology implementation depends on its degree of novelty and the changes required in the operation’s processes.

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268 PART TWO DESIGNING THE OPERATION

has not. More importantly, it becomes difficult to know why something has or has not worked.11 This idea is illustrated in Figure 8.9.

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 interac- tion with technology, the limitations of their understanding of the technology can be the main constraint on its use. For example, even some domestic technologies such as smart TVs cannot be used to their full potential by some 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 are given control of the technology they operate. Service operations may not have the same opportunity for customer training.

Walley and Amin12 suggest that the ability of the operation 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’ maybe needed: for example, the technol- ogies 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 perfor- mance 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

Figure 8.9 Learning potential depends on both technological resource and process ‘distance’

Resource distance

Technological pioneer

Process pioneer

P ro

ce ss

d is

ta n ce

Potential for learning is limited – too many

things change

Potential for learning is

relatively high

Technological development

Process development

Technological extension

Process extension

Technological modification

Process modification

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O P E R AT I O N S I N P R AC T I C E

It is not a big problem (at least not at the moment), but it could become one as robot technologies start to mix directly with customers. Robots can be dangerous, and not just in a highly automated factory environment. (But factory robots can be dangerous. In 2015 a factory worker at a Volkswagen factory was picked up and killed by a robot. He was installing it when he was lifted up by the robotic arm and crushed against a metal plate, suffering fatal chest injuries.) It is the intro- duction of robotic technologies into the customer environment that could give rise to new areas of reputational risk for companies. For example, in 2016, a robot that was intended to guard against shoplift- ers accidentally ran over a 16-month-old boy at a shopping centre in Palo Alto, California – ironically, a town famous for high-tech industries. The 130 kg robot, which looks like R2-D2 from Star Wars, apparently did not sense that the child had fallen in its path and failed to stop before they collided. According to the boy’s mother, ‘The robot hit my son’s head and he fell down — facing down — on the floor, and the robot did not stop and it kept moving forward.’

It is an issue that was causing concern (or discussion) decades ago, before robots existed. The author and vision- ary Isaac Asimov devised his Three Laws of Robotics to protect humans.

1 Don’t hurt a human being, or through inaction, allow a human being to be hurt.

2 A robot must obey the orders a human gives it unless those orders would result in a human being harmed.

3 A robot must protect its own existence as long as it does not conflict with the first two laws.

The robot’s makers, Knightscope, said the incident was ‘absolutely horrifying’ and that the company would apol- ogize directly to the family. It also pointed out that its fleet of similar robots had covered 25,000 miles on patrol duty and there had never been an incident like this before. Nevertheless, the Shopping Centre said it would temporar- ily take the robot out of service.

Other problems that have been raised by companies fearing legal liability and reputational risk include domes- tic devices like robot vacuum cleaners hurting pets or humans. A South Korean woman was sleeping on the floor when her robot vacuum ‘ate’ her hair. Also some ‘auto- mated’ services could lead to customers confusing what’s real and what isn’t, resulting in customers revealing more than they intended. For example, ‘Invisible Boyfriend’ is a service that, for a monthly fee, sends ‘pretend’ romantic texts and voicemails to your phone – but not all customers realize it is not fully automated, and that there are human operators involved.

Rampaging robots13

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. If, during the early adoption of a technology, there is some accident involving people, the resulting publicity can increase ‘customer’ resistance. For example, see the ‘Operations in practice’ case, ‘Rampaging robots’.

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

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270 PART TWO DESIGNING THE OPERATION

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 notoriously 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 empiri- cally 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 Massachusetts Institute of Technology14 argues that adjust- ment ‘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 8.10 is an example of what Chew calls a Murphy curve. It shows a typical pattern of performance reduction (in this case, quality) as a new process technology is introduced. It is recognized that implementation may take some time; therefore allowances are made for the length and cost of a ‘ramp-up’ period. However, as the operation prepares for the implemen- tation, the distraction causes performance actually to deteriorate. Even after the start of the implementation this downward trend continues and it is only weeks, indeed maybe months, later that the old performance level is reached. The area of the dip indicates the magnitude of the adjustment costs, and therefore the level of vulnerability faced by the operation.

Figure 8.10 The reduction in performance during and after the implementation of a new process reflects ‘adjustment costs’

Time

Actual performance

Forecast performance

Planned performance

O p

er at

io n s

p er

fo rm

an ce

(q u al

ity le

ve ls

)

Start of implementation

New technology planned to be

on-stream

Planned implementation

period

Summary answers to key questions

What is process technology and why is it getting more important?

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

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▶ Most new process technologies have a greater capability than what they are replacing, and many new technologies can be applied in all types of operation.

▶ One common method of distinguishing between different types of process technology is by what the technology actually processes – materials, information or customers.

How can one understand the potential of new process technology?

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

▶ It can be difficult to separate the reality of a new technology from the publicity and speculation that surrounds it. The ‘Gartner hype cycle’ attempts to illustrate this using five sequential stages.

▶ An understanding of a technology calls for a knowledge of its ‘primary capability’. That is, what is it better at than the technology it replaces : for example, its ability to think, or reason, see or sense, communicate or connect, move physical objects, or process materials.

How can new process technologies be evaluated?

▶ All technologies should be appropriate for the volume–variety characteristics of the task for which they are intended.

▶ All technologies should be evaluated by assessing the impact that the process technology will have on the operation’s performance objectives (quality, speed, dependability, flexibility and cost) and other operational factors.

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

How are new process technologies developed and implemented?

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

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

▶ The resource and process ‘distance’ implied by the technology implementation will indicate the degree of difficulty.

▶ Customer acceptability may be a barrier to implementation in customer-processing technologies. ▶ It is necessary to allow for the adjustment costs of implementation.

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C A S E ST U DY

Marketing Manager, who had been with the firm since its beginning, together with the Production Manager and the Accountant, both of whom had joined the company only six months before.

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

The Marketing Manager The current market for this type of preservative had reached a size of some £5 million, of which Rochem Ltd supplied approximately 48 per cent. There had, of late, been significant changes in the market – in particular, many of the users of preservatives were now able to buy products similar to

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

The Management Committee looked abashed. Rochem Ltd was one of the largest independent companies supplying the food-processing industry. Its initial success had come with a food preservative used mainly for meat-based products and marketed under the name of ‘Lerentyl’. Other products were subsequently developed in the food colouring and food container coating fields, so that now Lerentyl accounted for only 25 per cent of total company sales, which were now slightly over £10 million.

The decision The problem over which there was such controversy related to the replacement of one of the process units used to manufac- ture Lerentyl. Only two such units were used ; both were ‘Chemling’ machines. It was the older of the two Chemling units which was giving trouble. High breakdown figures, with erratic quality levels, meant that output level requirements were only just being reached. The problem was : should the company replace the ageing Chemling with a new Chemling, or should it buy the only other plant on the market capable of the required process, the ‘AFU’ unit? The Chief Chemist’s staff had drawn up a comparison of the two units, shown in Table 8.4.

The body considering the problem was the newly formed Management Committee. The committee consisted of the four senior managers in the firm: the Chief Chemist and the

Rochem Ltd

CHEMLING AFU

Capital cost £590,000 £880,000

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

Variable: £750/kg Variable: £600/kg

Design 105 kg/month 140 kg/month

Capacity 98 { 0.7% purity 99.5 { 0.2% purity

Quality Manual testing Automatic testing

Maintenance Adequate but needs servicing Not known – probably good

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

Delivery Three months Immediate

Table 8.4 A comparison of the two alternative machines

272 PART TWO DESIGNING THE OPERATION

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Lerentyl. The result had been the evolution of a much more price-sensitive market than had previously been the case. Further market projections were somewhat uncertain. It was clear that the total market would not shrink (in volume terms) and best estimates suggested a market of perhaps £6 million within the next three or four years (at current prices). However, there were some people in the industry who believed that the present market only represented the tip of the iceberg.

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

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

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

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

The Production Manager The Lerentyl Department was virtually self-contained as a production unit. In fact, it was physically separate, located in a building a few yards detached from the rest of the plant. Production requirements for Lerentyl were currently at a

steady rate of 190 kg per month. The six technicians who staffed the machines were the only technicians in Rochem who did all their own minor repairs and full quality control. The reason for this was largely historical since, when the firm started, the product was experimental and qualified techni- cians were needed to operate the plant. Four of the six had been with the firm almost from its beginning.

‘It’s all right for Dave and Eric (Marketing Manager and Chief Chemist) to talk about a big expansion of Lerentyl sales; they don’t have to cope with all the problems if it doesn’t happen. The fixed costs of the AFU unit are nearly three times those of the Chemling. Just think what that will do to my budget at low volumes of output. As I understand it, there is absolutely no evidence to show a large upswing in Lerentyl. No, the whole idea (of the AFU plant) is just too risky. Not only is there the risk. I don’t think it is generally understood what the consequences of the AFU would mean. We would need twice the variety of spares for a start. But what really worries me is the staff’s reaction. As fully qualified technicians they regard themselves as the elite of the firm; so they should, they are paid practically the same as I am! If we get the AFU plant, all their most interesting work, like the testing and the maintenance, will disappear or be greatly reduced. They will finish up as highly paid process workers.’

The Accountant The company had financed nearly all its recent capital invest- ment from its own retained profits, but would be taking out short-term loans the following year for the first time for several years.

‘At the moment, I don’t think it wise to invest extra capi- tal we can’t afford in an attempt to give us extra capacity we don’t need. This year will be an expensive one for the company. We are already committed to considerably increased expenditure on promotion of our other products and capital investment in other parts of the firm, and Dr Rhodes is not in favour of excessive funding from outside the firm. I accept that there might eventually be an upsurge in Lerentyl demand but, if it does come, it probably won’t be this year and it will be far bigger than the AFU can cope with anyway, so we might as well have three Chemling plants at that time.’

QUESTIONS 1 How do the two alternative process technologies

(Chemling and AFU) differ in terms of their scale and automation? What are the implications of this for Rochem?

2 Remind yourself of the distinction between feasibility, acceptability and vulnerability discussed in Chapter 4. Evaluate both technologies using these criteria.

3 What would you recommend the company should do?

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274 PART TWO DESIGNING THE OPERATION

Problems and applications

1 It is a new job, as yet without a formal title, but one commentator has called it being a ‘robot wran- gler’. They even proposed a possible job advert: ‘Wranglers wanted for growing fleets of robots. Your responsibilities will include evaluating robot performance, providing real-time analysis and support for problems. You must be analytical, detail-oriented, friendly – and ready to walk. No advanced degree required.’ Elisabeth Reynolds at the Massachusetts Institute of Technology also sees a future for people overseeing robots. ‘We use that term “autonomous” a lot when we think about robots, but in fact very few robots are purely autonomous,’ she says. Actual job adverts for this type of job use terms like technicians, monitors, handlers and operations specialists. Journalists have described the role as anything from robot chauffeurs to robot babysitters. Why would such a job be necessary? Isn’t the role of new technologies to replace humans?

2 Modern aircraft fly on automatic pilot for most of their time. Most people are blissfully unaware that when an aircraft lands in mist or fog, it is a computer that is landing it. When auto pilots can do something better than a human pilot, it makes sense to use auto pilots. They can take control of the plane during the long and (for the pilot) monotonous part of the flight between take-off and land- ing. They can also make landings, especially when visibility is poor because of fog or light conditions. In fact, automatic landings when visibility is poor are safer than when the pilot is in control. 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. As yet, commercial flights do not take off automatically, mainly because it would require airports and airlines to invest in extra guid- ance equipment which would be expensive to develop and install. Also, take-off is technically more complex than landing. Yet some in the airline industry believe that technology could be developed to the point where commercial flights can do without a pilot on the aircraft entirely. If it was devel- oped, what would be the problems and benefits associated with introducing this type of technology?

3 The ‘robot milkmaid’ can milk between 60 and 100 cows a day. Computer-controlled gates activated by transmitters around the cows’ necks allow the cows to enter. The machine then checks their health, connects them to the milking machine and feeds them while they are being milked. If illness is detected in any cow, or if the machine for some reason fails to connect the milking cups to the cow after five attempts, automatic gates divert it into special pens where the farmer can inspect it later. Finally, the machine ushers the cows out of the system. It also self-cleans periodically and can detect and reject any impure milk. Rather than herding all the cows in a ‘batch’ to the milking machine twice a day, the system relies on the cows being able to find their own way to the machine. Once they have been shown the way to the machine a few times, they go there of their own volition. The cows may make the journey to the machine three or more times per day. (a) What advantages do you think this technology gives? (b) Do you think the cows mind? (c) There is some anecdotal evidence that farmers still go to watch the process. Why do you think this is?

4 The International Frozen Pizza Company (IFPC) operates in three markets globally. Market 1 is its largest market where it sells 25,000 tons of pizza per year. In this market, it trades under the name ‘Aunt Bridget’s Pizza’ and positions itself as making pizza ‘just as your aunt Bridget used to make’ (apparently, she was good at it). It is also known for innovation, introducing new and seasonal pizza toppings on a regular basis. Typically, it would be selling around 20 varieties of pizza at any one time. Market 2 was smaller, selling around 20,000 tons per year under its ‘Poppet’s Pizza’ brand. Although less innovative than Market 1, it still sells around 12 varieties of pizza. Market 3 is the smallest of the three, selling 10,000 tons per year of relatively high-quality pizzas under its ‘Deluxe Pizza’ brand. Like Aunt Bridget’s Pizza, Deluxe Pizza also sells a relatively wide product range for the size of its market. Currently, both markets 1 and 3 produce their products using relatively little process automation and rely on high numbers of people, to assemble their products. Market 2 had always been keen to adopt more automated technology and uses a mixture of

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automated assembly and manual assembly. Now the management in Market 2 has developed an almost fully automated pizza assembly system (APAS). They claim that the APAS could reduce costs significantly and should be adopted by the other markets. Both Markets 1 and 3 are sceptical. ‘It may be cheaper, but it can’t cope with a high variety of products’ was their response. Use the volume–variety characteristics of the markets to explain the proposal by the management of Market 2.

5 Process technology can impact all of the operations performance objectives (quality, speed, depend- ability, flexibility and cost). Think through, and identify, how process technology could affect these performance objectives in the airline industry.

6 There have been a number of changes in medical process technology that have 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 infor- mation to healthcare professionals located anywhere in the world. Medical staff are alerted to changing conditions as they occur, and provided with a status report of a person’s health so that the appropriate care can be administered. Telemedicine generally refers to the use of communi- cations and information technologies for the delivery of clinical care. Formally, telemedicine is the ability to provide interactive healthcare utilizing modern technology and telecommunica- tions. It allows patients to virtually ‘visit’ with physicians, sometimes live using video links, sometimes automatically in the case of an emergency, sometimes where patient data are stored and sent to physicians for diagnosis and follow-up treatment at a later time. What do you think are the implications of telemedicine of how healthcare operations can be managed?

Selected further reading

Arthur, W.B. (2010) The Nature of Technology: What It Is and How It Evolves, Penguin, Harmondsworth. Popular science in a way, but very interesting on how technologies evolve.

Brain (2001) ‘How Stuff Works’, Wiley, New York. Exactly what it says. A lot of the ‘stuff’ is product technology, but the book also explains many process tech- nologies in a clear and concise manner without sacrificing relevant detail.

Brynjolfsson, E. and Mcafee, A. (2014) The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies, W.W. Norton, New York. This is one of the most influential recent books on how technology will change our lives.

Carr, N.G. (2000) Hypermediation : ‘Commerce and Clickstream’, Harvard Business Review, January–February. Written in the height of the Internet boom, it gives a flavour of how Internet technologies were seen.

Chew, W.B., Leonard-Barton, D. and Bohn, R.E. (1991) Beating Murphy’s Law, Sloan Management Review, vol. 5, Spring. One of the few articles that treats the issue of why everything seems to go wrong when any new technology is introduced. Insightful.

Christensen, C.M. (2016) The Innovator’s Dilemma : When New Technologies Cause Great Firms to Fail, Harvard Business Review Press, Harvard, MA. The latest published version of a classic.

Tapscott, D. and Tapscott, A. (2016) Blockchain Revolution: How the Technology Behind Bitcoin and Other Cryptocurrencies is Changing the World, Portfolio Penguin, London. A readable book outlining the uses and implications of Blockchain, but broad and generic rather than detailed.

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276

INTRODUCTION

Operations management is often presented as a subject, the main focus of which is on technology, systems, procedures and facilities – in other words, the non-human parts of the organization. This is not true, of course. On the contrary, the manner in which an organization’s human resources are managed has a profound impact on the effectiveness of its operations function. In this chapter we look especially at the elements of human resource management which are traditionally seen as being directly within the sphere of operations management. These are how operations managers contribute to human resource strategy, organization design, job design, and the allocation of ‘work times’ to operations activities. The more detailed (and traditional) aspects of these last two elements are discussed further in the supplement on work study at the end of this chapter. Figure 9.1 shows how this chapter fits into the overall model of operations activities.

People in operations9

KEY QUESTIONS

Why are people issues so important in operations management?

How can the operations function be organized?

How do we go about designing jobs?

How are work times allocated?

Figure 9.1 This chapter examines people in operations

Operations management

Direct

Design Develop

Deliver

Design

Layout and flow

Process design

Process technology

People in operations

Topic covered in this chapter

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Why are people so important in operations management? To say that an organization’s human resources are its greatest asset is something of a cliché. Yet it is worth reminding ourselves of the importance of the abilities, attitudes and culture of the people who make up the operations function. It is, after all, where most ‘human resources’ are to be found. It follows that it is operations managers who are most involved in the leadership, development and organization of human resources. In this chapter we examine some of the issues that most directly affect, or are affected by, operations management; these are illustrated in Figure  9.2 . But the influence of operations management on the organization’s staff is not limited to the topics that are covered in this chapter. Almost everything discussed in this book has a ‘people’ dimension. Yet, in some chapters, the human perspective is particularly important. In addition to this chapter, Chapters  16 and 17 , for example, are concerned largely with how the contribution of the operation’s staff can be harnessed. In essence the issues covered in this chapter define how people go about their working lives. It posi- tions their expectations of what is required of them, and it influences their perceptions of how they contribute to the organization. It defines their activities in relation to their work colleagues and it channels the flows of communication between different parts of the operation. But, of most importance, it helps to develop the culture of the organization – its shared values, beliefs and assumptions.

Operations culture What do we mean by culture in the context of the operations function? There is a wealth of aca- demic or popular literature that treats the concept of organizational culture, but no single authori- tative definition has emerged. Nevertheless, most of us know roughly what is meant by ‘culture’ in an organization. It is what it feels like to be part of it. What is assumed about how things get done rather than what is necessarily formally articulated. It is, in the words of one well-known writer on the subject, ‘the way we do things around here’ or ‘the organization’s climate’. 1 But the idea of ‘organizational’ culture can also apply to a single function like the operations function. In fact, there is considerable interest amongst researchers and practitioners in overcoming the cultural differences between different functions that can sometimes lead to what has been called ‘cultural fragmenta- tion’. Even though there may be elements of an organization’s culture that are shared across all parts of the enterprise, different functions are very likely to have their own subcultures.

Believe, know and behave Culture is difficult to explain. As was said of one organization with a particularly strong culture (a university as it happens), ‘ From the outside looking in, you can’t understand it. From the inside looking out, you can’t explain it.’ As far as the operations function is concerned, it is best summed up by what the operations team believes, what they know and how they behave. It is these three

Figure 9.2 People in operations

Operations principle Human resources aspects are especially important in the operations function, where most ‘human resources’ are to be found.

Understand how operations can be

organized

People in operations

Design individuals’ and groups’ jobs

Design the working

environment

Allocate work times

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278 PART TWO DESIGNING THE OPERATION

O P E R AT I O N S I N P R AC T I C E

Most famous for its high-performance fabrics such as Gore-Tex, W. L. Gore also has an enviable reputation as being one of the best companies to work for wherever it operates. In a recent ‘Best Companies to work for’ list its associates (the company does not use the term ‘employees’) gave it the very top marks for ‘feeling you can make a difference’. More than half of its staff have been with the firm for at least a decade, a consequence of its philosophy (‘to make money and have fun’), and its unique organizational culture and job design practices. Few in the company have any formal job titles, or job descriptions. There are no managers, only leaders and associates, people are paid ‘according to their contribution’ and staff help to determine each other’s pay. These ideas seem revolutionary yet are based on the company’s founding principles from over 50 years ago. Started by Bill and Vieve Gore in the basement of their home in Delaware, it has now become a global busi- ness with facilities in more than 45 locations around the world. Its skilled staff develop, manufacture and sell a range of innovative products, virtually all of which are based on just one material (expanded polytetrafluoro- ethylene) which was discovered by Bob Gore (the founders’ son), in 1969. It now has approximately 8,000 associates in its four main divisions (textiles, electronic, medical and industrial products) and annual revenues of over $2 billion. Gore’s approach to how it works with its staff is at the heart of the company’s success. On almost every level Gore is different to other global companies. Associates are hired for general work areas rather than specific jobs, and with the guidance of their ‘sponsors’ (not bosses) and as they develop experience, they commit to projects that match their skills. Teams organize around opportunities as they arise with associ- ates committing to the projects that they have chosen to work on, rather than having tasks delegated to them. Project teams are small, focused, multi-disciplined, and foster strong relationships between team members. Personal initiative is encouraged, as is ‘hands-on’ innova- tion, which involves those closest to a project in its decision making. There are, says Gore, no traditional organizational charts, no chains of command, no predetermined channels of communication. Instead, team members communicate directly with each other and are accountable to the other members of their team.

Groups are led by whoever is the most appropriate person at each stage of a project. Leaders are not appointed by senior management; they ‘emerge’ naturally by demon- strating special knowledge, skill or experience that advances a business objective. Everyone’s performance is assessed using a peer-level rating system. Even the Group’s CEO (one of the few people with a title), Terri Kelly, ‘emerged’ in this way. When the previous CEO retired, no shortlist of preferred candidates was inter- viewed ; instead, along with board discussions, a wide range of associates were invited to nominate people they would be willing to follow. ‘We weren’t given a list of names – we were free to choose anyone in the company,’ she says. ‘To my surprise, it was me.’

The explicit aim of the company’s culture is to ‘combine freedom with cooperation and autonomy with synergy’. Everyone can earn the credibility to define and drive projects. Sponsors help associates chart a course in the organization that will offer personal fulfilment while maximizing their

W. L. Gore2

▼

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elements of operations culture, belief, knowledge and behaviour, which provide the foundations for how it contributes to the business and how capable it is to improve over time.3

▶ What operations believe – By ‘operations belief’, we mean what the people within the operations function accept as self-evident. For example, do operations believe that they have a responsibility to fully understand all other functions’ strategies and their implications for operations? Do they develop capabilities within their operations resources and processes that offer a unique and long-lasting strategic advantage?

▶ What operations should know – What should the operations team know? Obviously, they should understand the underlying principles that govern how operations and processes work. Only with a thorough understanding of the objectives, concepts, tools and techniques of operations manage- ment will the operations function ever contribute fully to the success of any business.

▶ How operations should behave – The way operations managers should behave is not fundamen- tally different from any effective manager. The popular and academic literature has for decades been full of ‘key behaviours’ for effective leadership, and they don’t seem to have changed much for years. ‘Don’t micromanage your team, empower them while still being available for advice.’ ‘Be a coach to your team.’ ‘Be clear and results-oriented, but help the team to see how they can achieve them.’ ‘Have a clear vision and strategy.’ ‘Always communicate, both ways – and listen to your team.’ ‘Support open discussion and listen to the team’s concerns.’ All of these might obvious, but they make good managerial sense.

How can the operations function be organized? There are two issues here. The first is ‘how should the total set of processes and resources that produce products and services be organized?’ The second is ‘how should operations managers, who make the decisions about operations, position themselves relative to the rest of the operations func- tion’? We will look at the first issue by examining some common forms of organizational structures,

contribution to the enterprise. Associates adhere to four basic guiding principles, originally expressed by Bill Gore:

▶ Fairness to each other and everyone with whom we come in contact.

▶ Freedom to encourage, help, and allow other associates to grow in knowledge, skill, and scope of responsibility.

▶ The ability to make one’s own commitments and keep them.

▶ Consultation with other associates before undertaking actions that could impact the reputation of the company.

This degree of personal commitment and control by asso- ciates would not sit happily with a large ‘corporate’ style organization. It is no surprise, then, that Gore has unusual notions of economies of scale. Bill Gore believed in the need ’to divide so that you can multiply’. So when units grow to around 200 people, they are usually split up, with these small facilities organized in clusters or campuses. Ideally a dozen or so sites are close enough to permit good communication and knowledge exchange, but can still be intimate yet separate enough to promote a feeling of ownership. Bill Gore also believed that people come to

work to be innovative and had a desire to invent great products. This, he said, ‘would be the glue holding the company together’, rather than the official procedures other companies rely on. And at Gore’s Livingstone plant in Scotland the story of ‘the breathable bagpipes’ is used to illustrate this type of creative innovation generated from the company’s culture of trust that allows people to follow their passion. The story goes that an associate who worked in Gore’s filter bags department at Livingstone was also a keen exponent of his national instrument – the bagpipes. By day he’d be working on filter systems, in the evening he’d play his bagpipes. It occurred to him that the physical properties of the product he was putting together during the day could make a synthetic bag for the pipes he played in the evening. Traditionally, bagpipes have a bag made from sheepskin or cow leather which fills up with moisture and becomes a smelly health hazard. He recognized that if you added Gore-Tex, it would be breathable and it would be dry. He put a proto- type together, tried it, and it worked. So he decided to spend time developing it, created a team to develop it further, and now almost all Scottish bagpipes have a Gore- Tex bag in them.

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and the second by examining the role of operations ‘decision making’. First, though, it is worth looking at how ‘organizations’ can be described.

Perspectives on organizations4 How we illustrate organizations says much about our underlying assumptions of what an ‘organization’ is and how it is supposed to work. For example, the illustration of an organization as a conventional ‘organogram’ implies that organizations are neat and controllable with unambiguous lines of account-

ability. But this is rarely the case. In fact, taking such a mechanistic view may be neither appropriate, nor desirable. Seeing an organi- zation as though it was unambiguously machine-like is just one of several metaphors commonly used to understand organizations. One well-known analysis by Gareth Morgan proposes a number of ‘images’ or ‘metaphors’ which can be used to understand organiza- tions, as follows.

▶ Organizations are machines – The resources within organizations can be seen as ‘components’ in a mechanism whose purpose is clearly understood. Relations within the organization are clearly defined and orderly, processes and procedures that should occur usually do occur, and the flow of information through the organization is predictable. Such mechanical metaphors appear to impose clarity on what is actually messy organizational behaviour. But, where it is important to impose clarity (as in much operations analysis), such a metaphor can be useful, and is the basis of the ‘process approach’ used in this and similar books.

▶ Organizations are organisms – Organizations are living entities. Their behaviour is dictated by the behaviour of the individual humans within them. Individuals, and their organizations, adapt to circumstances just as different species adapt to the environment. This is a particularly useful way of looking at organizations if parts of the environment (such as the needs of the market) change radically. The survival of the organization depends on its ability to exhibit enough flexibility to respond to its environment.

▶ Organizations are brains – Like brains, organizations process information and make decisions. They balance conflicting criteria, weigh up risks and decide when an outcome is acceptable. They are also capable of learning, changing their model of the world in the light of experience. This emphasis on decision making, accumulating experience and learning from that experience is impor- tant in understanding organizations. They consist of conflicting groups where power and control are key issues.

▶ Organizations are cultures – An organization’s culture is usually taken to mean its shared values, ideology, pattern of thinking and day-to-day ritual. Different organizations will have different cultures stemming from their circumstances and their history. A major strength of seeing organi- zations as cultures is that it draws attention to their shared ‘enactment of reality’. Looking for the symbols and shared realities within an organization allows us to see beyond what the organization says about itself.

▶ Organizations are political systems – Organizations, like communities, are governed. The system of government is rarely democratic, but nor is it usually a dictatorship. Within the mechanisms of government in an organization are usually ways of understanding alternative philosophies, ways of seeking consensus (or at least reconciliation) and sometimes ways of legitimizing opposition. Individuals and groups seek to pursue their aims through the detailed politics of the organization. They form alliances, accommodate power relationships and manage conflict. Such a view is useful in helping organizations to legitimize politics as an inevitable aspect of organizational life.

Forms of organization structure There are many different ways of defining ‘organization structure’; here it is seen as the way in which tasks and responsibilities are divided into distinct groupings, and how the responsibility and coordi- nation relationships between the groupings are defined. Most organization designs attempt to divide an organization into discrete parts that are given some degree of authority to make decisions within

Operations principle There are many valid approaches to describing organizations. The process perspective is a particularly valuable one.

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their part of the organization. All but the very smallest of organizations need to delegate decision making in this way; it allows specialization so decisions can be taken by the most appropriate people. The main issue is what dimension of specialization should be used when grouping parts of the organ- ization together. There are three basic approaches to this:

▶ Group resources together according to their functional purpose – so, for example, sales, marketing, operations, research and development, finance, etc.

▶ Group resources together by the characteristics of the resources themselves – this may be done, for example, by clustering similar technologies together (extrusion technology, rolling, casting, etc.). Alternatively, it may be done by clustering similar skills together (audit, mergers and acquisitions, tax, etc.). It may also be done according to the resources required for particular products or services (chilled food, frozen food, canned food, etc.).

▶ Group resources together by the markets which the resources are intended to serve – again this may be done in various ways. Markets may be defined by location, with distinct geographical boundaries (North America, South America, Europe and Middle East, South East Asia, etc.). Alternatively, markets may be defined by the type of customer (small firms, large national firms, large multinational firms, etc.).

There are an almost infinite number of possible organizational structures. However, some pure types of organization have emerged that are useful in illustrating different approaches to organizational design, even if, in their pure form, they are rarely found.

▶ The U-form organization – The unitary form, or U-form, organization clusters its resources primarily by their functional purpose. Figure 9.3(a) shows a typical U-form organization with a pyramid management structure, each level reporting to the managerial level above. Such structures can emphasize process efficiency above customer service and the ability to adapt to changing markets. But the U-form keeps together expertise and can promote the creation and sharing of technical knowledge. The problem then with the U-form organization is not so much the develop- ment of capabilities, but the flexibility of their deployment.

▶ The M-form organization – This form of organizational structure emerged because the functionally based structure of the U-form was cumbersome when companies became large, often with complex markets. It groups together either the resources needed for each product or service group, or alter- natively, those needed to serve a particular geographical market, in separate divisions. The separate functions may be distributed throughout the different divisions (see Figure 9.3(b)), which can reduce economies of scale and operating efficiency. But it does allow each individual division to focus on the specific needs of its markets.

▶ Matrix forms – Matrix structures are a hybrid, usually combining the M-form with the U-form. In effect, the organization has simultaneously two different structures (see Figure 9.3(c)). In a matrix structure each resource cluster has at least two lines of authority, for example both to the division and to the functional groups. While a matrix organization ensures the representation of all interests within the company, it can be complex and sometimes confusing.

▶ The N-form organization – The ‘N’ in N-form stands for ‘network’. In N-form organizations, resources are clustered into groups as in other organizational forms, but with more delegation of responsibility for the strategic management of those resources. N-forms have relatively little hierar- chical reporting and control. Each cluster of resources is linked to the others to form a network, with the relative strength of the relationships between clusters changing over time, depending on circum- stances (see Figure 9.3(d)). Senior management set broad goals and attempt to develop a unifying culture but do not ‘command and control’ to the same extent as in other organization forms.

Operations ‘developers’ – ‘staff’ and ‘line’ roles Traditionally, it was common to distinguish between two types of role in organizations. People occu- pying classic ‘staff’ positions had a monitoring, planning, shaping and ‘developing’ role. They are the ones who are charged with building up the company’s operations strategic capability. It is a task that needs some organizational ‘space’ to be performed effectively. It is certainly not a task that coexists

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Figure 9.3 (a) U-form organizations give prominence to functional grouping of resources. (b) The M-form separates the organization’s resources into separate divisions. (c) Matrix form structures the organization’s resources so that they have two (or more) levels of responsibility. (d) N-form organizations form loose networks internally between groups of resources and externally with other organizations

(a) (b)

(c) (d)

Group headquarters

Group headquarters

Group headquarters

Org. A headquarters

Org. D

Group A

Group B

Group C Group D

Group E

Group F

Org. B

Org. C

Division A

Division B

Division C

Division A

Division B

Division C

Marketing Operations

Dept A

Dept B

Dept C

Dept A

Dept B

Dept C

Dept A

Dept B

Dept C

Finance

Marketing MarketingMarketing

Marketing

Operations

Operations

Operations OperationsFinanceFinance

Finance

Finance

easily with the hectic and immediate concerns of running an operation on a day-to-day basis. These people constitute what could be termed the ‘operations developers’ or ‘central operations’. They perform what are called (slightly confusingly) ‘staff’ roles. By contrast, people occupying ‘line’ roles are those who run the day-to-day operations. Theirs is partly a reactive role, one that involves finding ways round unexpected problems: reallocating resources, adjusting processes, solving quality prob- lems, and so on. They need to look ahead only enough to make sure that resources are available to meet targets. Theirs is the necessary routine. Knowing where the operation is heading, keeping it on budget and pulling it back on course when the unexpected occurs: no less valuable a task than the developer’s but very different.

While these descriptions are clearly stereotypes, they do represent two types of operations task. The issue, for organizational design, is whether it is wise to separate them organizationally. It may cause more problems than it solves. Although it allows each to concentrate on their different jobs, it also can keep apart the two sets of people who have most to gain by working together. Here is the paradox: the development role does need freedom from the immediate pressures of day-to-day management but it is crucial that it understands the exact nature of these pressures. What makes the operation distinctive? Where do the problems occur? What improvements would make most differ- ence to the performance of the operation? These questions can only be answered by living with the operation, not cloistered away from it. Similarly, the day-to-day operations manager has to interpret

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the workings of the operation, collect data, explain constraints and educate developers. Without the trust and cooperation of each, neither set of managers can be effective.

Four types of operations developer role We can use the dimensions which define the perspectives on operations strategy described in Chapter 3 to examine the role that operations developers play within the operations function.

▶ Top-down or bottom-up? – If operations developers have a predominantly top-down view of the world, they are likely to take a programmatic approach to operations activities, emphasizing the implementation of overall company strategy. Conversely, if they take a bottom-up view, they are likely to favour a more emergent model of operations development where individual business operations together contribute to the overall building of operations expertise.

▶ Market requirements or operations resource focus? – If operations developers take a market requirements view of operations development, they are likely to focus on the explicit performance achieved by each part of the operations function and how far that performance serves to satisfy the operation’s customers. An operations resource focus, on the other hand, emphasizes the way in which each part of the operation function develops its competences and successfully deploys them in its marketplaces.

We can use these two dimensions to define a typology of how the operations developer’s role could work, as shown in Figure 9.4. It classifies operations developers into four pure types called governors, curators, trainers and facilitators – a typology. Although, in practice, the central operations function of most businesses is a combination of these pure types, usually one type predominates.

▶ Operations developers as governors – The term ‘governor’ is used to describe an agent of a central authority, interpreting operations strategy and arbitrating over any disputes. The term is also used to denote that the mechanism sets clear goals for each part of the operation, judges their perfor- mance and, if performance is not to target, wants to know the reason why.

▶ Operations developers as curators – Operations developers can be concerned primarily with performance against market requirements without being top-down. They may take a more

Figure 9.4 A typology of the operations developer’s role

Trainer Governor

Facilitator Curator

Top down

Programmatic

Emergent

C a

p a

b ili

ti e

s fo

c u

s

P e

rf o

rm a

n c

e f

o c

u s

Controlling the performance of the operations by setting clear priorities and measuring performance against targets

Nurturing the performance of the operations by collecting performance data and distributing comparative performance information

Enabling operations in the development and deployment of their capabilities through shared advice, support and learning

Instructing operations in the development and deployment of their capabilities through standardized improvement methods

Bottom up

Market requirements

Operations resources

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emergent view by acting as the repository of performance data and ideas regarding operations practice for the company as a whole. The term ‘curator’ is used to capture this idea. Operations developers therefore will be concerned with collecting performance information, examples of best practice, and so on. They will also be concerned with disseminating this information so that oper- ations managers in different parts of the business can benchmark themselves against their colleagues and, where appropriate, adopt best practice from elsewhere.

▶ Operations developers as trainers – Moving from the market requirements to the operations resources emphasis shifts the focus more to the development of internal capabilities. If the mindset of operations developers is top-down, their role becomes ‘trainers’, who develop clear objectives, usually derived from overall company strategy, and devise effect methods of developing the various parts of the overall operation. And because the needs of individual parts of the operation may differ, ‘trainer’ operations developers may devise improvement methodologies that can, to some extent, be customized.

▶ Operations developers as facilitators – In some ways this final type of operations developer role is the most difficult to operate effectively. They are again concerned with the development of operations capabilities but do so by acting as facilitators of change rather than instructors. Their role is to advise, support and generally aid the development and deployment of capabilities through a process of mentoring the various parts of the operation. They share responsibility with day-to-day operation managers in forming a community of operations practice. Implicit in this type of oper- ations developer role is the acceptance of a relatively long-term approach to operations development.

How do we go about designing jobs? Job design is concerned with how we structure each individual’s jobs, the team to which they belong (if any), their workplace and their interface with the technology they use. In this section we deal with what is usually considered to be the central people-related responsibility of operations managers – job design. It is a huge topic and we can only deal with some of the influences on, and approaches to, job design.

The influences on job design that we deal with here are illustrated in Figure 9.5.

Figure 9.5 Some the influences on job design, work time allocation and the design of the working environment

Design individuals’ and groups’ jobs

‘Behavioural’ approaches

Flexible working

Division of labour

Team working

Ergonomics ‘Scientific’

management

Tele- commuting

Design the working environment

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The decisions of job design Job design involves a number of separate yet related elements.

▶ What tasks are to be allocated to each person in the operation? Producing goods and services involves a whole range of different tasks which need to be divided between the people who staff the operation. Different approaches to the division of labour will lead to different task allocations.

▶ What is the best method of performing each job? Every job should have an approved (or best) method of completion. And although there are different ideas of what is ‘best’, it is generally the most efficient method but that fits the task, and does not unduly interfere with other tasks.

▶ How long will it take and how many people will be needed? Work measurement helps us calculate the time required to do a job, and therefore how many people will be needed.

▶ How do we maintain commitment? Understanding how we can encourage people and maintain job commitment is, arguably, the most important of the issues in job design. This is why behav- ioural approaches, including empowerment, teamwork and flexible working are at the core of job design.

▶ What technology is available and how will it be used? Many operational tasks require the use of technology. Not only does the technology need to be appropriately and designed, but so does the interface between the people and the hardware.

▶ What are the environmental conditions of the workplace? The conditions under which jobs are performed will have a significant impact on people’s effectiveness. Although often considered a part of job design, we treat it separately in this chapter.

Task allocation – the division of labour Any operation must decide on the balance between using specialists or generalists. This idea is related to the division of labour – dividing the total task down into smaller parts, each of which is accomplished by a single person or team. It was first formalized as a concept by the economist Adam Smith in his Wealth of Nations in 1776. Perhaps the epitome of the division of labour is the assembly line, where products move along a single path and are built up by operators continually repeating a single task. This is the predominant model of job design in most mass-produced products and in some mass-produced services (fast food, for example). There are some real advantages in division-of-labour principles:

▶ It promotes faster learning. It is obviously easier to learn how to do a relatively short and simple task than a long and complex one. This means that new members of staff can be quickly trained and assigned to their tasks when they are short and simple.

▶ Automation becomes easier. Dividing a total task into small parts raises the possibility of automat- ing some of those small tasks. Substituting technology for labour is considerably easier for short and simple tasks than for long and complex ones.

▶ Reduced non-productive work. This is probably the most important benefit of division of labour. In large, complex tasks the proportion of time spent picking up tools and materials, putting them down again and generally finding, positioning and searching can be very high indeed. For example, one person assembling a whole motor car engine would take two or three hours and involve much searching for parts, positioning, and so on. Around half the person’s time would be spent on these reaching, positioning, finding tasks (called non-productive elements of work). Now consider how a motor car engine is actually made in practice. The total job is probably divided into 20 or 30 separate stages, each staffed by a person who carries out only a proportion of the total. Specialist equipment and materials-handling devices can be devised to help them carry out their job more efficiently. Furthermore, there is relatively little finding, positioning and reaching involved in this simplified task. Non-productive work can be considerably reduced, perhaps to under 10 per cent, which would be very significant to the costs of the operation.

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However, there are also serious drawbacks to highly divided jobs:

▶ Monotony. The shorter the task, the more often operators will need to repeat it. Repeating the same task, for example every 30 seconds, eight hours a day and five days a week, can hardly be called a fulfilling job. As well as any ethical objections, there are other, more obviously practical objections to jobs which induce such boredom. These include the increased likelihood of absen- teeism and staff turnover, the increased likelihood of error and even the deliberate sabotage of the job.

▶ Physical injury. The continued repetition of a very narrow range of movements can, in extreme cases, lead to physical injury. The over-use of some parts of the body (especially the arms, hands and wrists) can result in pain and a reduction in physical capability. This is sometimes called repetitive strain injury (RSI).

▶ Low flexibility. Dividing a task up into many small parts often gives the job design a rigidity which is difficult to change under changing circumstances. For example, if an assembly line has been designed to make one particular product but then has to change to manufacture a quite different product, the whole line will need redesigning. This will probably involve changing every operator’s set of tasks, which can be a long and difficult procedure.

▶ Poor robustness. Highly divided jobs imply materials (or infor- mation) passing between several stages. If one of these stages is not working correctly, for example because some equipment is faulty, the whole operation is affected. On the other hand, if each person is performing the whole of the job, any problems will only affect that one person’s output.

Designing job methods – scientific management The term ‘scientific management’ became established in 1911 with the publication of the book of the same name by Fredrick Taylor (this whole approach to job design is sometimes referred to, pejoratively, as Taylorism). In this work he identified what he saw as the basic tenets of scientific management:5

▶ All aspects of work should be investigated on a scientific basis to establish the laws, rules and formulae governing the best methods of working.

▶ Such an investigative approach to the study of work is necessary to establish what constitutes a ‘fair day’s work’.

▶ Workers should be selected, trained and developed methodically to perform their tasks. ▶ Managers should act as the planners of the work (analysing jobs and standardizing the best method

of doing the job) while workers should be responsible for carrying out the jobs to the standards laid down.

▶ Cooperation should be achieved between management and workers based on the ‘maximum pros- perity’ of both.

The important thing to remember about scientific management is that it is not particularly ‘scientific’ as such, although it certainly does take an ‘investigative’ approach to improving operations. Perhaps a better term for it would be ‘systematic management’. It gave birth to two separate, but related, fields of study, method study, which determines the methods and activities to be included in jobs, and work measurement, which is concerned with measuring the time that should be taken for performing jobs. Together, these two fields are often referred to as work study and are explained in detail in the supple- ment to this chapter.

Designing the human interface – ergonomic workplace design Ergonomics is concerned primarily with the physiological aspects of job design. Physiology is about the way the body functions. It involves two aspects: first, how a person interfaces with his or her immediate working area; and second, how people react to environmental conditions. We

Operations principle There are both positive and negative effects of the division of labour, but it is still a significant factor in job design.

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will examine the second aspect of ergonomics later in this chapter. Ergonomics is sometimes referred to as human factors engineering or just ‘human factors’. Both aspects are linked by two common ideas:

▶ There must be a fit between people and the jobs they do. To achieve this fit there are only two alternatives. Either the job can be made to fit the people who are doing it, or, alternatively, the people can be made (or perhaps less radically, recruited) to fit the job. Ergonomics addresses the former alternative.

▶ It is important to take a ‘scientific’ approach to job design: for example, collecting data to indicate how people react under different job design conditions and trying to find the best set of conditions for comfort and performance.

Anthropometric aspects Many ergonomic improvements are primarily concerned with what are called the anthropometric aspects of jobs – that is, the aspects related to people’s size, shape and other physical abilities. The design of an assembly task, for example, should be governed partly by the size and strength of the operators who do the job. The data which ergonomists use when doing this are called anthropometric data. Because we all vary in our size and capabilities, ergonomists are particularly interested in our range of capabilities, which is why anthropometric data are usually expressed in percentile terms. Figure 9.6 illustrates this idea. This shows the idea of size (in this case, height) variation.

Critical commentary

Even in 1915, criticisms of the scientific management approach were being voiced. In a submission to the United States Commission on Industrial Relations, scientific management is described as:

▶ being in ‘spirit and essence a cunningly devised speeding up and sweating system’; ▶ intensifying the ‘modern tendency towards specialization of the work and the task’; ▶ condemning ‘the worker to a monotonous routine’; ▶ putting ‘into the hands of employers an immense mass of information and methods that may

be used unscrupulously to the detriment of workers’; ▶ tending to ‘transfer to the management all the traditional knowledge, the judgement and skills

of workers’; ▶ greatly intensifying ‘unnecessary managerial dictation and discipline’; ▶ tending to ‘emphasize quantity of product at the expense of quality’.

Two themes evident in this early criticism do warrant closer attention. The first is that scientific management inevitably results in standardization of highly divided jobs and thus reinforces the negative effects of excessive division of labour previously mentioned. Second, scientific management formalizes the separation of the judgemental, planning and skilled tasks, which are done by ‘management’, from the routine, standardized and low-skill tasks, which are left for ‘operators’. Such a separation, at the very least, deprives the majority of staff of an opportunity to contribute in a meaningful way to their jobs (and, incidentally, deprives the organization of their contribution). Both of these themes in the criticisms of scientific management lead to the same point: that the jobs designed under strict scientific management principles lead to low motivation among staff, frustration at the lack of control over their work, and alienation from the job.

Operations principle Ergonomic considerations in job design can prevent excessive physical strain and increase efficiency.

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Figure 9.6 The use of anthropometric data in job design

Normal work area

Maximum work area

95% percentile5% percentile

5% 50% 95%

O P E R AT I O N S I N P R AC T I C E

Exoskeletons are not a new idea ; since the 1960s they have been suggested for the enhancement of people’s natural physical capabilities, usually for medical or mili- tary purposes. In the natural world, they are defined as ‘a hard outer layer that covers, supports, and protects the body of an invertebrate animal such as an insect or crus- tacean’. But, in the context of physical work, it is usually taken to refer to a ‘powered exoskeleton – a wearable powered mobile device that assists human movement or positioning to allow increased strength and/or endur- ance. Long the subject of science fiction, they are starting to be tested in industrial conditions. For example, typical of any automotive assembly lines, Ford requires its

Exoskeleton devices take the strain 6

Only 5 per cent of the population are smaller than the person on the extreme left (5th percentile), whereas 95 per cent of the population are smaller than the person on the extreme right (95th per- centile). When this principle is applied to other dimensions of the body, for example arm length, it can be used to design work areas. Figure  9.6 also shows the normal and maximum work areas derived from anthropometric data. It would be inadvisable, for example, to place frequently used components or tools outside the maximum work area derived from the 5th percentile dimensions of human reach.

▼

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Designing for job commitment – behavioural approaches to job design Jobs that are designed purely on division of labour, scientific management or even purely ergonomic principles can alienate the people performing them. Job design should also take into account the desire of individuals to fulfil their needs for self-esteem and personal development. This is where motivation theory and its contribution to the behavioural approach to job design is important. This achieves two important objectives of job design. First, it provides jobs that have an intrinsically higher quality of working life – an ethically desirable end in itself. Second, because of the higher levels of motivation it engenders, it is instrumental in achieving better performance for the operation, in terms of both the quality and the quantity of output. This approach to job design involves two conceptual steps: first, exploring how the various characteristics of the job affect people’s motivation; second, exploring how individuals’ motivation towards the job affects their performance at that job.

Typical of the models which underlie this approach to job design is that by Hackman and Oldham shown in Figure 9.7.7 Here a number of ‘techniques’ of job design are recommended in order to affect particular core ‘characteristics’ of the job. These core characteristics of the job are held to influence various positive ‘mental states’ towards the job. In turn, these are assumed to give certain performance outcomes. In Figure 9.7 some of the ‘techniques’ (which Hackman and Oldham originally called ‘implementing concepts’) need a little further explanation:

assembly employees to adopt positions that involve reaching overhead for long periods. This can result in aching back, neck and shoulders as well as general fatigue. This is why the company has partnered with California-based Ekso Bionics to trial an upper-body exoskeleton known as the EksoVest, which elevates and supports the arms. According to Marty Smets, an ergo- nomics expert at Ford who works on human systems and virtual manufacturing, Ford has been working on weara- ble robotics solutions since 2011, not to give their operatives superhuman strength, but to prevent injury. ‘Right now, we’re just using upper body supports, but we do have interest in other systems. Our goal right now is to just figure out how to integrate exoskeletons in our plants. Once we get them into our plants we can begin to replicate and figure out what the sweet spots are for application.’

Figure 9.7 A typical ‘behavioural’ job design model

Low absenteeism and turnover

High satisfaction with the work

High-quality work performance

High internal work motivation

Performance and personal outcomes

Experienced meaningfulness of the work

Skill varietyCombining tasks

Forming natural work units

Establishing client relationships

Vertical loading

Opening feedback channels

Task significance

Autonomy

Feedback

Task identity

Experienced responsibility for outcomes of the work

Knowledge of the actual results of the work activity

Mental states

Core job characteristics

Techniques of job design

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▶ Combining tasks means increasing the number of activities allocated to individuals. ▶ Forming natural work units means putting together activities which make a coherent whole. ▶ Establishing client relationships means that staff make contact with their internal customers

directly. ▶ Vertical loading means including ‘indirect’ activities (such as maintenance). ▶ Opening feedback channels means that internal customers feedback perceptions directly.

Hackman and Oldham also indicate how these techniques of job design shape the core characteristics of the resulting job, and further, how the core characteristics influence people’s ‘mental states’. Mental states are the attitude of individuals towards their jobs: specifically, how meaningful they find the job, how much responsibility and control they feel they have over the way the job is done, and how much they understand about the results of their efforts. All of these mental states influence people’s performance at their job in terms of their motivation, quality of work, satisfaction with their work, turnover and absenteeism.

Job rotation If increasing the number of related tasks in the job is constrained in some way, for example by the technology of the process, one approach may be to encourage job rotation. This means moving individuals periodically between different sets of tasks to provide some variety in their activities. When successful, job rotation can increase skill flexibility and make a small contribution to reducing monotony. However, it is not viewed as universally beneficial either by management (because it can disrupt the smooth flow of work) or by the people performing the jobs (because it can interfere with their rhythm of work).

Job enlargement The most obvious method of achieving at least some of the objectives of behavioural job design is by allocating a larger number of tasks to individuals. If these extra tasks are broadly of the same type as those in the original job, the change is called job enlargement. This may not involve more demanding or fulfilling tasks, but it may provide a more complete and therefore slightly more meaningful job. If nothing else, people performing an enlarged job will not repeat themselves as often, which could make the job marginally less monotonous. So, for example, suppose that the manufacture of a prod- uct has traditionally been split up on an assembly-line basis into 10 equal and sequential jobs. If that job is then redesigned so as to form two parallel assembly lines of five people, the output from the system as a whole would be maintained but each operator would have twice the number of tasks to perform. This is job enlargement. Operators repeat themselves less frequently and presumably the variety of tasks is greater, although no further responsibility or autonomy is necessarily given to each operator.

Job enrichment Job enrichment means not only increasing the number of tasks, but also allocating extra tasks which involve more decision making, greater autonomy and greater control over the job. For example, the extra tasks could include maintenance, planning and control, or monitoring quality levels. The effect is both to reduce repetition in the job and to increase autonomy and personal development. So, in the assembly-line example, each operator, as well as being allocated a job which is twice as long as that previously performed, could also be allocated responsibility for carrying out routine mainte- nance and such tasks as record-keeping and managing the supply of materials. Figure 9.8 illustrates the difference between what are called horizontal and vertical changes. Broadly, horizontal changes are those which extend the variety of similar tasks assigned to a particular job. Vertical job changes are those which add responsibilities, decision making or autonomy to the job. Job enlargement implies movement only in the horizontal scale, whereas job enrichment certainly implies movement on the vertical scale and perhaps on both scales.

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Figure 9.8 Job enlargement and job enrichment

More tasks of the same type

Job enlargement

Job enrichment

Original job

tasks

More tasks which give increased

responsibility, autonomy or decision

making

O P E R AT I O N S I N P R AC T I C E

This is how Édouard Michelin (then, a director of Michelin) put it back in 1928, ‘The spirit of empow- erment has always been one of our values and is part of the Michelin Group’s “genetic code”. One of our principles is to give responsibility to the person who carries out a given task because [they] know a lot about it.’ It is an approach to empowerment that survives today. In French, Michelin calls it ‘responsabi- lisation’, which roughly translates into English as a mixture of empowerment and accountability. It is an initiative that is part of the Group’s efforts to stream- line their organizational structures, increase responsiveness and efficiency, and encourage faster decision making. Team empowerment is seen as an essential part of this aim. ‘Not only does it foster initi- ative and dialogue’, says Michelin, ‘it also enables decisions to be made close to operations and custom- ers. Our Empowering Organizations are being developed throughout the Group, building trust-based relationships that encourage all employees to take part in our transformation. We are empowering front- line teams to organize themselves and find the right solutions to meet given objective in a framework defined by Management. In this way, managers are resuming their role as advisors, who develop people’s capabilities and train their teams.’ In essence, ‘responsabilisation’ means shifting more operational responsibility to those people who work on the factory floor. This involves learning new skills: how to work effectively in teams, how to structure projects, how to manage conflicts and how to communicate in non-confrontational ways. Rather than issue direct instruc- tions, team leaders act as coaches or, if any conflict arises, as referees. Workers in the teams allocate responsibility between themselves for tasks such as production scheduling, safety

procedures, quality control, and so on. After the company introduced the idea of greater worker autonomy in one of its factories, staff there said that they felt happier and more productive as a result. The company felt that it was such a success that it extended the practice to six factories in Europe and North America.

Michelin calls it ‘responsabilisation’8

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Empowerment Empowerment is an extension of the autonomy job characteristic prominent in the behavioural approach to job design. However, it is usually taken to mean more than autonomy. Whereas autonomy means giving staff the ability to change how they do their jobs, empowerment means giving staff the authority to make changes to the job itself, as well as how it is performed. This can be designed into jobs to different degrees.9 At a minimum, staff could be asked to contribute their suggestions for how the operation might be improved. Going further, staff could be empowered to redesign their jobs. Further still, staff could be included in the strategic direction and perfor- mance of the whole organization. The benefits of empowerment are generally seen as providing fast responses to customer needs (including dissatisfied customers), employees feeling better about their jobs and interacting with customers with more enthusiasm, promoting ‘word-of-mouth’ advertising and customer retention. However, there are costs associated with empowerment, including higher selection and training costs, perceived inequity of service and the possibility of poor decisions being made by employees.

O P E R AT I O N S I N P R AC T I C E

When Marissa Mayer, new the boss of Yahoo, ruled that employees of the company could no longer work from home, but must come into the office to work, it was met with horror throughout Silicon Valley, and beyond. The news also prompted a debate about how much freedom employees should be given to decide how, when and where they should do their jobs. Perhaps most surprising was that Ms Mayer’s decision seemed to go against the trend, especially in high-tech companies, to allow and even encourage a degree of what had become known as ‘tele- commuting’ (defined as ‘the practice of working from home for a business and communicating through the use of personal computing and communication systems’). Surveys had recently shown that home-based working in some industries, especially information systems, engineer- ing and science, was rising particularly quickly. Also, given that many of these technology firms produced the hard- ware and software that make working from home possible, it seemed only sensible to let their employees use them. As one headline read, ‘The “9 to 5” mentality is dead’. And it’s not surprising that telecommuting is popular; it has a number of advantages for firms. First, it is popular with (most) staff, so it helps retain (and gain access to a larger pool of ) talent. It also is said to improve productivity by avoiding the sometimes distracting work environment. And, of course, because staff spend less time in the office, there can be substantial overhead savings.

This is possibly why Yahoo’s decision was greeted with such criticism. ‘An epic fail’, ‘hypocrite’ and ‘idiotic’ were just some of the reactions. But it was not a fear that her employ- ees were sitting around in their pyjamas all day that had prompted Yahoo’s decision to send the memo to its

employees banning telecommuting. The leaked memo said that ‘the habit has slowed the firm down and made it harder to have serendipitous meetings that can give birth to new ideas’ and it was the innovation that came from these meet- ings that the firm required. ‘We can all feel the energy and buzz in our offices’, the memo explained. Yahoo’s defenders say that their staff are highly skilled people, such as design- ers and programmers, who needed more face time with colleagues. Quite simply, for Yahoo, the costs of telecom- muting were greater than its benefits. And there are some widely accepted disadvantages of telecommuting. Working from home can be isolating, for staff and for managers who will need to put effort into keeping in touch. In fact, tele- commuting can be difficult when employees require constant supervision. There is also the question of account- ability. It is difficult to judge whether staff really are working rather than watching daytime TV. Nevertheless, a blanket ban on working from home is still unusual in high-tech industries. And within a year of Yahoo’s original decision, there were some indications that, under certain circum- stances, telecommuting was once more being permitted.

Yahoo clamps down on telecommuting10

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Team working A development in job design which is closely linked to the empowerment concept is that of team- based work organization (sometimes called self-managed work teams). This is where staff, often with overlapping skills, collectively perform a defined task and have a high degree of discretion over how they actually perform the task. The team would typically control such things as task allocation between members, scheduling work, quality measurement and improvement, and sometimes the hiring of staff. To some extent most work has always been a group-based activity. The concept of teamwork, however, is more prescriptive and assumes a shared set of objectives and responsibilities. Groups are described as teams when the virtues of working together are being emphasized, such as the ability to make use of the various skills within the team. Teams may also be used to compensate for other organizational changes such as the move towards flatter organizational structures. When organizations have fewer managerial levels, each manager will have a wider span of activities to control. Teams which are capable of autonomous decision making have a clear advantage in these circumstances. The benefits of teamwork can be summarized as:

▶ improving productivity through enhanced motivation and flexibility; ▶ improving quality and encouraging innovation; ▶ increasing satisfaction by allowing individuals to contribute more effectively; ▶ making it easier to implement technological changes in the workplace because teams are willing

to share the challenges this brings.

Flexible working The nature of most jobs has changed significantly over the last 25 years. New technologies, more dynamic marketplaces, more demanding customers and a changed understanding of how individuals can contribute to competitive success have all had their impact. Also changing is our understanding of how home life, work and social life need to be balanced. Alternative forms of organization and alternative attitudes to work are being sought which allow, and encourage, a degree of flexibility in working practice which matches the need for flexibility in the marketplace. From an operations management perspective, three aspects of flexible working are significant: skills flexibility, time flexibility and location flexibility.

▶ Skills flexibility – A flexible workforce that can move across several different jobs could be deployed (or deploy themselves) in whatever activity is in demand at the time. In the short term staff at a supermarket may be moved from warehouse activities to shelf replenishment in the store to the checkout, depending on what is needed at the time. In the longer-term sense, multi-skilling means being able to migrate individuals from one skill set to another as longer-term demand trends

Critical commentary

Teamwork is not only difficult to implement successfully, but it can also place undue stress on the individuals who form the teams. Some teams are formed because more radical solutions, such as total reorganization, are being avoided. Teams cannot compensate for badly designed organizational processes; nor can they substitute for management’s responsibility to define how decisions should be made. Often teams are asked to make decisions but are given insufficient responsibility to carry them out. In other cases, teams may provide results but at a price. The Swedish car maker Volvo introduced self-governing teams in the 1970s and 1980s which improved motivation and morale but eventually proved prohibitively expensive. Perhaps most seriously, teamwork is criticized for substituting one sort of pressure for another. Although teams may be autonomous, this does not mean they are stress-free. Top-down managerial control is often replaced by excessive peer pressure which is in some ways more insidious.

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become obvious. So, for example, an engineer who at one time maintained complex equipment by visiting the sites where such equipment was installed may now perform most of his or her activities by using remote computer diagnostics and ‘helpline’ assistance. The implication of job flexibility is that a greater emphasis must be placed on training, learning and knowledge management. Defining what knowledge and experience are required to perform particular tasks and translating these into training activities are clearly prerequisites for effective multi-skilling.

▶ Time flexibility – Not every individual wants to work full-time. Many people, often because of family responsibilities, only want to work for part of their time, sometimes only during specific parts of the day or week (because of childcare responsibilities, etc.). Likewise, employers may not require the same number of staff at all times. They may, for example, need extra staff only at periods of heavy demand. Bringing both the supply of staff and the demand for their work together is the objective of ‘flexible time’ or flexi-time working systems. These may define a core working time for each individual member of staff and allow other times to be accumulated flexibly. Other schemes include annual hours schemes, one solution to the capacity management issue described in Chapter 11.

▶ Location flexibility – The sectoral balance of employment has changed. The service sector in most developed economies now accounts for between 70 and 80 per cent of all employment. Even within the manufacturing sector, the proportion of people with indirect jobs (those not directly engaged in making products) has also increased significantly. One result of all this is that the number of jobs which are not ‘location-specific’ has increased. Location-specific means that a job must take place in one fixed location. So a shop worker must work in a shop and an assembly line worker must work on the assembly line. But many jobs could be performed at any location where there are communi- cation links to the rest of the organization. The realization of this has given rise to what is known as telecommuting, teleworking, ‘flexible working’, ‘home working’, mobile working, and creating the ‘virtual office’. See the ‘Operations in practice’ example of telecommuting (or not) at Yahoo.

Work-related stress The idea that there is a link between human resource strategy and the incidence of stress at work not new. Even some of the early scientific management pioneers accepted that working arrange- ments should not result in conditions that promoted stress. Now it is generally accepted that stress can seriously undermine the quality of people’s working lives and, in turn, the effectiveness of the

Critical commentary

There is always a big difference between what is technically possible and what is organizationally feasible. Telecommuting does have its problems, especially those types of telecommuting that deny individuals the chance to meet with colleagues often face difficulties. Problems can include the following:

▶ Lack of socialization – offices are social places where people can adopt the culture of an organization as well as learn from each other. It is naïve to think that all knowledge can be codified and learnt formally at a distance.

▶ Effectiveness of communication – a large part of the essential communication we have with our colleagues is unplanned and face-to-face. It happens on ‘chance meet’ occasions, yet it is important in spreading contextual information as well as establishing specific pieces of information necessary to the job.

▶ Problem-solving – it is still often more efficient and effective informally to ask a colleague for help in resolving problems than formally to frame a request using communications technology.

▶ It is lonely – isolation amongst mobile or home workers is a real problem. For many of us, the workplace provides the main focus for social interaction. A computer screen is no substitute.

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workplace. Here stress is defined as ‘the adverse reaction people have to excessive pressures or other types of demand placed on them’.11 In addition to the obvious ethical reasons for avoiding work- related stress, there are also business-related benefits, such as the following.

▶ Staff feel happier at work; their quality of working life is improved and they perform better. ▶ Introducing improvements is easier when ‘stress’ is managed effectively. ▶ Employment relations: problems can be resolved more easily. ▶ Attendance levels increase and sickness absence reduces.

Table 9.1 illustrates some of the causes of stress at work and what operations managers can do about it.

Work–life balance A number of factors have made it increasingly difficult to separate work life from personal life. First is the general decline in the number of people working in operations where working times are very clearly delineated (usually those that employ routine, high-volume processes) towards operations where activities (and processes) are less formal and/or defined – and so are working times. Second, there is less distinction between what is clearly ‘work’ technologies (laptops, mobile devices, etc.) and personal devices, meaning that it is difficult to remain ‘unconnected’ from work emails, phone calls, etc. Third, as more people work from home, the discipline to set limited working hours is not always easy. Finally, some organizational cultures confuse ‘working longer’ with ‘working bet- ter’. Ensuring that there is an appropriate split between work and personal life is usually taken to mean that work should not interfere unreasonably with family obligations and personal interests (although what exactly constitutes ‘unreasonable’ can be a cause of some disagreement). From an organization’s perspective, the case for addressing work–life balance is usually made by stressing the following benefits.

▶ Employee retention is improved – staff who feel overloaded are more likely to seek alternative employment.

Causes of stress What can be done about it

Staff can become overloaded if they cannot cope with the amount of work or type of work they are asked to do

Change the way the job is designed, training needs and whether it is possible for employees to work more flexible hours

Staff can feel disaffected and perform poorly if they have no control or say over how and when they do their work.

Actively involve staff in decision making, the contribution made by teams, and how reviewing performance can help identify strengths and weaknesses

Staff feel unsupported: levels of sick absence often rise if employees feel they cannot talk to managers about issues that are troubling them

Give staff the opportunity to talk about the issues causing stress, be sympathetic and keep them informed

A failure to build relationships based on good behaviour and trust can lead to problems related to discipline, grievances and bullying

Check the organization’s policies for handling grievances, unsatisfactory performance, poor attendance and misconduct, and for tackling bullying and harassment

Staff will feel anxious about their work and the organization if they don’t know their role and what is expected of them

Review the induction process, work out an accurate job description and maintain a close link between individual targets and organizational goals

Change can lead to huge uncertainty and insecurity

Plan ahead so change is not unexpected. Consult with employees so they have a real input, and work together to solve problems

Table 9.1 Causes of stress at work and what could be done about it

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296 PART TWO DESIGNING THE OPERATION

▶ Reputation – the promotion of a healthy work–life balance will develop a reputation that will help companies to attract more able staff.

▶ Health problems – staff ‘burn-out’ will eventually lead to a higher incidence of physical or mental health problems – an ethical as well as an economic (increased absenteeism) problem.

▶ Higher levels of staff performance – it is usually assumed that stressed or overloaded staff are less effective at getting work done, but this is disputed. Although some studies show that staff with a healthy work–life balance work more effectively, others say that there is ‘insufficient evidence to support the notion that work–life practices enhance performance by means of reduced work–life conflict’.12

Many of the mechanisms for promoting better work–life balance are the measures that are described in this part of the chapter, such as various forms of flexible working, home working, job sharing, on-site child care, and so on.

O P E R AT I O N S I N P R AC T I C E

Those jobs that are on the front line of dealing directly with customers (particu- larly a lot of customers, all the time, of all different types) can be particularly stressful. Not all customers will be reasonable, patient, courteous or even sane. The people who have these high customer contact roles need support, training and perhaps a special aptitude. And there is plenty of advice for staff who have to deal with customers who are angry because they feel that the level of service they have received is inade- quate. Such advice usually includes such things as : acknowledge the (perceived) problem, try to put yourself in the posi- tion of the complainer, get the all facts straight, and try to rectify the problem. It isn’t easy, but if complaints can be resolved to the satisfaction of the customer, there can be significant benefits. Some surveys indicate that 90 per cent of customers whose complaints are resolved are happy to use the service again, and may even go on to become advocates for the service. Nevertheless, maintaining tolerance and politeness in the face of some particularly difficult customers can be more than, even experienced, staff can bear. That certainly was the case with Steven Slater, formerly an air steward on the US airline JetBlue. He was working on a New York flight when he had to arbitrate after a female passenger began arguing with a male passenger about space in the overhead luggage compartment during boarding. The female passen- ger swore at Mr Slater and pulled down the compartment door on his head. Later, when the plane landed, she

seemingly refused to follow his request to remain in her seat and got up to take her bag from the overhead locker while the plane was still taxiing. Again, the woman alleg- edly swore at Mr Slater. It was then that his patience ran out in a particularly dramatic fashion. He went to the intercom and broadcast to the whole plane : ‘To the passenger who just called me a motherf*****: F*** you. I’ve been in this business for 28 years and I’ve had it.’ He then collected his hand-luggage (and two beers from the trolley), opened the cabin door, activated the inflatable chute, announced, ‘to those of you who have shown dignity and respect for 20 years, have a great ride’ and slid out of the (fortunately stationary) plane on to the runway. As a way to give up your job, it’s not recommended. He was later arrested and charged with criminal mischief and reckless endangerment.

The stress of high customer contact jobs13

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How should the working environment be designed? The aspect of ergonomics that we examined earlier was concerned with how a person interfaces with the physical aspects of his or her immediate working area, such as its dimensions. But the subject also examines how people interface with their working environment. By this we mean the tempera- ture, lighting, noise environment, and so on. It will obviously influence the way jobs are performed. Working conditions which are too hot or too cold, insufficiently illuminated or glaringly bright, excessively noisy or irritatingly silent will all influence the way jobs are carried out. Many of these issues are often covered by occupational health and safety leg- islation which controls environmental conditions in workplaces throughout the world. A thorough understanding of this aspect of ergonomics is necessary to work within the guidelines of such legislation.

Working temperature Predicting the reactions of individuals to working temperature is not straightforward. Individuals vary in the way their performance and comfort vary with temperature. Furthermore, most of us judging ‘temperature’ will also be influenced by other factors such as humidity and air movement. Nevertheless, some general points regarding working temperatures provide guidance to job designers:

▶ Comfortable temperature range will depend on the type of work being carried out; lighter work requires higher temperatures than heavier work.

▶ The effectiveness of people at performing vigilance tasks reduces at temperatures above about 29°C; the equivalent temperature for people performing light manual tasks is a little lower.

▶ The chances of accidents occurring increase at temperatures which are above or below the comfort- able range for the work involved.

Illumination levels The intensity of lighting required to perform any job satisfactorily will depend on the nature of the job. Some jobs which involve extremely delicate and precise movement, surgery for example, require very high levels of illumination. Other, less delicate jobs do not require such high levels.

Noise levels The damaging effects of excessive noise levels are perhaps easier to understand than some other environmental factors. Noise-induced hearing loss is a well-documented consequence of working environments where noise is not kept below safe limits. When considering noise levels, bear in mind that the recommended (and often legal) maximum noise level to which people can be subjected over the working day is 90 decibels (dB) in the UK (although in some parts of the world the legal level is lower than this). Also bear in mind that the decibels unit of noise is based on a logarithmic scale, which means that noise intensity doubles about every 3 dB. In addition to the damaging effects of high levels of noise, intermittent and high-frequency noise can also affect work performance at far lower levels, especially on tasks requiring attention and judgement.

Ergonomics in the office As the number of people working in offices (or office-like workplaces) has increased, ergonomic principles have been applied increasingly to this type of work. At the same time, legislation has been moving to cover office technology such as computer screens and keyboards. For example, European Union directives on working with display screen equipment require organizations to assess all work- stations to reduce the risks inherent in their use, plan work times for breaks and changes in activity and provide information and training for users. Figure 9.9 illustrates some of the ergonomic factors which should be taken into account when designing office jobs.

Operations principle Designing working environments is an important part of job design.

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O P E R AT I O N S I N P R AC T I C E

Background music at work is not new. It has been used in the workplace for centuries. As far back as the industrial revolution orchestras and singers would be hired occasionally to perform for workers in the quieter factories. Later, in the 1940s, the BBC launched a radio program called Music While You Work. Broadcasting twice a day, it was made espe- cially for factory workers. Artists who were booked for the show were told to ‘play mate- rial with an upbeat rhythm that would keep the workers’ attention’, in the belief that it would improve productivity. But playing music at work is not always free. In the UK, for example, the law requires businesses that play any recorded music in public to get licences from the Performing Right Society (PRS), which collects fees and pays royalties to composers and their publishers. Listening to a device through headphones, however, is free. But does music help or hinder?

Some bodies definitely think that it helps. Musicworks (which is an organization supported by the PRS, so it is not exactly independent) cites studies that show that music in the workplace promotes positive mood, can build team spirit, improves alertness and can reduce the number of workplace accidents. It can also, they say, cut the number of sick days and increase workplace productivity. One study by Teresa Lesiuk at the University of Miami found IT specialists who listened to music, completed tasks more quickly and came up with better ideas than those who didn’t. But not everyone is convinced. ‘If people need a high level of concentration, it could be a distraction,’ says Dr Carolyn Axtell, at the Institute of Work Psychology. ‘When people choose to listen there can be positive effects – it can be relaxing and help manage other distractions such as noise. But when it’s imposed, they can find it annoying and stressful.’ However, individuals can differ in their reaction to music and problems occur when colleagues clash. ‘You can look away if you don’t want to see some- thing, but you can’t close your ears,’ she says.

In another study researchers at London University studied the apparently common practice of surgeons playing music in the operating theatre (playlists ranged from gentle classical music through heavy metal, to elec- tronic dance music). Patients didn’t complain, being anaesthetized, but other members of the surgical team were not always happy. Music could damage communi- cation in a surgical team, preventing team members from hearing instructions. Even worse, when sound levels are uneven and a new track blasts out unexpectedly, or when a surgeon turns up the volume when his or her favourite

song comes on, other team members can be disturbed. But notwithstanding the, sometimes conflicting, findings from researchers, some themes do emerge.

▶ How ‘immersive’ a task is makes a difference when eval- uating music’s effectiveness in increasing productive output. ‘Immersive’ refers to the variability and creative demand of the task. Creating an entirely original piece of work from scratch that demands a lot of creativity is ‘immersive’. Performing more routine tasks such as answering emails is not. When the task is routine, clearly defined and repetitive, music is probably useful for most people.

▶ Music affects your mood. Apparently, it isn’t the back- ground noise of the music itself, but rather the improved mood that your favourite music creates that is the reason for the increase in productivity. In one study, information technology specialists who listened to music completed their tasks more quickly and came up with better ideas than those who didn’t, because the music improved their mood.

▶ In open-plan offices where background chatter can be too much for some people to handle, headphones can help some people.

▶ Music does not help learning. It has a negative effect on absorbing and retaining new information, because it demands too much of your attention.

▶ Listening to music with lyrics, especially interesting and/ or new lyrics, detracts from performing immersive tasks. Listening to lyrics activates the language centre of your brain, so trying to perform other language-related tasks is particularly difficult.

(Full disclosure : most of this book was written while listening to music.)

Music while you work?14

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How are work times allocated? Without some estimate of how long it takes to complete an activity, it would not be possible to know how much work to allocate to teams or individuals, to know when a task will be completed, to know how much it costs, to know if work is progressing according to schedule, and many other vital pieces of information that are needed to manage any operation. Without some estimate of work times, operations managers are ‘flying blind’. At the same time, it does not need much thought before it becomes clear that measuring work times must be difficult to do with any degree of accu- racy, or confidence. The time you take to do any task will depend on how skilled you are at the task, how much experience you have, how energetic or motivated you are, whether you have the appropriate tools, what the environmental conditions are, how tired you are, and so on. So, at best, any ‘measurement’ of how long a task will, or should, take will be an estimate. It will be our ‘best guess’ of how much time to allow for the task. That is why we call this process of estimating work times, ‘work time allocation’. We are allocating a time for completing a task because we need to do so for many important operations management decisions. For example, work times are needed for:

▶ planning how much work a process can perform (its capacity); ▶ deciding how many staff are needed to complete tasks; ▶ scheduling individual tasks to specific people; ▶ balancing work allocation in processes (see Chapter  6 ); ▶ costing the labour content of a product or service; ▶ estimating the efficiency or productivity of staff and/or processes; ▶ calculating bonus payments (less important than it was at one time).

Notwithstanding the weak theoretical basis of work measurement, understanding the relationship between work and time is clearly an important part of job design. The advantage of structured and systematic work measurement is that it gives a common currency for the evaluation and comparison

Figure 9.9 Ergonomics in the office environment

Adequate contrast,

Adequate lighting

Forearms approximately horizontal

Seat back adjustability

Good lumbar support

No excess pressure on underside of thighs and backs of knees

Noise and fumes minimized

Foot support if needed

Leg room and clearance to allow postural changes

Keyboard: useable, adjustable, detachable, legible

Software: appropriate to task, adapted to user, no undisclosed monitoring

Work surfaces: allow flexible arrangements, spacious, glare-free

Seat height adjustability

Space for postural change, no obstacles under desk

no glare or distracting reflections

Screen: stable image, adjustable, readable, glare/reflection-free

Window covering

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of all types of work. So, if work time allocation is important, how should it be done? In fact, there is a long-standing body of knowledge and experience in this area. This is generally referred to as ‘work measurement’, although as we have said, ‘measurement’ could be regarded as indicating a somewhat spurious degree of accuracy. Formally, work measurement is defined as ‘the process of establishing the time for a qualified worker, at a defined level of performance, to carry out a specified job’. Although this is not a precise definition, generally it is agreed that a specified job is one for which specifications have been established to define most aspects of the job. A qualified worker is ‘one who is accepted as having the necessary physical attributes, intelligence, skill, education and knowledge to perform the task to satisfactory standards of safety, quality and quantity’. Standard performance is ‘the rate of output which qualified workers will achieve with- out over-exertion as an average over the working day provided they are motivated to apply themselves to their work’.

The techniques of work measurement At one time, work measurement was firmly associated with an image of the ‘efficiency expert’, ‘time and motion’ man, or ‘rate fixer’, who wandered around factories with a stopwatch, looking to save a few cents or pennies. And although that idea of work measurement has (almost) died out, the use of a stopwatch to establish a basic time for a job is still relevant, and used in a technique called ‘time study’. Time study and the general topic of work measurement is treated in the sup- plement to this chapter.

O P E R AT I O N S I N P R AC T I C E

Monitoring and analysing how people work is not new. Work study has always been used to increase produc- tivity by examining and evaluating methods of work. But, whereas tradi- tionally observing how people go about their jobs has been performed ‘up front’ and been obvious to whoever is being examined, increas- i n g l y e l e c t r o n i c s u r v e i l l a n c e technology is being used to track how we do our jobs. It is claimed to be a lot more effective, but a lot more contro- versial. Surveillance technologies range from simply requiring workers to tap in and out of their workplace (a method that has been used for over a century) to employee identification badges with inte- grated biometric measuring potential. These can track staff location, movements, interactions, the durations of any conversations, even the tone of voice being used in the conversation. Other technologies monitor whether you’re at your desk, how often you are interrupted, what emails and phone calls are being made and even what speech patterns are being used.

All of this is in support of increasing productivity and devising new work methods, say its supporters. Not so, say its detractors. There are dangers inherent in such surveillance, especially as technology creates more opportunities for companies to monitor their employees in unprecedented ways. Certainly, not everyone likes to be monitored. One study16 found (unsurprisingly) that the more people felt their privacy to be violated at

▼

Technology and surveillance at work15

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work, the more dissatisfied they were. Also, when they believe the surveillance to be unnecessary or too intense, they are more likely to find ways to subvert, sabotage or trick the surveillance systems. Objections can be more formalized. For example, when journalists at The Telegraph (a UK newspaper) discovered that a tracking device had been added to their desks by senior manage- ment, their union objected and the sensors (which monitored body heat, indicating when employees were at their desk and how often they moved around) were removed. ‘The right to be consulted on new procedures

governing such data is enshrined in law,’ said the union’s assistant general secretary. ‘[We] will resist Big Brother- style surveillance in the newsroom.’ Nevertheless, surveillance can be deemed necessary. In 2018 the UK Food Standards Agency announced that closed-circuit television will be installed at all 900 meat-cutting plants it monitored under plans to improve hygiene and reduce the risk of food poisoning. It had discovered that several plants had breached food safety rules by altering use-by dates on meat or dropping meat on the floor and putting it back on to the production line.

As well as time study, there are other work measurement techniques in use. They include the following.

▶ Synthesis from elemental data is a work measurement technique for building up the time for a job at a defined level of performance by totalling element times obtained previously from studies of other jobs containing the elements concerned or from synthetic data.

▶ Predetermined motion–time systems (PMTS) are a work measurement technique whereby times established for basic human motions (classified according to the nature of the motion and the conditions under which it is made) are used to build up the time for a job at a defined level of performance.

▶ Analytical estimating is a work measurement technique which is a development of estimating whereby the time required to carry out the elements of a job at a defined level of performance is estimated from knowledge and experience of the elements concerned.

▶ Activity sampling is a technique in which a large number of instantaneous observations are made over a period of time of a group of machines, processes or workers. Each observation records what is happening at that instant and the percentage of observations recorded for a particular activity or delay is a measure of the percentage of time during which that activity or delay occurs.

Critical commentary

The criticisms aimed at work measurement are many and various. Among the most common are the following:

▶ All the ideas on which the concept of a standard time is based are impossible to define precisely. How can one possibly give clarity to the definition of qualified workers, or specified jobs, or especially a defined level of performance?

▶ Even if one attempts to follow these definitions, all that results is an excessively rigid job definition. Most modern jobs require some element of flexibility, which is difficult to achieve alongside rigidly defined jobs.

▶ Using stopwatches to time human beings is both degrading and usually counterproductive. At best it is intrusive, at worst it makes people into ‘objects for study’.

▼

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Summary answers to key questions

Why are people issues so important in operations management?

▶ Human resources are any organization’s, and therefore any operation’s, greatest asset. Often, most ‘human resources’ are to be found in the operations function.

What forms can organization designs take?

▶ One can take various perspectives on organizations. How we illustrate organizations says much about our underlying assumptions of what an ‘organization’ is. For example, organizations can be described as machines, organisms, brains, cultures or political systems.

▶ The relationship between the ‘staff’ and ‘line’ roles in operation can be modelled using the four perspectives on operations strategy that were discussed in Chapter 3.

▶ There are an almost infinite number of possible organizational structures. Most are blends of two or more ‘pure types’, such as the U-form, the M-form, matrix forms and the N-form.

How do we go about designing jobs?

▶ There are many influences on how jobs are designed. These include: the division of labour; scientific management; method study; work measurement; ergonomics; and behavioural approaches, such as job rotation, job enlargement and job enrichment, empowerment, team working and flexible working (including ‘telecommuting’).

How are work times allocated?

▶ The best-known method is time study, but there are other work measurement techniques including synthesis from elemental data, predetermined motion–time systems (PMTS), analytical estimating and activity sampling.

▶ The rating procedure implicit in time study is subjective and usually arbitrary. It has no basis other than the opinion of the person carrying out the study.

▶ Time study, especially, is very easy to manipulate. It is possible for employers to ‘work back’ from a time which is ‘required’ to achieve a particular cost. Also, experienced staff can ‘put on an act’ to fool the person recording the times.

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rewarding than the routine “bread and butter” work. So my people who do that kind of work, usually the more experienced ones, don’t want to take on the routine stuff. With “high value” cases you have to be able to untangle the personal issues from the business ones. Interviewing these clients cannot be rushed. They tend to be wealthy people with complex assets. We will often have to drop everything and go off half way round the world to meet and discuss their situation. There are no standard proce- dures, every client is different, and everyone has to be treated as an individual. So we have a team of individuals who rise to the challenge each time and give great service. By contrast, the routine work is a lot less interesting, yet sometimes very harrowing. The more junior staff who tend to take on the routine cases can sometimes feel themselves to be “second-class citizens”. Many of them would like to get more experience with the complex high value work, but I  can’t take the risk of giving them that degree of responsibility, the work is too valuable. Also, frankly, the senior people who deal with the high value work don’t want to give up their more glamorous work. I have been trying to make sure that everyone in my team who wants to has a mix of interesting and routine work over the year. It’s the only way to develop them in the long term. You have to encourage them to exercise and develop their professional judgement. They are empowered to deal with any issues themselves or call on one of the more senior members of the team for advice if appropriate. It is impor- tant to give this kind of responsibility to them so that they see themselves as part of a team. But there are still tensions between senior and more junior staff. We are thinking about adopting an open-plan office arrangement centred around our specialist library of family case law, to try and encourage more cooperation.’

Grace Whelan, Managing Partner of McPherson Charles, was puzzled. Three of her most success- ful teams seemed to be facing similar problems with their staff, even though each team had very different tasks, processes and types of staff. Every year the firm surveyed its entire staff in order to gauge their views, levels of satisfaction with their jobs and development needs. It was the results from the latest survey that surprised Grace. ‘The results of the survey are really unan- ticipated. Only last year everything seemed fine. Now staff morale has evidently slumped in all three teams. Yet the partners who lead all of these teams are first class. Outstanding lawyers and good leaders.’

McPherson Charles, based in Bristol in the West of England, had grown rapidly to be one of the biggest law firms in the region, with 21 partners and around 400 staff. Three years previously the firm had reorganized into 15 teams, each headed by a ‘lead partner’ and specializing in practising one type of law. It had proved to be a good organizational struc- ture, which encouraged each team to organize themselves appropriately for the type of clients that they dealt with. In particular, three teams had flourished under this structure, ‘family law’, ‘property’ and ‘litigation’. Now it was these very teams whose staff were showing signs of dissatisfaction.

Before the results of the survey were published to all staff, Grace knew that she would need to have worked out some kind of response to the issues raised. She decided to go and see each of the lead partners in the three teams. The first person she decided to talk to was Simon Reece, who led the family law team. Before doing so she explained what his team did.

Family law ‘They are called the “family law” team but basically what they do is to help people through the trauma of divorce, separation and break up. Their biggest “high value” clients come to them because of word of mouth recommendation. Last year they had almost a hundred of these “high value” clients and they all valued the personal touch that they were able to give them, getting to know them well and spending time with them to understand the often “hidden” aspects of their case. Of course, not all their clients are the super-rich. About a third of the annual family law income comes from about 750 rela- tively routine divorce and counselling cases.’

Simon was blunt about the declining levels of staff satisfaction in his team. ‘The problem is that working with the “high value” clients is just more fun and more

Grace faces (three) problemsC A S E ST U DY

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reputation for being fast, friendly and giving value for money. Most of their work is ‘domestic’, acting for individ- uals buying or selling their home, or their second home. Each client is allocated to a solicitor who becomes his or her main point of contact. But, given that they can have up to a hundred domestic clients a week, most of the work is actu- ally carried out by the rest of the team of ‘paralegal’ staff (staff with qualifications less than a fully qualified lawyer) behind the scenes.

Kate Hutchinson, who led the property team, was proud of the process she and her team had set up. ‘There is a rela- tively standard process to domestic property sales and purchases and we think that we are pretty efficient at manag- ing these standard jobs. Our process has four stages, one dealing with land registry searches, one liaising with banks who are providing the mortgage finance, one who make sure surveys are completed and one section that finalizes the whole process to completion. We believe that this degree of special- ization can help us achieve the efficiencies that are becoming important, as the market gets more competitive. Our particu- lar problem is that increasingly we are also getting more complex “special” jobs. These are things like “volume re-mortgage” arrangements and rather complex “one-off” jobs, where a mortgage lender transfers a complex set of loan assets to another lender. These “special” jobs are always more complex than the domestic work and they are not popular with our staff. They don’t always fit easily into our standard process, and they disrupt the routine of working. For example, some- times there are occasions when fast completion is particularly important and that can throw us a bit.’

Grace was more worried about the property team than Kate appeared to be. The firm had recently formed partner- ships with two large speculative builders, which dealt in special ‘plot sales’ that would also be classed as non-standard ‘specials’ by Kate. Grace knew that all these ‘specials’ did involve a lot of work and could occupy several members of the team for a time. But they were an important source of revenue. Currently the team was dealing with up to 25 ‘specials’ each week, and this would certainly increase. Grace suspected that Kate was mistaken to try and follow the same process with them as the normal domestic jobs. Maybe trying to do different things on the same process was the cause of the dissatisfaction in the team?

QUESTIONS 1 What are the problems amongst the staff of each of

the three teams? 2 What are the individual ‘services’ offered by each of

the three teams? 3 How would you describe each team’s process in terms

of the jobs of its staff? 4 What do you think each team leader should be doing

to try and overcome their team’s problems?

Litigation Grace was less concerned about the litigation team, led by Hazel Lewis. ‘The litigation team has been our best success story. The have grown far faster than any other part of the firm, and a lot of that is down to Hazel. She provides a key service for our commercial client base. Their primary work consists of handling bulk collections of debt. The group has 17 clients of which 5 provide 85 per cent of total volume. They work closely with the accounts departments of the client companies and have developed a semi-automatic approach to debt collection. It’s a great service that Hazel has largely automated.’

Hazel had led the litigation team since it had been set up 4 years ago. As well as being the partner in charge of litiga- tion, unusually she and her assistant were the only qualified lawyers in the team. ‘Our problems in the litigation team are not really because of any internal tensions or disputes. Broadly, our people are happy with what they do and how they are supervised. The issue is just that we are so different from the rest of the firm. Apart from myself and Raymond [her assis- tant] everyone else in the team are either technicians who look after and develop the systems that we use, or people who have worked in processing or call centres, before they came to us. And between us we have developed a smart operation here. Our staff input data received from their clients into the system, from that point everything progresses through a pre-defined process, letters are produced, queries responded to and eventually debts collected, ultimately through court proceedings if necessary. Work tends to come in batches from clients and varies according to the time of year and client sales activities. At the moment things are fairly steady: we had almost 900 new cases to deal with last week. The details of each case are sent over by the client; our people input the data onto our screens and set up a standard diary system for send- ing letters out. Some people respond quickly to the first letter and often the case is closed within a week or so; other people ignore letters and eventually we initiate court proceedings. We know exactly what is required for court dealings and have a pretty good process to make sure all the right documentation is available on the day. Our problem is that the rest of the firm does not see us as being “proper lawyers”, and they are right, we’re not. But it does get difficult for our people, being looked down upon all the time. Our salary structure is different, our bonus scheme is different, and how we measure performance is different. But there is a solution. Because we have expanded so much, we need more space than is available in this building. I think that we should think about moving the litigation team. There is a great location out by the airport that could be expanded in the future if needed. There is really no reason for us to be located with the other teams.’

Property The ‘property’ team is one of the largest parts of the firm and is established in the local market with an excellent

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Problems and applications

All chapters have ‘Problems and applications’ questions that will help you practise analysing operations. They can be answered by reading the chapter. Model answers for the first two questions can be found on the companion website for this book.

1 Using technology for staff surveillance is clearly a controversial issue. Re-read the ‘Operations in practice’ example that discusses using technology for surveillance. (a) Draw up a list of possible positives and negatives that could result from staff surveillance. (b) Which industries do you think might be the most eager to trial staff surveillance?

2 Operations managers can have a profound influence on how organizations implement their human resource strategy (the overall long-term approach to ensuring that an organization’s human resources provide a strategic advantage). One authority on human resource (HR) strategy (Dave Ulrich, the University of Michigan) proposes four elements to the HR activity:

▶ Being ‘strategic partner’ to the business – aligning HR and business strategy: ‘organizational diagnosis’, manpower planning, environmental monitoring, etc.

▶ Administering HR procedures and processes – running the organization’s HR processes and ‘shared services’: payroll, appraisal, selection and recruitment, communication, etc.

▶ Being an ‘employee champion’ – listening and responding to employees: ‘providing resources to employees’, conciliation, career advice, grievance procedures, etc.

▶ Being a ‘change agent’ – managing transformation and change: ‘ensuring capacity for change’, management development, performance appraisal, organization development, etc.

What do you think is the relevance of these HR roles to operations managers?

3 (It is recommended that you look at the supplement to this chapter before answering this question.) A hotel has two wings, an east wing and a west wing. Each wing has four ‘room service maids’ working 7-hour shifts to service the rooms each day. The east wing has 40 standard rooms, 12 deluxe rooms and five suites. The west wing has 50 standard rooms and 10 deluxe rooms. The standard times for servicing rooms are as follows: standard rooms 20 standard minutes (SMs), deluxe rooms 25 SMs and suites 40 SMs. In addition, an allowance of 5 SMs per room is given for any miscellaneous jobs such as collecting extra items for the room or dealing with customer requests. The east-wing maids believe that they have the more demanding job. Are they right?

4 In the example above, one of the maids in the west wing wants to job share with his partner, each working 3 hours per day. His colleagues have agreed to support him and will guarantee to service all the rooms in the west wing to the same standard each day. Can this arrangement succeed without excessive work for the other three maids?

5 (This question is based on an original case study by Dr Ran Bhamra, Loughborough University.) Service Adhesives Ltd produces specialist adhesives. It has always been profitable, but there had

been a slowdown in the company’s profits. Several improvement initiatives had attempted to reverse the company’s declining position but none had fully taken hold. Some senior management put this down to staff having ‘below average’ skills and motivation, and being reluctant to change. Staff turnover was high and the company had started employing short-term contract labour to cope with fluctuating orders. There had been some tension between temporary and permanent

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employees. The company organized a visit to one of its customers, called (bizarrely) ‘Happy Products’. ‘It was like entering another world. Their plant was cleaner, the flow of materials seemed smoother, their staff seemed purposeful, it seemed efficient and everybody worked as a team. I’m sure that team-based approach could be implemented just as successfully in our plant’ (CEO, Service Adhesives).

The Happy Products operation made diapers (nappies) and healthcare products and was organ- ized into three product areas, each staffed by five operators. One operator was a team leader responsible for ‘first line management’. A second operator was a specially trained health and safety representative. A third was a trained quality representative who also liaised with the Quality Department. A fourth operator was a trained maintenance engineer, while a fifth was a non-specialist, ‘floating’ operator. This meant that most day-to-day problems could be dealt with immediately, so production output, product quality and line efficiency were controlled exceptionally well. Team members derived great satisfaction from playing a key part in the success of the organization. Teams were also involved in determining annual performance targets for their specific areas. Service Adhesives decided to adopt a team-based work organization. However, it realized that it lacked the organizational ‘cohesiveness’ that Happy Products had. Traditionally, it had prided itself on its hier- archical organization structure, with five layers of management from the plant director to the shop floor operatives. The chain of command was strictly enforced by operating procedures enshrined in the comprehensive quality assurance system.

(a) Service Adhesives Ltd currently employs some people on short-term contracts. How could this affect its proposed team-based working structure?

(b) In moving from a traditional to a team-based work structure, what sort of formal (e.g. roles and procedures) and informal (e.g. social groups and communication) barriers is Service Adhesive likely to encounter?

(c) Senior management of Service Adhesives thought that the main reason for ineffective improve- ment initiatives in the past was the apparent lack of cohesion amongst the organization’s human resources. Could a team-based work organization be the answer to their organizational difficulties?

(d) Employee empowerment is a key element of team-based working. What difficulties could Service Adhesives face in implementing empowerment?

6 Re-read the ‘Operations in practice’ example on ‘W. L. Gore & Associates Inc.’ (a) How is W. L. Gore different from most international corporations? (b) Why is Gore’s way of working particularly appro- priate for how it competes in its markets?

7 Among the first large organization to take flexible working seriously in Europe was Lloyds TSB Banking Group. It adopted flexible working because it was sensitive to the social and economic changes that were affecting both customers and staff. There were benefits of adopting work patterns that reflected its staff’s needs and yet still offered quality of service to customers. Recruiting and keeping talented people meant understanding and implementing the right balance between staff’s individual needs, the business’s requirement to control its costs, and the customers’ expectation of excellent service. A survey of employees’ views showed that one of

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their main concerns was trying to balance the job with outside commitments, such as family and leisure. So, the Group introduced its flexible working policy, called ‘Work Options’. It allowed staff to request a different working pattern from the conventional working day. Sometimes this simply involved starting and finishing earlier or later each day, while maintaining the same weekly hours. This could benefit the business. Varying staff’s work patterns could mean staffing is more closely aligned with actual customer demand. Job sharing is also used. It suits two staff, who may not want full-time employment and the business can have two people’s combined experience, skills and creativity. Job-sharing staff can also be more productive than full-time colleagues. Another form of flexible working is ‘compressed working’, where staff work a stand- ard one or two weeks within a shorter time scale, for example by working some longer days a week, then taking extra time off to compensate. (a) What seem to be the main advantages and potential disadvantages of flexible working for staff, the company and customers? (b) How can a firm such as Lloyds try and overcome any clashes between the requirements of staff, the busi- ness and customers?

Selected further reading

Argyris, C. (1998) Empowerment: the emperor’s new clothes, Harvard Business Review, May–June. A critical but fascinating view of empowerment.

Bock, L. (2015) Work Rules!: Insights from Inside Google that Will Transform How You Live and Lead, John Murray, London. With an agenda far wider than this chapter, it is nevertheless an absorbing book that gives an insight into an absorbing firm.

Dul, J. and Weerdmeester, B. (2008) Ergonomics for Beginners: A Quick Reference Guide, 3rd edn, CRC Press, Boca Raton, FL. Good, practical guidance on the removal from the workplace of physical and mental stresses caused by poor job or environmental design.

Hackman, R.J. and Oldham, G. (1980) Work Redesign, Addison-Wesley, Reading, MA. Somewhat dated but, in its time, ground breaking and certainly hugely influential.

Herzberg, F. (1987) One more time: how do you motivate employees? (with retrospective commentary), Harvard Business Review, vol. 65, no. 5, 109–120. An interesting look back by one of the most influential figures in the behavioural approach to job design school.

Lantz, A. and Brav, A. (2007) Job design for learning in work groups, Journal of Workplace Learning, vol. 19, no. 5, 269–285. The title is self-explanatory.

Shorrock, S. (Editor) (2016) Human Factors and Ergonomics in Practice. Routledge. An edited book, but with lots of examples of the real practice of human factors and ergonomics.

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INTRODUCTION

A tale is told of Frank Gilbreth (the founder of method study) addressing a scientific conference with a paper entitled ‘The Best Way to Get Dressed in the Morning’. In his presentation, he rather bemused the scientific audience by analysing the ‘best’ way of buttoning up one’s waistcoat in the morning. Among his conclusions was that waistcoats should always be buttoned from the bottom upwards (to make it easier to straighten his tie in the same motion; buttoning from the top downwards requires the hands to be raised again). Think of this example if you want to understand scientific management and method study in particular. First of all, he is quite right. Method study and the other techniques of scientific management may often be without any intellectual or scientific validation, but by and large they work in their own terms. Second, Gilbreth reached his conclusion by a systematic and critical analysis of what motions were neces- sary to do the job. Again, these are characteristics of scientific management – detailed analysis and painstakingly systematic examination. Third (and possibly most important), the results are relatively trivial. A great deal of effort was put into reaching a conclusion that was unlikely to have any earth-shattering consequences. Indeed, one of the criticisms of scientific management, as developed in the early part of the twentieth century, is that it concentrated on relatively limited, and sometimes trivial, objectives.

The responsibility for its application, however, has moved away from specialist ‘time and motion’ staff to the employees who can use such principles to improve what they do and how they do it. Further, some of the methods and techniques of scientific management, as opposed to its philosophy (especially those which come under the general heading of ‘method study’), can in practice prove useful in critically re-examining job designs. It is the practicality of these tech- niques which possibly explains why they are still influential in job design almost a century after their inception.

Method study in job design Method study is a systematic approach to finding the best method. There are six steps:

1 Select the work to be studied. 2 Record all the relevant facts of the present method. 3 Examine those facts critically and in sequence. 4 Develop the most practical, economic and effective method. 5 Install the new method. 6 Maintain the method by periodically checking it in use.

Supplement to Chapter 9 Work study

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Step 1 – Selecting the work to be studied Most operations have many hundreds and possibly thousands of discrete jobs and activities which could be subjected to study. The first stage in method study is to select those jobs to be studied which will give the most return on the investment of the time spent studying them. This means it is unlikely that it will be worth studying activities which, for example, may soon be discontinued or are only performed occasionally. On the other hand, the types of job which should be studied as a matter of priority are those which, for example, seem to offer the greatest scope for improvement, or which are causing bottlenecks, delays or problems in the operation.

Step 2 – Recording the present method There are many different recording techniques used in method study. Most of them:

▶ record the sequence of activities in the job; ▶ record the time interrelationship of the activities in the job; or ▶ record the path of movement of some part of the job.

Perhaps the most commonly used recording technique in method study is process mapping which was discussed in Chapter 4. Note that we are here recording the present method of doing the job. It may seem strange to devote so much time and effort to recording what is currently happening when, after all, the objective of method study is to devise a better method. The rationale for this is, first of all, that recording the present method can give a far greater insight into the job itself, and this can lead to new ways of doing it. Second, recording the present method is a good starting point from which to evaluate it critically and therefore improve it. In this last point the assumption is that it is easier to improve the method by starting from the current method and then criticizing it in detail than by starting with a ‘blank sheet of paper’.

Step 3 – Examining the facts This is probably the most important stage in method study and the idea here is to examine the cur- rent method thoroughly and critically. This is often done by using the so-called ‘questioning tech- nique’. This technique attempts to detect weaknesses in the rationale for existing methods so that alternative methods can be developed (see Table S9.1). The approach may appear somewhat detailed and tedious, yet it is fundamental to the method study philosophy – everything must be critically examined. Understanding the natural tendency to be less than rigorous at this stage, some organi- zations use pro forma questionnaires, asking each of these questions and leaving space for formal replies and/or justifications, which the job designer is required to complete.

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Step 4 – Developing a new method The previous critical examination of current methods has by this stage probably indicated some changes and improvements. This step involves taking these ideas further in an attempt to:

▶ eliminate parts of the activity altogether; ▶ combine elements together; ▶ change the sequence of events so as to improve the efficiency of the job; or ▶ simplify the activity to reduce the work content.

A useful aid during this process is a checklist such as the revised principles of motion economy. Table S9.2 illustrates these.

Steps 5 and 6 – Install the new method and regularly maintain it The method study approach to the installation of new work practices concentrates largely on ‘pro- ject managing’ the installation process. It also emphasizes the need to monitor regularly the effec- tiveness of job designs after they have been installed.

Work measurement in job design Basic times Terminology is important in work measurement. When a qualified worker is working on a speci- fied job at standard performance, the time he or she takes to perform the job is called the basic time for the job. Basic times are useful because they are the ‘building blocks’ of time estimation. With the basic times for a range of different tasks, an operations manager can construct a time estimate

Broad question Detailed question

The purpose of each activity (questions the fundamental need for the element)

What is done? Why is it done? What else could be done? What should be done?

The place in which each element is done (may suggest a combination of certain activities or operations)

Where is it done? Why is it done there? Where else could it be done? Where should it be done?

The sequence in which the elements are done (may suggest a change in the sequence of the activity)

When is it done? Why is it done then? When should it be done?

The person who does the activity (may suggest a combination and/or change in responsibility or sequence).

Who does it? Why does that person do it? Who else could do it? Who should do it?

The means by which each activity is done (may suggest new methods)

How is it done? Why is it done in that way? How else could it be done? How should it be done?

Table S9.1 The method study questioning technique

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for any longer activity which is made up of the tasks. The best-known technique for establishing basic times is probably time study.

Time study Time study is ‘a work measurement technique for recording the times and rate of working for the elements of a specified job, carried out under specified conditions, and for analysing the data so as to obtain the time necessary for the carrying out of the job at a defined level of performance’. The technique takes three steps to derive the basic times for the elements of the job:

▶ observing and measuring the time taken to perform each element of the job; ▶ adjusting, or ‘normalizing’, each observed time; ▶ averaging the adjusted times to derive the basic time for the element.

Step 1 – Observing, measuring and rating A job is observed through several cycles. Each time an element is performed, it is timed using a stopwatch. Simultaneously with the observation of time, a rating of the perceived performance of the person doing the job is recorded. Rating is ‘the process of assessing the worker’s rate of working relative to the observer’s concept of the rate corresponding to standard performance. The observer may take into account, separately or in combination, one or more factors necessary to carrying out the job, such as speed of movement, effort, dexterity, consistency, etc.’. There are several ways of recording the observer’s rating. The most common is on a scale which uses a rating of 100 to repre- sent standard performance. If an observer rates a particular observation of the time to perform an element at 100, the time observed is the actual time which anyone working at standard performance would take.

Broad principle How to do it

Use the human body the way it works best

▶ Work should be arranged so that a natural rhythm can become automatic. ▶ Motion of the body should be simultaneous and symmetrical if possible. ▶ The full capabilities of the human body should be employed. ▶ Arms and hands as weights are subject to the physical laws and energy should be conserved. ▶ Tasks should be simplified.

Arrange the workplace to assist performance

▶ There should be a defined place for all equipment and materials. ▶ Equipment, materials and controls should be located close to the point of use. ▶ Equipment, materials and controls should be located to permit the best sequence and path of motions. ▶ The workplace should be fitted both to the tasks and to human capabilities.

Use technology to reduce human effort

▶ Work should be presented precisely where needed. ▶ Guides should assist in positioning the work without close operator attention. ▶ Controls and foot-operated devices can relieve the hands of work. ▶ Mechanical devices can multiply human abilities. ▶ Mechanical systems should be fitted to human use.

Source: Adapted from Barnes, Frank C. (1983) ‘Principles of Motion Economy: Revisited, Reviewed, and Restored’, Proceedings of the Southern Management Association Annual Meeting (Atlanta, GA 1983), p. 298.

Table S9.2 The principles of motion economy

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312 PART TWO DESIGNING THE OPERATION

Step 2 – Adjusting the observed times The adjustment to normalize the observed time is:

observed rating standard rating

where standard rating is 100 on the common rating scale we are using here. For example, if the observed time is 0.71 minutes and the observed rating is 90, then:

Basic time = 0.71 * 90

100 = 0.64 mins

Step 3 – Averaging the basic times In spite of the adjustments made to the observed times through the rating mechanism, each sepa- rately calculated basic time will not be the same. This is not necessarily a function of inaccurate rat- ing, or even the vagueness of the rating procedure itself; it is a natural phenomenon of the time taken to perform tasks. Any human activity cannot be repeated in exactly the same time on every occasion.

Standard times The standard time for a job is an extension of the basic time and has a different use. Whereas the basic time for a job is a piece of information which can be used as the first step in estimating the time to perform a job under a wide range of conditions, standard time refers to the time allowed for the job under specific circumstances. This is because standard time includes allowances which reflect the rest and relaxation allowed because of the conditions under which the job is performed. So the standard time for each element consists principally of two parts, the basic time (the time taken by a qualified worker, doing a specified job at standard performance) and an allowance (this is added to the basic time to allow for rest, relaxation and personal needs).

Allowances Allowances are additions to the basic time intended to provide the worker with the opportunity to recover from the physiological and psychological effects of carrying out specified work under spec- ified conditions and to allow for personal needs. The amount of the allowance will depend on the nature of the job. The way in which relaxation allowance is calculated, and the exact allowances given for each of the factors which determine the extent of the allowance, varies between different organizations. Table S9.3 illustrates the allowance table used by one company which manufactures domestic appliances. Every job has an allowance of 10 per cent. The table shows the further percent- age allowances to be applied to each element of the job. In addition, other allowances may be applied for such things as unexpected contingencies, synchronization with other jobs, unusual working conditions, and so on.

Figure S9.1 shows how average basic times for each element in the job are combined with allow- ances (low in this example) for each element to build up the standard time for the whole job.

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CHAPTER 9 PEOPLE IN OPERATIONS 313

Allowance factors Example Allowance (%)

Energy needed

Negligible None 0

Very light 0–3 kg 3

Light 3–10 kg 5

Medium 10–20 kg 10

Heavy 20–30 kg 15

Very heavy Above 30 kg 15–30

Posture required

Normal Sitting 0

Erect Standing 2

Continuously erect Standing for long periods 3

Lying On side, face or back 4

Difficult Crouching, etc. 4–10

Visual fatigue

Nearly continuous attention 2

Continuous attention with varying focus 3

Continuous attention with fixed focus 5

Temperature

Very low Below 0°C over 10

Low 0–12°C 0–10

Normal 12–23°C 0

High 23–30°C 0–10

Very high Above 30°C over 10

Atmospheric conditions

Good Well ventilated 0

Fair Stuffy/smelly 2

Poor Dusty/needs filter 2–7

Bad Needs respirator 7–12

Table S9.3 An allowances table used by a domestic appliance manufacturer

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314 PART TWO DESIGNING THE OPERATION

Figure S9.1 Time study of a packing task – standard time for the whole task calculated

Job Location Observer

Observation

1 2 3 4 5 6 7 8 9 10

Observation Average basic time

Allowances

Raw standard time

Allowances for total job

Standard time for job SM

Element standard

time Element

Pack 20 × pt # 73/2A Packing Dept. FWT

Make box 0.71

90

0.64

1.30

90

1.17

0.53

90

0.48

1.12

100

1.12

Pack × 20

Seal and secure

Assemble outwe,

fix and label

Observed time

Observed time

Rating

Basic time

Rating

Basic time

Observed time

Rating

Basic time

Observed time

Rating

Basic time

0.71

90

0.64

1.32

90

1.19

0.55

90

0.50

1.21

90

1.09

0.71

90

0.63

1.25

100

1.25

0.55

90

0.50

1.20

90

1.08

0.69

90

0.62

1.33

90

1.20

0.56

90

0.50

1.25

90

1.13

0.75

80

0.60

1.33

90

1.20

0.53

90

0.48

1.41

90

1.27

0.68

90

0.61

1.28

90

1.15

0.53

90

0.48

1.27

90

1.14

0.70

90

0.63

1.32

90

1.19

0.53

90

0.48

1.27

90

1.14

0.70

90

0.65

1.32

90

1.19

0.55

90

0.50

1.15

100

1.15

0.70

90

0.63

1.30

90

1.17

0.49

100

0.49

1.20

90

1.08

0.68

90

0.61 0.626 0.689

1.308

0.545

1.275

3.817

0.191

4.01

10%

12%

10%

12%

5%

1.30

90

1.17 1.168

0.495

1.138

0.51

100

0.51

1.23

90

1.21

Worked example

Two work teams in the Monrovian Embassy have been allocated the task of processing visa applications. Team A processes applications from Europe, Africa and the Middle East. Team B processes applications from North and South America, Asia and Australasia. Team A has chosen to organize itself in such a way that each of its three team members processes an application from start to finish. The four members of Team B have chosen to split themselves into two sub-teams. Two open the letters and carry out the checks for a criminal record (no one who has been convicted of any crime other than a motoring offence can enter Monrovia), while the other two team members check for financial security (only people with more than Monrovian $1,000 may enter the country). The head of consular affairs is keen to find out if one of these methods of organizing the teams is more efficient than the other. The problem is that the mix of applications differs region by region. Team A typically processes around two business applications to every one tourist application. Team B processes around one business application to every two tourist applications.

A study revealed the following data:

Average standard time to process a business visa = 63 standard minutes Average time to process a tourist visa = 55 standard minutes

Average weekly output from Team A is:

85.2 business visas 39.5 tourist visas

▼

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CHAPTER 9 PEOPLE IN OPERATIONS 315

Average weekly output from Team B is:

53.5 business visas 100.7 tourist visas

All team members work a 40-hour week. The efficiency of each team can be calculated by comparing the actual output in standard minutes

and the time worked in minutes. So Team A processes:

(85.2 * 63) + (39.5 * 55) = 7,540.1 standard minutes of work

in 3 * 40 * 60 minutes = 7,200 minutes

So its efficiency = 7,540.1 7,200

* 100 = 104.72%

Team B processes:

(53.5 * 63) + (100.7 * 55) = 8,909 standard minutes of work

in 4 * 40 * 60 minutes = 9,600 minutes

So its efficiency = 8,909 9,600

* 100 = 92.8%

The initial evidence therefore seems to suggest that the way Team A has organized itself is more efficient.

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316

Deliver

PART THREE

Operations management

Direct

Design Develop

Deliver

Deliver

Planning and control

Supply chain management

Planning and control

systems

Capacity management

Lean operations

Inventory management

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A ll the activities involved in the design of an operation should have provided the nature and shape of the transforming resources that are capable of satisfying customers’ demands. Products and services then have to be created and delivered to customers. This is done by planning and controlling the activities of the transforming resources on a day-to-day basis to ensure the appropriate supply of products and services to meet the requirements of the market. This part of the book will look at six different aspects of planning and controlling the delivery of products and services as they flow through processes, operations and supply networks. The chapters in this part are:

▶ Chapter 10 Planning and control This examines how operations organize the delivery of their products and services on an ongoing basis so that customers’ demands are satisfied.

▶ Chapter 11 Capacity management This explains how operations need to decide how to vary their capacity (if at all) as demand for their products and services fluctuates.

▶ Chapter 12 Supply chain management This describes how operations relate to each other in the context of a wider network of suppliers and customers, and how these relationships can be managed.

▶ Chapter 13 Inventory management This looks at how transformed resources accumulate as inventories as they flow through processes, operations or supply networks.

▶ Chapter 14 Planning and control systems This describes how systems are needed to manage the very large amounts of information required to plan and control operations, and how enterprise resources planning (ERP) is used to do this.

▶ Chapter 15 Lean operations This explains the concepts that underlie one of the most influential sets of ideas to impact operations management.

317

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318

INTRODUCTION

The design of an operation determines the resources with which it creates its services and products, but then the operation has to deliver those services and products on an ongoing basis. And central to an operation’s ability to deliver is the way it plans its activities and controls them so that customers’ demands are satisfied. This chapter introduces and provides an overview of some of the principles and methods of planning and control. Later chapters in this part of the book develop some specific issues that are vital to an operation delivering its services and products. These issues start with managing capacity and move through managing inventory, providing an overview of supply chain management and looking at how planning and control systems, particularly enterprise resources planning (ERP), manage the information that ensures effective delivery. We then examine how ‘lean’ philosophy has influenced operations practice. Figure  10.1 shows where this topic fits into the activities of operations management.

Planning and control 10

KEY QUESTIONS

What is planning and control?

What is the difference between planning and control?

How do supply and demand affect planning and control?

What are the activities of planning and control?

Figure 10.1 This chapter examines planning and control

Topic covered in this chapter

Operations management

Direct

Design Develop

Deliver

Deliver

Planning and control

Supply chain management

Planning and control

systems

Capacity management

Lean operations

Inventory management

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CHAPTER 10 PLANNING AND CONTROL 319

What is planning and control? Planning and control is concerned with the activities that attempt to reconcile the demands of the market and the ability of the operation’s resources to deliver. It provides the systems, procedures and decisions which bring different aspects of supply and demand together. Consider, for example, the way in which routine surgery is organized in a hospital. When a patient arrives and is admitted to the hospital, much of the planning for the surgery will already have happened. The operating theatre will have been reserved, and the doctors and nurses who staff the operating theatre will have been provided with all the information regarding the patient’s condition. Appropriate preoperative and postoperative care will have been organized. All this will involve staff and facilities in different parts of the hospital, all of whom must have been given the same information and their activities coordinated. Soon after the patient arrives, he or she will be checked to make sure that the condition is as expected (in much the same way as material is inspected on arrival in a factory). Blood, if required, will be cross-matched and reserved, and any medication will be made ready (in the same way that all the different materials are brought together in a factory). Any last-minute changes may require some degree of re-planning. For example, if the patient shows unexpected symptoms, observation may be necessary before the surgery can take place. Not only will this affect the patient’s own treatment, but other patients’ treatment may also have to be rescheduled (in the same way as machines will need rescheduling if a job is delayed in a factory). All these activities of scheduling, coordination and organization are concerned with the planning and control of the hospital.

Operations principle Customers’ perceptions of an operation will partially be shaped by the customer interface of its planning and control system.

O P E R AT I O N S I N P R AC T I C E

Joanne Cheung is the Senior Service Adviser at a premier BMW dealership. She and her team act as the interface between custom- ers who want their cars serviced and repaired, and the 16 technicians who carry out the work in their state-of-the-art workshop. ‘There are three types of work that we have to organize,’ says Joanne. ‘The first is performing repairs on customers’ vehicles. They usually want this doing as soon as possible. The second type of job is routine servicing. It is usually not urgent so customers are generally willing to negotiate a time for this. The remainder of our work involves working on the pre-owned cars which our buyer has bought-in to sell on to customers. Before any of these cars can be sold they have to undergo extensive checks. To some extent we treat these categories of work slightly differently. We have to give good service to our internal car buyers, but there is some flexibility in planning these jobs. At the other extreme, emergency repair work for customers has to be fitted into our schedule as quickly as possible. If someone is desperate to have their car repaired at very short notice, we some- times ask them to drop their car in as early as they can and

pick it up as late as possible. This gives us the maximum amount of time to fit it into the schedule.

There are a number of service options open to customers. We can book short jobs in for a fixed time and do it while they wait. Most commonly, we ask the customer to leave the car with us and collect it later. To help custom- ers we have ten loan cars which are booked out on a first-come first-served basis. Alternatively, the vehicle can be collected from the customer’s home and delivered back

Joanne manages the schedule1

▼

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320 PART THREE DELIVER

The difference between planning and control Notice that we have chosen to treat ‘planning and control’ together. This is because the division between ‘planning’ and ‘control’ is not clear, either in theory or in practice. However, there are some general features that help to distinguish between the two. Planning is a formalization of what is intended to happen at some time in the future. But a plan does not guarantee that an event will actually happen. Rather it is a statement of intention. Although plans are based on expectations, during their implementation things do not always happen as expected. Customers change their minds about what they want and when they want it. Suppliers may not always deliver on time, process tech- nology may fail, or staff may be absent through illness. Control is the process of coping with these types of change. It may mean that plans need to be redrawn in the short term. It may also mean that an ‘intervention’ will need to be made in the operation to bring it back ‘on track’ – for example, finding

a new supplier who can deliver quickly, getting process technology up and running again, or moving staff from another part of the operation to cover for the absentees. Control activities make the adjustments which allow the operation to achieve the objectives that the plan has set, even when the assumptions on which the plan was based do not hold true.

Long-, medium- and short-term planning and control The nature of planning and control activities changes over time. In the very long term, operations managers make plans concerning what they intend to do, what resources they need, and what objec- tives they hope to achieve. The emphasis is on planning rather than control, because there is little to control as such. They will use forecasts of likely demand described in aggregated terms. For exam- ple, a hospital will make plans for ‘2,000 patients’ without necessarily going into the details of the individual needs of those 2,000 patients. Similarly, the hospital might plan to have 100 nurses and 20 doctors but again without deciding on the specific attributes of the staff. Operations managers will focus mainly on volume and financial targets

Medium-term planning and control is more detailed. It looks ahead to assess the overall demand which the operation must meet in a partially disaggregated manner. By this time, for example, the hospital must distinguish between different types of demand. The number of patients coming as accident and emergency cases will need to be distinguished from those requiring routine operations. Similarly, different

there when it is ready. Our four drivers who do this are able to cope with up to 12 jobs a day.

Most days we deal with 50 to 80 jobs, taking from half-an-hour up to a whole day. To enter a job into our process all Service Advisers have access to the computer-based scheduling system. On-screen it shows the total capacity we have day-by-day, all the jobs that are booked in, the amount of free capacity still available, the number of loan cars available, and so on. We use this to see when we have the capacity to book a customer in, and then enter all the customer’s details. BMW have issued “standard times” for all the major jobs. However, you have to modify these standard times a bit to take account of circumstances. That is where the Service Adviser’s experi- ence comes in.

We keep all the most commonly used parts in stock, but if a repair needs a part which is not in stock, we can usually get it from the BMW parts distributors within a day. Every evening our planning system prints out the jobs to be done

the next day and the parts which are likely to be needed for each job. This allows the parts staff to pick out the parts for each job so that the technicians can collect them first thing the next morning without any delay.

Every day we have to cope with the unexpected. A tech- nician may find that extra work is needed, customers may want extra work doing, and technicians are sometimes ill, which reduces our capacity. Occasionally parts may not be available so we have to arrange with the customer for the vehicle to be rebooked for a later time. Every day up to four or five customers just don’t turn up. Usually they have just forgotten to bring their car in, so we have to rebook them in at a later time. We can cope with most of these uncer- tainties because our technicians are flexible in terms of the skills they have and also are willing to work overtime when needed. Also, it is important to manage customers’ expec- tations. If there is a chance that the vehicle may not be ready for them, it shouldn’t come as a surprise when they try and collect it.’

Operations principle Planning and control are separate but closely related activities.

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CHAPTER 10 PLANNING AND CONTROL 321

categories of staff will have been identified and broad staffing levels in each category set. Just as impor- tant, contingencies will have been put in place which allow for slight deviations from the plans. These contingencies will act as ‘reserve’ resources and make planning and control easier in the short term.

In short-term planning and control, many of the resources will have been set and it will be diffi- cult to make large changes. However, short-term interventions are possible if things are not going to plan. By this time, demand will be assessed on a totally disaggregated basis, with all types of surgical procedures treated as individual activities. More importantly, individual patients will have been identified by name, and specific time slots booked for their treatment. In making short-term interventions and changes to the plan, operations managers will be attempting to balance the qual- ity, speed, dependability, flexibility and costs of their operation dynamically on an ad hoc basis. It is unlikely that they will have the time to carry out detailed calculations of the effects of their short-term planning and control decisions on all these objectives, but a general understanding of priorities will form the background to their decision making. Figure 10.2 shows how the control aspects of planning and control increase in significance closer to the date of the event.

The volume–variety effect on planning and control As we have found previously, the volume and variety characteristics of an operation will have an effect on its planning and control activities. Operations which produce a high variety of services or products in relatively low volume will have customers with different requirements and use dif- ferent processes from operations which create standardized services or products in high volume (see Table 10.1).

Figure 10.2 The balance between planning and control activities changes in the long, medium and short terms

Significance of planning or control

PLANNING

CONTROL

M o

n th

s/ ye

ar s

Determines resources in aggregated form

Determines resources and contingencies

Objectives set in largely financial terms

Objectives set in both financial and operations terms

Uses aggregated demand forecasts

Uses partially disaggregated demand forecasts

Uses totally disaggregated forecasts or actual demand Makes interventions to resources to correct deviations from plans Ad hoc consideration of operations objectives

Long-term planning and control

Medium-term planning and control

Short-term planning and control

D ay

s/ w

ee ks

/m o

n th

s

T im

e h

o ri

zo n

H o

u rs

/d ay

s

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322 PART THREE DELIVER

Take two contrasting operations – an architects’ practice and an electricity utility. The architects’ high variety of customized services means they cannot produce designs in advance of customers requesting them. Because of this, the time it will take to finally deliver their services to customers will be relatively slow. Customers will understand this, but will expect to be consulted extensively as to their needs. The details and requirements of each job will emerge only as each individual building is designed to the client’s requirements, so planning occurs on a relatively short-term basis. The indi- vidual decisions which are taken in the planning process will usually concern the timing of activities and events – for example, when a design is to be delivered, when building should start, when each individual architect will be needed to work on the design. Control decisions also will be at a relatively detailed level. A small delay in fixing one part of the design could have significant implications in many other parts of the job. For an architect, planning and control cannot be a totally routine matter; projects need managing on an individual basis. However, the robustness of the operation (that is, its vulnerability to serious disruption if one part of the operation fails) will be relatively high. There are probably plenty of other things to get on with if an architect is prevented from progressing one part of the job.

The electricity utility, on the other hand, is very different. Volume is high, production is continu- ous, and variety is non-existent. Customers expect instant ‘delivery’ whenever they plug in an appliance. The planning horizon in electricity generation can be very long. Major decisions regarding the capacity of power stations are made years in advance. Even the fluctuations in demand over a typical day can be forecast in advance. Popular television programmes can affect minute-by-minute demand and these are scheduled weeks or months ahead. The weather, which also affects demand, is more uncertain, but can to some extent be predicted. Individual planning decisions made by the

electricity utility are not concerned with the timing, but rather the volume of output. Control decisions will concern aggregated measures of output such as the total kilowatts of electricity gener- ated, because the product is more or less homogeneous. However, the robustness of the operation is very low because, if a generator fails, the operation’s capability of supplying electricity from that part of the operation also fails.

How do supply and demand affect planning and control? If planning and control is the process of reconciling demand with supply, then the nature of the decisions taken to plan and control an operation will depend on both the nature of demand and the nature of supply in that operation. In this section, we examine some differences in demand and supply which can affect the way in which operations managers plan and control their activities.

Volume Variety Customer responsiveness

Planning horizon

Major planning decision

Control decisions

Robustness

Low High Slow Short Timing Detailed High

High Low Fast Long Volume Aggregated Low

Table 10.1 The volume–variety effects on planning and control

Operations principle The volume–variety characteristics of an operation will affect its planning and control activities.

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CHAPTER 10 PLANNING AND CONTROL 323

O P E R AT I O N S I N P R AC T I C E

‘In many ways a major airline can be viewed as one large planning problem which is usually approached as many independent, smaller (but still difficult) planning problems. The list of things which need planning seems endless : crews, reservation agents, luggage, flights, through trips, maintenance, gates, inventory, equipment purchases. Each planning problem has its own considerations, its own complexities, its own set of time horizons, its own objec- tives, but all are interrelated.’

Air France has 80 flight planners working 24-hour shifts in its flight plan- ning office at Roissy, Charles de Gaulle. Their job is to establish the optimum flight routes, anticipate any problems such as weather changes, and minimize fuel consumption. Overall the goals of the flight planning activity are first, and most impor- tant, safety followed by economy and passenger comfort. Increasingly powerful computer programs process the mountain of data necessary to plan the flights, but in the end many decisions still rely on human judgement. Even the most sophisticated expert systems only serve as support for the flight planners. Planning Air France’s schedule is a massive job. The following are just some of the considerations which need to be taken into account:

▶ Frequency – for each airport how many separate services should the airline provide?

▶ Fleet assignment – which type of plane should be used on each leg of a flight?

▶ Banks – at any airline hub where passengers arrive and may transfer to other flights to continue their journey, airlines like to organize flights into ‘banks’ of several planes which arrive close together, pause to let passen- gers change planes, and all depart close together. So, how many banks should there be and when should they occur?

▶ Block times – a block time is the elapsed time between a plane leaving the departure gate at an airport and

arriving at its gate in the arrival airport. The longer the allowed block time, the more likely a plane will keep to schedule even if it suffers minor delays. However, longer block times also mean fewer flights can be scheduled.

▶ Planned maintenance – any schedule must allow for planes to have time at a maintenance base.

▶ Crew planning – pilot and cabin crew must be sched- uled to allocate pilots to fly planes on which they are licensed and to keep within maximum ‘on duty’ times for all staff.

▶ Gate plotting – if many planes are on the ground at the same time, there may be problems in loading and unloading them simultaneously.

▶ Recovery – many things can cause deviations from any plan in the airline industry. Allowances must be built in to allow for recovery.

For flights within and between Air France’s 12 geographic zones, the planners construct a flight plan that will form the basis of the actual flight only a few hours later. All planning documents need to be ready for the flight crew who arrive two hours before the scheduled departure time. Being responsible for passenger safety and comfort, the captain always has the final say and, when satisfied, co-signs the flight plan together with the planning officer.

Operations control at Air France2

Uncertainty in supply and demand Uncertainty is important in planning and control because it makes it more difficult. Sometimes the supply of inputs to an operation may be uncertain. Local village carnivals, for example, rarely work to plan. Events take longer than expected, some of the acts scheduled in the programme may be delayed en route, and some traders may not even

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324 PART THREE DELIVER

arrive. In other operations supply is relatively predictable, and the need for control is minimal. For example, cable TV services provide programmes to a schedule into subscribers’ homes. It is rare to change the programme plan. Similarly demand may be unpredictable. A fast-food outlet inside a  shopping centre does not know how many people will arrive, when they will arrive and what they will order. It may be possible to predict certain patterns, such as an increase in demand over the lunch and tea-time periods, but a sudden rainstorm that drives shoppers indoors into the centre could significantly and unpredictably increase demand in the very short term. Conversely, demand

may be more predictable. In a school, for example, once classes are fixed and the term or semester has started, a teacher knows how many pupils are in the class. Both supply and demand uncer- tainty make planning and control more difficult, but a combina- tion of supply and demand uncertainty is particularly difficult.

Dependent and independent demand Some operations can predict demand with relative certainty because demand for their services or products is dependent upon some other factor which is known. This is known as dependent demand. For example, the demand for tyres in an automobile factory is not a totally random variable. The process of demand forecasting is relatively straightforward. It will consist of examining the manu- facturing schedules in the car plant and deriving the demand for tyres from these. If 600 cars are to be manufactured on a particular day, then it is simple to calculate that 3,000 tyres will be demanded by the car plant (each car has five tyres) – demand is dependent on a known factor, the number of cars to be manufactured. Because of this, the tyres can be ordered from the tyre manufacturer to a delivery schedule which is closely related to the demand for tyres from the plant (as in Figure  10.3 ). In fact, the demand for every part of the car plant will be derived from the assembly schedule for the finished cars. Other operations will act in a dependent-demand manner because of the nature of the service or product which they provide. For example, a custom-made dressmaker will not buy fabric and make up dresses in many different sizes just in case someone comes along and wants to buy one.

Operations principle Planning and control systems should be able to cope with uncertainty in demand.

Figure 10.3 Dependent demand is derived from the demand for something else; independent demand is more random

Tyre manufacturer

Tyre fitter

Auto plant

Demand for tyres is largely governed by random factors

Demand for tyres is governed by the planned number of

cars to be made by the auto plant

Planned dem and for tyres

Random demand for tyres

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CHAPTER 10 PLANNING AND CONTROL 325

Nor will a high-class restaurant begin to cook food just in case a customer arrives and requests it. In both these cases, a combination of risk and the perishability of the product or service prevent the operation from starting to create the goods or services until it has a firm order. Planning and control in dependent-demand situations is largely concerned with how the operation should respond when demand has occurred.

By contrast, some operations are subject to independent demand. They need to supply future demand without knowing exactly what that demand will be; or in the terminology of planning and control, they do not have firm ‘forward visibility’ of customer orders. For example, the Ace Tyre Company, which operates a drive-in tyre replacement service, will need to manage a stock of tyres. In that sense it is exactly the same task that faced the manager of tyre stocks in the car plant. However, demand is very different for Ace Tyres. It cannot predict either the volume or the specific needs of customers. It must make decisions on how many and what type of tyres to stock, based on demand forecasts and in the light of the risks it is prepared to run of being out of stock. This is the nature of independent-demand planning and control. It makes ‘best guesses’ concerning future demand, attempts to put the resources in place which can satisfy this demand, and attempts to respond quickly if actual demand does not match the forecast. Inventory planning and control, treated in Chapter  13, is typical of independent- demand planning and control.

Responding to demand It is clear then that the nature of planning and control in any operation will depend on how it responds to demand, which is in turn related to the type of services or products it produces. For example, an advertising agency will only start the process of planning and controlling the creation of an adver- tising campaign when the customer (or client as the agency will refer to them) confirms the contract with the agency. The creative ‘design’ of the advertisements will be based on a ‘brief’ from the client. Only after the design is approved are the appropriate resources (director, scriptwriters, actors, produc- tion company, etc.) contracted. The actual shooting of the advertisement and post-production (edit- ing, putting in the special effects, etc.) then goes ahead, after which the finished advertisements are ‘delivered’ through television slots. This is shown in Figure 10.4 as a ‘Design, resource, create and deliver to order’ operation.

Other operations might be sufficiently confident of the nature of demand, if not its exact details, to keep ‘in stock’ most of the resources it requires to satisfy its customers. Certainly it will keep its transforming resources, if not its transformed resources. However, it will still make the actual service or product only when it receives a firm customer order. For example, a website designer will have most of its resources (graphic designers, software developers, specialist development software, etc.) in place, but must still design, create and deliver the website after it understands its customer’s require- ments. (See the ‘Operations in practice’ example of Torchbox, in Chapter  1.) This is shown in Figure 10.4 as a ‘Design, create and deliver to order’ operation.

Some operations offer relatively standard services or products, but do not create them until the customer has chosen which particular service or product to have. So a house builder who has standard designs might choose to build each house only when a customer places a firm order. Because the design of the house is relatively standard, suppliers of materials will have been identi- fied, even if the building operation does not keep the items in stock itself. This is shown in Figure 10.4 as a ‘Create and deliver to order’ operation. In manufacturing it would be called a ‘Make to order’ operation.

Some operations have services or products that are so predictable that they can start to ‘create’ them before specific customer orders arrive. Possibly the best-known example of this is Dell Computers where customers can ‘specify’ their computer by selecting between various components through the company’s website. These components will have already been created (usually by suppliers) but are assembled to a specific customer order. This is shown in Figure 10.4 as a ‘Partially create and deliver to order’ operation. In manufacturing it would be called an ‘Assemble to order’ operation.

Operations principle Planning and control systems should distinguish between dependent and independent demand.

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Figure 10.4 The P:D ratio of an operation indicates how long the customer has to wait for the service or product as compared with the total time needed to carry out all the activities to make the service or product available to the customer

Obtain resources

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Examples: advertising agency, construction project

Examples: website development, custom furniture production

Examples: hair blow-dry bar, house builder with standard designs

Examples: internet retail fulfilment, assemble to order computers (e.g. Dell)

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Examples: collect retailer (e.g. IKEA), vending machines

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DeliverObtain resources

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When an operation’s services or products are standardized, there is the potential to create them entirely before demand is known. Almost all domestic products, for example, are ‘Created to stock’, or ‘Make to stock’ (shown in Figure 10.4), from which they are delivered to customers. Taking this evolving logic to its conclu- sion, some operations require their customers to collect their own

Operations principle The planning and control activity will vary depending on how much work is done before demand is known.

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services or products. This is the ‘Choose/collect from stock’ illustration in Figure 10.4. IKEA and most high-street retail operations are like this.

One point to note in the operations illustrated in Figure 10.4 is that there is a relationship between how operations respond to demand and their volume–variety characteristics. It is easy to see that ‘Design, resource, create and deliver to order’ operations are intended for low-volume and high-variety businesses. By definition, designing different services or products will result in high variety, and perform- ing each activity for each customer would be too cumbersome for a high-volume business. Conversely, ‘Create to stock’ or ‘Choose/collect from stock’ clearly rely on standardized services or products.

P:D ratios3 Another way of characterizing the graduation between ‘Design, resource, create and deliver to order’ and ‘Choose/collect from stock’ planning and control is by using a P:D ratio. This contrasts the total length of time customers have to wait between asking for the service or product and receiving it, called the demand time, D, and the total throughput time from start to finish, P. Throughput time is how long the operation takes to design the service or product (if it is customized), obtain the resources, create and deliver it.

P and D times depend on the operation P and D are illustrated for each type of operation in Figure 10.4. Generally the ratio of P to D gets larger as operations move from ‘Design, resource, create and deliver to order’ to ‘Choose/collect from stock’. In other words, as one moves down this spectrum towards the ‘Create to stock’ and ‘Choose/Collect from stock’ end, the operation has anticipated customer demand and already cre- ated the services and products even though it has no guarantee that the anticipated demand will really happen. This is a particularly important point for the planning and control activity. The larger the P:D ratio, the more speculative the operation’s planning and control activities will be. In its extreme form, the ‘Choose/collect from stock’ operation, such as a high-street retailer, has taken a gamble by designing, resourcing, creating and delivering (or more likely, paying someone else to do so) products to its shops before it has any certainty that customers will want them. Contrast this with a ‘Design, resource, create and deliver to order’ operation as in the advertising agency mentioned earlier. Here, D is the same as P and speculation regarding the volume of demand in the short term is eliminated because everything happens in response to a firm order So by reducing their P:D ratio operations reduce their degree of speculative activity and also reduce their dependence on forecasting (although bad forecasting will lead to other problems).

But do not assume that when the P:D ratio approaches 1, all uncertainty is eliminated. The volume of demand (in terms of the number of customer ‘orders’) may be known, but not the time taken to perform each ‘order’. Take the advertising agency again: during each stage of the process, from design to delivery, it is common to have to seek the customer’s approval and/or feedback many times. Moreover, there will almost certainly be some recycling back through stages as modifications are made. And, in a similar way to how simultaneous development works in new service and product design (see Chapter 5), a stage can be started before the previous one has been completed. So, for example, the video shoot director will have started prior to the artwork design being completed. This is illustrated in Figure 10.5. So here it is the timings that are uncertain.

Sales and Operations Planning (S&OP) One of the problems with traditional operations planning and control is that, although several functions were often routinely involved in the process, each function could have a very different set of objectives. For example, marketing could be interested in maximizing revenues and ensur- ing continuity of delivery to customers. Operations are likely to be under pressure to minimize cost (perhaps achieved through relatively long and stable operating levels). Finance will be inter- ested in reducing working capital and inventory, and also reducing fixed costs. And so on. Yet

Operations principle The P:D ratio of an operation contrasts how long customers have to wait for a service or product with its total throughput time.

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these, and other functions such as engineering or human resources management, are all impacted by operations planning decisions and are probably involved in their own planning processes that partly depend on the output from the operations planning process. Sales and Operations Planning (S&OP) was first promoted as an important element of planning as Manufacturing Resource Planning (see the supplement to Chapter 14) became a commonly used process. Early Manufacturing Resource Planning implementations were often made less effective by the system being driven by unachievable plans. This is the dilemma that S&OP is intended to address. It is a planning process that attempts to ensure that all tactical plans are aligned across the business’s various functions and with the company’s longer-term strategic plans.

It is a formal business process that looks over a period of 18 to 24 months ahead. In other words, it is not a purely short-term process. In fact, S&OP developed as an attempt to integrate short- and longer-term planning, as well as integrating the planning activities of key functions. It is an aggregated process that does not deal with detailed activities, but rather focuses on the overall (often aggregated) volume of output. Generally, it is a process that happens monthly, and tends to take place at a higher level, involving more senior management than traditional operations planning. S&OP also goes by many names. It can be called Integrated Business Planning, Integrated Business Management, Integrated Performance Management, Rolling Business Planning and Regional Business Management, to name a few. It has also been noted4 that some organizations continue to use the phrase ‘S&OP’, although they may mean something quite different.

What are planning and control activities? Planning and control requires the reconciliation of supply and demand in terms of volumes, timing and quality. In this chapter we will focus on an overview of the activities that plan and control vol- ume and timing (most of this part of the book is concerned with these issues). There are four over- lapping activities: loading, sequencing, scheduling, and monitoring and control (see Figure  10.6).

Some caution is needed when using these terms. Different organ- izations may use them in different ways, and even textbooks in the area adopt different definitions. For example, some authori- ties term what we have called planning and control as ‘operations scheduling’. However, the terminology of planning and control is less important than understanding the basic ideas described in the remainder of this chapter.

Figure 10.5 The relationship between stages in some ‘Design, resource, create and deliver to order’ operations, such as an advertising agency, can be complex with frequent consultation and unpredictable recycling

Create

Customer approval

P = D = ?

Deliver

Customer

Obtain resources

Design service/product

Operations principle Planning and control activities include loading, sequencing, scheduling, and monitoring and control.

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Loading Loading is the amount of work that is allocated to a work centre. For example, a machine on the shop floor of a manufacturing business is available, in theory, 168 hours a week. However, this does not necessarily mean that 168 hours of work can be loaded onto that machine. Figure 10.7 shows what erodes this available time. For some periods the machine cannot be worked: for example, it may not be available on statutory holidays and weekends. Therefore, the load put onto the machine must take this into account. Of the time that the machine is available for work, other losses further reduce the available time. For example, time may be lost while changing over from making one component to another. If the machine breaks down, it will not be available. If machine reliability data are available, these must also be taken into account. Sometimes the machine may be waiting for parts to arrive or be ‘idling’ for some other reason. Other losses could include an allowance for the machine being run below its optimum speed (for example, because it has not been maintained properly) and an allowance for the ‘quality losses’ or defects which the machine may produce. Of course, many of these losses should be small or non-existent in a well-managed operation. However, the valuable operating time available for productive working, even in the best operations, can be significantly below the maximum time available. This idea is taken further in Chapter 11 when we discuss the measure- ment of capacity.

Figure 10.6 Planning and control activities

When to do things?

How much to do?

Are activities going to plan?Monitoring

and control

LoadingScheduling

Sequencing In what order to do things?

Figure 10.7 The reduction in the valuable operating time available

Quality losses

Slow running equipment

Maximum available time

Valuable operating time

Equipment ‘idling’

‘Breakdown’ failure

Set-up and changeovers

Not worked (unplanned)

Not worked (planned)

Operations principle For any given level of demand, a planning and control system should be able to indicate the implications for the loading on any part of the operation.

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Finite and infinite loading Finite loading is an approach which only allocates work to a work centre (a person, a machine, or perhaps a group of people or machines) up to a set limit. This limit is the estimate of capacity for the work centre (based on the times available for loading). Work over and above this capacity is not accepted. Figure 10.8 first shows how the load on the work centres is not allowed to exceed the capacity limit. Finite loading is particularly relevant for operations where:

▶ it is possible to limit the load – for example, it is possible to run an appointment system for a general medical practice or a hairdresser;

▶ it is necessary to limit the load – for example, for safety reasons only a finite number of people and weight of luggage are allowed on aircraft;

▶ the cost of limiting the load is not prohibitive – for example, the cost of maintaining a finite order book at a specialist sports car manufacturer does not adversely affect demand, and may even enhance it.

Infinite loading is an approach to loading work which does not limit accepting work, but instead tries to cope with it. The second diagram in Figure 10.8 illustrates this loading pattern where capacity constraints have not been used to limit loading so the work is completed earlier. Infinite loading is relevant for operations where:

▶ it is not possible to limit the load – for example, an accident and emergency department in a hospital should not turn away arrivals needing attention;

▶ it is not necessary to limit the load – for example, fast-food outlets are designed to flex capacity up and down to cope with varying arrival rates of customers. During busy periods, customers accept that they must queue for some time before being served. Unless this is extreme, the customers might not go elsewhere;

▶ the cost of limiting the load is prohibitive – for example, if a retail bank turned away customers at the door because a set number were inside, customers would feel less than happy with the service.

In complex planning and control activities where there are multiple stages, each with different capac- ities and with a varying mix arriving at the facilities, such as a machine shop in an engineering

Figure 10.8 Finite and infinite loading of jobs on three work centres A, B and C. Finite loading limits the loading on each centre to their capacities, even if it means that jobs will be late. Infinite loading allows the loading on each centre to exceed their capacities to ensure that jobs will not be late

A B Work centre

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Infinite loadingFinite loading

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0

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company, the constraints imposed by finite loading make loading calculations complex and not worth the considerable computational power which would be needed.

Sequencing Whether the approach to loading is finite or infinite, when work arrives, decisions must be taken on the order in which the work will be tackled. This activity is termed sequencing. The priorities given to work in an operation are often determined by some predefined set of rules, some of which are relatively complex. Some of these are summarized below.

Physical constraints The physical nature of the inputs being processed may determine the priority of work. For exam- ple, in an operation using paints or dyes, lighter shades will be sequenced before darker shades. On completion of each batch, the colour is slightly darkened for the next batch. This is because darkness of colour can only be added to and not removed from the colour mix. Sometimes the mix of work arriving at a part of an operation may determine the priority given to jobs. For example, when fabric is cut to a required size and shape in garment manufacture, the surplus fabric would be wasted if not used for another product. Therefore, jobs that physically fit together may be scheduled together to reduce waste. The sequencing issue described in the short case ‘Can airline passengers be sequenced?’ is of this type.

O P E R AT I O N S I N P R AC T I C E

Like many before him, Dr Jason Steffen, a profes- sional astrophysicist, was frustrated by the time it took to load him and his fellow passengers onto the aircraft. He decided to devise a way to make the experience a little less tedious. So, for a while, he neglected his usual work of examining extra-solar planets, dark matter and cosmology, and experimentally tested a faster method of boarding aircraft. He found that, by changing the sequence in which passengers are loaded onto the aircraft, airlines could potentially save both time and money. Using a computer simulation and the arithmetic techniques routinely used in his day-to-day job, he was able to find what seemed to be a superior sequencing method. His simula- tions showed that the most common way of boarding passengers was the least efficient. This is called the ‘block method’ where blocks of seats are called for boarding, starting from the back. Previously other experts in the airline industry had suggested boarding those in window seats first followed by middle and aisle seats. This is called the Wilma method. But according to

Dr Steffen’s simulations, two things slow down the boarding process. The first is that passengers may be required to wait in the aisle while those ahead of them store their luggage before they can take their seat. The second is that passengers already seated in aisle or middle seats frequently have to rise and move into the aisle to let others take seats nearer the window. So Dr Steffen

Can airline passengers be sequenced?5

▼

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suggested a variant of the Wilma method that minimized the first type of disturbance and eliminated the second. He suggested boarding in alternate rows, progressing from the rear forward, window seats first. Using this approach (now called the Steffen method), first, the window seats for every other row on one side of the plane are boarded. Next, alternate rows of window seats on the opposite side are boarded. Then, the window seats in the skipped rows are filled in on each side. The proce- dure then repeats with the middle seats and the aisles (see Figure 10.9).

Later, the effectiveness of the various approaches were tested using a mock-up of a Boeing 757 aircraft and 72 luggage-carrying volunteers. Five different scenarios were tested : ‘block’ boarding in groups of rows from back to front, one by one from back to front, the ‘Wilma method’, the Steffen method, and completely random boarding.

In all cases, parent–child pairs were allowed to board first. It was assumed that families were likely to want to stay together. As Dr Steffen had predicted, the conventional block approach came out as the slowest, with the strict back-to-front approach not much better. Completely random boarding (unallocated seating), which is used by several low-cost airlines, fared much better, most proba- bly because it randomly avoids space conflicts. The times for fully boarding the 72 passengers using each method were as follows : ‘block’ boarding – 6:54 minutes, back- to-front – 6:11 minutes, random boarding – 4:44 minutes, Wilma method – 4:13 minutes, Steffen method – 3:36 minutes.

The big question is, ‘would passengers really be prepared to be sequenced in this way as they queue to board the aircraft?’ Some airlines argue that directing passengers on to a plane is a little like herding cats.

Figure 10.9 The best way to sequence passengers onto an aircraft

3 3 3

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Customer priority Operations will sometimes use customer priority sequencing, which allows an important or aggrieved customer, or item, to be ‘processed’ prior to others, irrespective of the order of arrival of the customer or item. This approach is typically used by operations whose customer base is skewed, containing a mass of small customers and a few large, very important customers. Some banks, for example, give priority to important customers. Similarly, in hotels, complaining customers will be treated as a priority because their complaint may have an adverse effect on the perceptions of other customers. More seriously, the emergency services often have to use their judgement in prioritizing the urgency of requests for service. For example, Figure 10.10 shows a typical triage system used in hospitals to prioritize patients (see the ‘Operations in practice’ example). However, customer prior- ity sequencing, although giving a high level of service to some customers, may erode the service given

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to many others. This may lower the overall performance of the operation if work flows are disrupted to accommodate important customers.

Due date (DD) Prioritizing by due date means that work is sequenced according to when it is ‘due’ for delivery, irrespective of the size of each job or the importance of each customer. For example, a support ser- vice, such as a printing unit, will often ask when copies are required, and then sequence the work according to that due date. Due date sequencing usually improves the delivery dependability and average delivery speed. It may not provide optimal productivity, as a more efficient sequencing of work may reduce total costs. However, it can be flexible when new, urgent work arrives at the work centre.

Figure 10.10 A triage prioritization scale

Patients whose conditions are not true accidents or emergencies

Non-urgent5

Standard cases without immediate danger or distress

Standard4

Patients with serious problems, but apparently stable conditions

Urgent3

Seriously ill or injured patients whose lives are not in immediate danger

Very urgent2

Patient in need of immediate treatment for preservation of life

Immediate resuscitation

1

O P E R AT I O N S I N P R AC T I C E

One of the hospital environments that is most difficult to schedule is the Accident and Emergency department, where patients arrive at random, without any prior warning, throughout the day. It is up to the hospital’s reception and the medical staff to devise very rapidly a schedule which meets most of the necessary criteria. In particular, patients who arrive having had very serious accidents, or presenting symptoms of a serious illness, need to be attended to urgently. Therefore, the hospital will schedule these cases first. Less urgent cases – perhaps patients who are in some discomfort, but whose injuries or illnesses are not life-threatening – will have to wait until the urgent cases are treated. Routine non-urgent cases will have the lowest priority of all. In many circumstances, these patients will have to wait

for the longest time, which may be many hours, especially if the hospital is busy. Sometimes these non-urgent cases

The hospital triage system

▼

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Last in, first out (LIFO) Last in, first out (LIFO) is a method of sequencing usually selected for practical reasons. For exam- ple, unloading an elevator is more convenient on a LIFO basis, as there is only one entrance and exit. However, it is not an equitable approach. Patients at hospital clinics may be infuriated if they see newly arrived patients examined first.

First in, first out (FIFO) Some operations serve customers in exactly the sequence they arrive in. This is called first in, first out sequencing (FIFO), or sometimes ‘first come, first served’ (FCFS). For example, UK passport offices receive mail, and sort it according to the day when it arrived. They work through the mail, opening it in sequence, and process the passport applications in order of arrival. Queues in theme parks may be designed so that one long queue snakes around the lobby area until the row of coun- ters is reached. When customers reach the front of the queue, they are served at the next free counter.

Longest operation time (LOT) Operations may feel obliged to sequence their longest jobs first, called longest operation time sequencing. This has the advantage of occupying work centres for long periods. By contrast, rel- atively small jobs progressing through an operation will take up time at each work centre because of the need to change over from one job to the next. However, although longest operation time sequencing keeps utilization high, this rule does not take into account delivery speed, reliability or flexibility. Indeed, it may work directly against these performance objectives.

Shortest operation time first (SOT) Most operations at some stage become cash constrained. In these situations, the sequencing rules may be adjusted to tackle short jobs first; this is called shortest operation time sequencing. These jobs can then be invoiced and payment received to ease cash-flow problems. Larger jobs that take more time will not enable the business to invoice as quickly. This has an effect of improving delivery performance, if the unit of measurement of delivery is jobs. However, it may adversely affect total productivity and can damage service to larger customers.

Judging sequencing rules All five performance objectives, or some variant of them, could be used to judge the effectiveness of sequencing rules. However, the objectives of dependability, speed and cost are particularly impor- tant. So, for example, the following performance objectives are often used:

▶ meeting ‘due date’ promised to customer (dependability); ▶ minimizing the time the job spends in the process, also known as ‘flow time’ (speed); ▶ minimizing work-in-progress inventory (an element of cost); ▶ minimizing idle time of work centres (another element of cost).

Comparing the three sequencing rules described in the worked example, together with the two other sequencing rules described earlier and applied to the same problem, gives the results summarized in Table 10.2. The SOT rule results in both the best average time in process and the best (or least bad)

may even be turned away if the hospital is too busy with more important cases. In situations where hospitals expect sudden influxes of patients, they have developed what is known as a triage system, whereby medical staff hurriedly

sort through the patients who have arrived to determine which category of urgency each patient fits into. In this way a suitable schedule for the various treatments can be devised in a short period of time.

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Worked example

Steve Smith is a website designer in a business school. Returning from his annual vacation (he finished all outstanding jobs before he left), five design jobs are given to him upon arrival at work. He gives them the codes A to E. Steven has to decide in which sequence to undertake the jobs. He wants both to minimize the average time the jobs are tied up in his office and, if possible, to meet the deadlines (delivery times) allocated to each job.

His first thought is to do the jobs in the order they were given to him, i.e. first in, first out (FIFO):

Sequencing rule – first in, first out (FIFO)

Sequence of jobs

Process time (days)

Start time Finish time Due date Lateness (days)

A 5 0 5 6 0 B 3 5 8 5 3 C 6 8 14 8 6 D 2 14 16 7 9 E 1 16 17 3 14 Total time in process 60 Total lateness 32 Average time in process (total/5)

12 Average lateness (total/5)

6.4

Alarmed by the average lateness, he tries the due date (DD) rule: