Instructor’s Manual
Operations Strategy
Third Edition
Nigel Slack
Michael Lewis
For further instructor material
please visit:
www.pearsoned.co.uk/slack
ISBN: 978-0-273-74046-9
© Pearson Education Limited 2012
Lecturers adopting the main text are permitted to download and photocopy the manual as required.
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---------------------------------First published 2002
This edition published 2012
© Nigel Slack and Michael Lewis 2012
The rights of Nigel Slack and Michael Lewis to be identified as authors of this work have been
asserted by them in accordance with the Copyright, Designs and Patents Act 1988.
Pearson Education is not responsible for the content of third-party internet sites.
ISBN: 978-0-273-74046-9
All rights reserved. Permission is hereby given for the material in this publication to be
reproduced for OHP transparencies and student handouts, without express permission of the
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binding or cover other than that in which it is published, without the prior consent of the
Publishers.
ii
© Nigel Slack and Michael Lewis 2012
Contents
Working with Operations Strategy: A tutor’s guide to teaching operations strategy
5
Operations strategy: Course plans
7
Teaching guides
1: Topic – Operations strategy – developing resources for strategic impact
2: Topic – Operations performance
3: Topic – Substitutes for strategy
4: Topic – Capacity strategy
5: Topic – Purchasing and supply strategy
6: Topic – Process technology strategy
7: Topic – Improvement strategy
8: Topic – Product and service development and organisation
9: Topic – The process of operations strategy – formulation and implementation
10: Topic – The process of operations strategy – monitoring and control
51
55
58
61
64
67
70
74
77
80
Extra cases and the topics covered in each case
Hagen style
Dresding Medical
‘Call-Us’ Banking Services
Freeman Biotest Inc.
Aztec Component Supplies
Zentrill
Bonkers Chocolate Factory
Ontario Facilities Equity Management (OFEM)
The Thought Space Partnership
Customer service at Kaston Pyral
Project Orlando at Dreddo Dan’s
The Focused Bank
Clever Consulting
Saunders Industrial Services
Geneva Construction and Risk
82
84
90
99
106
114
121
127
134
142
150
159
166
172
178
185
Study guide
Chapter 1: Operations strategy – developing resources for strategic impact
Chapter 2: Operations performance
Chapter 3: Substitutes for strategy
Chapter 4: Capacity strategy
Chapter 5: Purchasing and supply strategy
Chapter 6: Process technology strategy
Chapter 7: Improvement strategy
Chapter 8: Product and service development and organisation
Chapter 9: The process of operations strategy – formulation and implementation
Chapter 10: The process of operations strategy – monitoring and control
196
214
232
254
279
298
317
331
343
360
3
© Nigel Slack and Michael Lewis 2012
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
Supporting resources
Visit www.pearsoned.co.uk/slack to find valuable online resources
For instructors
• Complete, downloadable Instructor’s Manual
• PowerPoint slides that can be downloaded and used for presentations
For more information please contact your local Pearson Education sales representative
or visit www.pearsoned.co.uk/slack
4
© Nigel Slack and Michael Lewis 2012
Working with Operations Strategy
A tutor’s guide to teaching operations strategy1
Nigel Slack
Purpose
The purpose of this study guide is to support those colleagues who are adopting this book for
their operations strategy classes. Of course, all of us have our own style and approach to how
we try and communicate in class. So this guide is not intended as being in any way prescriptive.
However, it does contain materials that I use when teaching my own MBA and undergraduate
classes in this subject.
If you have any comments on how we can improve the book or on this teaching guide, please do
not hesitate to contact me at nigel.slack@wbs.ac.uk.
Content
Six types of material are included in this guide. They are
•
Course plans
•
Topic teaching guides
•
Extra cases and teaching notes
•
Student study guides
•
PowerPoint slides
Course plans
The section on course plans is intended as a guide to how the topic can be divided amongst a
number of sessions. Clearly, how this is done will depend on many factors, the most important
of which is the number of sessions available. Suggested topics are given for courses of one, two,
three, five, eight, ten and twelve sessions.
1
This tutor’s guide is intended to accompany ‘Slack N and Lewis M A (2011) Operations Strategy, 3rd
Edition, Financial Times Prentice Hall
5
© Nigel Slack and Michael Lewis 2012
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
Topic teaching guides
A separate teaching guide is given for each topic (i.e. for each chapter of the text). This indicates
the cases that could be used to illustrate and demonstrate some of the issues in the topic. These
cases are drawn both from the cases included in the final section of the book and the extra cases
provided under ‘Extra cases and teaching notes’. Each teaching guide also contains a number of
discussion points, exercises and teaching tips which you may find useful.
Extra cases and teaching notes
In the first edition of Operations Strategy we included a ‘Case Exercise’ at the end of each of
the 15 chapters. Although these cases are no longer in the book itself, they are available in this
section of the teaching guide together with teaching notes that will help in debriefing the cases.
Student study guides
This section of the guide contains study guides that relate to each chapter in the text. These
study guides are relatively substantial pieces of work. They can be used either as a ‘background
primer’ for lecturers before they take a class in the topic. Alternatively, they can be copied and
handed out to students to support students’ individual learning before or after the relevant class.
It is hoped that these study guides together with the text will provide a complete learning
package that will support students in their studies.
PowerPoint slides
A full set of PowerPoint slides are included for each chapter. These sets of PowerPoint slides
contain not only some of the figures that are included in the text but other slides that you may
find useful in teaching. They are presented as a menu of slides rather than a prescription of how
you should teach the class. Please feel free to use only the ones that you find useful in
communicating the subject.
6
© Nigel Slack and Michael Lewis 2012
Operations strategy
Course plans1
Putting a course curriculum together
Putting a course curriculum together depends on a number of factors, amongst which are
•
The time available (number and length of sessions)
•
The expressed needs of the students
•
The experience of the students
•
The other courses that students are studying
•
The preferences and competences of teaching staff
Given the almost infinite number of possible combinations that the list above could generate, it
would be a mistake to try and provide any prescriptive list of topics that should be included in a
course. However, the following table may provide a broad guide to how the chapters in Slack
and Lewis could be divided between sessions.
Session number
Number
of
sessions
1
1
Ch
1&2
2
Ch 1
Ch2
3
Ch 1
Ch 2
Ch
9&10
5
Ch 1
Ch 2
8
Ch 1
10
12
2
3
4
5
6
7
8
Ch
4&5
Ch
6&7
Ch
9&10
Ch 2
Ch 3
Ch 4
Ch 1
Ch 2
Ch 3
Ch 1
Ch 2
Ch 2
9
10
Ch 5
Ch 6
Ch 9
Ch 10
Ch 4
Ch 5
Ch 6
Ch 7
Ch 8
Ch 9
Ch 10
Ch 3
Ch 4
Ch 5
Ch 6
Ch 7
Ch 8
Ch 9
11
12
Ch 10
Overview
Suggested topics that could be included in courses of various lengths are listed below.
1
All chapter numbers etc. refer to Slack N and Lewis MA (2011) Operations Strategy 3rd Edition, Financial
Times Prentice Hall
7
© Nigel Slack and Michael Lewis 2012
One session
What is operations strategy?
What is ‘operations’ and why is it so important?
•
Three levels of input–transformation–output
What is strategy?
Operations strategy – operations is not always operational
•
Four perspectives on operations strategy
•
The top-down perspective – operations strategy should interpret higher level strategy
•
The bottom-up perspective – operations strategy should learn from day-to-day experience
•
The market requirements perspective – operations strategy should satisfy the organisation’s
markets
•
The operations resource perspectives – operations strategy should build operations capabilities
The content and process of operations strategy
Performance objectives
•
Quality
•
Speed
•
Dependability
•
Flexibility
•
Cost
The internal and external effects of the performance objectives
The relative priority of performance objectives
Decision areas
•
Structural and infrastructural decisions
The operations strategy matrix
8
© Nigel Slack and Michael Lewis 2012
Two sessions
Session 1 – What is operations strategy?
What is ‘operations’ and why is it so important?
•
Three levels of input–transformation–output
What is strategy?
Operations strategy – operations is not always operational
•
Four perspectives on operations strategy
•
The top-down perspective – operations strategy should interpret higher-level strategy
•
The bottom-up perspective – operations strategy should learn from day-to-day experience
•
The market requirements perspective – operations strategy should satisfy the organisation’s
markets
•
The operations resource perspectives – operations strategy should build operations
capabilities
The content and process of operations strategy
•
Performance objectives
•
Decision areas
Structural and infrastructural decisions
The operations strategy matrix
Session 2 – Operations performance
Operations performance objectives
The five generic performance objectives
•
Quality
•
Speed
•
Dependability
•
Flexibility
9
© Nigel Slack and Michael Lewis 2012
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
•
Cost
The internal and external effects of the performance objectives
The relative priority of performance objectives
•
The relative priority of performance objectives differs between different products and services
•
The polar representation of performance objectives
•
Order-winning competitive factors
•
Qualifying competitive factors
•
Delights
•
The benefits from order-winners and qualifiers
•
Criticisms of the order-winning and qualifying concepts
The relative importance of performance objectives change over time
•
Changes in the firm’s markets – the product/service life cycle influence on performance
•
Changes in the firm’s resource base
•
Mapping operations strategies
Trade-offs
•
What is a trade-off?
•
Why are trade-offs important?
•
Are trade-offs real or imagined?
•
Trade-offs and the efficient frontier
•
Improving operations effectiveness by using trade-offs
Targeting and operations focus
•
The concept of focus
•
Focus as operations segmentation
•
The ‘operation-within-an-operation’ concept
•
Types of focus
•
Benefits and risks in focus
•
Drifting out of focus
10
© Nigel Slack and Michael Lewis 2012
Three sessions
Session 1 – What is operations strategy?
What is ‘operations’ and why is it so important?
•
Three levels of input–transformation–output
What is strategy?
Operations strategy – operations is not always operational
•
Four perspectives on operations strategy
•
The top-down perspective – operations strategy should interpret higher-level strategy
•
The bottom-up perspective – operations strategy should learn from day-to-day experience
•
The market requirements perspective – operations strategy should satisfy the organisation’s
markets
•
The operations resource perspectives – operations strategy should build operations capabilities
The content and process of operations strategy
•
Performance objectives
•
Decision areas
Structural and infrastructural decisions
The operations strategy matrix
Session 2 – Operations performance
Operations performance objectives
The five generic performance objectives
•
Quality
•
Speed
•
Dependability
•
Flexibility
•
Cost
11
© Nigel Slack and Michael Lewis 2012
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
The internal and external effects of the performance objectives
The relative priority of performance objectives
•
The relative priority of performance objectives differs between different products and services
•
The polar representation of performance objectives
•
Order-winning competitive factors
•
Qualifying competitive factors
•
Delights
•
The benefits from order-winners and qualifiers
•
Criticisms of the order-winning and qualifying concepts
The relative importance of performance objectives change over time
•
Changes in the firm’s markets – the product/service life cycle influence on performance
•
Changes in the firm’s resource base
•
Mapping operations strategies
Trade-offs
•
What is a trade-off?
•
Why are trade-offs important?
•
Are trade-offs real or imagined?
•
Trade-offs and the efficient frontier
•
Improving operations effectiveness by using trade-offs
Targeting and operations focus
•
The concept of focus
•
Focus as operations segmentation
•
The ‘operation-within-an-operation’ concept
•
Types of focus
•
Benefits and risks in focus
•
Drifting out of focus
12
© Nigel Slack and Michael Lewis 2012
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
Session 3 – The process of operations strategy
Formulating operation strategy
Time and timing – fast and slow cycles
Strategic sustainability
‘Dynamic’ or offensive approaches to sustainability
Analysis for formulation
Capabilities
The challenges to operations strategy formulation
How do we know when the formulation process is complete?
•
Comprehensive
•
Correspondence
•
Criticality
Implementing operations strategy
Strategic monitoring and control
•
Expert control
•
Trial and error control
•
Intuitive control
•
Negotiated control
Monitoring implementation – tracking performance
•
Tracking the appropriate elements
•
Project objectives
•
Process objectives
The Red Queen effect
The balanced scorecard approach
The dynamics of monitoring and control
•
Tight alignment and loose alignment
13
© Nigel Slack and Michael Lewis 2012
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
Implementation risk
Learning, appropriation and path dependency
•
Organisational learning
•
Single and double-loop learning
Appropriating competitive benefits
Path dependencies and development trajectories
The innovator’s dilemma
Resource and process ‘distance’
Stakeholders
14
© Nigel Slack and Michael Lewis 2012
Five sessions
Session 1 – What is operations strategy?
What is ‘operations’ and why is it so important?
•
Three levels of input–transformation–output
What is strategy?
Operations strategy – operations is not always operational
•
Four perspectives on operations strategy
•
The top-down perspective – operations strategy should interpret higher-level strategy
•
The bottom-up perspective – operations strategy should learn from day-to-day experience
•
The market requirements perspective – operations strategy should satisfy the organisation’s
markets
•
The operations resource perspectives – operations strategy should build operations
capabilities
The content and process of operations strategy
•
Performance objectives
•
Decision areas
Structural and infrastructural decisions
The operations strategy matrix
Session 2 – Operations performance
Operations performance objectives
The five generic performance objectives
•
Quality
•
Speed
•
Dependability
•
Flexibility
•
Cost
15
© Nigel Slack and Michael Lewis 2012
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
The internal and external effects of the performance objectives
The relative priority of performance objectives
•
The relative priority of performance objectives differs between different products and services
•
The polar representation of performance objectives
•
Order-winning competitive factors
•
Qualifying competitive factors
•
Delights
•
The benefits from order-winners and qualifiers
•
Criticisms of the order-winning and qualifying concepts
The relative importance of performance objectives change over time
•
Changes in the firm’s markets – the product/service life cycle influence on performance
•
Changes in the firm’s resource base
•
Mapping operations strategies
Trade-offs
•
What is a trade-off?
•
Why are trade-offs important?
•
Are trade-offs real or imagined?
•
Trade-offs and the efficient frontier
•
Improving operations effectiveness by using trade-offs
Targeting and operations focus
•
The concept of focus
•
Focus as operations segmentation
•
The ‘operation-within-an-operation’ concept
•
Types of focus
•
Benefits and risks in focus
•
Drifting out of focus
16
© Nigel Slack and Michael Lewis 2012
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
Session 3 – Capacity and supply strategy
What is capacity strategy?
•
Capacity at three levels
•
The overall level of operations capacity
Forecast demand
Economies of scale
The number and size of sites
Capacity change
•
Timing of capacity change
•
Generic timing strategies
•
Leading, lagging or smoothing
•
The magnitude of capacity change
What is supply network strategy?
•
Supply network strategy
•
Why take a supply network perspective?
•
Global sourcing
Inter-operations relationships in supply networks
•
The outsourcing decision – vertical integration? Do or buy?
•
Traditional market-based supply
•
Partnership supply
Which type of relationship?
Network behaviour
Network management
Session 4 – Technology and improvement strategy
What is process technology strategy?
Process technology should reflect volume and variety
17
© Nigel Slack and Michael Lewis 2012
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
•
Scale / scalability – the capacity of each unit of technology
•
Degree of automation / ‘analytical content’– what can each unit of technology do?
•
Degree of coupling / connectivity – how much is joined together?
The product–process matrix
•
Moving down the diagonal
•
Market pressures on the flexibility/cost trade-off?
Evaluating process technology
•
Evaluating feasibility
•
Evaluating acceptability
•
Evaluating vulnerability
Development and improvement
•
Breakthrough improvement
•
Continuous improvement
•
The differences between breakthrough and continuous improvement
Setting the direction
Developing operations capabilities
Deploying capabilities in the market
Session 5 – The process of operations strategy
Formulating operation strategy
Time and timing – fast and slow cycles
Strategic sustainability
‘Dynamic’ or offensive approaches to sustainability
Analysis for formulation
Capabilities
The challenges to operations strategy formulation
18
© Nigel Slack and Michael Lewis 2012
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
How do we know when the formulation process is complete?
•
Comprehensive
•
Correspondence
•
Criticality
Implementing operations strategy
Strategic monitoring and control
•
Expert control
•
Trial and error control
•
Intuitive control
•
Negotiated control
Monitoring implementation – tracking performance
•
Tracking the appropriate elements
•
Project objectives
•
Process objectives
The balanced scorecard approach
The dynamics of monitoring and control
•
Tight alignment and loose alignment
Implementation risk
Learning, appropriation and path dependency
•
Organisational learning
•
Single and double-loop learning
Appropriating competitive benefits
Path dependencies and development trajectories
The innovator’s dilemma
Resource and process ‘distance’
Stakeholders
19
© Nigel Slack and Michael Lewis 2012
Eight sessions
Session 1 – What is operations strategy?
What is ‘operations’ and why is it so important?
•
Three levels of input–transformation–output
What is strategy?
Operations strategy – operations is not always operational
•
Four perspectives on operations strategy
•
The top-down perspective – operations strategy should interpret higher-level strategy
•
The bottom-up perspective – operations strategy should learn from day-to-day experience
•
The market requirements perspective – operations strategy should satisfy the organisation’s
markets
•
The operations resource perspectives – operations strategy should build operations capabilities
The content and process of operations strategy
•
Performance objectives
•
Decision areas
Structural and infrastructural decisions
The operations strategy matrix
Session 2 – Operations performance
Operations performance objectives
The five generic performance objectives
•
Quality
•
Speed
•
Dependability
•
Flexibility
•
Cost
20
© Nigel Slack and Michael Lewis 2012
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
The internal and external effects of the performance objectives
The relative priority of performance objectives
•
The relative priority of performance objectives differs between different products and services
•
The polar representation of performance objectives
•
Order-winning competitive factors
•
Qualifying competitive factors
•
Delights
•
The benefits from order-winners and qualifiers
•
Criticisms of the order-winning and qualifying concepts
The relative importance of performance objectives change over time
•
Changes in the firm’s markets – the product/service life cycle influence on performance
•
Changes in the firm’s resource base
•
Mapping operations strategies
Trade-offs
•
What is a trade-off?
•
Why are trade-offs important?
•
Are trade-offs real or imagined?
•
Trade-offs and the efficient frontier
•
Improving operations effectiveness by using trade-offs
Targeting and operations focus
•
The concept of focus
•
Focus as operations segmentation
•
The ‘operation-within-an-operation’ concept
•
Types of focus
•
Benefits and risks in focus
•
Drifting out of focus
21
© Nigel Slack and Michael Lewis 2012
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
Session 3 – Capacity strategy
What is capacity strategy?
•
Capacity at three levels
•
The overall level of operations capacity
Forecast demand
•
Uncertainty of future demand
•
Changes in demand – long-term or short-term demand?
•
Long-term demand lower than short-term demand
•
Short-term demand lower than long-term demand
The availability of capital
The cost structure of capacity increments – break-even points
Economies of scale
Flexibility of capacity provision
The number and size of sites
Capacity change
•
Timing of capacity change
•
Generic timing strategies
•
Leading, lagging or smoothing
•
The magnitude of capacity change
Session 4 – Supply network strategy
What is supply network strategy?
•
Supply network strategy
•
Why take a supply network perspective?
•
Global sourcing
22
© Nigel Slack and Michael Lewis 2012
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
Interoperations relationships in supply networks
The outsourcing decision – vertical integration? Do or buy?
•
Making the outsourcing / vertical integration decision
•
Deciding whether to outsource
•
Some advantages and disadvantages of outsourcing
Traditional market-based supply
•
Problems with relying on market mechanisms
•
The internet and e-procurement
•
Electronic market places
Partnership supply
•
Closeness
•
Trust
•
Sharing success
•
Long-term expectations
•
Multiple points of contact
•
Joint learning
•
Few relationships
•
Joint coordination of activities
•
Information transparency
•
Joint problem solving
•
Dedicated assets
Which type of relationship?
Network behaviour
•
Quantitative supply chain dynamics
•
Qualitative supply chain dynamics
•
Supply chain instability
23
© Nigel Slack and Michael Lewis 2012
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
Network management
•
Coordination
•
Differentiation – matching supply network strategy to market requirements
•
Reconfiguration
•
Supply chain vulnerability
Session 5 – Process technology strategy
What is process technology strategy?
•
Direct or indirect process technology
•
Material, information and customer processing
Process technology should reflect volume and variety
Scale / scalability – the capacity of each unit of technology
Degree of automation / ‘analytical content’– what can each unit of technology do?
Degree of coupling / connectivity – how much is joined together?
The product–process matrix
•
Moving down the diagonal
•
Market pressures on the flexibility/cost trade-off?
Process technology trends
Evaluating process technology
•
Evaluating feasibility
•
Assessing financial requirements
•
Evaluating acceptability
•
Acceptability in financial terms
•
The life-cycle cost
•
The time value of money: net present value (NPV)
•
Limitations of conventional financial evaluation
24
© Nigel Slack and Michael Lewis 2012
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
•
Acceptability in terms of impact on market requirements
•
Acceptability in terms of impact on operational resources
•
Tangible and intangible resources
•
Evaluating market and resource acceptability
•
Evaluating vulnerability
•
Vulnerability because of changed resource dependencies
Session 6 – Improvement strategy
Development and improvement
•
Process improvement
•
Breakthrough improvement
•
Continuous improvement
•
The differences between breakthrough and continuous improvement
•
The degree of process change
•
Improvement cycles
•
Direct, develop and deploy
Setting the direction
•
Performance measurement
•
What factors to include as performance targets?
•
The degree of aggregation of performance targets
•
The balanced scorecard approach
•
Which are the most important performance targets?
•
How to measure performance targets?
•
On what basis to compare actual against target performance?
25
© Nigel Slack and Michael Lewis 2012
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
Benchmarking
•
Types of benchmarking
•
The objectives of benchmarking
Importance – performance mapping
The sandcone theory
Developing operations capabilities
•
The learning/experience curve
•
Limits to experience curve-based strategies
•
Process knowledge
•
The strategic importance of operational knowledge
Deploying capabilities in the market
•
The four-stage model
Session 7 – The process of operations strategy: formulation
and implementation
Formulating operation strategy
Time and timing – fast and slow cycles
Strategic sustainability
‘Dynamic’ or offensive approaches to sustainability
Analysis for formulation
Capabilities
The challenges to operations strategy formulation
How do we know when the formulation process is complete?
•
Comprehensive
•
Correspondence
•
Criticality
26
© Nigel Slack and Michael Lewis 2012
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
Session 8 – The process of operations strategy: monitoring and
control
Implementing operations strategy
Strategic monitoring and control
•
Expert control
•
Trial and error control
•
Intuitive control
•
Negotiated control
Monitoring implementation – tracking performance
•
Tracking the appropriate elements
•
Project objectives
•
Process objectives
The Red Queen effect
The balanced scorecard approach
The dynamics of monitoring and control
•
Tight alignment and loose alignment
Implementation risk
Learning, appropriation and path dependency
•
Organisational learning
•
Single and double-loop learning
Appropriating competitive benefits
Path dependencies and development trajectories
The innovator’s dilemma
Resource and process ‘distance’
Stakeholders
27
© Nigel Slack and Michael Lewis 2012
Ten sessions
Session 1 – What is operations strategy?
What is ‘operations’ and why is it so important?
•
Three levels of input–transformation–output
What is strategy?
Operations strategy – operations is not always operational
•
Four perspectives on operations strategy
•
The top-down perspective – operations strategy should interpret higher-level strategy
•
The bottom-up perspective – operations strategy should learn from day-to-day experience
•
The market requirements perspective – operations strategy should satisfy the organisation’s
markets
•
The operations resource perspectives – operations strategy should build operations capabilities
The content and process of operations strategy
•
Performance objectives
•
Decision areas
Structural and infrastructural decisions
The operations strategy matrix
Session 2 – Operations performance
Operations performance objectives
The five generic performance objectives
•
Quality
•
Speed
•
Dependability
•
Flexibility
•
Cost
28
© Nigel Slack and Michael Lewis 2012
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
The internal and external effects of the performance objectives
The relative priority of performance objectives
•
The relative priority of performance objectives differs between different products and services
•
The polar representation of performance objectives
•
Order-winning competitive factors
•
Qualifying competitive factors
•
Delights
•
The benefits from order-winners and qualifiers
•
Criticisms of the order-winning and qualifying concepts
The relative importance of performance objectives change over time
•
Changes in the firm’s markets – the product/service life cycle influence on performance
•
Changes in the firm’s resource base
•
Mapping operations strategies
Trade-offs
•
What is a trade-off?
•
Why are trade-offs important?
•
Are trade-offs real or imagined?
•
Trade-offs and the efficient frontier
•
Improving operations effectiveness by using trade-offs
Targeting and operations focus
•
The concept of focus
•
Focus as operations segmentation
•
The ‘operation-within-an-operation’ concept
•
Types of focus
•
Benefits and risks in focus
•
Drifting out of focus
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Session 3 – Substitutes for strategy
‘New’ approached to operations
Total quality management (TQM)
•
What is TQM?
•
The elements of TQM
•
Criticisms of TQM
•
Lessons from TQM
•
Where does TQM fit into operations strategy?
Lean operations
•
What is ‘lean’?
•
The elements of lean
•
Criticisms of lean
•
Lessons from lean
•
Where does lean fit into operations strategy?
Business process reengineering (BPR)
•
What is BPR?
•
The elements of BPR
•
Criticisms of BPR
•
Lessons from BPR
•
Where does BPR fit into operations strategy?
Six Sigma
•
What is Six Sigma?
•
The elements of Six Sigma
•
Criticisms of Six Sigma
•
Lessons from Six Sigma
•
Where does Six Sigma fit into operations strategy?
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Some common threads
•
Senior managers sometimes use these new approaches without fully understanding them
•
All these approaches are different
•
These approaches are not strategies but they are strategic decisions
•
Avoid becoming a victim of improvement ‘fashion’
Session 4 – Capacity strategy
What is capacity strategy?
•
Capacity at three levels
•
The overall level of operations capacity
Forecast demand
•
Uncertainty of future demand
•
Changes in demand – long-term or short-term demand?
•
Long-term demand lower than short-term demand
•
Short-term demand lower than long-term demand
The availability of capital
The cost structure of capacity increments - break-even points
Economies of scale
Flexibility of capacity provision
The number and size of sites
Capacity change
•
Timing of capacity change
•
Generic timing strategies
•
Leading, lagging or smoothing
•
The magnitude of capacity change
•
Balancing capacity change
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Location of capacity
•
The importance of location
•
The nature of location decisions
Session 5 – Supply network strategy
What is supply network strategy?
•
Supply network strategy
•
Why take a supply network perspective?
•
Global sourcing
Interoperations relationships in supply networks
The outsourcing decision – vertical integration? Do or buy?
•
Making the outsourcing / vertical integration decision
•
Deciding whether to outsource
•
Some advantages and disadvantages of outsourcing
Traditional market-based supply
•
Problems with relying on market mechanisms
•
The internet and e-procurement
•
Electronic market places
Partnership supply
•
Closeness
•
Trust
•
Sharing success
•
Long-term expectations
•
Multiple points of contact
•
Joint learning
•
Few relationships
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•
Joint coordination of activities
•
Information transparency
•
Joint problem solving
•
Dedicated assets
Which type of relationship?
Network behaviour
•
Quantitative supply chain dynamics
•
Qualitative supply chain dynamics
•
Supply chain instability
Network management
•
Coordination
•
Differentiation – matching supply network strategy to market requirements
•
Reconfiguration
•
Supply chain vulnerability
Session 6 – Process technology strategy
What is process technology strategy?
•
Direct or indirect process technology
•
Material, information and customer processing
Process technology should reflect volume and variety
Scale / scalability – the capacity of each unit of technology
Degree of automation / ‘analytical content’– what can each unit of technology do?
Degree of coupling / connectivity – how much is joined together?
The product–process matrix
•
Moving down the diagonal
•
Market pressures on the flexibility/cost trade-off?
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Process technology trends
Evaluating process technology
•
Evaluating feasibility
•
Assessing financial requirements
•
Evaluating acceptability
•
Acceptability in financial terms
•
The life-cycle cost
•
The time value of money: net present value (NPV)
•
Limitations of conventional financial evaluation
•
Acceptability in terms of impact on market requirements
•
Acceptability in terms of impact on operational resources
•
Tangible and intangible resources
•
Evaluating market and resource acceptability
•
Evaluating vulnerability
•
Vulnerability because of changed resource dependencies
Session 7 - Improvement strategy
Development and improvement
•
Process improvement
•
Breakthrough improvement
•
Continuous improvement
•
The differences between breakthrough and continuous improvement
•
The degree of process change
•
Improvement cycles
•
Direct, develop and deploy
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Setting the direction
•
Performance measurement
•
What factors to include as performance targets?
•
The degree of aggregation of performance targets
•
The balanced scorecard approach
•
Which are the most important performance targets?
•
How to measure performance targets?
•
On what basis to compare actual against target performance?
Benchmarking
•
Types of benchmarking
•
The objectives of benchmarking
Importance – performance mapping
The sandcone theory
Developing operations capabilities
•
The learning/experience curve
•
Limits to experience curve-based strategies
•
Process knowledge
•
The strategic importance of operational knowledge
Deploying capabilities in the market
•
The four-stage model
Session 8 – Product and service development and organisation
The strategic importance of product and service development
Developing products and services and developing processes
•
Product and process change should be considered together
•
Managing the overlap between product and process development
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•
Modular design and mass customisation
Product and service development as a process
Stages of development
•
Concept generation
•
Concept screening
•
Preliminary design
•
Design evaluation and improvement
•
Prototyping and final design
Developing the operations process
•
Product and service development as a funnel
•
Simultaneous development
A market requirements perspective on product and service development
•
Quality of product and service development
•
Speed of product and service development
•
Dependability of product service development
•
Flexibility of product and service development
•
The newspaper metaphor
•
Incremental commitment
•
Cost of product and service development
An operations resources perspective on product and service development
•
Product and service development capacity
•
Uneven demand for development
•
Product and service development networks
•
In-house and subcontracted development
•
Involving suppliers in development
•
Involving customers in development
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•
Product and service development technology
•
Knowledge management technologies
•
The organisation of product and service development
•
Project-based organisation structures
•
Effectiveness of the alternative structures
Session 9 - The process of operations strategy: formulation
and implementation
Formulating operation strategy
Time and timing – fast and slow cycles
Strategic sustainability
‘Dynamic’ or offensive approaches to sustainability
Analysis for formulation
Capabilities
The challenges to operations strategy formulation
How do we know when the formulation process is complete?
•
Comprehensive
•
Correspondence
•
Criticality
Session 10 – The process of operations strategy: monitoring
and control
Implementing operations strategy
Strategic monitoring and control
•
Expert control
•
Trial and error control
•
Intuitive control
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Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
•
Negotiated control
Monitoring implementation – tracking performance
•
Tracking the appropriate elements
•
Project objectives
•
Process objectives
The Red Queen effect
The balanced scorecard approach
The dynamics of monitoring and control
•
Tight alignment and loose alignment
Implementation risk
Learning, appropriation and path dependency
•
Organisational learning
•
Single and double-loop learning
Appropriating competitive benefits
Path dependencies and development trajectories
The innovator’s dilemma
Resource and process ‘distance’
Stakeholders
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Twelve sessions
Session 1 – What is operations strategy?
What is ‘operations’ and why is it so important?
•
Three levels of input–transformation–output
What is strategy?
Operations strategy – operations is not always operational
•
Four perspectives on operations strategy
•
The top-down perspective – operations strategy should interpret higher-level strategy
•
The bottom-up perspective – operations strategy should learn from day-to-day experience
•
The market requirements perspective – operations strategy should satisfy the organisation’s
markets
•
The operations resource perspectives – operations strategy should build operations capabilities
The content and process of operations strategy
•
Performance objectives
•
Decision areas
Structural and infrastructural decisions
The operations strategy matrix
Session 2 – Operations performance
Operations performance objectives
The five generic performance objectives
•
Quality
•
Speed
•
Dependability
•
Flexibility
•
Cost
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The internal and external effects of the performance objectives
The relative priority of performance objectives
•
The relative priority of performance objectives differs between different products and services
•
The polar representation of performance objectives
•
Order-winning competitive factors
•
Qualifying competitive factors
•
Delights
•
The benefits from order-winners and qualifiers
•
Criticisms of the order-winning and qualifying concepts
The relative importance of performance objectives change over time
•
Changes in the firm’s markets – the product/service life cycle influence on performance
•
Changes in the firm’s resource base
•
Mapping operations strategies
Session 3 – Trade-offs and focus
Trade-offs
•
What is a trade-off?
•
Why are trade-offs important?
•
Are trade-offs real or imagined?
•
Trade-offs and the efficient frontier
•
Improving operations effectiveness by using trade-offs
Targeting and operations focus
•
The concept of focus
•
Focus as operations segmentation
•
The ‘operation-within-an-operation’ concept
•
Types of focus
40
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Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
•
Benefits and risks in focus
•
Drifting out of focus
Session 4 – Substitutes for strategy?
‘New’ approached to operations
Total quality management (TQM)
•
What is TQM?
•
The elements of TQM
•
Criticisms of TQM
•
Lessons from TQM
•
Where does TQM fit into operations strategy?
Lean operations
•
What is ‘lean’?
•
The elements of lean
•
Criticisms of lean
•
Lessons from lean
•
Where does lean fit into operations strategy?
Business process reengineering (BPR)
•
What is BPR?
•
The elements of BPR
•
Criticisms of BPR
•
Lessons from BPR
•
Where does BPR fit into operations strategy?
Six Sigma
•
What is Six Sigma?
•
The elements of Six Sigma
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Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
•
Criticisms of Six Sigma
•
Lessons from Six Sigma
•
Where does Six Sigma fit into operations strategy?
Some common threads
•
Senior managers sometimes use these new approaches without fully understanding them
•
All these approaches are different
•
These approaches are not strategies but they are strategic decisions
•
Avoid becoming a victim of improvement ‘fashion’
Session 5 – Capacity strategy
What is capacity strategy?
•
Capacity at three levels
•
The overall level of operations capacity
Forecast demand
•
Uncertainty of future demand
•
Changes in demand – long-term or short-term demand?
•
Long-term demand lower than short-term demand
•
Short-term demand lower than long-term demand
The availability of capital
The cost structure of capacity increments – break-even points
Economies of scale
Flexibility of capacity provision
The number and size of sites
Capacity change
•
Timing of capacity change
•
Generic timing strategies
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Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
•
Leading, lagging or smoothing
•
The magnitude of capacity change
•
Balancing capacity change
Location of capacity
•
The importance of location
•
The nature of location decisions
Session 6 – Supply network strategy
What is supply network strategy?
•
Supply network strategy
•
Why take a supply network perspective?
•
Global sourcing
Interoperations relationships in supply networks
The outsourcing decision – vertical integration? Do or buy?
•
Making the outsourcing / vertical integration decision
•
Deciding whether to outsource
•
Some advantages and disadvantages of outsourcing
Traditional market-based supply
•
Problems with relying on market mechanisms
•
The internet and e-procurement
•
Electronic market places
Partnership supply
•
Closeness
•
Trust
•
Sharing success
•
Long-term expectations
43
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Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
•
Multiple points of contact
•
Joint learning
•
Few relationships
•
Joint coordination of activities
•
Information transparency
•
Joint problem solving
•
Dedicated assets
Which type of relationship?
Network behaviour
•
Quantitative supply chain dynamics
•
Qualitative supply chain dynamics
•
Supply chain instability
Network management
•
Coordination
•
Differentiation – matching supply network strategy to market requirements
•
Reconfiguration
•
Supply chain vulnerability
Session 7 – Process technology strategy
What is process technology strategy?
•
Direct or indirect process technology
•
Material, information and customer processing
Process technology should reflect volume and variety
Scale / scalability – the capacity of each unit of technology
Degree of automation / ‘analytical content’– what can each unit of technology do?
Degree of coupling / connectivity – how much is joined together?
44
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Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
The product–process matrix
•
Moving down the diagonal
•
Market pressures on the flexibility/cost trade-off?
Process technology trends
Evaluating process technology
•
Evaluating feasibility
•
Assessing financial requirements
•
Evaluating acceptability
•
Acceptability in financial terms
•
The life-cycle cost
•
The time value of money: net present value (NPV)
•
Limitations of conventional financial evaluation
•
Acceptability in terms of impact on market requirements
•
Acceptability in terms of impact on operational resources
•
Tangible and intangible resources
•
Evaluating market and resource acceptability
•
Evaluating vulnerability
•
Vulnerability because of changed resource dependencies
Session 8 – Improvement strategy
Development and improvement
•
Process improvement
•
Breakthrough improvement
•
Continuous improvement
•
The differences between breakthrough and continuous improvement
•
The degree of process change
45
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Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
•
Improvement cycles
•
Direct, develop and deploy
Setting the direction
•
Performance measurement
•
What factors to include as performance targets?
•
The degree of aggregation of performance targets
•
The balanced scorecard approach
•
Which are the most important performance targets?
•
How to measure performance targets?
•
On what basis to compare actual against target performance?
Benchmarking
•
Types of benchmarking
•
The objectives of benchmarking
Importance – performance mapping
The sandcone theory
Developing operations capabilities
•
The learning/experience curve
•
Limits to experience curve-based strategies
•
Process knowledge
•
The strategic importance of operational knowledge
Deploying capabilities in the market
•
The four-stage model
Session 9 – Product and service development and organisation
The strategic importance of product and service development
Developing products and services and developing processes
46
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Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
•
Product and process change should be considered together
•
Managing the overlap between product and process development
•
Modular design and mass customisation
Product and service development as a process
Stages of development
•
Concept generation
•
Concept screening
•
Preliminary design
•
Design evaluation and improvement
•
Prototyping and final design
Developing the operations process
•
Product and service development as a funnel
•
Simultaneous development
A market requirements perspective on product and service development
•
Quality of product and service development
•
Speed of product and service development
•
Dependability of product service development
•
Flexibility of product and service development
•
The newspaper metaphor
•
Incremental commitment
•
Cost of product and service development
An operations resources perspective on product and service development
•
Product and service development capacity
•
Uneven demand for development
•
Product and service development networks
•
In-house and subcontracted development
47
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Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
•
Involving suppliers in development
•
Involving customers in development
•
Product and service development technology
•
Knowledge management technologies
•
The organisation of product and service development
•
Project-based organisation structures
•
Effectiveness of the alternative structures
Session 10 – The process of operations strategy: formulation
and implementation
Formulating operation strategy
Time and timing – fast and slow cycles
Strategic sustainability
‘Dynamic’ or offensive approaches to sustainability
Analysis for formulation
Capabilities
The challenges to operations strategy formulation
How do we know when the formulation process is complete?
•
Comprehensive
•
Correspondence
•
Criticality
Session 11 – The process of operations strategy: monitoring
and control
Implementing operations strategy
Strategic monitoring and control
•
Expert control
48
© Nigel Slack and Michael Lewis 2012
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
•
Trial and error control
•
Intuitive control
•
Negotiated control
Monitoring implementation – tracking performance
•
Tracking the appropriate elements
•
Project objectives
•
Process objectives
The Red Queen effect
The balanced scorecard approach
The dynamics of monitoring and control
•
Tight alignment and loose alignment
Implementation risk
Learning, appropriation and path dependency
•
Organisational learning
•
Single and double-loop learning
Appropriating competitive benefits
Path dependencies and development trajectories
The innovator’s dilemma
Resource and process ‘distance’
Stakeholders
Session 12 – Overview
Operations strategy revisited
Applying the operations strategy matrix
Revisiting the five generic performance objectives
•
Quality
•
Speed
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•
Dependability
•
Flexibility
•
Cost
Revisiting the decision areas
•
Capacity
•
Supply networks
•
Technology
•
Improvement
•
Product/service development
Revisiting process
•
Alignment
•
Implementation
Operations strategy is close to operations management
Future trends
•
Technology
•
Globalisation
•
Corporate social responsibility
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© Nigel Slack and Michael Lewis 2012
Operations Strategy
TEACHING GUIDE 1
Topic – Operations strategy – developing
resources for strategic impact
Reading(s)
(This section includes the relevant chapter of Slack and Lewis plus any additional reading that
may be particularly helpful)
Chapter 1 of Slack and Lewis
Hayes, R.H., Pisano, G.P., Upton, D.M. and Wheelwright, S.C. (2004) Operations, Strategy,
and Technology: Pursuing the Competitive Edge. New York: John Wiley & Sons.
Cases
(This section refers to potential cases for use in class sessions. They are either included in the
Case study section of Slack and Lewis or in the ‘Extra case studies section of this Instructors
Manual)
•
McDonald’s Corporation (Abridged)
•
‘Hagen Style’
•
Dresding Medical
•
The Focused Bank
•
Contact Utilities
•
IDEO Service Design
Teaching this topic
Key questions
Why is operations excellence fundamental to strategic success?
What is strategy?
What is operations strategy?
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How should operations strategy reflect overall strategy?
How can operations strategy learn from operational experience?
How do the requirements of the market influence operations strategy?
How can the intrinsic capabilities of an operation’s resources influence operations strategy?
What is the ‘content’ of operations strategy?
What is the ‘process’ of operations strategy?
The objective of teaching this topic is primarily to convince students that operations
management isn’t always ‘operational’. Although Operations Management does deal with the
more operational aspects of the operations functions’ activities, operations managers have a
very significant strategic role to play. It is also important to demonstrate that there is a whole
range of performance criteria that can be used to judge an operation, and which operations
managers influence. ('…..although cost is important and operations managers have a major
impact on cost, it is not the only thing that they influence. They influence the quality that
delights or disappoints their customers, they influence the speed at which the operation responds
to customers’ requests, they influence the way in which the business keeps its delivery promises
and they impact on the way an operation can change with changing market requirements or
customer preference. All these things have a major impact on the willingness of customers to
part with their money. Operations influence revenue as well as costs.')
It is also vital to stress to students the importance of how the operations function sees its role and
contribution within an organisation. ('… you can go into some organisations and their
operations function is regarded with derision by the rest of the organisation; how come, they
say, that we still can’t get it right. This is not the first time we have ever made this product or
delivered this service. Surely we should have learned to get it right by this time! The operations
people themselves know that they are failures, the organisation does nothing but scream at
them, telling them so….. Other companies have operations functionaries who see themselves as
being the ultimate custodian of competitiveness for the company. They are the A team, the
professionals, the ones who provide the company with all they need to be the best in the
market…')
Other objectives are
•
To explain that there really is something very important embedded within operations and
processes. The skills of people within the operation and the processes they operate are the
repository of (often, years of) accumulated experience and learning.
•
To give examples of how markets and operations must be connected in some way. Whether
this is because operations are being developed to support markets, or markets are being
sought that allow operations capabilities to be leveraged, it doesn’t matter. The important
issue is that there should always be a connection between the two.
Possible lesson elements
Teaching hint – Teaching the nature and importance of the various performance objectives can
be done in two ways.
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One can look at each performance objective in turn, using examples of where the particular
performance objective has a special significance. For example,
•
Quality – Use companies (like Bentley or Toyota) that have a reputation for quality
products or services. High quality hotels and restaurants can be used, as can luxury services
such as high price hairdressers, etc. This can prompt a useful discussion regarding what we
mean by quality (although you may wish to reserve this for the lesson on quality).
Alternatively, use an example where high conformance is necessary for safety reasons such
as blood testing in hospitals.
•
Speed – Any accident, emergency or rescue service is useful to discuss here. The
consequences of lack of speed are immediately obvious to most students. Also, use
transportation examples where different speeds are reflected in the cost of the service. First
and second class postage is an obvious example as are some of the over-night courier
services. Likewise, the fast check-in service offered to business class passengers at airports
and the exceptionally fast service of Concorde (depending on whether it is flying when you
are reading this!) that offers a fast service at a very high price.
•
Dependability – Some of the best examples to use here are those where there is a fixed
‘delivery’ time for the product or service. Theatrical performances are an obvious example
(or the preparation of lectures). Other examples include space exploration projects that rely
on launch dates during a narrow astronomical ‘window’.
•
Flexibility – We have found the best examples here to be those where the operation does not
know who or what will ‘walk through the door’ next. The obvious example would be a
bespoke tailor who has to be sufficiently flexible to cope with different shapes and sizes of
customers and also (just as importantly) different aesthetic tastes and temperaments. A more
serious example would be the oil exploration engineers who need to be prepared to cope
with whatever geological and environmental conditions they find drilling for oil in the most
inhospitable parts of the world. Accident and emergency departments in hospitals can also
provide some good discussions. Unless they have a broad range of knowledge that allows
them to be flexible they cannot cope with the broad range of conditions presented by their
patients.
•
Cost – Use the example of low-cost retailers who have achieved some success in parts of
Europe by restricting the variety of goods they sell and services they offer.
Teaching hint – Try establishing the market-operations link by referring to organisations
familiar to the students. Even the ubiquitous McDonalds can be used (in fact there is a very
good case on McDonald’s operations in the Harvard Business School series; contact The Case
Clearing House for details). The important issue however is to raise the focus of discussion from
managing a single part of the organisation (such a single McDonald’s store) to managing the
operations for the whole organisation (for example, what are the key operations strategy
decisions for McDonald’s in the whole of Europe?). The discussion can then focus on the
difference between the two levels of analysis. Discussions can especially look at how the
operational day-to-day issues (such as, the way staff are scheduled to work at different times in
McDonald’s stores) can affect the more strategic issues for the organisation as a whole (such as,
what level of service and costs are McDonald’s franchise holders expected to work to?).
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Exercise – One method of establishing the connection between markets and operations is to ask
the class members to find a business-to-consumer website, formally list the ‘marketing’
promises that the website makes and then think about the operations implications of these
promises. For example, what will the company have to do in terms of its inventory management,
warehouse locations, relationships with suppliers, transportation, capacity management and so
on in order to fulfil its promises?
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© Nigel Slack and Michael Lewis 2012
Operations Strategy
TEACHING GUIDE 2
Topic – Operations performance
Reading(s)
(This section includes the relevant chapter of Slack and Lewis plus any additional reading that
may be particularly helpful)
Chapter 2 of Slack and Lewis
Boyer, K.K. and Lewis, M.W. (2002) Competitive priorities: investigating the need for tradeoffs in operations strategy. Production and Operations Management, Vol. 11, No. 1, pp. 9–20.
Cases
(This section refers to potential cases for use in class sessions. They are either included in the
Case study section of Slack and Lewis or in the ‘Extra case studies’ section of this Instructors
Manual)
•
Hagen Style
•
Dresding Medical
•
Call-Us Banking Services
•
The Thought Space Partnership
•
Customer Service at Kaston Pyral
•
The Focused Bank
•
Clever Consulting
•
Saunders Industrial Services
•
Disneyland Resort Paris
•
The Greenville operation
•
McDonald’s Corporation (Abridged)
•
Contact Utilities
•
IDEO Service Design
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Teaching this topic
Key questions
What are operations performance objectives?
Do the role and key performance objectives of operations stay constant or vary over time?
Are trade-offs between operations performance objectives inevitable or can they be
overcome?
What are the advantages and disadvantages of focused operations?
This chapter covers four important issues relating to operations performance. The chapter is
placed at the beginning of the book because it provides some of the basic ideas that reoccur
throughout the treatment of the various topics in both the content and process of operations
strategy. However, it could equally well have been placed towards the end of the book if one
wanted to relate back to the various examples used throughout the book in order to demonstrate
the nature of operations performance. So, from a teaching perspective, one might want to think
about delaying some of these issues towards the end of the course.
The four issues related to operations performance that are covered in the chapter are as follows:
•
There are five ‘generic’ performance objectives. However, note that one may introduce a
broader perspective on operations performance at this point, including aspects of corporate
social responsibility (CSR) and so on.
•
The relative importance of these performance objectives changes over time. The text uses
the VW example to illustrate this over a number of decades. But several of the cases listed
above could also be used to demonstrate this point.
•
There are trade-offs between the various performance objectives. The text uses the ‘efficient
frontier’ concept to illustrate this. But in addition, it is worthwhile exploring the debate over
whether trade-offs are real or imagined, and in particular the idea that trade-offs are very
real in the short term but can be overcome in the long term.
•
Focussing an operation on a very small number of performance objectives can lead to
superior performance in those objectives. This is the classic ‘focussed factory’ idea that
Skinner raised several decades ago. Of course, it applies equally to non-manufacturing
operations.
Possible lesson elements
Teaching hint – An important point to get over here is that performance objectives differ for
different operations with different strategies. It may seem obvious but it is fundamental and not
all students grasp this initially. An obvious way of demonstrating this is to take two well-known
companies in different parts of the same sector competing in different ways. For example, ask
the students to contrast a well-known low-cost airline such as Ryanair with Virgin Atlantic’s
Upper Class service.
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Exercise – Relating to the above point, one could ask students to explore the websites of two
organisations such as Ryanair and Virgin and from that deduce differences between the relative
importance of each performance objective.
Discussion point – ‘Surely the level of service offered by Ryanair is now so low that customers
will not be prepared to put up with it even at rock bottom prices?’
Exercise – The text quotes various statements from the website of some well-known companies
that emphasise one or more performance objectives. One could ask students to explore some
other company websites and identify their stated performance priorities.
Teaching hint – Polar diagrams are particularly useful when summarising any company’s
performance objectives. What ever company is being discussed, it is useful to have a summary
of its strategic stance in the form of a polar diagram.
Exercise – One can refine the idea of the relative importance of performance objectives by
asking students to distinguish between qualifiers, order winners and delights. Any of the ideas
already mentioned can be used to do this.
Exercise – The idea of delights is especially useful for teaching experienced students. One can
ask them to identify one product or service and ask them to distinguish between qualifiers, order
winners and delights now and in the future. See the study notes associated with Chapter 2 for
more details on this.
Teaching hint – The illustration of how performance objectives change over time used in the
chapter is that of VW. One can ask students to take another company with which they are
familiar (this works particularly well for experienced students) and trace its history as far as
back as their knowledge extends. They could then identify the various phases that the business
may have gone through and the associated changes in the relative importance of performance
objectives.
Exercise – One of the best illustrations of trade-off and focus comes from the (now rather old)
Shouldice Hospital case (see Case Clearing House). If you regard this case as too old, you could
ask students to look up Shouldice Hospital’s website and ask what trade-offs seem to have been
made.
Discussion point – ‘Trade-offs are all in the mind. Look at how we used to think about the
trade-off between cost and quality when buying automobiles. It was assumed that you had to
spend money in order to get a car without defects. The Japanese showed us that it is perfectly
possible to get great quality and low price at the same time. In fact, achieving an error-free
production process actually reduced the cost of manufacturing the vehicle and therefore reduced
the price that could be charged. It is the same with all other types of trade-off isn’t it?’
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Operations Strategy
TEACHING GUIDE 3
Topic – Substitutes for strategy
Reading(s)
(This section includes the relevant chapter of Slack and Lewis plus any additional reading that
may be particularly helpful)
Chapter 3 of Slack and Lewis
Spear, S. and Bowen, H.K. (1999) Decoding the DNA of the Toyota Production System, Harvard
Business Review, September-October.
Cases
(This section refers to potential cases for use in class sessions. They are either included in the
Case study section of Slack and Lewis or in the ‘Extra case studies section of this Instructors
Manual)
•
Customer Service at Kaston Pyral
•
Clever Consulting
•
Saunders Industrial Services
•
Geneva Construction and Risk
•
Turnround at the Preston Plant
Teaching this topic
Key questions
How does Total Quality Management fit into operations strategy?
How do Lean Operations fit into operations strategy?
How does Business Process Reengineering fit into operations strategy?
How does Enterprise Resource Planning fit into operations strategy?
How does Six Sigma fit into operations strategy?
What place do these new approaches have in operations strategy?
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This is a slightly unusual chapter in the context of operations strategy. We have included it in
the third edition of the text for two reasons. First, users of the text asked us to include brief
descriptions of some of the more popular and important approaches that are common currency
within operations strategy because students were increasingly asking about these approaches.
Second, as we say in the chapter, many organisations believe that by adopting one of these
approaches they are adopting an operations strategy. The main point of this chapter is to
demonstrate that none of these approaches is a complete operations strategy as such.
Nevertheless, the decision to adopt one of these approaches is a strategic decision. Prior to
adopting the approach, it is important to understand exactly what it means, what is implied by
adopting the approach and how it may have to be adapted over time.
In some ways, although the bulk of the chapter comprises brief descriptions of these new
approaches, the important discussion comes at the end of the chapter. It is of course important to
ensure that students understand the elements within each of these new approaches (which is one
of the points we make in the chapter), but it is even more important that they are able to
compare and contrast the approaches. The way we do this is to discriminate in terms of two
dimensions, radical change versus incremental change and a concentration of process versus a
concentration of exactly what changes should take place. This is only one way of discriminating
between these new approaches. We find it useful but you may wish to adopt a different
approach.
Possible lesson elements
Teaching hint – Start the session by asking students to identify some of new approaches that
they have either come across in their own organisations or (if they are inexperienced students)
have heard about. Write these approaches down (they may mention more than the ones we look
at the in chapter) and explain the chronology of the approaches, where they originally came
from and so on.
Discussion point – 'A lot of organisations tried Total Quality Management. If it has been that
useful they would still be doing it and yet TQM is now unfashionable. It can’t be any good.'
Exercise – Lean operations principles lend themselves to games of various sorts. Simple
production games where students make cards or use Lego can be used to demonstrate the effect
of between stage inventories and/or pull control. Different games can be devised, especially to
demonstrate lean ideas. Here are two ideas.
Take a cheap and easily available product that students can easily disassemble and assemble as
a mock assembly line. We use electrical plugs. These have to be of the type with enough bits
inside them to make the total disassembly/assembly task into four or five stages. Equip the four
or five ‘volunteer’ students with appropriate technology (screwdrivers) and set the process
running. Initially, allow as much inventory to build up as they wish (this is why a small product
is useful). Take keys measures over a three or four minute period such as the number produced,
the total throughput time, the amount space of used, the total inventory in the system and so on.
Then run the game again, this time with ‘kanban squares’ of (say) one or two units only,
between the stages. Demonstrate how this increases throughput time and reduces inventory.
As an alternative to a simple product such as the domestic electrical plug, devise a product made
with Lego bricks. This involves some initial outlay in order to purchase enough Lego to allow
the game to run for some minutes. However, the advantage is that it is easier to balance the
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amount of work at each stage in the line and also one can allow ‘design changes’ and
improvements in the system more easily.
Teaching hint –There is still an old video in circulation showing the above being done at
Hewlett-Packard. The video dates from about 1984 and unfortunately the clothes worn by the
people in the video make this obvious. Nevertheless, the video does demonstrate the principles
well. And it is now so old that one can make the point to students from service operations that
manufacturing operations were starting to understand lean synchronisation (or JIT as they would
have called it) 20 years ago. Ask them why it has taken so long to be recognised as being
valuable in service businesses?
Exercise – With smaller groups such as smaller MBA classes, or even executive classes, let
everybody participate in these games in teams of five or six people. After the first one or two
runs, set them the challenge of improving the process. While they are doing this walk amongst
them with a video camera try and capture shots of them attempting to improve the process. It is
not usually difficult to find examples of single individuals dominating discussion, groups
splitting into two to do their own thing, poor communication, arguments and so on. The session
can then be broadened out and illustrated using selected highlights from this video. This is
especially useful for covering the continuous improvement and human issues in lean operations.
Teaching hint – Lead a discussion on how lean principles could be used in a retail operation.
Lead this discussion back into a discussion of supply chain and how the whole supply chain,
from raw materials suppliers through to the retail operation, can be governed using lean
synchronisation principles.
Exercise – For Six Sigma it is particularly important that students come to understand the nature
of variation in process performance and how it can affect quality. We have found the best way
to do this is to devise games to demonstrate the choices that need to be made when dealing with
variability. Fortunately, it is not difficult to devise games of this sort. Here are two options.
•
Game 1 – Find some easily available product that contains pieces, supposedly of the same
size. We use the small wooden blocks that are used in some children’s building sets and
games. Instruct groups of students to measure successive blocks using a micro measuring
device (available at specialist and hardware stores). Get them to plot on an SPC chart the
variation in the size of the blocks and from that calculate the central and control limits for
mean and range.
•
Game 2 – Do something similar but select an Internet search site such as one that searches
for cheap flights or hotel accommodation. Get the students to time the variance in response
time and calculate limits as before. The advantage of this approach is that one can ask
students to sample from the same site at different times to check whether the process is
getting ‘out of control’.
Teaching hint – Off-air video clips are particularly useful for teaching quality. One can use any
short piece of video that simply shows an operation in practice. Retail organisations, hospitals,
trucking companies and so on are all shown frequently on air. Alternatively, select a ‘business’
programme that may have more in-depth pieces. Show the video to students and ask them to
define what quality would mean for such an operation.
Teaching hint – If one is treating ERP, it can be a complex issue for students to understand. Try
basing examples around cooking meals in a domestic situation. Simple recipes and simple
numbers are recommended. Inevitably, one will have to simplify the recipes greatly, but this
approach does have the advantage of relating to an activity that (some) students might
understand.
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Operations Strategy
TEACHING GUIDE 4
Topic – Capacity strategy
Reading(s)
(This section includes the relevant chapter of Slack and Lewis plus any additional reading that
may be particularly helpful)
Chapter 4 of Slack and Lewis
Kopper A. (2005) Location-based Services: Fundamentals and Operation: Fundamentals and
Application. New York: John Wiley & Sons.
Cases
(This section refers to potential cases for use in class sessions. They are either included in the
Case study section of Slack and Lewis or in the ‘Extra case studies’ section of this Instructors
Manual)
•
Freeman Biotest
•
Customer Service at Kaston Pyral
•
The Focused Bank
•
Disneyland Resort Paris
•
The Greenville operation
•
Delta Synthetic Fibres
•
Contact Utilities
Teaching this topic
Key questions
What is capacity strategy?
How much capacity should an operation have?
How many separate sites should an operation have?
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What issues are important when changing capacity levels?
Where should capacity be located?
Capacity is regarded by some people as a particularly ‘dry’ subject. The reality is very different.
Not only is the idea of capacity at the very heart of what operations management is about, the
failure to get capacity decisions right in the long term (or in the short term for that matter) can
be dramatic and sometimes disastrous. Not only that, but there are always examples of capacity
strategy in the press. News stories that look at location decisions, reducing capacity by reducing
the number of jobs in a firm, being surprised by the volume of demand, getting forecasts
hopelessly wrong, and so on, can all be exploited to illustrate aspects of capacity strategy. In
particular, a number of key points are addressed by the chapter.
•
How we manage capacity in the longer term is influenced by both market and operations
resource factors.
•
The idea of the breakeven point is hugely important. Profitability and volume are not always
related in a straightforward manner.
•
The idea of economies of scale and diseconomies of scale apply to all types of operation. In
particular, diseconomies of scale are a function of customer perception as well as the
straightforward cost implications of scale.
•
Various decisions that make up a capacity strategy are interrelated. In particular, the idea of
how many sites, how big each site should be, whether it should be specialist or generalist,
and its location, are all connected.
•
The dynamics of capacity change are as important as a static analysis. As volume changes
capacity must also change. Making changes that are too early, too late or of the wrong
magnitude can all have serious consequences.
•
Location is becoming a particularly important decision. The economies of location in many
industries are changing fundamentally. Easier communication and globalised industries
mean that the number of location options available is now often very great.
Possible lesson elements
Teaching hint – One way to promote a discussion on location issues is to choose a decision
currently in the press. Often this can be a government-originated project such as a sports
stadium or museum. The class can then be led through the criteria which may be used to decide
on the location.
Exercise – A related but different exercise can be constructed by asking the class to consider
how they would make their local area more attractive to incoming business. ‘If you were the
local government officer in charge of attracting business to this area, what could you do to make
the area more attractive?’
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Teaching hint – Try contrasting the different approaches to location taken by different types of
business. For example, compare the location decision facing a company wishing to build a new
factory in a region, with a fast-food restaurant looking for a location in a town where it has no
existing outlets. The idea here is to contrast two very different types of location decision.
•
The new factory location would follow the ideas as set out in the chapter. These tend to
assume that location is being chosen primarily on the grounds of minimising the costs
associated with the site. The amount of products sold by the company is unlikely to be very
much affected by its location, but its costs could be very much affected by location factors.
Furthermore, there are likely to be a very large number of sites that the company could
choose from.
•
The fast-food restaurant, on the other hand, is a different sort of location decision. Both
revenue and costs will be affected by location. Locating the restaurant away from other
restaurants and/or away from passing trade is likely to mean a reduction in revenue. Some
locations are better than others at attracting customers. Also, the costs of the location (such
as rent and rates etc.) are affected by location. Finally, there are rarely a large number of
options to choose the location from. Usually location is more opportunistic. The fast-food
restaurant might wait until a site becomes available and then take the decision as to whether
to have that site or to wait in case a better one becomes available.
Teaching hint – It is important to get over the importance of forecasting in capacity strategy.
There are plenty of examples of bad forecasts and there are plenty of examples of saying
associated with forecasting. (My personal favourite comes from Paul Gascoigne the footballer,
who is reputed to have said, ‘I never make predictions and I never will’).
Exercise – The example on IKEA can be made into an interesting little exercise. Ask students to
devise two lists. The first list identifies all the factors that contribute to economies of scale at
IKEA. The second list identifies the factors that may contribute to potential diseconomies of
scale. Ask the students to reflect on how many of the factors that influence diseconomies of
scale are either perceptual (it is a maze in there, you can’t get out for hours) or born by bodies
other than the company (traffic congestion etc.).
Exercise – The idea of breakeven points will be familiar to some students so it is important to
choose an exercise that both gets over the main ideas and yet provides some interest for students
who are familiar with the topic. The Freeman Biotest case does both these things.
Exercise – The Delta Synthetic Fibres case that included in the book works particular well if
you can ask the students to build a simple spreadsheet model to examine the effects of different
timing strategies on the profitability and cash flow of the company.
Discussion point – ‘Just look at the example of Wholefood Markets that is described in Chapter
4 of Slack and Lewis, would you really want to buy organic food from a huge factory-like place
like that?’
Teaching hint – The idea of clustering in location is a useful one to explore in class. The
obvious cluster to discuss is that of Silicon Valley. However, one can normally find various
clusters in whatever region you are teaching. The one I use in the UK is the manufacture of
racing cars (both for Formula 1 and for Indie Car Racing) most of which are made in the UK.
Get the class to discuss exactly why clusters occur.
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Operations Strategy
TEACHING GUIDE 5
Topic – Purchasing and supply strategy
Reading(s)
(This section includes the relevant chapter of Slack and Lewis plus any additional reading that
may be particularly helpful)
Chapter 5 of Slack and Lewis
Harvard Business School. (2006) Harvard Business Review on Supply Chain Management.
Boston: Harvard Business School Press.
Cases
(This section refers to potential cases for use in class sessions. They are either included in the
Case study section of Slack and Lewis or in the ‘Extra case studies’ section of this Instructors
Manual)
•
Aztec Component Supply
•
Zentrill
•
The Thought Space Partnership
•
Disneyland Resort Paris
•
The Greenville operation
•
Delta Synthetic Fibres
Teaching this topic
Key questions
What is purchasing and supply strategy?
What are the arguments for and against outsourcing?
What are the arguments for and against using traditional market relationships with suppliers?
How do partnership relationships seek to gain the ‘best of both worlds’?
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Are there ‘natural’ dynamic behaviours which supply networks exhibit?
In what way do companies try to change the nature of the supply network of which they are a
part?
One of the more important points made in Chapter 1 of the text is the idea that operations
management can be analysed at three levels, the level of the supply network, the level of
operation itself and the level of individual processes. This chapter is concerned with the
decisions relating to supply networks.
It is worthwhile thinking about how one positions the whole idea of supply network strategy.
The way we have positioned the topic in the text is as a part of the overall set of decisions that
go together to make up an operation’s strategy. An alternative, and in some way equally valid,
perspective is to see supply network strategy, or ‘supply strategy’ as the overarching idea that
dominates what we have called ‘operations’ strategy. If you prefer this view then obviously the
material contained in this chapter must come earlier. It may even be merged with the type of
topics contained in our Chapter 1.
Given one is using the topic in the way it intended in this book, there are a number of key points
to get over in any session devoted to supply network strategy.
•
All organisations have a supply network. One does not have to have any physical flow of
physical products in order to have suppliers, customers, suppliers’ suppliers, customers’
customers and so on.
•
A supply network perspective is by definition a strategic perspective.
•
Globalisation has changed the nature of how we think about supply networks.
•
The nature of relationships between different operations in a supply network goes a long
way to explain the capabilities of the supply network.
•
Outsourcing or vertical integration is a particularly important topic given the globalised
circumstances of many operations in recent years.
•
Conventional marked-based supply relationships are more common than is realised and may
be perfectly appropriate under certain circumstances.
•
Partnership relationships are a great idea in theory and can work in practice but pose some
very significant difficulties.
•
Supply networks are dynamic, disturbances in one part of the supply network will have
effects on other parts of the supply network.
•
Improving the performance of supply networks is usually a combination of operational
changes and (perhaps more significantly) changes to how the network is configured.
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Possible lesson elements
Teaching hint – We have found that one of the most important points to come out of this
chapter is an understanding of the whole concept of a supply network. One method of achieving
this is to lead a discussion on the supply network for a familiar operation such as a restaurant.
Suppliers can be traced back to food items, consumables such as napkins etc. Each of these can
then be traced back to the suppliers’ suppliers, back to the farm or paper factory etc. Similarly,
moving downstream in the supply network, one can work to the consumer directly, or assuming
that the restaurant supplies events such as dances and weddings, to the wedding organiser and
then to the ultimate consumer.
Teaching hint – Try tracing the development of a supply network over time. An ideal one is
that for the recorded music industry. Back in the 1950s record labels owned their own recording
studios, orchestras, engineers, arrangers, artists and so on. They also often made their own
albums and distributed them to their own retail outlets. Contrast this with what a supply network
might look like with internet-based distribution of MP3 files.
Exercise –Dell is an interesting example. Ask the students to revisit this and draw Dell’s supply
network and contrast it with the supply networks of other computer companies. Ask them to list
the advantages and disadvantages of Dell’s model.
Exercise – Ask students to draw the supply chain for a conventional music store selling CDs
and also for iTunes. Ask them to identify other industries that might adopt a similar model to
iTunes. (The movie and DVD industries are obvious examples).
Exercise – Following on from the former exercise, ask the students to identify as many industries
as then can that will be particularly affected by further developments in internet-based channels
of distribution. Ask them to draw supply chains that illustrate exactly how they will be affected.
Exercise – At the time of writing (2010) possible the most useful example of supply chain
innovation is that of Zara. A synopsis of the Zara phenomenon is included in the Inditex case in
the final part of the book. There is also a far fuller case available through the Case Clearing
House (co-authored by one of the authors of this book, Mike Lewis) and a video produced by
Harvard Business School. Either or both can be used very successfully in teaching sessions.
Exercise – The idea of ‘trust’ is fundamental to developing supply relationships. The Prisoner’s
Dilemma illustration of game theory can be used to distinguish between how businesses can
cooperate to maximise the benefits to the group or to operate individually to attempt to
maximise their individual benefits. The well-known ‘red-blue’ game can be used to illustrate
this (just search on the internet for ‘red-blue game’). Similarly, if students have seen the film ‘A
Beautiful Mind’ one can direct them to the scene where Russell Crowe describes the nature of
game theory in a bar.
Discussion point – ‘All this idea about partnership is nonsense. The nature of business is
competition and the nature of competition is trying to maximise ones own return from all
business deals. Partnership is just asking businesses to behave in an unnatural manner. It is
always going to be doomed to failure’.
Exercise – Perhaps the best-known of all management games in this area is the famous ‘Beer
Game’. Again, if you have never played this with a class simply use a search engine on the
internet and you will find the rules. It is a powerful illustration of supply chain dynamics but it
does need practice. If you have never taught it before, do practice with colleagues first!
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Operations Strategy
TEACHING GUIDE 6
Topic – Process technology strategy
Reading(s)
(This section includes the relevant chapter of Slack and Lewis plus any additional reading that
may be particularly helpful)
Chapter 6 of Slack and Lewis
McKeen J.D. (2003) Making IT Happen: Critical Issues in Managing Information Technology.
John Wiley Series in Information Systems.
Cases
(This section refers to potential cases for use in class sessions. They are either included in the
Case study section of Slack and Lewis or in the ‘Extra case studies’ section of this Instructors
Manual)
•
Dresding Medical
•
Call-Us Banking Services
•
Freeman Biotest
•
Bonkers Chocolate Factory
•
Ontario Facilities Equity Management
•
Turnround at the Preston Plant
•
The Greenville operation
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Teaching this topic
Key questions
What is ‘process’ technology strategy?
What are suitable dimensions for characterising process technology?
How do market volume and variety influence process technology?
How can process technology be evaluated strategically?
There are so many different processing technologies used in operations that it is probably not
worth trying to cover all types. However, it is important to make it clear to students that the
changing capabilities of process technologies can open up new opportunities for operations. We
find it useful therefore to concentrate (a) on the general issues associated with process
technology strategy and (b) on newer forms of technology. What is important is to try and get
students to think through the implications of adopting process technologies. In doing this it is
useful to try and identify new technologies that have not yet been fully developed. For example,
security systems are starting to use scanners which take a photograph of a person’s iris in order
to verify their authorisation to enter a building or to take money out of a machine etc. A
discussion around the operations implications of such new security technologies can be more
interesting and rewarding than one which concentrates on a manufacturing (say) technology
with which the students may not be familiar. The other way to approach process technology is
to do so through the task of evaluation. Any exercise which involves comparing alternative
technologies can be used not only to think about the process of evaluation but also to discuss
some of the underlying characteristics of the technology in question.
Some key points to cover in a session include the following:
•
To overcome the reluctance of some students to consider process technology as anything
other than ‘what engineers do’.
•
To establish the idea that all operations have some type of process technology.
•
To illustrate various types of material, information and customer processing technology.
•
To examine the strategic relevance of process technology choice and development.
•
To establish the three generic dimensions of process technology, automation (or analytical
content), scale (or scalability) and coupling (or connectivity).
•
To establish the main criteria for evaluating alternative process technologies.
Possible lesson elements
Exercise – Write up a list of different operations (restaurant, cinema, road side rescue service,
bank, etc.) and get the students in groups to answer the following questions.
What process technologies are used in these operations?
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What advantages does the process technology bring to the operation itself and its customers?
How might recent changes and innovations in process technology affect the way these
operations use their process technology?
What criteria do you think these operations would use to decide whether to invest in new
process technology?
Teaching tip – Choose an emerging or potential technology and prompt a discussion on its
implications for managing operations (e.g. what would be the impact on the operations
managers in several business of the widespread adoption of fuel cells in cars?).
Teaching tip – Hold a discussion on the impact of MP3 compression on record retailing
operations. Discuss whether this is only a threat to record retailers or whether they could harness
the technology in some way.
Discussion point – In any type of information technology (IT) the issue of scale just does not
matter anymore. The only thing that matters is scalability. That is, ‘how easy it is to extend the
operating capacity of the technology as quickly as possible’.
Exercise – Use the example ‘Will computers eventually do everything?’ as a starting point and
ask students, in groups, to identify how computer-based technologies will extend their analytical
ability over the next 5 years. Then ask them to identify some of the implications for managing
operations of these possible developments.
Exercise – The product–process matrix is a particularly important idea to get over to students. If
students have some significant degree of work experience it is sometimes possible to group
them so that each group represents a particular type of industrial sector. One can then ask them
to identify different types of process technology at different parts of the diagonal on the
product–process matrix.
Exercise – The evaluation framework that uses the three categories of feasibility, acceptability
and vulnerability, can be easily structured into an exercise. The simplest way to do this is to ask
students to identify a technology purchase that they have recently made in their domestic lives.
A more complex exercise would involve them identifying or exploring technology choices that
have been made in their own work setting.
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Operations Strategy
TEACHING GUIDE 7
Topic – Improvement strategy
Reading(s)
(This section includes the relevant chapter of Slack and Lewis plus any additional reading that
may be particularly helpful)
Chapter 7 of Slack and Lewis
Goldratt, E.M., Cox, J. and Whitford, J.C.D. (2004) The Goal: A Process of Ongoing
Improvement, 3rd edn. Great Barrington, MA: North River Press.
Cases
(This section refers to potential cases for use in class sessions. They are either included in the
Case study section of Slack and Lewis or in the Extra case studies section of this Instructors
Manual)
•
Hagen Style
•
Dresding Medical
•
Call-Us Banking Services
•
The Thought Space Partnership
•
Customer Service at Kaston Pyral
•
The Focused Bank
•
Clever Consulting
•
Saunders Industrial Services
•
Geneva Construction and Risk
•
Disneyland Resort Paris
•
Turnround at the Preston Plant
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Teaching this topic
Key questions
What are the differences between managing large ‘breakthrough’ improvement and managing
continuous improvement?
How do the needs of the market direct the ongoing development of operations processes?
How can the ongoing management and control of operations be harnessed to develop their
capabilities?
What can operations do to deploy their capabilities into the market?
The idea of improvement as an important topic within operations management is now fairly
well-established. This chapter attempts to identify the fact that improvement is also a
particularly important topic within operations strategy. In particular, all organisations need some
strategy that guides their improvement efforts. Given this more strategic nature of the topic,
there are fewer individual improvement techniques as such in this chapter than one would find
in an operations management text. The ideas covered are more generic and conceptual in nature.
The overall framework for the chapter is derived from the four perspectives of operations
strategy as originally identified in Chapter 1 of the text. Using these four perspectives, one can
identify four aspects of improvement, three of which are unambiguously the concern of the
operations function. These are as follows.
•
Understanding the nature of the existing market positioning adopted by the organisation and
translating this into a set of operations resources that will meet the requirements of the
market. This is called ‘direct’ in the text.
•
Developing the internal competencies of the operation’s resources so that they can
contribute to the organisation’s strategy as a whole. These competencies should give
something to the organisation that is unique and difficult to copy, which allows it to adopt a
market position superior to that it is occupying currently. This is called ‘develop’ in the text.
•
Leveraging the operation’s capabilities into the marketplace so as to achieve sustained
competitive advantage. This stage is called ‘deploy’ in the text.
Possible lesson elements
Exercise – The idea of performance measurement is relatively easy to devise exercise around.
For example, get students to identify operations with which they are familiar (fast food
restaurants, shops, public transport systems, etc.) and task them with devising suitable
performance measurement systems. This should involve them deciding on the most important
performance objectives for the type of operation, devising performance measures that reflect the
performance objectives, debating the most appropriate form of performance standards and then
discussing the practical implications of how to make such a performance system work. For
example, how often measurements should be taken, who should take the measurements and
so on.
Teaching hint – If you are feeling bold, ask the students to list ways in which the performance
of a university lecturer could be assessed!
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Teaching hint – Get students to devise benchmarking strategies for different types of
operations. For example, ‘how could a retail bank benchmark itself against its competitors’
levels of branch service?’
Exercise – The importance-performance matrix teaches particularly well and of all the
techniques and approaches described in the book this one is probably the most successful across
the broad spectrum of teaching that we do. The technique is only commonsense but the way in
which it is structured seems to enable students to understand the nature of prioritisation in
operations improvement. There are a number of ways it can be approached. The obvious
approach is to use the Kaston Pyral case in the extra case section of this Instructors Manual.
This contains a representative mixture of subjective (and pseudo objective) data. More
importantly, it can be used to both demonstrate the technique and prompt debate on what the
owner could do to improve performance.
Exercise – An alternative way of demonstrating the importance of performance matrix where
students have some industrial experience is to devise an exercise around that experience. For
example, see below.
•
Step 1 – Choose an operation with which at least one of your group is familiar. The
operation should have a relatively clear customer group and also direct competitors. The
person or people who know about the chosen operation should act as the sources of
information, the rest of the group act as consultants.
•
Step 2 – Identify the set of competitive factors that have some relevance to this operation.
One can use the list of generic performance objectives as a starting point in doing this. So,
use quality, speed, dependability, flexibility and cost and expand on each of them if
necessary.
•
Step 3 – Rate each of these on the 9-point importance scale.
•
Step 4 – Now judge each of these against the 9-performance scale
•
Step 5 – Position each aspect of performance on the importance-performance matrix in a
similar way to the example shown in the text.
•
Step 6 – Discuss how you might improve the objectives with the highest priority.
Discussion point – 'OK, continuous improvement may have its place, but you will never get
truly radical change by using continuous improvement. No set of people working at the
operational level of the organisation will ever have the vision, knowledge or motivation to make
the really dramatic breakthroughs that all companies need.'
Exercise – The balanced scorecard as described by Kaplan and Norton is discussed in the
chapter. These authors have extended this idea in a particularly useful fashion for dealing with
strategic improvement. They call this ‘strategy mapping’ and it is explained in their book,
Kaplan, R.S. and Norton, D.P. (2004) Strategy Maps: Converting intangible assets into tangible
outcomes, Harvard Business School Publishing Corporation, Boston, MA. It contains many
different exercises that can be constructively used, especially with experienced students.
Exercise – The idea of developing operations capabilities is an important one to stress.
However, it does sometimes confuse students because most development activities are
operational in nature yet the consequences of effective operations development are strategic in
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their outcomes. The ‘Turnround at the Preston Plant’ case is particularly useful in illustrating
this point. The case is included in the final section of this book. Note that it does require the
students to have some idea of statistical process control, not in any great detail, but at least in
terms of its objectives.
Exercise – The Bohn scale of knowledge described in the chapter can also be made into an
exercise. Ask students to identify a process with which they are familiar and then debate what
their state of process knowledge is.
Exercise – Hayes and Wheelwrights 4-stage model can also be turned into an exercise. See the
Study Notes for an example of how to do this.
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Operations Strategy
TEACHING GUIDE 8
Topic – Product and service development and
organisation
Reading(s)
(This section includes the relevant chapter of Slack and Lewis plus any additional reading that
may be particularly helpful)
Chapter 8 of Slack and Lewis
Cross, R. and Baird, L. (2000) ‘Technology is not enough: improving performance by building
organisational memory’, Sloan Management Review, Spring.
Cases
(This section refers to potential cases for use in class sessions. They are either included in the
Case study section of Slack and Lewis or in the Extra case studies section of this Instructors
Manual)
•
Hagen Style
•
Dresding Medical
•
Project Orlando at Dreddo Dan’s
•
Disneyland Resort Paris
•
The Greenville operation
•
IDEO Service Design
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Teaching this topic
Key questions
Why is the way in which companies develop their products and services so important?
What process do companies use to develop products and services?
How should the effectiveness of the product and service development process be judged in
terms of fulfilling market requirements?
What operations resource-based decisions define a company’s product and service
development strategy?
Product and service development is not a difficult topic to teach. Largely, this is because all
students have bought products and all students have experienced services. Given that customer
reaction is an important objective of the design activity, it is easy to use the student group as a
sample of consumers and ask them to evaluate alternative designs, and then speculate on some
of the organisational decisions that the provider must have taken in order to produce these
designs. The main objective of the session is to show how this topic can be analysed in the same
way as an organisation’s whole operations strategy. Many of the ideas already explained in the
text (for example, the operations strategy matrix) can be used to describe the issues involved in
an organisation’s product/service developmental activities. A further objective is to illustrate
that there are degrees of development from relatively minor to very major. The degree of
development is a significant influence on how product/service design is organised.
Key teaching objectives include the following.
•
To convince students that product and service design is an important issue in terms of its
impact on strategic success.
•
To establish the idea that product and service development can be analysed as an operations
strategy.
•
To examine the resource implications of product/service development in terms of capacity,
supply network, technology and organisation.
Possible lesson elements
Teaching hint – The UK’s Design Council site (www.design-council.org.uk) is a great source
for examples and illustrations of product and service design and development.
Teaching hint – The issue of sustainability in design is always worth discussing. It may also
serve to catch the interest of students (although not all will be motivated by the idea). The
Centre for Sustainable Designs site (www.cfsd.org.uk) is useful to find examples that can be
used to illustrate a lesson or converted into an exercise.
Exercise – We find that the example (Spangler, Hoover and Dyson) is a very good basis for a
group exercise or discussion. This issue for discussion is why Spangler never became wellknown, Hoover dominated the market for so many decades and why Dyson has replaced Hoover
as the leading manufacturer of vacuum cleaners.
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Exercise – Similarly, the box on aircraft ‘stealth technology’ can make a good exercise. In
particular, it brings out the idea of technical possibilities versus market acceptance.
Exercise – An exercise that can be used with experienced students is to get them to draw the
funnel of development (as described in the text), in reality, for their organisation. Rather than a
simple and logical smooth funnel, how does it actually look in your organisation?
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Operations Strategy
TEACHING GUIDE 9
Topic – The process of operations strategy –
formulation and implementation
Reading(s)
(This section includes the relevant chapter of Slack and Lewis plus any additional reading that
may be particularly helpful)
Chapter 9 of Slack and Lewis
Cole, R.E. (1998) Learning from the quality movement: what did and didn’t happen and why.
California Management Review, Vol. 41, No.1, Fall, pp. 43–73.
Cases
(This section refers to potential cases for use in class sessions. They are either included in the
Case study section of Slack and Lewis or in the ‘Extra case studies’ section of this Instructors
Manual)
•
Hagen Style
•
Dresding Medical
•
The Focused Bank
•
Clever Consulting
•
Saunders Industrial Services
•
Geneva Construction and Risk
•
Disneyland Resort Paris
•
The Greenville operation
•
Delta Synthetic Fibres (DSF)
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Teaching this topic
Key questions
What is ‘sustainable alignment’?
Why is sustainability of alignment so important?
What is the formulation process trying to achieve?
What are the practical challenges of formulating operations strategies?
If you are familiar with the first and second editions of this text, you will notice that we have
changed the way in which operations strategy ‘process’ is discussed. In the first edition, the
three stages of operations strategy process in the first edition were identified as
•
Fit (or alignment)
•
Sustainability
•
Risk
In the second edition we compressed the first two stages (fit and sustainability) into one chapter
and we made the risk issue part of the final chapter on implementation. Nevertheless, if you are
comfortable with the ‘fit, sustainability, risk’ model you may wish to introduce it at this point.
Now, in the third edition (and in response to user feedback) we have developed a simple stage
model that moves from formulation, to implementation, monitoring, and finally, control.
Possible lesson elements
Exercise – The ‘line of fit’ model shown in the text is particularly important to illustrate the
nature of alignment and it is therefore worth trying to structure an exercise of some sort round
this. One can do this either by using a case study (The Dresding Medical Case in the extra cases
section of this guide) is ideal for doing this. Alternatively, for experienced students, one can ask
them to draw on examples from their own organisations.
Exercise – This chapter contains the second part of the story of Dell Computers. At the time of
writing, it is not possible to say exactly how market and competitor changes have impacted on
Dell’s business model. It is nevertheless a good basis for a discussion and/or exercise
irrespective of how things actually work out. The way to do this is to make sure that you are upto-date on Dell’s current competitive position (simply search on the Internet for this). Then
examine the reason for Dell’s success initially and ask the students to identify the main reasons
why Dell’s business model came under threat. Also, get them to distinguish between sheer scale
(as companies get larger they find it more difficult to remain agile) and the appropriateness of
the business model as such (customer needs change and therefore operations models must
change with them).
Teaching hint – The ‘innovators dilemma’ and the idea of disruptive technology always goes
down well as a discussion point in class. One could ask students to identify examples of
disruptive technology. Some may identify the internet itself as a disruptive technology, others
might raise the idea of technology developments in communications or entertainment (MP3
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compression is an obvious example in entertainment). Also ask them to assess the response of
the incumbent companies to these threats. A good example is the way established record
companies have used Digital Rights Management (DRM) to attempt to protect their intellectual
property (or more accurately, failed to protect their intellectual property).
Exercise – Either the Hill or the Platts-Gregory models can be used with experienced students
as a basis for analysing their own organisations. If you decide to do this, it is important to stress
that both these approaches may need to be ‘customised’ to the specific circumstances of their
own company or organisation.
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Operations Strategy
TEACHING GUIDE 10
Topic – The process of operations strategy –
monitoring and control
Reading(s)
(This section includes the relevant chapter of Slack and Lewis plus any additional reading that
may be particularly helpful)
Chapter 10 of Slack and Lewis
Pearce, J.A. (2006) Formulation, Implementation and Control of Competitive Strategy.
Chicago: McGraw Hill.
Cases
(This section refers to potential cases for use in class sessions. They are either included in the
Case study section of Slack and Lewis or in the ‘Extra case studies’ section of this Instructors
Manual)
•
Hagen Style
•
Call-Us Banking Services
•
Customer Service at Kaston Pyral
•
Clever Consulting
•
Saunders Industrial Services
•
Geneva Construction and Risk
•
Disneyland Resort Paris
•
Turnround at the Preston Plant
•
Contact Utilities
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Teaching this topic
Key questions
How does strategic context affect implementation?
How does organisational context affect implementation?
How does methodology affect implementation?
How can project management affect implementation?
How can participation affect implementation?
Possible lesson elements
Exercise – The idea of using the line of fit model to illustrate risk is a particularly useful one.
Back in the first edition of the text we used two examples (Virgin Trains and Renault) to
illustrate the idea of operations related risks from lying above and below the line of fit.
Although these examples need updating, they can still be used in class with some success.
Exercise – Utilise the fact that newspapers continually refer to failures. Just go through any of
the broadsheets papers and cut out examples of failure. Give a separate one to each group of
students and ask them to analyse their failure in terms of why it happened, what the
consequences were and what could be done to prevent it occurring again.
Teaching hint – If your institution has an off-air recording licence, it is easy to find plenty of
failure examples on television. Some of these might be catastrophic failures such as major
accidents, others may be alleged service failures such as those dealt with on consumer
programmes. Either way, showing a video clip as a prelude to discussion can usually prompt
some interesting learning opportunities.
Exercise – On residential courses try combining business with pleasure by showing a movie in
the evening which demonstrates failure. The next morning this can be used as a case study. An
ideal example is the Apollo 13 movie staring Tom Hanks. It is a great example of failure and
failure recovery. All manner of lessons come out of this including the importance of
improvisation, the use of fail-safe devices, the concept of balancing risks, the role of creativity
in failure problem solving and so on.
Exercise – The study guide associated with this chapter contains an exercise where students are
asked to choose one statement from two that best reflects what they feel is appropriate in their
own organisation. This can be used to start a discussion on the role of central operations as
described in the text.
Exercise – Stakeholder management is a particularly important part of implementation. Ask
student groups to identify some major changes that they have heard of (either in their own
organisation or those that have been described in the press) and identify the type of stakeholders
that will need to be included in the implementation. Ask them to use the power-interest grid to
classify these stakeholder groups.
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Extra cases and the topics covered in
each case
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Case
Ch 1
Ch 2
Ch 3
Ch 4
Ch 5
Ch 6
Ch 7
Ch 8
Ch 9
Ch 10
Introduction
Perform
-ance
Subs
for
strat
Capacity
Supply
Technology
Improv
-ement
Pro/Serv
develop
-ment
Formulation
and
Implementation
Monitoring
and control
Hagen Style
∗∗
∗
∗
∗
∗
Dresding
Medical
∗
∗∗
∗
∗
∗
∗
∗
∗
∗∗
Call-Us
Banking
Services
∗
∗
∗∗
Freeman
Biotest
∗
∗∗
Zentrill
∗
∗∗
Bonkers
Chocolate
Factory
∗
∗
∗
∗
∗
∗
Aztec
Component
Supply
Ontario
Facilities
Equity
Management
∗
∗
∗
∗
∗
∗
Project
Orlando at
Dreddo
Dan’s
∗
∗
The Focused
Bank
∗
∗
∗
∗
∗∗
∗
∗
∗
∗
∗∗
∗
∗
∗
∗
∗
∗∗
∗
∗
∗∗
∗
Geneva
Construction
and Risk
∗
∗
∗∗
Clever
Consulting
Saunders
Industrial
Services
∗
∗∗
The Thought
Space
Partnership
Customer
Service at
Kaston Pyral
∗
∗
∗∗ Primary focus of case
∗ Secondary focus of case
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∗
∗∗
∗∗
∗
∗
∗∗
∗
∗
HAGEN STYLE
‘Hagen Style’ was one of the most successful direct marketing companies in North America,
selling kitchen equipment, tableware, containers, small gadgets, salad bowls and so on. Founded
around 40 years ago as a manufacturer of plastic kitchenware, it originally sold its products
through department stores. However, soon it had evolved into a pioneering direct marketing
operation which sold its products (only about half of which were now manufactured by itself)
through a network of local representatives. Working from home, they were recruited to service a
geographic area, usually within a one-hour drive. In total the company had almost 10,000
representatives although only around 70 per cent of them were ‘active’. Representatives would
sell from door-to-door or at places of work, community centres, clubs, etc. and consolidate their
orders on a weekly basis. Hagen would receive their orders, pack and dispatch them so that the
representatives could deliver to their customers in less than one week. Most representatives still
mailed their order to Hagen using pre-printed forms and pre-paid envelopes, some faxed their
orders and a growing number posted their consolidated orders by Internet. Whereas many
representatives now used the Internet to place orders, most of their customers were not amongst
those who would have access to, or be comfortable using, this way of placing orders. Most of
Hagen Style’s products were ‘value’ items of reasonable quality with standard rather than
innovative design.
Orders were received at one of Hagen Style’s two distribution centres (staggered through the
week so as to smooth demand on the centres). Both centres, one in Atlanta near the company’s
head office, the other, in New Jersey, used the same processes, perfected over many years. First,
the representatives’ orders were keyed in to the company’s information system (or checked if
they came through the Internet, mistakes by representative were still common using this
medium). This information was fed down to the warehouse where each representative’s order
(usually containing 20–50 individual items) was packed. Much of the packing process was
standardised and automatic. A standard sized box was automatically loaded on a moving belt
conveyor and, as it proceeded down the belt, automatic dispensers, each loaded with one of the
higher selling products, deposited items in the box. At the end of the belt, if an order was
complete, as around 45 per cent were, the box would be automatically check weighed (to ensure
that no items had missed the box), the delivery note inserted, filler put in the box to prevent
damage in transit, sealed and addressed. Those boxes which needed additional items packing
(usually these were less popular or large items which would not fit the automatic dispensers)
were automatically routed on to a manual line where operators would complete the packing
process. At the end of the packing lines were the loading bays where boxes would be loaded
onto the trucks for their journey to the representatives. The packing sequence fed down to the
warehouse was calculated so as to ensure that all boxes for a certain area arrived at the correct
loading bay just in time for dispatch on the correct truck.
Jed Mayer, Hagen Style’s vice president of distribution, was proud of his distribution centres. ‘It
is no exaggeration to say that we run one of the slickest order fulfillment operations in the
world. Years of investment and improvement have gone into perfecting it. Certainly industry
benchmarking studies show that we are significantly superior to similar operations. We have
lower costs per order, far fewer packing errors, and faster throughput times from order receipt
to dispatch. Our information system, transportation and warehouse people have together
created a great system. Our main problem is that the operation was designed for high volumes
but the direct marketing business using representatives is, in general, on a slow but steady
decline’.
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Jed’s anxiety over future business was shared by all the company’s management. Direct selling
using door-to-door representatives was increasingly regarded as an old fashioned market
channel. Traditional customers were moving towards using catalogues, TV shopping channels,
or just buying from supermarkets and discount stores, most of which now stocked the type of
products in which Hagen Style specialised. Recently even Hagen Style, bowing to the
inevitable, had started selling a limited range of its products through selected discount stores
and was planning to sell through a catalogue operation. It reckoned that it could maintain, or
even improve, its product margins selling through these channels. The company reckoned that
around 35 per cent of its business would be distributed this way within 5 years. The problem
was, ‘how to distribute their products through these new channels?’ Should they modify their
existing fulfillment operation or subcontract the business to specialist carriers? And what would
happen to their distribution centres?’
This posed a problem for Jed. ‘Although our system is great at what it does, the downside is that
it would find it difficult to cope with very different types of order. Moving into the catalogue
business will mean dealing with a far greater number of individual customers, each of whom
will place relatively small orders for one or two items. Our IT systems, packing lines, and
dispatch arrangements are not designed to cope with that kind of order. Fedex or UPS would be
great at that kind of delivery, but we couldn’t do it with our existing operations. We would have
the opposite problem delivering to discount stores. There, relatively few customers would place
large orders for a relatively narrow range of products. That is the type of job for a conventional
distribution company, of whom there are many who would just love to provide us with their
services. So, basically, we just can’t service either of the new market channels from our existing
operations. We either invest in new distribution operations, which would be expensive and we
don’t have the right experience, or we subcontract these activities. As far as I am concerned, it
would be better to concentrate on what we know. For example, I have been talking with Lafage
Cosmetics who sell their products in a very similar way to our traditional business. They have
always been envious of our fulfillment operation and have indicated that they would be willing
to subcontract most of their order fulfillment to us. Also, as our own traditional representativebased business declines, we will have the capacity to move their volume over to our centres. I
am sure we could still get profitable business by utilising our distribution skills for the
substantial number of companies who still need our kind of service. It’s either that, or give up
on distribution entirely and subcontract everything’.
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TEACHING NOTE – HAGEN STYLE
In many ways this simple example encapsulates the whole dilemma of operations strategy for
many companies. ‘Should we simply follow the market and make sure that our operations
resources are capable of meeting market requirements? Alternatively, should we recognise the
possibly unique strengths which we have and try to find parts of the market where we can
exploit those strengths?’ Here is a company whose market is changing. Not dramatically
perhaps, but in a clear enough way for the company to realise that their existing way of selling
is probably not viable in the long term.
Analysis
Hagen Style became a successful company through exploiting a niche in the homewares market,
namely selling value items through direct sales ‘representatives’. These company
representatives either sell door-to-door, or exploit their own social networks, or organise sales
through societies, clubs and places of employment. They provide a customised and high contact
sales experience even if the products themselves are from a standard range. Their products
represent ‘good value’, which is a combination of relatively low cost and reasonable quality.
They are neither stylish nor innovative but of relatively conservative design. The representatives
also serve another important function, consolidating orders into a weekly ‘batch’ which they
place with the distribution centre. Orders are then placed in a staggered sequence throughout the
week to smooth demand levels at the distribution centres. Although most consolidated orders
are still posted to the distribution centre, internet-based ordering is increasing. Delivery takes
place to customers, usually within one week of ordering. However, the traditional direct sales
method of selling using representatives is seen as being in steady decline. The company is
already selling some items through discount stores and is planning to sell through a catalogue
operation (and presumably will need to have a business-to-consumer internet sales operation
very soon).
Their ‘order fulfilment’ operations include processes which receive orders, check them, pack the
orders using some combination of automatic and manual packing, check/weigh the order, send
to the dispatch bay and distribute through its fleet of vehicles. It does this in two distribution
centres – one in Dortmund and the other in Munich. Considerable investment has been made in
the information technology which integrates order information with the physical process of
packing the orders and in the automatic packing technology. This has resulted in an order
fulfilment operation which is significantly better than other similar operations in the industry.
The company’s processes are efficient, low cost, make fewer errors and have faster throughput
times than equivalent operations elsewhere. However, the operation, although good at serving
the company’s existing markets, would be less effective at serving slightly different sales
requirements.
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Variety of items per order
wide
narrow
Existing
‘effective’
capability
Lafage
Cosmetics
requirements
Existing
‘effective’
capability
Catalogue
customers
small
Store
delivery
Number of items per order
large
Hagen Style – Comparison of new demands placed on the order
fulfilment processes by potential new business opportunities
The diagram above illustrates the capabilities and requirements of the company’s order
fulfilment processes in terms of the number of items per order (i.e. how big the order is) and the
variety of items per order (the number of different products contained within a single order).
Relative to the company’s existing capabilities, customers ordering through a catalogue would
be likely to place smaller orders with fewer separate items than the company’s representatives.
Stores that sell the company’s products on the other hand only sell a limited range but would be
selling them in higher volume and placing orders less frequently. If the company take on
responsibility for distributing to Lafage Cosmetic’s customers, as has been suggested, the
demand placed on the company’s processes would be very similar to their existing services to
their sales representatives.
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The figure below summarises some of these points in terms of the company’s operations
resources and its market’s requirements.
Operations Resources
Market Requirements
• 2 x distribution centres
• Cost efficiency
• Fast delivery
• Traditional
‘representative’
sales channels
declining in
popularity
•As above plus
• wider range of
requirements
• more demand
fluctuations?
•New channels
• catalogue
• internet
• discount stores
• State-of-art packing and
information technology
• Processes ‘fine tuned’ to traditional
‘representative’ sales channels
• Good at what it does
• cost efficient
• fast throughput
Hagen Style – Operations resources and market requirements
What is the question?
Put simply, this company faces the dilemma of moving with its markets and therefore changing
its operations resources to fit its new markets, or alternatively, seeking out new markets which
will allow it to exploit its operations-based superiority. Which is more important to it, its
markets or its operations capability? This question is linked to the more fundamental one of,
‘what does the company think it is really good at?’ Are its keys skills in understanding the needs
of those parts of the market who buy its products? Alternatively, is its key skill the ‘order
fulfilment’ business of translating customer orders into fast, high quality and low cost delivery?
What are the options?
Option A – do nothing, stick with existing services to existing customers through existing
channels, minimise any new business involving new channels.
Option B – accept that the market is changing and adapt the company’s processes and resources
so that they will be capable of serving new channels to market.
Option C – limit or abandon new channels to market and seek out new business opportunities
(such as the Lafage Cosmetics business) which allow the company to concentrate on what it
does best.
Option D – try and develop an operation which can serve all parts of the market including
existing channels, subcontracted business from Lafage, store delivery and catalogue customers.
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Evaluation
Option A – the main advantage with Option A is that it requires no action, no disruption and no
investment. This makes for a comfortable life, at least in the short term. It may also be a
perfectly sensible option to pursue. If the company is not able to afford to invest in either its
resources or its markets, there may be little alternative to this option. Moreover, the company
may conclude that none of the other options are worth pursuing because of the risks involved in
each. The problem, of course, is that the company’s current markets are in long-term decline.
So, with demand volume declining, the operation will find it increasingly difficult to maintain
the efficiency of its processes. At lower levels of utilisation, costs per order shipped will
undoubtedly increase. The issue for the company then becomes one of managing decline in the
business.
Option B – this option is the ‘popular’ solution to this company’s dilemma. The market is
clearly changing, so why not adapt the operations processes to match these changes? If those
new markets are both profitable and sustainable this may very well be the best way forward. We
do not have information on either the profitability or sustainability of either of the two new
market channels mentioned in the case (catalogue/internet-based selling and selling through
retail stores). What may give cause for concern is the fact that the company has moved into both
these markets as a reaction to the decline in its traditional direct selling channel. In other words,
the objective seems to have been to maintain volume rather than increase profitability. So the
first issue is to try and assess the profitability of potential new markets. The second issue is how
easy it would be to change the company’s operations to match new market requirements. A
large part of the company’s efficiency seems to be the result of using automated packing
technology. As with most automation, this is likely to be efficient at performing a specified task,
but less good at performing a range of tasks. Currently, it will be configured to pack orders with
a range of items per order and a range of different items within the order. Both the catalogue
customers and store delivery orders require a different combination of number and variety of
items per order. More significantly, each of these new markets is different from each other. The
technology may be able to be configured for any one of the markets, but it probably could not
serve two or three at the same time.
Option C – this option is unlikely to require much, if any, change to the company’s existing
processes. However, it does depend on both the likelihood of gaining the Lafage Cosmetics
business, the size and sustainability as well as the profitability of the Lafage business, and the
possibility of gaining other similar business. In other words, how big and how profitable is the
market for the kind of services which match Hagen Style’s current capability?
Option D – in some ways this is an ideal option. Multiple channels for their own products and
subcontracted business from other companies both increases the amount of business for the
company and provides a hedge against any one of the markets being served by the company
declining. Of course the major problem is that it compounds the operations-based challenge of
meeting multiple market requirements.
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DRESDING MEDICAL
Since founding her company over 10 years ago, Dr Laura Dresding had never been either so
anxious or so enthusiastic about the future of Dresding Medical (DM). The company had
enjoyed considerable success, both financial and in terms of market share by designing,
manufacturing and supplying a range of medical equipment to hospitals and clinics throughout
the USA. Starting with cardiovascular devices, their range expanded to include neurological
stimulators and monitoring diagnostic devices.
‘Success has come largely from our research and development culture. Although around 50 per
cent of our total manufacturing is done in-house, our core competence is an ability to
understand the needs of clinicians and translate those into our products. We were among the
first to expand the range and functionality of this type of equipment and integrate it with
sophisticated diagnostics software. Admittedly our products tend to be relatively highly priced
and we are coming under some cost pressures, but because of our technical excellence and our
willingness to modify equipment to individual customer needs, we avoid too much pressure on
our prices’.
DM’s operations planning and control systems had been relatively informal. A team of
specialist sales technicians discussed individual clinical needs with customers and wrote a
‘product specification’ for manufacturing to work to. Around 70 per cent of all orders involved
some form of customisation from standard ‘base models’. Manufacturing would normally take
around 3 months from receiving the specification to completing assembly. This was not usually
a problem for most customers; they were more interested in equipment being delivered on time
rather than immediate availability. The manufacturing department was largely concerned with
assembling, integrating and (most importantly) testing the equipment. Most components were
made by suppliers who had been doing business with DM for some years and were capable of
accommodating their strict quality requirements and their need to customise components. Laura
Dresding knew the strengths and weaknesses of her manufacturing operations.
‘Manufacturing is really a large laboratory. It is important to maintain that laboratory-like
culture because it helps us to maintain our superiority in leading edge product technology and
our ability to customize products. 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 manufacturing,
or indeed the rest of the company, will deal with the new markets and products which we are
getting into’.
Dr Dresding was referring to a new generation of ‘small black box’ products which the
company had developed. These were significantly smaller and smarter devices which were
sufficiently portable to be attached to patients, or even implanted. For example, a cardiac
defibrillator which, when necessary, can jolt the heart into maintaining a healthy rhythm and
diagnose how and why the heart has gone wrong. Other products included drug delivery
systems and neurological implants. All these new products had two things in common. First,
they took advantage of sophisticated solid-state electronics and second, they could be promoted
directly to consumers as well as to hospitals and clinics. Dr Dresding was under no illusions
about the significance of these changes.
‘On the market side we have to persuade health care and insurance companies to encourage
these new devices. They may be expensive in the short term but they can save money in the long
term. We are hoping that customer pressure will act in our favour. What is more problematic is
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our ability to cope with these new products and the new market they are addressing. We are
moving towards being a consumer company, making and delivering a higher volume of more
standardised products where the underlying technology is changing fast. We must become more
agile in our product development. A new base model currently takes over 3 years to develop; we
cannot afford to develop the new products in any more than 12 months. 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 technology to make the products will be very expensive.
There are subcontractors who could manufacture the products for us, 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 fulfillment’ capability which will be able to deliver products at
short notice. It is unlikely that customers would be willing to wait the 3 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 which we will have to develop if
we are to take advantage of this wonderful market opportunity. Who knows, it could become the
first step in transforming the whole company. I see no reason why, eventually, we should not
move into running health management clinics ourselves. We are already developing
technologies that could monitor patients at a distance. We can even re-programme implanted
devices, without surgical intervention, based on our diagnostic systems. I know all these actual
and potential changes suggest that we need to develop separate types of operation to service the
different markets, but I am really reluctant to destroy the culture of technical excellence we
have built up with our current operation’.
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TEACHING NOTE – DRESDING MEDICAL
This case illustrates an operations strategy dilemma which occurs in most companies at one time
or another. It treats a company which is entering a related but different market. The issue is how
to think through the implications of these changes as they affect the operations resources within
the company. This involves understanding how the company satisfies its current markets,
understanding the requirements of the new markets and understanding the implications for the
operations function of serving both markets.
Analysis
DM supplies a range of medical equipment including cardiovascular devices, neurological
stimulators and monitoring diagnostic devices to hospitals and clinics. More recently a new
generation of standardised products has been developed, designed to be attached or even
implanted into patients. Whereas the original products were multi-functional and sophisticated
pieces of equipment which almost always had to be customised to the requirements of
individual clinics and hospitals, the new range of products could be marketed more directly to
consumers as well as being sold through healthcare organisations. The major differences
between the current and new generation of products can be summarised as follows.
Current product range
•
Multi-functional devices.
•
Most delivered products are customised from a ‘base’ product.
•
Fifty per cent of manufacturing done in-house (especially final assembly and test).
•
Prices (therefore presumably margins) high but some cost pressures starting to build up.
•
Product development lead-time around 3 years.
•
Order lead-time around 3 months.
•
All manufacturing and delivery (and usually design) is ‘to order’.
•
Manufacturing operation is ‘laboratory style’.
•
Sales staff have to be technically very proficient, talk to medics on equal terms, so
presumably ‘relationship’ is important in achieving sales.
•
Long-term relationships with suppliers because of strict quality and customisation
requirements.
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The new range of products
•
More limited and targeted functionality.
•
More of a ‘consumer’ type of product in so much as users can be targeted directly.
•
Products still supplied through clinics, who would usually charge the customer for the
products. Prices are presumably considerably cheaper than current products but expensive
on a per customer basis.
•
Need to persuade healthcare and insurance companies that devices can save money in the
long term.
•
Volumes higher and products more standardised than current range.
•
Underlying technology changing fast so frequent product updates likely.
•
New product development lead-times need to be less than 12 months.
•
Delivery logistics capability will be needed. Production control will be important to
maintain quality and reliability levels.
•
Higher volume process technologies rather than laboratory style one-off manufacture.
•
New suppliers need to be developed who can maintain quality levels.
•
Unsure of what will constitute an acceptable order lead-time.
•
Uncertain growth in demand for products but likely to be fast.
•
Seen as important to meet demand, especially early in product life cycle.
From an operations perspective the differences between the market requirements for the current
and new product ranges can be illustrated by examining each of the performance objectives
(quality, speed, dependability, flexibility and cost). In this case though it is necessary to
‘unbundle’ these performance objectives slightly, it is important, for example, to distinguish
between specification quality and conformance quality. Similarly, here flexibility could be split
up into customisation, delivery flexibility and volume flexibility. The figure above shows the
profiles of the two product groups. Note that these profiles must be considered, to some extent,
approximations. They are derived from the information that is either stated explicitly or inferred
in the case. In practice such an analysis would be debated with the company’s management in
order to discover the more subtle differences and similarities between the two product groups.
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Quality
(specification)
Cost
Quality
(conformance)
X
X
X
Delivery
flexibility
X
X
Speed
X
X
X
Volume
flexibility
Dependability
Customisation
Current products
New products
Polar diagram illustrating the relative importance of the
performance objectives for the current and new products
What is the question?
As is sometimes the case in operation strategy, one has to dig a little in order to find the real
question in this case. Indeed, identifying the question is, in itself, a major issue for this
company. The question is certainly not whether to change. Dr Dresding seems convinced that
the market opportunity is too good to miss. However, it may be worth debating the risks
associated with moving into the new product range. Certainly it would require very different
capabilities from the company’s operations. Dr Dresding is even thinking of changing the nature
of the business in a more radical way by moving downstream into ‘managed healthcare’
services. What is in doubt though is whether Dresding will want to continue to market the older
products in the long term. However, we have no information on this, or even information that
would allow us to make a judgement as to whether it would be wise. The assumption must be
that the company will serve both markets, at least in the short to medium terms. Given this, the
question seems to be, ‘How do we make the changes to the operations which the new product
will require?’ Beneath this is the question of how to serve both markets with two different
ranges of products at the same time.
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What are the options?
If the company is indeed going to develop, manufacture and sell both the current and new range
of products, one can frame the options it faces in terms of how distinct to make the processes
which design, manufacture and sell each product range. So, the options could be stated in the
following manner.
Option A – design, manufacture and sell both ranges of products using the same processes.
Option B – design, manufacture and sell the two ranges using entirely separate processes (by
setting up a separate operation, site or even company).
Option C – design, manufacture and sell both ranges of products with some processes shared
and some separate.
This means that, in effect, there are an infinite number of options available to this company. Of
course, there is not sufficient detail given in the case to attempt any definitive answer.
Nevertheless, by thinking through the operations implications of the new product range, it
should be possible to assess how different the operations which satisfy this new market need to
be from existing operations. If they are relatively similar then this would imply that something
close to Option A could be considered. On the other hand, if both market requirements and the
operations resources which would need to satisfy them are very different for the two product
ranges, this would imply that something close to Option B should be considered.
Evaluation
Evaluating the degree of difference between the two product ranges is an ideal opportunity to
explore the operations strategy matrix, which is described in Chapter 2. The matrix is essentially
a descriptive device. It acts almost as a checklist by prompting links and associations between
the requirements of the market (stated in terms of performance objectives) and the nature of the
company’s operations resources (categorised into the four decision area categories outlined in
Chapter 2).
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Performance objectives
Quality (spec)
***
Quality (conform)
**
**
*
Dependability
*
*
*
*
***
**
Speed
**
*
Delivery flex
**
*
Volume flex
*** Customisation
Cost
*
*
Capacity
Lab style
manufacture
easy to change
very important
medium importance capacity
incrementally
***
* * some importance
*
**
*
Supply
Network
50% of
activities in house
*
Market
Competitiveness
Resource Usage
***
Process
Development
Technology
and
Organisation
Low process
technology
(but high
product
technology)
R&D, Mfg. and
Sales all share
common
knowledge base.
Incremental new
product
development
Decision areas
Current product range
The first operations strategy matrix describes the current state of the company. Specification
quality and customisation have already been identified as key market requirements.
Specification quality is achieved primarily by the close liaison between research and
development, sales and manufacturing, as well as the diagnostic and testing skills within
manufacturing. Hence the importance is given to the intersection between development and
organisation and specification quality. Development and organisation similarly affects the
company’s ability to customise its products. In fact this is closely related to specification quality
and again provides an important intersection. Of secondary, although still significant, influence
is that between the company’s long-term supply partners and its ability to produce customised
high-specification products. Note that speed of delivery is not seen as at all important according
to the case study.
The second matrix describes the fit which will be required between market requirements and
operations resources for the new range of products. We have already seen on the polar diagram
earlier that the two product ranges have somewhat different market requirements. Most notably
conformance quality for the new product range is particularly important (devices implanted
within the body are better if they keep going). Also volume flexibility, to cope with demand
uncertainty, becomes important whereas customisation is not at all important. Furthermore,
speed in both of delivery and new product development, not currently an issue, becomes fairly
important. The overall picture (again this is evident from the earlier polar diagram) is of a
market where many different aspects of competitiveness are important rather than one or two
key factors only. Although there is some room for debate on this, conformance quality and cost
are probably particularly important aspects of market requirements. Conformance quality, as
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Resource Usage
*
***
**
**
*
**
*
***
***
***
**
*
Market
Competitiveness
Performance objectives
Quality (spec)
**
Quality (conform)
***
Speed
**
Dependability
**
Delivery flex
*
** Volume flex
Customisation
***
Cost
***
Capacity
May need to
be adjusted
quickly
very important
medium importance depending on
demand
***
* * some importance
*
Supply
Network
Process
Development
Technology
and
Organisation
New supplies Needs
will be needed investment in
volume
/ developed
processes
R&D, Mfg. and
Sales less
interdependent.
Faster time-tomarket needed
Decision areas
New product range
with the old range, will be influenced by development and organisation issues such as the
liaison between the different functions. In addition, now it is also influenced by the capabilities
of the process technology which will need to be brought in to manufacture the new products.
Cost, previously not an important issue, is also likely to be affected by the efficiency of the
process technology, but is possibly most affected by getting capacity decisions right. Too much
capacity and excess costs will occur; too little capacity and the company will not be
insufficiently volume flexible to meet uncertain and/or fluctuating levels of demand.
Although it is a matter of judgement, the two operations strategy matrices do seem to be
significantly different. The way in which capacity is managed, supplier networks are managed,
process technology is developed and the development and organisation of the company’s
infrastructure are all likely to be different for the two different product ranges.
Capacity
Current product range
New product range
The laboratory-style manufacturing
set-up and the flexibility between
functions imply that capacity is
relatively easy to change. People,
because they share a similar
technical knowledge, can be moved
between tasks as demand varies
The higher volume production using
process technologies with fixed
capacity limits will mean that changes
in output level will involve larger
increments of capacity change. There
is more risk of getting capacity levels
wrong and greater cost consequences
of doing so
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Supply network Currently suppliers provide
components while customised
assembly and testing is performed
in-house. Most suppliers have been
with the company a long time.
Presumably relationships are well
developed
A new set of suppliers will need to be
contracted. The companies which
supply the components for the new
product range are unused to the
exacting quality standards demanded
by Dresding’s markets
Process
technology
It seems that process technology is
relatively general purpose and low
tech. Laboratory-style
manufacturing processes are need
to deal with the high variety implied
by customisation
The standardised nature of the new
range and higher volumes mean that,
to be cost efficient, automated
process technologies will be needed.
The company has no previous
experience with such technologies
Development
and
organisations
There is a close relationship
between the primary functions of
research and development,
manufacturing and sales. All share
a common technical knowledge and
work together on developing base
products as well as customising
products for individual customers.
New product development has
traditionally taken up to 3 years!
To some extent the three functions
will each have a more demanding
task. If R&D get product designs
wrong then they cannot be
customised to compensate for any
flaws in designs. Manufacturing need
to concentrate on getting the capacitydemand balance right and keeping
costs low. Sales and marketing now
have to thin in terms of market
segmentation and promoting products
to a wider range of end users. The
challenge will be to keep the three
functions together organisationally.
Also, new product development must
get considerably faster
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‘CALL-US’ BANKING SERVICES
‘Call-Us’ Banking Services (CUBS), a direct financial services company offered a telephonebased banking service. Originally a regional savings and loan company with a small network of
‘bricks and mortar’ branches, they had expanded and developed into a direct banking operations
which offered three types of financial product. The first and dominant product group was
conventional retail banking. This service offered the normal range of savings and check
accounts together with direct debit and payment facilities. The second product group was loan
services. This was divided into retail loans, who offered a service to retailers wishing to provide
their customers with credit facilities, and personal loans, where individual customers applied
directly for loans. The third and newest product group was insurance offering both automobile
and home contents insurance. This latter product group was branded differently to the other
products and advertised its services separately.
The company’s operations were centred around five call centres. Three of these were devoted to
‘account management’ for the retail banking services, one was devoted to loan products and one
dealt exclusively with insurance products. All five call centres were in different locations within
the region.
Account management activities for banking services consisted of simple debit and credit
transactions which moved money between different accounts. Customers could phone in at any
time of the day or night and conduct their transactions. Demand at any point in time was fairly
predictable, especially during the daytime. Demand during the night hours 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, Operations Director)
In the loan product call centre the department which processes calls from retail customers was
only staffed during normal retail opening hours. But during those hours it was important that
sufficient capacity was provided to deal with retail customers calls. Peter Fisher explained, ‘This
is very competitive market. If a salesperson in a showroom phones in to arrange a loan for a
customer and we don’t answer within two or three rings, the salesperson will simply dial
another company and we will have lost the business. Because of this we tend, if anything, to
over-staff the department, especially during critical sales times such as Saturday morning’.
Once contact was made by the retail store, the customer’s details were keyed into the system
which automatically checked them against a credit rating agency’s database. Credit rating
agencies are specialist suppliers of information who assess the credit worthiness of individual
customers. Loan companies, such as this division of CUBS, purchased services from such
agencies. Some agencies, for a higher fee, will guarantee faster and more detailed credit
assessments. CUBS were currently considering whether to purchase this enhanced service.
Other ways of improving service to ‘retail’ customers were being considered by Peter Fisher.
‘Recently we have been experimenting with installing our own computers into retailers’
showrooms. This would allow a salesperson to enter their customer’s details and links directly
and simultaneously to the credit agency and our own systems. It could provide a much faster
service for retail customers and would tie them into our company, but it would take
considerable investment to install such systems in all our customers’ showrooms’.
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The personal loans department in the loan call centre operated very much like the account
management call centres. The service was provided 24 hours a day and provided services both
to its own banking customers and anyone else who cared to apply for a loan. Similarly, the
insurance products call centre operated round the clock and was proving very successful.
Because it was a new service, all the technology and ‘multifunction’ information systems were
designed specifically to support its operations. ‘We had the advantage of not having to cope
with different generations of information systems. Everything is new. This also means that our
system response times are fast and we can devote more of our time to providing a more intimate
service for the customer. We can also ‘cross-sell’ car insurance to home contents insurance
purchasers and vice versa’.
Peter was, overall, pleased with the way in which his operations had improved since the
company ‘went direct’. However, he felt that a more systematic approach could be taken to
identifying improvement opportunities.
‘I need to develop a logical approach to identifying how we can invest our time and money into
improving the various aspects of operations performance. We need to both reduce our operating
costs and maintain, and even improve, our customer service. At the same time the company,
after investing huge sums into reshaping its operations, needs to be careful how it invests
further in operations improvement’.
More specifically, Peter had been asked to comment on a proposal put forward by the CEO of
the bank, Richard Dayton. He was increasingly concerned about the financial position of the
bank. Even though this was essentially healthy, the considerable investment in the bank’s
operations had heightened the need to recoup the investment through lower operating costs.
Peter fully understood Richard’s concerns, but was less sure of his proposal.
‘Richard wants us to consider merging the various divisions of the bank’s operations together.
The Marketing and Sales departments would remain separate and focused on their particular
markets, but Operations would be put together as one large ‘service provider’. The justification
for this is the economies of scale which would result from a single large Operations division.
Richard reckons that we could save 3–5 per cent of our current costs. Given that our profits are
a little less than 10 per cent of revenue, this is very significant. What worries me is that the
benefits of having our existing focused operations divisions are less easy to quantify. I need to
decide how to response to Richard’s proposal’.
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TEACHING NOTE – CALL-US’ BANKING
SERVICES
Analysis
Figure 1 shows three of the (probably many) trade-offs within Call Company’s operations. The
first is the trade-off involved in how staff are scheduled on an hour-by-hour basis. This in fact is
the normal trade-off implied in any sort of waiting line system. Scheduling more staff to be on
duty than is normal guarantees a fast response time to sales persons calls. This in turn increases
the likelihood of gaining extra business and therefore revenue. However, it does mean that there
is also an increased likelihood that staff will be under utilised and therefore operations costs will
be higher. Reducing the number of staff on duty will reduce costs but may increase response
time and therefore reduce revenue.
Response
time
Utilisation
of staff
Operational
cost of
credit
information
Speed and
quality of
information
1st trade-off
2nd trade-off
Staff scheduling
in retail loans
Level of service purchased
from credit agency
Operations
cost and
speed of
service
Capital
investment in
‘retail’ system
3rd trade-off
Range of
services
possible
Investment
in multifunction
system
Retail loans onsite investment
4th trade-off
Insurance IT system
investment
Figure 1
Three trade-offs in the Call Centre example
The second trade-off mentioned in the case concerns that between investing in a higher level of
service from the bank’s supplier of credit information. For a higher fee (and therefore cost to the
bank) both the quality and speed of credit assessments can be increased. The trade-off here is
between operational cost and the level of service given to customers. However, if the increased
quality of credit-worthiness information results in fewer inappropriate loans, then this could
recoup some of the cost.
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The third trade-off mentioned concerns the possibility of installing the company’s own
computer terminals into retailers’ showrooms. Allowing a sales person on-site in the retail
customers shop to enter information directly into the system would reduce costs (because the
customer would be performing tasks previously performed by the bank’s own staff), increase
the speed of response (by cutting out one link in the chain of information) and potentially tie the
company into using the bank’s services (because it will be convenient for retail staff to enter
customer information once for their own systems and the bank’s). However, the capital
investment involved would be substantial (although no precise figure is given in the case).
The fourth trade-off illustrated in Figure 1 concerns the insurance call centre’s decision to invest
in a relatively sophisticated, multifunctional computer system. This involves a high level of
capital expenditure in a state-of-the-art system, but does allow the company to offer a wide
range of services as well as allowing the possibility of cross-selling. Both of these abilities
increase the likelihood of the company gaining extra revenue.
What is the question?
According to Peter Fisher, the operations director of CUBS, the question is, ‘How to develop a
logical approach to operations improvement?’ The prior analysis has shown how some of the
improvement issues for CUBS’ operations can be articulated in terms of trade-offs. In fact, the
case describes all its trade-offs in terms of ‘repositioning’. That is, something must be sacrificed
in order to gain benefits elsewhere. So, utilisation of staff must be sacrificed if the company is
to give better response rates to their customers, more money must be paid to the credit
information agencies if the speed and quality of that information is to be improved, extra capital
investment must be provided in retail customers locations if costs and quality are to be
improved, sophisticated multifunction computer systems must be installed to provide a wide
range of services, and so on.
An alternative approach is to ask the question, ‘What would it take to improve one aspect of
performance without penalties elsewhere?’ Even more ambitiously, ‘Is it possible to gain
benefits all round without any sacrifice or even lack of benefit in any aspect of performance?’ A
conventional capital budgeting or cost accounting approach would see the company’s decisions
in terms of the first question, i.e. ‘How much reduction in one aspect of performance would it
take to improve another aspect of performance, and is it worth it?’ The paradox here is that, in
spite of describing things in terms of repositioning the trade-offs within his operation, he is
actually more interested in overcoming them. Hence his statement, ‘…we need to both reduce
our operating costs and maintain and even improve our customer service. At the same time the
company, after investing huge sums into reshaping its operations, needs to be careful how it
invests further in operations improvement…’.
What are the options?
Of the four trade-offs discussed in the case, three are still up for discussion while one seems to
have been settled. The decision which has already been made is to invest in a new
multifunctional system in the insurance call centre which allows call centre staff to offer a range
of services and cross-sell products, supported by the new system. So, service levels and
revenue-generated activity has been enhanced at the ‘cost’ of capital investment. As for the
other three trade-offs, while it is perfectly sensible to take an ‘accounting’ approach to costing
out whether it is worth changing the relative positions of the various aspects of performance
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through investment or changes in operational practice, it is also worth exploring the possibility
of overcoming the trade-offs.
Staff scheduling in retail loans
The trade-off here is between staff utilisation (and therefore costs) and response time to
customers. Scheduling a large number of staff gives great response times but lousy staff
utilisation (and therefore high costs). Scheduling too few staff to be on duty means that they will
be well utilised (low costs) but it also means that at times customers will be waiting too long for
a response. In fact this is a classic ‘waiting line’, or ‘queuing’ problem. Indeed there are
algorithms devised to ‘solve’ it. A trade-off approach, however, would ask the question, ‘What
could we do to minimise the effect of the trade-off?’ For example, would it be possible to make
a relatively small payment to some staff who lived locally to be ‘on-call’ at particular periods.
Then, if demand seemed to be building up to a higher level than forecast, they could be called at
home and brought in to staff the centre. This may improve response times without as higher cost
penalty as allocating them to a full shift. While this solution retains some elements of trade-off,
it also, at least partially, overcomes the trade-off. Another way of overcoming the trade-off
would be to improve forecasting methods. It would be at least worth checking if forecasts could
be improved.
Trade-offs and focus
One strategy level trade-off which is not mentioned in the case but is clearly implicit in the way
the operation is described, is that between the cost of running the whole operation and the
specificity of service offered to support the bank’s different products.
The bank has five call centres, three for retail banking services, one for loan products and one
for insurance products. To that extent it has adopted a policy of ‘focus’. The call centres are
focused on a particular market and a particular set of operational activities to support that
market. An alternative operations strategy for the company would be to pool its call centre
capacity. This could be done by investing in ‘call switching’ technology. This would, in effect,
introduce a further ‘macro’ trade-off between the expense of investing in sophisticated call
switching technology which allows calls to be diverted between different centres depending on
demand on one hand, and utilisation of call centre staff on the other. Without investing in this
system the company would not have to find the investment capital but would incur higher
operational costs because at some times staff in one centre would be fully utilised with some
customers waiting unacceptably long periods, while in other centres staff may be waiting with
no calls to take. So, for a given level of service this is a trade-off between finding the capital to
invest in a switching system or incurring the ongoing processing costs of under utilisation of
staff.
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Specific
B
Superficial
Ideal
performance
A
Quality of service
Ideal
performance
A
Quality of service
Specific
B
Superficial
Limited
Range of services
Broad
High
Low
Cost of providing services
Figure 2
Currently, the focused nature of the company’s operations implies a concave trade-off curve.
Figure 2 illustrates two trade-offs in this way. The first trade-off is that between the quality of
service offered in terms of how specific advice can be, first against the range of services offered
and second against the cost of providing those services. The company is currently at position A.
If it attempted to pool its capacity in order to save costs and took no other action, its quality of
service would suffer significantly because staff and systems would not be properly equipped to
answer the enquiries associated with a wider range of services. In effect, the company need to
make their operations more flexible or more ‘general purpose’. They could do this by providing
training, adapting on-screen information systems, etc. This would result in a more conventional
convex trade-off curve as shown in Figure 3.
Specific
C
Superficial
Ideal
performance
A
Quality of service
Ideal
performance
A
Quality of service
Specific
C
Superficial
Limited
Range of services
Broad
High
Low
Cost of providing services
Figure 3
Increasing the range of services would still impact on the quality of service but less so. The
company’s performance would move to position C on Figure 3. Presumably what the company
would then attempt to do is to modify its systems further and improve training and development
so that the convex trade-off curve is expanded outwards closer to the ideal performance area as
shown in Figure 4.
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Specific
D
C
Superficial
Ideal
performance
A
Quality of service
Ideal
performance
A
Quality of service
Specific
D
C
Superficial
Limited
Range of services
Broad
High
Low
Cost of providing services
Figure 4
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FREEMAN BIOTEST INC1
Process Line Configuration
BRAYFORD
BI-LINE 8
Capital cost
$5,900,000
$8,800,000
Processing costs
Fixed: $150,000/mth
Variable: $750/kg
Fixed:$400,000/mth
Variable: $600/kg
Design
capacity
1,050 kg/mth
98% ± 0.7% purity
1,400 kg/mth
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 4.7 A comparison of the two alternative process line configurations
Freeman Biotest 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 ‘FBXX’. Other products were subsequently
developed in the food colouring and food container coating fields, so that now FBXX accounted
for only 25 per cent of total company sales, which now was slightly over $100 million.
The decision
The problem over which there was such controversy was related to the replacement of one of
the process lines used to manufacture FBXX. Currently, two such process lines were being
used; both had been designed and installed by Brayford Corp., a process equipment
manufacturer. It was the older of the two Brayford lines that 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 Brayford line with
a new Brayford line, or should it commission another process line, the ‘Bi-line 8’line, that
would be manufactured by a relatively new company, Bi-Line Inc. V.P. for Technology had
drawn up a comparison of the two units, shown in Table 4.7.
The body considering the problem was the newly formed Management Committee. The
committee consisted of the V.P. for Technology and the Marketing V.P., who had been with the
firm since its beginning, together with the V.P.’s for Operations and Finance, both of whom had
joined the company only 6 months before.
1
Source: Based on Rochem Ltd., Slack, N., S. Chambers, and R. Johnston (2007) Operations
Management, 5th edn, London: Financial Times Prentice Hall.
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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 Vice President
Currently, the market for this type of preservative has reached a size of some $50 million, of
which Freeman Biotest 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 FBXX. 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 terms of volume) and best estimates
suggested a market of perhaps $60 million within the next three or four years (at current prices).
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. FBXX was sold in either solid
powder or liquid form, depending on the particular needs of the customer. Prices, however,
tended to be related to the weight of chemicals used. 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 FBXX each
month. I’m worried that unless we get a reliable new process line quickly, we will have
problems. The Bi-line 8 line could be working in a few weeks, giving better quality too.
Furthermore, if demand does increase, the Bi-line 8 will give us the extra capacity.'
The Vice President for Technology
The major part of the V.P. for Technology’s budget was devoted to modifying basic FBXX so
that it could be used for more acidic food products such as fruit. This was not proving easy and
as yet nothing had come of the research, although the Chief Chemist remained optimistic.
'If we succeed in modifying FBXX the market opportunities will be doubled overnight and we will
need the extra capacity. I know we would be taking a risk by going for the Bi-line 8 machine,
but our company has grown by gambling on our research findings, and we must continue to
show faith. Also, the Bi-line 8 technology uses principles that will be used in all similar
technologies in the future. We have to start learning how to exploit them sooner or later.'
The Operations Vice President
The FBXX Division was self-contained as a production unit, located at the smaller of the
company’s two sites. Production requirements for FBXX were currently at a steady rate of
around 1,900 kg per month. The technicians who staffed the FBXX lines were the only
technicians in Freeman Biotest 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 technicians were needed to operate the plant. Four of the six had been with the
firm almost from its beginning.
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'It’s all right for some of my colleagues to talk about a big expansion of FBXX sales; they don’t
have to cope with all the problems if it doesn’t happen. The fixed costs of the Bi-line 8 unit are
nearly three times those of the Brayford. 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
FBXX. No, the whole idea (of the Bi-line 8 plant) is just too risky. Not only is there the risk. I
don’t think it is generally understood what the consequences of the Bi-line 8 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 Bi-line 8 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 Finance Vice President
The company had financed nearly all its recent capital investment from its own retained profits,
but would be taking out short-term loans next year for the first time for several years.
'At the moment, I don’t think it wise to invest extra capital we can’t afford in an attempt to give
us extra capacity we don’t need at the moment. 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. I accept that there might
eventually be an upsurge in FBXX demand but, if it does come, it probably won’t be this year
and it will be far bigger than the Bi-line 8 can cope with anyway, so we might as well have three
Brayford plants at that time.'
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TEACHING NOTE -FREEMAN BIOTEST INC
The provision of capacity cannot be always separated from the characteristics of the technology
that provides that capacity. So it is in the Freeman Biotest case. The company has two facilities
(known as Brayford lines) one of which is starting to prove unreliable. In any event, the total
capacity of the two Brayford lines is only a little greater than current volumes. Given that
volume is forecast to increase by around 20 per cent in the next few years, there will be a need
to invest in extra capacity if demand is to be fulfilled.
Analysis
Current sales value of the FBXX product
=
$25 million
Average price
=
$1,050/kg
Therefore annual sales volumes
=
25 million ÷ 1050
=
23,809.5 kg per year
=
1,984 kg per month
The total market for such products has been estimated to grow by around 20 per cent in the next
three or four years at current prices. Although the market is becoming more price sensitive, if
Freeman Biotest retains its current market share, one would expect monthly volumes to rise to
around 2,400 kg over this period. This is greater than the combined capacity of the two existing
lines, which is 2,100 kg per month.
Any evaluation of which facility to invest in will need to examine both technical and financial
capacity criteria.
Technical Capacity Criteria
The most obvious technical criterion is functional capability, that is can the capacity do the job
required of it. Certainly, this criterion can be used as an initial screening test to eliminate
obviously unsuitable facilities. But, often, there will be several that ostensibly meet the
criterion. It may be that the capability requirements are difficult to define or predict, or that
neither of the alternative facilities completely fulfils the requirements.
As well as absolute capacity, variation in capability can be important; variation both in the
sense of reliability, and the process variability in performance that the facility displays. The
relative reliability of alternative facilities is usually difficult to predict in advance of purchase.
However, if contractors are prepared to give guarantees then this can alleviate some of the cost
of repair although not the inconvenience of the facility not being available. Most processes
exhibit some variability in performance and a certain level is normally tolerable. However, if the
required capability had tolerances on variation in performance this must be used as a criterion.
The range of capability could also be an important factor, that is, how adaptable, flexible or
general does the facility have to be? This will depend on how accurately we can predict the
future use to which the facility will be put.
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Financial Capacity Criteria – Costs
Cost is clearly a major financial criterion for choosing between facilities. There are, however,
two aspects of the cost of any facility, the initial cost and the total life cycle cost. The initial cost
is its basic purchase price.
Sometimes, limitations on the amount of capital available could eliminate some alternatives
that, although they may be good investments, require more initial capital than the company can
afford. The total life cycle cost includes the cost associated with acquiring, using, caring,
development, design, production, maintenance, replacement and disposal as well as all the
support, training and operating costs generated by the acquisition.
Financial Capacity Criteria – Benefits
The benefits that accrue from investing in capacity cannot always be described accurately in
financial terms, but always indirectly reflect in financial performance. Benefits are usually
expressed in terms of profit or savings, whichever is more appropriate to the particular decision.
Any sensible measure of benefit can be used provided all alternatives are assessed on the same
criteria. The timing of benefits can also be important.
A useful method of comparing costs and revenue for various levels of use of a facility is by
using cost-volume-profit graphs.
Risk and uncertainty
Most factors that determine the ultimate pay-off of a facilities acquisition decision are, at the
time of the decision, only an estimate. We may have more confidence in our forecast of some of
the factors than in others, but few of them will be known absolutely. It is useful in such a
situation to have some idea of the sensitivity of the outcome of a decision to changes in the
various factors.
What is the question?
In the short-term, the question is whether to invest in a Brayford or a Bi-line 8 facility. New
capacity is required both because one of the current Brayford facilities is failing and because
demand is almost filling current capacity. In the long-term, the decision concerns not only the
type of facilities that will provide the company’s capacity but also must take into account the
uncertainties in the marketplace. Broadly speaking, demand is likely to grow slowly if no
product technology breakthrough is achieved, but could grow very quickly indeed if the product
modifications are developed successfully. Any short-term capacity solution will need to take
into account possible future capacity requirements.
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What are the options?
Put simply, the options are,
a) Invest in a Brayford facility.
b) Invest in a Bi-line 8 facility.
Technical capacity factors:
1.
The Bi-line 8 facility gives more capability if needed (1,400 kg per month, against 1,050 kg
per month).
2.
The quality levels that can be achieved on the Bi-line 8 facility are better, but this is
something of a red herring since the case is quite clear in stating that when the Brayford is
working properly it achieves perfectly satisfactory quality levels. This would only be an
issue if the marketing plan for the future required higher quality levels.
3.
There is limited information about the ease of maintenance of each facility. The likelihood
is that the Bi-line 8 will be better, but the Brayford is adequate, that is satisfactory.
4.
As regards after sales service, again there is little information on the Bi-line 8, but the
Brayford is likely to be better.
5.
It could be seen as the maintenance and after sales service factors trade-off between the two
facilities, but the Bi-line 8’s plus points on maintenance are based on estimates of
performance and therefore are less certain.
Financial capacity costs
1. The capital cost of the Bi-line 8 is almost 50 per cent more than the Brayford – a
considerable cash difference, but its capacity is 40 per cent higher.
2. Figure 1 shows the cost-volume-profit curves for the two alternative strategies.
a) buy another Brayford.
b) buy a Bi-line 8 (and use it first, bringing in the Brayford when demand exceeds 1,400
kg a month).
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$US
4m
Revenue
3m
3 Brayford
facilities
2m
1 Bi-line 8 facility
1 Brayford facility
1m
150000
Current volume
1000
2000
3000
Monthly volume (kg)
4000
Figure 1
Cost-volume-profit curves for two alternative capacity strategies
3. From Figure 1:
Up to 1,050 kg a month the Brayford option has lower costs.
Between 1,050–1,400 kg a month the Bi-line 8 option has lower costs.
Between 1,400–2,100 kg a month the Brayford option has marginally lower costs.
Over 2,100 kg a month the Bi-line 8 will generate more profit (even assuming that the old
Brayford facility will be worth operating).
It is evident that the level of profitability depends on the view that the company takes over
future sales levels. A very pessimistic view (less than 1,400 kg a month) or a reasonably
optimistic view (2,000–2,400 kg a month) favours the Bi-line 8 option. A very little growth
marginally favours the Brayford.
4. If we take an optimistic view based on a doubling of sales due to a successful modification
of the product, the decision then involves a third and fourth facility. Several combinations
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of the two facilities then become possible, but it seems likely that the company would stay
with the type of facilities that it decided to buy at this point in time.
In some ways the long-term capacity issue is simpler than the short-term one. Several
facilities are likely to be needed in the event of a successful modification to the product. It is
therefore useful to examine the operating costs associated with each facility when working
at full capacity.
Brayford cost at full capacity
Cost per kilogram
Bi-line 8 cost at full capacity
Cost per kilogram
=
=
=
=
$150,000 + $750 × $1,050
$937,500
$937,500 ÷ $1,050
$892.86
=
=
=
=
$400,000 + $600 × $1,400
$1,240,000
$1,240,000 ÷ $1,400
$885.71
The Bi-line 8 provides a lower cost solution although the difference in cost is relatively
small, around 1 per cent. Nevertheless, a 1 per cent difference on a $5 or $6 million
production cost may still be regarded as significant by the company.
Other factors
1. The spares issue is worth mentioning. A mixture of two types of facilities doubles the spares
that the company would have to carry and also doubles the quantity of maintenance
knowledge that the firm would have to ‘carry’.
2. The effect of introducing new technology into the production system must be recognised. In
this case, it would involve some new training to use the Bi-line 8, but in the long run it
would de-skill the jobs of the people operating them.
3. If demand does indeed grow rapidly with the modification of the product, one must consider
the dynamic problem of increasing capacity as demand increases. The usual capacity
planning problems will then be faced, viz:
a) Whether to lead or lag demand.
b) Whether to go for small capacity increments (Brayford facilities) because these can be
more readily used to tailor capacity to demand.
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AZTEC COMPONENT SUPPLIES
The senior management team at Aztec Component Supplies knew that they were facing a
decision crucial to the future of the company. A plastic injection mouldings manufacturer, they
had for the last 20 years specialised in providing industrial mouldings for domestic appliance
manufacturers. They were especially adept at moulding relatively large components, such as the
outer casing for carpet cleaners. Large components were difficult to make to the high levels of
tolerance and finish which customers demanded. Because of this ability they had increasingly
focused on the few large customers who were willing to pay their prices. Five years ago, 12
customers accounted for around 80 per cent of Aztec’s sales, now 3 customers accounted for
over 90 per cent of sales.
The decision concerned an approach which had been made to them by their largest customer,
the Desron Corporation. One part of Desron was already their largest customer’s with around 65
per cent of their output. Desron now wanted Aztec to become a sole supplier for a wider range
of their larger components. It would, in the first instance, be a 3-year deal whereby Aztec would
devote manufacturing cells for each component type exclusively to supply Desron. Although
Aztec would not be prevented from dealing with other customers, the amount of business
Desron was promising would initially be 5 per cent more than their current total sales and
(according to Desron) could double within 5 years. Because Aztec would be manufacturing
parts currently made by other suppliers the total variety of parts would increase by around 40
per cent. Prices would be held at current levels in the first year but then would be reduced by 5
per cent per year.
Aztec would be responsible for reducing costs in line with price reductions (average cost
savings at Aztec had averaged between 2 and 3 per cent per year in the last few years). If Aztec
accepted the deal it would also mean them purchasing some new larger machinery to cope with
the increased proportion of physically large parts. Ethan Condos, Aztec’s CEO, did not see this
as a problem.
‘We need to replace many of our machines anyway. This provides us with the stimulus to do it
and our calculations indicate that the deal would give us a good return on the investment.
Investment isn’t the problem, it’s the risks of doing the deal which worry me. How do we know
that we can cope with the increased variety? We will need to increase the flexibility of our
manufacturing operations to cope with this variety, while at the same time reducing costs and
maintaining quality levels. And can we achieve a minimum of 5 per cent annual cost reduction?
It’s higher than we’ve ever done before. They will help us by providing their own engineers to
reconfigure our production system but that will mean exposing ourselves to their scrutiny. I’m
nervous about that, the next thing they will be wanting is to examine our financial accounts.
Also, what if they ditch us after 3 years? If we accept this deal we cannot keep much of our
other business. Just coping with the Desron business will mean us expanding by 5 per cent.
Once we have dropped our other customers I doubt if we could get them back easily. Most of
all, are we prepared to act as a servant to such a large corporation? Are we ready to put up
with so much interference in our business? They are talking about putting their own quality
people and production planning people in offices in our plant! As part of the deal they are also
insisting that we abandon our MRP (Material Requirement Planning) system and use the more
modern ERP (Enterprise Resource Planning) system which they use. They are also insisting that
we lease the ERP system from an Applications Service Provider (ASP)’. (Applications service
providers hold computer applications such as ERP systems, together with dedicated data bases
on their own servers which their clients access using internet-type technologies).
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Alice Chang, the Purchasing Vice-President of Desron, was particularly keen that ‘single
source’ suppliers, such as Aztec might be, outsourced their planning and control effort using
ASPs.
‘Getting our suppliers to use ASPs is particularly important for us. It encapsulates what we are
trying to do with sole suppliers. First, we want them to use compatible systems to ensure
seamless co-ordination of material flows between their plants and ours. Second, we don’t want
to get into negotiations every time we update our systems. We can do a deal with the ASPs for
suppliers to update their own systems at relatively low cost at the same time as we update.
Third, there needs to be far more transparency around planning decisions with our suppliers.
We don’t want to get into plastic injection moulding ourselves, that isn’t our business, but we
want to ensure as smooth a supply of parts as if their operation was an integral part of our
plants.
It is difficult to understand why they are hesitating in accepting this deal. We both agree that,
providing they can keep reducing costs, they will be overall more profitable and get better
return on assets under the new deal. Also they will have a chance to participate in, and directly
influence, our success on which they themselves ultimately depend. For example, they will be
expected to take an active part in new product development so they can contribute their
expertise in moulding for our mutual benefit. We are not even preventing them from dealing
with other companies. I would prefer that they didn’t of course. Just coping with our increased
business will be a tough job for them. But they have to understand that unless they make up
their minds soon, and fully commit to the deal, we will lose patience. They are not a particularly
large supplier, accounting for less than 10 per cent of our purchased parts expenditure. The
Desron Group are 50 times bigger than they are, can’t they see we are in a position to help
them?’
Ethan Condos was not so sure. ‘Sure it’s a great opportunity but the choice is just too stark for
comfort: accept the deal or reject it. Maybe we have to simply be courageous and make a
decision one way or the other. If so, we need to fully understand the advantages, disadvantages
and, above all, risks of accepting the deal or not. However, I would also like to explore the
possibility of some kind of deal which would involve a less radical move than committing
ourselves so totally’.
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TEACHING NOTE – AZTEC COMPONENT
SUPPLIES
Partnership, especially between companies of very different sizes, can be something of a mixed
blessing. On one hand, closer relationships can lead to considerable mutual benefit. On the other
hand, the risks associated with the relationship going wrong can be fatal to both (but especially
the smaller) companies. This case explores such a potential partnership. The rewards for both
parties could be great, but the risks are also significant.
Analysis
As a starting point, it is useful to think through the issues contained within this partnership
proposal in terms of the changes in market requirements or market position which it implies and
the changes to each company’s operations resources (or in the case of Desron, the changes in its
supply position). Figure 1 summarises some of the issues under these headings.
Aztec
Market
requirements
Operations
resources /
supply
•
Desron 65 –105% (?)
200% in 5 yrs (?)
•
3-year deal
•
Prices level year 1
then –5%/year
•
Guarantees after 3 years??
•
Lose other customers for good?
•
Dedicated cells
•
Variety Ï 40%
Desron
•
Secure Aztec knowledge of
injection moulding for new
product development
•
‘Seamless coordination’ with
Aztec
•
•
Costs need to reduce >5% to
maintain profit (historically 2–3%
•
cost reductions)
•
Need investment
•
Desron process engineering
help
•
More (financial?) scrutiny
•
In-house quality and production
planning from Desron
•
Ditch current systems → ASP
Supply quality and planning staff
to Aztec
Supply process –
engineering/cost reduction
expertise
As far as Aztec’s are concerned, the main impact on its market stance is an increase in Desron
business from 65 per cent of its current capacity to 105 per cent of its current capacity.
Furthermore, this could increase to 200 per cent of current capacity within 5 years. The deal
would also secure Desron business for at least 3 years. However, although prices will be stable
in the first year, there is an agreement for ongoing reductions of 5 per cent each year. Also, the
deal does not offer any guarantees after 3 years. Just as problematic, Aztec would either have to
give up the business from its other customers, with the risk that they would be difficult to win
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back, or expand capacity substantially by around 40 per cent (35 per cent for current business
from other customers plus the extra 5 per cent required to meet Desron business).
Similar disruption would hit Aztec’s operations resources. They would be required to dedicate
manufacturing cells to Desron business and take on all Desron’s work, which implies a 40 per
cent increase in variety with all its attendance costs of complexity. The operation would also
have to take on responsibility for reducing its costs by more than 5 per cent (in order to
guarantee 5 per cent reduction in prices without reduced profits). Historically, it has only
achieved a 2 to 3 per cent cost reduction per annum. All this resulted during a period of coping
with increased investment. However, Desron would provide process engineering help as well as
placing some of their quality and production planning staff within Aztec. Moreover, the
operations function would have to ditch its current MRP systems in favour of a new application
service provided ERP system. All of this would inevitably mean more scrutiny by their
customer.
The impact on Desron does not seem to be as great. Desron’s market position may be enhanced
because they would have closer access to Aztec’s technical knowledge of injection moulding
which could be incorporated in their new product development efforts. However, they would
also need to take responsibility for what they call the ‘seamless coordination’ of Aztec’s
systems with their own, as well as providing the staff to be based at Aztec’s operations and
supplying process engineering capability more generally.
What is the question?
The question is relatively straightforward in this case. Should Aztec take up the offer to become
Desron’s sole supplier of injection moulded parts or should it turn down the offer?
Turns down
Desron’s offer
Accepts
Desron’s offer
Will Desron find
someone else to ‘single
supply’?
Dedicate to
Desron
Minimises
investment but high
vulnerability
Retain some
other customers
Increases investment in
capacity but retains
‘safety net’ of other
customers
Figure 2
Options for Aztec
There may also be a subsidiary question namely, if Aztec do take up Desron’s, offer should they
attempt to keep any of their other customers or should they dedicate themselves solely to
supplying Desron? Figure 2 illustrates these options.
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What are the options?
The central decision centres around whether the Desron offer is attractive to Aztec and also
whether it is really in Desron’s best interests. Let us examine the advantages and disadvantages
of the proposed partnership for each company. Figure 3 summarises these.
For Aztec, the major advantage is that it guarantees a considerable amount of business.
Furthermore, it offers the potential for perhaps substantial transaction costs savings. If they are
dealing only with Desron they do not need a sales force as such. All the cost and uncertainty
surrounding having to sell their services in the market place is taken away. Similarly, the
transaction costs associated with quality control and production planning and control generally
will be reduced because Desron are, in effect, taking over responsibility for these on themselves
by placing their own staff in Aztec’s operations. Indeed, Desron have undertaken to provide
general process engineering expertise to help Aztec with the installation of its new equipment
and to help it achieve its cost reductions. According to the case, the deal on paper offers a better
return on assets than the current arrangements.
Aztec
Advantages
•
•
•
•
Disadvantages •
•
•
•
•
•
Desron
More (all?) their business
guaranteed
Overhead savings because of
lower transaction costs –
fewer – sales
– quality
– planning
staff needed
‘Better return on assets’
Desron process engineering
expertise
•
•
•
•
5 per cent reductions
‘Seamless’ coordination
Their staff on-site at Aztec
Can get out in 3 years if Aztec do
not perform
Desron could drop them in 3
years
No ‘safety net’ of other
customers unless they make
substantial investment or
increase capacity
>5% annual cost reduction.
Exposure to scrutiny.
Cope with +4 per cent variety
(cost of complexity?).
Cope with new (ASP provided)
systems.
•
•
Tied to one supplier (for 3 years)
Experience of providing quality
and planning staff for Aztec
Figure 3
Balanced against this, the deal is only for 3 years initially. Desron could drop them (either
because they do not perform or because they have another partner in mind) in 3 years. Also if
they retain few, or none, of their other customers, they would not have any safety net of
business to grow in place of the Desron business. There is also the risk as to whether they could
maintain a greater than 5 per cent annual cost reduction, especially with a 40 per cent increase in
variety, while they are getting to grips with the new (ASP provided) systems. Finally, there is
Aztec’s reluctance to expose itself to the scrutiny of its customer.
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For Desron the partnership arrangement is not as big a deal. It has the advantage of providing 5
per cent price reductions year on year as well as ‘seamless’ coordination. Moreover, they can
get out of the deal in 3 years if Aztec do not perform. However, for those 3 years they are tied to
Aztec contractually, so Desron are taking some risk if Aztec fails to perform well. They also
have to bear the expense of providing quality and planning staff to manage those functions
within Aztec.
Key questions
Before Aztec decides what to do, they would be well advised to address some particularly
important questions.
•
What happens if they turn Desron down? Are Desron likely to just shrug their shoulders and
carry on as before? Alternatively, will they try and seek out some other company who could
provide them with a single-sourced supply of components? One would have thought that the
risk of Desron looking elsewhere is fairly high. Therefore, unless Aztec can grow its nonDesron business by around 200 per cent before Desron goes elsewhere, it would suffer a fall
in volume. All this infers a much more basic question, namely, ‘Does Aztec really have the
choice of turning Desron down?’
•
What is the value of independence for Aztec? If Aztec becomes a dedicated supplier to
Desron it is both losing its independence to try for new business opportunities elsewhere
and exposing itself to a possible future decision by Desron to change its supplier
arrangements. Is Aztec’s management willing to do this? They are currently in charge of
their own destiny. Would they really want to become almost departmental managers for
Desron?
•
What is the outlook for cost savings? Aztec really has to get to grips with understanding the
chances of making an excess of 5 per cent per annum cost savings. They need to evaluate to
the best of their ability
•
What would be the extent of transaction costs savings (they can be considerable but
might involve sacking people who already perform such jobs as quality and production
planning, are they willing to do this)?
•
What increases in productivity will the new machinery bring?
•
How much is Desron’s offer of process engineering help really worth to them?
They also need to evaluate some of the factors working against cost savings, most notably
•
•
How will the 40 per cent increase in variety affect the costs of complexity? Can the new
machinery cope with this variety?
•
How difficult will the new machinery be to install? What are the dangers of installation
causing disruption and extra costs?
Can some of the risks be reduced? It is important that Aztec identify what it sees as being
the key risks and works out ways to minimise these risks or their impact. For example
•
Desron volumes drop – traditionally they have simply taken orders from customers like
Desron, should they now put themselves in the position of forecasting their customers’
demand levels?
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•
The new machinery has problems being installed – can we guarantee in advance help
from Desron to make sure the machinery goes in smoothly; it is, after all, in Desron’s
interests to do this.
•
The variety proves too costly – start working out now exactly what the variety will
mean in terms of its impact on manufacturing and other processes; ensure that the new
machinery can cope with this variety.
•
Have difficulty getting the year-on-year cost reductions – try and formally tie in
Desron’s process engineers to share responsibility for doing this, be proactive in
organising progress meeting to manage the cost reduction programme.
•
Desron dumps them in 3 years – ……er…er…. Tricky!….. Get Desron to take an
equity stake in the business?
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Zentrill
Zentrill were a medium sized chain of fashion women’s apparel retailers with 120 stores,
typically relatively small units, in premier High Street locations and shopping malls mainly in
California and some Southern states. Their clothes were stylish without being at the extremes of
fashion and aimed at relatively affluent customers between the ages of 30 and 60. Gross margins
(the difference between what Zentrill pay for clothes and what they sell them for) were
undisclosed but, as is common in this part of the fashion market, were very high. Typically an
outdoor coat retailing at $1,000 would cost the company less than $200. Zentrill’s designs were
exclusive and styled by both in-house design staff and outside consultant designers. All
Zentrill’s tailored garments (everything apart from knitwear and accessories) were
manufactured by Lopez Industries, a small but high-quality garment manufacturer in Mexico.
Traditionally, the fashion retail industry in the northern hemisphere has two seasons; January to
July is the Spring/Summer season and August to December is the Autumn/Winter season. Both
break points between seasons have traditionally been marked by ‘sales’ where surplus product is
marked down for clearance. The proportion of items sold in these sales, or sold through
intermediaries (with the Zentrill label removed) could be very high. Typically at Zentrill, only
around 50 per cent of items were sold at full price. This caused anxiety to Zentrill’s
merchandising vice president, Mary Zueski.
'Achieving only 50 per cent full price sales is obviously an issue to us. Although no worse than
most of our competitors, reducing the proportion of discounted sales is the best way to increase
our profitability. Sometimes we are left with surplus items because our designers have just got it
wrong that season. We can never predict exactly what will sell. However, usually we are quite
good at knowing our market. What is more annoying is when a customer walks out of a store
because an item which we could have sold to her is not in stock or is not available at that store
in her size. Every time this happens hundreds of dollars are walking out of the store with her.
Ideally, we would like to be able to promise such a customer that we could deliver the item to
her within 24 or 48 hours. Even if we can’t do that, it is important that we sense how sales of
different lines are going and flex our order quantities from our manufacturer during the season.
Although Lopez is a great supplier in many ways, they do not seem to be very good at being able
to change their production plans at short notice. Otherwise, our relationship with them is very
good. Our designers like them because they can make almost anything we choose to design, and
their quality is excellent, as it should be in our part of the market'.
Manuel Lopez, the CEO of Lopez Industries, was fully aware of Zentrill’s views.
'I know that they are happy with our ability to make even the most complex designs to an
exceptionally high level of quality. I also know that they would like us to be more flexible in
changing our volumes and delivery schedules. We obviously could not deliver within 2 days.
The problem of the customer walking out because a size or style is not available in a particular
store is caused by the way they manage their own inventory. But I admit that we could be more
flexible within the season on a week-by-week basis. Partly, I am reluctant to do this because we
have to buy-in cloth at the beginning of the season based on the line-by-line forecast volumes
which Zentrill provide for us. Even if we could change our production schedules, we could not
get extra deliveries of cloth, nor can we return any surplus cloth to the cloth manufacturers. The
problem is that we only deal with high quality and innovative European cloth manufacturers,
usually German or Italian. They provide the type of cloth which Zentrill’s designers like to work
with. Also, it can give us a competitive advantage because much of the cloth is either
lightweight or stretches or has some other characteristic which makes it difficult to machine.
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Over the years we have developed considerable skill in machining this type of cloth to high
quality standards. Not many garment manufacturers can do that on a mass production basis.
Sometimes I think we know more about the characteristics of these cloths than the
manufacturers do. Unfortunately, most of our cloth suppliers are very large compared to us, so
we do not represent much business for them. Perhaps we should persuade Zentrill to let us use
smaller cloth suppliers who would be more flexible?'
Typical of the cloth suppliers to Lopez Industries was Schweabsten, a German company that
both manufactured cloth and tailored men’s and women’s wear under its own label. Felix Brensten
was Schweabstens marketing vice president.
'We compete primarily on quality and innovation. Designing cloth is as much of a fashion
business as designing the clothes which it is made into. Around a third of our output of cloth
goes to make our own-labeled garments. We do not manufacture these of course; that is done by
a whole collection of sub-contract manufacturers. In fact, that is our main problem, finding subcontract manufacturers for our own label products who can cope with high fashion cloths and
designs whilst still maintaining quality. The other two-thirds of our output goes to tens of
thousands of customers around the world. These vary considerably in their requirements, but
presumably all of them value our quality and innovation'.
After discussion with her colleagues, Mary Zueski had recently and reluctantly come to a
conclusion on the company’s supply problem.
'I guess we can no longer leave everything up to our suppliers. We have to try and organise the
whole supply chain more effectively. This will, of course, mean looking at how we manage the
part of the supply chain that we control ourselves, from our central warehouse to our stores.
But it will also mean taking responsibility for our suppliers, particularly Lopez, and even their
suppliers. The question is how to do this? We don’t own them, even if we have some market
power over them. How do we begin to identify what each stage in the chain could do for the
benefit of the whole chain? More importantly, how do we persuade everyone that it is in their
own interests to cooperate?'
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TEACHING NOTE – ZENTRILL
Sometimes we can only understand the pressures on one operation by putting it in the context of
its suppliers’ and customers’ operations. The Zentrill case provides us with an opportunity to
look for not only the relationships between the three operations described but also how upstream
and downstream relationships affect each other.
Analysis
The absence of quantitative information in this case does not mean that we cannot examine the
relationships between the stages in the supply chain in a systematic manner. Perhaps the most
appropriate model to use is that illustrated in Figure 7.5 of Slack and Lewis. This model was
used to examine the qualitative nature of supply chain relationships. It enables the search for
potential mismatches and misunderstandings between operations at each stage of the supply
chain. Figure 1 uses the model to summarise the market requirements and operations
performance of the three companies described in the case. These companies are, Zentrill, the
fashion retail chain who sell directly to consumers, Lopez Industries, who manufacture the
garments for Zentrill and Schweabstens, the cloth manufacturers.
Good quality
Flexibility during
season
Wide capabilities
Innovation
High quality
Flexible delivery
Quality and
innovation
Use only very high
quality fashion cloth
suppliers
Good quality
Fast availability
Flexibility during season
Wide capabilities
Market
requirements
What
B
wants
What A
thinks B
wants
What
C
wants
Lopez Industries
Garment manufacturers
B
Schweabstens
Cloth manufacturers
A
How
A thinks it is
performing
Doesn’t
know (or
care?)
What B
thinks C
wants
How B
perceives A’s
performance
How
B thinks it is
performing
Zentrill
Fashion retailers
C
How C
perceives B’s
performance
Operations
performance
Too small to
influence supplier?
Great quality,
wide capabilities
but inflexible
within season
Great quality
Innovation
Very inflexible
Great quality, wide
capabilities but
slow and inflexible
within season
Figure 1
Let us follow the ‘market requirements’ logic through the chain. Zentrill are in the fashion
business. They are also an up-market store who sell at high prices with big margins. However,
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only around 50 % of their garments actually sell at full price. The rest are sold for substantially
lower margins in sales, etc. From their garment suppliers (Lopez) they demand high quality,
they would very much like fast response in order to give high availability if demand for some
products is higher than forecast, flexibility to change orders during a season and, more
generally, a wide capability to make a wide range of products. Broadly speaking, Lopez
Industries seems to have a reasonable appreciation of Zentrill’s stated requirements. They
understand the need for high quality and the need to develop wide capabilities. They are
particularly proud of their ability to machine difficult cloths such as lightweight cloth. They are
also sympathetic to Zentrill’s need for flexibility to change volumes for different products
through the season, even if they find it difficult to accommodate such a need. Where they
disagree with Zentrill is in the need for fast response. They feel that it is unreasonable to expect
a two-day response and believe that the problem could be at least partially solved by Zentrill
improving their own inventory management systems.
In most industries a company’s interpretation of its customers’ needs would lead it to choose a
set of suppliers who could best fulfil those needs. Lopez Industries are more constrained
because Zentrill’s designers will have a big say in which cloths they want to use. This means
Lopez are required to use the high-fashion German and Italian cloth manufacturers who provide
the type of materials appropriate for Zentrill’s designs. What is important for our analysis is that
we can see the association between Lopez’s interpretation of Zentrill’s needs and their use of
particular suppliers.
Lopez’s requirements from its cloths suppliers are for the high-fashion innovation required by
Zentrill, high quality and flexible delivery. Flexible delivery would allow Lopez to be more
flexible in changing its production levels, which would in turn enable Zentrill to match their
stocks with emerging demand.
Looking at Schweabstens understanding of Lopez’s requirements (Schweabstens is not the only
supplier but is typical of them) we find a major gap. Schweabstens perceives its market as
wanting quality and innovation and little else. To be fair, it has a point insomuch as Lopez is not
typical of its customers and represents relatively little business. Schweabstens biggest customer
is itself, in the sense that it markets its own branded range of garments.
Working back down the chain and examining how each link in the chain performs, Schweabsten
does not seem to have much idea as to the appropriateness of its own operations performance.
For example, ‘(our customers) vary considerably in their requirements, but presumably all of
them value our quality and innovation’.
Indeed Lopez sees Schweabstens performance as providing great quality and innovation.
Unfortunately they also are regarded as being exceptionally inflexible. Yet, flexibility is a prime
requirement for Lopez.
Lopez uses its inability to persuade Schweabstens to be flexible as the reason for the limitations
on its own performance. It believes itself to be too small to influence the cloth suppliers who are
usually much larger companies.
Because of this inability to influence its own suppliers, Lopez sees its performance as being
poor in terms of ‘within-season’ flexibility. However, partly because of its own capabilities and
partly because of the high quality of the cloth it gets from Schweabstens, it has excellent quality
and wide capabilities.
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Zentrill agrees. There is essentially very little mismatch between how Lopez and how Zentrill
regard the performance of Lopez Industries.
So, in summary, the relationship between Lopez and Zentrill is one characterised by shared
understandings, even to the extent of agreeing where performance is less than acceptable. The
only discontinuity in the mutual understanding between the companies concerns the ambition to
move to a two-day response for urgent garments. However, the relationship between the large
cloths suppliers such as Schweabstens and Lopez Industries is much less satisfactory. The lack
of flexibility (and the lack of any appreciation that flexibility is important) from the cloth
manufacturers is having an effect throughout the chain.
Options
In this case the options, in terms of what the various players in the chain could do, are not
mutually exclusive. There are several potential avenues that could be explored in order to ease
some of the problems in the chain. In fact, each stage in the chain could potentially improve its
overall performance as follows.
Zentrill
Zentrill’s contribution to solving the lack of flexibility in the chain is largely to try and reduce
their need for fast response. They could do this in a number of ways.
•
Improve their knowledge of where stock is – the better Zentrill’s knowledge of what stock
each store carries, the more likely it is that they can allocate stock appropriately. A
combined point-of-sale and stock management system would help them in this respect.
•
Move stock between retail outlets – it may be worth considering a regular ‘taxi style’
service between stores in a geographic region that could shift reserved stock between
branches as demand patterns shift. It could also be possible to accommodate special orders
from customers (‘… sure I can get it you Madam, could you come back tomorrow or
perhaps we could deliver it to your home?’). With margins as high as Zentrills, there should
be sufficient cash to invest in exceptionally high customer service such as this.
•
Design using more ‘flexible’ cloth – some companies in the fashion garment business try to
encourage their designers to use cloths that can ‘work’ on several different garments. Some
styles and patterns of cloth will only work on one style of garment. Others could be used on
several styles of garment. Clearly, it is an advantage to design garments using cloth that
could be used on other garments if the original design fails to sell in the volumes forecast.
The dilemma is how to do this without inhibiting the creativity of the designers.
Lopez Industries
Lopez also have a number of possible ways they could improve supply chain performance.
•
Make efforts to achieve quick response – although they dismiss the idea of a two-day
response level, there are few companies that cannot improve their response rates. Many
similar companies have special ‘quick response’ manufacturing cells that are designed
specifically to cope with urgent deliveries without disrupting the rest of the operation.
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•
Joint forecasting with Zentrill – perfect forecasts are not possible, however, if they were,
they would eliminate the problem. Even though perfection is beyond any forecaster, it may
be that a more serious attention devoted to forecasting could help Lopez to schedule more
accurately.
•
Leverage machining expertise with Schweabstens – Lopez Industries may be a very small
customer of Schweabstens, but they may be able to persuade the cloth manufacturer to take
them more seriously by, in effect, trading their specialist knowledge. Schweabstens admit
that they have problems finding high quality sub-contractors to make their own garments.
Lopez Industries has considerable expertise, especially with difficult cloths. It may be that
they can trade this expertise for more flexible delivery from Schweabstens.
•
Explore smaller, more flexible cloth manufacturers – if Schweabstens and the other big
suppliers remain unconvinced, it may be worth exploring the possibility of using smaller,
more flexible companies, especially if they can give similar levels of innovation.
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BONKERS CHOCOLATE FACTORY
Chocolate making starts with a series of primary processes to convert milk, sugar and cocoa into
thick viscous liquid chocolate. The conching process is a critical element of the primary process,
taking fatty powders and, through a shearing action between large contra-rotating rollers which
releases fats and disperses solids, to produce liquid chocolate with various controllable physical
properties, such as temperature and viscosity. This chocolate is then used at secondary
processes; to mould solid bars, to coat biscuits and assortments, and to make speciality products
such as Christmas novelties. Bonkers Chocolate, the American division of a multinational candy
company, was facing a critical decision over the future of its conching technology. In late 2001,
at a meeting of the Bonkers Chocolate Management Committee, discussion centred on the
purchase of additional equipment for the Chocolate plant. The Engineering Vice President was
proposing the implementation of a new in-house conching technology, whereas the
Manufacturing Vice President wanted his $3 million capital application for a fifth conventional
conch machine (to provide an additional 25 per cent capacity) approved.
‘I believe that we cannot survive and grow without this type of leading edge development. In my
view, the old technology is often barely able to achieve the demands placed on it by the complex
new products being dreamed up by our Development people. There are at least six advantages
of this technology, not all of which can be evaluated financially: (1) trials indicate that for 50
per cent of recipes, fat content can be reduced by up to 1 per cent without significant changes to
flavour or texture. As cocoa butter is expensive, this could give significant savings for some
products; (2) the new process gives much greater control over viscosity, allowing more precise
coating potentially reducing reject levels on all coated products; (3) conventional conches take
hours to clear for a recipe change, during which time the output is a mixture of two recipes,
which can, therefore, only be used on the lower quality specification product (usually selling at
a lower price). The new conch, in comparison, fully clears all material in less than half an hour,
reducing the cost of materials; (4) the new conching process will allow a much wider range of
chocolates to be produced, as it can produce to a higher viscosity and to tighter tolerances; (5)
we believe that the technology will work at any size from one-tenth to double the size of
conventional conches. They can be custom-built for our specific needs; (6) the new conch
occupies 1500 square feet on one level, whereas a similar sized, conventional machine occupies
2000 square feet on three levels (total 6000 square feet). These modern and efficient process
technologies will be critical in our future developments; Mars and Nestlé are certainly investing
heavily in their factories’. Engineering Vice President
‘If we cannot approve the purchase of another conch machine, we won’t meet forecast demand
growth for 2002/2, and will be forced to cut back on expansion plans. We already experience
frequent capacity problems in the chocolate plant……it is nearly impossible to plan an efficient
sequence of production to satisfy the needs of all the secondary user departments. We should
purchase another (identical) conventional conch machine to be installed in under 6 months and
we would have considerable flexibility…to move staff around the different conches, to plan for
any type of chocolate on any conch, and to hold standard spare parts. The new technology
conch could take 12 to 15 months to develop, would require different skills in production and
maintenance and different planning rules. All this would be too disruptive, just when we need to
concentrate on output and new product development’. Operations Vice President
‘I support the purchase of another conventional conch so we get into production by mid-2002;
the new technology conch would not be into production until at least 6 months later. But, even
more importantly, whilst we know that the small trial machine has made chocolate which the
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tasting panel cannot distinguish from our standard product, there is no guarantee that would be
the case for a machine ten times larger. We know that conching is critical in creating our
unique Bonkers Best flavour and texture, so we should take no risks and stick with the process
we have been using for at least 80 years. The extra capacity will allow us to go ahead with trials
and product launches, which are already being disrupted by capacity and planning constraints’.
Sales Vice President
‘We will have to defend existing volume brands by maintaining price competitiveness and
quality (taste). The factories must be able to support this by delivering cost reductions but we
must also launch new, high quality, high margin products at a faster rate than ever before. I
know there are plenty of eager competitors out there ready to erode our shelf space in the
convenience stores and supermarkets. Realistically, not all of these new products will be a
success and few will ever even reach ten per cent by weight of sales of core products. Taken
together however they will be very profitable and provide most of our projected growth. I think
you can see why I favour the conventional conch technology. It minimises the fixed-cost burden
of extra capacity and ensures low-cost production without any risks associated with new
processes’. Marketing Vice President
The Engineering Vice President had been expecting resistance from Sales and Marketing but
had made attempts to convince Operations of the advantages of the new conch technology. The
Finance Vice President also objected, on the grounds that providing the same level of capacity
in the new process would cost about $4 million rather than $3 million. It appeared that 2 years
of research and trials had been for nothing – but he sprang to the defence of his proposal.
‘I understand your worries but trials of the one-tenth scale conch have been successfully used
on our full product range and the tasting panel reports no detectable changes in taste, texture
or aroma. I also accept that the new conch could delay capacity by around 6 months and cost a
little bit more. The relative annual cost saving of the new technology conch (compared to a
conventional conch) in the primary processes would be around $280,000: The labour saving is
only small, perhaps half a person or around $20,000. Space savings are estimated by Finance
to be worth around $40,000 in opportunity cost. Improved control of cocoa fat content will save
the department around $60,000 based on our trials on the prototype machine. The biggest
saving is reduced material wastage at changeovers: we expect a $160,000 reduction here. But
the big benefits will be seen in the secondary departments, where there will be much more
control of coating thickness and less quality and productivity problems. Unfortunately, these
savings are much more difficult to predict. Our conventional capital expenditures applications
have always had to demonstrate clear departmental cost savings such as reductions in direct
labour and associated overheads which result from automation technologies. The opportunities
for further automation of high volume production processes are diminishing as the variety of
our products is expanding’.
The Division’s CEO was alarmed to find that there was no agreed strategy for the purchase of
conching capacity but recognised that the decision had to be made quickly and appropriately.
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TEACHING NOTE – BONKERS CHOCOLATE
FACTORY
This example includes a number of different operations strategy issues. It describes a process
technology investment decision but also comprises more generic themes. It is equally, for
instance, a capacity investment decision and more broadly reflects many of the practical
difficulties encountered when formulating strategy. There are different market segments to be
served, functional disagreements, short and long-term concerns, varied levels of technical
knowledge etc., all of which are classic rescue/requirement reconciliation issues.
Analysis
Conching is a critical direct (p. 248) material processing technology (p. 249) in the chocolatemaking process. It influences key physical properties of the liquid chocolate and therefore has a
major impact on the characteristics of finished products (after passing through a range of
secondary processes).
Transforming resources
(Conching technology, contra-rotating rollers)
Inputs (Cocoa butter
blends and Chocolate Crumb)
Physical material
transformation
(shearing action, releasing
fat, dispersing solids etc.)
Outputs (liquid
chocolate)
These finished products seem to split into traditional products (such as the 80-year-old Bonkers
Best) and the trend towards highly volatile (10% success rate) innovative products. In addition,
there appears to be (albeit anecdotal) evidence that competitors are investing heavily in process
technology and there is a sense that they might ‘fall behind’ if they fail to innovate. As evidence
of the significance of the investment decision, the firms’ Management Committee is making the
final decision but there is no real agreement amongst the different managers. Engineering had
proposed an innovative ‘in-house’ technology, whereas manufacturing wanted capital to
purchase an additional 25% conventional conching capacity (a fifth machine).
Potential advantages of the new conching technology
The engineering department identified, based on trial findings, a number of key advantages
associated with the new process technology
•
Reduction of fat content (for 50% of products) without affecting flavour or texture. This, it
is estimated, could create savings of around 60,000 euros. The total annual cost saving in
primary processes would be around 280,000 euros.
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•
All materials can be cleared from the machine in less than half an hour, thus increasing
flexibility and improving quality. This provides the biggest potential saving in reduced
material wastage at changeovers: they estimate 160,000 euros.
•
The new process allows a wider range of chocolate products to be produced, as it can
produce to a higher viscosity, allow more precise coating and improve quality (narrower
product tolerances).
•
The technology could be custom built to work at a range of ‘scales ’: from 10 to 200%
conventional conch size.
•
The new conch is smaller. It takes up 150 m (on one level), whereas a similar sized
2
2
conventional machine would occupy 600 m (200 m on three levels). This is estimated to
be worth around 40,000 euros in opportunity cost.
•
The labour saving is only small, around 20,000 euros.
2
Potential disadvantages of the new conching technology
The manufacturing, sales and finance departments highlighted a number of disadvantages
associated with the new process technology compared with purchasing another traditional
machine
•
The slower implementation plan for the new process technology (12/15 months compared
with 6 months) means that the firm would fail to meet forecast demand growth (for 1997/8).
This capacity shortfall would also mean cutting back on expansion plans.
•
This delay (and the other disruptions caused by process innovation) would serve to
compound existing capacity problems in the chocolate plant – caused by difficulties with
sequencing of production.
•
Standard technology allows for staff flexibility around the different conches and to hold
standard spare parts.
•
Although the trial machine had made chocolate with the traditional taste (tasting panel
evidence), there was no guarantee that would be the case for a machine ten times larger.
This concern over taste was particularly pronounced for their 80-year-old Bonkers Best
product.
•
Concern over new product competition meant that any distraction from production (i.e. keep
costs low and meet production targets) should be avoided, if at all possible.
•
The same level of productive capacity using the new process would cost about 4 rather than
3 million euros.
From an operations perspective, there are a number ways of interpreting these apparently
conflicting conclusions. In a similar way to the analyses deployed elsewhere (Dresding Medical,
Hagen Style, Focus Bank etc.), it is possible to examine the implications of, say the traditional
and innovative chocolate products, upon the generic performance objectives (quality, speed,
dependability, flexibility and cost). Although Bonkers products may not be available, it is
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possible to consider other manufacturers products and compare their traditional (i.e. classic solid
bar of milk chocolate) and innovative (i.e. products with peanuts, wafers, formed into particular
shapes, calorie controlled) products. In particular, the example can be used to refine the
flexibility dimension to include consideration of range, volume and speed/response flexibility.
What is the question?
As mentioned earlier, this case is illustrative of a number of different operations strategy issues.
It is possible to apply the books resource and requirement analyses (OS matrix) but it is also
possible to look at other frameworks such as that (designed for manufacturing strategy
formulation) proposed by Terry Hill. Likewise the case demands consideration of the impact of
adding capacity at different rates and in different scale increments. This ambiguity is actually a
good way of getting into the debate and the functional perspectives of the different managers
can be used to highlight the various risks and opportunities faced by the company. Regardless of
this breadth however, the key question must be, ‘Should Bonkers Chocolate implement their
own conching technology solution instead of buying another “off-the-shelf” unit of capacity?’
What are the options?
In addressing this process technology investment decision, four options immediately become
apparent.
Option A – Do Nothing. Delay the decision until market requirements or the viability of
potential technological solutions becomes a little clearer.
Option B – Yes, they should build on the work completed by the engineering group, take the
development risk and implement their own technological solution.
Option C – No, they should simply purchase another conventional conching machine.
Option D – Yes and No. Purchase another machine to meet short-term demand and continue to
invest in the new technology.
Evaluation
Before addressing the specific competitive options it is useful to develop a richer understanding
of the new technology. Using the dimensions and models proposed in Chapter 5 of Slack and
Lewis it is possible to define the new conching technology’s (relative to the traditional)
characteristics.
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Low volume
High variety
High
Loose acuity and Many,
separated judgment small units
High volume
Low variety
High
Market requirements
High
COST
Low
FLEXIBILITY
Actual characteristics of current technology
(larger scale; less automated; more ‘integrated’)
Low
SCALE
AUTOMATION
COUPLING
Potential characteristics of new technology
(smaller scale/greater scalability; more automated; less ‘integrated’)
Integrated Low
Few, large,
rigid acuity and small units
judgment
Whilst such technical characteristics might suggest that the new technology is an obviously
beneficial investment, the case illustrates how important it is to be able to fully articulate the
full range of competitive benefits (i.e. not just rely on cost savings) a technology delivers. This is
particularly important when, as per normal, there is considerable uncertainty surrounding the
final implementation of the new technology. It is, of course, also possible to apply the market
requirements and resource-based analysis.
Option A – This has the clear advantage of avoiding/minimising managerial conflict. In effect,
the firm could treat the sunken investment costs as having purchased a ‘real option’ that allows
them to develop the technology at some point in the future. This means that the firm can wait
until residual market uncertainty is better resolved and may minimise the risks associated with
the final investment. The challenge is to decide how long it is possible to wait before
‘exercising’ the option becomes worthless (because of competitor action etc.).
Option B – This (given the above analysis) is the popular and ‘strategic operations’ (i.e.
building advantage through operations-related investment) option. There are clear advantages
associated with the potential characteristics of the new technology. In particular, its greater
levels of flexibility (quicker changeovers etc.) and control (chocolate coating etc.) appear to be
critical if the trend towards a short life cycle, innovative chocolate products come to dominate
their market. Moreover, the firm’s conventional capex applications have always had to
demonstrate clear departmental cost savings (such as reductions in direct labour and associated
overheads); however, the opportunities for further automation of high volume production
processes are diminishing as the variety of products expands. It also allows the firm to match
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their rival’s investments and not find itself competing with inadequate operational capabilities.
Equally, if the trials prove correct, then the new system should not affect the all-important taste
of ‘Bonkers Best’. It is important however to recognise and address the concerns of the other
functional managers. Why are they concerned, why do they want a quicker option, what would
be the impact of any delay in adding productive capacity. As an illustration of playing ‘devil’s
advocate’, consider the investment cost decision. The difference between the figures is
essentially marginal between the two purchase (B and C) options (although not when compared
with option A) but, if the forecast development costs were twice as big, would the benefits still
seem as critical? Several of the frameworks from Chapter 5 of Slack and Lewis (feasibility etc.)
could be used to discuss these issues.
Option C –The key concern with this option seems to be whether the forecast demand will
materialise. If greater emphasis is placed on the uncertainty associated with development (i.e.
the implementation actually takes 24/36 months) it could be seen as creating an unacceptable
risk of not meeting market requirements. If however, the market uncertainty was seen as the
greater source of risk, then this option would be difficult to justify. Some of the arguments for
this option (existing skills, interchangeability of staff and mechanical parts etc.) are legitimate
but not critical, whereas others (production scheduling, inventory build up etc.) simply reflect
poor analysis or poor communication of the benefits by the technology ‘impresario’.
Option D – This might seem like the perfect option and in many ways is an alternative real
option. It involves (1) deferral of major investment, hopefully allowing market requirements to
become clearer and (2) staging of smaller investments, allowing the firm to abandon its
development project if some insurmountable technical or market problem emerges. It is
important to recognise however, that such a strategy has to be carefully planned and analysed
because it also runs the risk of being ‘stuck in the middle’ with respect to competitors. In other
words, the firm might be left with a partial technology that is incapable of responding to market
requirements or a reasonable sunk cost that delivers no value (except for some salvage value).
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ONTARIO FACILITIES EQUITY MANAGEMENT
(OFEM)
Facilities management now is a multi-billion dollar business in most developed economies.
Facilities management companies offer a range of property management services including
basic maintenance, cleaning, fitting and supplying office equipment, heating and environmental
services, ‘disaster recovery’ services and increasingly, information technology equipment
hosting and leasing.
‘Facilities management is the basic housekeeping of business. It may not be glamorous
but it is vital. It has always been done of course, usually in-house by people who often had
other responsibilities. As buildings and services became more sophisticated, the provision
of even standard office services required more cash and more expertise. Most large
companies soon found that companies like OFEM could provide these services better and
cheaper. That is what we have to keep in mind as we move into providing more (and more
varied) services – we have to be better and cheaper than our customers could do it
themselves. If we ever forget that we will be in trouble’. (Guy Presson, CEO OFEM).
The Security Division
Within OFEM, the Security Division looked after the development and installation of security
equipment and systems in client’s property. These included alarm and intrusion systems,
security enclosures (safes), surveillance and monitoring systems, and entry security systems. In
fact, entry security systems were becoming particularly important for the company. Many firms
were increasingly security conscious. As companies became more information-based they felt
themselves vulnerable to industrial espionage or threats from individuals and groups dedicated
to causing disruption, either for its own sake or to pursue political ends. Entry security systems
had the purpose of permitting entry into various parts of a building only those individuals who
were authorised to be there. Traditionally this had been done using swipe cards or various kinds
of security PIN numbers and codes.
‘Entry security systems are now in routine use. There are very few of our clients who do
not want some kind of personnel security system, and they expect us to be able to provide
it. Financial services companies have been in the forefront of our customers demanding
increasingly tight security. More recently it has been IT-based companies who have made
the running in demanding security. Some of our most demanding clients now are those
with large web-hosting operations. They demand several levels of security, as a minimum
at the “building”, “department” and “machine” levels. In other words, individuals need
to be checked for access authorisation as they enter the building, when they enter a
particular part of the building, and before they can use an individual terminal to access
computer systems. Machine level security has traditionally been provided using encrypted
security passwords. However, passwords are particularly problematic because they are
either forgotten, written down or even shared. In fact it is not difficult to guess many
people’s passwords’. (Mirella Freni, Head of Security Division)
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Technological developments
The Security Division was facing a period of technological change in so much as several new
developments in security technology were starting to emerge. These were affecting both what
was known as ‘front-end’ and ‘back-end’ elements of security systems.
Back-end technologies were the systems which record, analyse and interpret the data from frontend technology such as swipe cards, etc. These systems enabled companies to know exactly
who was where, and when. In addition to the use of such information for security purposes, it
could also be used for monitoring employee working hours and so on. Systems were now
becoming available which could detect ‘abnormal’ behaviour in staff. For example, if the same
swipe card was used to enter a building within minutes of it being used to leave the building,
this could prompt an investigation to check that it had not been lost and picked up by an
unauthorised individual. OFEM were considering adopting this type of technology. It would
mean working closely with systems developers to provide a generic system which could be
customised to the needs of individual clients. This would be expensive but the company felt that
they could probably charge clients for the extra services this technology would provide. The
systems themselves were very similar to those used by credit card companies to detect unusual
behaviour but would need some modification. It was estimated that OFEM would need to invest
between C$2.5 million and C$3 million over the next two years to have these systems up and
running. The revenues from such an enhanced service were difficult to estimate but some within
the firm claimed they could be as high as C$1–C$1.5 million per year.
It was the recent ‘front-end’ technological developments which were even more intriguing.
These involved the application of biometrics – using human features for unique identification.
This technology was becoming available commercially for the routine identification of
individuals through features such as eye characteristics, fingerprints, voice recognition and even
body odour. In particular, fingerprint recognition and iris (the central part of the eye)
recognition looked promising. Fingerprint identification was in many ways the simpler of the
two.
‘One advantage of using fingerprints for unique identification is that the same system can
be used at all levels of security. Fingerprints can allow access to buildings, departments,
and can also allow access to an individual machine. Panasonic has already produced
some laptops for one life insurance company with a fingerprint reader built in. This means
that the security risks of losing a laptop or having it stolen are virtually eliminated. Such
technology can also be used for mobile phone security. But fingerprint recognition is not
perfect. It can be affected by machine malfunction or changes and damage to an
individual’s skin’. (Mirella Freni, Head of Security Division)
More exciting in the long run was the prospect of extensive use of iris recognition. An
individual’s iris is one of the most uniquely identifiable characteristics and one which does not
change over time. Surprisingly, it also works well if the person is wearing spectacles, contact
lenses or even sun glasses.
‘This is probably the real technology of the future, it is already being used by some ATM
manufacturers to prevent cash machine fraud and there have been trials at several high
security establishments. Again, we can use the same technology at building, departmental
and machine levels. In fact, machines will become even easier to use. There will no more
need for passwords, no necessity to repeatedly enter the same data such as personnel
details, it will even be easier to share computers without losing the advantages of security.
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Cameras can be built into the screens of computers which will enable them to
discriminate between different users with different levels of security clearance’. (Mirella
Freni, Head of Security Division)
There were however some drawbacks to using iris recognition. Even though it was more reliable
than using fingerprints, the general problem of reliability remained an issue. The problem of
falsely accepting someone who was not authorised to use a system was not an issue, rather it
was the problem of falsely rejecting genuine users. Anything other than a tiny proportion of
false rejections would be very irritating to any clients’ staff. Second, the technology, although
likely to be widely used in the future, was relatively new to the company. There was the risk
that there may be disadvantages which had not yet been thought of. Fingerprinting was a better
understood technology. Third, in some companies some staff had proved reluctant to subject
themselves to this security. There was still the impression that the technology involved ‘laser
scanning’ the eye. This sounds dangerous to most people, though in fact the system did not use
lasers but rather simple digital camera-like technologies. Finally, some groups were worried that
the technology could be used intrusively to monitor employees’ use of systems, or even levels
of staff attention as they worked at the screen.
Costs and benefits
Both fingerprinting and iris recognition systems would be expensive to develop. It had been
estimated that at least C$1 million a year would be needed for the next 3 years, probably a little
more than this for the iris recognition systems. In the Security Division’s overall revenue budget
of C$15 million this was not necessarily a prohibitive sum, the real problem lay with the
uncertainty of any revenue coming from such an investment.
‘Investing in more sophisticated back-end systems will mean extra revenue for us, but it is
unlikely that we could charge much, if anything, extra for improved front-end security.
There is no real extra service even though there is a higher level of security. I’m not sure
that customers would be willing to pay significantly more for this. OK, some of our real
security-minded customers may do so, but most won’t. Yet this is the way technology is
moving. Certainly our competitors are considering adopting such technologies, and if they
are doing it we should be considering it. Also, if we master iris recognition in particular,
other business may be open to us, such as the maintenance of ATMs and so on. At the
moment the critical decision for us is where to invest our money, back-end? Front-end?,
or both? And if we go for new front-end technology, should it be fingerprint based or iris
recognition?’ (Mirella Freni, Head of Security Division)
Even though Mirella Freni knew that revenue projections for any of the options were uncertain,
she had asked her marketing colleagues to come up with some kind of estimate. This had not
been a popular request. Marketing had declared that any estimate would be highly problematic
and could only be taken as a ballpark indication of future revenue. Others in the division were
openly sceptical of Marketing’s ability to forecast levels of sales of its existing services, never
mind services which were entirely new to the market. Mirella, however, was determined that the
decision should be based on some quantifiable data.
When the estimates were received they surprised Mirella (see Exhibit 1).
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Exhibit 1 – Revenue projections for the three investment opportunities
Yr 0
Yr 1
Yr 2
Yr 3
Yr 4
Yr 5
Back-end analysis
0
0
CS1m
C$1.5
C$1.5
C$1.5
Front-end fingerprint recognition
0
0
0
C$0.5
C$1.5
C$1.7
Front-end iris recognition
0
0
0
C$0.3
C$1.5
C$2.5
Note: figures are in C$ millions at today’s prices
‘It seems the more they (Marketing staff) thought about the possibilities of the front-end options,
the more enthusiastic they became. Personally, I find these estimates optimistic, but my Head of
Marketing is now saying that he is willing to stake his reputation on the figures. But whatever
one thinks of the estimates, we need to make a decision soon’. (Mirella Freni, Head of Security
Division)
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TEACHING NOTE – ONTARIO FACILITIES EQUITY
MANAGEMENT (OFEM)
This case is discussing investments which a facilities management company could make in its
process technologies. In this case it is concerned with customer processing and information
processing technologies. It calls the customer processing technologies ‘front-end’ technologies
and the information processing technologies ‘back-end’ technologies. One back-end investment
and two front-end investments are discussed.
Analysis
The case describes three separate potential investments in process technology. These are
•
an enhanced back-end system which allows for sophisticated information processing,
including routines which can enhance security.
•
fingerprint recognition technology which would eliminate the need for bar code scanners or
the use of security codes.
•
iris recognition technology which again overcomes the limitations of traditional security
systems and is potentially more reliable than the fingerprint recognition.
These investments are not mutually exclusive insomuch as the company could invest in all
three. However, two things could prevent investing in all of the new technologies, first, all are
expensive and it is unlikely that the security division could justify such investment, second, to
some extent fingerprint recognition and iris recognition are alternatives to the current
technology. Given this, perhaps the best approach which the company could take would be to
evaluate all three options and prioritise them.
To try and structure an analysis we can use the three criteria of;
•
feasibility – can we do it?
•
acceptability – what benefits do we get from doing it?
•
vulnerability – what risks do we run if we do it?
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Figure 1 shows a summary of the three investments.
Feasibility
Back-end
systems
•
•
•
Front-end
fingerprint
recognition
•
•
•
Front-end
iris
recognition
•
•
•
Acceptability
Vulnerability
Already have less
•
sophisticated back- end
systems in place.
•
Analytical software
similar to that used
elsewhere.
•
C$2.5–C$3m
investment required
over 2 years.
Confidence in future
revenue streams.
Crude payback on
investment 3.7–5
years.
Could customise
service to clients
needs.
No in-house experience •
of this technology.
Other industries using it •
– computer
manufacturers.
Investment of ≈ C$3m
•
over 3 years.
Essentially a
•
defensive move.
Unlikely to generate •
new revenue streams
but could protect
existing business.
Payback??
May not prove
sufficiently reliable.
Competitors may
invest in same
technology.
No in-house experience •
of this technology.
Some other industries
starting to use it.
Trials at some very high
•
security facilities.
Partly defensive,
•
partly opens potential
new business in very
high security at ATM
areas.
‘Technology of the
•
future’.
Payback??
More reliable in
use than fingerprint
recognition but
less well
developed.
Intrinsically more
risky technology?
•
•
•
Low risk from
process
technology itself.
Risk of competitors
getting ahead with
‘higher security’
customers if this is
only investment in
new technology.
Figure 1
Back-end systems investment
This potential investment is basically an upgrading of current back-end systems to incorporate
more sophisticated analytical software and provide more functionality. The investment is fairly
substantial (C$2.5–C$3 million over 2 years). However, the software is similar to that used in
the banking and credit card industries. Presumably the estimates of investment required will be
reasonably accurate. The company also have confidence in their ability to use the technology to
provide services at higher margins. The major risk is not from the technology itself but rather
from investment in this technology draining funds from investment in front-end technology
development. Nevertheless, overall, this seems to be a relatively safe and attractive investment.
Front-end fingerprint recognition
This type of technology is already in place in some industries, most notably the computer
industry. However, OFEM have no experience of using it. It is likely that the company will have
less confidence in their estimate of how much investment will be needed to develop this
technology. Currently they believe it to need C$3 million investing over 3 years. They believe
that other companies are already likely to move into this technology. Therefore, adopting it must
be seen as essentially a defensive move. Furthermore, it is unlikely to generate new revenue
stream, although it could protect existing business. The payback from such an investment is
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difficult to estimate, though is unlikely to be very large. One problem already identified with the
technology is that it may not prove sufficiently reliable in practice. The ‘false negative’ problem
of legitimate users being rejected may seriously undermine clients perception of the quality of
service they receive.
Front-end iris recognition
Again, the company have no in-house experience of using this technology. Also, again, some
other industries are starting to use it. Perhaps most encouragingly, there would appear to have
been trials at some very high security facilities. This is a similar setting to the one in which
OFEM intend to use the technology. The technology itself, although partly defensive, may open
opportunities for new business. The two areas mentioned are in the very high security market
and in the servicing of ATMs (Automatic Teller Machines). Also, it seems to be regarded more
as the ‘technology of the future’. However, as with fingerprint recognition, the payback is
uncertain. Although it may open new revenue streams, the investment will be no less than for
fingerprint recognition and possibly will be higher. However, in use the technology is likely to
be more reliable than fingerprint recognition even though it is less well developed currently.
Nevertheless, the technology must be considered intrinsically more risky because of its lack of
development.
Evaluation
To some extent this case is an exercise in balancing long-term and short-term developments in
process technology. In the short term, development of the back-end system seems a safe bet. It
is not particularly risky and seems capable of creating future revenue streams. It is unlikely that
the company could resist making such an investment. However, in the long term, it is the frontend systems which may provide the more significant impact on the company’s competitiveness.
Here there is probably a good argument for ‘leap-frogging’ fingerprint recognition and going
straight for iris recognition technology. Indeed, iris recognition technology seems to dominate
fingerprint recognition in a number of ways. It is likely to be more robust in use, it has already
undergone trials in some very high security facilities, so presumably others in the industry
regard it as a potentially attractive technology, it can open up new business streams especially in
the very high security area which sounds like a new market for the company, it seems to be
regarded as having a longer term future than fingerprint recognition technology, and its payback
is likely to be better (assuming that the future revenue streams are greater than the extra
investment needed).
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Figure 2 illustrates where the three process technologies may lie on a ‘process distance –
resource distance’ graph. Although approximations, it does illustrate that both front-end
technologies are intrinsically more difficult insomuch as they infer greater process distance and
greater resource distance than the back-end investment.
Process distance
Front-end
fingerprint
recognition
Back-end
development
Zero learning
potential
Front-end iris
recognition
Strong
learning
potential
Resource distance
Figure 2
Resource and process distance and learning range
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THE THOUGHT SPACE PARTNERSHIP
….we need radical change…
'It was a total shambles. Thought Space is supposed to be one of the leading creative companies
in this part of the world. Yet we manage to come over as being indecisive and inefficient. We
always used to boast that we had the three Cs – creativity, commercialism and competence. We
had some of the best minds who were capable of the most creative solutions, we understood the
commercial priorities of our clients and we always delivered on time, and on budget. Not in this
case. The Cityscope project has been dogged by confusion and problems from the beginning; we
ought to rename the three Cs as confusion, criticism and chaos. Nor have we ever had such bad
publicity. OK, so it was not an easy assignment. The overall purpose and objectives were never
that clear and there was political interference from the start. The city council approved the
money but against such opposition that it was always going to be controversial. Also, the
sponsors were being leaned on, politically. Some didn’t really want to contribute at all. On top
of that, the whole project was managed by committee. Some of them thought it was a kind of
theme park, others that it should be a museum, for some it was a performance space, for others
an Expo.
Yet we can’t blame them entirely. We should have known what kind of project it was. The real
point is that we might have been able to offer a leadership role if it wasn’t for our inability to
recognise the project for what it was. The different perceptions of each department in the
Partnership reflected the differences within the project itself. "Event’s" saw it as a cross
between an exposition and a performance. "3D design" saw it as some kind of gallery or
museum. "Technical Solutions" thought of it more as a theme park. "Graphics" just saw it as a
nuisance. None of them every really worked together. They may be experts in their field but this
type of project called for some creative collaboration. It also called for some fast footwork as
ideas developed and as the political processes within our client group began to be evident.
Relying on a single project coordinator was crazy. Even an experienced guy like Gordon, could
not get everyone to pull together.
The real point is that large, complex projects like this will soon become our main business.
Depending on how you define our assignments, around a third of our business is already
heavily cross-functional, we can’t afford to have Tech Solutions pleasing themselves what they
develop, Events always seeking high profile business irrespective of the internal chaos it causes,
3D design seeing themselves as the real creative ones and Graphics virtually declaring
independence. No, I would scrap the whole functional organisation. We need to form dedicated
but temporary teams for each assignment. These could then both integrate the various skills we
have and understand the exact nature of the task we are being set. They could respond flexibly
and appropriately to each assignment. When not engaged on a particular assignment, staff
could carry out some of the more routine departmentally-based work. We are supposed to be
one of the most creative partnerships in the business. Why can’t we be creative with our own
organisation?' (Caroline Hesketh – Creative Partner)
….one mistake doesn’t mean it’s broke…
'Look, I know we didn’t cover ourselves in glory with the Cityscope project but let’s not overreact. Admittedly, it was not a well-executed piece of work but it’s made to seem worse by the
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fact that a couple of journalists decided to make a story out of us. In reality, we were no worse
than any of the other creative agencies who were used on the project. It’s just that our zone
attracted more controversy. We were unlucky as much as we were incompetent. It is certainly
no reason for totally shaking up the whole organisation.
The existing groups work well together. One of the ways we get such creativity out of our people
is by hiring very capable minds, letting them mix with other equally challenging individuals and
expecting them to hone their skills in the commercial reality of their clients’ projects. It’s the
interplay of ambitious, challenging individuals with shared skills which makes for creativity.
Most of our clients are still wanting the services of one, or at the most two, of our groups.
Graphics and events work largely alone. Tech Solutions and 3D design do work together more
than any two other groups, but only about 30 per cent of their work is collaborative. Breaking
up the departments would be both profoundly unpopular with most of our staff and risk
destroying our experience base. I cannot see why we cannot continue to use the Project
Manager idea for the larger cross-functional projects. If Cityscope was a failure it was a failure
of project management. It’s the cross-functional project management skills that we need to
develop. I know Gordon is experienced but no one could have foreseen the can of worms which
this project was to become. Perhaps the real lesson from this is not that we need a new
organisation, rather it is that we should be more careful about the kind of assignment we take
on, and we need more project management experience. That’s what we need to buy-in. There is
plenty of work about which can be done under our existing structure. Why try and fix something
that ain’t broke?' (Jeff Siddon – Creative Partner)
….ditch the ‘us and them’ approach …
‘We are all agreed that the last few months have been traumatic for everyone. It was
embarrassing and it has damaged our reputation, though I don’t think permanently. Yet it has
been positive in some ways. At least it brought us all together for a while when we were fighting
a rearguard action to limit the damage and salvage some professional price. All the
departments worked together better during that period than at any time I can remember. Also, it
proved to us that, whatever the lessons we choose to learn from this incident, we must address
the issue of how we work across organisational boundaries. We were forced to do it in order to
recover when things really looked bad, and when we were working cross-functionally we
achieved real creativity, if only in preventing things getting worse.
But let us take this idea further. Most of us agree that the roots of the whole problem lay in the
lack of agreement between the various external stakeholders in the project. We can view this
two ways. We can say, "OK, no more projects unless we can be sure that the clients’ objectives
are clear". To me that’s just running away from the problem. The alternative is to admit that
most of our projects, and all of the really interesting ones, have some degree of ambiguity built
into them. The real issue is how do we manage the ambiguities and conflicts which are a part of
any large, complex (and lucrative) project? What I am saying is that it is not just the internal
boundaries we want to breach, it’s the external ones also. In fact both sets of boundaries are
related. We can’t get stakeholders involved in an open and creative way unless we can show
them the potential which derives from the combination of our various internal skills. Yet we
can’t really manage that creative combination of our skills unless we involve the external
stakeholders more directly.
The solution I am proposing is that we make our own "ideas factory" a living example of what
we are capable of. It should be a place where everything from the design of the office space
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through to the way we greet visitors reflects the creative values of the business. Any clients or
groups of clients visiting us (and they all should be made to) should feel they are entering an
ideas "theme park", a place which excites their vision of what is possible, a place where they
can interact with us, where we can understand their various requirements and where clients can
use the environment to understand any of their own internal conflicts. I propose that our
existing marketing department transforms itself into a "Client Experience" team, responsible for
the design and management of the total client experience. This would include deploying our
existing, or any new, centres of expertise within the building and organising their work to
provide the appropriate client experience while ensuring that our creativity is fully exploited’.
(Pauline O’Sullivan, Marketing Partner)
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TEACHING NOTE – THE THOUGHT SPACE
PARTNERSHIP
This case treats a professional service company in the ‘creative industries’ sector. There is
relatively little written about professional services, nor are they the subject of many case studies.
This is surprising because they are increasingly becoming an important sector in developed
economies. In some countries the professional services sector is at least as large as the
manufacturing sector. Furthermore, professional services are interesting from an operations
strategy viewpoint because they are ‘knowledge rich’. That is, they add value for their clients by
developing and deploying knowledge, often by blending different types of ‘technical’ expertise.
This is certainly true of those professional services operating in the creative industries. In The
Thought Space Partnership case exercise we get two views of the same project. Both agree that
the project was unsuccessful but disagree on how to prevent similar problems reoccurring.
Analysis
Although the case does not provide an explicit description of the company’s current
organisational structure, it would appear to be based on a conventional functional organisation
with cross-functional project managers. In this sense it is a combination of what Chapter 10 of
Slack and Lewis called a U-form organisation and a matrix organisation. Figure 1 shows the
company structure.
Top
Management
Events
Graphics
..Etc.
Project A
Project B
Project C
Figure 1
Some of the ‘functions’ seem to be based on activities that may be close to certain market
segments, for example, ‘Events’ presumably means the job of organising and designing
corporate events such as trade shows, etc. Others seem to be based around technical skills such
as ‘Graphics’. Presumably, there are also more conventional functions such as Marketing and
Accounting, even if these are not particularly large. Two departments are described as working
largely alone; these are ‘Events’ and ‘Graphics’. Two other departments are described as
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working together for around 30% of their activities; these are ‘3D designs’ and ‘technical
solutions’.
What is interesting here is the degree to which the conventional functions of the firm, in effect,
overlap. Some organisations (especially service organisations) have organisational overlap
between the activities of product and service development, marketing and operations. With
professional services this overlap is even greater. Figure 2 illustrates this.
Product/service
development
Marketing
Marketing
(CREATIVITY)
Product/service
development
Product/service
development
Operations
Marketing
Operations
(COMMERCIALISM) (COMPETENCE)
Operations
Some
manufacturing
Mass
services
Professional
services
Figure 2
Increasing overlap between operations and the other core functions
This explains the comment in the case exercise by Caroline Hesketh that, 'We had the three C’s
– creativity, commercialism and competence'. These roughly map on to product/service
development (which is the heart of the creative process), marketing (understanding the
commercial imperatives of clients) and operations (exhibiting competence in the delivery of
services). The implication of such high degree of overlap between the core functions is that any
organisational structure will be, to some extent, imperfect. The same structure needs to ensure
creativity, present an appropriate external face to the client and deliver a high quality of service.
Evaluation
From the quotes in the case exercise, it appears that the Cityscope project failed in all three of
the company’s core functions.
•
In terms of marketing, the organisation exhibited an 'inability to recognise the project for
what it was'. In other words, marketing’s role of deciding whether to accept the project or
not was flawed. There is a suggestion that the seeds of the project’s failure should have been
evident to the company from the beginning. Marketing's fundamental task of positioning the
company where it could profitably differentiate itself through the application of its expertise
was not realised.
•
Product/service development has the responsibility to devise products and services that fit
the client’s needs, are creative and can be delivered. In this case the client’s needs do not
seem to have been fulfilled, there is some doubt about the creativity exhibited and whether
the project was delivered on time or not, it seems to have caused considerable internal
friction.
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•
Operations has the task of delivering the service to specified levels of quality, speed,
dependability, flexibility and cost. Presumably it did not achieve this, otherwise the client
would have been happier.
The two viewpoints expressed in the case articulate two views of how the organisational
structure could be improved. Caroline Hesketh puts forward the case for what she calls a
radically new sort of organisational structure. This seems to consist of retaining the current
departments but in a weaker form and forming dedicated but temporary teams to deal with the
large cross-functional projects. Staff from each of the functions would be assigned to a team for
the duration of the project and then either be assigned to another team and another project on its
completion, or return temporarily to their functional ‘holding area’. It is not clear how clients
who required only one department’s expertise would be served. Presumably, by having direct
contact with the department as at present. The other view, as expressed by Jeff Siddon,
envisages the retention of the current functional organisation but with more effective project
management. He sees the failures of the organisation as coming from a weakness in an
organisational mechanism that is already in place. It is not the organisational structure which is
at fault, he says, but the fact that one part of it is not being made to work properly. Figure 3
illustrates some of the criticisms that were made of the company’s handling of the Cityscope
project. These are as follows.
•
It made us look bad.
•
The objectives were never clarified.
•
It couldn’t cope with the external politics.
•
It couldn’t cope with being part of a total project that was managed by committee.
•
It did not provide leadership for the total project.
•
It did not cope with differing internal perceptions of the project.
•
Departments did not work together.
•
There was no ‘creative collaboration’.
•
There was no ‘fast foot work’ response to emerging issues.
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Functional organisation
with better project
management
Dedicated temporary
teams
Made us look bad
9
Objectives never clarified
9
Couldn’t cope with external politics
?
?
Project management of whole by
committee
?
?
Did not provide leadership
?
?
Different internal perceptions
9
Departments did not work together
9
9
No ‘creative collaboration’
No ‘fast foot work’ response to
emerging issues
9
Figure 3
Criticisms of Cityscope Project
Figure 3 compares the improved functional organisation with the ‘dedicated team’ organisation.
Of all the criticisms made of the Cityscope project most would seem to be at least partially
improved by using the dedicated temporary team organisation. Such a dedicated team would be
better at coping with potentially damaging public relations issues and would stand a better
chance of clarifying objectives. The members of the team, after all, are working only on the
single project and would see themselves as being held responsible for its success. It would also
be better at avoiding different internal perceptions and working together. Other things being
equal, it could also respond more flexibly as issues emerged. Whether it would be better at
coping with the external politics of the project, managing the external project committee or
providing leadership is less clear. Maybe the one area where the functional organisation is
superior is the ability to come up with creative ideas. At least as far as the individual technical
specialisms are concerned, the in depth knowledge and critique of closely-knit functional
specialists may provide superior solutions. However, it may be that the creativity between
technical specialisms is more important for this kind of project.
It is difficult therefore to justify the current organisation, even with strengthened project
management. The nature of large inter-disciplinary projects is such that dedicated temporary
teams will generally be superior. Maybe the real question is whether the company sees
themselves as moving more into this kind of business. Currently, it accounts for around a third
of the total company revenues. If that figure is likely to increase and/or if that kind of business
is particularly profitable, then the dedicated team organisation would look even more attractive.
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The Future?
One organisational form that the company may wish to consider moving towards is the N-form
organisation as described in Chapter 10 of Slack and Lewis. Figure 4 illustrates this structure. A
word of warning, however. It is unlikely that moving immediately to such a radical structure
would be wise for this organisation. It has, after all, only just come to the realisation that its
traditional functional structure may be inappropriate. Nevertheless, the N-form organisation is
often promoted as being ideal for organisations that need to both nurture their technical
competences and cope with a wide variety of market and client needs.
Top
Management
Client D
Client B
Graphics
Client E
Events
Client C
Technical
Solutions
3D design
Marketing
Accounts
Figure 4
N-form organisations form loose networks internally between
groups of resources and externally with other organisations
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CUSTOMER SERVICE AT KASTON PYRAL
'One of the trends in our business has been the increasing internationalisation of call centres.
Companies have realised that they do not necessarily have to be physically represented in the
country whose market they are serving. Decreasing telecommunications costs have made us all
aware that we can get unheard of economies of scale by focusing on large and sophisticated
call centres that can serve a whole continent, or even the whole world'. (Lisa Jackson, Customer
Service Vice President, Kaston Pyral, US).
Kaston Pyral Group (KPG) is an international manufacturer and installer of heating, air
conditioning, environmental control and condition monitoring systems. While the company’s
products still included electro mechanical devices and (mainly) gas burning heating devices,
heat exchangers, etc., increasingly they provided the sophisticated software that controlled and
monitored both their own and their competitors' systems. These control systems could be
updated independent of the hardware. They could also be integrated with other building and
environmental management systems to provide ‘total monitoring and maintenance’ control. This
could include remote diagnostics capabilities that allowed KPG’s engineers to spot potential
problems even before the customer had noticed. The customer service division of KPG provided
customers with a range of services including spare parts supply, maintenance and technical
support. Technical support was becoming particularly important because the integration of new
KPG systems with ‘legacy’ control systems could cause unforeseen problems. In most markets
around the world the division had their own service centres, but also used contract service
engineers. Until recently the division also operated call centres in each country in which it
operated. The call centres would take orders for spare parts and arrange delivery, investigate
billing queries, arrange for regular or emergency repair and maintenance visits and provide
technical support for installed hardware and control software.
Merging the call centres
The customer service division had recently decided to merge its individual country-based call
centres into three regional call centres that would cover its three regional markets worldwide.
Last year, the call centre in Antwerp, Belgium, had expanded its capacity by five times and had
taken over responsibility for all European customer service. A single centre in Kuala Lumpur,
Malaysia, was planned to serve the Asian market. Lisa Jackson’s responsibility was to oversee
the merger of the North American call centres (previously in New Jersey, Montreal and Mexico
City) into a new centre located in Atlanta, Georgia. The changeover to the new centre was
planned to be phased over 20 weeks. Lisa was 10 weeks into the changeover. Things were going
well, as Lisa explained.
'Our current concerns are centered around managing the changeover smoothly. Atlanta is a
Greenfield site and most of our staff are relatively inexperienced, but we have put a lot of effort
into training and we have managed so far without any real disaster, although it’s been a steep
learning curve for all of us. We have been working totally in the dark. None of us had any
experience of what it means to bring together the responsibilities of three different centres with
different traditions, cultures and, to some extent, systems. I am just happy that we have
managed well so far. We are currently operating at 75 per cent of our planned final volume and
can already see how concentrating all activities on one site will allow us to achieve economies
of scale compared to having separate country-based centres. We have invested in the latest
telecommunications technology and call handling systems that allow us to route calls to
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associates (call centres operators) with the appropriate technical and language skills. The
larger scale also allows us to cope with the "natural" uncertainty in the volume and type of calls
that come in. Around 40 per cent of our staff are bi-lingual and 5 per cent tri-lingual, which
gives us the flexibility to cope with fluctuating demand between English, Spanish and French
speaking customers. In fact, because all our customers are businesses, most of them can speak
English, however we always try to use the appropriate language. It is a matter of courtesy and it
also helps to build relationships with our customers'.
The customer survey
Prior to the changeover period, the New Jersey centre had carried out an extensive survey of its
US customers. The summary results are shown in Figure 1. Lisa was pleased to have this data.
'The New Jersey centre’s survey provides us with a good benchmark. In the short term we have
to make sure that we at least match this level of performance and in the long term we must
improve on it. Certainly the overall level of satisfaction score is not good enough. Our
challenge is to achieve excellence in all aspects of service. But customer service is not the only
thing we have to monitor. It is vital that we get some financial payback for the investment in the
new centre. I have been tasked with making this centre the ultimate in leading edge process
management to ensure "world class" levels of efficiency. That is why we also intend to monitor
productivity-based measures closely. In fact, since the new centre started we have been
recording our progress closely on four key measures (Table 1 shows these measures for the first
10 weeks of the centre’s operation). These are the measures that we have decided will be the key
performance indicators for the centre. "Calls per associate hour" is the best measure we have of
our associates’ productivity and the "average call time" is a related measure that indicates how
efficient the associates are at dealing with customer queries. As we get better at routing calls to
the right associate quickly and efficiently and as our associates get to know the business better,
the average call time should shrink to below eight minutes. "Average wait time" and the
"percentage of abandoned calls" gives us an indication of how well we are matching our
capacity to demand throughout the day. We have already started to experiment with using
control charting procedures to monitor some of these performance measures, specifically,
average call time, average wait time and the percentage of abandoned calls. It is by using this
type of technique that we aim to develop one of the most efficient call centres of its type'.
The future
The progress of the call centre reorganisation in the customer service division was being
watched closely by Kaston Pyral’s group management. The European reorganisation had gone
reasonably well and the US centre seemed to be on track. Eddie Karowski, KPG’s CEO, was
keeping a close watch on the new call centre strategy because he believed that customer service
would become the way the company could differentiate itself.
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Figure 1
Results of the customer survey carried out by the US call centre prior to the merger of
the North American centres
'Our business is getting more competitive every year. We already have a range of products
which are (we believe) the best in the world. Surveys show that the functionality and reliability
of our equipment is outstanding compared to our competitors. But they are catching up fast. To
stay ahead we need to do three things really well. First, we must be more innovative in the new
products and services we introduce, especially now that new technology such as the control and
diagnostics power of new software can be integrated into our systems. In effect we could offer
"remote management" of customers’ systems, monitoring their equipment, automatically
dispatching our engineers, providing customers with management reports, advising on their
energy strategy and so on. The potential for exciting new offerings is vast. However, as yet, no
one really knows what customers want in this area, I suspect they all want slightly different
things from the hardware, control software and the services we offer, but whatever emerges we
must be in a position to supply it. This will mean that we really need to understand customers’
actual requirements at a deep level. Then we must act fast to get those services to them. Second,
whatever we finish up doing, we have to give impeccable service. Excellent customer service
builds relationships and is the best way of establishing customer loyalty. Again, this means
really understanding their needs. Third, we have to make sure that we are always in a position
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to keep the customers updated with the new product and service offerings that could benefit
them in order to make the best of sales opportunities. This is an ongoing education process. The
better customers know what we can do, the more useful they will be in articulating their own
needs and so stimulating our service development processes. Our call centre operations have
the potential to help us in all of these areas. The question that we have to answer is how best to
make sure that the three new consolidated call centres become the power house for keeping us
ahead of the competition.'
Week of
Volume of
Changeover calls taken
Number of
associates
(full-time
equivalents)
Calls per Average call Average wait Abandoned
associate time (mins) time (mins)
calls (%)
hour
1
2,650
104
0.64
28.6
5.3
0.08
2
7,800
185
1.06
25.4
8.9
0.06
3
10,600
260
1.04
19.8
8.8
0.04
4
19,900
280
1.75
14.2
5.5
0.05
5
42,200
285
3.70
11.6
5.4
0.03
6
56,000
311
4.61
11.4
3.9
0.03
7
60,000
312
5.01
8.8
4.4
0.03
8
59,400
325
4.98
8.6
2.1
0.03
9
64,800
325
5.30
9.0
4.7
0.02
10
64,400
325
5.29
8.2
4.9
0.03
Table 1
Atlanta call centre performance measures during the first 10 weeks of changeover period
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TEACHING NOTE – CUSTOMER SERVICE AT
KASTON PYRAL
This case exercise illustrates two specific and one general set of issues that are having an impact
on many types of operations. The two specific issues are those of increasing internationalisation
and (often along with that) increasing consolidation into larger units of capacity. The general
issue is that of operations improvement. How should we improve? And how do we know if the
improvement is appropriate and fast enough? The case contains both general statements of the
company’s strategy along with a description of its decision to concentrate its call centre
operations into three sites covering its global operations. Also, within the case is some
quantified data both relating to the performance of the new North American centre and customer
satisfaction with various aspects of service.
Key questions
A number of questions suggest themselves.
•
Does the company’s strategy of centralising on three call centres seem sensible?
•
How should the company judge its own improvement when implementing this strategy?
•
Does the company seem to be on track in the progress of its operations performance?
Analysis
In Chapter 6 of Slack and Lewis, an improvement cycle is suggested that includes the three
stages – direct, develop and deploy. In other words, assess how the requirements of the market
are directing the nature and direction of improvement, examine how the operation is developing
appropriate capabilities in line with market requirements and assess how well the business is
deploying its operations capabilities to enhance its potential market position. We can use these
three headings to examine Kaston Pyral.
Direct
There are a number of aspects of this company’s market that are identified in the case, both
from comments made by the company’s managers and from the customer survey carried out by
the New Jersey call centre prior to its merger.
•
Decreasing telecommunications costs have enabled economies of scale to be realised by
focusing on a small number of large call centres.
•
Technical support, such as that provided by the call centres, is becoming particularly
important for KPG because of the complications arising from multiple ‘legacy’ control
systems.
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•
Although not essential, the North American market appreciates the company’s ability to
converse in the appropriate language (Spanish, English or French).
•
It is important to match and preferably improve on the level of performance achieved by the
old New Jersey call centre.
•
Call centre productivity is seen as important in order to justify the investment in the call
centres.
•
It is important to be more innovative both with new products and new services. This will
place particular strain on technical support.
•
Exact customer needs are changing and not well understood.
•
Whatever customer requirements emerge, the company must be in a position to supply
them.
•
Customer service is increasingly seen as important in building relationships and achieving
customer loyalty.
•
Call centre operations are increasingly seen as being able to monitor the market and create
sales opportunities.
One could argue that the company is attempting to achieve everything at the same time. On one
hand, the customer service vice president is keen to achieve both a smooth changeover to the
new call centre system and high levels of productivity in order to justify the investment in the
systems. On the other hand, the CEO stresses the need for innovation, service and using the call
centres as a communication channel with customers. Of course, all companies are trying to
achieve both reasonable levels of productivity and high levels of innovation, flexibility and
customer service. Yet, here there is the sense that the relationship between productivity and
service has not been fully explored. Certainly, promoting productivity-based improvement too
far or too fast could seriously undermine the call centre’s ability to be useful as a driver of
innovation and customer communication.
The New Jersey survey is also interesting. The information it contains lends itself to being
illustrated on an importance-performance matrix. Figure 1 shows the average scores for
importance and performance for each of the seven aspects of customer service included in the
survey.
When survey data is averaged in this manner there will inevitably be some clustering of the
results as is shown in Figure 1. However, there is sufficient discrimination between the points
representing each aspect of service for some general conclusions to be drawn.
•
The overall level of satisfaction (averaging slightly over 4, where 1 is good and 9 is bad)
seems to be higher than the individual average of the call centre’s performance in the nine
aspects of service. This could be explained in a number of ways. For example, it could be
that when asked to be more specific in their comments, customers tended to be more critical
because they were more likely to recall specific negative service episodes. An alternative
explanation is that those aspects of performance that rated higher than average (for example,
‘staff attitude’ and ‘knowledge of staff’) are valued significantly more than the other aspects
of service.
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GOOD
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1
2
PERFORMANCE
3
Staff
attitude
4
Getting to
right
person
5
6
Knowledge
of staff
Time to
resolution
Staff understanding
Completeness
Kept informed
7
BAD
8
9
9
LOW
8
7
6
5
4
IMPORTANCE
3
2
1
HIGH
Figure 1
Importance-performance matrix for the New Jersey survey
•
If we follow the zones of the importance-performance matrix as described in Chapter 6 of
Slack and Lewis ‘staff attitude’ is in the ‘appropriate’ area, ‘knowledge of staff’ is on the
border line between the ‘appropriate’ and the ‘improve’ zone. ‘Keeping the customer
informed’ is just in the ‘urgent action’ zone, everything else is clearly in the ‘improve’ zone.
Overall these are not the results from a delighted set of customers.
•
Generally, one would expect to see the aspects of service that customers rated highly in
terms of importance being judged highly in terms of performance. In fact, if anything, this
diagram shows that the more important the aspect of performance, the worse the company is
seen as performing.
•
The two aspects of service judged to be performing the best are those associated with the
skills and attributes of individual call centre staff. Many of those whose performance is less
satisfactory are associated with the ability of the customer service division to integrate its
own activities. This may provide a clue as to how improvement should be directed.
Develop
There is little mention in the case of how the call centres can be used to deliver high quality and
innovative service while at the same time build a relationship with customers, which can be
used both to stimulate ideas for new services and sell existing products and services. The ability
to do these things will require the development of sophisticated capabilities both within the
company’s human resources and in its technical ability to create integrated information systems.
Yet, this is not referred to by the customer service vice president. What is seen as important is
the rate of productivity improvement. This is contained in Chapter 6 of Slack and Lewis.
According to this data, the company’s productivity is improving in a reasonably predictable
manner. Figure 2 shows the Learning Curve for ‘associate hours per call’ as plotted by the
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company. (‘Associate hours per call’ is the reciprocal of ‘calls per associate hour’. It is not
known why the company chose to change their metric in this way). It shows that the company is
likely to achieve its ambition of an average call time under 8 minutes. If current volume at
approximately 64,500 calls per week is 75% of the final planned volume, then approximately
86,000 calls per week will eventually be reached. This means that within a year the call centre
should have ‘experience’ of around 4,500,000 calls.
Associate hours per call
10.0
1.0
0.1
0.01
1000
100000
100000
1000000
Cumulative volume of calls processed
10000000
Figure 2
Log-log experience curve for KPG Atlanta call centre
The most important issue here is not that the data predicts ever-improving productivity; rather, it
is that the company needs to ensure that productivity does not get in the way of all the other
strategic objectives that the call centre will need to achieve.
This type of operation is ideal for the application of statistical process control (SPC) techniques.
Measures such as average call time, average wait time and percentage of abandoned calls are
likely candidates to be monitored on an SPC basis. Remember what was stressed in Chapter 6 of
Slack and Lewis though? The purpose of using control techniques is not only to detect when
some process is moving out of control but also to enhance process knowledge. Therefore, SPC
techniques will need to be integrated within an on-going experimentation programme designed
to further understand the subtleties of the processes within the call centre.
Deploy
Deployment means that whatever capabilities have been developed within the operation are
leveraged into the marketplace to enhance the competitive performance of the business. So, in
order to assess how the company might think about its ability to deploy its capabilities, it is
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useful to compare the capabilities it seems to developing with the broad position it seems to be
aspiring to in its markets.
Capabilities being developed – The company’s operations management seems to be
understandably obsessed with the practical problems of merging the three North American sites
into one integrated operation. In particular, it seems anxious to improve its productivity.
Future market position – By contrast, the CEO, in his final statement, identifies the critical
role of the call centre in establishing information links with existing customers and potential
customers. The important capability he seems to be identifying as a vision for the future is the
ability to gain a greater understanding of customers’ real needs as well as the ability to ‘educate’
customers to the potential of the company’s products and services.
The obvious point to make here is the clear gap between what the operation is currently
developing as its capabilities and what the CEO sees as its role in the future.
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PROJECT ORLANDO AT DREDDO DAN’S
‘Most people see the snack market as dynamic and innovative, but actually it is surprisingly
conservative. Most of what passes for product innovation is in fact tinkering with our marketing
approach, things like special offers, promotion tie-ins and so on. We occasionally put new packs
round our existing products and even more occasionally we introduce new flavors in existing
product ranges. Rarely though does anyone in this industry introduce something radically
different. That is why this project is both exciting and scary’.
Monica Allen, the technical vice-president of PJT’s snack division, was commenting on a
potential new product to be marketed under PJT’s best-known brand ‘Dreddo Dan’s Snacks’.
The new product development project referred to was internally known as Project Orlando (no
one could remember why). The project had been running officially for almost 3 years but had
hitherto been seen as something of a long shot. Recent technical breakthroughs by the project
team now made the project look far more promising 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 2
years.
‘Orlando’ was a range of snack foods which had been described within the company as ‘savory
potato cookies’. Essentially they were one a half-inch discs of crisp, fried potato with a soft
dairy cheese-like filling. The idea of incorporating dairy fillings in snack had been discussed
within the industry for some time but the problems of manufacturing such a product were
formidable. Keeping the product crisp on the outside yet soft in the middle, while at the same
time ensuring microbiological safety, would not be easy. Moreover such a product would have
to be capable of being stored at ambient temperatures, maintain its physical robustness and have
a shelf life of at least 3 months. Enough of the technical problems associated with these
requirements had been solved by the Project Orlando team for the company to have real
confidence that a marketable product would eventually emerge. It would however be the most
important new product development in the company’s history.
‘The main problem with this type of product is that it will be expensive to develop and yet, once
our competitors realise what we are doing, they will come in fast to try and out-innovate us.
Whatever else we do we must ensure that there is sufficient flexibility in the project to allow us
to respond quickly when competitors follow us into the 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 product is 200 per cent safe. We have no experience in dealing with the
microbiological testing which dairy-based food manufacture requires. Other divisions 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 development 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
product development.
•
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
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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. In addition to 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.
•
How much development to outsource – Because of the size of the project, Monica had
considered outsourcing some of the development activities. Other divisions within the
company may 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 organise the development – Currently the small development function had been
organised 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 project to the whole division.
The budget to develop Project Orlando through to launch had been set at $30m. This made
provision to increase the size of the existing development team by 70% 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 potential competitor reaction after
the launch. So, of the $30m around $12m was for extra staff and contracted-out product
development, $5m for the pilot plant and $3m for one-off costs (such as the purchase of test
equipment, etc.). Monica was unsure whether the budget would be big enough.
‘I know everyone in my position wants more money, but it is important not to under fund a
project like this. Increasing our development staff by 70% is not really enough. In my opinion
we need an increase of at least 90% to make sure that we can launch when we want. This would
need another $5m spread over the next 20 months. We could get this by not building the pilot
plant I suppose, but I am reluctant to give that up. It would mean begging for test capacity on
other companies’ plants, which is never satisfactory from a knowledge-building viewpoint. Also
it would compromise security. Knowledge of what we were doing could easily leak to
competitors. Alternatively we could subcontract more of the research which may be less
expensive, especially in the long run, but I doubt if it would save the full $5m we need. More
importantly, I am not sure that we should subcontract anything which would compromise safety,
and increasing the amount of work we send out may do that. No, it’s got to be the extra cash or
the project could overrun. The profit projections for the Orlando products looks great (see
Exhibit 1) but delay or our inability to respond to competitor pressures would depress those
figures significantly. Our competitors could get into the market only a little after us. Word has it
that Marketing’s calculations indicate a delay of only 6 months could not only delay the profit
stream by the 6 months but also cut it by up to 30%’.
Time period*
1
2
3
4
5
6
7
Profit flow ($ million)
10
20
50
90
120
130
135
*6-month periods
Exhibit 1
Preliminary ‘profit stream’ projections for the Project Orlando range of products,
assuming launch in 24 months time
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Monica was keen to explain two issues to the management committee when it met to consider
her request for extra funding. First, that there was a coherent and well thought-out strategy for
the development of Project Orlando over the next 2 years. Second, that saving $5m on the
development budget would be a false economy.
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TEACHING NOTE – PROJECT ORLANDO AT
DREDDO DAN’S
This case exercise covers many issues found in new product and service development projects.
In particular the case examines a new type of product which is to be launched in an uncertain
and unpredictable market and also carries some development risks. Above all the project is a
significant development for the company with both the potential for major competitive benefits
and some downside risk.
Key questions
In effect the questions have been defined by Monica Allen in her analysis of the project. She
sees the key decisions as follows.
•
How to resource the project. In other words, how many people to devote to developing the
new product.
•
Whether to invest in a pilot plant or, alternatively, experiment with another company’s
process technology.
•
How much of the total development effort to outsource.
•
How to organise the resources which will be devoted to developing the new project.
Analysis
The first point to emphasise is that this is a very significant project for the company. In terms of
the dimensions discussed in Chapter 7 of Slack and Lewis, the new product could be classed as
a ‘development of an existing product/service’, but represents a greater degree of process
change, probably somewhere between a ‘development to existing processes’ and a ‘pioneer
process’. As Chapter 7 in Slack and Lewis implies, such a project is difficult to manage because
there are so many things going on at the same time. Not only is the product technology (recipe
and composition) novel to the company it is being launched into a market for whom the product
will be totally new. Furthermore, the process, although similar to processes used elsewhere, is
totally novel for the company. This means that learning and knowledge acquisition within the
development project will be particularly difficult. Yet learning is likely to be an important issue
for the company. Competitors (they assume) will respond quickly when Dreddo Dan’s product
hits the market. They must be in a position to counterattack. This will require a considerable
degree of confidence with the product and process technologies. The knowledge acquired
during the development process is the foundation for this confidence.
Market-based performance objectives
As far as the market into which this new product will be launched is concerned a number of
performance objectives are mentioned in the case. Perhaps the most important are as follows.
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•
Safety – project Orlando involves dairy products, a material with which the company is not
familiar and which poses considerable microbiological risk. Not only do the company have
a moral obligation to ensure product safety, any health-related issues close to product
launch would be a marketing disaster.
•
Quality – the quality of the products must be absolutely on-specification from day 1 of their
launch. This is a novel product and customers are likely to form their judgement of it on
their first tasting. If the first packet they buy is not up to standard, they probably won’t buy
a second one.
•
Flexibility – there are several areas of uncertainty within this development project. There is
uncertainty around the timing of the launch. There is uncertainty as to exactly what the final
form of the launch range of products will take. Above all, there is uncertainty as to how
competitors will respond in the short and medium term. All these uncertainties will mean
that both volumes of production and the variety of products produced will not become clear
until later on in the development process. The development process must be sufficiently
flexible to cope with this.
•
Cost – this is never unimportant. What is uncertain is how much of an issue it is for the
company. Whereas they would not wish to see cost escalate out of control, the case implies
that issues of safety, quality and flexibility are more important than development cost.
Development operations resources
The four questions posed by Monica Allen in fact match the four decision areas which have
been stressed throughout Slack and Lewis and which were also proposed as an approach to
examining development resources.
•
Capacity – generally this means the size, composition and location of any development
team. In this particular case there is no stated location issue so capacity, in effect, means the
number and capabilities of the development team devoted to the project.
•
Supply network – the issue here is one of how much of the development effort to keep inhouse and how much (if any) to outsource. Other parts of the group have some experience
in some aspects of this new technology and also have used outside consultancies. Should
Monica use any of these outside resources or try and keep everything in-house?
•
Process technology – although by ‘process technology’ in this context we are usually
referring to any technology (such as computer-aided design, CAD), which is used in the
development process itself, we can include the decisions over the pilot plant in this
category. This is because the pilot plant will be used to build knowledge around the nature
of the product itself.
•
Development and organisation – the main issue here is how to organise the development
process. Will the existing functional organisation be sufficient? Or should a dedicated team
be formed?
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Using an operations strategy matrix
One method of exploring these questions is to use the operations strategy matrix as suggested in
Chapter 12 of Slack and Lewis. Figure 1 illustrates briefly what such a matrix might look like.
Performance Objectives
Safety
No significant
relationship.
Is the company willing
to subcontract any
responsibility for
safety?
Pilot plant may enable
potential hazard to be
detected.
Dedicated team may
help reinforce safety
objective.
No significant
relationship.
Strict quality standards
need to be
communicated to any
subcontractor.
Pilot plant may enable
better quality learning.
Dedicated team may
help to reinforce
quality objective.
Need to have sufficient
development capacity to
respond quickly to
accelerated development
needs.
Very significant, the
larger the development
team the higher the cost
of development.
Does subcontractor
development imply
reduced flexibility?
Pilot plant would be
dedicated so increase
flexibility, but may have
scale-up problems.
Dedicated team likely to
be more flexible if all
necessary skills are
represented in it.
Subcontracting
development to
specialists may reduce
total development cost.
Pilot plant is likely to be Dedicated team likely to
be more expensive,
more expensive that
using partners’ capacity. functional organisation
usually gives higher
utilisation of staff.
** *
Quality
** *
Flexibility
** *
Cost
*
Capacity
Supply Network
Size of
team?
Subcontract any
development?
Process
Technology
Development and
organisation
Build pilot plant?
Dedicated team?
Market Competitiveness
Resource Usage
Decision areas
Figure 1
Operations strategy matrix for Project Orlando
Note that the analysis highlights the trade-off between safety, quality and flexibility objectives
on one hand and the cost objective on the other. Broadly, a development strategy which includes
putting together a relatively large and dedicated development team who subcontract relatively
little of the work, except where it offers distinct technical advantages, and who build their own
pilot plant so as to promote their own product and process learning, is likely to promote safety,
quality and flexibility. However, all these decisions are expensive. Therefore, the decision
comes down to how much the company are prepared to invest in the development in order to
achieve its other development objectives. The case seems to indicate that safety, quality and
flexibility are much more important than development cost. Therefore, the company may wish
to consider the following advice.
•
Make sure that the development team is large enough to encompass the relevant skills and
has sufficient capacity to respond to changing or emerging development needs.
•
Some of the development can be subcontracted, but only when there are distinct technical
advantages in doing so. It is important that the development team build up their knowledge
in terms of both the product and the process. This is more difficult when much of the
development is subcontracted. Where any development is subcontracted, consider
identifying a dedicated member of the development team to work with the external experts.
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•
A pilot plant could have significant advantages providing there is reasonable confidence
that scale-up problems will not be too great. A dedicated pilot plant would, again, enhance
learning opportunities and would enable changes in development direction to be
accommodated quickly. It may even be worthwhile considering both building a pilot plant
and using spare capacity on other companies’ full-scale processes. This may reduce the
scale-up risks associated with using the pilot plant.
•
For a project of such importance a dedicate team is likely to be superior to using the
existing, largely functional (by specialism) structure. However, it is important to ensure that
the team maintain contacts with their specialist colleagues in order to be able to deploy the
whole company’s knowledge as and when required.
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THE FOCUSED BANK
It is only 3 years since e1TM bank was first formed as a joint venture between 6th State Bank of
Victoria and AuroraTM, a leading provider of outsourcing services to the financial sector based
in New York. The strategic intent was to become an early-entrant into the exclusively on-line
retail banking firm operating throughout North America. Although not expected to register any
real profit for 5 years, the banks tightly defined operational and market proposition, ensured that
all customers contributed to an ongoing operating profit. In its first year the new bank only
signed up 25,000 customers. However, as household Internet usage continued to grow rapidly,
aggressive price-related marketing (lower loan and higher savings interest rates) and a
developing reputation for dependability (a form of early-mover advantage) meant that after 30
months the bank had passed the 0.5 million customer mark.
During the 1990s a range of new entrants (savings and loans, supermarkets, insurance providers,
etc.) had made the retail banking sector increasingly competitive. Despite these pressures, the
industry continued to generate significant profits and remain highly attractive to shareholders.
For instance, in the first six months of 1997 (the year that e1TM was launched) the overall sector
index rose by almost 50%. At the time, most of the established 'high street' banks were talking a
great deal about the potential impact of the Internet on their core service delivery (see the table
detailing average cost per transaction) but most were still a long way from launching a fully online option.
TRANSACTION TYPE
Branch
Telephone
ATM
PC Banking Internet
COST ($)
0.91
0.49
0.25
0.01
0.009
Despite this initial success, the last 6 months have seen their rate of customer growth begin to
flatten off. As increasing numbers of customers can access internet-based services, more and
more competitors have entered the market including, perhaps most significantly, the long
established high street banks. Having established a strong presence in the retail market by
exploiting core operational strengths, the firm began to consider how they could build new
markets and as a result e1’s CEO, Kevin Tilly, hired James Phillips from an international
consulting firm to head up a new product development process. After an in-depth market
analysis, the decision was taken to explore the potential of the corporate services market. As
James explains, there were very good reasons for choosing this particular segment.
'Like our attack on retail banking, this is a market with largely the same well-established
players who quite frankly charge a lot of money and provide very ordinary service. The tragic
thing is that our analyses suggested that the big players didn’t make anywhere near the money
they could out of these customers simply because they were so inefficient. This meant that our
core strengths could be leveraged effectively. Several of the key corporate clients banked with
us as individuals and in focus groups expressed surprise that we didn’t offer our services to
different customer groups.'
Starting with a small pilot service (3 clients) the firm began, in early 1999, to offer corporate
services. They hired a team of 8 corporate banking specialists from one of the established
players and invested substantial time and energy in defining and meeting the needs of these new
‘premium’ clients. After 6 months they had added 15 new clients, 7 new staff and were
establishing a new reputation in the marketplace. James Phillips recognised, however, that they
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needed to add several new services, hire more staff and open a dedicated New York office if
they were to truly realise their potential. A special meeting was convened to discuss the project
and seek approval for further expansion investment. It did not proceed quite as James had
expected, as the following excerpts illustrate.
'As you know, these clients are paying a lot of money for the services we offer. They came to us
because of our high-tech reputation but they will only stay if we build strong relationships. This
means more staff and better facilities. Similarly, some of them are hinting that we don’t offer the
full range of products. This is not a problem yet and as I have explained to them, with our
expertise I see no reason why they shouldn’t get exactly what they want. They were very
impressed by this kind of commitment.' James Phillips, New Product Director
'You all know we needed to grow rapidly in order to be viable in the medium-term! When we
first started our unique proposition was enough to win us new customers but the big players are
no longer as hopeless as they once were! I see this experiment as an unambiguous success and
fully support James request for further investment' Maria Andorri, Marketing Director
'I think that no-one disputes the growth argument, the question is how do we achieve it? We
founded the business on a simple proposition and I think that we’re in danger of destroying that
with this new venture. What James seems to be saying is that they like what we do but can we
change it all!' Berny Kovak, Operations Director
'….you’ve all seen the numbers, you know that basic account opening rates of growth are
slowing, I thought that this was what I had been hired to do, quite frankly I can’t see why this is
even an issue!' James Phillips, New Product Director
Neither Berny nor James was willing to compromise on their positions. As a result the meeting
became somewhat acrimonious and Kevin Tilly proposed a short analysis of the overall viability
and impact of the new venture.
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TEACHING NOTE – THE FOCUSED BANK
This example describes the process of operations strategy (formulation and implementation)
with the primary focus on achieving fit: the firm faces different market segments, changing
competitive circumstances, functional disagreements, differing levels of expertise, short- and
long-term concerns, etc. It also, inevitably, addresses sustainability and risk and equally
comprises more specific issues relating to service design and technological infrastructure.
Analysis
The Focused Bank was formed as a joint venture between an established financial services
business and a provider of infrastructure support to this industry segment. Therefore, although
the business idea sought (first-mover advantage) to become the first exclusively on-line retail
banking firm, it was far from being an independent start-up. The operation proved to be very
successful and after only 30 months had signed up over 1 million customers to its new service.
Despite this initial success, more recently (as competitors saw the potential and launched on-line
banking as a complement to their core delivery channels) they have experienced a declining rate
of customer growth. As a result, the firm began to consider how they could build new markets
and hired a new product development manager. After an in-depth market analysis, the decision
was taken to explore the potential of the corporate services market. The firm hired a team of 8
corporate banking specialists to serve 3 ‘pilot’ clients. After 6 months they had added 15 new
clients, 7 new staff and were establishing a new reputation in the marketplace. Now they have
reached a crucial decision point, should they continue to expand the corporate service business
or re-focus on their original market.
Advantages of the Corporate Service Offering
The NPD and marketing directors have identified a number of key advantages associated with
the new service offering. In particular, given the slow down in their core market, this mediumterm strategy offers a point of entry into a market with apparently favourable market conditions
(well-established players providing 'ordinary service') akin to their retail launch. In addition, an
efficient service provider (like focus) could realise significant margins on this ‘premium’
service and it would allow then to build upon their established reputation (key corporate clients
banked with Focus as individuals).
Disadvantages of the Corporate Service Offering
The Operations director has some concerns with the shift into corporate services. He believes
that sometimes 'strategic managers' place too much emphasis on the market environment,
without considering what the firm is capable of actually delivering. Focus Bank may have
clarity about its market positioning but this also has significant internal strategic implications.
The additional complexity (high variety, low volumes, high visibility, etc.) of the new services
is predicted to have a significant impact on the processing capabilities of the firm. In particular,
the Operations director is concerned that this will affect the focus that he has achieved in his
back office.
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What is the Question?
This case is illustrative of a number of different operations strategy issues. Regardless of this
breadth however, the key question remains, 'Should The Focused Bank take the next step in
developing their corporate business and make a major investment?'
Options/Discussion Criteria
Unlike previous cases, the suggestion for this example is to structure analysis not around three
different options. This case provides a basis for assessing the three different elements, as
defined in Chapter 8, which constitute an operations strategy that 'fits':
1. Exploring what it means for an operations strategy to be comprehensive
2. Ensuring there is internal coherence between the different decision areas and that they
correspond to the true priority attached to each performance objective and
3. Highlighting which resource/requirement intersections are the most critical with respect to
the broader financial and competitive priorities of the organisation. On reaching this point,
any debrief can include generating and discussing ‘what to do next’ options.
Evaluation
Before addressing the specific nature of the strategy process, it is instructive to articulate a more
conceptual picture of operations strategy fit. It is helpful to develop a generic map of the firms’
resource and requirement position.
X1
specific market criteria
A
Y1
Y2
B
tight fit
X2
ideal level of resource capability
The precise location of Focused Bank on such a map is, of course, somewhat arbitrary but two
themes can provoke interesting debate. The success of the firm in both its chosen markets
appears to suggest that it has achieved a strong degree of fit. Given the first-mover nature of the
initial offering, in many ways the service launched at position A (i.e. above ‘normal’ levels of
(y1) market requirements and (x1) operational capability). On the other hand, with the new
corporate service, even the managerial advocates of the new offering argue that in some ways it
falls short of delivering the complete performance that the market requires (y2) because it lacks
the appropriate level of operational capability (x2). Practically, given the dynamic nature of
markets and capabilities, all operations find themselves in this position at one time or another.
The Focused Bank, therefore, has to explore the performance envelopes (defining the minimum
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degree of fit necessary to ensure competitive survival) associated with each of its two service
offerings.
Comprehensive
This case can be used to discuss the practical value of a range of different operations strategy
models (including the book’s OS matrix). At the very least these models provide an aidememoire for determining the ‘comprehensiveness’ of an operations strategy. Many operations
have simply failed in their strategies to notice the potential impact of, for instance, new process
technology. Similarly, many attempts to achieve fit have failed because operations have paid
undue attention to one of the key decision areas – often the softer, people-related aspects.
In debriefing the case, the OS matrix can be used to flesh out (infer) the underlying capabilities
that the firm must have had in place to successfully serve first the mass retail and then the
corporate markets. For instance, operational factors that were central to the start-up like the
reliable, scalable front and back-office technology (rapid volume growth), factors influencing
capacity, costs associated with customer contact (initially limited to a simple back up email and
telephone call-centre), etc. might be less relevant for the new service offering.
Coherence
At the same time as capturing as many of the critical variables as possible, it is also important to
constantly reflect upon the overall coherence of the decision elements. The focused bank
operation needs to achieve a correspondence between the choices made against each of the
decision areas and the relative priority (internally and externally) attached to each of the
performance objectives. There are a number of ways of judging the relative coherence of the
operations strategy (in a similar vein to the analyses of Dresding Medical, Hagen Style, Bonkers
Chocolate, etc.). Below is a simple polar representation (again very powerful in class debrief) of
the original and new service offerings, derived (again) from the generic performance objectives
(quality, speed, dependability, flexibility and cost).
high-speed transactions
high-speed transactions
24-hour service
availability
low-cost processing
24-hour service
availability
low-cost processing
high-contact
customer service
product/service
flexibility
high-contact
customer service
1 2 3 4 5
product/service
flexibility
high dependability
transactions
high dependability
transactions
Figure: Core retail and New corporate service profiles
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Criticality
In addition to the difficulties of ensuring coherence between decision areas, there is also a need
to include financial and competitive priorities. Although all decisions are important and a
comprehensive perspective should be maintained, in practical terms some resource/requirement
intersections will be more critical than others. The Hill framework (in Chapter 8) highlights
some of these issues by stressing relative customer priorities (order-winners/qualifiers: see
Chapter 2) but it does not pay sufficient attention to other effects on criticality – in particular,
the influence of competitor behaviour. Here again the OS matrix can be used to develop a
discussion of the critical intersections and related options facing the firm. For instance:
COST
QUALITY
KE
SPEED
FLEXIBILITY
develop & organise
supply network
process technology
capacity
KE
1. If the chosen option is to commit fully to the corporate venture then a critical or key
intersection becomes that option as between ‘quality’ and ‘development and organisation’.
In other words, as the NPD director explains in the case: 'these clients are paying a lot of
money for the services we offer. They came to us because of our high-tech reputation but
they will only stay if we build strong relationships. This means more staff and better
facilities'.
2. Conversely, the success of the original retail service was directly tied to the ability of the
underlying process technology (customer-facing and back-office) to provide volume
flexibility – in the face of surprisingly rapid volume growth. This cost-effective flexibility
may offer little value in the new markets, where variety flexibility will rapidly predominate:
'some of [the new corporate clients] are hinting that we don’t offer the full range of
products. This is not a problem yet and as I have explained to them, with our expertise I see
no reason why they shouldn’t get exactly what they want. They were very impressed by this
kind of commitment.'
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CLEVER CONSULTING
The Clever Consulting Company (CCC) was first established in October 2000 when four
business school finance faculty decided to ‘…try and do it for real … and also make a lot more
money!’. The firm was not entirely independent. The idea was created with the support of their
university’s business development scheme, whereby for an equity stake and some supervisory
influence, the university provided the opportunity, continued association with the university
name and some basic facilities.
The original operation comprised the four partners, four consultants (all recent MBA graduates
who had been taught by the academics), three analysts (recent first degree graduates from the
university) and one person providing administrative and secretarial support. At the start of the
venture, none of the partners were firmly established as the leader, they were all first among
equals.
‘During the first 18 months everything went incredibly smoothly… the initial proposition was to
leverage our academic credibility and functional expertise in order to give us a niche position
and the market responded. We began with one big bank as a client but very quickly we
undertook two or three smallish projects for other clients who without exception came back to
us with larger and longer projects. No-one minded putting in the hours… which frankly were
often crazy… I guess that in those early days commitment and creativity drove growth’ –
Managing Partner.
By the end of the second full year of trading, however, it became clear that the firm’s flat
managerial structure was unsustainable, especially in their dealings with the university parent
and other equity holders. Although the firm continued to grow organically, November 2002 saw
the firm enter into a prolonged period of leadership crisis. Eventually one of the partners was
firmly established as the Managing Partner but it was not a smooth transition. For nearly a year
there was personal and professional conflict within the firm making it difficult for the firm to
address strategic growth and corresponding structural issues. Evidence for the impact of this
crisis on CCC’s business can be seen in the annual revenue figures. The years immediately
before the crisis saw growth of 55 and 66 per cent, whereas during this difficult period growth
fell to 17 per cent. Whilst apparently respectable, this was considerably lesser than their growth
target and at the same time a number of operational initiatives floundered. Recruitment, training
and promotions became difficult and plans to develop a web-based infrastructure for capturing
project knowledge were postponed indefinitely. The crisis of leadership was only partially
resolved when, in April 1997, two of the founding partners returned to full-time academia in
different institutions. A year later the third founding partner retired.
During the last two financial years, CCC’s revenues have grown by an impressive 93 and 113
per cent, arguably a demonstration of the benefits of clear managerial direction. Unfortunately,
this level of growth has simply served to reinforce many of the structural and infrastructural
challenges ignored over the last 2 years. What kind of consulting operation was CCC and what
kind did it want to become? It seemed clear that depending on the type of work the firm
undertook/received, different structures would be needed – with a range of operational
implications. For instance, the more procedural or routine consulting work becomes higher than
the analyst/partner ratio. Consequently, intense competition for career progression up to partner
level is created and staff turnover in this type of firm is very high. If staff turnover is high then
preventing valuable knowledge from leaking out of the firm becomes critical. Similarly, too
complicated a mix of different types of assignments can make capacity planning extremely
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complex etc. Whilst the Managing Partner had very clear views on the nature of the dilemma
they faced, she was less certain about the strategy they should follow.
‘I love this business and believe that we have created something special here. I want to build a
firm that will still be here in 10 years time but I know that in order to develop truly sustainable
competitive advantage we have to get over a number of obstacles… Operationally we need to
decide what kind of consulting firm we are going to be. I read a book recently1 that summed it
up very effectively. There is the kind of consulting work that comprises a large ‘grey matter’
quotient; the work with a large ‘grey hair’ quotient; and work where the problem is recognised,
well understood and just needs ‘bright’ people resource thrown at it. I believe that we began life
as a combination of the first two but over time… and with our senior people problems… I have
tried to steer us towards the first rather than second mode of operation. The future might be
different again?’
1 Maister, D. (1993) Managing the Professional Service Firm. New York: Free Press.
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TEACHING NOTE – CLEVER CONSULTING
The nature of this professional service example – without large-scale investment decisions
(capacity, process technology, supply network etc.) – allows us to focus directly on the ‘process
of operations strategy’. In addition to generic discussion of the reconciliation of resources and
requirements, the exemplar also provides some details on specific themes such as indirect
process technology (knowledge management system) and different types of management
consultancy process.
Analysis
The dilemmas faced by Clever Consulting Company (CCC) are in many ways typical of a small
business start-up. Amongst its founders there was an initial passion ‘to do something different’,
allied with a desire ‘to make some serious money’. The initial ownership and financing
arrangements were complex and perhaps best characterised as opportunistic rather than
strategic. The key events in the firms’ development can be summarised as follows:
•
The firm began operating with four partners, four consultants (MBAs), three analysts
(recent graduates) and one person providing administrative and secretarial support. The
small size of the operation meant that management structures and formal decision-making
procedures were underdeveloped (not needed?) Their niche market proposition sought to
leverage a deep repository of academic credibility and functional expertise – beginning with
a single large client (retail bank) who had guaranteed them a certain amount of business.
•
The first 18 months saw the addition of three pilot projects for new clients that transformed
into larger and longer projects. There was no expansion in capacity but more and more
utilisation of the existing resource base.
•
By the end of the second full year of trading (after annual revenue growth of 55 and 66 per
cent, respectively), the limitations of the original managerial and financial structures
became increasingly apparent. In particular, the founding partners began to disagree about
the future direction of the business and for nearly 12 months there was personal and
professional conflict making it difficult to address either market or resource issues. Annual
revenue growth during this period growth fell to 17 per cent. At the same time, a number of
operational initiatives floundered. Both recruitment (capacity) and training/promotion
(development and organisation) became difficult, and plans for systemic project knowledge
capture (indirect process technology) were postponed indefinitely.
•
Eventually two of the founding partners returned to academia and, 12 months later, a third
founding partner retired. This left the fourth founder clearly established as the Managing
Partner but facing a number of strategic dilemmas. In particular, she had lost 75 per cent of
the ‘grey matter’ that had underpinned their original market proposition. Despite these
challenges, these 2 years saw CCC’s revenues grow by 93 and 113 per cent, arguably a
demonstration of the benefits of clear managerial direction. Unfortunately, this level of
growth also reinforced many of the structural and infrastructural challenges.
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Partners (P )
Consultants (C)
Analysts (A)
Partners (P )
Consultants (C)
Analysts (A)
Partners (P )
Consultants (C)
Analysts (A)
Grey Matter Assi gnments: This type of work is
typically unique and requires a considerable
amount of innovative and creative input. There is
a low ratio of analysts to partners.
Grey Hair Assignments: This type of work
is similar to previous assignments, therefore
the firm can apply/trade-on experience.
There is a larger ratio of analysts to partners.
Procedure Assignments: This type of work usually
involves well-recognized and familiar problems. The
solution (method) is often highly standardized. There is
a high ratio of analysts to partners.
As discussed in Chapter 8, the OS matrix could be used to illustrate how different resource and
requirement issues have become more or less important over time in the CCC case. It also
allows us to discuss the complexity, coherence and comprehensiveness of the overall strategy.
(n.b. this might be a good mechanism for introducing any case discussion). However, it does not
capture the balancing act of reconciliation over time. The figure below is an attempt to represent
this dynamic process.
Level of market requirements
?
y5
D
y4
C
y3
y2
B
y1
A
x1
Level of operational resource capability
x4
x2
x5
x3
From the outset (point A) CCC deployed a high degree of (applied) academic experience and
knowledge into the marketplace for a single client. Therefore, the initial level of market
requirement (shown as level y1) was less than the operations’ capability to deliver (x1). The 18month ‘start-up’ phase is represented on the above figure by the transition to point B. Having
satisfied their first client, trading to a certain extent off the reputation of the university parent,
the firm won more work (→y2). Over this period, they leveraged and refined their capabilities
over a number of months (→x2). After this ‘honeymoon period’ however, the managerial and
structural difficulties begin to emerge. This is why the transition from point B to C is shown as a
shift to the left of the ‘line of fit’ – indicating that internal problems were leaving them with
insufficient capability to meet market requirements (failing to meet growth targets, insufficient
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infrastructure development etc.) After resolving the leadership issue, the firm began once again
to win more and more public and private work and over time (y3→y4) reinforced underlying
capabilities (x3→x4). The dilemma that the Managing Partner faces however is to try and
maintain this fit. She is uncertain both about the nature of the market to pursue (and the
corresponding dynamics of the selected segment) and the type of operational structures needed
to support this ambition (x5, y5).
What is the question?
As mentioned earlier, this case is illustrative of the challenge of achieving sustainable fit. By
corollary therefore, the material can also be used to discuss issues of static fit and extended into
consideration of risks. Regardless of how much breadth is given to debrief. However, the key
question is some variant of, ‘What kind of consulting operation was CCC, and what kind did it
want to become?’
What are the options?
In developing an overall strategy for the consulting operation, any number of specific resource
or market-focused initiatives might be identified. The Managing Partner however, had
recognised that the categorisation proposed in the Maister (1993) book, Managing the
Professional Service Firm (Free Press, New York) suggested three ‘broad-brush’ visions, which
highlighted the key dilemmas faced by the firm.
Types of consulting operation
Depending on the type of work a consultancy firm undertakes/receives, different operational
structures and arrangements are needed. For instance, the more procedural or routine consulting
work becomes the higher the analyst/partner ratio. Consequently, intense competition for career
progression up to partner level is created and staff turnover in this type of firm is very high. If
staff turnover is high then preventing valuable knowledge from leaking out of the firm becomes
critical. Similarly, too complicated a mix of different types of assignments can make capacity
planning extremely complex etc. The Maister typology can be summarised as follows:
Quoting the Managing Partner:
‘…we need to decide what kind of consulting firm we are going to be. There is the kind of
consulting work that comprises a large ‘grey matter’ quotient; the work with a large ‘grey hair’
quotient; and work where the problem is recognised, well understood and just needs ‘bright’
people resource thrown at it. I believe that we began life as a combination of the first two but
over time… and with our senior people problems… I have tried to steer us towards the first
rather than second mode of operation. The future might be different again?’
Option A – Refocus the business on its origins, seeking to reinforce the reputation for
originality and creativity.
Option B – Build on current strengths, with some experienced consultants and a definite market
orientation and continue to look for relatively challenging, but not innovative problems.
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Option C – Expand the business, hire more consultants and seek to develop procedural solution
methods for a range of problem sets.
Alternative discussion criteria
Although this teaching note follows the standard ‘questions and options’ structure, the analysis
of this case could also be structured around the three process elements discussed in Chapter 14.
These themes (organisational learning, appropriation of competitive benefits and the impact of
path dependency) are offered as ‘shorthand’ for evaluating the degree to which an operations
strategy might achieve ‘sustainable’ fit. In other words, the case can be used together with The
Focused Bank (Chapter 13) and Saunders Industrial Services (Chapter 15) as a set for
considering the process of operations strategy.
Evaluation
It is possible to apply many of the models and frameworks described throughout the book and
more specifically in the process chapters (13, 14 and 15) to this case. In particular, however, the
case provides a useful way of illustrating application of the frameworks for classifying (1) static
barriers to entry and imitation and (2) dynamic mechanisms for innovation and change. In
discussing the different options, the following issues could be raised.
Option A – Discussion of this option can highlight some interesting trade-offs between static
resource-based sustainability mechanisms. For instance, emphasising individual senior
consultants and ‘grey matter’ type assignments can lead to experience, knowledge and
reputation that are very difficult to copy. At the same time, such individuals are highly mobile
and can easily (as shown in the CCC example) move, effectively diminishing the firm’s
competitive advantage. Such a strategy also embodies the benefits and disadvantages of
‘double-loop learning’. It can be creative, flexible and responsive to dynamic market
requirements, but can also lead (as during the yearlong leadership crisis) to paralysis and
confusion.
Option B – This represents the option with the most continuity with the preceding 2/3 years. It
will be managerially attractive because it exploits the benefits of incremental capability
development. Particular discussion can be generated around an application of the internal
‘barriers to imitation’ dimensions to a professional service. At the same time, some discussion
of the ‘innovators dilemma’ (p. 491) should also highlight some of the dangers.
Option C –The third option is in many ways the most attractive from a growth perspective. It
involves dealing with more and more clients and hiring relatively low cost analysts who deploy
standardised methodologies. However, in the discussion of sustainability in the face of
competition, biological analogies were drawn with the zero-sum games of a species fit with its
environment. In other words, it never gets any easier. Moreover, the strategy that appears to be
the most attractive can quickly become the one that rivals will also adopt, learn to block.
Moreover, as CCC developed in this direction, their procedural innovations could soon be
countered by others that are bigger (and can compete on price) and better established in this
market. With some additional material (i.e. management consultancy market data), it is possible
to apply the external ‘barriers to entry’ models.
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SAUNDERS INDUSTRIAL SERVICES
Saunders Industrial Services (SIS) began life as the classic family firm. Art Saunders’ father had
opened a small manufacturing and fabrication business in his hometown of Milwaukee on
returning from duty in World War II. He had successfully leveraged his skills and passion for
craftsmanship over many years whilst serving a variety of different industrial and agricultural
customers. Art himself spent nearly 10 years working as a production engineer for an
automotive original equipment manufacturer (OEM) but eventually returned to Milwaukee to
take-over the family firm. Exploiting his experience in mass manufacturing, Art spent more than
20 years building the firm into a larger scale industrial component manufacturer but retained his
father’s commitment to quality and customer service. In 1985 he sold the firm to an UK-owned
industrial conglomerate and 10 years later in 1995 it had doubled in size again and now
employed approximately 600 people and had a turnover approaching $210 million. Throughout
this ‘third’ period the firm had continued to target their products into niche industrial markets
where their emphasis upon product quality and dependability meant they were less vulnerable to
price and cost pressures. However, in 1992, in the midst of difficult economic times and
widespread industrial restructuring, they had been encouraged to bid for higher volume and
lower margin work. This process was not very successful but eventually culminated in a 1994
tender for the design and production of a core metallic element of a child’s toy.
Interestingly, the client's firm, KidCorp, was also a major customer for other businesses owned
by SIS’ corporate parent. They were adopting a preferred supplier policy and intended to have
only one or two purchase points for specific elements in their global toy business. They had a
high degree of trust in the parent organisation and on visiting the SIS site were impressed by the
firm’s depth of experience and commitment to quality. In 1995, they selected SIS to complete
the design and begin trial production.
'Some of us were really excited by the prospect … but you have to be a little worried when
volumes are much greater than anything you’ve done before. I guess the risk seemed okay
because in the basic process steps, in the type of product if you like, we were making something
that felt very similar to what we’d been doing for many years.' Operations Manager
'Well, obviously we didn’t know anything about the toy market but then again we didn’t really
know all that much about the auto industry or the defence sector or any of our traditional
customers before we started serving them. Our key competitive advantage, our capabilities, call
it what you will, they are all about keeping the customer happy, about meeting and sometimes
exceeding specification.' Marketing Director
The designers had received an outline product specification from KidCorp during the bid
process and some further technical details afterwards. Upon receipt of this final brief, a team of
engineers and managers confirmed that the product could and would be manufactured using an
up-scaled version of current production processes. The key operational challenge appeared to be
accessing sufficient (but not too much) capacity. Fortunately, for a variety of reasons, the Parent
Company was very supportive of the project and promised to underwrite any sensible capital
expenditure plans. Although this opinion of the nature of the production challenge was widely
accepted throughout the firm (and shared by KidCorp and Parent) it was left to one specific
senior engineer to actually sign both the final bid and technical completion documentation. By
early 1996, the firm had begun a trial period of full volume production. Unfortunately, in this
design validation process SIS had effectively sanctioned a production method that would prove
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to be entirely inappropriate for the toy market but it was not until mid-1997 (16 months later)
that any indication of problems began to emerge.
Throughout both North America and Europe, individual customers began to claim that their
children had been ‘poisoned’ whilst playing with the end product. The threat of litigation was
quickly leveled at KidCorp and the whole issue rapidly became a ‘full-blown’ child health
scare. A range of pressure groups and legal damage specialists supported and acted to aggregate
the individual claims and although similar accusations had been made before, the litigants and
their supporters focused in on the recent changes made to the production process and, in
particular, the increasing role of suppliers.
'….it’s all very well claiming that you trust your suppliers but you simply cannot have the same
level of control over another firm in another country. I am afraid that this all comes down to
simple economics, that KidCorp put its profits before children’s health. Talk about
trust……parents trusted this firm to look out for them and their families and have every right to
be angry that boardroom greed was more important!' Legal spokesperson for the litigants,
interviewed on UK TV consumer rights show.
Under intense media pressure, KidCorp rapidly convened a high profile investigation into the
source of the contamination. It quickly revealed that an ‘unauthorised’ chemical had been
employed in an apparently trivial metal cleaning and preparation element of the SIS production
process. Although, when interviewed by the US media, the Parent firm’s legal director
emphasised there was 'no causal link established or any admission of liability by either party'
KidCorp immediately withdrew their order and began to signal an intent to bring legal action
against SIS and its Parent. This action brought an immediate end to production in this part of the
operation and the inspection (and subsequent official and legal visits) had a crippling impact
upon the productivity of the whole site. The competitive impact of the failure was extremely
significant. After over a year of production, the new product accounted for more than a third
(39%) of the factory’s output. In addition to major cash-flow implications, the various
investigations took up lots of managerial time and the reputation of the firm was seriously
affected. As the site operations manager explained, even their traditional customers expressed
concerns.
'It’s amazing, but people we had been supplying for thirty or forty years were calling me up and
asking "[Manager’s name] what’s going on?" and that they were worried about what all this
might mean for them … these are completely different markets!'
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TEACHING NOTE – SAUNDERS INDUSTRIAL
SERVICES
This example describes the formulation and implementation of an operations strategy: with the
primary focus on the risks associated with OS process. This traditionally low volume
manufacturing firm, which had been operating for many years, faced changed competitive
circumstances and under ‘parental’ pressure to diversify (and satisfy an established corporate
client) it decided to embark on a new era of high volume manufacturing. Inevitably, this case
also considers fit and sustainability themes and equally comprises more specific issues relating
to product design and corporate operations parenting.
Analysis
In Chapter 10, a definitional model of operations-related risk (drawing upon the transformation
model widely employed in operations analysis) was presented:
•
the potential for unwanted negative consequences from an operational event.
This simple model can be used to portray what happened at SIS in a structured and largely
chronological manner.
CAUSATIVE
NEGATIVE
CONSEQUENCE
SIS began life as the classic family firm. By 1995, it had doubled in size again and now (as part
of a UK-owned industrial conglomerate since 1985) employed approximately 600 people and
had a turnover approaching $210 million. This process was not very successful but eventually
culminated in a 1994 tender to become the preferred supplier for a metallic element of a child’s
toy. In 1995, KidCorp (already a customer for other businesses owned by the corporate parent)
selected SIS to complete the design and begin trial production. After visiting the firm, KidCorp
purchasing managers had been impressed by the firm’s depth of experience and commitment to
quality. Unfortunately, SIS effectively commissioned a production method that would prove to
be entirely inappropriate for the toy market but it was not until mid-1997 (16 months later) that
any indication of problems began to emerge.
Causative Event
The factors contributing to industrial failures are summarised as a generic set of Human,
Organisational and Technological (HOT) variables.
•
Organisational. In 1992, in the midst of difficult economic times and widespread industrial
restructuring, they had been ‘strongly encouraged’ by their corporate parent to bid for
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higher volume and lower margin work. Similarly, KidCorp were an important corporate
client and there was clearly pressure for SIS to help further develop this relationship.
•
Technological. The SIS designers received an outline specification from KidCorp during
the bid. A team of engineers and managers confirmed that the product could and would be
manufactured using an up-scaled version of current production processes. The key technical
challenge appeared to be accessing sufficient capacity. Fortunately, the Parent was very
supportive (see above) and authorised capital expenditure plans.
•
Human. There is a great deal of ongoing legal argument around whether an individual
engineer made the wrong design assumptions when responding to the original brief.
Although the production challenge was widely accepted as simply being one of scale, (an
opinion apparently shared by KidCorp and Parent) it was left to one specific senior engineer
to actually sign both the final bid and technical completion documentation.
Similarly, the causative events can be characterised using the generic resource categories/
decision areas that underpin the OS matrix.
CAPACITY
SUPPLY NETWORK
PROCESS
TECHNOLOGY
DEVELOPMENT &
ORGANISATION
As well as allocating
dedicated capacity to
a specific customer,
the KidCorp
production involved a
shift from low volumes
and multiple
customers to high
volume and single
customer.
Underpinning the
decision to invest
heavily with SIS was
the KidCorp decision
to adopt a single
source or
‘partnerships’ supply
network management
initiative.
It was superficial
product similarities
that led to an
inappropriate
production process
being employed.
Ultimately, however, it
is the process
technology that stands
accused of causing
health problems.
An assumed similarity
between existing and
new product lead to
insufficient exploration
of specific design
brief. As a result of
design errors, the
quality control
systems introduced
proved to be
inappropriate.
What is the Question?
As mentioned earlier, this case is illustrative of a number of different operations strategy issues.
It is possible to apply the OS matrix but the case also requires consideration of the dynamic
impact of adding capability, meeting requirements, etc. over time. In this case, the
resource/requirement ‘fit’ graph can be very helpful. Issues of ambiguity and uncertainty are of
course central to the case but an indicative key question might be, 'What operational risks did
SIS face when deciding to become a strategic supplier for KidCorp and what control problems
did they encounter in implementing this strategy (pre and post investigation)?'
Options/Discussion Criteria
This case provides a basis for assessing the three different ‘risk’ elements, which need active
consideration in any operations strategy process:
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1. Firstly, operations strategy must consider how ‘actors’ (managers and staff, as well as
current and potential customers, regulators, etc.) understand and cope with risk. The
cognition of risk is therefore particularly significant because individuals rarely deal with
risk in a rational manner.
2. Secondly, perceived pure and speculative risks are strongly influenced by the internal
(operational system) and external (customer and stakeholder) operating context.
3. Finally, because, by definition, a risk is something with unwanted consequences, it is
something that we normally seek to control. However, the control of risk covers a range of
different strategies including prevention, mitigation and if the worst comes to the worst,
failure recovery.
Evaluation
level of mark et requirements
Before addressing the specific nature of the risks inherent in the operations strategy process, it is
helpful to develop a map of the firms’ resource and requirement position over time.
m1
1
2
m0
0
cp2
cp0
0
cp1
level of operational capability
Cognition
The product development process had been intended to develop (shifting from point 0)
knowledge of new market requirements (m0 to m1), leverage and refine existing product
engineering and production (new capital investment, etc.) capabilities (cp0 to cp1) and establish
a partnership-specific customer relationship. After over a year of production, the new product
accounted for almost half of the SIS factory output and appeared to be a great success – in other
words, an exact fit. However, in reality (albeit only later established by external investigation)
this capability/requirements match was not exact because it was underpinned by an
‘unauthorised’ chemical employed in an apparently trivial metal cleaning and preparation
element of the SIS production process (Point 1). This cognitive mismatch might be explained in
a number of ways, for instance:
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•
The apparent familiarity of the product/process perhaps led to key managers/engineers
being insensitive to ‘obvious’ technological development risks.
•
Although KidCorp was in many ways the same kind of customer that SIS was very used to
dealing with, the end consumer market was very different to any they had served, no matter
how indirectly, before.
•
The parental pressure to serve a key corporate client may have brought distorting time and
political pressure to bear on the development decision-making process.
Context
Once end customers began to claim that their children had been ‘poisoned’ whilst playing with
the end product, a range of pressure groups and legal damage specialists ('I am afraid that this
all comes down to simple economics, that KidCorp put its profits before children’s health!')
acted to aggregate the individual claims. The changing operating context had a significant
impact upon SIS (point 2):
•
Under intense media pressure, KidCorp rapidly convened a high profile investigation into
the source of the contamination. In addition to major cash-flow implications, this (and
subsequent) investigations took up lots of managerial time and the reputation of SIS (and by
association its parent) was seriously affected: 'people we had been supplying for thirty or
forty years were calling me up and asking "what’s going on?"’.
•
The litigants quickly focused in on the recent changes made to the supply network and the
subsequent investigation quickly revealed the ‘unauthorised’ chemical. KidCorp immediately
withdrew their order and began to signal intent to bring legal action against SIS and its
Parent. This action brought an immediate end to production in this part of the operation and
the inspection (and subsequent official and legal visits) had a crippling impact upon the
productivity of the whole site.
Control (and Coupling) Strategies
A matrix can be used to link notions of control and ‘coupling’. The vertical axis is a conflation
of the discussion of operational events and negative outcomes into a generic negative impact
scale. The horizontal axis is the degree of systemic coupling. The diagonal between the two
dimensions suggests a limit to the applicability of mitigation strategies (and hence a retention of
some degree of control) before the advent of probable crises and a reliance on recovery
strategies. The upper left-hand corner of the matrix indicates that it is likely, following a major
and complex negative operational outcome, that there will be almost no scope for mitigating
negative competitive consequences. In these cases recovery strategies will predominate whilst
recognising a tendency for such failures to become more tightly coupled as they trigger
stakeholder and media interest, etc. The bottom-right corner of the matrix indicates how, in a
tightly coupled system, only the most minor negative outcomes can be tolerated before negative
consequences are realised, mitigation becomes impossible and recovery is necessary.
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Degree of coupling in the organisation
loose
tight
Causal event (failure)
major
(complex)
minor
(simple)
Applied to the case study (see figure above), it is interesting to highlight two different positions
on the matrix. The first location (lighter shaded) indicates the perceived general control position
prior to the failure incident (this case involved a significant degree of control judgment error)
and the second (darker shaded) indicates one more realistic interpretation of the ‘actual’ position
following the realisation of negative consequences. The familiarity of the process gave SIS a
sense of confidence that they knew what could go wrong and who would be affected by it. This
had worked well for them in the past but, under pressure from the corporate parent, they
misinterpreted the level of similarity between traditional products and the new market. This led
them to infer a level of control over both the product development and manufacturing processes
that was misplaced and also meant that they underestimated the nature of the failure and the
negative consequences. Equally, the shift towards higher volume supply for a single client, who
in turn distributed the end product, globally changed the production systems’ (i.e. internal)
coupling characteristics. Moreover, following the failure (and allegations of failure), the firm
was subject to intense corporate, regulatory, legal, pressure group and international media
investigation. This radically changed the nature of external systemic coupling.
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GENEVA CONSTRUCTION AND RISK
‘This is not going to be like last time. Then, we were adopting an improvement programme
because we were told to. This time it’s our idea and, if it’s successful, it will be us that are
telling the rest of the group how to do it’. (Tyko Mattson, Six Sigma Champion, GCR)
Tyko Mattson was speaking as the newly appointed ‘Champion’ at Geneva Construction and
Risk Insurance, who had been charged with ‘steering the Six Sigma programme until it is firmly
established as part of our on-going practice’. The previous improvement initiative that he was
referring to dated back many years to when GCR’s parent company, Wichita Mutual Insurance,
had insisted on the adoption of totally quality management (TQM) in all its businesses. The
TQM initiative had never been pronounced a failure and had managed to make some
improvements, especially in customers’ perception of the company’s levels of service.
However, the initiative had ‘faded out’ during the 1990s and, even though all departments still
had to formally report on their improvement projects, their number and impact was now
relatively minor.
History
The Geneva Construction Insurance Company was founded in 1922 to provide insurance for
building contractors and construction companies, initially in German-speaking Europe and then,
because of the emigration of some family members, to the USA, North America. The company
had remained relatively small and had specialised in housing construction projects until the
early 1950s when it had started to grow, partly because of geographical expansion and partly
because it has moved into larger (sometimes very large) construction insurance in the industrial,
oil, petrochemical and power plant construction areas. In 1983 it had been bought by the
Wichita Mutual Group and had absorbed the group’s existing construction insurance businesses.
By 2000 it had established itself as one of the leading providers of insurance for construction
projects, especially complex, high-risk projects, where contractual and other legal issues,
physical exposures and design uncertainty needed ‘customised’ insurance responses. Providing
such insurance needed particular knowledge and skills from specialists including construction
underwriters, loss adjusters, engineers, international lawyers and specialist risk consultants.
Typically, the company would insure losses resulting from contractor failure, related public
liability issues, delays in project completion, associated litigation, other litigation (such as ongoing asbestos risks) and negligence issues.
The company’s headquarters were in Geneva and housed all major departments including, sales
and marketing, underwriting, risk analysis, claims and settlement, financial control, general
admin, specialist and general legal advice, and business research. There were also 37 local
offices around the world, organised into four regional areas; North America, South America,
Europe Middle East and Africa and Asia. These regional offices provided localised help and
advice directly to clients and also to the 890 agents that GCR used worldwide.
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The previous improvement initiative
When Wichita Mutual had insisted that CGR adopts a TWM initiative, it had gone as far as to
specify exactly how it should do it and which consultants should be used to help establish the
programme. Tyko Mattson shakes his head as he describes it. ‘I was not with the company at
that time but, looking back; it’s amazing that it ever managed to do any good. You can’t impose
the structure of an improvement initiative from the top. It has to, at least partially, be shaped by
the people who are going to be involved in it. But everything had to be done according to the
handbook. The cost of quality was measured for different departments according to the
handbook. Everyone had to learn the improvement techniques that were described in the
handbook. Everyone had to be part of a quality circle that was organised according to the
handbook. We even had to have annual award ceremonies where we gave out special
“certificates of merit” to those quality circles that had achieved the type of improvement that
the handbook said they should’. The TQM initiative had been run by the ‘Quality Committee’, a
group of eight people with representatives from all the major departments at head office.
Initially, it had spent much of its time setting up the improvement groups and organising
training in quality techniques. However, soon it had become swamped by the work needed to
evaluate which improvement suggestions should be implemented. Soon the work load
associated with assessing improvement ideas had become so great that the company decided to
allocate small improvement budgets to each department on a quarterly basis that they could
spend without reference to the quality committee. Projects requiring larger investment or that
had a significant impact on other parts of the business still needed to be approved by the
committee before they were implemented.
Department improvement budgets were still used within the business and improvement plans
were still required from each department on an annual basis. However, the quality committee
had stopped meeting by 1994 and the annual award ceremony had become a general
communications meeting for all staff at the headquarters. ‘Looking back’, said Tyko, ‘the TQM
initiate faded away for three reasons. First, people just got tired of it. It was always seen as
something extra rather than part of normal business life, so it was always seen as taking time
away from doing your normal job. Second, many of the supervisory and middle management
levels never really bought into it, I guess because they felt threatened. Third, only a very few of
the local offices around the world ever adopted the TQM philosophy. Sometimes this was
because they did not want the extra effort. Sometimes, however, they would argue that
improvement initiatives of this type may be OK for head office processes, but not for the more
dynamic world of supporting clients in the field’.
The Six Sigma initiative
Early in 2005 Tyko Mattson, who for the last 2 years had been overseeing the outsourcing of
some of GCR’s claims processing to India, had attended a conference on ‘Operations
Excellence in Financial Services’, and had heard several speakers detail the success they had
achieved through using a Six Sigma approach to operations improvement. He had persuaded his
immediate boss, Marie-Dominique Tomas, the head of claims for the company, to allow him to
investigate its applicability to GCR. He had interviewed a number of other financial services
who had implemented Six Sigma as well as a number of consultants and in September 2005 had
submitted a report entitled ‘What is Six Sigma and how might it be applied in GRC?’ Extracts
from this are included in Appendix 1. Marie-Dominique Tomas was particularly concerned that
they should avoid the mistakes of the TQM initiative. ‘Looking back, it is almost embarrassing
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to see how naive we were. We really did think that it would change the whole way that we did
business. And although it did produce some benefits, it absorbed a large amount of time at all
levels in the organisation. This time we want something that will deliver results without costing
too much or distracting us from focussing on business performance. That is why I like Six
Sigma. It starts with clarifying business objectives and works from there’.
By late 2005 Tyko’s report had been approved both by GCR and by Wichita Mutual’s main
board. Tyko had been given the challenge of carrying out the recommendations in his report,
reporting directly to GCR’s executive board. Marie-Dominique Tomas was cautiously
optimistic, ‘It is quite a challenge for Tyko. Most of us on the executive board remember the
TQM initiative and some are still sceptical concerning the value of such initiatives. However,
Tyko’s gradualist approach and his emphasis on the “three pronged” attack on revenue, costs,
and risk impressed the board. We now have to see whether he can make it work’.
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Appendix – Extract from ‘What is Six Sigma and
how might it be applied in GCR?’
Six Sigma – pitfalls and benefits
Some pitfalls of Six Sigma
It is not simple to implement, and is resource hungry. The focus on measurement implies that
the process data is available and reasonably robust. If this is not the case it is possible to waste a
lot of effort in obtaining process performance data. It may also over-complicate things if
advanced techniques are used on simple problems.
It is easier to apply Six Sigma to repetitive processes – characterised by high volume, low
variety and low visibility to customers. It is more difficult to apply Six Sigma to low volume,
higher variety and high visibility processes where standardisation is harder to achieve and the
focus is on managing the variety.
Six Sigma is not a ‘quick fix’. Companies that have implemented Six Sigma effectively have
not treated it as just another new initiative but as an approach that requires the long-term
systematic reduction of waste. Equally, it is not a panacea and should not be implemented as
one.
Some benefits of Six Sigma
Companies have achieved significant benefits in reducing cost and improving customer service
through implementing Six Sigma.
Six Sigma can reduce process variation, which will have a significant impact on operational
risk. It is a tried and tested methodology, which combines the strongest parts of existing
improvement methodologies. It lends itself to being customised to fit individual company’s
circumstances. For example, Mestech Assurance has extended their Six Sigma initiative to
examine operational risk processes.
Six Sigma could leverage a number of current initiatives. The risk self-assessment methodology,
Sarbanes Oxley, the process library, and our performance metrics work are all laying the
foundations for better knowledge and measurement of process data.
Six Sigma – key conclusions for GCR
Six Sigma is a powerful improvement methodology. It is not all new but what it does
successfully is to combine some of the best parts of existing improvement methodologies, tools
and techniques. Six Sigma has helped many companies achieve significant benefits.
Six Sigma could help GCR significantly improve risk management because it focuses on
driving errors and exceptions out of processes.
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Six Sigma has significant advantages over other process improvement methodologies.
It engages senior management actively by establishing process ownership and linkage to
strategic objectives. This is seen as integral to successful implementation in the literature and by
all companies interviewed who had implemented it.
It forces a rigorous approach to driving out variance in processes by analysing the root cause of
defects and errors and measuring improvement.
It is an ‘umbrella’ approach, combining all the best parts of other improvement approaches.
Implementing Six Sigma across GCR is not the right approach
Companies that are widely quoted as having achieved the most significant headline benefits
from Six Sigma were already relatively mature in terms of process management. Those
companies, who understood their process capability, typically had achieved a degree of process
standardisation and had an established process improvement culture.
Six Sigma requires significant investment in performance metrics and process knowledge. GCR
is probably not yet sufficiently advanced. However, we are working towards a position where
key process data are measured and known and this will provide a foundation for Six Sigma.
A targeted implementation is recommended because:
Full implementation is resource hungry. Dedicated resource and budget for implementation of
improvements is required. Even if the approach is modified, resource and budget will still be
needed, just to a lesser extent. However, the evidence is that the investment is well worth it and
pays back relatively quickly.
There was strong evidence from companies interviewed that the best implementation approach
was to pilot Six Sigma, and select failing processes for the pilot. In addition, previous internal
piloting of implementations has been successful in GCR – we know this approach works within
our culture.
Six Sigma would provide a platform for GSR to build on and evolve over time. It is a way of
leveraging the on-going work on processes, and the risk methodology (being developed by the
Operational Risk Group). This diagnostic tool could be blended into Six Sigma, giving GCR a
powerful model to drive reduction in process variation and improved operational risk
management.
Recommendations
It is recommended that GCR management implement a Six Sigma pilot. The characteristics of
the pilot would be as follows:
•
A tailored approach to Six Sigma that would fit GCR’s objectives and operating
environment. Implementing Six Sigma in its entirety would not be appropriate.
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•
The use of an external partner: GCR does not have sufficient internal Six Sigma, and
external experience will be critical to tailoring the approach, and providing training.
•
Establishing where GCR’s sigma performance at present. Different tools and approaches
will be required to advance from 2 to 3 Sigma than those required to move from 3 to 4
Sigma.
•
Quantifying the potential benefits. Is the investment worth making? What would a 1 Sigma
increase in performance vs. risk be worth to us?
•
Keeping the methods simple, if simple will achieve our objectives. As a minimum for us
that means Team Based Problem Solving and basic statistical techniques.
Next steps
1. Decide priority and confirm budget and resourcing for initial analysis to develop a Six
Sigma risk improvement programme in 2006.
2. Select external partner experienced in improvement and Six Sigma methodologies.
3. Assess GCR current state to confirm where to start in implementing Six Sigma.
4. Establish how much GCR is prepared to invest in Six Sigma and quantify the potential
benefits.
5. Tailor Six Sigma to focus on risk management.
6. Identify potential pilot area (s) and criteria for assessing its suitability.
7. Develop a Six Sigma pilot plan.
8. Conduct and review the pilot programme.
Questions
1. How does the Six Sigma approach seem to differ from the TQM approach adopted by the
company almost 20 years ago?
2. Is Six Sigma a better approach for this type of company?
3. Do you think Tyko can avoid the Six Sigma initiative suffering the same fate as the TQM
initiative?
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Teaching note – Geneva Construction and Risk
(GCR)
Case synopsis
Geneva Construction and Risk (GCR) is an insurance company that specialises in providing
insurance for construction projects, especially complex, high risk projects, where contractual
and other legal issues, physical exposure and design uncertainty need ‘customised’ insurance
responses. It is part of the larger Wichita Mutual Insurance Group. The case describes the
company’s intention to adopt a Six Sigma improvement methodology.
Unfortunately, the company’s experience with ‘quality initiatives’ is not good. Some years ago
Wichita Mutual had instructed all companies in its group to adopt a TQM initiative. It had done
this in a very prescriptive way by issuing a handbook with detailed instructions of how TQM
was to be implemented throughout the group. Although the TQM initiative had never been
formally pronounced a failure, it had faded over the years without having the overall impact that
once was hoped of it. This time, Tyko Mattson, the Six Sigma champion at GCR, is convinced
that an improvement initiative based on Six Sigma principles will be more of a success. The
case describes the previous TQM initiative and why it is hoped that the Six Sigma initiative will
prove more effect. Extracts from a document prepared by Tyko Mattson are included in the
case. This describes his views of some of the advantages and disadvantages of Six Sigma as an
improvement approach and makes recommendations as to how it can be applied at GCR.
Using the case
This is a rich and complex case that can be used in a number of ways in class. How it is used
will depend on whether the topics of TQM and Six Sigma have been taught prior to running the
case or not. If this case is used as in introduction to improvement and improvement initiatives,
then the debrief should provide an opportunity for presenting the key points of both TQM and
Six Sigma. If the case is used after these topics have been treated in class, then the case can be
used to develop some of the issues concerning the differences between the two approaches, the
similarities between the two approaches, and the difficulty in implementing initiatives of this
type. It is recommended that when the class contains relatively inexperienced students with little
knowledge of the realities of improvement initiatives such as these, the case is used to introduce
some of the main characteristics of TQM and Six Sigma. Where the majority of the students
will have experience of this type of initiative, it can be used to treat some of the more
organisational problems of implementing improvement initiatives.
Notes on questions
Question 1 – How does the Six Sigma approach seem to differ from the TQM
approach adopted by the company almost 20 years ago?
This is an opportunity to discuss the main differences between TQM and Six Sigma, both in
abstract and in terms of how CGR sees each approach. Some points that can be brought out
regarding each approach are as follows.
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TQM
•
The handbook said that everyone must be involved.
•
The handbook said that all companies in the group must organise the TQM initiative in the
same way ‘according to the handbook’.
•
Emphasis was put on measuring the cost of quality.
•
Similar improvement techniques were used throughout the group.
•
Everyone was assigned as part of a quality circle.
•
Annual award ceremonies were conducted where ‘certificates of merit’ were awarded.
•
The initiative was run by a company-wide quality committee.
•
The quality committee organised groups and quality training. It also evaluated whether the
suggestions for improvements should be implemented and allocated budget to their
implementation.
•
Eventually the evaluation procedures were taking up so much time an effort that the
company moved towards a limited form of self-certification involving small improvement
budgets on a group-by-group basis.
•
Improvement budgets and improvement plans are still used in the company.
•
The annual awards ceremony is now a ‘general communications’ meeting.
Six Sigma
The definition of Six Sigma as described in the text is …‘Six Sigma is a comprehensive and
flexible system for achieving, sustaining and maximising business success. Six Sigma is uniquely
driven by close understanding of customer needs, disciplined use of facts, data, and statistical
analysis, and diligent attention to managing, improving, and reinventing business processes’.
•
It is a process-centred approach that includes process design, performance measurement,
continuous improvement (using the DMAIC cycle), statistical process control, quantitative
and evidence-based decision making, an emphasis on the negative effects of process
variation, and the ‘normalisation’ of processes using the ‘defects per million opportunities’
(DPMO) principle.
•
GCR is also wanting to use Six Sigma to tackle operational risk.
They believe it to be ‘resource hungry’.
•
They accept it is not a ‘quick fix’.
•
They believe it to be harder for low volume, non-standardised processes.
They believe that the Six Sigma approach fits well with the other initiatives in the company.
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•
They accept that Six Sigma is not new as such.
•
They see a major advantage of Six Sigma being that it engages senior management by
establishing process ownership and linking process performance to strategic objectives.
They are attracted by the idea that it is a rigorous approach.
•
They believe it to be an ‘umbrella’ approach that can incorporate the other initiatives.
The previous two lists should be generated by asking the class to call out how each initiative is
(and was) seen by the company. Develop these two lists on different parts of the board. At this
point we find it useful not to make too much comment on each of the points. Try and reach
consensus where students disagree about a point but do not engage in too much debate. If these
points are debated at this stage, it is easy to lose sight of the overall direction of the case and the
teaching points that one wishes to emerge.
Only at that point is it worth going back to the question and asking how Six Sigma is different
from TQM in the context of CGR. The debate at this point can be wide ranging and will depend
on the nature of the class. However, this is the time to go over some of the points made
previously and have a debate on them individually. For example, see the following.
•
Both TQM and Six Sigma can be interpreted in different ways. TQM was characterised by
several ‘quality gurus’, all of whom had a slightly different approach and emphasised
different points. Similarly, Six Sigma has no single definition (the one we quoted earlier is
typical but not accepted by everyone). Nevertheless there are some clear differences
between the two approaches.
•
The fact that the previous initiative was imposed from above is very important in this case.
It is difficult to separate the two issues of, on one hand, how the improvement approach was
introduced to the company, and on the other hand, the intrinsic merit of each approach. It
may be that the best and most appropriate improvement approach would still have failed
because it was imposed on the company.
•
Tyko is right (more or less) in the way he sees Six Sigma as a collection of previously ‘tried
and tested’ techniques and methods.
•
He is also right to say that Six Sigma can be ‘resource hungry’. (However, so is TQM). Yet,
there is no recognition in the case of just how resource hungry Six Sigma can be. A
fundamental part of Six Sigma is the idea of internal improvement champions/consultants
(called Black Belts and Master Black Belts) who are relieved of all line duty. This is an
extra cost. Similarly, the degree of training recommended by most consultants in this area
(admittedly because it is in their interests to do so) is very large.
Tyko’s view that Six Sigma will fit well within the company’s culture is an important one.
•
The idea that Six Sigma will ‘fit well with other company initiatives’ may be worth
debating. At worst, it can encourage competition between alternative approaches (though
some authorities believe this can be positive). Arguably, it is more important to ensure that
there is some degree of compatibility and integration between the different initiatives.
•
The idea that, because Six Sigma is a collection of ideas that have been around for some
time, it can be an ‘umbrella’ approach is worth debating here. Although Six Sigma can be
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seen in this way, it does have a number of themes running through it that cannot be
compromised, including process perspective, linking process objectives both to customer
needs and strategic intention, a rigorous approach to problem solving that is not afraid to
use quantitative techniques, and the idea of continuous improvement.
Question 2 – Is Six Sigma a better approach for this type of company?
Try opening this question up first before making any comment on it. It can provoke a vigorous
debate. Often, different students will take different views. This is good for learning because the
question is actually rather simplistic. This may be the time to promote a ‘side debate’ on the
nature of improvement initiatives generally. All improvement approaches reflect the time in
which they emerged. Because of this, TQM now seems dated, yet it still contains many good
points, and many that have been included within Six Sigma. We use this stage in the debrief to
move students towards accepting that none of these approaches are the ultimate recipe for
improving operations. What is important is that they are not presented as panaceas (there is
some evidence that CGR may be falling into this trap). If they are, inevitably there will be a
backlash against them in time and the useful activities that they have promoted will be discarded
along with those that are less useful.
However, there is a difference between the two approaches. Broadly, Six Sigma is less
challenging and revolutionary than was TQM in its day, but does reflect the more challenging
business environment that has emerged in recent years. It also places a great deal more emphasis
on quantitative approaches such as statistical process control. This may appeal to some
industries more than other. Insurance for example is essentially a quantitative industry that relies
on actuarial statistics to make pricing judgements. Perhaps this is why the evidence-based
quantitative approach of Six Sigma is attractive to such companies.
The paradox here is that, although Six Sigma may be more appropriate for this kind of
company, it may be that it is appropriate simply because it is their own idea, rather than one that
has been imposed on them. This could be a more important factor than any more ‘rational’
reasons for adopting the approach.
Question 3 – Do you think that Tyko can avoid the Six Sigma initiative suffering
the same fate as the TQM initiative?
Tyko believes that there were three reasons why the TQM initiative faded away.
•
People got tired of it and it was always seen as something extra rather than part of normal
business life.
•
Middle management never bought into it because they felt threatened.
•
Only a very few of the local offices around the world adopted the TQM philosophy.
It is useful to debate each of these points in turn.
It faded away and it was just extra work – These are separate points, although related. People
will get tired of any initiative if it ceases to have value. Unless everyone can see some kind of
benefit for the actions they are taking, then it is inevitable that the idea will fade away. The fact
that TQM did not work in this respect is not necessarily a problem with TQM as such. Rather it
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is the way it was implemented. Again, at this point a debate about the nature of improvement
initiatives could be useful.
Middle management didn’t accept because they felt threatened – Middle management often
feel threatened by these initiatives for a very simple reason – they are threatened. The idea of
devolving improvement decision making down the hierarchical structure of the organisation is
clearly going to be a real threat to those people who, hitherto, had assumed this role. A debate
on this issue could go on for a long time, and is (strictly) part of other courses. However, it may
be worth having a debate on the changing role of middle management (from task decision
making to process decision making, from administration to coaching and developing, etc.).
Very few local offices adopted the TQM philosophy – This is a common problem with all
improvement initiatives. Because of the geographical spread of local offices it is more difficult
to engage them with any new idea. However, what may be a more interesting point of debate is
the idea that the TQM initiative was less appropriate to them. One interpretation of this point is
that the local offices were saying because they were more of a sales and support operation, the
(in our terms) high visibility processes that they ran were less susceptible to improvement
initiatives that were designed for ‘back-office’ processes. Whether Six Sigma is more
appropriate for such high visibility processes is debatable. Some practitioners still concentrate
on low visibility, back-office operations in the way they advice on Six Sigma implementation.
Yet, because it is a process-focused initiative, it should be able to recognise differences between
processes. Certainly the DPMO idea within Six Sigma is partly a recognition that processes are
different and therefore must be judged in different ways.
Some people would argue that one of the great advantages of Six Sigma over TQM is the
greater emphasis on strategic objectives. Many TQM initiatives focussed very much on ‘the
customer’ alone. This may not have been how TQM was seen by many of its founders, but that
is the way it was often implemented. By contrast, Six Sigma looks at the needs and contribution
of three elements,
•
the customer,
•
the processes that create the services for the customer, and
•
the overall strategic objectives of the company.
This is a far more realistic context in which to improve operations.
However, it is always worth finishing off the debrief by reminding the class that in a few years
time there will be yet another improvement initiative. Will we be making the same criticisms
about Six Sigma when that time comes?
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Study guide
CHAPTER 1
Operations strategy – developing resources for
strategic impact
Chapter aims
This first chapter is a relatively long chapter because Chapter 1 of Slack and Lewis covers
several important points that are fundamental to developing an understanding of operations
strategy, why operations strategy is important and how one can take four distinct but related
perspectives on the topic. This chapter aims to
•
Show why the concept of operations strategy is important and relevant to any business or
enterprise
•
Explain the four perspectives on operations strategy
•
Demonstrate how the performance objectives of operations can be related to the decision
areas of operations strategy
Studying operations strategy
You may find operations strategy to be more difficult conceptually and in some more ways
more abstract than operations management, but do not worry too much. It does take a while to
understand the difference between operations management and operations strategy. Read
Chapter 1 carefully, then work through this guide, and if you still have difficulty, try moving
forward with the guide and then return periodically to the first chapter. Hopefully, by the end of
all the chapters you should have a reasonable understanding of the topic!
The chapter poses a number of questions that anyone wishing to understand the nature of
operations strategy needs to address. These are
•
What is ‘operations’ and why is it so important?
•
What is strategy?
•
What is operations strategy?
•
How should operations reflect overall strategy?
•
How can operations strategy learn from operational experience?
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•
How do the requirements of the market influence operations strategy?
•
How can the intrinsic capabilities of an operation’s resources influence operations strategy?
•
What is the difference between the ‘content’ and the ‘process’ of operations strategy?
•
What are operations strategy performance objectives?
•
What are operations strategy decision areas?
•
How do performance objectives relate to decision areas?
For many people who have studied operations management the first of these questions will have
been covered in your operations management course. Also, if you have studied general (or
business, or corporate) strategy, the second question will be familiar. Because of this we will
treat these two questions only very briefly in this guide. But the other questions are likely to be
new to you and will form the structure of the remainder of this part of the study guide.
What is ‘operations’?
Operations is important because all businesses depend on their operations to deliver the services
and products on which they depend. No matter how good a strategy, it is rendered impotent
unless the business’s day-to-day operations can actually delivery what the strategy requires. The
basic model used in operations management to explain how operations management works is
the input–transformation–output model. This model can be extended to demonstrate how
operations can contribute at different levels of analysis from strategic through to operational.
This is treated under the heading ‘Three levels of input–transformation–output’ in Chapter 1.
Essentially the model demonstrates that, no matter what level of analysis is taken, operations is
concerned with the capability of individual entities (whole operations, processes or individual
resources within a process) and the relationship between them. This is shown in Figure 1.1.
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What is strategy?
Actually the text does not provide a specific definition of ‘strategy’, it simply discusses what
characterises strategic decisions. Yet there is no shortage of definitions. In fact that is the
problem. As the text also makes clear there are many definitions. Here are a few (in no
particular order).
Strategy is…
•
A scheme: an elaborate and systematic plan of action
•
A long-term plan of action designed to achieve a particular goal
•
A broad non-specific statement of an approach to accomplishing desired goals and
objectives
•
A general plan or direction selected to accomplish specified objectives
•
A long-term plan for success, intended to achieve an advantage. It includes key milestones
and targets
•
The differentiating activities an organisation pursues to gain competitive advantage
•
A systematic plan, consciously adapted and monitored, to improve one's performance
•
A comprehensive plan or action orientation that identifies the critical direction and guides
the allocation of resources of an organisation
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•
A planned, deliberate procedure that is goal-oriented (has an identifiable outcome) and
achieved with a sequence of steps
•
An approach taken that will affect the overall direction of the organisation
•
A plan or method including options and priorities towards the achievement of a defined goal
or objective
These definitions are both short and, to some extent diverse, they do convey the overall idea of
what strategy is. They also give a general idea about what operations strategy is. Substitute the
word ‘operation’ for ‘organisation’ and one has a working definition of operations strategy. The
decisions taken as part of a company’s operations strategy are considered strategic because they
•
Are widespread in their effect and so are significant in the part of the organisation to which
the strategy refers
•
Define the position of the organisation relative to its environment
•
Move the organisation closer to its long-term goals.
However, a ‘strategy’ is more than a single decision; it is a total pattern of the decisions.
Similarly, a company’s operations strategy is shown in the pattern of decisions that the
organisation takes to develop its operations resources. Such decisions include the magnitude and
nature of its total capacity, the way in which it relates to customers, competitors, suppliers and
partner operations, its approach to acquiring or developing process technology, the way in
which it organises and develops its resources, and so on.
‘Operations’ is not always ‘operational’
As the text points out, operations strategy does seem a contradiction in terms. Yet, as it also
points out, one should not confuse ‘operations’ with ‘operational’. Operational is not strategic,
in fact it is the very opposite of strategic (it means detailed, localised, short term, day-to-day).
But ‘operations’ is different, it is ‘the activity of managing the resources and processes that
produce and deliver goods and services’. So operations strategy looks at the strategic
implications of how the operations activity is managed. It is concerned with what the operation
has to do in order to meet current and future challenges, and with the long-term development of
operations resources and processes, so that they can provide the basis for a sustainable
advantage. Any business that fails to appreciate the strategic impact that effective operations
management can have is missing a huge opportunity to establish a competitive advantage. The
influence of an organisation’s aspirations for its operations as well as the operations function’s
ability to contribute to strategic positioning are both fundamental to its long-term success. Both
issues are also undeniably strategic.
This is not to downplay the importance of ‘operational’ operations management. It is of course
important to get the details right and do so on a dependable day-to-day basis. In fact, it is the
accumulation of day-to-day experience which can build-up the operations capabilities which go
towards providing the strategic operations advantage. This is the paradox of running a
successful operation. It has to be good at both the day-to-day details and the broader strategic
issues. In fact it has to be able to connect the operational and the strategic aspects of operations
together.
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How is operations strategy different from operations management?
While there are many ways in which a strategic perspective on operations can be distinguished
from the more operational perspective of operations management, four types of difference are
particularly useful.
Timescale – Operations management is largely concerned with short to medium timescales,
though what constitutes short or medium will vary for different industries. Nevertheless, time
horizons are relatively short. A typical decision in a food factory would be, ‘what demand
fluctuations do we have to deal with over the next few months?’ Operations strategy is
concerned with the longer term. A typical decision would be, ‘when should we plan to add
further capacity so that we can meet rising forecast demand?’
Level of analysis – Operations management is largely concerned with managing resources
within and between micro operations (departments, work units, etc.) A typical decision might
be, ‘where should we position each product category within our department store?’ The
boundaries of the decision are the walls of one store (in this case), while the ‘building blocks’ of
the decisions are the units or departments. Operations strategy is more concerned with decisions
affecting a wider set of the organisation’s resources. Typical decisions would be, ‘How many
stores should we have, where should we locate them and how should we supply them?’ Here the
‘building blocks’ of the decision are whole stores and the transportation network which supplies
them.
Level of aggregation – Operations management is concerned with the details of how products
and services are produced. Individual sets of resources are treated separately, as the component
parts of the operation. A typical decision for a firm of accountants might be, ‘How do we
provide tax advice to the small business sector in Antwerp?’ To answer the question individual
human skills, specific technology capabilities and separate physical locations must be
considered. Operations strategy, on the other hand, brings together and consolidates such details
into broader issues. A typical question would be, ‘what is our overall business advice capability
compared with our other European activities?’ Here we are concerned with a general capability
to provide a broad category of service within a wider geographic area.
Level of abstraction – Operations management is concerned largely with what is immediately
recognisable and tangible. In a health care organisation, for example, it would include concrete
issues such as, ‘how do we improve our purchasing procedures?’ The purchase orders,
information flow and physical inventory associated with purchasing, can all be readily observed.
Operations strategy, on the other hand, often deals with more abstract issues. So, for example,
the question, ‘should we develop strategic alliances with selected medical products suppliers?’
again deals with purchasing but in a manner which touches on the philosophy and values of the
company. One cannot observe the concept of a strategic alliance directly, only the effects of it.
Does operations strategy apply to service as well as manufacturing organisations?
Yes. It is no accident that the title of the book is ‘Operations Strategy’ rather than the, far more
common, ‘Manufacturing Strategy’. Of course there are differences between different types of
business. No one is denying that running a hospital is not the same as running an automobile
plant. But, there are many common issues, common decisions and common principles. It is the
commonality in the approach to operations strategy analysis which is stressed throughout the
book. Yet whereas operations management is now a reasonably well developed subject,
operations strategy is, as yet, not. But the same forces that have moved manufacturing
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management to operations management also apply to operations strategy. In most developed
economies, manufacturing accounts for around 20 per cent or less of economic activity (see
Figure 1.3). Admittedly, it is a very important 20 per cent, but the fact remains that the vast
majority of business activities are concerned with trading services rather than trading products.
This means of course that the vast majority of operations are concerned with producing service
rather than producing products. The inescapable logic is that, if operations strategy is to be a
useful concept, it must be at least as applicable to service operations as it is to manufacturing
operations. Yet the history of the subject is deeply rooted in manufacturing. It is only relatively
recently that books on the subject and university courses started to change their names to
operations strategy rather than manufacturing strategy.
Commentary on ‘AESSEAL’ example
The trend towards ‘servitisation’ is not confined to the manufacturers of physical goods. It
also applies to other sectors such as software development. Figure 1.4 shows how the
proportion of revenue earned through services by four of the largest software developers
increased between 1998 and 2002. Like any industry that has been operating for some years,
the installed based of its products (products it has already sold and are being used by is
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customers) is usually far, far higher than the value of new products sold each year. The
obvious conclusion is that serving this installed base can provide a significant business
opportunity. Combine that with the tendency of services to have higher margin than physical
products and the business case for moving into services becomes overwhelming.
So, the implication of all this is that you should not get too worried about any perceived
difference between services and manufacturing. In many ways they are becoming the same
thing. Think about the objective of operations strategy as putting the strategies in place that
will ensure customers are well (and profitably) served both now and in the future.
Does operations strategy apply to ‘not-for-profit’ organisations?
Our belief is that all types of operation, for-profit or not-for-profit, service or manufacturing,
free market-based or regulated market-based, will find the ideas of operations strategy useful.
Forgive us though if we now lapse into ‘commercial’ terminology. It is not that we are
discounting the value of other types of operation or the value of operations strategy ideas to
these operations. It is just that the conventional type of operation which attempts to achieve an
acceptable ‘return’ on its ‘investments’ through ‘market’ ‘competitiveness’ is the most useful
base case on which to try out the various ideas explored in the course. We believe that the vast
majority of these ideas translate relatively easily into other contexts. Some terms and ideas may
have to be adapted, for example, the idea of competitive advantage seems alien to this sector.
However, environmental charities compete for funding from government and private sources,
police forces compete against increasingly sophisticated criminals, government think tanks
compete with their new ideas against older more orthodox ideas (and against those of rival think
tanks). All these organisations need to consider how they develop and deploy their resources to
gain incremental competitive advantage.
A related issue is the variety of ‘customers’ and stakeholders who need to be accommodated
within non-profit organisations. This may not only add to the complexity of operations analysis
and decision making, it can have other consequences. For example, the organisation may rely on
several sources of funds (from its different stakeholders) which are associated with different
objectives. For example, a local theatre may get its income from ticket sales (maximised by
popular but low cost shows), its bar and restaurant (maximised by investing in the development
of these facilities), local government (who will sustain funding if the theatre attracts a wide
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cross-section of local society), national government (who sustain funding if the quality of
performances is excellent), art charities (who may fund experimental theatre) and star
performers (who generate extra sales but will come only if given some artistic freedom). In such
an environment operations strategy decisions of where to allocate investment, how to set-up an
effective organisational structure, which products (plays) to produce, and so on, are likely to be
slow, complex, political and uncertain. Also an important category of stakeholder may be the
staff themselves. Not only in the normal sense that staff have a share and an interest in the
success of the organisation but also because many people could be giving their contributions on
a voluntary basis. This gives an extra emphasis to the need to treat staff sensitively. It may
largely be their beliefs which provide their motivation and they may demand the freedom to
express and implement their beliefs.
The C suit perspective
Slack and Lewis introduce what is an unconventional view of operations strategy, namely that
many of the concepts and approaches used in operations strategy (and explained in the text and
these notes), can also be used to develop any functional strategy. This is because any function
produces services, on behalf of, or directly for, the rest of the business. Some are relatively
simple; others are more multifaceted and difficult. But all these services are produced using
processes, and developing processes is essentially what ‘operations’ is about. It is surprising,
therefore, that executives in non-operations functions have traditionally devoted relatively little
time and effort to making sure that their processes produce services that are practical,
responsive, (where necessary) flexible and produced efficiently. It is not as though these process
skills are elusive. It is what the operations function is supposed to be an expert at. Of course,
operations have had decades to come to terms with the many new ideas that have emerged in
process management. But this is could be a huge advantage for non-operations functions. It
means that we can learn from their experience and adapt process management approaches to the
needs of finance. Thankfully, most companies have now come to understand the importance of
process. This is because they have realised that because effective process management gives the
potential to improve both efficiency and customer service simultaneously, they also have a
strategic impact.
The four perspectives on operations strategy
A large part of Chapter 1 is taken up by explaining the ‘four perspectives’ on operations
strategy. Although this is a good approach to understanding the various ways in which
operations strategy can be analysed, it can be confusing to those who require a more prescriptive
‘recipe’ for putting an operations strategy together. The best way to think about these four
perspectives is not as a guide to the ‘process’ of operations strategy (we will distinguish
between content and process later), these issues are dealt with in the last three chapters. Rather,
think about the four perspectives as exactly that – four different ways of looking at how
operations strategy can contribute to the business.
The four perspectives, as discussed in Chapter 1, are as follows:
•
Operation strategy is a top-down reflection of what the whole group or business wants to do
•
Operations strategy is a bottom-up activity where operations improvements cumulatively
build strategy
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•
Operations strategy involves translating market requirements into operations decisions
•
Operations strategy involves exploiting the capabilities of operations resources in chosen
markets
Remember that the chapter does stress that none of these four perspectives alone gives a full
picture of what operations strategy. However, they do explain the pressures which go to form
the content of operations strategy. The next four sections in this chapter will treat each in turn.
The top-down perspective – how should operations reflect overall strategy?
The top-down perspectives on operations strategy views it as one of several functional strategies
in a hierarchy of strategies. Not all enterprises will be sufficiently large to warrant a ‘corporate’
strategy, but any corporate or multidivisional group will need a corporate strategy to position
itself in its global, economic, political and social environment. This means deciding what types
of business the group wants to be in, what parts of the world it wants to operate in, how to
allocate resources between its various businesses, and so on. This is the ‘corporate strategy’ of
the group. 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 corporate group of which it is a part. Also, within the business, each function will need a
‘functional strategy’ to shape what part each function should play in contributing to the strategic
objectives of the business. The operations, marketing, product/service development and other
functions will all need to consider how best they should organise themselves to support the
business’s objectives. So, the top-down perspective on operations strategy is that it should take
its place in this hierarchy of strategies. Its main influence, therefore, will be whatever the
business sees as its strategic direction.
The bottom-up perspective – how can operations strategy learn from operational
experience?
The top-down approach to operations strategy (or any strategy) is relatively easy to understand
and is what most people think of as the way strategy should work. Yet there is plenty of
evidence that, in practice, strategies are not always derived in such a clear and logical manner.
Some strategy academics argue that very many strategic decisions are derived from day-to-day
operational experience within the firm rather than any top-down vision of how the firm should
be operating. The concept of an ‘emergent strategy’ is that strategy originates, not necessarily
from the senior management in an organisation, but in the interaction of an organisation with its
environment. In other words, a whole set of experiences within the firm prompt the formation of
ideas an possible actions that eventually converge into a pattern of decision that reflect the way
the organisations has learnt from its experiences.
Of course, strategy can be formed through the deliberative actions of senior managers.
Sometimes a decision is taken by senior management that goes on to become the implemented
strategy of the organisation. But not every formal decision actually finishes up as an
implemented strategy; sometimes they just kind of ‘fade way’ because they receive insufficient
internal support in the organisation or become to be regarded as impractical. At other times,
strategies emerge and may become formalised as explicit formal strategies later. Figure 1.5
illustrates this.
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The idea of bottom-up emergent strategies is particularly important for the operations function
because operations have responsibility for so much of a firm’s day-to-day activities. Not all of
course, other functions within the business such as marketing, finance, etc. also have resources
that are devoted to day-to-day business. Yet, in many organisations the operations function (in
its broadest sense) accounts for a very high proportion of its people, physical assets and
investment. So, if an organisation aspires to capture the value from its on-going experience in
creating and delivering service to customers, it must have an operations function that both learn
from this experience and is capable of using that learning to contribute to strategy.
The market requirements perspective – how do the requirements of the market
influence operations strategy?
The vast majority of practical models for operations strategy formulation take an ambiguously
‘market requirements’ perspective. That is, they start from an understanding of the markets that
operation is intended to serve and then ask the relatively straightforward question, ‘what does
the operation have to do in order to serve those markets well?’ This is a sensible starting point
for assessing the appropriateness of any operations strategy. After all, if an organisation does
not fulfil the needs of its market (or its broad social objectives in a not-for-profit organisation) it
will not (or should not) survive in the long term. In this sense, the market requirements
perspective is the most immediate and most important short-term perspective on operations
strategy. The idea of operations strategy being driven by market requirements is sometimes
called the ‘outside-in’ approach because it looks at the external market environment for an
organisation and translates this into its internal implications. Yet, as the text points out, and as
we reiterate in these notes, it is not the only perspective. In the longer term the other three
perspectives also become important. But that does not invalidate the idea that, without satisfying
markets, a business may not survive in the long term.
The operations resource perspective – how can operations capabilities influence
operations strategy?
Some authorities argue that the way in which an organisation deploys or exploits its resources to
create competences is a better predictor of sustainable competitive advantage than its choice of
market position. Therefore, it is argued, operations strategy should concentrate on identifying
and developing its ‘core’ competences which can then be exploited, perhaps in several markets.
The concept of competence (the word comes from the Latin verb ‘competere’, meaning to be
suitable) was first developed by psychologists to describe an individual’s ability to respond to
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demands placed upon them by their environment. Now the extension of this concept
encompasses entire organisations.
If you want to understand the link between resources, processes and operations strategy
decisions, look at the lighting company example in Chapter 1. It illustrates the nature of the
‘operations resource’ perspective. In the analysis of the example, Statement (a) is a summary of
the company’s tangible resources – facilities and staff. Statement (b) identifies some of the
intangible, largely knowledge-based, resources developed in the company. This leads on to (c)
where the company recognises that these intangible resources are embedded in its routines.
Brought together in Statement (d), these resources and processes give the company a unique set
of competences which, given based on their experience, will be difficult for competitors to
copy. However, to cultivate these competences the company, in Statement (g), identifies the
decisions which will allow them to sustain their competitive advantage.
The idea of intangible resources is very closely linked with the idea of competencies. To
understand the value of the intangible resources that a company possesses, simply look to how
they are valued by those who invest in it. The difference between the market value of a
company and the value of its physical assets is, in part, explained by the company’s intangible
assets. So, for example, a company’s reputation (or in a more managed sense, its brand) is often
of immense importance to a firm’s success, yet may be difficult to define precisely. However, if
a brand is closely identified with a distinguishing name, symbol, trademark or visual design, it
may be valued in monetary terms, especially when a brand is sold independently of the
operation’s (tangible) resources. Just because a resource is intangible does not necessarily mean
it cannot be traded. Other intangible resources, although having real value to a firm, are less
easy to trade. They are in that sense less tangible.
Even the more tradable assets such as patents, copyrights, licensing agreements and brand
names can be valued as part of a company’s capital in its financial accounts only under very
strict conditions. Including such investments as research and development in a company’s assets
is generally not allowed because of the difficulty in precisely associating future benefits from
the investment. Those assets which are even less tangible, such as ‘knowledge’ or ‘intellectual
capital’, cannot be formally counted at all.
Commentary on the ‘Amazon, So what exactly is your core competence?’
example
The example on the way Jeff Bezos (the founder of Amazon.com) now sees his vast
company is a great example of how the underlying competencies of an organisation can
come to define what it is. Admittedly, one of the major drivers of Amazon seeing itself as a
technology provider has been the seasonality of its demand. Had Amazon not had to cope
with this, it might never have been prompted to develop its other services. Nevertheless, it
now does see itself as having acquired unique and difficult to replicate competencies that
can be leveraged in other markets. Furthermore, these competencies have been developed
within its operations function. Only by investing in and developing its information
technology, fulfilment processes and skills over a long period of time could it have done
that. Now it can take those competencies into other markets. This is an ideal example of
strategy being formed ‘inside-out’.
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The appendix at the end of Chapter 1 reviews the idea of competencies and how it influences
the resource-based view (RBV) of the firm. The RBV is particularly important in operations
strategy because it highlights how many of a firm’s intangible resources are embedded in its
routines. And the management of most of the value-adding processes and routines, as we noted
earlier, is the prime task of operations management. The RBV also allows us to make the link
between an organisation’s resources and processes and its capabilities.
Example of the four perspectives on operations strategy – an
e-learning company
Top-down
An entrepreneur owns several small companies, all of which are involved in some way in
providing web-based solutions to businesses. Two companies are involved in web design. Two
companies are involved in providing data analysis and data mining solutions to retail clients,
and one company provides e-learning and employee development services to a range of large
businesses, mainly in the banking, manufacturing and general service sectors. This e-learning
company has decided to specialise in providing customised ‘blended learning’ packages.
Blended learning is a careful combination of e-learning and ‘learning workshops’. The
entrepreneur and the managing director of the e-learning company jointly decided to specialise
in customised blended learning because they felt that it would provide a long-term profitable
investment. The implication of this business strategy for the e-learning company is that its
operations activities (the people in the company who create and deliver the customised packages
for clients) need to be especially flexible because all clients believe themselves to have very
specific and individual needs. It is also necessary to have wide network of subject experts and
tutors on whom the company can call to help them in the preparation and presentation of the
learning packages. What is important to understand is that different business objectives would
probably result in a very different operations strategy. The role of operations is therefore largely
one of implementing or ‘operationalising’ business strategy.
Bottom-up
So, the company has a business strategy that has positioned it as a provider of customised
blended learning packages. These services have a higher margin than more routine e-learning
packages. However, over time, the company’s operations and sales staff realise that two things
are happening in the market. The first is that, although customers claim that they want totally
customised packages, between 80 and 90 per cent of all customers are happy with a relatively
standardised product with some elements customised to their own circumstances. Second,
because competitors are starting to enter the market more aggressively, competition is becoming
more significant and for the first time the company has to reduce its prices. Based on this
experience the company’s operations staff start to develop broad ‘learning templates’ for
different types of client. These broad templates define most of the product but allow for
specially developed inserts to be ‘dropped in’ in order to provide a seemingly customised
solution at lower cost. Eventually, this idea is formally adopted by the company’s senior
management who put resources behind developing a number of templates that cover almost all
of the company’s clients.
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Market requirements
The company’s clients are almost all large companies, but the way in which these customers
make the commissioning decision (the way they buy the e-learning company’s products) is
changing. Increasingly, commissioning is done by human resource or ‘management
development’ departments. Often, some part of the client organisation realises that it needs
some development and asks the human resource department to commission development and
training ‘interventions’. It also becomes clear that these HR departments are very poorly placed
to make this kind of decision they need advice on how to handle their internal clients.
Furthermore, requests often come at short notice (i.e. internally a department will say, ‘we want
it yesterday’. In addition, more competitors are entering the market although, mostly, they are
offering relatively standardised e-learning packages. Nevertheless, this is having an effect on
prices by making customers a little more price sensitive. Because of these long-term trends in
the market, the e-learning company decides that it must increasingly confine itself to the top end
of the market specialising in high levels of customisation, expertise and high service levels and
close client relationships. Given these market requirements, the implications for the e-learning
company’s operations are that it must be able to provide a good diagnostic of each client’s
needs, a high quality of package presentation and the flexibility to deal with different client’s
needs and sometimes demanding lead times
Operations resources
From a market perspective the company’s operations must be able to provide insightful
diagnostics of its client’s needs, a high quality of presentation, and flexibility in response to
customer requests. The company’s operations staff do understand this and are constantly
striving to achieve excellence in these areas. However, they also know that they should be
building a set of operations-based capabilities that will be difficult for competitors to match.
They were aware that they already had a set of tremendously valuable assets in their staff, the
development software and web portal that they had developed, and their experience in designing
multimedia e-learning packages. Furthermore, they had started to improve a number of their key
processes such as the process that helps clients diagnose their development needs, the creative
production process that designs and creates the learning package, and (increasingly importantly)
the process of helping clients to implement and use the learning packages. While all these
processes were satisfactory they felt that they needed to go further and establish a set of valueadded capabilities that were, to quote the company’s managing direction, ‘Better than anything
on the market at the moment or is likely to be acquired by out competitors for some years to
come’. As such, they decide to invest in acquiring a number of new skills. In particular, they use
a system of supplying ‘guest developers’ who will actually be located within some of their
larger customers for a period of time helping their client to understand their needs and
implement the e-learning solutions. They also start to develop new web-based discussion boards
and learning diagnostic processes (‘It is not just a matter of developing the software; it is also
gaining the experience of how to make the software really add value for clients’). Finally, they
also invest in extending their network of experts who can be called upon in the design process.
Even though some of these ‘experts’ are not needed currently, the company wish to establish the
relationships for potential future clients. Figure 1.6 illustrates this.
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It is important to remind ourselves at this point that these four perspectives on operations
strategy neither necessarily conflict nor are they alternative ways of formulating strategy. All
four perspectives are valid and can be pursued simultaneously. As the text stresses, they simply
represent alternative starting points for understanding operations strategy.
What is operations strategy? – balancing market requirements with operations
resources
Operations strategy is the total pattern of decisions which shape the long-term capabilities of
any type of operation and their contribution to overall strategy, through the reconciliation of
market requirements with operations resources.
So the chapter chooses to define operations strategy (or at least the way various operations
strategy decisions are made) in terms of the reconciliation of two of these perspectives – market
requirements and operations resources. Until relatively recently, the market requirements
perspective was seen as the major, if not the only, driver of how operations strategy should be
viewed. More recently it has become generally accepted that, by itself, this perspective is
incomplete. There are very few organisations which can simply configure their operations
resources to match market requirements quickly and effectively. Usually markets are capable of
changing far faster than a company can reconfigure its resources. Therefore, at the very least,
operations strategy must recognise the inertia and constraints represented by its physical
facilities, people, technology, organisational structure and system. But the concept of operations
resources is wider than this. All operations have a history and a set of experiences from which
they have accumulated knowledge. This accumulated knowledge may even have formed itself
into a set of competencies or capabilities which allow it to do certain things particularly well.
Blindly reacting to (possibly short term) market demands, even if it is possible, would waste
these capabilities. An important responsibility for the operations function is to understand its
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own capabilities and attempt to build on these and develop them to a point where they provide a
distinctive competitive advantage against competitors. This is what we mean by the operations
resource perspective.
But the dilemma is ‘does market position shape operations resources or vice versa?’ The text
holds that, while both perspectives are important, and while the reconciliation of the two
perspectives, in most cases market requirements dominate operations strategy decisions. All
organisations have markets. Not all organisations have unique capabilities that are worth
exploiting!
Content and the process
In some ways the distinction between the content and process of operations strategy (or strategy
in general) is an artificial distinction as the text does point out. However, we use it in these notes
(and it is used in the text) because at a simple level it allows us to distinguish between
What you decide to do with in an operations strategy, and how you make that
decision and make it work in practice.
The first of these categories above is the content of operations strategy. That means the
collection of decisions that together form the strategy. So ‘content’ refers to the detailed actions
that will be taken to move an organisation in a particular direction. Process on the other hand, is
concerned with sequence of steps that are taken in order to make content-type decisions.
For example, consider an investment bank. Typical content decisions could include the
following:
•
How big should each of our offices be in different parts of the world?
•
Should some offices specialise in particular areas of expertise or should each office be
capable of doing everything?
•
Shall we do all our back-office processing ourselves or should we sub-contract it to another
organisation?
•
If we do sub-contract, should we sub-contract everything or just the more routine processes?
•
If we do sub-contract, to whom should be give the contract?
•
Should we allow each office to develop its own IT platform, or should we impose some
uniformity?
•
Should we update our back-office processing technology (IT systems) or should we wait for
the next generation of technology?
•
Should we encourage each office to improve the effectiveness of their operations by
providing development and training in various operations improvement approaches?
•
Should all back-office operations report to a global vice-president of operations, or should
they report to the heads of the various regional or product markets?
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By contrast, process-type decisions could be as follows:
•
Do we have any kind of formal operations strategy or do we let each regional office ‘do
their own things’?
•
If we do have a formal operations strategy, should it be uniform throughout or global
network?
•
Should senior managers in one region have any influence over decisions that need to be
taken in another region?
•
Who should gather the information that will be used to inform operations strategy
decisions?
•
Should we have ‘post-implementation’ reports that enable us to see how different operations
strategy decisions have been implemented?
•
Do we encourage our various offices to adopt a particular approach to operations such as
business process reengineering (BPR)?
•
What formal report procedures should each office have to go through in order to report on
their progress?
It is also worth noting that Slack and Lewis do point out that the distinction between content and
process is not always clear. Content decisions, particularly around organisational structure, will
inevitably affect the way strategies are formulated. Similarly, the way strategies are formulated
is going to be influenced by the constraints that result from previous content decisions.
Performance objectives
Performance objectives are the dimensions of an operation’s performance, with which it will
attempt to satisfy market requirements. They are
Quality
Speed
Dependability
Flexibility
Cost
And they will be considered further in the study guide to the next chapter. The important point
is that it is through these five performance objectives that operations can contribute to
competitiveness. It is also worth noting that, as the chapter points out, the relative importance of
these performance objectives will be shaped by a combination of customers needs and
competitors’ actions.
Many authors on operations (or more frequently, ‘manufacturing’) strategy have defined their
own set of performance objectives. No overall agreement exists on either the terminology to use
when referring to these objectives or what they are. They are referred to variously as
‘performance criteria’, operations ‘strategic dimensions’, ‘performance dimensions’, ‘competitive
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priorities’ or ‘strategic priorities’. Here, we will be using the term performance objectives.
While there are differences between authors as to exactly what these performance dimensions
are, the ones we use here include some commonly used categories. However, not all authors in
this area use this particular set. For example, Hayes and Wheelwright at Harvard University do
not use speed, seeing it as part of flexibility. Other authors include ‘innovation’ which we
include as part of flexibility. To be honest it really does not matter. As we pointed out in the
Management of Operations course, there are different aspects of quality, speed, dependability,
flexibility and cost. Think of these five categories as clusters of issues, which at times will need
separating out, depending on what we are trying to do with them. We use them here primarily
because they were the terms which were used in the Management of Operations course.
Decision areas
Like many authors in this field, Chapter 1 identifies a number of ‘decision categories’ that,
together, define how the operation is shaping its operations resources. Unlike other authors they
seek to justify their decision categories by using ratio analysis. Two important points come from
this ratio analysis. The first is that the operations function can influence return on assets (ROA)
in more ways than keeping operational costs down (although clearly this is important).
Operations also influences ROA through its impact on revenue generation, volume flexibility,
imaginative and economical design of the process, and tight inventory management. The second
point is that we can identify the four groups of operations strategy decision areas which are most
associated with each part of this interconnecting pattern of ratios.
The categories used in the text are as follows:
•
Capacity strategy
•
Supply network strategy
•
Process technology strategy
•
Development and Organisation strategy
But, the boundaries between operations strategy decisions in these four areas are not clean. For
example, decisions on capacity location are influenced by the choice of suppliers in the supply
network; the extent of vertical integration is determined partly by the nature of the process
technologies involved, the organisation structure of the operation is influenced by the size of
operating locations, and so on. Furthermore, the exact nature of the decisions will depend on the
nature of the organisation. However, this relatively straightforward categorisation allows the
examination of each set of decisions in turn, even if it is necessary to remind ourselves
continually of the interconnections between them.
The operations strategy matrix
Performance objectives and decision areas are clearly related to each other. There is a cause–
effect relationship that works both ways depending on whether one takes a market requirements
or operations resource perspective. So, from a market requirements perspective, the
performance objectives that are required by the market will dictate what decisions are taken in
each of the decision areas. From an operations resources perspective, the intrinsic capabilities of
an operation that have been built-up over time by making a series of decisions in the various
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decision areas will give an operation the ability to excess in certain performance objectives.
This will then dictate how the company positions itself in its markets. The mechanism to try and
understand the relationship between performance objectives and operations strategy decision
areas is the ‘operations strategy matrix’. This is a relatively simple device that provides a ‘check
list opportunity’ to articulate the relationship between each performance objective and each
decision area. In this way, it brings the market requirement and operation resource perspective
on operations strategy together. See Figure 1.7.
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Study guide
CHAPTER 2
Operations performance
Chapter aims
•
To illustrate how strategies emphasising different performance objectives are likely to need
different operations strategy decisions
•
To illustrate how the relative priority of performance objectives differs in terms of whether
competitive factors are order winners or qualifiers
•
To introduce the concept of some competitive factors as ‘delights’
•
To show how the balance between the market requirement perspective of operations
strategy and the operations resource capability perspective on operations strategy varies
over time in response to external and internal stimuli
•
To examine the concept of trade-offs between performance objectives and introduce a
simple categorisation of trade-offs
•
To introduce the idea of operations focus
Introduction
This chapter links three issues which are sometimes treated separately but are, in fact, very
closely linked. The first idea is that operations strategy takes place in a dynamic environment
where the aims of its stakeholders change over time, in particular as markets and resource
capabilities change, the type of things operations strategy is called upon to do will also change.
Second, at any point in this dynamic journey operations strategy has to accept that the things
any operation can do are all interrelated. In the short term it cannot be exceptionally good at
everything and may have to sacrifice performance in one area for excellence in another. Third,
this idea of sacrificing one thing for great performance in another area can be taken to its logical
conclusion by focusing or targeting operations on a very narrow set of tasks and objectives.
What are ‘performance objectives’?
The chapter starts with some reminders from the previous chapter regarding performance
objectives. These are the main devices used to understand market requirements. They are the
various aspects of performance that are used to express market requirements. However,
‘performance objectives’ are not the same as the various tools and classifications which
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marketing professional use to understand markets. They are a set of broad performance
measures which have some meaning to the operations function. Many of the concepts and
frameworks used within the marketing function, although very effective at enabling marketing
professionals to understand markets, have little meaning when brought within the operations
function. Therefore, performance objectives are a ‘translation’ into operations-speak of a
marketing professional’s view of the market.
The five performance objectives used throughout the set text are
•
Quality
•
Speed
•
Dependability
•
Flexibility
•
Cost
However, not everyone who writes on operations strategy uses this particular set. One of the
best-known author teams, Hayes and Wheelwright of Harvard University, for example do not
use speed, seeing it as part of flexibility. Other authorities include ‘innovation’ as a performance
objective, while this chapter sees it as part of flexibility. It really does not matter. In fact, all the
performance objectives, quality, speed, dependability, flexibility and cost, are really clusters of
issues and measures. For example, ‘dependability’ could mean a proportion of services or
products delivered late, average lateness, proportion delivered early, etc.
It is best to think of each performance objective as a ‘bundle’ of more detailed factors which
will need separating out. Sometimes these more detailed factors are called competitive factors.
Figure 2.1 illustrates how competitive factors can be disaggregated from performance
objectives. Think of performance objectives as providing a checklist defined in sufficiently
broad terms to be applicable to any kind of business or operation.
Perhaps the most important points implicit in the chapter is that the pursuit of different
performance objectives implies different operations decisions. So, if it is particularly important
for a process to exhibit high degrees of flexibility (say), it would be designed and run in a
different way from another process where cost (say) is the dominant objective. This also applies
at a more strategic level. In fact, it is even more important at a strategic level. Businesses that
compete in different markets will emphasise different performance objectives which can only be
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achieved by pursuing different policies and strategic decisions within the business. The
following sections identify just some of the different types of decisions that are likely to be
taken depending on whether the business competes primarily on quality, speed, dependability,
flexibility or cost.
Commentary on ‘A tale of two terminals’ example
This cautionary tale explains one of the most embarrassing episodes in the history of a major
airline. Look at the diagram in Figure 2.2 to understand how failures accumulated in the
network of processes within Terminal 5 at Heathrow airport
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Quality-related strategies
Businesses that emphasise the quality of their products or services are likely to pursue capacity
strategy that avoids capacity shortages interfering with the need to devote resources to achieving
high quality. It is also likely to stress the development of specialist knowledge within each part
or site occupied by the business. Its supply network strategy may prefer to keep activities in
house so as to maintain quality control. Suppliers are likely to be selected on the basis of their
quality capability and relationships maintained through partnership and close coordination.
Process technology must be secure, certain and well understood so as to reduce variability.
Similarly, processes are likely to stress variability reduction, knowledge management and
learning. This may suggest functionally based organisation structures that can develop and
retain such knowledge.
Speed-related strategies
Speed related strategies will require surplus capacity so as to avoid bottlenecks where possible
and sites close to sources of demand. Supply network strategy will emphasise the selection of
suppliers who can respond quickly, understand their customers’ needs and communicate those
needs quickly and effectively. If the business keeps inventory it may keep those downstream in
the supply chain the faster to supply customers. Similarly, process technology, where possible,
should ensure straight-through and fast throughput times which in turn may imply a degree of
flexibility that does not inhibit fast response. New products and services must also be developed
to emphasise fast time-to-market. This may include modular designs to avoid redesigning for
every customers and market focussed organisational structures.
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Dependability related strategies
Dependability related strategies will generally favour surplus capacity so as to guarantee supply
to customers with any change in capacity levels ensuring the continuation of surplus capacity or
(where possible) inventories to maintain supply. Multipurpose sites, each of which can perform
a wide range of activities, could also help to ensure dependability of supply to customers.
Supply network strategies may emphasise in-house or dual supply, partnership relationships,
close coordination and (where possible) strategic inventories, all of which help to ensure supply
to customers. Process technologies must themselves be reliable (as opposed to ‘state-of-the-art’
technology which is not as yet tried and tested). Maybe all smaller scale technologies operating
in parallel so that failure in any one part of the process does not affect the whole process. New
products and services must come to market dependably which implies project-based
development teams. Maintenance processes to ensure reliable equipment will be needed and
there is likely to be a heavy emphasis on identifying failure points through operational risk
processes before they can disrupt supply.
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Flexibility related strategies
Flexibility related strategies are also easier to achieve with surplus capacity (because of the
uncertainty of demand at any time) and flexible or multipurpose sites that can respond to
different types of demand. A wide network of suppliers, with a wide range of capabilities, is
also likely to be an advantage especially if those suppliers are themselves flexible. Process
technologies similarly must be flexible and may emphasise smaller scale technology. This is
because many smaller pieces of technology may be able to offer a wider range of technological
capability. Network-based organisation structures may also give the level of organisational
flexibility required as will project-based design and development teams. Finally, if an
organisation is to contain a wide range of capabilities, its staff must have a similarly wide range
of capability and skills.
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Cost-related strategies
Cost-related strategies are likely to want to try and utilise their capacity as much as possible.
This implies that capacity must be kept at the level of demand or even below it to ensure high
utilisation and therefore low unit costs. Furthermore, relatively few, large and specialised sites
could exploit economies of scale and economies of specialisation. Supply network strategies
may emphasise a continual searching for low cost supply using market-based mechanisms. It
may even involve contracts with suppliers that emphasise year-on-year cost reductions. Where
possible inventories should be minimised to reduce working capital requirements and off
shoring opportunities to low cost locations may be explored. Automated technology may also
help to reduce costs as can large-scale technologies that could bring more economies of scale.
Improvement strategies will obviously emphasise lean philosophies of waste reduction.
Standardisation of parts or processes and modularity of design will also help to reduce costs.
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Note…
The explanations (and diagrams) used here are only indicative. The types of decisions described
are not comprehensive, nor are they universal. They simply serve to illustrate the contingent
nature of operations strategy. In other words, what you do strategically depends on what you
want to achieve.
Order-winners and qualifiers and ‘delights’
The chapter also deals with the distinction between order-winners and qualifiers, one of the
most important issues in operations strategy. Order-winners are those aspects of performance
that, when improved, will significantly and directly improve the competitive position of the
business. Qualifiers are those aspects of performance that, when they get worse, may drastically
impair competitive performance of the business, but where improvement will not necessarily
improve competitive performance. Qualifiers may also be called ‘dial tone factors’ (just like the
dial tone on a telephone, one only notices when it is not there).
The concept of ‘delights’ is an intriguing one. Delights both add value in some way for
customers and yet are unexpected until they are introduced to the customer. The implication of
this is that no competitor is currently offering that competitive factor, at least not to the same
level. So, according to this definition, delights do not come from anything other than relatively
novel (or novel levels of) competitive factors.
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Operations strategy changes over time
The chapter draws extensively on the example of Volkswagen (VW) Motor Company and traces
its history from its foundation up to the present day. In doing so, it shows how the balance
between operations resources and market requirements has changed over time. Interestingly, the
one time when the company was having major difficulties in understanding it own strategy was
the time when both operations resources and market requirements were themselves confused.
The chapter also revisits the idea of the ‘emergent strategy’ as being important when
considering the dynamics of operations strategy. Do not underestimate this point. Remember…
‘the concept of emergent strategies in an important one in operations strategy. Emergent
strategies often emerge from the organisational resource which are the direct responsibility of
operation….’ At different points in its history VW has adopted strategies that have emerged as a
result of its experiences.
Commentary on ‘VW – The first 70 years’ example
‘Volkswagen has acquired symbolic stature for whole generations of people. Of all the motor
vehicles that have been produced, the Beetle, the VW Bus, the Golf and the New Beetle are
practically unparalleled in the extent of their identification with entire epochs of social
history’ – Volkswagen Kommunikation.
The story of VW over such an extended period really does illustrate the dynamics of
operations strategies. They do not, and should not, stay constant over time. They will shift and
adapt to internal and external stimuli in a way that makes full sense only in retrospect. The
reconciliation between market requirements and operations resource capability is a response
to these stimuli – an attempt to maintain competitiveness notwithstanding the pressures of
environment and organisational circumstance. Reconciliation is what you do to make things
fit. In fact, notice how, in Slack and Lewis’ Figure 2.9, the reconciliation process is described
in terms of the firm’s product offerings. Often this is the most revealing way of illustrating
reconciliation, because a firm’s products or services are the outward manifestation of how it
attempts to reconcile what it believes the market requires with what it is capable of
producing. Embedded in the product or service is the package of performance characteristics
which the firm is making available to the market. Within this package of performance
characteristics are also to be found the prioritisation and trade-offs inherent within the firm’s
decision-making processes and behaviour. (We shall deal with trade-offs more fully later in
the chapter.)
Note also that the process of strategic decision-making is not always neat or necessarily even
well thought out. At times Volkswagen, like any other company, were reacting to events in a
manner which was more painful to them than if they had taken similar decisions earlier, before
they became crises. The company’s struggle to reduce its cost base during the 1990s is an
example of this. At other times the company seemed to move towards a strategic position not so
much through planning as through a slowly emerging consensus. These strategies are what
were called in Chapter 1 emergent strategies. The concept of emergent strategies is an important
one in operations strategy because they often emerge from the organisational resources which
are the direct responsibility of operations.
For example, the move to modify the ‘common platform’ strategy could be seen as an
emergent strategy. The following is a press statement from VW explaining the move.
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VW save up to 1,000 dm per car in new production strategy – Piech
06 November 2000
WOLFSBURG, Germany
Volkswagen AG is about to overhaul its ‘platform sharing’ strategy, with a system that could
save up to 1,000 dm per car, Ferdinand Piech said in an interview in the Wall Street Journal
Europe.
No longer will the company focus its savings strategy on developing cars of similar sizes that
sit on the same platform.
Rather, VW is now aiming to develop ‘joint production systems’ that could lead to major
components being shared by a wide range of models and brands, he said.
Piech said that is some cases he will be able to save up to 1,000 dm in production costs per
car under the new program as the company achieves greater economies of scale.
The strategy will also help underscore differences within VW’s wide-ranging brand portfolio,
he said.
All told, he envisions VW basing models on eleven joint-production systems, which will be
implemented through 2005.
‘In the future we are going to have 11 module systems instead of four platforms’, Piech said.
He also said the company will achieve a return-on-capital target of 9 pct to 11 pct by next
year, possibly even this year.
VW needs to expand its profit base, he added. Now, almost all of its profit is generated by
new car sales and its parts business. Several years down the road, however, the company
hopes to cleave its profit base into thirds – new cars, financial services and vehicle servicing.
A number of points emerged from this move.
In the balance between operations efficiency (which is enhanced by shared platforms) and
effective market positioning (through the company’s brand strategy), the shared platform
strategy probably leaned too much in the direction of exploiting the efficiencies of platform
sharing at the expense of brand values. Much of the press speculation during 2001 concerned
the damage to VW’s premium brands (such as Audi). Customers were, so the press said,
reluctant to pay a premium for the Audi brand when a very similar car (with the same
platform) can be bought less expensively with a Skoda badge.
Cost reduction objective remains, but the way of achieving it shifts from a design-based
solution (shared platforms) to one based on the company’s broad operations capability
(common module designs and production systems).
The operations function is still seen as the main driver of the company’s strategic direction.
This manufacturing company sees its future as a balanced service and manufacturing
company.
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Trade-offs
A trade-off implies that there is a relationship between simultaneously desirable operations
objectives. Furthermore, it implies that at least the broad form of this relationship is known. So,
for example, ‘We know that our costs will increase if we offer more choices of colour to our
customers, and costs will increase even more dramatically if we also offer a choice of size’. This
statement identifies that costs will increase as variety increases and, furthermore, that costs will
increase more rapidly for certain types of variety extension.
The issue of trade-offs has been one of the most closely fought debates in operations strategy.
Broadly speaking, there are three schools of thought regarding trade-offs. The original school of
thought derives from Skinner who was the first to point out that trade-offs were an important
issue in operations strategy. He emphasised the point that trade-offs should be managed to
reflect the company’s overall strategy. In other words, achieving the right balance or positioning
between various performance objectives is fundamental to operations strategy. The second
school of thought was very much opposed to this idea. It emerged in the early 1980s under the
influence of Japanese manufacturing principles and the concept of continuous improvement. Put
simply, it claimed that trade-offs were largely imagined, that the main objective of operations
management was to be good at everything. Merely accepting that one aspect of performance
must deteriorate if another is to be improved was, they claimed, at best unimaginative and at
worst irresponsible. The final (and now largely accepted) school of thought is that yes, tradeoffs do exist, but over time they can be overcome. This is the approach taken in the chapter.
Figure 2.8 indicates these three schools of thought using the kind of trade-off diagrams
explained in the chapter.
A typology of trade-offs
Trade-offs are found in all types of operation and at all levels. Because trade-offs describe the
relationships between different aspects of operations performance, any pair of performance
measures potentially constitute a trade-off. And, since they may represent a legitimate target for
operations improvement, it is important to be able to identify an operation’s trade-off
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relationships. Identifying trade-offs is best done by looking for them within specific categories.
This requires a typology of trade-offs.
The list of generic performance objectives (quality, speed, dependability, flexibility and cost)
provides a good starting point. For convenience we divide these five generic performance
objectives between, on one hand, the four which can be taken to constitute the service which an
operation delivers to its customers, and, on the other hand, the cost of providing the service. In
addition, both cost and service can be influenced by the capital expenditure the operation
commits to its facilities, and the level of working capital (usually in the form of inventories) the
operation works with. Trade-offs can occur between any pair of from these four categories as
shown in Figure 2.9.
The following example illustrated these trade-offs:
Food Co. is a manufacturer of confectionery products. Their product range can be divided into
three groups. Chocolate bars account for around 5 per cent of total output by volume and
exhibit relatively low seasonality. Assortments account for around 75 per cent of total output by
volume and is seasonal with its two peak periods for sales in April and December (Easter and
Christmas) having sales of 160 per cent and 210 per cent of the low season average (August),
respectively. Chocolate novelties account for around 20 per cent of output and are highly
seasonal, with sales limited to the Easter and Christmas periods. The manufacturing processes
for the first and last product groups are effectively single-stage processes with manufacturing
and wrapping fully integrated. Assortments are manufactured in two stages, the manufacture of
the individual chocolates, which are then stored prior to assembly in a variety of pack types.
The company has recently invested in some automatic packing equipment for its chocolate bar
products. This has considerably reduced labors costs for this product. However, the company
still had to produce different products for different market which added to costs. ‘The problem is
that tastes vary between different markets. We have to use a different recipe for the chocolate
we sell to Northern Europe as opposed to Southern Europe for example. Changing recipes adds
to the complexity of scheduling and generally reduces the utilisation of equipment’.
The company was also considering investing in flexible packing equipment for its assortments
products. Currently, individual chocolates are automatically wrapped and automatically packed
into boxes using relatively old equipment. Investing in newer equipment would allow for a
wider variety of shapes and sizes of boxes. ‘At the moment we really do have to restrict our
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marketing department from using novel pack shapes which could very well increase sales. They
have to restrict their designs to a narrow range of basic shapes. This new equipment would
allow us to extend our use of special promotions and other sales promotion ideas’. The other
problem in producing assortments was how to cope with seasonal sales variations. Currently,
the company produced more or less evenly throughout the year, producing for finished goods
inventory during the low periods and depleting the inventory during the high demand periods.
This saved the disruption and cost of changing production levels every month but increased the
working capital tied up in inventories over the year.
The main problem with the chocolate novelties products also came from seasonality. Though in
this case the seasonality was much greater and demand much more difficult to forecast.
Building up a large inventory before the heavy demand period allowed the company to cope
with heavier than expected demand but also increased the working capital and obsolescence
costs. One possible solution being considered was to invest in more physical capacity which
would allow production levels to be flexed at short notice in line with fluctuations in demand.
Trade-off analysis for Food Co.
Analysing the trade-offs for Food Co. is more complex than it was for Call Co. This is because
an extra performance dimension needs to be included, namely working capital. Figure 2.10
illustrates six of the trade-offs which Food Co. has to deal with.
For chocolate bar production there are two main issues. The first concerns the chocolate recipe.
Using many recipes enables different products to match regional tastes but increases
manufacturing costs. The second concerns the recently installed automatic packing equipment.
This required capital expenditure but has saved on manufacturing costs. The investment being
considered for assortment packing, by contrast, aims to increase flexibility. Thus, the ability to
produce a wider variety of products may be obtained at the cost of extra capital investment.
Investment of another type is involved in scheduling production levels for assortments. Keeping
manufacturing levels constant reduces manufacturing costs but at the expense of working capital
investment in finished goods inventory levels. Similar trade-offs affect the highly seasonal
novelty products. Building up investment in pre-season inventories, although costly in working
capital terms, does allow the company to respond to unexpected demand. However, investing in
inventory would be unnecessary if the company had sufficient capacity for novelty manufacture
to respond to demand as it occurred. This however would necessitate investment in new
capacity.
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Trade-offs in reconciliation
The idea of reconciliation can be described in terms of two elements in managing trade-offs
within the operation. These are
•
Repositioning the balance between the different aspects of the trade-off and
•
Overcoming the trade-off through improvement
Reconciliation as repositioning trade-offs
While not the only way to manage trade-offs, repositioning clearly has a role in reconciling
market requirements with operations resources. In fact at one time it was regarded as the only
way of achieving reconciliation. An operation’s relative achievement in each dimension of
performance, it was argued, should be driven by the requirements of its markets. This would
involve emphasising some aspects of performance and (inevitably) sacrificing others. Even
when it was considered to be the sole route to reconciliation, repositioning the relative
performance balance through trade-offs was never regarded as straightforward. Operations are
bundles of complex organisational and technological systems. They cannot be simply
repositioned by adjusting a set of simple controls. Two factors in particular complicate the
repositioning process
•
There is a ‘friction cost’ of changing relative performance levels.
•
The complexity of trade-off interrelationships can set in chain a set of other trade-offs.
As an example take a frozen food manufacturer. One of the trade-offs which its operations will
have to manage is that between inventory levels of finished product and the ability to respond to
unexpected demand, therefore giving better service to customers. The company has to choose
between good customer service or good (i.e. low) working capital. In practice, changing the
balance between these two dimensions of performance will itself involve some extra effort (and
therefore cost) in order to decide exactly which products are to have their stock levels increased
or reduced. More important, there is a degree of risk involved in making this choice. Get the
decision wrong and both dimensions of performance could get worse. For example, suppose
working capital is to be increased to give better customer service by investing in higher
inventory levels in selected product lines. If the wrong products are chosen then working capital
will increase while customer service levels could get worse. The company could finish up with
high stock levels of the wrong products while failing to satisfy its customers in delivering the
right ones. To some extent, changing the position of a trade-off involves moving to less wellknown operating conditions. This not only means extra planning effort but also extra risk.
Factoring the extra planning with the increased risk together constitutes the friction cost of
repositioning.
Even when the trade-off between working capital and customer service is executed well, in
terms of making the correct stocking decisions, other relationships may complicate the issue.
For example, increased inventory may give a better chance of responding to customer
requirements, but it will also increase the average time products spend in finished goods storage.
Given that this product has a limited life, quality may be compromised by extra time in storage
and the ‘shelf life’ available to the customer may be reduced. So by repositioning the trade-off
(between service level and working capital) in favour of service level, another trade-off
(between service level on one hand and product quality and life on the other) has been affected.
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Repositioning trade-offs is rarely an isolated decision. In practice, attention cannot simply be
focused on one, easily bounded, relationship. The interrelationships between trade-offs need to
be considered.
It is a mistake to dismiss repositioning as merely working within the existing constraints of an
operation. Repositioning can result in sometimes substantial improvements in operations
performance. The British Airways’ first class seat redesign example shows that changing the
balance between aspects of performance can result in superior performance overall.
Reconciliation as overcoming trade-offs
Repositioning trade-offs was described earlier as moving the balance between dimensions of
performance along an operation’s ‘natural frontier’ (from X to Y in Figure 2.11). Using
repositioning to achieve reconciliation between market requirements and operations resources is
fine if market requirements lie within the natural frontier of the operation, as in area P in Figure
2.11. However, if market requirements are such that performance levels must fall within area Q
then the only way to achieve reconciliation is either to abandon the target market which requires
this combination of performance, or alternatively to extend the natural frontier of the operation
so that its performance is improved to the extent that it can now satisfy market requirements –
position Z in Figure 2.11.
For example, in many financial services firms that offer a ‘direct call’ service, one trade-off is that
between the utilisation of staff in call centres and the time taken to respond to customer calls. If the
company’s human resource policies allow for a ‘capacity cushion’ of staff to be on duty they may
not always be fully employed and therefore labour cost per transaction would be relatively high.
However, because of the relative over-supply of staff, customers would only rarely have to wait
more than a few rings before their call was answered. The company could therefore gain more
business. Transaction costs may be high but so would be revenue. A repositioning approach would
involve deciding on the balance between utilisation of staff (therefore transaction cost) and
response time (therefore revenue) that would maximise profitability.
However, an improvement approach would seek to either
•
Improve both dimensions of performance or
•
Improve one dimension of performance while preventing or limiting any deterioration in the
other.
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Both of these options would, in effect, push back the natural frontier of the operation’s
capabilities. For example, a financial services company may decide to redesign their working
time practices. Their new approach involves paying a small premium to staff who live within a
20-minute journey time of their call centre. This premium would allow them to be ‘on call’ for
certain periods when demand was relatively unpredictable. This allows each call centre to bring
in staff at very short notice if their predictive systems indicate a higher than expected level of
demand building up. Making such a change could materially affect the trade-off relationship
between staff costs and customer response time by allowing better response time with only
marginal increases in staff costs. The trade-off is still there, of course. Even with this new
working time policy, staff utilisation and response time will trade off against each other. But
now the trade-off is at a higher level – the operation’s natural frontier has been pushed back.
Commentary on the ‘Flat beds trade off utilisation for comfort’ example
The trade-offs involved in the installation of flat bed seats at British Airways (and
subsequently many other airlines) is a good example of how different types of trade-off
interact with each other. Figure 2.12 illustrates this. In this case, because the service offered
is largely intangible, working capital is not a direct issue. Nevertheless, the other three
categories of capital expenditure, cost and service are all affected. So increased capital
expenditure on seats reduces the space utilisation of the cabin but also increases the
perceived level of service by customers (they have more space and are more comfortable).
So, service increases but space utilisation decreases. This translates as revenue increases but
so do costs. In this case, the repositioning between service and cost resulted in higher levels
of profitability because customers were willing to pay far more for the increase in service
than the airline’s costs had increased.
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Operations focus
The idea of targeting operations or parts of operations on a relatively narrow set of tasks or
markets is not a new one. It was first written about in the 1960s and 1970s and pre-dates that in
practice. Yet it is still one of the most important ‘solutions’ to managing the complexity present
in most operations.
Put simply, focused operations are given a narrow set of objectives, technologies, products or
services, markets, or activities on which to concentrate. A focused operation is one which does
not have to do everything. There are a number of advantages to focusing operations.
The overall managerial targets for operations management can be made simple and clear. For
example, ‘We will protect you from the variations in the market but you must keep costs to a
very minimum’ or ‘No customer must ever be turned away, you must customise services to meet
their individual needs, even if this means increasing our costs.’
Resources appropriate for those narrower set of objectives can be allocated to this focused
operation. For example, if cost is the main objective then high volume, low variable cost
technology could be used. If customisation is particularly important then more flexible
technology could be used. The same applies to people and systems.
Focused operations can take a more appropriate improvement trajectory. For example the
operations which concentrate on cost can become particularly experienced in shaving every cent
off operations costs, whereas those specialising in customisation can develop particular skills of
understanding and interpreting customers’ needs into the delivered service.
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Comment on the ‘Ryanair’ example
Slack and Lewis use Ryanair, the low cost airlines as an example of operations that have
placed themselves at an extreme trade-off position, by sacrificing service functionality for
low cast. They also credit Southwest Airlines as the original, and still the best of these
focused airlines. Southwest Airlines is the only airline that has been consistently profitable
every year for over thirty year. It is also now one of the largest airlines in the world by value.
Yet back in 1971 it was upstart three-jet airline operating out off Dallas, Texas (still its
headquarters). The strategy of the company has been consistent since it was founded, to get
its passengers to their destinations when they want to get there, on time, at the lowest possible
fares, and make sure that they have a good time doing it. Its success in achieving this is down
to clever management, a relaxed and employee-centred corporate style, and, what was then a
unique way of organising its operations. For over 30 years it has introduced a series of cost
saving innovations. Unlike most airlines it provided simple snacks (originally only peanuts)
instead of full meals. This not only reduced costs but also reduced turn round time at airports.
Because there are no meals there is less mess to clear up and also less time is needed to
prepare the galley and load up the aircraft with supplies. Passengers were sold tickets without
a seat allocation (simpler and faster) and expected to seat themselves (faster). Originally,
boarding passes were plastic and reusable and the company was one of the first to use
electronic tickets. It was also early in its adoption of the internet to sell tickets directly to
passengers. Although most airlines at the time used a range of different aircraft for different
purposes, Southwest has consistently stuck with Boeing 737s since it started. This
significantly reduces maintenance costs, reduces the number of spare parts needed and makes
it easier for pilots to fly any aircraft. Southwest’s employee involvement practices are
designed to empower employees to take responsibility for maintaining high efficiency and
high quality of service with profit sharing plans for almost all employees and innovative stock
options plans for its pilots. The result has been what some claim to be the most productive
work force in the airline industry.
Comment on the ‘Burning your bridges (or boats)’ example
An attractive operations strategy for many businesses is to set-up ‘focused operations’ that
concentrate on one activity or part of a market. The example ‘Burning your bridges (or
boats)’ demonstrates one of the advantages of such an arrangement, but also highlights one of
the risks that accompany these benefits. Put simply, an operation with a high degree of focus
must make a success of its business or fold. There is nowhere else to go. This is where the
‘burning your bridges’ analogy comes in. Army 1 that has deliberately destroyed its own
means of retreat has (presumably) two options: (a) fight or (b) die. By contrast, Army 2 has
two different options: (a) fight or (b) run away. In effect, Army 1 has reduced the ‘symmetry’
of its decision options. This is what, at its extreme, operations focus does. By setting up a
separate operation focused exclusively on one task or part of the market, one is taking away
the option of compromise or retreat because that focused operation is incapable of doing
anything but the activities for which it was designed.
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Study guide
CHAPTER 3
Substitutes for strategy
Chapter aims
This chapter is a little different from the other chapters in the book. It deals with a number of
‘new’ approaches to the management of operations that are often seen as operations strategies,
but are not actually strategies in themselves. Four of the more important ‘new’ approaches are
treated in the chapter, namely, Total Quality Management, lean operations, Business Process
Reengineering and Six Sigma. They all need to be understood (particularly the similarities and
differences between them) if they are going to help with strategy or strategic implementation.
Of course, none of these approaches can transform an organisation over night, but what really
matters in the long run is how these approaches help an organisation to learn from its
experiences and build operations capabilities. The chapter aims to:
•
Examine the background and elements of Total Quality Management.
•
Examine the background and elements of lean operations.
•
Examine the background and elements of Business Process Reengineering.
•
Examine the background and elements of Six Sigma.
•
Examine how these approaches can contribute to operations strategy.
The list is not exhaustive
The chapter’s ‘new approaches to operations improvement’ is by no means exhaustive. Almost
all academics and consultants in this area will have their own prioritised list of improvement
approaches. Other candidates that could have been added to their list include Total Productive
Maintenance (TPM), Quality Function Deployment (QFD), Zero Defects, Cycle Process
Reduction (CPR), the Work-out Approach, Quality Circles, Value Engineering and so on. Nor is
there is much hard evidence as to the extent to which these approaches actually give concrete
results in terms of performance improvement. Also, the success of any or all of these new
approaches seems to be very much context-dependent.
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One of the earliest investigations is one of the most interesting.1 The data from the study, when
analysed, supported the idea that TQM does provide economic value to a firm. Also, firms that
had adopted TQM for long periods reported more satisfaction with the approach than those with
less experience. Yet long-term TQM firms did not seem to have a significantly higher
performance level than short-term TQM firms. This may be because long-term TQM firms had
more chance to master the core TQM techniques and were therefore more confident in their use,
even if the benefits were not particularly evident. More broadly, the conclusions of the survey
were reported as follows. 'The findings support the conclusion that TQM can produce economic
value to the firm, but that it has not done so for all TQM adopters. TQM’s success appears to
depend critically on executive commitment, open organisation and employee empowerment, and
less upon such TQM staples as benchmarking, training, flexible manufacturing, process
improvement and improved measurement. Although firms may find these tools indispensable to
a fully integrated TQM initiative, they apparently do not produce performance advantage in the
absence of the intangibles. This result is consistent with the resource-based notion of
complementary resources, and suggests that, rather than merely imitating TQM procedures,
firms should focus their efforts on creating a culture within which those procedures can thrive.'
In other words, the tools and techniques of TQM are necessary and valuable, but they depend
critically on other intangible and cultural factors. The study goes on to suggest that, ‘Although
the intangibles were universally important to TQM’s success, other factors were contextdependent.’ In other words, an organisation may or may not master the detailed tools and
techniques of TQM, but even if it does make a perfectly sound set of decisions on adopting
exactly the right techniques, it is unlikely to be successful unless it gets the intangibles right.
And this probably applies to all the ‘new’ approaches discussed in this chapter. Getting the
details right is a necessary (and important) but not sufficient condition for successfully adopting
any of these approaches.
Nevertheless, as the chapter puts it…‘Before anyone can judge whether any of these new
approaches is right for them, they must understand what they are, their underlying philosophy
and how they differ from each other.’ The four approaches discussed are as follows:
•
Total Quality Management
•
Lean operations
•
Business Process Reengineering
•
Six-Sigma
Total Quality Management (TQM)
TQM is, ‘an effective system for integrating the quality development, quality maintenance and
quality improvement efforts of the various groups in an organisation so as to enable production
and service at the most economical levels which allow for full customer satisfaction’2. TQM was
one of the earliest management ‘fashions’ that peaked in the late 80s and early 90s. TQM now
1
Powell, T.C. (1995) ‘Total Quality Management as Competitive Advantage: A Review and Empirical
Study’, Strategic Management Journal, Vol.16, 15–37.
2
Feigenbaum, A.V. (1986) Total Quality Control, New York: McGraw Hill.
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seems a little outdated. Yet, this does not mean that the ideas behind TQM are no longer worth
studying or that TQM is no longer influential. In fact, some of its principles have been
‘absorbed’ into many organisations’ improvement philosophies. This is partly because TQM
was never just about 'quality management as such'. It was always about more than simply
assuring product or service quality. It would be more accurate to view TQM as being a way of
doing business. Its principles cover many different aspects of management from managing
people and business processes to aiming for complete customer satisfaction at every stage in
every process.
The origins of TQM
All of the approaches covered in the chapter are the subject of some debate as to what their main
principles are, what the true definition of the approach is and so on. No more so than TQM.
Perhaps that is why almost all descriptions of TQM start by identifying the authorities who,
through their work, contributed to developing the idea. Unfortunately, these individuals came to
be known as TQM ‘gurus’. Table 3.1 identifies some of these ‘gurus’ together with the strengths
and weaknesses of their particular perspective on TQM.
Table 3.1 Some relative strengths and weaknesses of some of the quality gurus
Quality ‘guru’
Strengths of approach
Armand Feigenbaum was a
doctoral student at the
Massachusetts Institute of
Technology in the 1950s when he
completed the first edition of his
book Total Quality Control. He
defines TQM as: ‘an effective
system for integrating the quality
development, quality maintenance
and quality improvement efforts of
the various groups in an
organisation so as to enable
production and service at the most
economical levels which allow for
full customer satisfaction’.
Weaknesses of approach
Provides a total approach to Does not discriminate
quality control.
between different kinds of
quality context.
Places the emphasis on the
importance of management. Does not bring together the
different management
Includes socio-technical
theories into one coherent
systems thinking.
whole.
Participation by all staff is
promoted.
Despite his early writings in
America, it was the Japanese who
first made the concept work on a
wide scale and subsequently
popularised the approach and the
term ‘TQM’.
W. Edwards Deming, considered
in Japan to be the father of quality
control, asserted that quality starts
with top management and is a
strategic activity.3 It is claimed that
much of the success in terms of
quality in Japanese industry was the
result of his lectures to Japanese
Provides a systematic and
functional logic which
identifies stages in quality
improvement
Stresses that management
comes before
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Action plan and
methodological principles
are sometimes vague
The approach to leadership
and motivation s seen by
some as idiosyncratic
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
companies in the 1950s. Deming’s
basic philosophy is that quality and
productivity increase as ‘process
variability’ (the unpredictability of
the process) decreases. In his 14
points for quality improvement, he
emphasises the need for statistical
control methods, participation,
education, openness and
purposeful improvement:
Leadership and motivation Does not treat situations
are recognised as important which are political or
coercive
Emphasises role of
statistical and quantitative
Recognises the different
methods
contexts of Japan and
North America
Joseph M. Juran tried to get
organisations to move away from
the traditional view of quality as
‘conformance to specification’ to a
more user-based approach, for
which he coined the phrase ‘fitness
for use’. He pointed out that a
dangerous product could conform to
specification but would not be fit to
use. Juran was concerned about
management responsibility for
quality, but he was also concerned
about the impact of individual
workers and involved himself with
the motivation and involvement of
the workforce in quality
improvement activities.5
Emphasises the need to
move away from quality
hype and slogans
Kaoru Ishikawa has been credited
with originating quality circles and
cause-and-effect diagrams.
Ishikawa claimed that there had
been a period of over-emphasis on
statistical quality control (in Japan),
and as a result people disliked
quality control. They saw it as
something unpleasant because they
were given complex and difficult
tools rather than simple ones.
Furthermore, the resulting
standardisation of products and
processes and the creation of rigid
specification of standards not only
made change difficult but made
people feel bound by regulations.
Ishikawa saw worker participation
as the key to the successful
implementation of TQM. Quality
circles, he believed, were an
important vehicle to achieve this.
Strong emphasis on the
Some of his problemimportance of people and
solving methods seen as
participation in the problem- simplistic.
solving process.
Does not deal adequately
A blend of statistical and
with moving quality circles
people-oriented techniques. from ideas to action.
Does not relate to other
work on leadership and
motivation
Seen by some as
Stresses the role of the
customer, both internal and undervaluing the
contribution of the worker
external
by rejecting bottom-up
Management involvement
initiatives
and commitment are
stressed
Seen as being stronger on
control systems than the
human dimension in
organisations
Introduces the idea of
quality control circles.
Genichi Taguchi was the director
Approach pulls quality back
of the Japanese Academy of Quality to the design stage.
and was concerned with
engineering-in quality through the
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Difficult to apply where
performance is difficult to
measure (e.g. in the
service sector).
Nigel Slack and Michael Lewis, Operations Strategy, 3rd Edition, Instructor’s Manual
optimisation of product design
combined with statistical methods of
quality control. He encouraged
interactive team meetings between
workers and managers to criticise
and develop product design.
Taguchi’s definition of quality uses
the concept of the loss that is
imparted by the product or service
to society from the time it is created.
His quality loss function includes
such factors as warranty costs,
customer complaints and loss of
customer goodwill.7
Recognises quality as a
societal issue as well as an
organisational one.
Phillip B. Crosby is best known for
his work on the cost of quality. He
suggested that many organisations
do not know how much they spend
on quality, either in putting it right or
getting it wrong. He claimed that
organisations that have measured
their costs say that they equate
them to about 30 per cent of sales
(others suggest a smaller figure of
around 10 per cent). Crosby tried to
highlight the costs and benefits of
implementing quality programmes
through his book Quality is Free in
which he provided a zero defects
programme. This is summarised in
his absolutes of quality
management.
Provides clear methods that Seen by some as implying
are easy to follow.
that workers are to blame
for quality problems.
Worker participation is
recognised as important.
Seen by some as
emphasising slogans and
Strong on explaining the
platitudes rather than
realities of quality and
recognising genuine
motivating people to start
difficulties.
the quality process.
Zero defects sometimes
seen as risk avoidance.
Methods are developed for
practising engineers rather
than theoretical
statisticians.
Strong on process control.
Quality is seen as primarily
controlled by specialists
rather than managers and
workers.
Regarded as generally
weak on motivation and
people management
issues.
Insufficient stress given to
statistical methods.
While some authorities see TQM’s dependence on the work of quality ‘gurus’ as positive, other
see it as a major weakness in the whole concept. Although sincere in their beliefs, many TQM
gurus were consultants who made their living out of selling their own ideas. Under those
circumstances there is a clear conflict of interest between a dispassionate and evidence-driven
approach to examining the behaviour of organisations and the need to develop a set of simple
prescriptions that managers could easily understand and implement. Moreover, by reducing
quality management to a simple list of good practice ideas, it ignores the often hugely
important, differences in organisation context.
TQM puts the customer at the centre of improvement
An important element in TQM is the idea that all businesses have many types of customers,
both external and internal. And the relationships between internal customers and suppliers are
important because it directly influences the relationship with external customers. In fact, TQM
focuses strongly on the importance of the relationship between customers (internal and external)
and supplier. Networks of process are known as the 'quality chains'. They can fail at any point
by one person or one piece of equipment not meeting the requirements of the customer. Not
fulfilling customer requirements in any part of the quality chain will multiply failure by creating
problems elsewhere, which in turn leads to yet more failure and problems.
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TQM’s emphasis on the ability to meet customers’ (external and internal) requirements has led
to the popularising of a series of questions. The idea is that all process or operations managers
should be able to identify and understand their customers and suppliers. Table 3.2 illustrates a
typical set of questions.
Table 3.2 Typical customer and supplier analysis questions
How well do I relate to and understand my
customers?
How well do I relate to and understand
my suppliers?
•
Who are my customers?
•
Who are my internal suppliers?
•
What are their actual needs and
expectations?
•
What are my true needs and
expectations?
•
What is my ability to meet their needs and
expectations?
•
Do I communicate my needs and
expectations effectively to my suppliers?
•
Do I have the capability to meet their
needs and expectations?
•
Do my suppliers have the capability to
meet my needs and expectations?
•
If not, what must I do to improve this
capability?
•
How do I communicate effectively any
changes in my needs and expectations?
•
Do I always meet their needs and
expectations?
•
If not, what prevents this from happening
when the capability exists?
•
How do I detect changes in their needs
and expectations?
Don’t dismiss these questions or the ‘questioning’ approach. At first glance it may seem both
superficial and certainly not strategic. Yet remember that the internal customer concept that was
originated in the TQM philosophy does point out that an important part of strategic capability
does derive from operational practice. Or, as TQM proponents would put it, 'How can you hope
to satisfy external markets if you can’t even fulfil internal customer requirements?'
Kaizen or continuous improvement
An enduring legacy of TQM is the idea of continuous improvement (CI), also known by its
Japanese (more or less) equivalent term ‘kaizen’. Both terms refer to the idea of constantly
introducing small incremental changes in a business in order to improve performance.
Underlying this approach is the assumption that employees are the best people to identify
improvement opportunities because they see the details of what really happens within processes
all the time. The implication is that a firm that uses this approach therefore has to have a culture
that encourages and rewards employees for their contribution to the process. Key features of
Kaizen include the following
•
Improvement is based on many, small changes.
•
Since ideas come from staff, they are likely to be easier to implement.
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•
Small improvements are less likely to require major capital investment than major process
changes
•
All staff see their jobs as including seeking ways to improve their processes.
•
An emphasis on developing a culture of trust throughout the organisation.
The 'Business Excellence’ model from the EFQM
The third aspect of TQM that has endured is not so much a ‘legacy’ as a development of many
of the themes that made TQM so popular. These themes are included in Figure 3.2 in Chapter 3.
It has been used widely, especially throughout Europe, as a model (or rather a framework) for
assessing quality and improvement. A number of research studies have investigated the
correlation between the adoption of holistic Models, such as the EFQM Excellence Model, and
improved organisational results. The majority of such studies show a positive linkage.3
The EFQM describes its model as follows:
'Regardless of sector, size, structure or maturity, to be successful, organisations need to
establish an appropriate management framework. The EFQM Excellence Model was introduced
at the beginning of 1992 as the framework for assessing organisations for the European Quality
Award. It is now the most widely used organisational framework in Europe and it has become
the basis for the majority of national and regional Quality Awards… [It]….a practical tool that
can be used in a number of different ways:
•
As a tool for Self-Assessment.
•
As a way to Benchmark with other organisations.
•
As a guide to identify areas for Improvement.
•
As the basis for a common Vocabulary and a way of thinking.
•
As a Structure for the organisation’s management system.
The EFQM Excellence Model is a non-prescriptive framework based on 9 criteria. Five of these
are “Enablers” and four are “Results”. The “Enabler” criteria cover what an organisation does.
The “Results” criteria cover what an organisation achieves. “Results” are caused by “Enablers”
and “Enablers” are improved using feedback from “Results”.
EFQM also believes that the process of Self-Assessment is a catalyst for driving business
improvement. Its definition of Self-Assessment is as follows: Self-Assessment is a
comprehensive, systematic and regular review by an organisation of its activities and results
referenced against the EFQM Excellence Model. The Self-Assessment process allows the
organisation to discern clearly its strengths and areas in which improvements can be made and
culminates in planned improvement actions that are then monitored for progress.
3
K. Hendricks & V. Singhal, Quality Awards and the Market Value of the Firm: An Empirical Investigation,
Georgia Tech, Management Science, Vol. 42, No. 3. March 1996, pp. 415–436
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Some of the benefits of using the model for self-assessment include:
•
Providing a structured approach to identifying and assessing organisational strengths and
weaknesses.
•
Improving the process of how plans are developed.
•
Creating a common language and conceptual framework for improvement.
•
Educating staff on the factors that contribute to operations performance.
•
Integrating possible disparate improvement initiatives within an organisation
Lean operations
The principles of lean operations are counterintuitive, particularly to those who have been
brought up in what was the conventional wisdom of operations management that was obtained
during the 1970s (and still is orthodoxy in some manufacturing and many service industries). It
is also partly because the many ideas and principles that go to make up lean are interconnected.
The chapter describes how customer-centric pull triggers synchronous flow that leads to a
change in behaviour, which in turn encourages waste elimination.
The Origins of Lean
There is evidence that smooth flow of items in processes was seen as important as far back as
the Arsenal in Venice in the 1450s. But the first person to apply mass production to an entire
production process was Henry Ford in 1913 when he created what he called flow production.
But Ford’s system, although it promoted smooth flow, could not easily provide variety. The
Model T was limited to one colour and to one specification so that all Model T chassis were
identical. When automakers tried to produce many different models, each with many options it
resulted in processes with much longer throughput times. Progressively larger and larger
machines were installed that ran faster and faster, apparently lowering costs of processing, but
actually increasing throughput times and inventories.
In the 1930s, Taiichi Ohno, and others at Toyota believed that it might be possible to provide
both smooth, fast process flow and wide variety. Their ideas developed into what by the 1960s
was being called the Toyota Production System. The best known of all descriptions of the ideas
underlying lean operations is The Machine That Changed the World (1990) by James P.
Womack, Daniel Roos, and Daniel T. Jones (http://www.lean.org/Bookstore/ProductDetails.
cfm?SelectedProductID=160). In a later book, Lean Thinking (1996), James P. Womack and
Daniel T. Jones distilled these lean principles even further to five:
•
Specify the value desired by the customer.
•
Identify the value stream for each product providing that value and challenge all of the
wasted steps (generally nine out of ten) currently necessary to provide it.
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•
Make the product flow continuously through the remaining, value-added steps.
•
Introduce pull between all steps where continuous flow is possible.
•
Manage toward perfection so that the number of steps and the amount of time and
information needed to serve the customer continually falls.
The Lean Enterprise Institute, who specialise in the practice of lean ideas in a variety of
contexts, recommend the following stages in applying lean principles.
Specify value – As Womack and Jones note in Lean Thinking, ‘The critical starting point for
lean thinking is value. Value can only be defined by the ultimate customer. And it's only
meaningful when expressed in terms of a specific product (a good or a service, and often both at
once), which meets the customer's needs at a specific price at a specific time.’ Lean must focus
on the customer when specifying and creating value. Neither shareholder needs, nor senior
management¹s financial mind-set, nor political exigencies, nor any other consideration should
distract from this critical first step in lean thinking.
Identify the value stream – The value stream is the set of all the specific actions required to
bring a specific product through the critical management tasks of any business: the problemsolving task running from concept through detailed design and engineering to production
launch, the information management task running from order-taking through detailed
scheduling to delivery and the physical transformation task proceeding from raw materials to a
finished product in the hands of the customer. Identifying the entire value stream for each
product is the next step in lean thinking, a step that firms have rarely attempted but which
almost always exposes enormous, indeed staggering, amounts of waste.
Examine flow – Only after specifying value and mapping the stream can lean thinkers
implement the third principle of making the remaining, value-creating steps flow. Such a shift
often requires a fundamental shift in thinking for everyone involved, as functions and
departments that once served as the categories for organising work must give way to specific
products and a ‘batch and queue’ production mentality must get used to small lots produced in
continuous flow. Interesting, ‘flow’ production was an even more valuable innovation of Henry
Ford¹s than his better-known ‘mass’ production model.
Introduce customer pull – As a result of the first three principles, lean enterprises can now
make a revolutionary shift: instead of scheduling production to operate by a sales forecast, they
can now simply make what the customer tells them to make. As Womack and Jones state, ‘You
can let the customer pull the product from you as needed rather than pushing products, often
unwanted, onto the customer.’ In other words, no one upstream function or department should
produce a good or service until the customer downstream asks for it.
Pursue perfection – After having implemented the prior lean principles, it ‘dawns on those
involved that there is no end to the process of reducing effort, time, space, cost and mistakes
while offering a product which is ever more nearly what the customer actually wants,’ write
Womack and Jones. ‘Suddenly perfection, the fifth and final principle, doesn’t seem like a crazy
idea.’
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Commentary on example – Volvo falls to the power of lean
Some may find the story of how Volvo moved towards adopting lean principles throughout its
auto making plants a little depressing. After all, the radical and worker-centred plants at
Kalmar and Uddevalla seemed to hold out the promise of ‘work with dignity’. Certainly, to
those whose view of assembly line working was still influenced by Charlie Chaplin’s Modern
Times, the philosophy behind Volvo’s experimental plants seemed to give control back to the
people who actually produced the automobiles. And although neither of these plants were
failures as such (high quality standards were achieved and, broadly, workers seemed happy
with their extended tasks), they just could not match the combination of benefits that came
from adopting lean principles. Of course, proponents of lean would argue that not only do
automobile plants designed on just-in-time principles give better quality, faster throughput
and lower costs they also provide the opportunity for operators to have a more meaningful
level of involvement in process improvement. One may or may not, accepts that argument.
But this is a story that demonstrates the power of lean principles in automobile
manufacturing. It may also be a demonstration that there is a globalised market in ideas as
well as products.
Business Process Re-engineering (BPR)
BPR can be defined in different ways, Here are two : ….the fundamental rethinking and radical
redesign of business processes to achieve dramatic improvements in critical, contemporary
measures of performance, such as cost, quality, service and speed4….and….‘Business Process
Reengineering….. seeks radical rather than merely continuous improvement. It escalates the
effort of ……. (lean) …… and TQM to make process orientation a strategic tool and a core
competence of the organisation. BPR concentrates on core business processes, and uses the
specific techniques within the …. (lean) ….. and TQM tool boxes as enablers, while broadening
the process vision’.5
In fact, almost all definitions stress the idea of identifying a number of business processes,
usually assuming that there are a number of ‘core’ business processes. There are two ‘schools of
thought’ with BPR. The first starts with no preconceptions about what the most important endto-end processes will be in any given organisation. The second prefers to identify a number of
‘classes’ or ‘types’ of core process. Both approaches share the common idea that there is a
collection of interrelated tasks that solve a particular issue. But there is no universal agreement
on what the main core types of business process are. Some typologies use an internal
organisational task approach. For example:
•
Management processes – the processes that govern the operation of a system, including
'corporate governance', 'resource allocation' and 'strategic management'.
•
Operational processes – the processes that are part of the core business, and that directly add
value, including manufacturing, service provision, procurement, marketing and sales.
4
Hammer, M. and Champy, J. (1993) Reengineering the Corporation: A Manifesto for Business
Revolution, New York: Harper Business.
5
Johansson, H.J. (1993) Business Process Reengineering: Break Point Strategies for Market Dominance,
New York: John Wiley & Sons.
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•
Supporting processes – these support the core processes, including accounting, payroll,
recruitment and IT.
No matter how one defines overall processes, there are some generally agreed guidelines on
how BPR should be approached. One commercial report combines data from three
benchmarking studies to present a picture of process redesign and reengineering projects as well
as views on the mistakes to avoid in BPR projects6. Its key findings areu:
•
The need to reduce cost/expense was the most frequently cited business driver for
reengineering projects with competitive pressure, poor customer satisfaction and poor
quality of products and services rounding out the top-four.
•
The top activity that project teams would do differently on the next project is more effective
change management.
•
Teams whose projects were driven or heavily supported by top management were more
likely to complete their project at or above expectations.
•
Participants overwhelmingly indicated that the planning stage, where scope and roles were
set, was the most important phase in the project.
•
Resistance to change within the organisation was cited six times more often than any other
as the number one obstacle to successful implementation.
Six Sigma
The chapter defines Six Sigma, as, ‘A disciplined methodology of defining, measuring,
analysing, improving and controlling the quality in every one of the company’s products,
processes and transactions – with the ultimate goal of virtually eliminating all defects’. A
slightly different definition is provided by Isixsigma, an organisation of Six Sigma practitioners.
'...Six Sigma is a rigorous and disciplined methodology that uses data and statistical analysis to
measure and improve a company's operational performance by identifying and eliminating
"defects" in manufacturing and service-related processes. Commonly defined as 3.4 defects per
million opportunities, Six Sigma can be defined and understood at three distinct levels: metric,
methodology and philosophy...'.
The origins of six sigma
Engineers in Motorola during the 1980's used the Six Sigma title informally for an in-house
initiative for reducing errors in manufacturing processes. Feeling that using a percentage scale
to measure defects was insufficiently ambitious, they adopted the idea of using the 'defects per
million' metric. And given that Six Sigma of variation was the equivalent of 3.4 defects per
million, the term ‘Six Sigma’ stuck. Later, Motorola extended the idea to its other business
processes. More significantly ‘Six Sigma’ became the in-house brand name for its performance
improvement methodology. Within a few years, other companies, most notably Allied Signal,
had adopted some parts of Motorola’s improvement method, but it was when General Electric's
6
Prosci, ‘Best practice in Business Process Reengineering and Process Design', www.prosci.com
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CEO Jack Welch heard of the success of the approach at Allied Signal and decided to
implement Six Sigma in GE that the approach really started to be taken seriously by the
business world more generally.
GE claimed that, by the late 1990s Six Sigma had resulted in more than three-quarters of a
billion dollars of cost savings. So, in around 10 years Six Sigma had become both a popular and
influential improvement and a consultancy product in its own right. Yet, the organisations that
were involved in Six Sigma’s development have slightly differing interpretations. For example,
Motorola’s view is '...Six Sigma has evolved over the last two decades and so has its definition.
Six Sigma has literal, conceptual, and practical definitions. At Motorola University (the
company’s training and consultancy division), we think about Six Sigma at three different levels
…[but]… essentially, Six Sigma is all three at the same time.'
•
As a metric
•
As a methodology
•
As a management system
'...Six Sigma as a Metric: The term "Sigma" is often used as a scale for levels of "goodness" or
quality. Using this scale, "Six Sigma" equates to 3.4 defects per one million opportunities
(DPMO). Therefore, Six Sigma started as a defect reduction effort in manufacturing and was
then applied to other business processes for the same purpose..'
'...Six Sigma as a Methodology: As Six Sigma has evolved, there has been less emphasis on the
literal definition of 3.4 DPMO, or counting defects in products and processes. Six Sigma is a
business improvement methodology that focuses an organisation on:
•
Understanding and managing customer requirements
•
Aligning key business processes to achieve those requirements
•
Utilising rigorous data analysis to minimise variation in those processes
•
Driving rapid and sustainable improvement to business processes..'
'..At the heart of the methodology is the DMAIC model for process improvement. DMAIC is
commonly used by Six Sigma project teams and is an acronym for:
•
Define opportunity
•
Measure performance
•
Analyse opportunity
•
Improve performance
•
Control performance..'
'...Six Sigma Management System: Through experience, Motorola has learned that disciplined
use of metrics and application of the methodology is still not enough to drive desired
breakthrough improvements and results that are sustainable over time. For greatest impact,
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Motorola ensures that process metrics and structured methodology are applied to improvement
opportunities that are directly linked to the organisational strategy. When practiced as a
management system, Six Sigma is a high performance system for executing business strategy.
Six Sigma is a top-down solution to help organisations:
•
Align their business strategy to critical improvement efforts
•
Mobilise teams to attack high impact projects
•
Accelerate improved business results
•
Govern efforts to ensure improvements are sustained..'
After Motorola’s original work, it was General Electric (GE) who were responsible for
popularising the idea of Six Sigma. GE’s view of Six Sigma is as follows. '...Six Sigma is a
highly disciplined process that helps us focus on developing and delivering near-perfect
products and services. Why "Sigma"? The word is a statistical term that measures how far a
given process deviates from perfection. The central idea behind Six Sigma is that if you can
measure how many "defects" you have in a process, you can systematically figure out how to
eliminate them and get as close to "zero defects" as possible. To achieve Six Sigma Quality, a
process must produce no more than 3.4 defects per million opportunities. An "opportunity" is
defined as a chance for non-conformance, or not meeting the required specifications. This
means we need to be nearly flawless in executing our key processes.'
GE sees Six Sigma as revolving around a few key concepts.
•
What is ‘Critical to Quality’, that is what are the attributes that are most important to the
customer?
•
Defining defects as anything that fails to deliver what the customer wants.
•
Process Capability is what your process can deliver compared with what customers want.
•
Reducing the variation in what the customer sees and feels.
•
Stable Operations that ensure consistent and predictable processes to improve what the
customer sees and feels.
•
Designing to meet customer needs and process capability...
The differences and similarities between the approaches
It is careful to stress the importance of not putting all one’s faith in copying how any of these
approaches have been implemented in other organisations. In fact one can question the universal
appropriateness on the very idea of ‘best practice’. But, even if one accepts that there are points
to be learned from ‘best practice’, there are some further points stressed in Chapter 3.
•
Senior managers sometimes use these new approaches without fully understanding them.
•
All these approaches are different.
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•
These approaches are not strategies but are strategic decisions.
•
Avoid becoming a victim of improvement ‘fashion’.
The various approaches contain common elements
The chapter distinguishes between the approaches in terms of whether they ate top-down or
bottom-up, and whether they attempt to dictate what to do or how to do it. However, all these
approaches are capable of some degree of interpretation. A more realistic description of the
differences between them is shown in Figure 3.1. This shows that there is some overlap between
the approaches
Figure 3.1 Each of the ‘new approaches’ positioned in terms of their emphasis on what
changes to make or how to make the changes, and whether they emphasise rapid or
gradual change and indicating the degree of overlap between them
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The chapter also describes the main ‘elements’ contained within each of the approaches that are
reviewed. You may have noticed that many of these elements appear more than once, some of
them several times. Figures 3.2 to 3.6 attempt to summarise these elements and how they fit into
each approach.
Figure3.2 The elements that go to make up the ‘new approaches’ reviewed with those
emphasised by TQM highlighted
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Figure 3.3 The elements that go to make up the ‘new approaches’ reviewed with those
emphasised by Lean highlighted
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Figure 3.4 The elements that go to make up the ‘new approaches’ reviewed with those
emphasised by BPR highlighted
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Figure 3.5 The elements that go to make up the ‘new approaches’ reviewed with those
emphasised by ERP highlighted
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Figure 3.6 The elements that go to make up the ‘new approaches’ reviewed with those
emphasised by Six Sigma highlighted
Implementation problems
The main barrier to adopting the new ideas when they were first proposed was overcoming the
cognitive challenges posed by ideas that were counterintuitive to those of a traditional mindset.
For example, the approach taken to quality by Japanese automobile manufacturers such as the
Toyota Motor Company were met with incomprehension and incredulity when they were first
articulated. For example, Cole quotes the following reaction of Toyota’s Quality Vice-President
when asked whether continuous improvement really did have merit.7
'There has always been a problem because to research a 20 yen problem you have to spend 100
yen. However, we have stopped arguing about whether the research compensates for the loss in
money. We stopped it 20 years ago. This is because failure cost is really only a small part of the
total cost. For example, with our warranty system a customer will bring a faulty automobile
which we fix for free. So, it takes a certain amount of money on our side for repairs. But the
customer must pay for gasoline to bring the car to the shop, and he must find a way to get home,
plus he will not be able to use the car for a certain period. And since the car is not being used,
this is a minus for the national economy. Therefore, we are not covering all these losses with the
7
Cole, R. E. (1998) Learning from the quality movement: What did and didn’t happen and why? California
Management Review, Vol. 41, No. 1.
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money we use at the factory to repair the car. In short, the losses far exceed the costs we
incurred fixing the problem.'
As Cole points out, critical to his response are the implicit assumptions that the unmeasured
customer and society incurred costs will become company costs (through negative reputational
effects) if not addressed and that reducing them, even if we can’t measure them in a precise
fashion, is well worth the investment. On a similar theme, Nadler identified what he regarded as
quality-hostile assumptions to the adoption of TQM (again, this list could be used or adapted for
almost any of the new approaches). This is shown in Table 3.3.
Table 3.3 Quality-hostile assumptions8
Barriers
Corporate
purpose
Customers
Performance
People
8
Illustrative assumptions
•
Our overriding purpose is to make money and produce short-term
shareholder return.
•
Our key audience are the financial markets, in particular the analysis.
•
We are smarter than our customers and know what they really need.
•
Quality is not a major factor in customer decisions; they cannot tell the
difference.
•
It costs more to provide a quality product or service and we will not
recover the added cost.
•
The law of diminishing returns makes continuous improvement
unworkable.
•
Strategic success comes only from large breakthrough improvements
rather than continuous improvement.
•
The way to influence corporate performance is portfolio management
and creative accounting.
•
We will never be able to operate competitively at the lower end of the
market.
•
Managers are paid to make decisions; workers are paid to do, not to
think.
•
We do not trust our people.
•
The job of senior management is strategy not operations or
implementation.
•
The key disciplines for senior management are finance and marketing.
Adapted from: Nadler D, (1992) Organizational architecture, San Francisco: Jossy-Bass .
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Problem solving
and
improvement
Organisation
•
To err is human; perfection is unattainable and an unrealistic goal.
•
Quality improvement can be delegated; it is something that top
management can tell middle management to do to the bottom of the
organisation.
•
Celebrate success and shun failure; there is not much to learn by
dwelling on our mistakes.
•
If it ain’t broke don’t fix it.
•
Functional loyalties take precedence over other loyalties.
•
An emphasis on systems inevitably leads to deadly bureaucracy.
Of course, as the chapter points out, there is a mirror-image barrier to overcoming cognitive
challenges. That is, managers take on an uncritical or an evangelical view of a new idea.
‘Swallowing an idea whole’ without any understanding or critical evaluation of its suitability
inevitably leads to disappointment and disillusionment. This is why there is such merit in
putting these ideas together, comparing them and attempting to understand their similarities and
differences.
The learning context of adopting new approaches
Even organisations that have made significant improvements in their operations should want to
further develop their operations capability, and through that, their operational performance.
Many firms look to a comprehensive education programme that will enhance the breadth and
depth of operations capability throughout their management population.
Yet, notwithstanding the progress that may have been made in some parts of an organisation,
there is usually evidence to indicate room for further improvement. Common problems include
the following:9
•
There is some inconsistency of the messages coming out of different development
interventions and in some cases confusion as to how different initiatives relate to each other.
•
Where individual improvement projects have been successfully implemented the learning
often fails to be embedded throughout the organisation.
•
Some tools and techniques, although used in places, fail to have a significant impact
because the underlying principles on which they are based are not properly understood.
•
The responsibility of operations managers for improving their processes is seen as
secondary to maintaining on-going performance (keeping the show on the road).
•
There are very different levels of knowledge, experience achievement in different parts of
the operation.
9
Slack and Betts (2008) Forgotten Heroes: Process Leadership in financial service operations, Research
Report 8–50, opsman.org, forthcoming.
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There is ‘initiative fatigue’ and lack of engagement.
•
There is some weakness in the understanding by middle managers of their strategic position,
contribution and role.
•
There are potential issues with an improvement culture that may be seen as being top-down
and directive. Such a culture may become less appropriate for an organisation moving
towards relatively sophisticated improvement strategies.
•
There may be little understanding of how current operational performance compares with
comparable operations, either internally or externally.
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Study guide
CHAPTER 4
Capacity strategy
Chapter aims
Chapter 4 deals with capacity strategy. The capacity of any operation is usually taken to mean
its capability of operating at a particular level. The chapter aims to:
•
Emphasise the importance of long-term capacity strategy as part of operations strategy.
•
Illustrate what is meant by capacity and capacity strategies and show some of the
difficulties in using these terms.
•
Explain why capacity levels are set at particular levels, what economies and diseconomies
come through scale, how the timing and magnitude of capacity change affect operations
performance and summarise the key issues involved in the location of capacity.
Introduction
Not only does size matter in operations, size is a vitally important issue in determining how well
an operation can serve its markets. Capacity strategy decisions affect all the significant
measures of operations success: costs, service, revenue, return on assets, working capital, future
capabilities and the overall image of the business. That means it’s an extremely important topic.
Also, because it deals with often expensive physical assets one doesn’t get too many chances to
get it right. Nor is capacity a straightforward issue. It is complex, both in the sense that it is not
always easy to measure and in the sense that two similar operations with similar levels of
overall capacity can, in reality, be very different in how they deploy their capacity. The chapter
consists of three parts. The first takes a steady state view of capacity. It more or less ignores
issues of growth or decline and concentrates on how organisations can configure their capacity
given a particular level of demand. The second deals with capacity dynamics. In other words,
how the quantity and nature of a company’s capacity is changed to match changing patterns of
demand. The third looks at some issues that influence the location of capacity.
Measuring capacity
The chapter devotes some space to some of the problems of measuring capacity. Don’t
underestimate this issue. Without a way of measuring capacity it is difficult to manage it
strategically. Often, capacity is measured as output of products or services per unit of time. So,
each of Volvo’s’ car plants will have a capacity of so many automobiles per week or per year.
However, not all types of operations can measure their capacity in output. For example, a retail
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chain of stores could measure its capacity in terms of the number of customers it serves, but that
would not be a very meaningful figure. In fact, such an organisation would measure its capacity
in thousands of square feet of floor space devoted to retailing. This is an input measure of
capacity. The capacity of any operation’s unit also depends on the mix of products or services
produced. Each of Volvo’s car plants will need to take into account whether the mix of
automobiles it makes remains constant. If it does not then its effective capacity will change.
What is capacity strategy?
The chapter provides a relatively thorough treatment of the main issues, both of configuring
capacity and changing capacity, over the long-term. The key issues they identify are shown in
Figure 4.1.
•
What should our overall level of capacity be? In other words, ideally, how big should our
operation be?
•
What type of capacity to have? In other words, what should be the balance between the
number and size of sites that make up our overall capacity?
•
What should our location strategy be? In other words, where should we place our various
sites?
•
What should be the timing of any change in capacity?
•
What should be the magnitude of any change in capacity?
The overall level of operations capacity
The chapter concentrates on the more ‘rational’ perspective on determining capacity levels, and
issues of economics of scale are, or course, important. Some say that the principle of an
optimum size for any operation is one of the most important concepts in operations strategy.
However, the text does not go into any depth on another aspect of size – how it affects the
‘softer’ issues of creativity and innovation. The following example illustrates this idea.
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The paradoxes of scale in the pharmaceutical industry
There is a fundamental and intriguing paradox in the pharmaceutical industry. Scale is
increasingly seen as important. Drug companies are merging to form a handful of industry
giants. Yet, these giants are obsessed with the dynamic innovation capabilities exhibited by
companies at the very opposite end of the scale spectrum, such as the small biotech
companies with their start-up mentality and innovative culture. For example,
GlaxoSmithKline (GSK) merged together from Glaxo Wellcome and SmithKline Beecham,
then the number two and three in the industry, to form a $180 billion giant that became the
largest company in the industry. Then, within 3 or 4 months it announced plans to separate
out part of its research operations into six competing ‘biotechnology-like companies’. Each of
these would concentrate on different disease areas, for example asthma and cancer.
Tachi Yamada, head of research and development at GSK, was quoted at the time as
justifying the move in terms of trying to achieve both scale economies and small company
advantages at the same time. 'We have to be big and small at the same time. I had to design
something that would take advantage of scale. But we know for a fact that big can sometimes
mean bad. So we had to design something that could also maintain agility and entrepreneurial
spirit.'
Scale is particularly important, especially in the early stages of drug development where
many hundreds of thousands of compounds are checked out on an almost production line
basis, using advanced technologies to look for ‘hits’ against biological targets. Scale is also
important in the later stages of development that rely on massive worldwide trials to establish
the effectiveness of the drug and meet a myriad of regulatory standards around the world.
Scale is again important to ensure that a company has all the required skills. Small companies
cannot afford the investment in establishing a deep knowledge base across all the different
specialisms necessary for modern drug development.
The disadvantages of scale come in the middle of the development process. This is where the
‘hits’ from the basic screening processes are developed through to prototype drugs with what
the industry calls ‘proof of concept’. That is, having sufficient scientific backing to warrant
investment in massive drug trials. This part of the process needs creativity, agility,
entrepreneurial spirit and, above all, an ability to be fast on your feet. None of these qualities
come naturally to large and often bureaucratic drug corporations. This needs what Mr.
Yamada at GSK calls ‘autonomy and accountable entrepreneurial spirit that maximises
scientific interaction and internal competition for resources. You need something that looks
and feels like a biotechnology company. GSK has created six units, two in the UK, one in
Italy and three in the US. Each will concentrate on one of the different disease areas.’
GSK’s six units have no more than 500 scientists (small scale by pharmaceutical company
standards) working on the drug hits that have been discovered during the screening process,
organised at corporate level. If they manage to turn these leads into safe and effective drugs
they could receive significant financial rewards. After all, independent biotech start-up
creates plenty of millionaire scientists, 'Why,' says Mr. Yamada, 'should GSK not do the
same?'
GSK is not alone in trying to achieve economies of scale and entrepreneurial focus
simultaneously. AstraZeneka is reshaping the layout of its largest research unit in the north of
England which houses 2,500 scientists. Gone are the long corridors with their rows of isolated
laboratories working behind closed doors. In their place the company is intending to build
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hubs around which laboratories will be clustered and where scientists can interact, debate and
test out their latest ideas. The idea is to stimulate innovation by mixing different ideas and
different disciplines. Many of the most profitable drug discoveries have come from the
intersections between different disciplines, or from ideas that have crossed the boundary from
one discipline to another. For example, at Novartis, another major drugs company, 18 per cent
of drug development projects actually began in another therapeutic area. Perhaps the most
famous example of how boundary hopping stimulates creativity comes from Pfizer. Their
blockbuster drug Viagra actually started out as a heart drug. Again, here is the paradox.
Without entrepreneurial focus Viagra would never have been developed in the way it was.
Yet without scale, there may not have been the appropriate therapeutic boundary for it
to cross.
Market forecasts
One of the big issues for many companies when planning their capacity strategy (often for years
ahead) is the reliability of market forecasts. Sometimes, these can be spectacularly wrong. This
was the case in parts of the telecommunications industry between 1998 and 2002. The problems
faced by the dot com companies was dwarfed by the over capacity issues of the companies that
built the networks that carry telecommunications traffic. Their problems arose for four main
reasons. First, their forecasts were just plain too optimistic. Although the Internet did bring
substantial amounts of new traffic, growth was much slower than many in the industry were
forecasting. Second, attracted by what they thought would be huge returns on their investment,
both established players in the industry and several new entrants all built their own networks.
Between 1998 and 2001 the amount of optical fibre cable in the ground increased fivefold.
Third, there was a technical development that meant that signals could be put into and taken out
of the fibre optic cables considerably faster than using the older technology. This effectively
increased the transmission capacity of each strand of fibre by 100 times. Fourth, there is a high
fixed cost of digging up the ground to lay the fibre in the first place. It therefore seemed sensible
to put in more cable while you are at it. Then came the crash and with demand down, the
volume of business slumped while the overcapacity in the industry kept prices low. So, profits
were hit just as the companies were trying to pay off the debt they had incurred by investing in
transmission capacity in the first place.
Cost, volume, profit relationships
If more capacity is provided than is justified by demand, the resources that constitute the
capacity will be under-utilised. Conversely, if demand is greater than provided capacity, sales,
and therefore revenue, will be lost. In this way the level of capacity chosen by an operation will
directly affect its operating profitability. Beyond this, however, because the provision of
capacity usually involves investment in resources, the decision also affects the level and nature
of the operation’s asset base.
The ‘Cost, volume, profit relationship’ is a simple, but still useful, approach to starting to
understand capacity decisions. It is based on the differing relationships between cost and
volume on one hand, and revenue and volume on the other. At activity levels below its capacity
the average cost of producing each unit will increase because the fixed costs of the operation are
being covered by fewer units produced or customers served The unit cost of producing or
serving x units is then given by the formula:
CX = (FC/x) + VC
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Where
CX
=
the unit cost of producing x units
FC
=
the fixed costs of the operation
VC
=
the variable cost of producing one item or serving one customer
This is illustrated in Figure 4.3 in the chapter. According to this formula the average cost of
producing the units seems to reach its lowest point at maximum capacity; however, the actual
average cost curve may not conform to this theoretical relationship. There may be cost penalties
of operating the plant at levels close to or above its nominal capacity. Long periods of overtime
may reduce productivity levels as well as costing more in extra payments to staff; operating
equipment for long periods with reduced maintenance time may increase the chances of
breakdown and so on. This usually means that average costs start to increase after a point that
may be lower than the theoretical maximum capacity of the plant.
Commentary on example ‘Ikea exploit the scale factor’
The chapter uses the example of Ikea to describe the concept of using scale to provide a
competitive advantage. In retail this approach is sometimes called the ‘Category Killer’
approach. That is, the use of capacity as an aggressive competitive move. Capacity is used
both to influence demand itself and to raise the risks for any competitor attempting to respond
in similar terms. So far we have assumed that capacity strategy is concerned with providing
sufficient capacity to match ‘natural’ demand. This is not always so. Sometimes capacity
decisions can be made with the objective of influencing demand itself. The most obvious
example of this is the ‘category killer’ in retailing. At one time the best-known category killer
in retailing was the TOYS ‘R’ US toy chain, which started life in the United States but then
spread all over the world. The company’s huge sites offered customers a wide selection of
products at low prices. The sheer size of each operation gave customers the range of choice
that attracted them in large numbers. The large numbers meant high throughput and the high
throughput meant not only that the company could build large capacity, low transaction cost
sites but also that it could win substantial discounts from toy manufacturers, reducing the cost
even further (and attracting even more customers, etc.). In some of its markets (such as the
USA) the TOYS ‘R’ US Company sold up to 20 per cent of all toys purchased. But then the
company was accused of using its market dominance to pressurise its suppliers unduly. The
resulting bad publicity did nothing to enhance the brand’s reputation.
Economies of scale
A key issue in capacity configuration is that of economies of scale. Broadly, this means that for
any operation’s unit, as its size increases so its costs of producing its goods and services
decreases. However, after a particular point diseconomies of scale start to kick-in. Thus, there is
a theoretical optimum point for any operation where costs minimise. Economies of scale are
really important in most industries, but don’t think this optimum level of capacity is always easy
to discover. It can change with the mix of activities the operation has to cope with and it is just
as influenced by 'soft' or attitudinal issues as it is by hard technical ones (see the example on
Whole Foods Markets in the text).
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Economies of scale manifest themselves in terms of decreasing total cost per unit as capacity
increases. These savings arise through:
•
Spreading overheads – an increase in capacity may not require a proportional increase in
fixed costs, for example administration and insurance costs, resulting in company overheads
being spread over a greater output.
•
Dedicated technology– an increase in volume and a reduction in non-productive costs, for
example set-up costs, investment in work-in-progress, may be achieved by dedicating
resources to a limited range of products and services or through a move away from general
purpose technology.
•
Improved technology – an investment in more automated or more technically advanced
equipment may have the effect of reducing variable costs, for example direct labour costs or
material wastage.
Despite possible savings through economies of scale, there may be costs and risks associated
with increasing capacity:
•
The cost and associated risk of increasing borrowing to fund the investment in additional
capacity.
•
The risk and costs associated with having idle capacity if the expected demand volumes do
not materialise.
•
The costs associated with having an imbalance of types of capacity, if some degree of
dedication has taken place, that is not the appropriate variety of demand.
•
The risk of incurring unforeseen costs with the introduction of new technology, where there
may be little knowledge or experience of installation.
•
The costs of having spare capacity whilst demand catches up with capacity.
•
Diseconomies of scale – some costs may increase as capacity is increased. These are costs
associated with having to distribute goods over a wider area, the costs of additional
management structure, the costs of additional control systems to cope with the added
complexity from extra volumes, and the risks associated with being big.
Commentary on example: ‘So why should Cemex want to be bigger?’
The Cemex example is interesting because of the company’s attitude to economies of scale.
One of the reasons that businesses like to grow is that it provides opportunities for
conventional economies of scale – merging head offices, consolidating shared services,
allowing sites to specialise and so on. Cemex certainly realises that these benefits are
important, but they also stress the importance of two other factors, both of which are a
function of Cemex’s operations capabilities.
The first factor is that Cemex believes that they have a superior way of managing their type of
operations. Their attitude is, ‘We are better at managing these types of processes than
anybody else in the world. Therefore, every time we take over another company it’s an
opportunity for us to exploit and gain value from our operations capability.’
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The second factor is that they have grown their capability to manage the process of improving
the operation of the acquired companies. It isn’t just that they can run better processes; it’s
that they can move the acquired companies’ processes down the learning curve faster and
more effectively than other predator companies.
What drives scale economies?
The idea that large-scale operations allow cost savings applies to many areas of business
activity. And although economies of scale are often thought of as being primarily an issue of
reduced operational costs following from the ability to spread fixed costs over a larger volume
of output, there are other savings, some of which are especially evident when firms merge. Here
are two examples.
•
When Ford took over the car-making division of Sweden’s Volvo for $6.45 billion, it made
relatively little difference to Ford’s overall size. Volvo’s modest output of less than 400,000
cars per year was tiny by world standards. Yet, the effect on Volvo’s ability to compete was
significant. Even in the short term, cost savings could come from tapping into Ford’s
logistics and purchasing functions. Ford’s logistics network in the US could easily cope
with Volvo’s products and the United States was Volvo’s biggest market. Similarly with
purchasing: although Volvo had its own platform designs, even in the short term, it could
substitute some of Ford’s components that it bought from specialist suppliers.
•
Size matters in the pharmaceuticals industry, partly because of the escalating cost of
research and development. This has led to mergers, such as that between Hoechst and
Rhône-Poulenc. Combining these two European companies enabled them to attempt to
compete with industry giants in the US, such as Merck, Pfizer and Bristol-Myers Squibb.
Largely because of expensive new technology for discovering disease mechanisms and
potential drugs, even the largest companies could not hope to compete across every disease
area. However, the bigger the company, the more areas can be covered. Similarly, the cost
of marketing was growing, particularly in the US, where direct-to-consumer advertising,
including pricey television campaigns, was fuelling profitable sales. Again, though, only the
largest companies could afford spending of this magnitude.
Commentary on example: ‘Can you get too big?’
Whole Foods Market provides an interesting example of how economies of scale can be
affected by brand image – both positively and negatively. As a food store, it brings in all the
normal economies of scale that one could see in any other supermarket chain. However, it
does this in a sector of the market where customers have a particularly strong image of
themselves and why they shop for this type of produce. Many of the customers who prefer to
buy organic food (and pay the premium that such products attract) simply do not like to think
of such services being delivered by a large-scale, high volume operation.
Of course, it may be that for every customer who is put off the Whole Foods Market brand
there are several others who are attracted to the convenience or using its stores. Nevertheless,
what is undeniable is that there is a link between the image of the Whole Foods Market brand
and the scale of its individual operations and its total market share.
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The number and size of sites
The number of sites the operation has and the size of those sites are clearly related. So, a
business may have to choose between having a few very large sites (perhaps even one very large
site), or many relatively small sites, or something in between. Of course, as the chapter point
out, for most operations the range of options available is more limited than this. So, for
example, a retail chain or a Government service, cannot always consider the option of having
one huge operation serving the whole of their territory because they need to deliver local
services. A minimum level of convenient geographical coverage is necessary to provide
acceptable degrees of customer service. However, even in such high customer contact
operations there is usually some degree of choice to be made. While the accident and emergency
services provided by the Government have to be geographically well dispersed so as to meet
customer needs, more specialist units, such as burns units, can afford to be fewer in number and
(relative to demand) larger.
Example – A voucher processing centre
A company in the banking industry is planning to build a ‘voucher processing’ centre that will
process cheques, credit card documents and so on for other retail financial services companies.
Although demand is unsure, it is believed that it will be around 10 million documents per year.
The capital cost of building the centre, together with document readers, automated sorting
technology, sophisticated information technology, etc. will depend on the capacity of the centre.
The higher the capacity of the centre, the bigger the building, the larger the capacity of the
computer systems and the more document readers will be needed. Table 4.1 gives details of the
capital costs, fixed processing and variable processing costs and capacity, for three alternative
investment options.
Table 4.1 The three alternative capacity investments for the bank
Capacity of processing
centre (documents/year)
Capital costs
(€m)
Fixed costs per
year (€m)
Variable cost per
document (€)
5 million
2.2
0.28
0.01
10 million
4
0.6
0.01
15 million
5.5
0.8
0.01
The retail banking customers pay, on average, €0.25 per document processed.
Given that the forecast for the centre’s services are around 10 million documents per year, the
company decides to build a centre with this capacity. Their (simplified) calculations are as
follows.
Capital cost
=
€4 million
Operating cost per year
=
Fixed cost + (volume × variable cost)
=
0.6m + (10m × 0.01)
=
€0.7m
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Revenue
Profit
Return
=
10m × 0.25
=
€2.5m
=
€2.5m − $0.7m
=
$1.8m
=
€1.8m/$4m
=
45%
But to the company’s great regret the forecasts turn out to be optimistic and annual demand is
only 5 million documents per year.
This is how the simple return on investment figures now look.
Capital cost
=
€€m
Operating cost
=
€0.6m + (5m × $0.01)
=
€0.65m
=
5m × 0.25
=
€1.25m
=
€1.25 − 0.65m
=
€0.6m
=
€0.6m/€4m
=
15%
Revenue
Profit
Return
If the company had built a 5 million document capacity centre its return would have been
acceptable, namely:
Capital cost
=
2.2m
Operating cost
=
€0.28m + (5m × $0.01)
=
€0.33m
=
5m × €0.25
=
€1.25m
=
€1.25 − $0.33m
=
€0.92m
=
€0.92m/$2.2m
=
41.8%
Revenue
Profit
Payback
Following a similar, but more comprehensive, analysis, the company could have explored the
consequences of each of its three capacity options under a range of demand levels. It might even
have refined its market research to the point where it felt able to assign probabilities to different
levels of demand. Table 4.2 shows the crude payback figures for each capacity option at three
levels of demand. It also shows probabilities of each level of demand actually occurring.
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Table 4.2 Simple return on investment consequences of capacity investment for different
demand levels
Annual demand (documents)
Capacity of processing centre
(documents/year)
5 million probability =
0.3
10 million
probability = 0.4
15 million
probability = 0.3
5 million
41.8%
41.8%
41.8%
10 million
15.0%
45.0%
45.0%
15 million
7.3%
29.0%
51.0%
Using an expectation approach, the company can weigh each return on investment by the
likelihood of it occurring. So,
If a 5 million capacity centre is built
Expected return
=
(0.3 × 41.8)+ (0.4 × 41.8)+ (0.3 × 41.8)
=
41.8%
If a 10 million capacity centre is built
Expected return
=
(0.3 × 15)+ (0.4 × 45)+ (0.3 × 45)
=
36%
If a 15 million capacity centre is built
Expected return
=
(0.3 × 7.3) + (0.4 × 29) + (0.3 × 51)
=
29.1%
So, in this case the highest expected return is obtained when a centre with capacity only half of
the expected demand is built. This is because of the basic financial consequences of failing to
utilise a larger centre. Of course, there may be other market-related reasons why the company
may not want to under-supply the market and so would build a larger centre. These will be
discussed next. The purpose of this simplified example is that it demonstrates the magnitude of
the effect that a mismatch between capacity and demand can have on the return on investment,
or even the viability, of the company. The cost penalties of over-capacity can be very large
compared, for example, with the cost savings normally obtained from routine improvement.
Conversely the lost supply, revenue and profit opportunities of under-capacity can mean the
difference between acquiring profitable market share and being consigned to be, at best, an
industry follower.
When to make a capacity change
A key decision is when to make the introduction of extra capacity increments, or when to take
out some capacity. The effect of this timing decision will be to change the balance between
demand and capacity, and therefore the balance between potential revenue, costs and capital
spend. Timing capacity introduction relatively early results in capacity levels that are always
meeting, or in excess of, forecast demand, an approach called a ‘capacity leading’ strategy.
Delaying the introduction of capacity can result in a demand-capacity balance that means that
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only when new capacity is first introduced is capacity equal to demand. This approach is called
a ‘capacity lagging’ strategy. Also described in the chapter is a third approach that is a
compromise between leading and lagging but also involves some element of over-production
during times of capacity leading so that the surplus production can be used to fulfil market
demand in periods of capacity lagging. But this latter strategy can only be used where the output
from an operation is storable, usually in make-to-stock manufacturing operations. Also, the
working capital implications of this strategy could be prohibitive. Moreover, the risk of product
obsolescence or deterioration may make it difficult to implement in all but the most robust and
commodity-like of products.
The magnitude of capacity change
The chapter discusses the question of how big to make each unit of capacity expansion.
However, it assumes that levels of demand and capacity plans are both known and certain. Yet,
in any realistic capacity planning exercise there are two major types of uncertainty:
•
The uncertainty of future demand and
•
The uncertainty in the timing of the new capacity’s availability. Construction or delivery
delays may push back the introduction of the new capacity; conversely, it may become
available earlier than thought.
Because of these uncertainties, capacity planning often has to include contingencies to allow for
demand and capacity lead-time uncertainties. This obviously adds extra costs to any capacity
provision plan, or alternatively, threatens a firm’s ability to capture revenue. Firms also may
seek to reduce the level of uncertainty by adopting more flexible approaches to the provision of
capacity. Where the capacity lead-time is long and demand difficult to forecast, these issues
come to the forefront of capacity planning.
Long capacity lead times
One particular problem in timing and magnitude of capacity investment is illustrated by the
airline industry. Orders need to be placed with aircraft manufacturers, often several years in
advance of their delivery. These orders will be based on the airline’s best estimate of the
demand for its services in several years’ time. But the airline industry is both cyclical and
subject to disruption by unexpected international events. For example, the Gulf War in the early
1990s had a catastrophic effect on demand for flights, especially out of the United States.
Similarly, the economic crises that faced nations in Asia in the mid-1990s reduced demand in an
important and (hitherto) fast-growing part of the market. Similarly, the lead-time for aircraft
manufacture is influenced by the balance between demand and capacity at the aircraft
manufacturers (in the passenger aircraft industry, now consolidated to two major manufacturers,
Boeing and Airbus). Like any other business, airlines do not like operating where demand is
lower than capacity. (Utilisation in the airline industry is called ‘load factor’.) Low load factors
translates into high unit costs and low margins, given that most costs for servicing a route are
fixed by the number and length of flights rather than the number of passengers on the aircraft.
On the other hand, too high a load factor can prevent airlines from obtaining highly profitable
last-minute bookings and can affect the ability of customers to rearrange their itinerary.
However, airlines do not like to forego growth when the potential is there. Historically, there
has been a tendency for airlines to be optimistic when ordering aircraft during an economic
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upswing in anticipation of high growth in the future. Unfortunately, given the lags in receiving
the aircraft, they are often delivered at the start of the next cyclical downturn. Given that aircraft
manufacturers charge relatively high prices for cancellation of options on their aircraft, capacity
planning in this industry can be extremely risky. This is why many airlines lease much of their
capacity, either from other airlines or from leasing companies (which may be owned by the
aircraft manufacturers themselves). The airline will own its own ‘core’ fleet of aircraft and lease
the balance on relatively flexible terms. By expanding its core fleet only gradually, and timing
its leasing periods with those times it wants to retain the option of making permanent additions
to its core fleet, the airline tries to reduce its exposure to capacity risks.
Commentary on example: ‘Why industries have more capacity than they need’
This example explains why, in industries where there is significant overcapacity such as the
automobile industry, companies often call for capacity reduction….. as long as it’s not their
capacity that has to reduce! There is always the hope that ‘they will be last man standing’
after competitors have closed down their own capacity. It also explains why there is always a
tendency to add more capacity even when there is already too much capacity in the industry.
As one manager put it, 'Sure, I’m building a new plant when there is already capacity in the
industry. But my plant will be the newest and the best. It won’t be my plant that’s left lying
idle.
Using decision trees in capacity strategy
Decision trees can be used for exploring and illustrating decisions made under uncertainty, such
as the capacity timing decision. Decision trees are a formalisation of any decision that has a
number of options, the outcomes from which future and uncertain events will be affected. Once
drawn, they can be used to organise the use of a simple expectation probability theory, so as to
choose the option with the best expected outcome (although other decision criteria may be used,
such as avoiding the worst outcomes). Figure 4.2 shows a simple decision-tree representation of
a capacity timing decision. Here, a firm needs to choose between expanding this year or not.
Expanding its capacity will cost it $8 million. However, it faces uncertain future demand. If
demand does grow in the coming year, it is likely to do so to a level that would fill the new unit
of capacity. If demand does not grow, it is likely to stay level and be roughly in balance with the
company’s existing capacity. Forecasts indicate that there is a 50–50 chance of demand growing
or remaining level. Profits from the operation will depend on whether capacity has been
expanded and on the subsequent level of demand.
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If the company decides to expand its capacity:
There is a 0.5 chance of demand growing, earning the company $12m in profits.
There is a 0.5 chance of demand being level, earning the company $5m in profits.
So expected profits = (0.5 × 10) + (0.5 × 3)
= $6.5m
But the company would have paid out $8m to expand its capacity.
If the company does not expand its capacity:
The company will earn $5m in profits whatever happens to demand.
Given these outcomes, the company decides that it does not wish to spend $8m to have expected
profits of $6.5m when it can be sure of $5m without any capital outlay (especially when there is
a 50 per cent chance that it will earn $2m less than it would do without any investment).
Sequential capacity decisions
Decision trees are a useful, but very simplified, framework by which to structure capacity
timing decisions. They are used, usually, as a ‘first-level analysis’. However, they are at their
most useful when used to model sequential investment decisions. For example, suppose the
company introduced in the theory box on decision trees extended its analysis to include the
possibility of also expanding in year 2. The decision tree now looks more complex but it does
enable a more useful analysis (see Figure 4.3). The decision tree again indicates the profits
earned for each set of decision options, this time over the 2-year period. It also indicates that the
probabilities of demand growing in the second year depending on whether it has grown in the
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first year. To analyse this tree we need to take a perspective of how the second-year decision
would be made, depending on what had happened in the first year. These are points C to F in
Figure 4.3.
At point C – expanded in Year 1 and demand grew.
If company expands in Year 2, expected profits
= (0.3 × 32) + (0.7 × 18)
= $22.2
If company doesn’t expand in Year 2, expected profits
= $24m
The company would not choose to expand because expected profits would be lower and $8m
investment is needed.
At point D – expanded in Year 1 and demand was level.
If company expands in Year 2, expected profits
= (0.7 × 15) + (0.3 × 8)
= $12.9m
If company doesn’t expand in Year 2 expected profits
= (0.7 × 17) + (0.3 × 9)
= $14.36m
Again the company would choose not to expand because expected profits would be lower
and $8m investment is needed.
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At point E – did not expand in Year 1 and
demand grew.
If company expands in Year 2, expected profits
= $18m
If company doesn’t expand in Year 2, expected
profits
= $8m
The company would expand because, even with $8m expenditure, the cash flow is higher
than not expanding.
At point F – did not expand in Year 1 and demand was level.
If company expands in Year 2, expected profits
= (0.7 × 18) + (0.3 × 14)
= $16.8m
If company doesn’t expand in Year 2, expected
profits
= $8m
The company would expand, again cash flow would be higher even with investment in extra
capacity.
Working back to points A and B.
At point A there is a 0.5 chance of $24m profit.
And a 0.5 chance of $14.6m profit
(i.e. there would be no further expansion no matter what happened to demand).
So expected profit at point
= (0.5 × 24) + (0.5 × 14.6)
= $19.3m
At point B there is a 0.5 chance of $10m profit (after expenditure of $8m on the expansion).
And a 0.5 chance of $8.8m profit (after expenditure of $8m on the expansion).
So expected profit at point B
= (0.5 × 10) + (0.5 × 8.8)
= $9.4m
The company should therefore expand in Year 1 because its expected cash flow (after the $8m
for expansion) would be 19.3 − 8 = $11.3m higher than the expected profit of not expanding in
Year 1.
Then, if demand in Year 1 does grow (point C), or remains level (point D), no further expansion
is justified.
Note that extending the analysis for the further year has changed the original decision described
in the theory box. Horizon time is an important issue in all capacity change decisions.
Game theory and competitor activity
Using the decision-trees to structure a capacity timing decision does allow us to include
uncertainty, but the environment in which the decision is being made is assumed to be
independent of the decision itself. So the chances of the market growing or remaining level were
not affected by the company’s decision to expand or not. However, in most markets, rival firms
will watch each other closely and shape their own actions on the basis of what their competitors
are doing. Thus, the environment is not only related to the decision itself, but the relationship is
rarely benign, or even neutral. In other words, there are significant issues in the competitive
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environment that are controlled by competitors who will act partly in response to our decisions
and usually against our interests. So, for example, a decision to expand or contract capacity at a
particular point in time may be affected by how we believe a competitor might react. This is
where ‘game theory’ is useful.
Game theory is a study of the strategic behaviour of rational ‘players’, each of whom has a set
of possible actions, or strategies, available to them. The outcomes of choosing a strategy depend
on the action of the other players. Although studied by economists for more than 50 years, game
theory has revolutionised some branches of economics over the past 20 years. Its power lies in
modelling the choices available to companies in oligopoly markets. An oligopoly is the area
between being a monopoly and having perfect competition. Thus, most organisations compete
in an oligopoly, that is, there are a finite number of known competitors who take decisions in
the light of how they believe the others will act.
Figure 4.4 illustrates a typical game theory formulation for a capacity decision. Our own
company and a competitor are the two major players in a particular market. We are both
deciding whether to increase capacity. Currently the total demand of 100,000 units is shared
equally between the two of us and we each have a capacity of 50,000 units. The market price for
our products is 100 and our costs are 50 per unit. Thus we each make 50,000 × 50 = 2,500,000
profit.
Demand in the next period is forecast to increase by 50,000 to 150,000. If we decide to increase
our capacity by the standard increment of 50,000 units, our profits will depend on whether our
competitor does the same. Similarly, if we decide not to increase capacity, again, our profits will
depend on our competitor’s action. Figure 4.4 shows our forecasts for the outcome, both to
ourselves and our competitor, depending on what we and the competitor decide to do.
Arguably, the best outcome for us jointly would be for neither to increase capacity. This would
result in under-capacity in the market, the same level of demand but higher prices. In fact, this
will not happen. If we believe our competitor will increase their capacity, the profit to us will be
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2,250,000 if we also increase capacity, or 2,000,000 if we do not. We would therefore increase
capacity. If we believe that our competitors will not increase their capacity, increasing our own
capacity would result in a profit to us of 5,000,000. Not increasing our capacity would result in
a profit to us of 3,500,000. We would therefore increase our capacity. Thus, in this case, unless
we co-operate with the competitor, it is always in our interests to increase our capacity.
Furthermore, looking at it from the competitor’s point of view, it is always in their interests to
increase their capacity. In fact, this is not an unusual situation. It can be added to the list of
reasons of why over-capacity exists in so many industries discussed in the example in the
chapter on ‘Why industries have more capacity than they need’.
Capacity decrease
The chapter examines various strategies for changing capacity and illustrates them under
conditions of increasing demand. Remember, however, that the same issues will apply when
demand is decreasing. However, when managing decline there are an additional set of issues.
'Reducing capacity' sounds neutral when it is written in this technical manner, but of course it
often means wrenching social disruption and severe personal individual stress for those people
who once staffed the capacity that is being 'reduced'. For example, when 3,400 workers from the
United Auto Workers (UAW) went on strike at General Motors’ metal-stamping factory in
Flint, Michigan, within 6 days a components manufacturing plant within the group had followed
suit and the dispute finally ended 54 days later. By that time 26 of GM’s 29 North American
plants had been affected and the company had lost $2.3 billion. What had started as a local
dispute about investment at a metal-stamping plant had turned into the longest and costliest
strike in the company’s history. The cause of all this was the company’s difficulty in managing
the reduction in its manufacturing capacity.
Reducing levels of capacity is going to be difficult for any company when it involves taking
away the livelihoods of individual workers. General Motors had a particularly difficult task in
reconfiguring its capacity to compete with the high-tech, and often non-unionised, Japanese
plants. At the time, GM was making almost $1,000 less on each vehicle it sold than its archrival Ford. Much of this extra cost was because it had too many factories that were too small
and too old-fashioned in their work processes. At the time GM had 14 stamping plants like
Flint, when it probably needed fewer than 10. However, GM’s real problems lay in the timing
and manner of its capacity reduction plans. The UAW had negotiated its ‘pattern’ agreement
with all the three big American car makers some time earlier. However, Ford and Chrysler had
already done much of their slimming down when the agreement was struck. GM had to try to do
the same under the more restrictive new agreement. Nor did GM’s approach to the problem
make their life any easier. Their relationship with the UAW had always been poor. At one point,
early in the dispute, they secretly moved stamping dyes out of the factory over a public holiday,
an action the workers branded as underhand and sneaky. They were also accused, by union critics,
of promising investment in exchange for better productivity and then reneging on the deal.
Location of capacity
The issue of location in the chapter is described as being influenced largely by two main factors.
•
Supply side factors such as labour costs, land costs, energy costs, transportation costs and
community factors.
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•
Demand side factors that include labour skills, suitability of site, image of location and
convenience for customers.
However, sometimes the personal preferences and prejudices of individuals within a company
can have a significant effect on location decisions. At other times a company is ‘there because
its there’. That is, historical reasons have determined location and management have either not
thought about any advantages that might be gained from moving, or judge that any advantages
are not worth the disruption.
The attractiveness of regions
The chapter discusses what is becoming a more significant issue in location, namely the way
individual cities, states or regions of the world are deliberately trying to make themselves more
attractive to inward investment. The following example – ‘Why Japan Invested in the UK’ –
tells the story of one particular stream of investment. It is worthwhile studying this because it
contains some elements that are common to all the efforts of different regions to attract
investment.
Example – Why Japan invested in the UK
The 1990s in particular saw many hundreds of Japanese companies setting up operations in
Europe. Manufacturing companies particularly have recognised the importance of developing a
foothold in the huge European market to avoid having to add European Union import duties to
the cost of their products. The largest numbers of these companies have chosen to locate in the
UK.
Some large early arrivals, such as Nissan, were attracted to the UK by generous governmentfunded financial support and tax concessions in regional development areas. They recognised
that although potential employees did not necessarily have the skills needed to make their
products, they were willing to be trained and did not come with any ‘bad habits’ picked up from
similar employment. Later arrivals had much fewer direct financial incentives, but saw the other
advantages gained by the early arrivals. In some areas, such as Telford and Milton Keynes, a
critical mass of Japanese companies developed, creating a flow of good publicity back to Japan
and encouraging further interest in these locations. This success was reinforced by a growth in
support infrastructure, such as Japanese schools, social activities and even food retailing to help
the expatriate families feel at home.
Another important factor was language. Many Japanese manufacturing companies are accustomed
to trading and producing in the US, and so the English language is the first foreign language of
most business people. Drawings of products and processes, instruction sheets and computer
programs were often immediately available for use without further translation for the UK. This
meant a lower risk of misunderstandings and mistranslation, smoothing communications
between the new plant and head office in Japan.
It also became apparent that both the quality and cost of labour were important reasons to locate
in the UK. While many large indigenous manufacturing companies had been criticising the
educational standard of the workforce, Japanese companies took great care to select employees
who were keen to learn, adaptable, willing to work hard and able to create improvements. Some
companies were able to quote exceptionally high levels of productivity and quality performance
in the UK, as an example to their Japanese workforce. Others began to export products from the
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UK to Japan. At the same time, the total cost of labour in the UK was relatively low, both due to
hourly wage rates significantly below those typically paid in some other European Union
countries, and also because of low indirect labour costs. Other significant reasons for a choice of
the UK have been the relatively low rate of corporation tax, good communication links with
most parts of the world and a stable political and social system.
The development planning process is cumbersome (as in most advanced economies), but at least
it is transparent and difficulties of bribery and protection do not usually arise. There are also
other underlying factors that cannot be discounted: the UK is renowned for its excellent golf
courses, spacious housing is available in the countryside near industrial development areas and
London is known for its excellent shopping and leisure facilities. The climate, although not the
kindest in Europe, is temperate and the rainfall is not unlike that in Japan.
So, the main reasons why Japanese investors came in such large numbers into the UK (as
opposed to other European countries) are as follows.
•
It is within the European Union, a large and affluent market, especially for the products of
the companies that are located in the UK. Automobiles and electronic equipment are the
obvious examples of this. Importing from outside the European Union would have incurred
import duties or even limits on the number of products that could be imported.
•
The UK government was willing to give government-funded financial support such as
grants and tax concessions to companies. This was especially true when the chosen
locations were in areas of relatively high unemployment (this made it easier to square things
with the European Union commissioners). It is also worth noting that, although some of the
early locations had substantial inducements, later ones had less.
•
In some areas of the UK there was a strong industrial tradition that meant the labour force
had skills that might be useful to the incoming companies. It is interesting though, that this
was also regarded as a disadvantage by some companies who were afraid of the ‘bad habits’
of job demarcation and conservatism that had marked some areas.
•
Some factors were not ‘rational’ as such, but were nevertheless important. One example of
this is the ‘critical mass’ issue. Simply because many other Japanese companies had located
in the UK it was perceived as a safe place to come. This is partly to do with such things as
the availability of Japanese schools, Japanese food stores and so on. Partly, though, it is also
merely that the experience becomes a familiar one rather than one that is unfamiliar and
therefore perceived as risky.
•
Clearly, the fact that the English speak, well ….English, is an advantage to any company
with international operations. The Japanese especially, if they speak a foreign language, it is
likely to be English. This is not only convenient, it also helps to reduce errors and
misunderstandings through mistranslation.
•
The cost of labour, and just as important, the cost of employing labour, it would appear, was
an issue. Especially when compared to continental European countries, UK labour rates, at
the time, looked attractive.
•
An issue mentioned in the example but given relatively little space is that of, the prevailing
business culture of the country. The UK was seen as a country where it was easy ‘to do
business’. This was an image actively promoted by the government of the time.
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•
The final point mentioned again may not be seen as purely ‘business like’ but nevertheless
seems to have been important. The UK is seen by the Japanese as a good place to live. The
climate is familiar to them, entertainment such as golf courses and leisure facilities are
regarded as more than adequate, and the historical ‘heritage’ image of the country, it would
appear, appealed!
But, notwithstanding all these reasons for the UK leading the European inward investment table,
other forces can work against the location as the commentary ‘Toyota moves to France’ makes
clear (see below).
Commentary on example: ‘Toyota moves to France’
This is another example of where the balance between market requirements and operations
resource capabilities is seen to be the major driver of operations strategy. However, here we
have an example of how brand image pressures (part of the set of ‘market requirements’
pressures) are both important and unusual in global terms.
Two or three decades ago it was important where a car was made. Many countries preferred
to buy cars designed and produced in their own country and preferably that came from a
business quite clearly owned by shareholders (or sometimes the government) of the country.
But the world is now far more global. One manifestation of this is that, in most markets,
consumers care about the product, its characteristics and its price, but have grown used to the
idea that the car may actually be made anywhere in the world. But not all markets are like
this. The French market, for example, very much prefers to buy cars that are manufactured in
France. Toyota figured that there was a distinct advantage to be gained from manufacturing at
least some of its models in France if it was to be successful in the French market. Of course,
as the example makes clear, that was not the only reason that Toyota chose not to simply
expand its UK operation. However, it was a significant factor and highlights the importance
of market image in some operations strategy decisions.
Changing location
If a company is small, notwithstanding any other advantages it may have, it is unlikely to enjoy
many economies of scale. As it grows, it will presumably configure itself internally so as to
capture the scale economies that come from its increased level of activity. This may mean
adopting higher-volume technologies and gearing up their infrastructure to allow indirect
resources to be used more effectively. As growth continues, eventually the level of activity in
the operation will be such that any losses of scale economies from splitting the operation into
two or more parts are relatively small. This is when total capacity decisions must also include
location decisions. The argument for or against operating across a few relatively large, or many
relatively small, sites was treated in the previous chapter. Here we extend the debate to include
the issue of how the role of sites may vary or develop over time, especially when a company’s
expansion includes overseas sites.
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Configuration and coordination
Decisions relating to how organisations choose to locate their operations, and especially change
the location of their operations, often distinguish between configuration decisions and
coordination decisions.1 Configuration is broadly what we discussed in our treatment of location
in the previous chapter. It means exactly where facilities are located and what resources are
allocated to each location. Co-ordination refers to questions of how to integrate the activities of
each site so as to achieve the organisation’s overall strategic objectives. In many ways
coordination is more of an infrastructural decision and, indeed, we shall refer to it in later
chapters when we discuss the development and organisation of operations resources. The reason
for raising it at this point is that both configuration and co-ordination issues come into play
when companies change their locations as a result of broad capacity dynamics.
Example – breakfast cereals manufacturer
A company that manufactures and markets breakfast cereals is entering a new regional market
in a part of the world in which it has not operated before. Volume forecasts indicate that, after a
slow start, while its brands establish themselves, volume will grow relatively quickly. The
technology employed to manufacture breakfast cereals is of three types: ‘flaking’, ‘puff’ and
‘extrusion’. These technologies are mutually exclusive. Products that depend on flaking
technology cannot be made on equipment designed for extrusion. Forecasts indicate that for the
first year of operation the company will need three production lines, one of each technology.
After the first year the company is likely to require several more of each technology. The
dilemma for the company is whether they should start with one manufacturing location in which
they could house the three different production lines, or alternatively, whether they should start
with three locations, each devoted to a separate technology. The advantage of developing one
mixed technology site is that, even in the first year of operation, the site is working with three
lines that can share some general infrastructural costs such as supervision, planning and
maintenance. The disadvantage is that after 2 or 3 years of growth, the site will be both large
and complex because of the slightly different requirements of the three technologies.
Developing three sites from the start would mean that in the long term each site could focus
solely on the needs of one of the technologies and could therefore gain the improvements from
specialising in a single technology. This is likely to mean higher degrees of process knowledge
and better manufacturing performance in the long term. However, in the short term each of the
three sites will be significantly under-utilised, only having one line in each, yet still require a
certain degree of infrastructural services.
In this example we have two sets of conflicting pressures. First, there is a conflict between the
short-term needs of the organisation and its long-term needs. Having initially only one
manufacturing site would minimise production costs in the short run but would be an inferior
configuration in terms of the long-run development of its operations. This is because focused
plants devoted to single technologies are easier to coordinate internally, which in turn can lead
to long-term superior performance. The other conflict is between the familiar ‘market
requirements’ and ‘operations resource’ needs. It may be that, in the long term, a number of
sites, all of which use mixed technologies, may be better at serving different areas of the market,
each area having an ‘all-purpose’ site that can serve all its needs. But, as we have just argued,
more focused single technology sites may develop the operation’s resources more effectively.
1
Porter, M.E. (1989) ‘Changing patterns of international competition’, California Management Review,
28(2).
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The final choice for this company will depend upon its own assessments of market requirements,
cost pressures and the potential for process improvement. The key point, however, is not so
much what is best for this company but rather that the location decision has involved both
configuration and co-ordination issues.
What issues are important when changing the location of capacity?
Changing the absolute level of capacity in a business and changing the location of sites are
rarely independent decisions. For example, expansion may mean automatically having to choose
a further location if the current location has insufficient room for expansion. Two issues tend to
be considered in location change decisions. These are the configuration of what facilities are
located where, and the co-ordination between those resources. Although co-ordination is more
of an infrastructural issue, it is affected by the configuration of sites. Spanning both these issues
is the role that is expected of individual sites. Some authorities recommend that individual sites
should be expected to develop enhanced capabilities that can benefit other sites.
The role of sites
A further example of how the dynamic nature of location decisions can affect the more
infrastructural side of operations strategy comes when the role, or contribution, of each site
within an organisation is considered. Professor Kasra Ferdows calls this the ‘strategic role’ of
sites.2 To identify these roles he distinguishes between two variables:
The main motive for establishing the site – for example to gain access to low-cost inputs such as
labour or raw materials, to use local technological resources such as specific software
development skills or to provide proximity to a market such as the breakfast cereal example
mentioned previously.
The extent of the capabilities, or ‘technical activities’, at the site – is the site limited to simply
carrying out activities under the complete control of a distant headquarters or, at the other
extreme, is it responsible for the technological development of its products and services,
processes planning, procurement, distribution, etc.?
Bringing these two various sets of variables together, he identified six generic roles for sites (in
fact, in developing these ideas Professor Ferdows is talking about manufacturing sites in an
international context, but the ideas can be used more generally). See Figure 4.5 given below.
2
Ferdows, K. (1997) Making the most of foreign factories, Harvard Business Review, March–April.
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In this manufacturing context the six roles for a factory that Ferdows identifies are as follows.
•
Off-shore factory – its role is limited to producing specific items at low cost. Local
management have relatively little discretion as to how production is organised and most, if
not all, product and process technology is likely to be dictated by head office.
•
Source factory – although again established primarily for low-cost production, managers in
this kind of plant are allowed more discretion over how to exploit the opportunities they
have to reduce costs. They may also have discretion on how best to distribute this
knowledge to other plants.
•
Server factory – this type of plant is likely to be set up in order to serve specific regional
markets, perhaps to reduce distribution costs or overcome tariff barriers. The way in which
it produces its products, however, is likely to be dictated largely by its headquarters.
•
Contributor factory – although primarily serving a regional market, this type of factory may
be expected to develop original ways of serving its market and test out new products that
are later rolled out in other markets.
•
Outpost factory – these factories are set up in order to exploit some local factor that is
unavailable elsewhere. As such, they are expected to supply information to other factories.
•
Lead factory – although set up originally to exploit local factors, a lead factory’s
contribution has progressed to the point where it can educate other plants in some aspect of
the firm’s business. It is a centre of innovation to which other parts of the organisation look
for the development of unique capabilities.
Ferdows’ main point is that organisations can gain advantage by developing the role of their
locations from that where they represent a relatively passive unit of production capacity,
through to a role where they are expected to develop and deploy unique capabilities that can be
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transferred to other parts of the organisation. These trajectories of development generally move
from a low level of discretion and capabilities through to increasing levels of ‘technical’ or
knowledge-creating activity. Sites may also change their primary purpose. For example, those
set up as outposts in order to gain local skills and knowledge may develop this in such a way as
to reduce costs and therefore become ‘source’ plants, or develop new markets and thus become
‘contributor’ plants. This in turn may lead to development of unique levels of knowledge that
qualify them as ‘lead’ plants.
Commentary on example ‘Location Clustering around the typewriter’
This example highlights the importance of historical industrial development in shaping the
trajectory of future growth. There are clear economies of location clusters once a particular
level of clustering has been achieved. Like-minded companies, with similar needs, have an
instinct to exploit these economies by clustering together. Michigan is dominated by auto
makers, northern Italy by knitted garment manufacturers, Connecticut by insurers, part of the
English Midlands by racing cars, North Carolina has its furniture makers and so on. The most
famous cluster of all, though, is probably Silicon Valley in California. Microsoft may be
based in Seattle, Compaq in Texas and IBM operates out of New Jersey, but the centre of
gravity for computer technology companies is, by common consent, the area south of San
Francisco whose core is Santa Clara County.
But Silicon Valley is not an entirely recent creation. Back in 1938, Fred Terman, a professor
at Stanford University, persuaded two of his students, Bill Hewlett and David Packard, to set
up a company making electronic measuring equipment. In the 1950s Hewlett-Packard,
together with several other companies, relocated to Stanford University’s new industrial park.
From that point, other companies became increasingly attracted to the area because of the
skill of its labour pool, the spread of its network of suppliers and relatively easy access to
venture capital. In many ways the catalyst for all this was the excellence of its research and
education institutions such as Stanford, Berkeley and the Palo Alto research centre. It has
been estimated that more than 1,000 companies have emerged from Stanford University
alone.
Just as important is the culture that has grown up in the area. This may even be more
important than any conventional economic or technological factors. The Silicon Valley
culture has been characterised as including the following.
•
A tolerance of failure – companies go bankrupt, entrepreneurs learn what they did wrong
and try again.
•
Mobility tolerance – staff leave companies, the original company is upset but the staff
start their own outfits. A tolerance of failure – companies go bankrupt, entrepreneurs
learn what they did wrong and try again.
•
Mobility tolerance – staff leave companies, the original company is upset but the staff
start their own outfits.
•
People take risks – at the forefront of technological advances, risk taking becomes a way
of life. One estimate has it that out of 20 Silicon Valley companies, four will go
bankrupt, six will stay in business but lose money, six will make only a modest return,
three will do reasonably well and one will do exceptionally well.
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•
Enthusiasm for change – fast-moving technology means that companies have to reinvent
themselves continually.
•
Egalitarianism – Silicon Valley is open to men and women of all nationalities. Youth and
success are often prized more highly than age and seniority.
•
Sharing – Silicon Valley is full of knowledge junkies whose chat sites, restaurants and
social occasions are full of borrowed and shared ideas.
•
People take risks – at the forefront of technological advances, risk taking becomes a way
of life. One estimate has it that out of 20 Silicon Valley companies, four will go
bankrupt, six will stay in business but lose money, six will make only a modest return,
three will do reasonably well and one will do exceptionally well.
•
Enthusiasm for change – fast-moving technology means that companies have to reinvent
themselves continually.
•
Egalitarianism – Silicon Valley is open to men and women of all nationalities. Youth and
success are often prized more highly than age and seniority.
•
Sharing – Silicon Valley is full of knowledge junkies whose chat sites, restaurants and
social occasions are full of borrowed and shared ideas.
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Study guide
CHAPTER 5
Purchasing and supply strategy
Chapter aims
The basic idea behind the network concept is not particularly novel, indeed the recognition that
firms operate within an environment that contains its customers, suppliers, partners and
collaborators has been widespread for at least two decades. Yet it is still a topic that dominates
many businesses’ operations strategy discussions. This is because, ‘the network is the context in
which an organisation’s operations strategy is developed’. Indeed some authorities hold the
‘supply strategy’ is a broader and more descriptive term for what here we call operations
strategy. But our main interest with the network perspective in this chapter is the recognition
that it is possible to exert varying degrees of influence over our network in order to serve our
strategic goals.
This chapter aims to:
•
Describe the concepts of a ‘supply network’ and ‘supply network strategy’.
•
Understand what is meant by the term ‘supply chain’.
•
Evaluate the factors influencing the degree to which a company should ‘do’ or ‘buy’.
•
Identify different forms of inter-organisational relationships such as contractual and
‘partnership’ relationships.
•
Understand the dimensions of supply network strategy that enable managers to achieve their
strategic aims through the management of their network.
Purchasing and supply strategy
‘Purchasing and supply strategy is the strategic direction of an organisation’s relationships with
suppliers, customers, suppliers’ suppliers, customers’ customers, and so on. In particular, it
includes such issues as ensuring that the organisation has an understanding of its supply
networks, determining appropriate supply network relationships for its various activities,
understanding supply network behaviour, in particular how the dynamics of a supply network
will affect the organisation and how networks can be managed (or at least influenced) for the
long-term benefit of the organisation’.
When discussing supply networks, it is very important to be clear about the various levels of the
network to which we refer. The chapter describes each of these levels, but it is important to
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understand the differences as terminology can cause confusion in this subject. Figure 5.1 shows
how they have viewed the three different ‘levels of analysis’.
Figure 5.1 Three different levels of supply network analysis
So, the three levels are:
•
The internal supply network – the interconnected network of ‘micro operations’ within
a company. These may be departments, sites or whole divisions, depending on how the
‘company’ is defined.
•
The immediate supply network – the suppliers and customers (and co-operators) with
which the company has direct contact.
•
The total supply network – the network of suppliers, customers, suppliers’ suppliers,
customers’ customers and so on. In practice this concept is often limited to one or two
‘stages’ away from the focal company.
Supply network and supply chain management is one of the most discussed topics in and around
operations management/strategy. Yet there is considerable confusion relating to the definition of
a supply chain or network (we have found over 400 differing, varied, but related definitions
including, ‘demand chains’, ‘strategic purchasing’, ‘supplier development’, ‘efficient consumer
response’, and so on also there are many sub-categories and different perspectives). However,
the term ‘network’ is commonly understood, and in reality we find that industry structures do
not conform to the simplified single supply chain. Here we examine supply networks from the
viewpoint of the individual businesses that operate within them. In order to do this we must first
clarify the nature of supply networks and the terminology used to describe them.
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Commentary on example – ‘What’s the nationality of your car?’
This example makes a fairly obvious point; namely that the ‘nationality’ of a product is not
always easy to identify, and that the publics’ perception of a car’s nationality is often at odds
with the reality of where it is designed and made. Of course, this phenomenon does not apply
only to automobiles. Many electronic goods are made (and sometimes designed) globally
rather than in the country with which the brand name is identified. This has some important
implications both for how supply networks are configured and for how brands are managed.
However, there is conflicting evidence of how important a brand’s ‘nationality’ is to its
success. Some businesses fear that moving their supply network outside of their ‘brandidentified’ region would be damaging. For example, Absolut Vodka is still made in Sweden
in spite of the fact that its major market is the United States. Yet VW is happy to manufacture
its automobiles outside of Germany, relying on their customers’ ability to value the quality of
German engineering and German management even if the automobile is made elsewhere.
Why take a supply network perspective?
The chapter argues that there are a number of competitive benefits of companies visualising
themselves as part of the whole supply network, including;
•
It enhances understanding of competitive and cooperative forces
•
It confronts the operation with its strategic resource options
•
It highlights the ‘operation to operation’ nature of business relationships
In addition, a supply network perspective also promotes a focus on long-term issues. There are
times when circumstances make some parts of a supply network weaker than their adjacent
links. A major plant breakdown, for example, or a labour dispute, might disrupt an operation.
How then should its immediate customers and suppliers react? Should they exploit the weakness
as a legitimate move to enhance their own competitive position or should they ignore the
opportunity, tolerate the problems, and hope the customer or supplier will eventually recover?
Sometimes short-term adversarial opportunities seem too good to miss, and short-term issues
too pressing to give thought to how the total supply network is being affected. However, a
longer term view would be to weigh the relative advantages to be gained from assisting or
replacing the weak link. Similarly, when considering investment decisions, an operation will
look at its current, and likely future, levels of demand. When the operation’s ‘vision’ is
restricted to its immediate customers, the overall industry dynamics shaping demand may not be
obvious. Extending the operation’s vision to include its total supply network will sensitise the
operation to trends in parts of the network which may take time to work through to its own level
in the industry. A routinely established habit of considering all external relationships as part of
the total supply network is not a guarantee of long-term self-interest or an antidote to shorttermism, but it does help.
Also a supply network perspective identifies any particularly significant relationships. Any
analysis of networks must start with an understanding of what constitutes competitive
performance at the ‘downstream’ end of the network. This helps to identify the parts of the
network that contribute most to satisfy end-customer requirements. This analysis will probably
show that not all companies’ contributions will be equally significant. For example, the
important end customers for some types of automotive are the installers and service companies
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who deal directly with end consumers. They are supplied by ‘inventory holders’ whose
competitive success relies on a combination of price, range and, above all, a high availability of
supply. This means having all parts in stock and delivering them fast. Suppliers of parts to the
stockholders can best contribute to their customers’ competitiveness partly by offering a short
delivery lead-time but mainly through dependable delivery. The key players here are the
stockholders. Without effective service levels and competitive prices from them, the end
customers will not be as likely to buy the products of the parts manufacturer. The best way of
winning end-customer business is by helping the key players in the network; in this case by
giving them prompt delivery which helps keep costs down while providing high availability of
parts.
But perhaps the most important implications of a supply network perspective are the idea put
forward that it highlights the ‘operation to operation’ nature of business relationships. For the
whole supply chain to operate effectively, the chain of operations must interface effectively with
each other. For that to happen each operation in the network must understand the nature of their
suppliers’ and their customers’ operations. After all, how can any company sell goods and
services to a customer when it doesn’t fully understand how it can make that customer’s life
easier? Similarly, how can any operation help its suppliers to supply more effectively if it
doesn’t understand the nature of its supplier’s operations? This implies a very significant
reorientation in the mindsets of the people in the organisation who have not traditionally seen
themselves as requiring operations management knowledge.
But, is ‘purchasing and supply’ really part of operations strategy?
This quite clearly establishes the importance of purchasing and supply strategy not only within
operations strategy but also as an important component of business strategy generally. This is a
fair reflection of the way this area of strategic thought is developing, and you may well find that
the network concept is discussed in other courses. For example, Marketing Strategy has long
been concerned with the issue of linkages in the supply network, especially the relationships
that exist between industrial customers and suppliers, as well as the way a company should
‘position’ itself in its industry (or put another way, ‘determine its preferred role within the
supply network’). Certainly there are parallels between the writings of those Marketing authors
who focus on industrial markets and customer–supplier relationships, and the developments in
operations strategy. Increasingly we are seeing Marketing authors addressing the nature of
interaction and relationships between firms, as opposed to the bare transactions that occur
between, which can be seen as a mirror image of the ‘supplier development’ idea adopted by
many Operations authors.
However, what we need to clarify here is the place of supply network strategy within an
operations strategy course. Whilst Marketing views the companies it supplies as customers, in
operations we think of customers in our supply networks as other operations. These operations
have their own characteristics of demand, process design, control and planning, all of which
have a direct and significant impact upon our operations and its strategic performance. By
thinking about our customers in this way, we recognise the operations task we are faced with
expressed in terms of the provision of the right mix of quality, speed, dependability, flexibility
and cost to help our customer’s operations managers to operate more effectively. So, our focus
in this course is with an ‘operations to operations’ perspective of the supply network both
towards our suppliers (‘upstream’) and our customers (‘downstream’).
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Commentary on example ‘Extracts from Levi Strauss’ Global sourcing policy
This example simply selects some extract from one business’s global sourcing policy in order
to illustrate how companies who make extensive use of outsourcing, especially to low cost
regions of the world, are increasingly conscious of the interface between choosing suppliers
and corporate social responsibility (CSR). The drivers for policies such as this one may well
include genuine ethical concerns, but also certainly include the reputational risk implications
of being identified with unethical supply practice. That is certainly what is driving companies
such as Nike. Over the last few years Nike has received negative publicity for their sourcing
practices. In particular, the company has received criticism after claims emerged of poor
working conditions at some of their suppliers’ plants. For example, in 2007 Nike suspended a
Pakistan-based football maker for breaking its code of conduct. Only when Silver Star, a
company from Pakistan’s Punjab province, had met Nike’s ethical specifications was it
allowed back. The new agreement with Silver Star specified that all workers must be
registered full time employees, all workers must receive social benefits, and all workers will
have the right to unionise and collectively bargain.
No less than Mark Parker, Nike's President and CEO, said ‘We hope this is the beginning of
broader, positive systemic change for workers, and that the example Silver Star sets will help
Pakistan’s soccer ball industry create a new model of responsible, globally competitive
manufacturing’.
Nike’s annual corporate responsibility report reinforces their policy, claiming that they, ‘are
making strenuous efforts to cut down the amount of overtime carried out in their 700 contract
factories over the next four years’. And, according to Mark Parker ‘We see corporate
responsibility as a catalyst for growth and innovation’.
Inter-operations relationships in supply networks
There are many trends in how supply networks are managed. Broadly speaking, these are as
follows.
•
An increase in the proportion of goods and services outsourced – generally companies are
performing fewer activities in-house. The idea of ‘core capability’ is important here. The
discrimination between what is a core capability to the long-term competitiveness of the
organisation and what is less strategically important has often provided the basis for
outsourcing, the argument being that a company can achieve both better efficiency and
more operational effectiveness by concentrating on a few important activities and
outsourcing the rest. Especially for companies that deal in a number of specialised
technologies, it has proved almost impossible to maintain expertise in everything.
Subcontracting at least some of these activities to other parts of the network allows access to
technological innovations while reducing the risk of being stuck with outdated resources.
•
Organisations are reducing the number of their suppliers – for activities of any reasonable
complexity there is a transaction cost of buying in products and services. Specification and
quality levels must be agreed, delivery times organised and prices agreed. Reducing the
number of supply contacts will potentially reduce these transaction costs. Just as important,
the time saved managing a large number of suppliers can be invested into improving the
quality of fewer, more secure and potentially more valuable relationships.
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•
Generally organisations are attempting to develop ‘partnerships’ with suppliers and customers.
This may take the form of some combination of long-term contractual agreements, colocation of resources, transparency of cost information, integrated systems and procedures,
automated electronic financial communication, and so forth.
•
Not all these changes happened at the same time. Generally, companies started to reduce the
scope of their activities before understanding the importance of developing their
relationships with customers and suppliers. Thus, many companies moved from the classical
vertically integrated operation through to what is now sometimes called traditional supply
management. This reduced the scope of what an organisation chose to do internally but
relied on simple market mechanisms to determine which suppliers should provide the goods
and services hitherto produced in-house and which customers should be given priority in
terms of service and supply. Although the trend towards outsourcing activities has
continued, the parallel trend towards closer relationships with fewer suppliers has moved
supply network relationships towards ‘partnership’ supply.
Three types of relationship
The chapter implies three different ways of categorising the relationships between players in
supply networks, although they do indicate that each of these categories can include somewhat
different approaches. These three pure types of relationship are as follows.
•
Vertical integration – that is doing activities in-house.
•
Contractual (market) relationships – using many suppliers with little closeness in the
relationships.
•
Partnership relationships – involving attempts to build long-term and close relationships
with a relatively few suppliers.
Do or buy? The vertical integration decision
Vertical integration is the extent to which an organisation owns the network of which it is a part.
At a strategic level it involves an organisation assessing the wisdom of acquiring suppliers or
customers. At the level of individual products or services it means the operation deciding
whether to make a particular component or to perform a particular service itself, or alternatively
buy it in from a supplier. An organisation’s vertical integration strategy can be defined in terms
of:1
•
The direction of integration;
•
The extent of the span of integration;
•
The balance among the vertically integrated stages.
1
Hayes, R. and S.C. Wheelwright (1984) Restoring our Competitive Edge: Competing through
manufacturing, Wiley.
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The direction of vertical 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 sometimes called backward or ‘upstream’ vertical
integration and expanding on the demand side is sometimes called forward or ‘downstream’
vertical integration. Backward vertical integration, by allowing an organisation to take control
of its suppliers, is often used either to gain cost advantages or to prevent competitors gaining
control of important suppliers. This is why backward vertical integration is sometimes
considered a strategically defensive move. Forward vertical integration, on the other hand, takes
an organisation closer to its markets and allows more freedom for it to make contact directly
with its customers. For this reason, forward vertical integration is sometimes considered an
offensive strategic move.
The extent of vertical integration
Some organisations deliberately choose not to integrate far, if at all, from their original part of
the network. Alternatively, some organisations 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. 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 stages
The final vertical integration decision 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 organisation. The balance of the part of the network owned by an
organisation is the amount of the capacity at each stage in the network which 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. Fully balanced networks have the virtue of simplicity and
also allow each stage to focus on the requirements of the next stage along in the network.
Having to supply other organisations, perhaps with slightly different requirements, might serve
to distract from what is needed by their (owned) primary customers.
Some advantages of vertical integration/insourcing
The chapter cites a number of advantages of vertical integration.
•
Securing dependable delivery – The most fundamental reason for engaging in some
process in-house rather than outsourcing it is that it can’t satisfactorily be outsourced. 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. For example, some specialist
electronic components are manufactured in-house by equipment manufacturers until
potential suppliers have developed the capacity and knowledge to supply from outside.
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•
Reducing costs – This reason sounds straightforward but isn’t. Sometimes this is a good
reason for moving some activity in-house. But in addition to direct costs there must be some
allocation of indirect costs. If there really is no allocation of indirect costs it means that the
company is inefficiently run anyway (which is an argument for improving the operating
practices of the company rather than vertically integrating any new process into its
activities). Cost saving through integration is also dependent on the assumption that start-up
and learning costs will be relatively trivial, and that the cost savings will be such as to
maintain, or even improve, the return on assets of the company, allowing for any increase in
investment necessary to perform the activity in-house. A more straightforward case can be
made when there are technical advantages of integration through performing an activity inhouse. For example, the companies that roll kitchen foil will first of all roll it to the required
gauge (thickness) in giant rolls up to 2 m wide. They will then ‘slit’ these rolls into the
widths we buy in the supermarket. Two activities which could be performed by two
different companies in the supply network. Yet if it is technically feasible and convenient to
slit the foil in line with the rolling process, it saves the loading and unloading activity in
between rolling and slitting as well as any transportation necessary. This argument can be
taken further to include not only the direct technical activities but also the indirect activities
such as quality control, human resource management or financial management. Putting two
sequential processes together may genuinely reduce costs (or even improve the
effectiveness) of such ancillary processes. However, perhaps the most frequently deployed
cost argument in favour of vertical integration is that it reduces the transaction costs of
dealing with suppliers and customers.
•
Improvement to product and service quality – The exact specialist advantage may be
anything from the ‘secret ingredient’ in fizzy drinks through to a complex technological
process. In either case the argument is the same. ‘This process gives us the key identifying
factor for our products and services. If anyone but ourselves performs this activity we
cannot keep it to ourselves for any length of time. Vertical integration therefore is necessary
to the survival of product or service uniqueness’.
•
Learning by owning – So, for example, Benetton, the Italian fashion garment
manufacturer, although subcontracting the majority of their manufacturing processes, still
do some work in-house. Some of this in-house work is devoted to core processes such as
fabric dyeing (a core process which defines their products). But some of the processes will
merely perform activities which are also outsourced. One reason for this is that outsourcing
the whole of one activity may result in the company getting out of touch with improvements
in that process and failing to learn new techniques. Similarly, 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?
The disadvantages of vertical integration
The chapter also cites a number of disadvantages of vertical integration.
•
It creates an internal monopoly – At the core of this argument is if the consequences of
not maintaining or exceeding the levels of service and efficiency required by the market is
that the operation goes out of business, then the motivation to remain competitive is a
powerful one. Furthermore, market forces are relatively transparent. If the operation does
not produce services and goods of sufficient quality, or takes too long in delivering them, or
fails to keep its delivery promises, or will not change to suit customers’ requirements, or
cannot profitably meet competitors’ prices, then it loses business. Customers stop placing
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orders, everyone can see the lack of activity, suppliers feel less sure of their future business
and owners and shareholders demand to know what is happening. Either the company
improves its performance to match what is available elsewhere in the market or,
alternatively, ceases to trade and the business goes to those operations that can satisfy their
customers. Such incentives and sanctions do not apply if the supplying operation is part of
the same company.
•
You can’t exploit economies of scale – The businesses to which one outsources activities
are unlikely to be exclusively dedicated to one customer. This means that they can perform
similar activities for many different customers and therefore achieve a higher volume of
operations than any of their customers performing the same activities themselves.
•
It results in loss of volume flexibility – Conversely, low fixed costs (even with high
variable costs) mean that the fluctuations in volume of demand have far less impact on the
profitability of the operation.
•
It cuts you off from innovation – Depending on how it is defined, a second type of
flexibility may be impaired by vertical integration: new product and service flexibility – in
fact innovation generally. Vertical integration means investing in the processes and
technologies necessary to produce products and services. No one likes to invest in processes
which are soon overtaken by superior technologies. As soon as that investment is made the
company has an inherent interest in maintaining the appropriateness of that technology.
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. Nor is it only the new technologies and ideas available in the
free market to which a low vertically integrated company has the access. It is also the ideas
sparked off through the company’s dialogue with customers and suppliers. There is a
considerable body of evidence to suggest that.
•
It distracts you from core activities – The final, and arguably most powerful, argument
against vertical integration concerns any organisation’s ability to be technically competent
at a very wide range of activities. The argument goes something like this – One of the worst
things they can do is attempt to be equally good at many other things. They can be
profitable by being very good indeed at a narrow range of activities, but they find it far
more difficult to be profitable by being merely reasonably good at a very wide range of
activities. ‘Reasonably’ good is not sufficient protection against some other company
entering the market in order to be even better.
When vertical integration is appropriate?
Although vertical integration is clearly an important issue, and although many research studies
have been published in the area, don’t expect too much unambiguous guidance on whether
vertical integration is a good thing or a bad thing. However, notwithstanding the fact that there
seems to be at least some evidence to support almost every view on vertical integration, some
points have emerged which command some degree of consensus.
•
Vertical integration is not fashionable. Far more organisations over the past 20 years have
tended to de-integrate rather than integrate. Companies most frequently justify this in terms
of ‘sticking to the business that they know best’.
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•
Vertical integration is easier to justify when the total of all costs incurred by all the
processes integrated are reduced. (At times vertical integration has been justified by looking
at savings in one part of the network only.) This is most clearly demonstrated when there
are technical cost savings of integration (such as the in-line slitting mentioned earlier).
•
Vertical integration is generally regarded as a high-risk strategy since it means high levels
of investment. If the environment in which the vertically integrated company is operating is
relatively stable then the risk may be worthwhile. However, if the market is likely to
undergo significant changes in its levels of activity or types of products or service produced,
then vertical integration exposes the company’s lack of flexibility.
•
Generally vertical integration makes its difficult for a company to access the innovations
which become available in the supply market. This is especially true when those
innovations are autonomous (i.e. they do not depend on other innovations for their
contribution to a company’s competitiveness). The case for vertical integration is stronger
when innovations are systemic (i.e. an innovation in one part of the network requires
innovations in other parts of the network to exploit its full contribution to competitiveness).
Traditional contractual (market-based) supply
Some authorities argue that two factors are particularly important in determining whether
contractual mechanisms are appropriate in shaping buyer–seller relationships and in determining
exactly how market mechanisms are used:2 the number of alternative suppliers in the market,
and the resource cost to the buyer of changing suppliers.
When the cost to the buyer of making a change in supplier is very high and anyway there are
few alternative suppliers to switch to, it is unlikely that buyers would want to use pure market
mechanisms. The buyer’s hand is relatively weak whereas the supplier has relatively high shortterm security. Under these circumstances it is likely that some kind of partnership agreement
may be appropriate (we shall deal with partnership relationships next). Conversely, when the
cost to the buyer of making a change in supplier is low and there are many alternative suppliers,
leveraging the free market is probably the best way for a buyer to keep the performance of their
suppliers competitive.
Between these extremes the issue is less straightforward and as much concerned with how to use
market mechanisms as it is whether to use market mechanisms. A key factor here is market
uncertainties (we aren’t entirely sure what is available out in the supplier market) and needs
uncertainties (we aren’t entirely sure what we need from the supplier market). When the cost to
the buyer of making a change in supplier is low and there are few alternative suppliers, buyers
have little market uncertainty. There are few alternative suppliers and it is not difficult to
negotiate with them all over the subtleties and trade-offs of what and how they supply. They are
willing to enter into this type of negotiation because they know that you could switch to an
alternative supplier relatively easily. However, both of you know that you cannot be constantly
switching suppliers. Because there are few alternative suppliers, your promiscuous behaviour
soon would make you an unattractive customer. From the buyer’s point of view a sensible
question to ask existing suppliers would be, ‘Given that you and other alternative suppliers are
2 Kapoor, V. and A. Gupta (1997) ‘Aggressive sourcing – a free-market approach’, Sloan Management
Review, Fall.
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relatively close in what you can offer, how can your company offer some combination of supply
performance to me which helps me solve my problems?’ When the cost to the buyer of making
a change in supplier is high and anyway there are many alternative suppliers, no buyer can have
perfect knowledge of all of them so there is high market uncertainty. Also, because there are
many alternative suppliers, the chances are that there is a wide range of alternative deals and
supply performance levels available. Although buyers can easily find an alternative supplier,
they will only do so if the gap between existing suppliers’ performance and prospective new
suppliers’ performance is sufficiently high to recoup the high cost of switching. Existing
suppliers know that buyers will be reluctant to switch unless the performance gap is large.
Therefore negotiation is likely to centre around exploiting market uncertainty. The buyers
stance could be, ‘I can easily find a better supplier but will not switch to them if you can
promise to come close to matching their performance’.
Partnership supply
By building better supplier relationships, many of the benefits ascribed to vertical integration
can be achieved without the costly recourse of large capital investment. However, good
relationships and good supplier performance are neither an automatic nor even a guaranteed
outcome. Care and attention to supplier selection and supplier management is required in order
to gain the maximum benefits from the supply network.
Supplier selection
Selecting a supplier with whom we intend to have a long and profitable relationship is
undoubtedly a major strategic decision. Failure to identify potential weaknesses or shortcomings
can prove very costly and may be irretrievably damaging to your strategic fortunes.
It is not uncommon for firms to set out their sourcing policy in terms of:
•
Their key or critical items of expenditure.
•
Their strategic aims in terms of supply network structure (number and responsibilities of
suppliers; future outsourcing patterns).
•
Targets for cost, quality, delivery and timing performance of their supply network.
•
How many suppliers they want to have in their first tier.
•
The extent to which they intervene with second tier supplier activities.
•
Whether to single-source or multi-source their supplies.
•
The degree of autonomy and responsibility for design to confer on their key suppliers.
•
The level of financial commitment for tooling and equipment they wish to make with their
suppliers.
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How they will organise their supplier management process (e.g. multi-functionally).
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For example, Hewlett Packard in the UK had a policy to single source parts, and multi-source
commodities. Their reasons for single sourcing are first that it is part of the overall long-term
commitment to the relationship with their suppliers. Second, it allows them to focus on
selecting, developing and monitoring one source only. Finally, there are sound commercial
reasons for doing so – leverage can be gained from volume in both price and service, there is
greater likelihood of obtaining consistent quality levels, and any tooling investment is limited to
one source. There are risks though associated with single sourcing. These include the lack of a
second source when the fist source has problems, and the competitive advantage of having
multiple sources.
Supplier management in partnership relationships
Central to the idea of partnership is the ‘closeness’ of the relationship between the partners. The
chapter identify a number of factors that have been cited in the body of research in this area as
being important in achieving closeness. These factors are as follows.
•
Trust
•
Sharing success
•
Long-term expectations
•
Multiple points of contact
•
Joint learning
•
Few relationships
•
Joint coordination of activities
•
Information transparency
•
Joint problem solving
•
Dedicated assets
All these issues are important, partly because the capabilities of suppliers are critical to any
businesses’ competitive performance, and the strategic choices we take about our operations
need to take into account not only the form of internal operational capabilities, but also the
manner of relationship we wish to develop and sustain within our supply network. In particular
the development of mutual trust marks the degree of closeness between purchasers and
suppliers. The chapter, in effect, identifies a continuum of trust, calculative trust, through
cognitive trust to bonding trust. The degree of trust that exists between the two parties is
important in identifying the relationship. However, the chapter categories are better known
amongst academics than practitioners. A better-known categorisation is as follows:
•
‘Competence’ trust, which relates specifically to the perceptions and confidence in the
capability, expertise and knowledge of one party by the other.
•
‘Contractual’ trust, which at its simplest level is the faith in the other party to honour the
contractual obligations.
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•
‘Goodwill’ trust, ‘...a mutual expectation of open commitment to each other’.
Trust, in any of these forms, may develop over time as a result of the experiences of both parties
with each other, but it may also be affected by the reputation of one of the parties. Purchasers
also conduct formal assessment and evaluation of potential and existing suppliers on a regular
basis. Ford Motor Company, for example, has a long established and highly regarded Supplier
Quality system, and many companies look for possession of an international accreditation such
as the ISO 9000 series or Baldridge awards as indicators of supplier capability and performance.
The idea of mutual learning is also important. For example, suppose a retail bank has a
partnership agreement with a credit agency which gives credit risk assessments of the bank’s
customers who are applying for loans. Whereas the bank would not wish to carry all the
information which would enable it to judge the loan applicants themselves, it can do more than
merely wait until the credit agency pronounces on the applicants’ credit worthiness. In
discussions with the credit agency it may be able to improve the questions it asks of applicants,
and it may also be able to screen out certain applicants at an earlier stage of the application
process. It is therefore learning how to deploy the credit agency’s services (preferably) to both
their advantages. Similarly, the credit agency might wish to further refine its decision-making
processes in consultation with the bank’s experiences of which customers were indeed credit
worthy. In this way the partners learn from each other to their joint advantage.
Similarly the idea of limiting relationships to a relatively few is central to developing
partnerships. Of course, sometimes customers are obliged to source products or services from
more than one supplier. A single supplier may not be able to fulfil volume, location, or variety
requirements. Similarly, a single customer, no matter how close, may not be able to take
sufficient volume to make exclusive relationships economic. However, it is worth stressing that
the recent general move towards having fewer suppliers is related to the general desire to
develop closer relationships with those which remain.
Supply network dynamics
Network behaviour is concerned with the dynamics of how supply networks actually perform in
practice. The chapter classifies the underlying causes of supply chain behaviour in terms of their
•
quantitative dynamics, and
•
qualitative dynamics.
Quantitative supply chain dynamics
One of the most important issues in supply network behaviour is what The chapter call the
quantitative dynamics of the way supply networks operate. Central to this idea is the so-called
‘bull-whip’ effect. This is illustrated in Chapter 5 by using a four-stage supply chain. Although
not specified, this example is clearly a manufacturing supply chain in so much as it transfers
physical items between stages. However, the bull-whip effect also applies in non-manufacturing
chains. Here, it is not so much the inventory between stages and the lag between placing orders
and receiving orders that causes progressive amplification down the chain; rather it is the
fluctuation in capacity at each stage. The chapter’s example assumes that there is no constraint
on capacity and that each stage can produce as many as its customer demands. This is clearly a
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simplification, especially in service chains where they may be a significant lag between the
capacity being required and it coming on stream. Yet the net result is broadly the same whether
we are dealing with physical items moving between stages in the supply chain or less tangible
‘service’ moving between the stages.
Qualitative supply chain dynamics
The essence of supply network management is that operations can derive some advantage from
examining, understanding and influencing the other operations in the network of which they are
a part. It is the degree of influence that managers have over the resources that create their
products and services is, to some extent, a function of how close the resources are. If they are
located, say, in another division of the business, they will be managed (partly) in the interests of
that division, which may not totally coincide with other parts of the business. If the resources
are in a supplier’s or customer’s business, influencing the resources is even more difficult. The
resources in customers’ customers and suppliers’ suppliers are several degrees more difficult to
influence. Yet, if the other operations in the network are to be influenced, an essential
prerequisite is that we understand the way in which they influence, and are influenced by, the
dynamics of the network.
The chapter discusses the dynamic behaviour of supply chains. Their discussion includes the
‘Bull-whip’ effect. This is an important ‘natural’ characteristic of supply chains and is often
discussed in academic and practitioner books on the subject. What is very rarely mentioned is
what The chapter call qualitative behaviour. They use a little known model derived originally by
Harland as a basis for looking at how the ‘non-physical’ flow of operations performance can
become distorted or misaligned along a supply chain. The following figure replaces the original
Harland terminology with more ‘user friendly’ terms.
The ‘perception gap’ model of qualitative dynamics
The gap model described by The chapter is a particularly useful diagnostic for any organisation
wishing to examine critically its supply network performance. In effect, it is asking businesses
to be honest in assessing not only how they see a relationship but how they believe their
customers and suppliers perceive the relationship. In doing so it identifies some important
potential gaps. These are as follows.
•
The supplier improvement gap is that between what a customer believes its needs and what
it sees itself as getting from its supplier. This is the most serious of the potential mismatches
if the customer’s perception of its supplier’s performance falls below what it believes its
own requirements to be.
•
The market perception gap is essentially a gap between the perception of what a supplier
believes its customer wants and what its customer really does believe it wants. It is a market
positioning mismatch, which could occur because of a lack of understanding between A’s
sales and marketing function and B’s purchasing function.
•
The operations performance gap is the gap between a supplier’s view of its own performance
and how its customers view its performance. A may believe that it is performing well
enough while B, in reality, is either wanting different things from its supplier or,
alternatively, has different standards against which it is assessing A’s performance.
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•
The operations improvement gap shows how a supplier rates its own performance against
what it believes its customer to want. Significant gaps here should be driving the suppliers’
own operations improvement programs.
When extended to a supply chain, as opposed to a simple customer–supplier pairing, two further
linkages are worth considering. These are shown on the diagram as ‘supply choice’ and ‘supply
development’.
•
The ‘supply choice’ association is the link which an operation makes between how it is
served by its supplier and what it believes its own customer wants. A strong association
means that the supply relationships significantly affect an operation’s ability to serve its
customers. It is a measure of the degree of fit between its supply strategy and its overall
operations strategy.
•
The ‘supply development’ association is the link between how an operation is, in reality,
served by its supplier and how it is capable of serving its own customer. It is a measure of
the extent to which an operation’s competitive success or failure can be explained by its
supplier’s performance. It also dictates the approach an operation could take to developing
its supply strategy.
Of course, one could extend this type of analysis to look further into suppliers and customers.
So, for example, it may be useful to understand the supplier improvement gap in the customer’s
operation. That, after all, will be shaping their view of us as a supplier. Similarly, one might
investigate the operations performance gap in a supplier. This would tell us the extent to which
problems with supply are a result of their operations failure rather than requirement or
performance misunderstandings.
And every time there is a gap between the perceptions of customers and suppliers, and every
time there is a failure within an operation to understand the associations between its supply side
and demand side requirements and performance, information is distorted. This distortion can
lead to operations developing their resources inappropriately. Investments may be made,
systems and processes designed, and operations strategies formed which inhibit the effective
integration of the operation within its network. In fact one can view the cumulative effect of
these gaps up and down a supply chain as being the qualitative equivalent of the bull-whip
effect discussed earlier. Mistaken perceptions in any part of the chain can become amplified as
they are further distorted by the mis-communications and perception gaps between other
operations in the chain.
Managing suppliers over time
By ‘managing suppliers over time’ the chapter means the way in which supply networks can be
managed in order to ensure effective operation and improve overall network performance.
What happens when the supply network manages you?
An implicit assumption running through the chapter’s discussion of supply network
management (and one that is almost universal in all writings on supply networks) is that the
customer holds the balance of power in the buyer–supplier relationship. This power is assumed
to be held unilaterally, and allows the customer to influence suppliers who will be willing to
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conform to their requirements. Yet, in reality this is not always the case, for example when a
customer is significantly smaller than a supplier and when the business represents a small
proportion of the supplier’s sales, but a large proportion of the customer’s costs. What then is
the likelihood that a customer can ‘manage’ their immediate suppliers? The balance of power is
firmly with the supplier and the company may be more managed by, than managing, its supply
chain. Some small companies, especially those making low-tech, highly standardised products,
may never find themselves in a position of having much leverage with their large suppliers.
Their only option, maybe, is to multi-source because in such scenarios, supplier loyalty cannot
be guaranteed. However, many small companies have unrealised sources of strength. They may
be able to trade with something other than money. They may have process or market knowledge
which itself is valuable to their suppliers. By developing and deploying core competencies such
as technological or market know-how, powerful suppliers may be willing to invest in the
relationship, even when it is not a large proportion of their sales.
Example
Company X manufactures assay and analysis machines for the examination of soil samples.
These machines almost always involve the use of radioactive sources. These radioactive sources
are the key component of most of the company’s products and are bought from two or three
large companies. Although small, Company X is a typical customer for the radioactive source
suppliers who, despite having some large customers, sell more than 75 per cent of their products
to small customers not much larger than Company X. Frustrated by the difficulty in gaining
their radioactive source suppliers’ attention, Company X launched two initiatives. The first
involved exploring ways in which the radioactive sources could be used more effectively within
their own product designs. The second involved surveying their own customers (mainly mineral
exploration companies and laboratories) in order to determine likely future trends in their
market. The results from both of these initiatives were made available to the most receptive of
their radioactive source suppliers.
‘In effect we said to them, look, we can offer you two invaluable pieces of knowledge. First, we
can tell you how you could modify your products to be better for your small customers,
especially those in similar fields to ours. Of course there was a risk in that for us, but we figured
that, even though our competitors might get this knowledge, we could always keep ahead of
them in terms of how that knowledge could be deployed. Second, we said to them, your business
depends on your customers’ customers. They are our immediate customers. We have taken the
trouble to get to know them very well indeed. Therefore we can jointly develop a model of how
the industry could develop in the future. We offered ourselves up as valuable “knowledge
partners” to them in developing our joint business. We were saying to them, hey, you can get
real competitive advantage by working in partnership with us’.
Fisher’s Model
One of the most influential supply network strategy models to emerge over the last few years is
summarised in Figure 5.3. This so-called ‘Fisher model’ seeks to discriminate between different
market-based objectives and recommend varying supply network management policies for
different market objectives. In his original article Fisher poses some interesting notions about
the strategic performance of the supply network. The importance of this article is that the
approach he advocates mirrors our perspective on operations strategy, namely:
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Make a choice about what you need to do to compete with your products and services.
Set about matching the resources and processes in the supply network with the strategic choices
you have made.
Fisher also cites the case of Campbell Soup, who improved the speed and dependability of
supply to their retail customers by highlighting the disruptive (and unprofitable) implications of
certain price promotions. The contrast between a marketing strategy aimed at boosting the
volume of a particular flavour of soup, and the impact upon their supply network performance
was quite startling. By adopting a different pricing strategy, Campbell Soup was able to give the
retailer a better return on purchases, and the manufacturing and distribution elements of their
network were able to improve their operating efficiency and effectiveness – a ‘win-win’
situation that keeps all parties happy!
The important issue here, however, is that the different types of markets will need serving in
different ways by their supply chains.
However, useful though this kind of analysis is, the Fisher model does it imply that market
requirements are either predominantly functional or predominantly innovative? Furthermore it
avoids the question of whether supply chains can be organised to mix responsiveness and
efficiency in different proportions, or should they be designed to be one or the other?
Whatever the answer to the question, what if a company has a mix of products, some of which
are functional and others innovative? Can both of these products be moved down the same
supply chain? If so, is that supply chain a compromise between responsiveness and efficiency,
or does one give different products different priorities? Alternatively, does it imply that separate
supply chains are necessary for different types of product?
As a further illustration of how market objectives influence supply strategy, Figure 5.2
illustrates two supply networks, structurally identical, but managed in different ways. The top
network is designed for low cost. Inventories are kept low, especially in the downstream parts of
the network, so as to maintain fast throughput and low working capital. The inventory in the
network is concentrated primarily in the manufacturing operation, where it can help to keep
utilisation high and manufacturing costs low. The predominant flow of products and
information occurs up and down the chain. Information must flow quickly from the outlets to
the manufacturer and supplier so that their schedules can be given the maximum amount of time
to adjust efficiently. Products then flow as quickly as possible down the chain to replenish what
little stocks are kept in the downstream outlets.
By contrast, the lower network is organised for high service levels and responsive supply to the
end customer. The inventory in the network is deployed as close to the customer as possible, so
as to cope with what may be dramatic changes in customer demand. Of course, fast throughput
from the upstream parts of the network is still needed to replenish the downstream stocks, but it
would not be sufficient in itself to give a high enough level of end customer availability. Again,
although products and information will flow up and down the network, it is also important to
ensure flow across the downstream part of the network. So, for example, if stock-outs occur in
one of the outlets it may be faster to transfer product from other outlets to where it is needed.
This is why some retail stores invest in information systems which allow them to check whether
one location has a product in stock which another location has temporarily run out of.
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Reconfiguring networks
As an example of how the linkages in a supply network could be changed, consider Figure 5.3.
A manufacturing operation which has three plants is supplying eight customers. In the
arrangement in Figure 5.3(a) each plant supplies each customer. This means that in total there
are four routes (24 links between each pair of plant and customer). Each plant must have
separate lines of communication with all eight customers and each customer will need to
communicate directly with each of three plants.
Now consider the second arrangement in Figure 5.3(b). Two regional warehouses have been
imposed between the plants and the customers. The three plants now distribute their products to
the two regional warehouses from which their local customers are supplied. There are still 24
routes but simplified by using only six plant–warehouse and eight warehouse–customer links.
More significantly, each plant now has to deal directly with only two immediate demand-side
links for its products instead of the previous eight. Similarly, each customer now has to deal
with only one supplier (its local warehouse) instead of three as previously. Figure 5.3(c)
simplifies the linkages even further, but it does this by transferring complexity to the plants
themselves. Whereas, in the previous two network structures, each plant concentrated on one set
of activities, this final design requires each plant to widen the scope of its activities so as to be
able to serve the total needs of its customers.
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Study guide
CHAPTER 6
Process technology strategy
Chapter aims
This chapter is not concerned with the detailed description of any actual technologies as such.
Rather it is concerned with the strategic impact of process technologies – an impact that can be
very significant. Whether it is advanced manufacturing technologies in manufacturing or pointof-sale systems in retailing or advanced optical reading equipment in banking, process
technology can provide profound advantages in almost any industry. However, there have also
been some spectacular failures resulting from the introduction of new process technologies. This
is why this topic is so important; a failure to understand the implications of a new technology or
a badly implemented technology can destroy all the potential benefits of technological
innovation. This chapter aims to:
•
Explore the nature of ‘process’ technology strategy
•
Identify the characteristics of process technology and how they need to be adapted for new
information technologies
•
Describe the ‘product-process’ matrix, in which market volume and variety can be shown to
influence process technology
•
Discuss the strategic evaluation of process technology
Process technology strategy
Technology strategy is ‘the set of decisions that define the strategic role that direct and indirect
process technology can play in the overall operations strategy of the organisation and sets out
the general characteristics that help to evaluate alternative technologies’. It also points out the
central role of operations in articulating how technology can improve operational effectiveness
and acting as an ‘impresario’ for implementation. Not that operations managers should be
experts in the core science behind the technology, but they should be able to ask relevant
questions such as the following:
•
What does the technology do that is different from other similar technologies?
•
How does it do it?
•
What constraint does using the technology place on the operation?
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•
What skills will be required from the operations staff in order to install, operate and
maintain the technology?
•
What capacity does each unit of technology have?
•
What is the expected useful lifetime of the technology?
The following example gives the flavour of how technology impacts operations and how these
questions can be used.
Into Oblivion
After more than a year of secret development, the summer of 1998 saw Alton Towers Theme
Park in Staffordshire, England (owned by Tussaud’s Group), unveil what had become known
throughout the industry as their Secret Weapon 4 (SW4). This ride – called Oblivion – was the
world’s first vertical drop roller coaster. The ride was designed and manufactured in
Switzerland by the specialist roller-coaster design firm, Bolliger and Mabillard. The firm from
Monthey, Switzerland, was founded in 1988 and has a reputation for innovation. In 1992, for
example, they invented – at the Six Flags Great America park in Gurnee, Illinois – the world’s
first suspended coaster where people’s feet actually hang down below them during the ride.
SW4 was demonstrated initially to journalists and ride enthusiasts (who, on the Web, had been
speculating for a long time about what SW4 might be). This level of speculation was actively
encouraged and, before launch day, Oblivion was the subject of an intensive marketing
campaign that sought to tease customers about the exact nature of the ‘entertainment’ that
awaited them.
‘Taking the plunge in a way never experienced before are passengers test-riding the world’s
first roller coaster with a vertical drop. Passengers on the 160-s ride endure a four-second
pause dangling face-first over a dark tunnel before dropping 200 ft into it at 70 mph … moving
rapidly from light to dark will induce the same sort of disorientation as jet pilots experience. By
the end of the ride, passengers’ pulse rates will have soared to about 180 beats per minute – the
equivalent of a hard workout’.
The ride has proved to be extremely successful. Alton Towers is open for only 8 months of the
year, yet Oblivion manages to throughput approximately 3.5 million passengers in that time.
Despite the relatively short length of the ride, this popularity inevitably created major queuing
issues. Therefore, in addition to the physical processing technology challenges of the ride, there
was also a need to develop active queue entertainment systems. There are different themed
stages – the four stages of Oblivion – to the process, each involving a different video
presentation. In stage one, participants are told about the physical effects the ride may have on
their bodies, including a suggestion that it may make your skull rattle! Stage two encourages
people to consider whether they can cope and stage three links messages such as ‘is this really
entertainment?’ with answers like ‘it’s just a ride’. As the riders are strapped in to the train,
they hear the fourth-stage message, ‘Welcome to Oblivion, there is no reason, and there is no
rationale’. Pragmatically, the Alton Towers marketing manager explains it thus: ‘It’s basically
to get people excited in the queue … we really want to make the entertainment last longer than
the ride’.
This example illustrates many of the challenges that process technology created for all types of
operations. For instance, the Alton Towers management had to answer a series of technical
questions, such as:
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What does the technology do that is different from other similar technologies? Does the
technology provide capabilities that have hitherto been difficult to obtain? In the theme park
market, most customers will make only one visit per year (a typical ticket costing upwards of
$50) and they have an increasing variety of choices. A widely acknowledged reputation for
‘uniqueness’, is therefore a very valuable competitive attribute. Oblivion was the first vertical
drop ride and comprised a number of unique technical elements. For instance, the nature of the
ride necessitated a very complex lifting system, using four separate conveyor systems.
How does it do it? That is, what particular characteristics of the technology are used to perform
its function? Looking at the lifting system, for instance, the first vertical conveyor is the lift
mechanism (much stronger than a normal coaster chain) that lifts the train to the apex of the
track; a horizontal conveyor then takes the train to the drop point where it engages with the drop
conveyor. This vertical conveyor takes the train slightly over the edge of the drop crown and
puts it into a holding position that helps to maximise the passenger’s ride sensation. After a
suitably ‘tantalising’ period, this conveyor accelerates away and effectively allows the train ‘to
drop’. The final horizontal conveyor picks up the train after its braking run and takes it to the
loading/unloading station’s control systems.
What constraint does using the technology place on the operation? Very few firms
manufacture their own process technology and often they have little input to the design process
beyond the setting of the original concept. The management of the supply-chain aspect of
process technology development has a major influence upon eventual technical and competitive
success or failure. Although there were one or two delays in the development of the ride, in this
case the relationship with Bolliger and Mabillard seems to have been successful. Ultimately,
however, rivals can now hire the firm to create something equivalent (or more likely, even
better) for themselves.
What skills will be required from the operations staff in order to install, operate and maintain
the technology? Although the physical manifestation of the technology may be its metal frame,
hydraulic devices, rotating mechanisms, etc., often this does not represent its most critical or
complex aspect. For Oblivion, there is a software system that links together all the different
elements and controls their interactions. The ride operator has a very different role, therefore
(not like a classic fairground operator who physically spins the carriage on a ride). He or she is a
monitor of system performance whose intervention is rarely, if ever, needed.
What capacity does each unit of technology have? There may be a choice between employing
several small units of process technology, or one large-scale unit of technology. The unique
nature of the technology means that it has a ‘natural scale’ defined largely by the technical
characteristics of the ride (its vertical drop, track and car size, etc.), and therefore effective
capacity management (i.e. high utilisation of a single unit) was a key challenge for Oblivion. In
order to maximise the throughput of riders on the roller coaster (1950 per hour in this case)
multiple trains were required to be on the track at any one time. However, given that this ride is
much shorter than a traditional one, this requirement necessitated yet further innovative process
solutions. The ride’s designer explained how they achieved this by ‘loading and unloading two
trains at once … one train will be on the lift hill, and another ready to drop. One train will be at
the start of the brakes. The other two will be sitting outside the station waiting to come in and
unload’.
What is the expected useful lifetime of the technology? Will its technical performance
deteriorate over time? How easy will it be for the technology to be upgraded in line with future
technological developments? In a competitive market, ‘uniqueness’ is clearly an invaluable
competitive attribute but it is one that is very difficult to sustain, especially as rivals can quickly
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observe the technology or, in this case, commission the same firm of design engineers who
created the original. The functionality of the technology will not deteriorate in the short term
(although health and safety requirements will necessitate regular maintenance and eventual
refit) but as vertical rides become commonplace and other parks offer longer and scarier drops,
the relative performance of the technology will diminish. The combined effect of the
competitive dynamic, the one-off nature of the ride and the service context it operates in means
that little, if any, consideration was given to potential upgrades for the technology as it dates
over time.
Understanding the different types of technology
The chapter uses a definition for technology based on one from Zanussi – the appliance of
science. So… process technology is the appliance of science to any operations processes. But,
what exactly is meant by the term ‘process technology’.
Process technology versus product/service technology
This is one of those distinctions that it is important to understand yet which is not, in itself, a
clear and clean distinction. Direct process technology directly helps to create the service or
product whereas indirect process technology helps to manage the process that creates the service
or product. It is a relatively simple distinction to understand in manufacturing operations. So, a
business manufacturing specialised and customised communication electronics may compete
through its high-performance products using advanced product technology. The process
technology that is used to manufacture these products will probably be general purpose and
capable of making whatever products are designed. In this case the operation’s product and
process technologies will be relatively independent. Other (even manufacturing) operations will
have a stronger association between the development of the operation’s product and process
technologies. For example, an ice-cream manufacturer will use process technology that has been
developed to make ‘frozen semi-liquid’ products and could not make any other type of products
very effectively. However, in service operations it is more difficult to distinguish process from
product/service technology because customers very often have direct experience of the
technology. A chain of cinemas, for example, may be investing in digital projection technology
and by doing so is investing in both product and process technology simultaneously.
As a further example of this distinction consider the legal industry. Because lawyers consider
themselves part of the ‘professional service’ industry does not mean that they cannot gain
benefit by using process technology. The fact that lawyers ‘process’ knowledge (and clients)
means that technology can help them store, analyse and manipulate this knowledge (and these
clients). Some of this technology is known as ‘litigation support’ technology. These enable
lawyers and clients to access databases, sometimes via the Internet, containing previous legal
judgments. Such databases are designed to help law firms capture, share and recycle their
accumulated collective experience. Search engines can help them search ‘practice area libraries’
to obtain access to different types of legal information. By contrast, the indirect process
technologies used by legal firms are less client facing and more back-office oriented. These
systems concentrate on scheduling work, controlling activities within the firm and ensuring the
efficiency and dependability of the delivered service. Remember though that some technologies
can cross this direct/indirect divide. Some newer process technologies used in the legal industry
are built around systems that can help clients directly to help track the progress of the work
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being undertaken for them and even answer questions and take part in the processing
themselves.
It is also worth remembering that one company’s process technology is another company’s
product technology. The processing equipment in a food factory, or in a call centre, is clearly its
process technology. Yet, for the companies that manufactured that equipment, it is their product
technology. In fact, increasingly, product and process technologies are merging. Look at
Google, one of the most successful internet-based companies in the world, which in a few years
has moved from being the provider of a particularly effective search engine, to being one of the
most active players in providing internet-based services. Google is a company that is its process
technology. Google is offering its process technology to a whole community of internet users
and advertisers (which is almost all of us; hence the company’s spectacular growth). Its product
is its process. Behind the scenes, Google spends millions of dollars on developing its processes.
Without investment in understanding the future directions of both technology and markets, and
without a very significant investment in the right kind of staff, its process technology, and
therefore its business model, would not be as successful.
The product/process innovation life cycle
The idea that the life cycles of product and process technologies differ is based on research that
investigated the competitive dynamics of a number of different manufacturing industries.1 These
‘life cycles’ indicated the relative importance of product or process technology over time. For
example, an innovative new product enters (usually) a fragmented market and, will not be mass
manufactured because of low and uncertain volumes. However, because it is innovative, some
considerable effort will have been devoted to the product’s technology. As the product becomes
established, dominant designs emerge and competitors force products to become increasingly
commodity like. Therefore, cost minimisation becomes critical and the role of process
innovation becomes more significant. Product and process innovation cycles are shown in
Figure 6.1. Not all firms will have the same relationship between product and process
technology life cycles. For assembled products the relationship is as shown in Figure 6.1(a).
Yet, Intel will not separate the development of a new generation of chip from their ability to
manufacture it, nor will most chemical and pharmaceutical manufacturers drive new products
from the development of new production processes. Here the relationship will be more like that
in Figure 6.1(b). For many service businesses the product/process distinction is even more
difficult to conceptualise. The key technological considerations are inevitably those that relate
to process because the process is itself the service; these ‘product’ and process life cycles
become the same thing as in Figure 6.1(c).
1
Abanathy, W.J. and J. Utterback (1975) ‘Dynamic model of product and process innovation’, Omega,
Vol. 3, No. 6.
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Direct and indirect process technology
The chapter also distinguishes between two types of process technology. The first contributes
‘directly’ to the production of goods and services, for example robots welding body panels or
sorting machines processing mail. The second type of process technology (one receiving
increasingly significant investment) is the ‘indirect’ or ‘infrastructural’ technology that acts to
support core transformation processes. Both manufacturing and service operations are
increasingly reliant upon ‘indirect’ process technology (and investing more in indirect
technologies). These are defined by the chapter as ‘infrastructural and information technologies
that help control and coordinate direct processes’. Put another way, indirect (or supporting)
process technology is the ‘appliance of science to the processes which provide or support the
infrastructure for those processes which directly contribute to the production and delivery of
products and services’. Indirect technology includes such things as supply chain management
systems, stock control systems, yield planning and pricing systems, information databases,
Enterprise Resource Planning (ERP) systems and the scheduling systems that plan transport
routes and staff rostering for mail delivery and so on. Figure 6.2 illustrates this idea.
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Again, remember that one operation’s indirect process technology can be another operation’s
direct process technology. So, a business may invest in a customer relationship management
system to help it offer more appropriate services to its customers. This is an important indirect
process technology to the business. However, alternatively, it may engage the services of a
specialist agency that offers customer analysis services using exactly the same technology. But
to this agency the technology is very much a direct process technology because it directly
provides services to the agency’s customers. In other words, the overall purpose of this direct
process technology is to produce products and services for an operation’s external customers.
Material, information and customer processing technology
An alternative classification of process technology is based on the main input that is processed
by the technology. They can be either materials processing (as in manufacturing operations),
information processing (as in financial services, for example) or customer processing (as in
retail, medical, hotel, transport operations, etc.). A shortened list of example technologies used
in Chapter 6 of the text is shown in Table 6.1 also classified as direct or indirect. Note how
indirect process technology is confined to information processing.
Table 6.1 Some process technologies classified by their primary inputs and their direct
or indirect role
Direct or indirect?
Direct process
technologies
Material
processing
technologies
Flexible
manufacturing
systems (FMS)
Weaving machines
Automatic vending
machines
Information
processing
technologies
Optical character
recognition machines
Online financial
information systems
Customer
processing
technologies
Surgical equipment
Milking machines
Medical diagnostic
equipment
Body scanners
Aircraft
Container handling
equipment
Mass Rapid Transport
(MRT) systems
Automatic
warehouse facilities
Renal dialysis
systems
Theme park rides
Indirect process
technologies
Management
information systems
Search engines on the
Internet
Telecommunication
technologies
Archive storage
systems
Global positioning
systems
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The characteristics of process technology
The chapter uses three underlying characteristics of process technology.
•
The scale or scalability of the technology (in capacity terms – not physical size).
•
The degree of automation or analytical content embodied in the process technology.
•
The degree of coupling or connectivity of the technology.
These three characteristics are strongly related. For example, at the small scale, manual,
uncoupled and flexible end of the technology spectrum (the manufacturing job-shop or
professional service firm), flows will be intermittent, loading in the different parts of the
operation will vary almost every hour. The progress of work through the system could be almost
anywhere and so have to be monitored and controlled. At the other end of these dimensions,
technology is large, automated, integrated and less flexible (a steel production line or an
automated cheque-processing unit). Any miscalculations in the choice of technology will be
extremely difficult to overcome because once the operation is committed to the capacity and
nature of this structure; most subsequent changes will require (often substantial) capital
expenditure.
Scale/scalability
The first of the three underlying characteristics is that of scale or scalability, an issue that is very
closely aligned to the ideas of scale discussed in Chapter 3 on capacity strategy. Broadly
speaking, some technologies benefit from economies of scale while others find it difficult to do
so. Some process technologies that are deployed in commodity industries like cement
manufacture or petrochemicals often benefit from scale and therefore tend to come in large
capacity increments. Other technologies have a ‘natural scale’ that is much smaller. In some
theme-park rides, making the cars that carry customers any bigger could be technically difficult.
Example – Micro-power2
Big is no longer beautiful in the world of power generation. Traditionally, economies of scale
have ruled in the construction of power stations. Generating electricity meant burning fossil
fuels to drive giant turbines that produced electricity. Not many years ago, giant plants burnt
coal and produced 2,000 MW (megawatts) of electricity. Even smaller nuclear plants were built
to produce 1,000 MW. But technological development, market pressures and environmental
concerns have acted together to change the whole outlook of the industry. Now a plant
producing only 100 MW is seen as too expensive, too risky and needing too long to construct.
In June 2000, ABB (the global technology company) launched its ‘Alternative Energy
Solutions’ programme. The company, which had recently sold its business making large-scale
power plants, had begun to concentrate on making small 10 MW systems, the consumption of a
fairly large factory.
2
Boyle, S. and C. Henderson (2000) ‘Small scale is beautiful’, Financial Times, 10 August; The Economist
(2000) ‘The Dawn of micro-power’, 5 August.
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Behind this move was a belief by ABB that there would be a general move from large
centralised power plants, whose energy was distributed through grids around a large region, to
‘virtual utilities’ that can link small-scale power plants serving individual operations. The future
of electricity generation could be one involving large numbers of individual operations. Offices,
or even houses, could each generate small amounts of electricity, perhaps using new
technologies such as fuel cells housed in units no larger than an average domestic heating boiler.
‘Net metering’ would allow any surplus energy generated to be sold into the electricity grid,
with electricity being taken off the grid in the conventional way when local consumption
exceeded generation capacity. In effect, the electricity meter would run backwards or forwards
depending on whether electricity was being bought or sold. Ironically, the first person to have
this vision was Thomas Edison. More than a hundred years ago, he imagined a world of
connected, flexible and decentralised power plants in all large homes and offices.
Increasingly, where the technology in question is ‘information rich’, scale is being replaced by
scalability. If technologies can be easily and conveniently brought together to provide extra
capacity when required, the scale of any individual piece of technology becomes less important.
Of course, scalability requires a high degree of standardisation and compatibly. Not only is this
not always possible, it also has some disadvantages. Highly standardised technologies can be
relatively inflexible in the long term. Changing the characteristics of one piece of technology
may make it less compatible with the other pieces of technology and therefore difficult to be
combined in order to provide increased scale.
Automation / analytical content
The idea of automation is, in principle, relatively straightforward to understand. It simply means
substituting technology in place of human judgement. This has long been a well-understood
concept in material processing technologies. Machines find it easier to do relatively simple tasks
but more difficult to perform tasks involving discretion and judgement. Yet, the borderline
between what machines find easy to do and what they find difficult to do is for ever moving
towards automation being increasingly feasible in a wider range of activities. At the same time
the strong drive towards greater automation in both manufacturing and service operations is
largely related to this desire to operate faster and/or deliver reduced direct labour costs.
However, the true impact of automation needs to be assessed in broader terms.
But, the term ‘automation’ is not always relevant when the technology has the function of
replacing human decision-making. What is important is the extent to which the technology can
take responsibility for the analytical content of the decision. This means that although, at a first
level of analysis, information technology applications may seem to have fully replaced human
intervention with technology-based decision making, there is still a range of ‘analytical content’
embedded within the technology. For example, an investment bank will use a very wide range
of information technologies. However, these will vary from relatively simple and standardised
spreadsheet applications that do very little other than perform very basic calculations, right
through to highly sophisticated market trading systems that react in micro-seconds to market
movements and continually learn from the results of their interventions. So, even in newer
technologies there is still a continuum that runs from relatively unsophisticated technologies
through to highly sophisticated systems that react faster and more effectively than humans.
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Commentary on example – Will computers eventually do everything?
Be careful with this example. It is not meant to imply that the abilities of technology
(especially new technologies) are overrated. Nor is it a reaction against increasing
technological dependence. All it is saying is that there will always be some kind of frontier
that represents the boundary between what technology can achieve and what it cannot.
Admittedly this frontier is forever expanding but it is always likely to be there in some form
or at some point. Moreover, there may be certain types of activity that can never be
performed by anyone other than human beings. In fact, it is a rather reassuring message. The
example is saying that we are never going to be totally replaced by machines but we can have
fun pushing forward technological frontiers.
Coupling / connectivity
Coupling is the extent to which different items of technology can interact with each other. This
may mean the ability to physically connect material processing technologies using materials
handing technologies. It may mean using similar screen layouts for B2C website screen so that
customers are not confused when moving between screens, or it may mean the use of common
databases and common protocols so that IT systems can talk to each other. In fact, the term
‘coupling’ is best replaced by the term ‘connectivity’ in IT-based technologies. Also, the
traditional rigidity of tightly integrated physical technologies are overcome by technologies that
can easily communicate with each other because of their connectivity.
The benefits of such highly coupled or connected technologies are usually derived from their
ability to leverage their compatibility (so that delays between activities are minimised) and
increase their ability to coordinate (so that activities can be synchronised or brought together in
some way). However, the wider the variety or range of activities that an operation has to
perform, the more difficult it is to achieve coupling (and sometimes connectivity). Compatibility
is usually easier to achieve when there is some predictability or standardisation in products or
services being processed. So, for example, a health care operation will perform a series of tests
and measurements on patients to screen them for a common problem such as their risk of
suffering heart disease. The readings from such tests may even be merged together into a
formula that predicts the likelihood of heart disease. However, for a patient displaying
symptoms for which the cause is not obvious, the various tests and measurements performed on
them will be carried out separately and brought together to help the diagnosis of the clinical
team.
Example – Ditching the pipes3
Look at any processing plant in the chemical industry and you will see miles of pipes: pipes that
move chemicals from one process to another, pipes that carry away excess heat from the
processes and pipes that connect pumps, valves, centrifuges and so on. In fact, over 75 per cent
of the capital cost of a conventional process plant goes into the structural work and plumbing
that connects what are known as ‘unit operations’ together. These unit operations are the
separate processes such as filtration, distillation and evaporation that are the building blocks of
most chemical processing. Recently though, a new philosophy has intruded into the
3
Swan, R. (2000) ‘Engineers face new challenges and tough contracts’, Financial Times, 3 July.
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conventional world of process plant design. This is called process intensification (PI). Although
the idea has been around for more than 20 years, it is now having an impact in the design of
process technology in the chemical industry. It attempts to make plants dramatically smaller and
harder-working by designing equipment that will increase coupling by performing two or more
hitherto separate activities in the same unit of technology. Using PI condensation, distillation
and re-boiling can all happen in the same piece of equipment, a reactor can also act as a heat
exchanger and so on. It all has the effect of making process technology smaller and reducing
overall costs. In this way chemical plants, always regarded as being tightly coupled, have
extended their integration to the extent that once-separate processes are now fully merged
together.
The product-process matrix
The main purpose of the product/process matrix is to demonstrate two points. The first is that
there is a ‘natural diagonal’ or line of fit between the product or service offerings that a
company has and the characteristics of its process technologies. Companies may move their
position on this line of fit, often moving down the diagonal as they progress along the
product/service life cycle, or choose to concentrate on inhabiting one particular position on the
diagonal. The second point is that any deviation away from the natural line of fit has cost
consequences. If technologies are too small, labour intensive and uncoupled for the volume and
variety of products and services produced, then the costs of making those products and services
will be higher than they could be using more appropriate technologies. Conversely, if the
technologies are too large, capital intensive and integrated for the volume and variety of
products and services produced, then the technology will be too rigid, which itself produces
extra costs and/or lost opportunities.
The product-process matrix was first described by Hayes and Wheelwright4 in 1979. They took
the product life cycle concept and linked it to process choice. Their original notion was that as a
product passes through the four different life cycle stages (start-up, growth, maturity and
decline) a business can select the ‘correct’ process for the particular product by considering both
volume and variety characteristics. For example, whilst a product is exhibiting the low volumes
associated with start-up, it is likely that the jobbing or batch mode of manufacture will be most
suitable. As volumes increase, production could be switched to mass or even continuous
processes. Companies who have products or service at different points on the product life cycle
often choose to separate their operations according to the volume characteristics they must cope
with.
Commentary on example – Voucher processing in retail banking
This is the story of how technology in one industry (retail banking) has moved down the
diagonal of the product/process matrix. The question it does not address is, ‘What happens
next?’ Perhaps the answer lies in the way the natural diagonal of the product/process matrix is
being pushed outwards towards the top right-hand corner of the matrix. This is a point that
will be dealt with later in this lesson. When you come to that point in the lesson think about
how a greater integration of banking IT allows the bank’s back-office centres to be connected
so that flexibility is enhanced and costs reduced.
4
Hayes, R.H. and S.C. Wheelwright (1979) 'Link Manufacturing Process and Product Life Cycles', Harvard
Business Review, pp. 133–140, Jan-Feb
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Example – Learning from being ‘off the diagonal’
Moving away from the ‘natural’ diagonal usually proves costly but can also provide learning
opportunities for any operation having to cope with the resulting problems. Consider the
following story about a traditional manufacturer of hand tools, for example. The firm received
repeated requests from their main customers (out-of-town DIY superstores) for a rationalisation
of their product offering. This led them to revise their screwdriver range, replacing some 50
separate types with a newly designed (and better branded) set of 9.
The original range was manufactured in batches in a number of stand-alone processes that
cropped steel bar, forged the end, trimmed, heat treated, ground, sometimes plated, marked and
inserted the blades into the handles; set of process technologies that were small scale, fairly
manual, not integrated and very flexible.
The narrow product range prompted the company’s production engineers to draw up plans for a
new production system that integrated several of the operations in the original process sequence.
This involved investing in rotary forging, large bed grinders and induction coil heat treatment –
as well as materials-handling technology. There would be more capital equipment, fewer
people, larger machines and less changeover flexibility.
However, a delay in gaining approval for the capital cost resulted in the new product range
being made on the old, flexible but inefficient process. Initially this seemed as if it meant
redundant flexibility and high costs. The operation had not moved down the technology
dimensions, yet the product profile had moved to the right.
But rather than accept cost disadvantages as an inevitable consequence of having inappropriate
technology, the company actively tried to exploit the advantages that their position gave them.
For example, the old flexible technology could manufacture smaller batches than seemed to be
warranted. But by issuing forecasts weekly rather than monthly as before, production schedules
could be accommodated that matched demand much more closely and gave lower finished
goods inventory. The old system was being exploited to improve responsiveness and thus
reduce working capital requirements. Admittedly, total manufacturing costs were higher than
would have been the case with the new technology, but not as high as they would have been
without the changes to the forecasting and scheduling procedures.
Eventually, the new technology superseded the old, but not quite as originally conceived. The
company had become impressed with the benefits of a flexible, responsive operation. They were
unwilling to sacrifice their changeover flexibility for a more automated, higher production rate,
process. Consequently, several changes were built into the new integrated system to allow the
same responsiveness as before. In some ways the new system was still less flexible than the old
(9 types instead of 50), but not where it mattered.
There are clear lessons here. Although the product–process matrix can give us a general
indication of how process technology should/will differ for different product profiles, it does not
prescribe a ‘correct’ technology. It gives a general idea of how technology will need to be
adapted as product profiles change, but this does not preclude breaking the connection between
the dimensions of technology so as to get some of the best of all worlds. Any company finding
itself off the diagonal could usefully ask how it could exploit the benefits that its position gives
it, and what it must do to overcome the negative effects of its position.
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Evaluating process technology
A straightforward financial evaluation is the main approach to evaluating process technology for
most businesses. However, traditional measures, such as return-on-investment (ROI), can be
difficult to calculate, especially if the costs and benefits associated with the technology are
spread across the whole organisation. ROI models are much better adapted to narrowly defined,
single product-market projects where the 'pay-back' benefits are clear. But, many technology
investments are made for 'strategic' reasons, where the eventual returns might include improved
reliability, productivity enhancements, increased speed of response, etc. Although these can be
critical success factors in a service business, they are difficult to incorporate in an ROI model.
Particularly when IT is involved, many managers don't really know the long-term value of their
investment simply because they cannot predict if and when the technology will become
obsolete. Also, many firms appear to take a reactive view of technology, and it is therefore
unsurprising to discover that they have difficulties in assessing the real impact that such
investments will have upon the competitive advantage of the firm. This is why the chapter takes
a broader approach to technology evaluation using the ‘feasibility, acceptability, vulnerability’
framework.
•
Technology investment must be feasible – If the resources required to install a piece of
technology are greater than those that are either available or can be obtained, it is infeasible.
Three broad questions are worth asking: (a) What kind of skills, technical or human, are
required? Every investment in process technology needs a set of specific skills to cope with
the implementation. If an investment is similar to the usual activities of the organisation
these skills will probably be present. But with a completely novel process, novel
implementation skills might be needed. (b) What quantity of operational resources are
necessary? This involves determining the number of resources – people, facilities, space,
materials, etc. – that would be required to implement the process. (c) What are the funding
or cash requirements? For many decisions the major feasibility issue concerns the cash that
would be required. For some decisions this could mean simply examining a one-off cost,
such as the purchase price. Other, more strategic process investments, may need an
examination of its effects on the cash requirements of the whole organisation.
•
Technology investment must give acceptable benefits – By the ‘acceptability’, we mean
the benefit it is expected to bring to an operation; unsurprisingly the greater the benefits, the
greater the overall acceptability. A process technology’s acceptability is how far it fulfils
the company’s objectives, in terms of the following. (a) Its operations resource capabilities.
Process technology should provide resource capabilities that give a sustainable advantage
by being, scarce, difficult to move, difficult to copy and/or difficult to substitute for. (b) Its
market requirements. All process technology should contribute to the business in an
operational context. So, use operations performance objectives to assess acceptability –
giving more weight to those that contribute directly to competitiveness. (c) Its financial
impact. The financial impact of process technology is the comparison of the costs to which
the investment commits the operation, and the financial benefits that might accrue. Ideally,
both the ‘costs’ of the investment and the resulting benefits ought to include everything that
is influenced by the investment over its life. In fact, this is impossible in any absolute sense.
The effects of any large process decision ripple out like waves in a pond, impinging on and
influencing many other decisions.
•
Technology investment must not expose the operation to excessive vulnerability – The
risk inherent in any process investment is there because one cannot totally predict three
issues. (a) How it will affect the performance of the whole operation. (b) The external
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conditions prevailing after the investment is made – for example, the volume of demand or
the interest rate. (c) The reaction of outside companies to the investment – for example,
whether competitors are likely to make similar investments. All these need assessing and
putting in terms of the downside risk for the operation – the most pessimistic outcome
possible. The key question then becomes, ‘Is the downside risk worth taking?’
Working with emergent technologies
The ‘feasibility, acceptability, vulnerability’ framework approach to analysing process
technology is both systematic and logical. However, under some circumstances the final set of
criteria (vulnerability or risk) is so great that any use of new technology must be handled
particularly carefully. This is especially true of emergent technologies whose efficacy have not
yet been fully established.
For example, in the music industry, Platinum Blue Music Intelligence uses a technology called
Music X-Ray to analyse the underlying mathematical patterns in music. This process can be
compared to the original x-ray when it was first introduced to medicine. The x-ray shows the
doctor something that is already there but that could not be seen. The doctor then uses that
information to make better decisions. Music X-Ray technology works in much the same way in
that it shows music industry professionals their music and their market in ways they could not
see it before. They say that their service… accurately predicts the success of hit songs and is
thus used on the supply side of the music industry as a crystal ball. It helps the companies that
make and sell music predict which songs are going to become hits due to the discovery that hit
songs conform to a limited number of mathematical patterns that cannot be heard with the ear.
Most singles released by music labels sound and feel like hits but lack these optimal
mathematical patterns and this is a main reason why the industry has less than a 20% success
rate. Less than one in 5 songs that are released as singles and promoted with a significant
budget actually reach the charts. By using our technology hit rates can be increased to over
80%; four times the accuracy rate the industry currently has, effectively providing a risk
management capability that helps yield massive improvements in return on investment.
(Company web site)
While this technology is undoubtedly valuable in the decision-making processes in the music
industry, should it entirely replace human judgement? In other words, should the technology be
seen as having sufficiently high acuity and judgement in terms of its analytical content (see
earlier categorisations) to take over some of the decision making? It is already difficult to know
exactly how this technology is being used. Even the music companies and record labels that use
it are reluctant to talk about it (no one likes to think that their music is being generated from a
box). Also, record companies are aware of the danger that all their products will eventually
sound similar if it uses the same process technology to be selected. In fact, like many decision
support technologies, the solution is to blend the information emerging from this technology
with more conventional human judgement. This may not eliminate all the dangers of using this
type of technology, but according to some industry analysts, ‘no record label can now ignore
this type of screening’.
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Example – Technological races5
The ‘entrapment’ game – essentially, an auction ‘with a twist’. The auctioneer announces to the
players that she is going to auction off a £20 note to the highest bidder. After someone opens the
bidding, each following bid must exceed the previous one by at least 50p. The ‘sting in the tail’
is that once the bidding stops, not only the highest but also the second-highest bidder must give
their bids to the auctioneer. The highest bidder gets the £20 note and the second highest gets
nothing! Regardless of the type of player, the pattern of bidding remains very similar. Following
the opening bid, offers quickly proceed to £10, or half the amount being auctioned. There is
then a pause, as the players digest the fact that, with the next bid, the total of the two highest
bids will exceed £20 and push the auctioneer into profit. Imagine yourself as the second-highest
bidder at this point, considering what your options actually are. You can give up and take a
certain loss of £9.50 or you can risk a little more and possibly win £9.50. At this point in the
game, it is common for all but the top two bidders to drop out.
If we return to our auction, as the bidding approaches £20, there is a second pause as the bidders
appear to be pondering the fact that even the highest bidder is likely to lose money. Again,
consider the alternative: dropping out means definitely losing £19.50. Once the £20 threshold
has been crossed, the bidding quickens again, and from then on it is a battle of nerves. And if
you are thinking to yourself that you would never be so silly as to get involved in a game that so
strongly favoured cost escalation, reflect on the following. A psychology professor claims that
over 10 years he won more than $17,000 auctioning $20 bills to his MBA students at the
Kellogg Graduate School of Management.
Players in the entrapment game ‘auction with a twist’ face similar drivers to those firms
considering investments in new performance-enhancing technologies. If there are any kinds of
‘winner takes all’ factors at play (i.e. first-mover advantage) then investing just a little more
than a rival can shift the results in one’s favour. At the same time, these factors also mean that
very often the second-placed player faces minimal returns on his or her investment, if not actual
losses and (of at least equal significance) the potential for appearing foolish.
Investment to meet evolving customer needs
The obvious driver of a firm’s motivation to invest in new process technology is that there has
been some kind of change in customer needs. So, for example, in the food industry, regardless
of whether requirements emerge for particular recipes (i.e. following media-led food fashions),
alternative formats (i.e. more biscuits in a ‘family’ packet) or new packaging types (i.e.
individually wrapped for snacking), each change requires manufacturers to modify their process
technology. Some changes derive from specific requirements whereas others are part of longerterm trends. As a specific example, several new processing technologies, such as the in-packet
pasteurisation of fresh pasta, have developed as the result of a general trend in customer
preference for processed foods with high ‘perceived’ freshness (this is not necessarily the same
as actual freshness).
Other market changes can have a more profound impact. For instance, changes in consumer
attitudes towards fat (especially saturated fat) have led many manufacturers, including global
margarine producers like Procter and Gamble, to invest huge sums in developing and adopting
technologies that could process reduced fat and reduced cholesterol-bearing products.
5
Adapted from Frank, R.H. and P.J. Cook (1995) The Winner Takes All Society, Penguin.
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The process life cycle
Because scientific developments often occur independently of specific market dynamics,
companies may be faced with a potential process technology in search of a sensible market
application. Raytheon in the USA lost over $5 million with their first microwave oven by
marketing it to industrial users and emphasising the technical performance of the underlying
technology, rather than marketing it to catering operations and demonstrating the rapid cooking
of popcorn. In the previous chapter we discussed some of the difficulties associated with
separating product/service and process life cycles. Yet, the notion that a process technology has
a specific life span is still a powerful one – especially when discussing whether to exploit a
specific technological opportunity. This is where the ‘S-curve’ comes in.
The so called ‘S-curve’ describes the relationship between research efforts (investment) put into
improving a process technology over time and the performance outcome that is achieved as a
result. The S-curve shape is as it is because of a number of factors. Initially, returns from any
innovative process technology are low but as the technology is more widely adopted and its
basic performance is improved, returns grow rapidly. Finally, as a technology matures, it
becomes increasingly difficult to gain further technological progress no matter how much
money is thrown at it. Several authors6 have used this curve to argue that as organisations reach
the upper limits of a technology (point A in Figure 6.3), further investment is better spent on an
entirely new S-curve that represents a new technology and a host of new opportunities (position
B). Celebrated examples of a lack of awareness of the S-curve abound. For example, none of the
top ten manufacturers of vacuum tubes (in the 1950s) was quick enough to see the impact of
semiconductor technology and none of them was in this new top ten.
However, the model should not be taken as offering simple prescriptions for operations strategy.
But it is useful in forcing organisations to consider some critical questions:
•
How do we really know that a technology has reached its limit?
•
How can we be sure that customers will value investment in a new process technology?
What about past investments and the underlying capability bases we have developed?
•
Will we be able to replicate the same level of capability?
6
Foster, R.N. (1986) Innovation: The Attacker’s Advantage, New York: Summit Books.
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The market and resource impact of process technology
This uses a simple charting methodology applied to a police forensic laboratory to evaluate both
market resource and operations capability dimensions. Here is a further example that
demonstrates how this approach can be used.
The original Payless operation opened in 1956 in Topeka, Kansas, with an extremely simple yet
revolutionary service concept – instead of being guided by an employee towards their footwear
purchase, customers browse independently in a self-service environment. This simple, yet
appealing concept gave, and continues to give, their operations a basic efficiency that allows
them to sell their shoes at low prices (today, most of their products sell for less than $15 a pair).
In the 1990s Payless ShoeSource Inc. was spun off from its by then more diversified parent and
became an independently traded company on the New York Stock Exchange (trading as PSS).
Like most successful garment manufacturers, the business exploits a global network of factories
and agents. Although somewhat late compared with other retail sectors and other competitors,
the firm launched its new online retail business in 2000. The synergy with their established selfservice retail concept seemed to be strong. Adopting a relatively cautious approach to the new
operation, PSS deployed an ‘off-the-shelf’ web front-end and order receipt system created by
the Internet division of IBM. The ‘back office’ order processing was completed using the preexisting (and completely tried and tested) systems developed to support hundreds of individual
retail outlets across North America.
We will apply the market requirements and resource-based analyses described above. The
complete analyses are also summarised in Figures 6.4 and 6.5.
Quality – The online ordering system is essentially an extension, or new front-end, on the
inventory and order management systems used to support the existing Payless stores. However,
the simple-to-use web site (following the tradition of their self-service stores) does offer some
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additional features such as a permanently available up-to-date catalogue and corporate
information for the firm’s investors. The likelihood of ordering errors, though, could be greater
if customers do not follow the site instructions.
Speed – Although customers can now place orders from home, the physical distribution of
shoes, etc. exploits the same back-office delivery systems as before. Therefore the overall speed
of delivery can even be, if a customer has to wait for a courier to deliver their goods, actually
slower than visiting a store with the product in stock.
Dependability – As the underlying processes are the same, just as they are no faster, they are no
more dependable in terms of product availability (although actual stock is more visible) and ontime delivery.
Flexibility – The introduction of a complementary web-based service effectively extends the
scale of their retail operations. The number of potential customers is no longer restricted to
those within a reasonable travel distance from a store and likewise the ordering process is now
available 24 hours a day, 365 days a year.
Cost – Online transaction costs are a fraction of those associated with the traditional storeordering process that could involve considerable amounts of staff time. Unlike a start-up web
retailer, Payless’s exploitation of established processes massively reduced their initial costs and,
by increasing total volumes, reduced overall unit transaction costs.
We can analyse the resource profile of the technology in a similar fashion. Interestingly, most of
the hardware and software elements deployed by Payless were ‘off-the-shelf’ items: from the
standard network servers to IBM’s Internet store solution. Figure 6.5 charts this resource profile
and distinguishes between hardware, software and the intangible aspects of the technology.
Scarce? – Although Payless created a fairly standard retail web site, more crucially, it enables
the company to leverage their existing brand and thereby reinforce/protect it.
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Difficult to move? – It would be very difficult for another retailer to rapidly grow the same web
presence independently of the already established retail brand and customer relationships
(including sales data, customer preferences, etc.) that underpin it.
Difficult to copy? – With the exception of specific logos and graphical elements, the basic
functionality of any web ‘store front’ can easily be copied (especially one bought off the shelf
from a global supplier). To a lesser extent this is also true of any back-office processes
(recognising how far down the learning curve Payless are after decades of being in business).
However the firm’s reputation – and the trust this creates – is inimitable.
Difficult to create a substitute for? – Interestingly, on the S-curve, one could argue that the
Internet is the twenty-first-century substitute retail technology. However, there is nothing that
renders the technology itself intrinsically difficult to substitutes. Most crucially for Payless, a
web presence extends their market position (more than 4,000 stores), allowing them to exploit
and defend their already significant incumbent’s advantage.
A final word on process technology evaluation
It is worth remembering that, in practice, the choice of new technologies is far less rational and
‘clinical’ than the impression given in Chapter 6. Usually, investment decisions of this type are
made against a background of opposing factions in the managerial team with different views of
how the market may change, what risks are appropriate, which technologies represent the way
of the future and which represent technological ‘dead-ends’ and so on. The issues and questions
outline in Chapter 6 should therefore be considered as providing a set of checklists and
structures that can raise this debate to a higher level rather than give any answers as such.
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Study guide
CHAPTER 7
Improvement strategy
Chapter aims
There is an important distinction between how organisations set up their strategy for on-going
improvement and how they review their overall operations strategy, which is done relatively
infrequently. The latter issue is known as the operations strategy formulation process and is
covered in Chapters 9–10. The aims of this chapter are to:
•
Define the basic idea of an improvement strategy.
•
Explore different approaches to improvement, especially the balance between ‘top-down’
management-driven improvement and ‘bottom-up’ shop-floor improvement.
•
Examine the nature of performance measurement.
•
Describe the importance–performance approach to prioritising for improvement.
•
Discuss the model of operations improvement which contains the three concepts of ‘fit’,
‘learning’ and ‘contribution’ (or Direct, Develop, Deploy).
•
Understand the ‘four-stage’ model of operations contribution.
Improvement in operations strategy
Only a few years ago there was relatively little effort devoted to how operations could improve,
with more emphasis being placed on the routine decisions that simply ‘kept the show on the
road’. But now there is a large body of opinion that recognises the importance of operations
staying ‘ahead of the game’. For example: ‘The companies that are able to turn
their…organizations into sources of competitive advantage are those that can harness various
improvement programs…in the service of a broader [operations] strategy that emphasizes the
selection and growth of unique operating [competences].’ Hayes and Pisano 1996, p.40
Partly because of this, operations managers have seen a huge range of essentially faddish
solutions to a range of perceived problems, with the over-implementation of techniques that
were viewed as panaceas (and were therefore almost by definition ‘doomed to disappoint’). Yet
nearly all the techniques had some potential value, but too often organisations lacked a
sufficiently strategic view of what was necessary to make operational improvement possible.
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Breakthrough improvement or continuous improvement?
The chapter, like most treatments of this subject, divides improvement ‘philosophies’ into
‘breakthrough’ or ‘major’ improvement projects, and more ‘continuous’ or incremental
improvement. But this is something of an artificial distinction. Most organisations will require a
mix of both types of improvement as well as some improvements that are somewhere in
between these two types. To some extent, the relative emphasis placed on either continuous
improvement or breakthrough improvement will depend on the degree of process change that is
implied by the improvement. The chapter distinguishes between four levels of process change
from ‘modification’ through to ‘extension’ through to ‘development’ through to ‘pioneer’.
Figure 7.1 makes the connection between the type of improvement approach that will be
necessary and the degree of process change. Although there is no simple distinction between
breakthrough and continuous improvement, generally the greater the change the more likely it is
that breakthrough approaches to improvement will be appropriate.
Benchmarking
Benchmarking highlights how key operational elements compare against ‘best in class’
competitors, so that key areas for focused improvement can be identified. However,
benchmarking does not provide a vision of how to go beyond competitors. As Prahalad and
Hamel (1994) say: 'Path breaking is a lot more rewarding than benchmarking. One does not get
to the future first by letting someone else blaze the trail.' Yet benchmarking may not always
imply the simple ‘copying’ of some other organisation’s ideas. If one takes a far broader view of
benchmarking, it could include the general comparison of one’s own approach to managing
operations with some other organisation’s approach. In this case benchmarking is not being used
in order to simply compare performance levels, nor is it being used to seek out ‘best practice’ as
such. Rather, one is looking at other organisations for challenges, alternative views or simply
inspiration. And whilst not advocating ‘industrial tourism’ as it is sometimes called, for its own
sake, examining other organisations’ approaches to operations strategy can often be helpful if
only to contextualise one’s own approach.
The ‘Direct, Develop, Deploy’ model
It is useful to have some strategic conceptualisation of what is necessary to encourage
operational improvement. This is where the ‘Direct, Develop, Deploy’ model is useful, it uses
the powerful idea of the improvement cycle to identify three different, but clearly related,
mechanisms, without which no improvement strategy could be complete.
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•
Direct – means ensuring that there is fit between market and operations resources.
•
Develop – means that the capabilities of these operations resources are improved through
learning over time.
•
Deploy – means that these operations capabilities are contributed to shaping market
position.
Figure 7.2 illustrates this idea.
Getting the fit right – Direct
An important, and usually the first, stage in any improvement strategy is to make sure that
improvement is very clearly linked to the requirements of the organisation’s markets. This
means first of all understanding markets and then translating market requirements into a set of
performance measures that both reflect market requirements and have meaning within the
operation.
Performance measurement
Strategically, an important question is, 'How do we know if our operations are good, bad or
indifferent?' In other words, how do we begin to judge the performance of the resources and
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processes which; taken together, comprise investment in the operation? Unless performance is
regularly assessed in some way, there is no basis for evaluating operations effectiveness. And
unless we have some idea of exactly how effective our operations are, we have no sound basis
for devising means of improving our operations. Traditionally, performance measurement has
been seen as a means of quantifying the efficiency and effectiveness of action.
Performance measurement concerns ‘sensing’ performance and evaluating it by ‘comparison’
against ‘standards’. This view gives rise to what the chapter terms the four generic issues of
performance measurement. These are,
•
What factors to include as performance targets?
•
Which are the most important?
•
How to measure them?
•
On what basis to compare actual against target performance?
What factors describe performance?
The history of operations performance measurement has been one marked by the steady
broadening of the scope of what it is regarded as appropriate to measure. If the operations
function is responsible for more than cost and productivity, it should measure more than cost
and productivity. It was then an issue of broadening out the natural scope of measurement to
encompass external and internal, long-term and short-term and ‘soft’ and ‘hard’ measures. The
‘Balanced Scorecard’ approach taken by Kaplan and Norton, argues that adopting a balanced
range of measures enables managers to address the following questions1
•
How do we look to our shareholders (financial perspective)?
•
What must we excel at (internal business perspective)?
•
How do our customers see us (the customer perspective)?
•
How can we continue to improve and create value (innovation and learning perspective)?
It was dissatisfaction with traditional performance and control systems, often designed and
managed by accounting specialists, which led to the development of the Balanced Scorecard
Approach. It had long been recognised that inadequately designed performance measures could
result in dysfunctional behaviour. And as well as focusing almost exclusively on financial
measures of performance, traditional performance measurement systems did not provide the
important information that is required to allow the overall strategy of an organisation to be
reflected adequately in specific performance measures. Although the balanced scorecard
approach does include financial measures of performance, it also includes more operational
measures of customer satisfaction, internal processes innovation and other improvement
activities. In doing so, it measures the factors behind financial performance, which are seen as
the key drivers of future financial success.
1
See Kaplan, R.S. and D.P. Norton (1996) The Balanced Scorecard, Harvard Business School Press,
Boston, MA.
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Developing a balanced scorecard is a complex process and is now the subject of considerable
debate. But the approach does attempt to bring together many disparate elements which reflect
an organisation’s strategic position. These may include product or service quality measures,
product and service development times, customer complaints, labour productivity and so on. At
the same time, it attempts to avoid performance reporting from becoming unwieldy by
restricting the number of measures and focusing especially on those seen to be essential. The
advantages of the approach are that it presents an overall picture of the organisation’s
performance in a single report and by being comprehensive in the measures of performance it
uses, encouraging companies to take decisions in the interests of the whole organisation rather
than sub-optimising around narrow measures. One of the key questions that has to be considered
during this process is how specific measures of performance should be designed? It is
recognised that inadequately designed performance measures can result in dysfunctional
behaviour, so teams of managers are often used to develop a scorecard that reflects their
organisation’s specific needs.
Perhaps one reason for the popularity of the balanced scorecard approach to performance
measurement is that the four categories of performance measures used are very similar to the
four perspectives of operations strategy (see Chapter 1). Figure 7.3 illustrates how Kaplan and
Norton’s category of financial performance measures is very close to what we have called
earlier the top-down perspective of operations strategy. Their idea of ‘customer performance
measures’ is equivalent to what we have called the market requirements perspective of
operations strategy, their ‘internal process performance measures’ is the same as what we have
called the operations resource capability perspective on operations strategy and their ‘learning
and growth performance measures’ corresponds to what we have called the bottom-up or
emergent perspective on operations strategy.
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Which are the most important performance measures?
The chapter frames this question as trying to achieve some balance between having a few key
measures on one hand (straightforward, simple, but may not reflect the full range of
organisational objectives), or, on the other hand, having many detailed measures (complex,
difficult to manage, but capable of conveying many nuances of performance). The compromise
is to make sure that there is an explicit link between competitive strategy, the performance
objectives that are given to the operations function, the key performance indicators (KPIs) that
reflect the main performance objectives and the bundle of detailed measures that are used to
‘flesh out’ each key performance indicator. However, unless competitive strategy is well
defined (not only in terms of what the organisation intends to do but also in terms of what the
organisation will not attempt to do), then it is difficult to focus on a narrow range of key
performance indicators.
How do we measure them?
The key question here is, ‘What is an ideal performance measure?’ The following is a useful set
of criteria against which we can judge individual performance measures2.
•
Performance measures should be derived from strategy.
•
Performance measures should be simple to understand.
•
Performance measures should provide timely and accurate feedback.
•
Performance measures should be based on quantities that can be influenced, or controlled,
by the user alone or in co-operation with others.
•
Performance measures should reflect the ‘business process’ – that is, both the supplier and
customer should be involved in the definition of the measure.
•
Performance measures should relate to specific goals (targets).
•
Performance measures should be relevant.
•
Performance measures should be part of a closed management loop.
•
Performance measures should be clearly defined.
•
Performance measures should have visual impact.
•
Performance measures should focus on improvement.
•
Performance measures should be consistent (in that they maintain their significance as time
goes by).
•
Performance measures should provide fast feedback.
2
Neely, A.D. (1998) Measuring Business Performance, Economist Books, London.
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Performance measures should have an explicit purpose.
•
Performance measures should be based on an explicitly defined formula and source of data.
•
Performance measures should employ ratios rather than absolute numbers.
•
Performance measures should use data that are automatically collected as part of a process
whenever possible.
•
Performance measures should be reported in a simple consistent format.
•
Performance measures should be based on trends rather than snapshots.
•
Performance measures should provide information.
•
Performance measures should be precise – be exact about what is being measured.
•
Performance measures should be objective – not based on opinion.
What basis to use to compare actual against target performance?
The discussion in the chapter under this heading is an interesting and important one. Namely
that the way we view a performance measure will depend entirely on the ‘standard’ we compare
it with. This ‘standard’ reflects the threshold between what is considered acceptable
performance and not acceptable performance. It uses an example of delivery performance and
compares it against four different ‘standards’ to show how our judgement of whether
performance is acceptable varied depending on the standard.
•
Historically performance is good (or at least better than it was).
•
Against the company’s improvement goal, it is poor (83% against 95%).
•
Compared with competitors it is good (they only achieve 75%).
•
Against what it could be potentially it is poor (an absolute level of 100% – perfection).
So how we judge a performance measure very much depends on the standard against which we
compare it. Different standards will be appropriate in different circumstances.
•
Historical standards – are useful for some improvement programmes where the rate of
improvement is a key issue, or where it is important to celebrate progress.
•
Target-based standards – are useful where, like all budgets, one needs a figure around which
to plan other activities, or where the target is seen as exercising constructive motivational
impetus to an improvement programme.
•
Competitor-based standards – are particularly useful in longer term strategic decision
making. After all, as the organisation improves, it is that piece of improvement that takes it
past its competitors who may have the most utility. An equivalent to competitor-based
standards for non-competitive operations would be to use the performance levels achieved
by similar operations elsewhere.
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•
Absolute performance standards – are useful for calibration purposes. In effect, they
highlight the amount of improvement that has still to be made. Improving from 60 per cent
delivery performance to 83 per cent is not so much an improvement of 23 percentage points;
rather it is slightly over halfway to the ultimate goal.
Prioritising improvement – the importance–performance matrix
In most companies, finding things to do which will make them better is not a difficult task.
Deciding which of these many improvements to tackle first is far more difficult. However there
are some basic rules that can be used to guide prioritisation. For example, ‘do the easy things
first’ (the ‘low-hanging fruit’ approach), ‘do the cheapest things first’, ‘do the things that our
customers are complaining about first’, ‘do the things where we believe ourselves to be
vulnerable to competitors first’ and so on. The approach we discuss in this lesson has been
found to be a useful procedure in practice, and furthermore takes a relatively strategic view of
the improvement process. By this we mean it links an external view of the way products and
services are viewed in the marketplace to an internal view of how good we are at delivering (in
the broadest sense of the word) these products and services.
The idea of the importance–performance gap driving improvement is not new. The chapter’s
version of it uses 9-point scales. It uses the running example of TAG Transport to demonstrate
the use of this approach. Essentially the whole idea of the importance–performance matrix is to
help operations to prioritise the particular competitive factors or performance objectives on
which they should be concentrating. Let us summarise their description of this technique as a
step-by-step procedure.
•
Step 1 – Select one product or service into one market – In fact the chapter does not
emphasise this issue but it uses the technique initially to look at one particular service into
one market. This is quite important as we shall discover later. Performing this technique on
whole operations, which may be producing a wide range of products or services and selling
into several different markets, only results in generalities on the matrix that are of little
value. To begin with, it is best to get used to how this approach works by selecting a
relatively clearly defined product or service and consider it from the point of view of
satisfying one of its markets. Choosing a product or service that is either accepted as being
clearly very good or obviously very bad would probably not be wise! To begin with, it has
been found useful to select a product or service where there can be genuine debate over the
way it is produced.
•
Step 2 – Identify relevant competitive factors – This step involves selecting a range of
performance objectives that have some relevance to the customers for the product or
service. Remember here to distinguish between the customers who are the immediate
purchasers of the product or service and the end consumers. Choose one or the other to base
your analysis on, but do not mix the two. Most organisations prefer initially to work from
the customers’ point of view rather than the ultimate consumers. The next issue is to select
the appropriate factors. A useful way of doing this is to start from the five performance
objectives (quality, speed, dependability, flexibility and cost). Almost certainly however,
these will need to be customised to make them appropriate for the chosen product or
service. So, in the example used by the chapter, the simple performance objective ‘quality’
is divided into ‘service quality’ and ‘distribution quality’. It is best to use the five
performance objectives as a starting point or checklist and then develop appropriate factors
from them.
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•
Step 3 – Rate the factors on the 1 to 9 importance scale – This is a relatively straightforward
procedure – just pick the relevant point that seems closest to how you see the importance of
each factor to customers. Of course, it may be that you cannot fit one of these statements
exactly to your understanding of customers’ views. Remember this is not a precise exercise.
Remember also that it is quite intentionally subjective. The technique is asking individual
managers or a group of managers to articulate their understanding of how customers value
aspects of their performance. If, on reflection, the views of the customer group chosen are
too disparate to be summarised in a single point, then identify a range.
•
Step 4 – Identify operations performance on the 1 to 9 scale – Again remember that this
is not a formal benchmarking exercise; it is a subjective assessment of how the operation
sees its performance relative to its competitors. It is worth mentioning though that, of
course, this might prove difficult in many organisations. Unless some effort has been put
into monitoring competitors’ operations performance, it may be difficult to make this
judgement. If so, (a) it is a salutary lesson for any organisation to admit that they do not
know such basic competitive information, and (b) managers will just have to make an
impressionistic judgement. The other point to note at this stage is that the chapter uses ‘cost’
instead of ‘price’. This is because comparing a company’s prices against their competitors
may not be too revealing. Either prices are set deliberately to differentiate the company
from its competitors or, alternatively, market forces may have pushed prices together
anyway. Far more revealing from an operations point of view is a comparison on a cost-bycost basis. That is, ‘are our costs of producing this product or service better, the same as, or
worse than, our competitor?’
•
Step 5 – Plot the points on the importance–performance matrix – The matrix itself is
shown in Figure 7.7 of the chapter. It is divided into four zones. These are: (i) the high
priority zone or urgent action zone;(ii) the improve zone (containing elements of
performance which need to be improved but not as a priority if there are other elements
within the urgent action zone); (iii) the appropriate zone where performance is judged to be
reasonable; (iv) the excess? (note – the question mark is important) zone where the
performance factors need to be questioned to check whether excess resources are being used
to maintain these levels of performance. If any factor appears in this zone, it does not
necessarily mean that it has to have resources taken away form it – merely that questions
should be asked.
Drawing the matrix with these clear distinctions between zones is somewhat misleading.
Obviously, the bottom right-hand side of the matrix does imply urgent action and the top lefthand side of the matrix does imply some kind of excess; however, do not take the lines between
the zones as being definitive. In reality, perhaps one should regard them as where one zone
gradually merges into another. The idea behind the matrix is to give a broad indication of how
one might approach the degree of prioritisation to put behind improvement in each area.
Also, consider what the matrix is really doing. It is encouraging operations managers to consider
similar aspects of their performance from two quite different perspectives.
•
The external perspective – how customers and markets would view these aspects of
performance.
•
The internal perspective – how good the operation is at performing on each aspect of
performance.
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In this way, it is attempting to bring market and operations perspectives together. In effect, it is
an approach that could be said to help the principle of strategic fit (see Lesson 8). It is doing so
by identifying ‘gaps’ between what is (customer perspective) and what should be (operations
performance).
More to the point, it forces management teams to articulate their underlying assumptions about
what drives improvement prioritisation. Experience of using this technique has shown that
managers often have surprisingly varied perceptions of both importance and performance. Yet
when asked if they believe that their perspective would be shared by their colleagues, they
nearly always believe it would. Joint discussions as to exactly how importance and performance
of each factor should be rated help to ‘get things out on the table’. Where differences still
persist, they do become clearer. In fact, rarely does the matrix show any particular surprises. But
it does help to discriminate between different degrees of urgency or prioritisation to be allocated
to each factor of performance.
This is why the technique is intended to be used as a formalisation of subjective perceptions.
The whole idea is to expose consensus, or the lack of consensus. Moving prematurely into
sophisticated customer surveys or benchmarking exercises is something that might make sense
later on, but not at this stage of prioritisation. Sometimes managers merely hide behind formal
survey results rather than face up the issues of their own strategic ignorance. In fact, the exercise
itself can give some important guidelines to where further research, of a more formal nature is
necessary.
Building capabilities through learning – Develop
This step is arguably the most important stage in developing an improvement strategy. Put
simply, ‘how can one ensure that the basic resources and processes acquired by the organisation
are used in such a way as to build operations capabilities?’ Different organisations in the same
industry may have identical process technologies, use very similar process configurations and
adopt common organisation structures. Does this mean that the performance of these
organisations will inevitably be the same? Of course it does not. In fact, almost certainly their
performance will be different. So, what explains these differences? It is their ability to learn
how to use the resources that they have acquired. It is the sometimes subtle and tacit knowledge
that is built up and (hopefully) captured through the experience of using the resources. And this
is what the ‘develop’ stage of the model is about – how an organisation can build unique
capabilities through learning.
The learning/experience curve
The chapter explain the learning/experience curve in terms of how the relationship between the
time taken to perform a task and the accumulated learning or experience was first formulated in
the aircraft production industry in the 1930s. Studying production data revealed that the
reduction in unit labour hours was proportional to the cumulative number of units produced.
Every time the cumulative output double, the hours reduce by a fixed percentage. Similar
examples were found elsewhere, for example, in labour-intensive manufacturing, such as
clothing manufacture. A reduction in hours per unit of 20 per cent was found every time
cumulative production doubled. This is called an 80 per cent learning curve. The text explains
that when plotted on log–log paper, such a curve will appear as a straight line – making
extrapolations (and strategic planning) more straightforward.
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Commentary on example - Dell (part 1) learning how to turn difficulties into
advantages
The purpose of this example is to demonstrate that capabilities can be developed
notwithstanding what may seem like unpromising circumstances. Dell were forced into
adopting a different supply network configuration (bypassing conventional retailer channels)
as the only way that they could compete with the low prices being offered by their more
established rivals. However, rather than simply see this strategy as ‘the only feasible option’,
they actively explored whether it would be possible to gain benefits from having no retail
outlets. The lesson here is that there are often potential positives and negatives to every
strategic option. Just because one is forced into an unorthodox competitive stance does not
necessarily mean that the potential negatives of a strategy outweigh the more obvious
positives. By being both energetic and creative, Dell managed to turn the disadvantages of
having no retail outlets into a set of advantages built upon having direct contact with their
consumers.
Learning and knowledge
An essential element in improving operations is to establish what is going on in your own
operation. You can never go on to be creative in the management of operations unless you have
a relatively full knowledge of your processes. The question is how do we measure our degree of
knowledge about how to produce goods and services? The text describes the approach to this,
which has been put forward by Roger Bohn. He described an eight-stage scale ranging from
‘total ignorance’ to ‘complete knowledge’ of the process.
Table 7.4 in the chapter summarises some aspects of these eight stages of knowledge.
Remember though that not all processes will ever get to the higher states of knowledge. Often
changes to technology or market requirements ‘knock back’ the learning to a lower state of
knowledge and the operation has to carry on developing its process knowledge to this lower
base. Obviously, when variety is high and the environment turbulent, it becomes difficult to
progress beyond a relatively low state of knowledge. However, strategies such as modular
design (i.e. used extensively in software production) allow a greater degree of standardisation,
which in turn allows a greater degree of stability. This allows the process to be controlled at a
higher level of knowledge.
Using the Bohn scale of process knowledge
Step 1
Select a process. Maybe one for which you are responsible, or one with which you are familiar,
or one which is important to the success of your organisation, or alternatively, choose a
domestic process with which you are familiar, for example baking biscuits (cookies).
Step 2
Consider what your ‘state of knowledge’ of the process is, according to the Bohn scale.
•
Stage 1 – You can recognise what the process is doing but have no idea how it does that.
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•
Stage 2 – You have a broad understanding of what affects the performance of the process
but could not say, which are the most important factors affecting performance.
•
Stage 3 – You understand, in detail, what is supposed to happen in the process and have
written process procedures that have been designed to try and get the most out of the
process.
•
Stage 4 – You have detailed and documented process procedures that are understood by
everyone in the process. You also know how to change the design and operational practice
of the operation so as to change its average performance.
•
Stage 5 – You know what factors cause variation in the performance of the process and can
control or eliminate these factors to make the performance of the process predictable.
•
Stage 6 – You know exactly how the process would perform under different circumstances
such as performing a different task or working with a new IT system.
•
Stage 7 – You have a clear, mathematically formulated, understanding of why all the cause–
effect relationships within the process work as they do and can quantify them in such a way
as to optimise performance under any set of circumstances.
•
Stage 8 – You know everything about what happens in the process, how it happens and why
it happens. You probably also know how the process fits into the greater meaning of life,
the universe and everything. Leave the course now – you do not need it!
Here is how different stages of a cookie baking process might be viewed (adapted from Bohn’s
original paper).
Stage 1:
Complete ignorance
Stage 2:
Awareness
Stage 3:
Measurement
Stage 4:
Control of mean
Stage 5:
Capability
Do not even know what influences results. Any variation considered
‘random’. Mix anything in cupboard together, bake for ‘a short time’.
Observe others in kitchen. Begin to build list of possibly relevant
variables, for example ingredients, time of day, baking time,
weather. Have a vaguely defined mixing procedure.
Learn to measure key variables. But no precise details of mixing
procedure.
Develop countdown schedule and sequence of mixing actions and
times. Only bake on days when weather seems suitable. Decide not
to bother about time of day since it does not seem to make a
difference.
You practice measuring ingredients until 95% reliable. Write down
recipe as a ‘formal document’. Cookies now taste OL but
appearance may sometimes vary and some are very occasionally
burnt.
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Stage 6:
Characterisation
Stage 7:
Know why
Getting to Stage 8:
Complete knowledge
You run a series of experiments on many variables including baking
time and temperature, exact quantities and so on. Discover effects
of small variations in quantities. If you are asked for a different type
of cookie, you can make it without having to go back to basics.
Discover that weather has no significant effect on results.
You go to local university. Study the science behind baking. You
derive formulae that predict sweetness, texture and so on. If you
want to back a batch quicker you know how to adjust temperature,
ingredients and so on.
You understand the effect of variables as yet unconsidered (and
which may not ever change) such as size of cookie, type of baking
tray. You can predict the effect of any change in the process that is
suggested without any experimentation or trials.
Contributing to Operations Capabilities – Deploy
No matter how excellent an operation’s capabilities, they are wasted if they are not fully
leveraged into the market place. Many of the issues concerning operation’s contribution to
strategy have been covered already in this course. The text puts forward a particularly powerful
model to illuminate this stage of strategic improvement. It is the Hayes and Wheelwright’s 1 to
4 model. This, in effect, attempts to calibrate the degree of operations contribution. Their ‘Stage
4’ operations had not only enhanced their own process capabilities but were quite clearly also
the drivers of the organisation’s strategy.
Commentary on example – Siemens leverages its global capabilities
This example demonstrates how different types of operations in different locations, even
when they are part of the same business, can deliberately develop different capabilities.
Furthermore, the driver for how capabilities are built in any operation must take account of its
location. So, for example, the company’s locations in China have a set of responsibilities that
include developing low-cost component and product manufacture as well as developing an
understanding of how product development processes can take account of the needs of the
Chinese market. More expensive European locations need to develop broad technical
capabilities, more advanced and/or sophisticated manufacturing capabilities as well as the
flexibility to change what is being made or overall production volumes.
Now it may seem obvious that different parts of a large group such as Siemens will need to
develop different capabilities at different sites. However, some organisations attempt to
impose common ‘one size fits all’ approaches to improvement and development throughout
their whole organisation. This can inhibit the development of capabilities that are customised
to the role of the site within the total group.
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Hayes and Wheelwright’s 4-stage model
The chapter describes a model, originally devised by Hayes and Wheelwright. It is a four-stage
model that articulates a progression from:
•
Holding back the business (Stage 1), to
•
Achieving similar performance to the rest of the industry (Stage 2), to
•
Being clearly the best in the industry (Stage 3), to
•
Using the capabilities of the operation to achieve longer-term superiority. (Stage 4)
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Study guide
CHAPTER 8
Product and service development and
organisation
Chapter aims
•
To establish why the way in which companies develop their products and services is so
important
•
To examine the process used by some companies to develop products and services
•
To take a market requirements and operations resource view of new products and service
developments
•
To introduce the idea of the funnel of development as a method of articulating the
management of the development process
•
To highlight the times in the development process where management attention is
particularly important
•
To look at some issues on the management of development teams
Introduction
Competition on an increasingly worldwide basis and novel technologies means that product and
service development is both important and challenging. Organisations are continually renewing
themselves through the way they use their resources and capabilities to develop new products
and services.
Why is product and service development strategically important?
How organisations develop their products and services is strategically important for two
reasons. The first is that organisations who manage the development process so attractive
products and services with appropriate market characteristics, quickly, dependably and
efficiently, will maintain its revenue streams over time. The second and in some ways more
important reason is that it reflects the underlying characteristics and capabilities of the
organisation. Those businesses that have developed unique internal capabilities have created for
themselves the option of leveraging those capabilities in the design of their products and
services. Those that are creative in the way they manage their day-to-day operations are likely to
be creative in the way they develop their products and services.
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Example – Introducing the ballpoint pen1
The chapter discusses the development of new products and services in the context of both
product and service change and process change and makes the point that requiring an
organisation to make significant degrees of change in both its products or services and the
processes that create them can be far more difficult than simply changing the product or service
on one hand or the process on the other. In Chapter 8, their Figure 8.3 illustrates this idea by
demonstrating how introducing new branch banking services in a retail bank was less difficult
than when the banks introduced their internet banking services. Here is another example.
In 1938, two Hungarian brothers, Ladislao and Georg Biro, patented a design for a
revolutionary ballpoint pen. By 1944 the brothers had managed to develop a manufacturing
process and started to produce their first commercial products. Distribution rights for the US
market were bought by a fountain pen manufacturer called Eversharp. However, a Chicago
businessman, Milton Reynolds, had seen the biro pen while travelling in Europe, had liked what
he saw and had a copy product on sale in a New York department store before Eversharp
received their first delivery. Not surprisingly, Eversharp sued in the courts and in the legal
wrangling which followed it emerged that in fact there had been an earlier patent for a ballwriting pen as far back as 1888. Meanwhile, both Eversharp and Reynolds enjoyed some
success with their ballpoint pens, Reynolds developing the first product enhancement when they
introduced a retractable point which clicked in and out of the pen barrel.
However, although the design was revolutionary, it was far from perfect. The pens were prone
to blotting and leaking and sales dropped severely as the public lost patience with such
unreliable products. Eventually, both Eversharp and Reynolds were forced out of business
because of the problems. Another established pen company, Parker, then stepped into the
market but with a product redesigned to overcome its reliability problems. In fact, Parker
enjoyed many years of commercial success with their improved product. This success
encouraged other companies to enter the market, perhaps the most innovative being Bic, a
French manufacturing company. Bic’s success lay in developing the manufacturing process to a
level that enabled them to produce pens which could sell at around a tenth of their competitor
products. This revolutionised the market. The ballpoint’s competitor, the fountain pen, became a
low-volume niche product and the ballpoint became a consumer disposable.
Figure 8.1 illustrates the changes that each of these organisations made in order to produce their
pens. The original Biro brothers developed an idea that was new (at least they thought so) which
was, in the context of this example, developed through advanced research and development.
Eversharp essentially took the Biro brothers’ original design (relatively low product change) but
had to develop a very new process in order to make it. When Reynolds copied Eversharp’s
design it made even less change to the product itself although, like Eversharp, it had to develop
very new processes to make the product independently of Eversharp. When it entered the same
market, Parker redesigned the product to overcome reliability problems but only made relatively
small changes to the process that both Reynolds and Eversharp had adopted. The eventual
success of Bic derived partly from their changing the product to make it more manufacturable,
but mainly from their development of an extremely effective high volume manufacturing
process.
1
Schnaars, SP (1994) Managing Imitation Strategies, The Free Press, New York.
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Commentary on example – Spangler, Hoover and Dyson
In many English-speaking countries people talk of ‘Hoovering’ their carpets rather than
cleaning them. This is an indication of how the Hoover Corporation dominated the vacuum
cleaner market for many decades. But in terms of product development it is the beginning of
Hoover’s story and their history over the last few years that are the most interesting. As the
example describes, it was not Hoover who invented the vacuum cleaner it was Spangler. No
one speaks of ‘Spanglering’ their carpets. That was because (a) Spangler perhaps did not fully
understand the importance of his invention, and (b) it is the organisations that do understand
powerful product innovation when they see it and are capable of commercialising the idea
who appropriate both the value and the fame.
Yet nothing lasts forever. The example also describes how a new approach to the same
product function developed by James Dyson has overtaken Hoover in terms of sales and
profitability. It is also worth noting why Dyson succeeded in knocking Hoover off the top
spot. First, he was creative in the way he developed ideas. Second, he was exceptionally
persistent in the way he worked at that idea until it came right. Third, he understood the
power of design. If a product looks good and works well the market will pay a premium for it.
Who knows whether we will be Dysoning our carpets in the future?
Product and service development and the four perspectives on operations
strategy
A useful perspective from which to describe the strategic development of new products and
services is to return to the four perspectives on operations strategy as outlined in Chapter 1.
Figure 8.2 uses these four perspectives to construct a 2X2 classification of the four
organisational roles that are particularly important in the development process. In this case, we
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combine both the operations role and any ‘technical’ role that may be involved in product and
service development under one heading – operations resource capabilities. This simple
classification allows one to ask eight basic questions regarding how product and service
development is organised.
•
How effective is the strategic market function at understanding market opportunities?
•
How effective is the strategic operations function in development long-term capabilities?
•
How effective is the day-to-day marketing (and/or sales) function in understanding what
customers really value in practice?
•
How effective is the day-to-day operations function in learning from their experience in
order to build long-term capabilities?
•
How effective is strategic communication between the marketing and operations functions?
•
How effective is the operational level communication between the operations and marketing
functions?
•
How effective is the top-down and bottom-up communication in the marketing function?
•
How effective is the top-down and bottom-up communication in the operations function?
Let us illustrate these organisational routes and the role of the four functions with a hypothetical
example.
A company producing bottled water was aware that an increasing proportion of sales were
coming through vending machine outlets. The company’s product was particularly gaseous
(fizzy and had traditionally used glass bottles in order to ensure that the product did not lose its
fizzyness before it was sold. The company’s sales representatives had become aware that there
were a rising number of comments from customers about the problems of transporting and
loading glass bottles into vending machines. Not all vending machines were suitable for such
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heavy products. The following stages shown in Figure 8.3 describe each part of the ‘route’ taken
by this product development.
•
This trend was reported upwards to senior marketing executives who conducted a survey to
assess the market growth of vending machine sales and the market attractiveness of a plastic
bottle.
•
On finding that this would be an attractive product they asked strategic operations and
technical management to explore the challenges involved in moving from a glass to a plastic
bottle. The strategic operations team knew that it would be very difficult to develop a
suitable bottle and closure (screw cap) that could guarantee product integrity (i.e. the water
would retain its fizzyness).
•
They requested their research and development laboratories and their process engineers to
jointly explore the new skills and capabilities that would be needed to produce a plastic
bottle that would retain product integrity.
•
Whilst developing various possible solutions, the laboratories and process engineers
communicated regularly with the sales representatives in order to find out in detail the
requirements of the new plastic bottle and to explore the acceptability of the various ideas
that they were developing.
•
Although it took many months to develop suitable technologies and production methods to
produce such a bottle, they eventually believed that they had found a suitable solution. It
would involve both significant capital investment and a degree of risk because of the
novelty of the technology. These findings were discussed with senior operations
management in order to check whether the investment and associated risks would be
feasible.
•
Once a clear idea of how the new investment would fit within the overall development of
technical capabilities with the organisation, the strategic operations team developed
recommendations that were communicated to the strategic marketing team. They jointly
then took the proposals to the company’s board for a final decision.
Although the above example is obviously highly simplified (and unusually successful in terms
of the ability of the various parts of the organisation and their communication skills), it does
provide an illustration of how development can happen. Of course, even in other successful
development the ‘development route map’ may not be the same as this one. Ideas for new
product and service developments can come from any of the four functional areas specified in
the diagram or even from more than one simultaneously.
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Managing the internal design chain’s resources
The chapter describes a typical process, stage by stage, which organisations go through to
design product and services. However, as is mentioned, the idea that products and service
development follows a set pattern of stages does not happen in quite such an orderly way in
practice. It is useful to re-examine some of the points made by the chapter in terms of what does
happen, rather than what should happen. In particular
•
Is the process of filtering out alternative product and service designs quite so orderly and
rational as it seems from the textbook treatment of the subject?
•
Where should management effort go during the development process?
•
Is service design and development really the same as product design and development?
•
Most organisations have several development projects happening simultaneously. What
issues arise from managing many projects at once?
The funnel of development in reality
The idea of the funnel of development is straightforward. The mouth of the funnel needs to wide
enough to capture enough knowledge and ideas to stimulate embryonic product and service
developments. This may be done through systematic searching of research publications,
examination of competitors’ activities, and rigorous and systematic focus group activity with
customers, regular meetings with suppliers and so on. The task then is to put organisational
mechanisms in place which progressively narrows the funnel down such that ideas which are
not capable of being developed further are dropped and do not take up more of the
organisation’s time and effort. Most authorities suggest this is done through a filtering
procedure (the use of screening criteria) which fits the company’s technological resources and
competitive objectives.
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Planning and management attention
The whole concept of the development funnel is really an articulation of how a company
believes it ought to be making decisions about the development process. A closely related idea
is that management should also schedule the extent of their involvement with development
projects in advance. One would assume that wherever the funnel is changing its dimensions (i.e.
the number of potential ideas is increasing or they are being discarded) senior management will
need to be involved in these decisions. But, just as in reality, development funnels are not
smooth, pre-planned and rational, so management attention is not always planned to be
available when it can have the most effect.
Figure 8.4 illustrates how one authority observed the degree of attention given by management
to one particular development project and compares it with an assessment of management’s
ability to influence the final outcome of the development. Clearly, management’s ability to
influence any development project is highest in the earlier stages of development. As decisions
are made, the ‘room for manoeuvre’ to change the details of the project rapidly diminishes. In
the example in Figure 8.4, this reduction in the ability to influence things is particularly rapid
when detailed design decisions are being made during the ‘basic design’ phase. The contrast
with the degree of attention given to the project by senior management could hardly be starker.
During the phases of ‘knowledge acquisition’ and ‘concept investigation’, and indeed during
‘basic design’, management attention was minimal. Presumably it was assumed that these stages
were relatively routine. During the ‘prototype build’ phase the company started to experience
problems in converting the design from paper to reality. This caused some friction between
departments. Senior management were called in to mediate between the departments, as well as
provided the extra resources necessary to solve any problems. As ‘pilot production’ started the
problems began to be ironed out and senior management attention once more diminished.
However, during ‘manufacturing ramp-up’ a whole new set of problems to do with the
company’s ability to manufacture the design cropped up. Again this required senior
management attention and mediation. Finally, after these manufacturing issues had been sorted
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out, and management’s attention again subsided and the launch of the product into the market
brought another batch of problems.
The point being made here (and one made by many authorities in this field) is that management
attention should not be reactive, as implied by Figure 8.4, but rather planned proactively to be
involved in decision making ‘before the fact’ rather than ‘after the fact’.
Example – Then Netscape changed2
It is worthwhile noting that, in addition to the factors discussed in the chapter, organisational
issues can play a hugely important role in determining the success of product and service
development projects. The following example provides an illustration of how cultural issues can
change within organisations and affect both its culture and its ability to innovate.
It was an archetypal, loosely organised collection of free spirits. They were the kind of
development group that was always associated with software developers working on the frontier
of their science (or art?). They had free soft drinks permanently available for the developers,
brought their pets into work, kept beds under their desks for those times (not unusual) when
they would work extended periods to crack a particularly intriguing bug. They had a web cam
constantly updating a picture of their fish tank. They built a scale model of the Golden Gate
Bridge across part of their headquarters, made entirely of soft drink cans. They embedded secret
jokes into their code for the amusement of the faithful. Above all else, they were dedicated,
innovative and creative. They (and all their followers) called their product Mozilla, after the
cartoon lizard-like creature which was their mascot.
Everyone else called their company Netscape. They were the first to develop a web search
engine, at least in the form we know them today. It was based on a web browser called Mosaic
written by the National Centre for Supercomputing, from where most of the original
development team came. Like much of the web’s software at the time, the Mozilla browser was
free, reflecting the anti-big business culture of many pioneering development groups. Maybe
change was inevitable, and change it did. Commercial pressures started to curb the slightly
anarchic culture of the developers. In 1998, the web cam was turned off. The company’s
website became almost indistinguishable from other corporate sites. By the end of the year, Jim
Clark, the CEO of Netscape, sold the company to AOL, regarded by some as the symbol of big
business in the internet world. Several of Netscape’s founding developers left (setting up their
own web site, www.ex-mozilla.org). As one website devoted to images of the Mozilla cartoon
had it, ‘Mozilla was the mascot of the Netscape company in the early days; he gradually went
away, because he was scared of the pinstriped suits.’
Process technology in design
Process technology used in the design and development activity can provide very significant
assistance in the process. Most of these are IT-based and an increasing number are internetbased. For example, the ability of developers to collaborate across organisations and within
global networks is very much based on internet technology. Although this has presented a new
set of challenges (for example, can a virtual collaborative team using internet communications
ever achieve the creativity that comes from personal contact?) such technologies have
2
Original sources: O’Brien, D (2000) ‘The rise and fall of Mighty Mozilla’, Sunday Times, 10 Sept.
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nevertheless provided many new opportunities. For example, the best-known process
technology in product development is computer-aided design (CAD). CAD systems store and
categorise product and 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 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; this enables a
library of standardised part and component designs to be built-up. Not only can this
dramatically increase the productivity of the design process but it also aids the standardisation
of parts in the design activity. Often CAD systems come with their own library of standard
parts.
Another example of process technology in design and development is simulation. One of the
best-known uses of simulation for success in the sporting world came in the 1995 America’s
Cup. The America’s cup is a yacht race, originally founded in 1851 by the Royal Yacht
Squadron of England. An American boat won that first race and from that point the race
acquired its name. American boats continued to win the race for the next 132 years until 1983
when an Australian boat, using a radical new design, captured the trophy. This focused even
greater attention on to the design of the boats and the next ten years saw the incorporation of
formal experimentation, testing and computer-based simulation during the design processes
which were attempting to come up with world-beating yacht designs. By the 1995 contest,
various potential challengers for the trophy were using different types of computer simulation to
analyse the structural characteristics of a design, simulate the flow of water over the ‘critical
surfaces’ and predict how the yacht would behave under different wind and sea conditions. It
had been found that, although simulations were not always totally accurate, they had a number
of advantages over the alternative experimental technique of using scale models in wind tunnels
and towing tanks. This had proved an expensive technique and even with the large budgets
available for America’s Cup yacht designs, teams could rarely afford more than 20 or so
prototypes to be tested in this way. Simulation provided both faster and cheaper feedback to the
designers. Unfortunately, the advanced simulation programs required a considerable amount of
computing power. For this reason, teams often formed partnerships with organisations who
could provide advanced computing facilities. The New Zealand team partnered with Silicon
Graphics, the Australian team used the facilities of the Sun computing company and an
American team obtained over $1 million worth of computer time with a group of partners that
included the aircraft manufacturer Boeing and the supercomputer manufacturer Cray.
The eventual winner in January 1995 was the boat designed by Team New Zealand. Not only
was this one of the very few non-American boats ever to win the cup in its history, but they won
by a clear 5–0 margin. Much of their success was put down to their use of simulation-based
experiments during the process which culminated in their final design. Although using cycles of
frequent simulation and feedback, they were careful to blend their own practical experience with
the more theoretical information coming from the simulations. Dave Egan, Team New
Zealand’s head of simulation, was careful to put the role of their computer-based experiments in
perspective. ‘In practice, if you start with a bad design, simulation won’t get you anywhere near
a good one. Some of the other (design) syndicates let. . . simulation . . . drive their process. The
Australians, for example, had some really deep simulation experts, and see where that got
them.’ (In one of their early races against Team New Zealand, the Australian boat sank!)
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Development team strategy
Example – Product development at Microsoft3
Project development teams are commonly used for the organisation of development resources,
with a gradual shift in the organisation of development from functionally based organisation
structures to team-based structures. Take, for example, software development – an activity of
increasing importance in many companies. And none more so than Microsoft, the biggest
software company in the world. Here the numbers of staff involved in product development are
huge, with the main problem being how to organise such a large number of staff.
The software industry has, especially over the past ten years, posed new challenges for product
and service development. Both user requirements and the underlying technological possibilities
for software products are turbulent and difficult to predict. Furthermore, the products
themselves are complex and frighteningly interconnected in their internal structure. Making
changes to one part of a software product during the development process will almost certainly
affect other parts, though exactly how is difficult to predict. Above all, software products are big
and getting bigger. Some Microsoft products from the early 1980s had fewer than 100,000 lines
of code. The first Windows NT in 1993 had about 4.5 million lines of code and Windows 95
(introduced in 1995) has 11 million lines of code. Similarly, teams of developers who once
numbered 10 or 20 can now number many hundreds.
At Microsoft a strategy for coping with such difficult development products has emerged. It
consists of two main clusters of ideas. The first defines the approach the company takes to
conceptualising the overall development task and allocating resources to its various stages. The
second concerns the company’s approach to managing the development process itself on a dayby-day basis.
The first part of the strategy has been referred to as focus creativity by evolving features and
fixing resources. This consists of a number of ideas, including the strict prioritisation of
individual features within the product, the most important being developed first. Without such
prioritisation development can drag on, always a tendency in software development, especially
when customer requirements and technologies are moving rapidly. Brief vision statements for
each part of the project help to define more detailed functional specifications needed to
determine resources, but not so detailed as to prevent the redefinition of development objectives
as the project progresses. (Often feature sets can change by over 30 per cent during
development). A modular architecture for the product as a whole facilitates incremental change
involving the addition or deletion of individual features. An important element in this part of
Microsoft’s strategy is its rule to ‘fix’ project resources early in the development process. This
limits the number of people and the time available for each part of the development,
encouraging the individual development teams to abandon features if development times slip
(not necessarily harmful because of the strict prioritisation). It also focuses the team’s creativity
towards achieving a ‘working’ (if not perfect) version of the product which can be made ready
for market testing.
The second part of the Microsoft strategy has been referred to as do everything in parallel with
frequent synchronisations. This is an attempt to tackle the dilemma of ensuring development
3
Sources: Company documents and Cusumano, M.A. (1997) ‘How Microsoft makes large teams work like
small teams’, Sloan Management Review, Fall.
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discipline and order without inhibiting the developers’ creativity. Big projects do need clearly
defined development phases and task allocation, but over-specifying a project structure does not
encourage innovation. Microsoft uses relatively small teams of three to four hundred developers
who synchronise their decisions very frequently, often every day. These synchronisations, called
‘builds’, always occur at a fixed time (usually 2 p.m. or 5 p.m.). Staff are free to work flexibly
and contribute their development to the project only when they have something to add.
Developers submit their work at the fixed ‘build’ time. This then allows the various bits of code
to be recompiled (put together) by the end of the day or the start of the next day. Testing and
debugging can then commence. This frequent synchronisation allows individual teams to be
creative and to change their objectives in line with changing circumstances but, at the same
time, ensures a shared discipline. Even so, it is necessary to stabilise the design periodically
through the use of intermediate ‘milestones’. Each milestone marks the completion of a cluster
of components. Providing such ‘finish points’ reduces the number of components being
developed in parallel and makes the project easier to control.
Microsoft seems to have come up with a number of ‘rules’ which help them to keep the task
manageable. These are as follows:
•
Keep project size and scope limits clear, with limited product vision; personnel and time
limits.
•
Make product ‘architectures’ clear and divisible through modularisation by features,
functions, subsystems and objects.
•
Make project architectures clear and divisible through specified feature teams and milestone
subprojects.
•
Keep a small-team structure with many small multifunctional groups with high autonomy
and responsibility.
•
‘Force’ co-ordination and synchronisation through daily product builds, immediate error
detection and correction, and milestone stabilisations.
•
Encourage good communications within and across functions and teams through shared
responsibilities, one site, common language and open culture.
•
Retail product–process flexibility to accommodate the unknown by evolving product
specifications, project buffer time and evolving process.
External design networks
There is a trend towards outsourcing some design responsibility to external agencies. This may
be an agency specialising in design, sometimes it is the company which will supply the product
or service when it is in full ‘production’. So, for example, a vehicle manufacturer might choose
to ask a components supplier to design the component (within specific design limits) as well as
manufacture it. This means that, for many suppliers, management of knowledge and
management of relationships are two issues which have become increasingly important.
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Commentary on example – Will airline passengers learn to love stealth
technology?
This example illustrates some of the risks involved in long-term radical product and service
redesign. It describes a very real tension between what is an effective design as far as the
customer is concerned (the customer in this case being the airlines who buy the aircraft) and
what is an effective design as far as the final consumer is concerned (the consumer being the
passengers who use the airlines services). The issue here being whether any aircraft
manufacturer will invest serious money into developing a design such as the one described
when there is a distinct likelihood that it will never be acceptable to consumers. Or will it?
The investment decision will depend on ones view of a whole series of uncertainties. For
example, the uncertainty surrounding the real cost of developing such an aircraft design, the
uncertainty regarding whether such a design could ever by practical, the uncertainty regarding
aircraft fuel prices (at what price of air fares will customers overcome their reluctance to use
this kind of design?), the uncertainty regarding global warming and consumers’ reaction to it,
etc. At some time there may come a point where the aircraft manufacturers’ subject
judgement of all these uncertainties makes significant investment in this kind of design a risk
worth taking.
Commentary on example - IBM develops its research base in China
IBM’s research facility in China illustrates how establishing such product and service
development organisations in new markets can achieve two advantages. First, it provides a
base from which to develop an in-depth understanding of the new market. Specialists working
in a development centre have a unique potential for bringing marketing and technical issues
together. Second, it can take advantage of the particular resources that may be available in
that new market. In this case, it was both the level of technical expertise and education of
Chinese researchers as well as their relatively low cost compared to their Western
equivalents.
It also provides an illustration of how, when well-managed and led, an overseas development
centre can carve out an important role for itself within a worldwide network of organisations.
Much of the success the Chinese centre is attributable to the vision and energy as well as the
technical expertise and managerial competence of the centre itself. IBM had the foresight to
‘give them space to develop’ but it was the centre and its management that created the
opportunity for themselves.
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Study guide
CHAPTER 9
The process of operations strategy – formulation
and implementation
Chapter aims
The chapter divides the process of operations strategy formulation into four stages: formulation,
implementation, monitoring and control. Chapter 9 looks at the first two of these stages:
formulation and implementation, while Chapter 10 examines the final two stages: monitoring
and control. Our study guides 9 and 10 mirror this division. This study guide aims to
•
Introduce the concepts ‘formulation’, ‘alignment’ in formulation and strategic sustainability
•
Examine some of the methods used in formulation
•
Illustrate the nature of operations strategy implementation
•
Explain how participation can affect implementation
What do we mean by ‘process’
Put simply, the chapter’s distinction between operations strategy content and operations strategy
process is that…
Operations strategy content is the set of decisions which a company makes (explicitly or
implicitly) which shape its operations strategy (‘What shall we do?’).
Operations strategy process is the method or approach they take to making those content
decisions (‘How shall we decide what we do?’)
So the process of operations strategy is concerned with ‘how’ to reconcile market requirements
with operations resources over the long term. Yet the chapter does admit that, in practice,
achieving this reconciliation (or ‘alignment’) is much more difficult than it sounds. It also
makes the point that, although their simple step-by-step model of how to ‘do’ operations
strategy is, in reality a ‘simplification of a messy reality’, the four stage model is useful to
illustrate some of the elements of ‘process’. It is also worth noting that the majority of the book
has been concerned with content, rather than process, issues. Many content decisions (such as
the role and organisation of the operations function) profoundly affect the process of putting
strategies together. Similarly, the approach taken to strategy formulation (not full considering
competitors, for example) can influence the final content decisions.
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The stage model of the process of operation strategy
Although the stage model of the process of operation strategy used in Chapters 9 and 10 is a
reasonable representation of how operation strategies are (or should be) put together, it could be
argued that a better representation should reflect the learning that (again should) occurs. Figure
9.1 shows a cyclical representation of the four stages. The idea is that the experiences and
learning gained from each stage will refine each replication of the process.
The formulation stage
The formulation of operations strategy, according to the chapter, is ‘the practical process of
articulating the various objectives and decisions that make up the strategy’. It looks at ‘how’
operations strategies are put together. Its main objective is ‘sustainable alignment’. This is the
achievement of some kind of alignment, or ‘fit’, between what the market wants, and what the
operation can deliver, that can be sustained over time. One can treat this objective at three
levels.
•
Fit – achieving alignment between what the market wants and what the operation’s
resources and processes are capable of giving
•
Sustainability – achieving fit over time either to maintain the levels of market requirements
and operations capabilities at the same level or to achieve fit between the two at a higher
level.
•
Risk – coping with the uncertainties, and their consequences, as the operation attempts to
achieve alignment over time.
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Chapter 9 deals with the first two issues. The third (risk) is treated in Chapter 10. Taken
together, the three levels involve progressively greater complexity (and become progressively
more difficult to deal with at a conceptual level).
Alignment?
The chapter’ Figure 9.2 shows the conceptual model used to illustrate the idea of alignment.
Alignment implies an approximate balance between required market performance and actual
operations performance. This is represented by the ‘line of fit’ on Figure 9.1 (alternatively
called the ‘line of alignment’). However, as the chapter emphasises, this diagrammatic
representation is a conceptual, rather than practical model. But it does allow one to describe the
various deviations from the ideal position of sustainable alignment as shown in Figure 9.2. The
original position of an operation is at point X which is on the line of fit. In other words, its
operations resource capabilities match the requirements of the markets that it is operating in. If
the operation moves to point A this means that the requirements of the markets in which it is
operating have significantly increased. This has left the operation with insufficient operations
capabilities to satisfy these market requirements. If the operation moves to point B it indicates
that the operation itself has suffered a loss of capability, either over time or suddenly (for
example, through a catastrophic operations failure). So, like position A, it is no longer able to
satisfy its markets. If the operation moves to point C it means that the operation has developed
some degree of enhanced operations capabilities but for some reason these have not been
exploited in its markets. To that extent the enhanced capabilities are, at the moment, wasted in
terms of their impact on overall competitiveness. If the operation moves to point D, then its
market requirements have significantly reduced leaving it with excess operations capabilities.
This means that, like at point C, it has capabilities that are not being exploited in its markets.
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Moving up the line of fit – An example1
TDG plc are specialists in providing third party logistics services to the growing number of
manufacturers and retailers who choose not to do their own distribution. Instead they outsource
to companies like TDG, who have European logistics services operations that cover the UK,
Ireland, France, Spain, Poland and Holland. Here is how their CEO, David Garman, sees the
business. ‘There are a number of different types of company providing distribution services.
Each with different propositions for the market. At the simplest level, there are the ‘haulage’
and ‘storage’ businesses. These companies either move goods around or they store them in
warehouses. Clients plan what has to be done and it is done to order. One level up from the
haulage or storage operations are the physical distribution companies, who bring haulage and
storage together. These companies collect clients’ products, put them into storage facilities and
deliver them to the end customer as and when required. After that there are the companies who
offer contract logistics. As a contract logistics service provider you are likely to be dealing with
the more sophisticated clients who are looking for better quality facilities and management and
the capability to deal with more complex operations. One level further up is the market for
supply chain management services. To do this you have to be able to manage supply chains
from end to end, or at least some significant part of the whole chain. Doing this requires a much
greater degree of analytical and modelling capability, business process reengineering and
consultancy skills.’
TDG, along with other prominent logistics companies, describes itself as a ‘lead logistics
provider’ or LLP, This means that they can provide the consultancy-led, analytical and strategic
services integrated with a sound base of practical experience in running successful ‘on-the-road’
operations. ‘In 1999, TDG was a UK distribution company’, says David Garman, ‘now we are a
European contract logistics provider with a vision to becoming a full supply chain management
company. Providing such services requires sophisticated operations capability, especially in
terms of information technology and management dynamism. Because our sites are physically
dispersed with our vehicles at any time spread around the motorways of Europe, IT is
fundamental to this industry. It gives you visibility of your operation. We need the best
operations managers, supported by the best IT’.
So, why is David Garman moving TDG towards providing more sophisticated services to
clients? The answer is that there is usually more profit to be made from providing complex
services than simple ones. The problem with any company that produces simple products or
services is that any other company can also do it. Therefore, because other companies have
similar operations capabilities, prices will drop as each company tries to undercut the other.
Conversely, products and services (such as sophisticated supply chain distribution services) are
far more difficult to create. This means that only the companies with the required resources and
experience can provide such services. And if a company has few competitors it can more easily
maintain higher prices and (hopefully) high margins. David Garman is moving towards
providing more sophisticated services because it is more profitable for him to do so.
However, the main problem with trying to provide sophisticated products and services is that
they are difficult to create. Companies providing such products and services, therefore, are
likely to be operating at the limit of their capability. Under these circumstances it is more likely
that the company will make mistakes. The main danger with TDG’s strategy is that it tries to
1
Original example from Slack et al. (2010) Operations management, Financial Times Prentice Hall
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offer sophisticated services before it has developed appropriate operations capabilities. Figure
9.3 fits David Garman’s description of his industry into the ‘line of fit’ model.
Starting with requirements or operations resource capabilities
The chapter goes to some length in explaining how the process of formulating an operations
strategy to achieve alignment can be completed in two different ‘directions’, either starting with
requirements or operations resource capabilities. In Figure 9.4, the ‘stage models’ of how
strategies should be put together that are implied by the two starting points for operations
strategy formulation are illustrated. Remember though, the chapter does emphasise that starting
from market requirements and working inwards towards identifying appropriate operations
capabilities that should be developed is far more common that starting with operations
capabilities and then attempting to seek markets where they can be profitably exploited. Again,
as the chapter points out, this is not surprising since all businesses have market but not all
businesses necessarily have capabilities that are worth exploiting in the market.
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Commentary on example – Clean and Green (CAG) Recycling Services
In the CAG case, first-mover advantage in a specific geographical area effectively locked
out other competitors. In resource terms, the distribution of dedicated recycling facilities
(i.e. specially designed receptacles for paper) proved an effective barrier to entry. This
expensive strategic decision was inspired by the successful deployment (albeit one that has
subsequently caused a great deal of legal furore) of proprietary freezers by the ice cream
industry. The early contractual arrangements with suppliers reduced their bargaining power
(and effectively prevented them from moving upstream into this business) and the deliberate
co-production between CAG and its clients of an environmental reputation also reduced their
bargaining power. Nevertheless, despite all the barriers to entry and imitation that CAG
created and/or exploited during their ‘start-up’ phase, their growth plans required them to
enter new markets and develop both related and entirely new capabilities. This required them
to actively embrace risk and uncertainty, especially with their later strategies which
anticipated future legislation. Figures 9.5–9.8 illustrate CAGs development over time.
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Figure 9.7 Operations strategy matrix for CAG Recycling Services as they anticipated
future recycling legislation
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Formulation methods
Without a firm intellectual understanding of the issues involved in putting operations strategies
together, the process can become at best superficial or at worst misleading. Yet operations
strategy formulation is essentially a practical exercise. It answers a very basic question: ‘what
are we going to do to ensure that an operation contributes to the whole organisation?’ And a
first step in getting close to an answer to this question must be to gather and analyse information
that will form in the inputs to the formulation process. However, this is not always a
straightforward process. Both information regarding market requirements and operations
resource capabilities is rarely straightforward.
Surprisingly, few firms (even if they recognise this importance) have any idea about how to
create an operations strategy. Although in the broader field of corporate and business strategy
there are many practical formulation models, they remain relatively rare in operations. This may
seem somewhat surprising (given the essentially practical nature of the operations discipline)
but arguably reflects the fact that operations strategy is simply more difficult to formulate.
Three specific reasons can be put forward to explain this:
•
Operations inevitably have the largest number of internal and external interfaces and any
strategy will have to deal with this enhanced complexity
•
Many organisations see no competitive role for their operations and therefore no need for a
separate strategy
•
The ‘lower status’ associated with operations has meant that operations managers have been
viewed as having no strategic role and often lacked any strategy formulation experience
However, some models for formulating operations strategy are relatively well known, and we
will describe two of the main methods. Both these (Hill and Platts/Gregory) were originally
intended for manufacturing organisations but in general the techniques they encompass are
relevant to service firms as well.
The Hill framework
One of the first, and certainly most influential, approaches to operations strategy formulation
(although once again its development is largely connected with manufacturing operations) is
that devised by Professor Terry Hill. The ‘Hill framework’ is illustrated in Figure 9.9. Hill’s
model, which is here adapted to the terminology used in the chapter, follows the well-tried
approach of providing a connection between different levels of strategy making. It is essentially
a five-step procedure. Step one involves understanding the long-term corporate objectives of the
organisation so that the eventual operations strategy can be seen in terms of its contribution to
these corporate objectives. Step two involves understanding how the marketing strategy of the
organisation has been developed to achieve corporate objectives. This step, in effect, identifies
the products/service markets which the operations strategy must satisfy, as well as identifying
the product or service characteristics such as range, mix and volume, which the operation will
be required to provide. Step three translates marketing strategy into what we have called
performance objectives. These are the things which are important to the operation in terms of
winning business or satisfying customers. Hill goes on to divide the factors that win business
into order-winners and qualifiers (this distinction was explained study guide 2). Step four is
what Hill calls ‘process choice’. This is similar, but not identical, to the chapter’ decision areas
of capacity, supply networks and process technology. The purpose is to define a set of structural
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characteristics of the operations which are coherent with each other and correspond to the way
the company wishes to compete. Step five involves a similar process but this time with the
infrastructural features of the operation (broadly what we have called ‘development and
organisation’ decisions).
Hill’s framework is not intended to imply a simple sequential movement from step one to step
five, although during the formulation process the emphasis does move in this direction. Rather,
Hill sees the process as an iterative one, whereby operations managers cycle between an
understanding of the long-term strategic requirements of the operation and the specific resource
developments which are required to support strategy. In this iterative process, the identification
of competitive factors in step three is seen as critical. It is at this stage that any mismatches
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between what the organisation’s strategy requires and what its operation can provide become
evident.
The steps in the Hill framework are closely related to classic corporate planning methodologies
(with clear separations of responsibility, strong functional tasks, etc.) but Hill argues that
whereas the first three elements are treated as interactive and iterative, the final two are
commonly presented as straightforward, linear, logical implementation issues. By stressing the
iterative nature of his framework, Hill emphasises the need to improve the critical relationship
between operations and marketing (too often a ‘fault-line’ in businesses) and facilitates this
process by providing a framework that helps to simplify the complexity of manufacturing
operations. This is essentially a mechanism for ensuring the coherence and correspondence of
the overall strategy. Furthermore, he stresses that these reviews should not be static in so far as
they should consider both existing products and plans for future products. This allows
considerations of product (and process) life cycle to be included. With finite resources available,
the framework can highlight some of the trade-offs that exist in any operations strategy.
The Hill methodology was one of the first and certainly most influential models that fully
address the issue of operations strategy and the difficulties associated with the formulation
process. However, it is more than 20 years old and a number of critical issues need to be
highlighted.
•
Although many of the core issues addressed by the framework are equally applicable to a
service environment, the basic concepts and underpinning research are derived from a
manufacturing environment and a certain bias is inevitable.
•
The framework attempts to translate external, market driven requirements into their
implications for internal resource development. However, as described in the first study
guide, establishing ‘fit’ is not the only competitive role for operations. The Hill framework
is firmly entrenched in a top-down marketing-led view of corporate strategy
•
Hill’s methodology does not distinguish between external ‘competitive factors’ and internal
‘performance objectives’
The Platts–Gregory procedure
Whilst the Platts/Gregory framework is also manufacturing-focused and adopts a similar, topdown view of strategy, it is much more concerned with the practical nature of formulating a
strategy whilst actually running day-to-day operations. It also involves identifying those factors
that are required by the market and then explicitly comparing them to the level of achieved
performance in the operation. Although superficially similar to the Hill framework, the work of
Ken Platts and Mike Gregory of Cambridge University adds at least one crucial element missing
from Hill – namely a form of prioritisation based upon an assessment of relative, competitive
performance. The overall framework comprises three distinct stages (see Figure 9.10).
Stage 1 involves developing an understanding of the market position of the organisation.
Specifically, it seeks to identify the factors that are ‘required’ by the market and then compares
these to a level of achieved performance.
Stage 2 seeks to identify the capabilities of the operation. Decision categories (similar to those
developed by Hayes and Wheelwright) are provided to help managers classify current
operations practice and then link these practices to the priorities identified in Stage 1.
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Stage 3 is the least structured of the elements, encouraging managers to review the different
options they have for improvement and developing a new operations strategy – against the
backdrop of market criteria.
Like many of the practical quality methodologies, the Platts–Gregory procedure develops a
‘gap-based’ model for driving improvement. Here the gap is between customers’ view of what
is important and the way in which the operation actually performs. In this way it is similar to the
importance–performance matrix. But instead of a matrix the procedure uses profiles of market
requirements and achieved performance to show up the gaps which the operations strategy must
address. Figure 9.11 illustrates the use of these profiles.
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Platts/Gregory employ a similar conceptualisation of operations strategy to that described in Hill
and it is therefore in the area of practical applicability. Where their greatest, and in some ways
still unique, contribution lies in the use of worksheets, project management guidance etc.
However, a number of problems still have to be highlighted:
•
Once again the exclusive focus of their work is manufacturing operations and although the
concepts are transferable, the language and examples given do not facilitate this process
•
They retain the same view ‘outside-in’ marketing-led view of business strategy
•
The final stage of the process is arguably the most important because it is here that the
‘what happens now’ questions are addressed. Unfortunately, it is here that the framework is
at its least prescriptive and weakest.
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Commentary on example – IBM falls victim to a reluctance to change2
The way in which IBM fell from grace during this period is something of a classic story. It is
often used by business academics to illustrate how reluctance to change and a failure to
understand the emerging needs of a changing market can cripple a company. And it is true
that it is a cautionary tale that shows how vulnerable even the largest corporations are to
emerging technologies and changing markets. When the environment of any business is
turbulent, even relatively small mistakes can come close to destroying a business. But what
the example in the chapter does not go on to say is that IBM has emerged from this very
troubled period to be, once again, a successful and dynamic company. It has done this partly
by coming to terms with the reality of the new market for computing services and partly by
restructuring its operations resources to meet those new demands.
For example, in recent years IBM's strategy has been to move away from old-style hardware
and decrease its reliance on its large technology services arm by focusing on developing
markets and the high-margin market for corporate software. IBM’s software business is the
second-largest in the world behind Microsoft’s (2007 data). According to the IBM’s chief
executive Sam Palmisano , ‘strong growth in the middleware market made it likely that the
software division would account for about half of IBM's profit markets by 2010. IBM employs
more than 53,000 people in India, and 10,000 each in China, Brazil, by 2010. The irresistible
forces of globalisation will help IBM double its revenues from emerging Russia and eastern
Europe.
Look at this extract from one of IBM’s press releases.
IBM will on Tuesday unveil plans to offer its “Jamming” in-house technology to companies
and organisations in an effort to build a business out of their need to communicate with
thousands of employees in online brainstorming sessions. The launch of the product – born
out of Big Blue's desire to listen to 300,000 staff around the world – underlines the challenge
faced by companies seeking to keep in touch with a diverse, dispersed workforce. It also
shows how technology companies are exploiting the internet's popularity by grafting their
own proprietary tools onto the worldwide web.
IBM hopes that the “jams” – named after the spontaneous riffing of jazz musicians – can be
sold to companies that want to involve employees in crucial issues such as merger integration,
corporate strategy and their relationship with customers. IBM says that it has already received
requests for jams from companies in the financial services, telecommunications and
packaging services sectors. The jams, which will begin next week with an event for the ailing
US car parts industry, enable thousands of employees to give opinions on specific topics via
the internet over several days. "It is a very democratic process. Everyone has the same voice,"
said Liam Cleaver, head of IBM Jams. "It really pools the brain power of the organisation."
Unlike instant messaging and virtual chat rooms, jam participants are not anonymous and are
monitored by IBM technology that enables management to pick out specific themes, ideas and
grudges from the cacophony of the online dialogue. The search tool was used by IBM for a
2003 jam that saw more than 50,000 employees, including Sam Palmisano, help the company
rewrite its corporate values.” The exercise had proved that modern companies could not
prosper without grassroots input”, said Mr Palmisano.
2
F. Guerrera, (2007), IBM to offer corporate Jamming, Financial Times, Feb 26, and
F. Guerrera (2007), IBM to switch focus to software division, Financial Times, May 17.
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The implementation stage
The second stage of the four-stage model of operations strategy process is concerned with
implementation. That is ‘the way that strategies are operationalised or executed’. It includes,
they say, ‘the processes that attempt to ensure that strategies are achieved. Implementation is an
important part of operations strategy because, ‘strategy remains only a document until it has
been implemented’. Implementation then, is the realisation of an application, or execution of a
plan, idea or policy. In the context of operations strategy, implementation means the organising
of all the activities involved in making the strategy work as intended. Yet there is a view that
implementation is something of a forgotten issue in, not only in the strategy literature generally,
but also surprisingly, in operations strategy. Surprising, because operations is where
implementation usually happens. One relatively comprehensive study of 160 companies over a
5-year period investigated what contributes to company success.3 In this study, success was
strongly correlated, among other things, with an ability to implement strategy. Factors such as
culture, organisational structure and aspects of operational implementation were vital to
company success, with success measured by total return to shareholders.
Commentary on example – Implementing Renault’s Romanian strategy
One could use this example both to illustrate the nature of fit in devising an operations strategy
that is compatible with market requirements, and to illustrate how the implementation of that
strategy must also be compatible with the overall intention of the strategy. So, clearly the idea
of building a low cost automobile for the European market has a high degree of fit with the
types of technology used and the location of the factory etc. From an implementation point of
view there are a number of decisions made by Renault that follow on from this strategy.
3
•
The company had to decide whether to exploit the rather mixed capabilities of an existing
Eastern European auto plant or to build a greenfield site, possibly in a similar location.
They decided on the former but recognised that the implementation would have to be
managed in a particular way. For example, they put significant effort into communicating
their long-term intentions and commitment to the area even though they were obliged to
shed more than half their labour force.
•
Some of the detailed design decisions of the car were chosen to assist implementation, for
example, the use of flat glass in the windshield
•
Local suppliers where used where possible, possibly partly to emphasise Renault’s
commitment to the region in the longer term
•
The decision to use relatively few robots because of difficulty in supporting such
technology locally is significant. It does not mean that robots are necessarily inappropriate,
nor does it mean that they will never be used in this site. Rather it was an implementation
decision that recognised the limitations of what could be done in the short term.
William Joyce, Nitin Nohria, and Bruce Roberson, (2003) What (Really) Works, Harper Business.
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Participation in operations strategy implementation
The chapter makes the fairly obvious point that organisations that want to be successful at
implementation must always consider the aspects of organisational behaviour that actually make
strategies happen. This has a number of elements, amongst which may be the following:
•
They should understand the impact that the strategy could have on individual’s and groups’
working circumstances
•
They should be aware of the effects a new strategy will have on human resource needs (the
number and skills of staff for example)
•
They should understand how much change the strategy implies and how quickly that change
must be provided
•
They should be able to articulate the strategy so that those charged with developing the
corresponding action develop a full understanding of the strategy so that they can further
develop the tactics necessary for implementation
•
They should think about the organisation's communication needs
Of course this is not a comprehensive list. Moreover, the whole subject of participation and
involvement in the implantation process is huge with a rich literature and body of knowledge.
Many aspects of this subject are fully covered in other courses, so we will not dwell on this area
(important though it is) extensively. Nevertheless two points are worth making here. The first is
that there are many frameworks in the strategy literature that are worth revisiting to gain useful
perspectives on implementation, even if the framework originally had a wider purpose For
example, the ‘well established’ (in other words, quite old) 7S framework. The second point is
that many organisations already have some kind of improvement mechanism in place that can
be the vehicle for implementation. GE’s ‘Workout’ is described as an example of this.
Commentary on example – Dell (part 2) Things change OK?
Don’t write off Dell yet. This example in the chapter should be taken as a warning of how
‘core rigidities’ go along with core competencies. It is certainly intended to be Dell’s obituary.
Nevertheless, there are some points which are worth thinking about from Dell’s dilemma.
Clearly its investment in a radically different supply chain configuration, although it gave it
significant advantage in its early days, is now proving to be less than ideal for the new
markets.
When the radical supply chain model was set-up, it was not at all obvious that the market
would change in the way that it has with a far greater emphasis on design aesthetics and the
merging of computing and entertainment products.
To some extent, the market has changed because of the action of competitors, most notably
Apple who have educated consumers to the importance of good aesthetic design.
It is difficult to untangle two issues, both of which may explain Dell’s dilemma. The first is the
lack of fit between the company’s supply chain configuration and the way markets are moving
(as mentioned previously). The second is that Dell, unlike its early days, is a large and mature
company which may have lost some of its cutting edge simple because of the growth that has
come from its previous success.
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GEs ‘Work-out’
GE’s publicity has it that Jack Welch wanted a mechanism to harness his belief that employees
were an important source of brainpower for new and creative ideas. He ‘wanted to create an
environment that pushes towards a relentless, endless companywide search for a better way to
do everything we do.’ Further, he believed that in most organisations, change efforts come and
go and rarely make a real difference. But in GE, which is one of the largest companies in the
world, they say that one particular change process has helped to start ‘a complete
transformation’. It is known as Work-out. The Work-out program was devised as a way to
reduce bureaucracy and give every employee, from managers to factory workers, an opportunity
to influence and improve GE's day-to-day operations. The program was named because Welch
had talked about ‘working out’ the nonsense of GE, and dealing with problems that had to be
‘worked out’. Work-out was designed to ‘reduce and ultimately eliminate all of the waste hours
and energy that organisations like GE typically expend in performing day-to-day operations’.
As Welch put it, ‘Work-out is meant to help people stop ‘wrestling’ with the boundaries, the
absurdities that grow in large organisations. We're all familiar with those absurdities: too many
approvals, duplication, pomposity and waste.’
Like many ‘high profile’ improvement and implementation approached, Work-out is neither
totally new nor is it a particularly complicated idea. All it involves is getting groups of
stakeholders, (staff, management, sometimes internal or external customers and suppliers)
together to brainstorm problems and generate solutions. However, GE took this simple idea
much further, using structured processes, Work-out ‘Town Meetings’ and so on. Essentially
though, it remains a simple concept based on the idea that those closest to the work know it best.
When these people’s ideas, whatever their roles, are encouraged and turned into action, creative
solutions often emerge. However, anyone with any experience of this type of ‘branded’
approach knows the dangers of exhortation-based methods that over-promise and often underdeliver. Certainly with ‘Work-out’ there have been examples of naïve senior managers being
sold the approach, probably add it to the existing bundle of half thought out initiatives already
current in the organisation and expecting it to ‘transform’ their business. This is not to say that
Work-out or any other similar approach is necessarily doomed to failure, but it all too often is
abused. The point here is that any attempt to harness staff in the implementation of operations
strategies should take account of any existing mechanisms such as Work-out. If not, the
implementation may simply become yet another initiative.
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Study guide
CHAPTER 10
Monitoring and control
Introduction
Study guide 9 examined the first two of the four stages of operations – strategy process;
formulation and implementation. This study guide looks at the final two stages – monitoring and
control. Figure 10.1 in the text shows how these two stages fit into their four-stage model. But
note the point we made in the previous study guide for Chapter 9, a better way of thinking about
the process of operations strategy is a cyclical model. Doing this emphasises a more continuous
set of activities. This idea is shown in Figure 10.1.
This study guide aims to:
•
Examine the differences between operational and strategic monitoring and control.
•
Look at how progress towards strategic objectives can be tracked.
•
Describe the dynamics of monitoring and control, especially in terms of how monitoring
and control attempts to control risks.
•
Explain how learning and stakeholder management contribute to strategic control.
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Monitoring and control at a strategic level
Before examining the separate stages of strategic monitoring and control, the chapter discusses
the joint purpose of these two stages. They make a number of important points.
•
Any monitoring and control procedure should provide an early indication (a ‘warning bell’
they call it) that corrective action may be needed.
•
It should be capable of diagnosing data and triggering appropriate changes in how the
operations strategy is being implemented.
•
Although a strategic view of monitoring and control is similar to how it works
operationally, it is less obvious.
•
Several assumptions underlying an operational view of monitoring and control do not
necessarily apply at a strategic level.
•
In particular,
•
Are strategic objectives clear and unambiguous?
•
Is that there is some reasonable knowledge of how to bring about the desired outcome
(in other words, is there significant uncertainty that cannot be entirely eliminated)?
•
What is the frequency with which control interventions are made?
The chapter then adapts work first expounded by Professor Geert Hofstede to develop a
typology of control that moves from relatively straightforward control through increasingly
more complex and ambiguous states. Their types of control are as follows.
•
Routine control – Where objectives are unambiguous, the effects of interventions are
known and activities are repetitive.
•
Expert control – If objectives are unambiguous, yet the effects of interventions relatively
well understood, but the activity is not repetitive, control can be delegated to an ‘expert’;
someone for whom such activities are repetitive because they have built their knowledge on
previous experience elsewhere.
•
Trial-and-error control – If strategic objectives are relatively unambiguous, but effects of
interventions not known, while, however, the activity is repetitive, the organisation can gain
knowledge of how to control successfully through its own failures. In other words, although
simple prescriptions may not be available in the early stages of making control
interventions, the organisation can learn how to do it through experience.
•
Intuitive control – If strategic objectives are relatively unambiguous, but effects of
interventions not known, nor is strategic decision making repetitive, learning by trial and
error is not possible. Therefore, the organisation has to view strategic control as more of an
art rather than as a science. And in these circumstances, control must be based on the
management team using its innate intuition to make strategic control decisions.
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•
Negotiated control – The most difficult circumstance for strategic control is when
objectives are ambiguous. This type of control involves reducing ambiguity in some way by
making objectives less uncertain and resolving ambiguities so that external uncertainties
become internal certainties.
Using the model
To illustrate how the nature of strategic monitoring and control will differ depending on the
nature of the strategic implementation, think through the following three brief examples.
Example A – Building and running an international games event (The Bigton
Games)
The Games Delivery Authority (GDA) is a public body responsible for developing and building
the new venues and infrastructure for the ‘International Games’ and their use after the event.
After construction, the games will be staged and hosted by the Bigton Organising Committee of
the Games and Paralympics Games, a private sector company. After the games, the Games Park
Legacy Company (GPLC) will be responsible for ensuring the Games deliver positive changes
for the area. The GDA appointed a consortium as Managing Contractor on the site, with
responsibility for the Games Park and Athletes Village. The consortium is responsible for the
overall programme’s quality, delivery and cost management in addition to health and safety,
sustainability, equality and diversity targets. The 202-hectare Games Park itself in East Bigton,
will be a $14.7bn largely public-funded construction programme spreading across five separate
Bigton local government areas. Additionally, there will be other sites under construction in the
area including transport developments, retail areas and local regeneration projects. But in many
ways the most noteworthy aspect of the project is its emphasis on sustainability. From its
inception, sustainability was central to the Bigton Games. It is to be the first Host City to embed
sustainability in its planning right from the start. ‛They were', said the GDA, 'aiming to set new
standards, creating positive, lasting change for the environment and communities....
"Sustainability" is far more than being "green". It's ingrained into our thinking – from the way
we plan, build and work, buy, to the way we play, socialise and travel; ultimately everything
that we do.' The sustainability agenda also included using the Bigton River as an
environmentally friendly and economic way of moving materials across Bigton to construction
sites, minimising greenhouse gas emissions, minimising waste at every stage of the project and
ensuring no waste is sent to landfill. To ensure they stuck to commitments, the GDA set up an
independent body (the Commission for a Sustainable Bigton 2015) to monitor the project.
The GDA determined that all construction and operations bids would be judged on a 60/40 split
between quality and price. Quality criteria not only included the usual timing, delivery,
specification and consistency factors but also included some very demanding sustainability
criteria. All potential contractors tendering for parts of the project were aware that a major
underlying objective of the Games initiative was regeneration. The Games site was to be built
on highly industrialised and contaminated land. So extensive land remediation would be
required involving both soil processing and offsite disposal. The planning application had to
include details of how all materials, including contaminated materials, would be dealt with. It
was also clear that the sustainability (carbon footprint) of sourced materials was particularly
important for the GDA. Closely related to this was the issue of logistics, that is, how materials
were transported to and from the site which again would be judged not only on price but also in
terms of carbon footprint. Providing sustainable materials in a sustainable delivery mode were
considered essential to provide differentiation in the tender process.
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Example B – Commissioning a new high-tech distribution centre
The supermarket’s new logistics boss, was blunt in his assessment of its radical supply chain
implementation. ‘Our rivals have watched in utter disbelief' he said. ‘Competitors looked on in
amazement as we poured millions into implementing new IT systems and replaced 21 depots
with a handful of giant automated 'fulfilment factories'.
The supermarket had first devised their strategy for a new faster and more efficient supply chain
strategy 5 years ago when their former chief executive signed a £2 billion 7-year contract with a
business services firm (Brenture), to modernise its IT and take on 800 of its staff. The problem
turned out to be how they put their strategic objectives into practice. It was a huge project, with
highly automated facilities and totally reconfigured IT systems. Eventually, the cost reached
£3.4bn over 4 years, with new technology installed across all the company’s distribution
network. Yet, during this time the company slipped into third place in a market that it once led.
‘In hindsight, the heavy reliance on automation was a big mistake, especially for fast moving
goods’, said the company’s CIO. 'When a conventional facility goes wrong, you have lots of
options. You have flexibility to deal with issues. When an automated "fulfilment factory" goes
wrong, frankly, you're buggered.' Most damming was the way that the supermarket pressed on
with the implementation of the automated facilities before proving that the concept worked at
the first major site. ‘I'd have at least proved that one of them worked before building the other
three’, he said. ‘Basically, the whole company was committed to doing too much, too fast, trying
to implement a seven-year strategy in a three-year timescale.’
One industry analyst claimed that the supermarket just tried to do too much at the same time,
reconfiguring its logistics, reducing the number of distribution sites, increasing the scale of the
remaining operations, implementing a totally new over-complex IT system, outsourcing its dayto-day running, installing radical and largely untried automation and so on. And soon the
supermarket’s Chief Executive had admitted the scale of the problem. 'Our supply chain systems
and automated depots are not fully operational. And the IT systems that were built to back up
that have not delivered,' he said. 'The IT cost is a greater proportion of sales than they were
three years ago. The system was developed to account for stock but the system can't see the
stock on the shelves. The problems happen most often when we revamp a range. The system
could not allocate the range because it could not see that we had taken old stock off the shelves.
Every store is now going to manually update the stock levels on its shelves’.
Example C – Launching a new product
'It’s impossible to overemphasise just how important this launch is to our future', said the CEO.
'We have been losing market share for seven quarters straight. Traditionally, we have managed
to secure more than 40 per cent of what is a hypercompetitive market. However, we have very
high hopes for the new XC10 unit.' And most of the firm’s top management team agreed with
her. Clearly the market had been maturing for some time now, and was undoubtedly getting
more difficult. New product launches, mainly from Taiwanese competitors, had been eroding
both market share and absolute volumes. Yet competitors’ products were not always technically
superior. At best, they simply matched the firm’s offerings in all benchmark tests. That was
what was so frustrating. 'What can we do?' said the firm’s Development Vice President. 'Unless
someone comes up with a totally new technology, which is very unlikely, it will be a matter of
making marginal improvements in product performance and combing this with well targeted
and coordinated marketing. Fortunately, we are good at both of these. We know this technology,
and we know these markets. We are also clear what role the new XC10 should play. It needs to
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consolidate our market position as the leader in this field, half the slide in market share, and reestablish our customers’ faith in us. Margins, at least in the short term, are less important'.
All three of these examples are important implementations for their organisations. But they do
vary in terms of the degree of difficulty they pose and the nature of how the implementations
need to be managed. Table 10.1 summarises the key questions used in the chapter’s modified
Hofstede model.
Example
Clear,
unambiguous
objectives?
Process
knowledge
complete?
Activity
repetitive?
Type of
monitoring and
control?
Example A –
Building and
running an
international
games event
(The Bigton
Games)
Not very clear.
Conflicts between
public and
private, long-term
and short-term
objectives. A
‘political’ and a
‘political’ project.
Some individual
elements are well
understood,
others less so.
Some issues of
‘environmental
sustainability’ not
well understood.
Some elements
have been
managed
previously, but
these
stakeholders are
unlikely to repeat
a project of such
complexity.
Overall probably
negotiated with
some elements of
intuitive and trial
and error
monitoring and
control.
Example B –
Commissioning a
new high-tech
distribution centre
Fairly clear
objectives.
Complex, but not
ambiguous.
Not very well
understood. Big
changes in
technology,
operations
capacity structure
and organisation
happening
simultaneously.
Probably not for
this company, but
elements of the
implementation
will have been
done before (by
somebody).
Overall probably
intuitive with
some elements of
trial and error and
expert monitoring
and control.
Reasonably well
understood
technology and
markets.
It sounds as if
they have done
this before and
will do it again.
Overall a
reasonably
routine
monitoring and
control task with
some elements of
trial and error.
Example C –
Very clear
Launching a new objectives. The
product
implementation is
very important,
but that is not the
same as being
unclear.
The modified Hofstede model introduces the idea that organisational context is important in
monitoring and controlling implementations. And organisational designs have indeed been
changing in response to the dual, and often conflicting, pressures of serving turbulent markets,
whose requirements are continually changing, while at the same time preserving, and even
extending, the essential capabilities that enable them to differentiate themselves from
competitors. The organisation’s structure is therefore not just the context of the implementation
process, it also represents the corporate memory of how strategy has shifted and accommodated
to these pressures over time. And how we illustrate organisations says much about our
underlying assumptions of what an ‘organisation’ is and how it is supposed to work. For
example, the illustration of an organisation as a conventional ‘organogram’ implies that
organisations are neat and controllable with unambiguous lines of accountability. Even a little
experience in any organisation demonstrates that rarely, if ever, is this the case. Nor does it take
much more experience to question whether such a mechanistic view is even appropriate, or
desirable. In fact, seeing an organisation as though it was unambiguously machine-like is just
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one of several metaphors commonly used to understand the realities of organisational life. One
well-known analysis by Gareth Morgan proposes a number of ‘images’ or ‘metaphors’ that can
be used to understand organisations1. Some of these are listed below. As you read them, try to
associate them with the types of monitoring and control identified in 'The chapter’ modified
Hofstede model.
Organisations are machines – the resources within organisations can be seen as ‘components’
in a mechanism whose purpose is clearly understood. Relations within the organisation are
clearly defined and orderly, processes and procedures that should occur usually do occur and the
flow of information through the organisation is predictable. Such mechanical metaphors are
popular because they appear to impose clarity on what is usually seen as deviant, messy
behaviour within the organisation. Indeed, where it is important to impose clarity (as in much
operations strategy analysis) such a metaphor can be useful. It is, however, a particularly
limiting way of thinking about organisations. Flexibility and creativity are not emphasised, nor
is independence of thought or action.
Organisations are organisms – organisations are also living entities. Their behaviour is
dictated by the behaviour of the individual humans within them. Individuals, and therefore the
organisation, adapt to circumstances just as different species adapt to the environmental
conditions in which they need to survive. The organism image helps us to understand how
organisations interact with their environment, work through their life cycle and relate to other
‘species’ of organisation. This is a particularly useful way of looking at organisations if parts of
the environment (such as the needs of the market) change radically. The survival of the
organisation depends on its ability to exhibit sufficient flexibility to respond to its environment.
However, the natural environments in which real organisms live are reasonably well understood,
and are independent of the views of the organism itself. The social and political environment in
which organisations exist is partly a function both of how they act and how they choose to see
the environment. Organisations, even in the same industry, may see the opportunities and threats
in very different ways.
Organisations are brains – organisations process information and make decisions. No
machine, or perhaps even organism, comes close to the degrees of sophistication of which a
human brain is capable. Organisations, like brains, 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 important in
understanding organisations. Brains, like organisations, are capable of developing and of
organising themselves. However, organisations are clearly not unitary entities like brains. They
consist of conflicting groups where power and control are key issues.
Organisations are cultures – an organisation’s culture is usually taken to mean its shared
values, ideology, pattern of thinking and day-to-day ritual. Different organisations will have
different cultures stemming from their circumstances and their history. Because an
organisation’s internal structure and view of itself are influenced by its culture, we can think of
an organisation as an expression of its culture. A major strength of seeing organisations as
cultures is that it draws attention to their shared ‘enactment of reality’. Within this, the
symbolism present in processes and procedures is seen to be important. Looking for the symbols
and shared realities within an organisation allows us to see beyond whatever that organisation
may formally say about itself. Unfortunately ‘culture’ has, in many organisations, come to be
1
Morgan describes these and other metaphors in Gareth Morgan (1986) Images of Organization, Sage.
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seen as something that can be changed at whim. Although managers can influence the evolution
of culture, they cannot control it as if it were an air conditioning unit.
Organisations are political systems – organisations, 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 organisation are usually ways of understanding alternative
philosophies, ways of seeking consensus (or at least reconciliation) and sometimes ways of
legitimising opposition. Individuals and groups seek to pursue their aims through the detailed
politics of the organisation. They form alliances, accommodate power relationships and manage
conflict. Formal structures of authority may not always reflect the reality of influence and
power. Such a view is useful in helping organisations to legitimise politics as an inevitable
aspect of organisational life. However, seeing organisations exclusively as political systems can
lead to cynicism or the pursuit of organisational power for its own sake.
Although there is no direct equivalence between Morgan’s ‘metaphors’ and the chapter’s
modified Hofstede model types, they follow a similar progression. As the required type of
monitoring and control moves from simple ‘routine’ through to ‘negotiated’ control, so the
implicit metaphor for the organisation moves from ‘organisations as machines’ through to
‘organisations as political systems’; see Figure 10.2.
Performance tracking
After dealing with the broader issues of monitoring and control, Chapter 10 starts to focus on
the monitoring (or ‘tracking’) activity. The argument is that firms should invest in tracking
performance, interpreting information and responding appropriately, especially when their
environment is changing rapidly. Doing this successfully involves:
•
Tracking the appropriate aspects of the implementation so that progress can be assessed.
•
Comparing progress against targets.
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•
Coping with any risks faced.
While not repeating the text, there are some points worth emphasising.
The Red Queen effect
The constant battle to survive in a competitive marketplace reflects an almost biological view of
competition (if you have the superior capabilities, you will probably survive, but it won’t get
any easier!). Once practical and theoretical discussions turn to questions of sustainability and
long-run survival in a competitive environment, the comparisons with biology become apparent.
There is, for instance, a whole field of academic study called evolutionary economics that draws
explicitly on concepts from the biological sciences. One of the most widely employed
metaphors, and one that is described in the text, is that of the ‘Red Queen’ effect. Simply
described, this holds that any species (or firm) that wishes to continue fitting in with its
environment it can never relax. The struggle for survival is continual and never gets easier. As
the fictional Red Queen puts it,’ it takes all the running you can do, to keep in the same place. If
you want to get somewhere else, you must run at least twice as fast’.
Implementation difficulty
Some implementations are more difficult than others because of their scale, uncertainty and
complexity. This is illustrated in Figure 10.3. Large-scale implementations involving many
different types of resources with durations of many years will be more difficult to manage, both
because the resources will need a high level of management effort, and because implementation
objectives must be maintained over a long time period. Uncertainty also affects implementation.
Very novel implementations are likely to be especially uncertain with ever-changing objectives,
leading to planning difficulty. When uncertainty is high, the whole implementation process
needs to be sufficiently flexible to cope with the consequences of change. Similarly,
implementation projects with high levels of complexity, such as multi-organisational projects,
often require considerable control effort. Their many separate activities, resources and groups of
people involved, increases the scope for things to go wrong. Furthermore, as the number of
separate activities in a project increases, the ways in which they can impact on each other
increases exponentially. This increases the effort involved in monitoring each activity. It also
increases the chances of overlooking some aspect of the implementation which may be
deviating from the plan. Most significantly, it increases the ‘knock-on’ effect of any problem.
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Implementation risk
The line of fit model is also useful to illustrate that moving up the line of fit (which is often the
intention of implementation) can occur in different ways. As the chapter points out, deviating
from the line of fit is both inevitable at some point and risky when it happens. This allows us to
generalise about how different implementation philosophies carry different types for risk. In
Figure 10.4 two paths are shown, each moving an operation from point A to the more ambitious
point B.
The upper path represents an implementation that is, in effect, making (implicit or explicit)
promises to the market before its operation is capable of meeting those promises fully.
Managing risk in these circumstances involves both managing the understanding and
expectations of the market carefully and maximising the learning within the operation so that
capabilities are developed as fast as possible. This is sometimes done when an organisation
deliberately uses market pressure to motivate its operations to improve.
The lower path represents an implementation that is committed to developing its internal
capabilities before exploiting them in its markets. Managing risk in these circumstances
involves ensuring that the capabilities being developed really do have value in the market, and
ensuring that the organisation has the ability to appropriate value from those capabilities when
the time comes.
Also note how this idea of implementation exposing the firm to external (upper path) or internal
(lower path) risks is similar to the previous discussion regarding how operations strategy can
make firms either better than, or different from, their competitors.
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Controlling risk
Perhaps the most useful advice regarding implementation risk from Chapter 10 is to fully
consider three areas during the implementation of any operations strategy. These three areas are
as follows:
•
Prevention – where an operation seeks to completely prevent (or reduce the frequency of) an
event occurring – the question being, 'what can we do to prevent events with negative
consequences occurring?'
•
Mitigation – where an operation seeks to isolate an event from any possible negative
consequences – the question being, 'what can we do to prevent (or minimise) the negative
consequences, if a potentially negative event occurs?'
•
Recovery strategy – where an operation analyses and accepts the consequences from an
event but undertakes to minimise or alleviate or compensate for them – the question being,
'what would we do to recover from a negative consequence should one occur?'
Cognition, context and control
Taking a ‘risk’ perspective on the process of operations strategy implementation both adds a
greater richness to the formulation activity and allows us to judge operations performance from
a more realistic standpoint. But individual managers will often see risk in different ways. They
will also attempt to manage it in different ways. To understand possible responses to risk in
operations strategy we need to consider three sets of factors.
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•
First, an operations strategy must consider how the real ‘actors’ in the operations (managers
and staff, as well as current and potential customers, regulators, etc.) view risk. It is their
cognition of risk which is significant because individuals do not always deal with risk in a
rational manner.
•
Second, our perception of risk is strongly influenced by its business context. Therefore the
internal (operations system) and external (customer and stakeholder) circumstances must be
taken into account.
•
Third, because by definition a risk is something with unwanted consequences, it is
something that we normally seek to control. However, the control of risk covers a range of
different strategies, including prevention, mitigation and, at worst, failure recovery.
Of course, individual attitudes to risk are complex and subject to a wide variety of biases and
influences. For instance, John Ettlie, an authority on managing technological innovation
references what he describes as a little known but interesting empirical study into risk aversion
amongst managers.2 Figure 10.5 shows a simplified representation of the results, with larger
scores on the vertical axis representing greater risk aversion. It was found that older managers
would be more risk averse (line A). However, closer analysis of the data revealed the more
interesting result (line B). Risk aversion decreased sharply until about 35 but then leveled off
until about 50 when risk aversion set in again. The study3 offers interesting insight into the
relationships that exist between risk cognition and the individual. In fact, many studies have
demonstrated that people are generally very poor at making risk-related judgements. Consider
the success of state and national lotteries. In nearly every case, the chances of winning are
extraordinarily low, and the costs of playing sufficiently significant, to make the financial value
of the investment entirely negative. If we broaden the analysis further, then participation can
begin to seem foolhardy. For example, if players have to drive their car in order to purchase a
ticket, they may be more likely to be killed or seriously injured than they are to win. Individual
perceptions, or ‘subjective’ judgements, will probably not coincide with an expert, or
‘objective’, view.
2
Ettlie, J. (1998) Managing Technological Innovation, Free Press, New York.
3
Vroom, V.H. and B. Pahl (1971) ‘The relationship between age and risk taking among managers’, Journal
of Applied Psychology, Volume 55, No. 5, pp. 399–405.
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Commentary on example – Planning for recovery
As a postscript to this story, in July 2007, confectionery giant Cadbury was fined £1m for
food and hygiene offences over the salmonella outbreak at the firm’s plant in Herefordshire
that made more than 40 people ill, with three requiring hospital treatment. In addition, the
firm was ordered to pay an additional £152,000 in costs. The outbreak led to the recall of
more than a million bars in the UK. Birmingham Crown Court was told the outbreak was
caused by a leaking pipe at the Marlbrook factory, where salmonella was found in some of the
firm's products between January and March 2006 and Cadbury’s recalled many of its products
on 23 June. At the hearing, the court heard how Cadbury changed its quality-testing systems,
allowing salmonella to enter its chocolate bars, to save money. However, the judge said he
did not believe the firm had made the changes in a deliberate cost-cutting attempt. Rather, he
said, 'I regard this as a serious case of negligence. It therefore needs to be marked as such to
emphasize the responsibility and care which the law requires of a company in Cadbury's
position.'
The Company admitted nine charges brought by Herefordshire and Birmingham councils. A
total of 42 people fell ill. The solicitor representing some of the people affected by the
contaminated chocolate, said: 'Our clients are relieved that Cadbury have pleaded guilty to
the charges brought against them, and in doing so accept their responsibility to the public.'
‘The £1m fine sends a clear message that companies who have a great deal of responsibility
for protecting public health cannot afford to ignore a potentially dangerous situation and
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cannot take a risk with the public's health.’
A spokesman for Cadbury apologised and offered the company’s ‘sincere regrets’ to the
people who were taken ill. ‘Quality has always been at the heart of our business, but the
process we followed in the UK in this instance has been shown to be unacceptable. We have
apologized for this and do so again today. In particular, we offer our sincere regrets and
apologies to anyone who was made ill as a result of this failure. We have spent over £20m in
changing our procedures to prevent this ever happening again.’
Risk, learning and methodology
Not infrequently large companies are capable of accumulating, sometimes significant,
experience concerning the management of implementation. Not only is there a large selection of
widely applicable methodologies in their ‘implementation toolbox’ but, equally important, some
organisations may have become expert in identifying, deploying and constantly improving the
appropriate methodologies for all types of project. One study, based on a large multinational
group, summarised key study guides from the many hundreds of implementation projects
undertaken by the group. It was seen as important to do this because truly effective
implementation requires not only that the business improves its current operational processes
but also that it improves the implementation process itself. Of course, a commitment to
implementation is nothing new. Many large groups have, for years, run many local operations
strategy implementation projects. But whilst there may be a common approach, the ‘learning’
from each project is not always systematically captured, reviewed or shared. Operations strategy
implementation is seen as being a local activity. Implementations, even if significant, are not
always used as a source of valuable learning that is capable of being spread globally.
Good implementation methodologies have some common characteristics.
•
They must be (financially) realistic and deal with the problems as they are. The sheer scale
and cost of some implementations means that it is critical that the project tracks specific
benefits and ensure that operational targets were accurately included in the Profit & Loss
Accounts for future business plans.
•
They should be generic, applicable across a wide range of activity and able to guide action.
For example, the group defined a common approach for measuring capacity utilisation. This
process identified that only two-thirds of the group’s industrial assets were being effectively
utilised. Emerging out of this analysis, generic opportunities for implementation were
identified in areas such as: focused investments, identifying site locations, standardisation
and harmonisation of products as a means to focus the product mix and achieve economies
of scale, more effective technology deployment and so on.
•
They should be adaptable and capable of being developed and modified to fit specific
circumstances. An operations strategy implementation planning methodology should be
capable of being developed and institutionalised in other parts of the group.
•
They should be educational. In addition to helping to solve particular problems, they should
also contribute to the implementation team’s own understanding and capabilities.
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Stakeholders
Chapter 10 finishes with a reference to monitoring and control from a stakeholder perspective.
While this is a significant and useful angle on implementation in general, it is important to
recognise that the stakeholder perspective is not without its critics. It is not that the model is
unattractive. The success of the stakeholder model in management literature and business
practice is mainly because of its innate simplicity, clarity and ethical attractiveness. Yet it has
also attracted criticism. Critics cite the lack of clarity, abstraction and ambiguity of stakeholder
theory. But a more fundamental criticism of stakeholder theory is that it threatens conventional
business objectives. Or, put another way, the only end of a business is to balance the interests of
stakeholders no matter how impractical this may be. The stakeholder theory implies the full
inclusion of everyone who has a legitimate interest in the firm. Yet for most firms this is a very
large number. At the very least, there would need to be some way of both delineating and
prioritising stakeholders. More seriously, critics of stakeholder theory have argued that it
fundamentally under represents the moral (and often legal) rights of stockholders.
Nevertheless, even accepting some of the objections to stakeholder theory, as an organisational
mechanism, incorporating the interests of a relatively wide cluster of individuals and groups
who have an interest in the outcome of an implementation, seems broadly sensible. As the
chapter put it, notwithstanding any ethical imperative to include as many stakeholders as
possible in an implementation, it also can prevent problems later in the implementation.
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