Operations
Case Study
WWW.MATTHEWKILLEEN.COM
13/07/2014
IMPORTANT NOTICE: This resource was created for presentation to
peers in 07/2014 and has not been edited for a wider audience. Some
elements are liable to be out of date and inaccurate.
One should seek to keep up to date with the latest developments,
consider using the following sources:
• www.ausbt.com.au
• www.asx.com.au
• www.qantasnewsroom.com.au
• IBISWorld and Factiva, which are accessible at
ezproxy.sl.nsw.gov.au/login with a State Library of NSW membership
• Other news outlets, including the SMH and ABC
Thanks for using this resource.
Spelling mistake? Want something updated? Fundamentally disagree
with me about something of no importance? Let me know here:
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13/07/2014
Since May 2014…
• New flagship lounges opened in LAX and HKG, received very
favourable reviews
• The Coalition Government has accepted a proposal by the
Labor opposition which scraps some of the Qantas Sale Act's
current foreign investment limits (Wed, 16 Jul)
• Qantas Frequent Flyer hits 10 million members, points earn
rate decreased by 5-10%
• Increased fuel surcharges on international flights
• Early repayment of $450m of unsecured debt announced
• A380 flooding incident brings negative PR
• Expanding services to Gold Coast, Hamilton Island & Hawaii,
cutting less profitable routes (e.g. to AKL)
13/07/2014
Since May 14…
✘Domestic market share decreased from 71% to
69.5%
✘Some analysts expect QF losses for 2013-14 to
reach as high as $1.2 billion. Final results will be
released shortly
✔International market share significantly increased
from 23% to 29.6%
✔Morgan Stanley survey shows that domestic
customers prefer QF over VA in every category
except price
‒ Share price at $1.24 (up from $1.01), but fluctuating
with daily changes of +/- 5%
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Traffic and Capacity
• In May 2014, capacity increased by 3%, but demand
only increased by 1.5%, resulting in a lower revenue
seat factor of 73.4%.
• As a result, on 21 May, QF announced that total
domestic capacity growth will be zero for July,
August, and September.
• This announcement demonstrates a move away
from the irrational behaviour of increasing supply
without demand which is, to today, destructive to the
industry.
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Operations Syllabus
• Role of Operations
Management
• Cost leadership and
differentiation
• Operations Influences
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Globalisation
Technology
Quality expectations
Cost based competition
Government policies
Legal regulations
Environmental
sustainability
• CSR
• Operations Processes
• Inputs
• Processes – the 4 V’s;
sequencing & scheduling;
monitoring, controlling &
improvement
• Outputs
• Operations Strategies
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Performance objectives
SCM
Outsourcing
Technology
New Product Design
Inventory management
Quality control
Global factors
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Defining Operations for QF
• Operations management is the management of an
operating system to achieve the desired
organisational outputs (including intangible outputs;
features and benefits) from inputs, with an optimum
balance of economy, efficiency, and effectiveness.
• Operations management at Qantas must devise
strategies in an effort to achieve a competitive
advantage, these strategies are guided around the
generic principles of cost leadership and
differentiation.
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Cost Leadership
• Cost leadership is an attempt to control the market
through being the lowest cost producer within an
industry.
• It is a paradigm that is more applicable to LCCs
which aim to command market share amongst
leisure travellers, but when VA made the shift to a
full service carrier, QF has been forced to implement
some elements of cost leadership in the mainstream
brand.
• Cost leadership has proven to be unsustainable in
the long term, so the focus for QF has shifted to
delivering value to the customer rather than merely
competing on cost.
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Achieving Cost Leadership
• Economies of scale, by purchase or production of
auxiliary products in bulk (e.g. Q Catering, maintenance),
and negotiations with suppliers. This leads to a
decreased average cost of production.
• Pursuing cost reductions through tight procedural
controls, restructuring, streamlining, and rationalisation.
• Ensuring the most up-to-date technology (e.g. the
Boeing 787) in operations to reduce overheads.
• Outsourcing non-core functions of the business.
• Gaining exclusive access to a exclusive groups of high
value customers through QFF, Oneworld, and Emirates.
• Cutting unnecessary distribution channels & higher use
of e-commerce.
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Differentiation
• Differentiation seeks the creation of a distinction
between products that fulfil the same purpose, but
are made by different businesses with unique
features and characteristics.
• Differentiation may be achieved by the following
means:
• Increasing R&D funding to create an innovative
product (à la Apple)
• Affective engineering, which is design which seeks an
emotional and aesthetic reaction (à la Mercedes)
• Higher levels of service at a reasonable cost (this is
what Qantas seeks with its operations & marketing
strategies)
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Operations Processes
Inputs
Outputs
• Transforming Resources
• Materials, information,
customers
• Transformed Resources
• HR, facilities
• Features
• Benefits
• Customer Service
Transformation
Processes
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Operations Processes
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Influences: Globalisation
What is globalisation?
• Globalisation is the increasing worldwide integration
of economic, cultural, political, religious, and social
systems.
• Economic globalisation is the process by which the
whole world becomes a single market. This means
that goods and services, capital, and labour are
traded on a worldwide basis, and information flows
readily between countries.
• This gives consumers the opportunity to purchase
products from businesses in a global market,
especially when coupled with technologies such as
the internet.
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Influences: Globalisation
How is globalisation changing the airline industry?
• The most significant recent change in the industry is the
open skies policies across the EU, US and ASEAN.
• Open skies is the theoretical concept of allowing freedom
to airlines to operate as they wish, to and from any
destination. It involves:
• Open entry on all routes with no restriction on the number of
carriers that can fly such routes.
• Unrestricted capacity and frequency on all routes,
unrestricted route and traffic rights
• Rights to control/perform own support functions at airports
• Liberal code-sharing opportunities and charter
arrangements
Recommended reading: http://goo.gl/pU4LQS
The Impacts of Globalisation on International Air Transport Activity (OECD Report)
13/07/2014
Influences: Globalisation
How does it impact Qantas?
• New competitors – Qantas now competes
domestically against Virgin Australia, which is
largely owned by foreign airlines Air NZ (20%),
Singapore Airlines (20%), and Etihad (18%). The
international market is also flooded with new
operators.
• New customers – The Qantas Group is able to
target customers in new markets through new
airlines such as Jetstar Japan, Jetstar Asia, and
Valuair.
• New partners – QF has moved away from it’s
traditional partner of British Airways to form closer
ties with Emirates.
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Influences: Technology
• Technology in the airline industry is rapidly changing, and
it is important to all players in the airline industry that
they keep up to reduce their costs, and to meet
consumer expectations.
• Recent developments in the airline industry that may be
revolutionary include:
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Next generation aircraft – the A350 and B787
Cheaper aircraft for LCCs – the MS21 and C919
On flight 4G and Wi-Fi
New, more ergonomic design of seats
• By keeping abreast of the latest changes, QF can adopt
the technology that suits its vision and enhances its
competitive advantage.
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Influences: Technology
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Influences: Quality Expectations
• Businesses must continually meet and satisfy the
needs of their customers, and this influences
operations in the quest to make a consistently high
quality product and to drive customer loyalty.
• This is especially important to Qantas perhaps due
to the Pareto principle – 80% of sales revenue is
generated by the most loyal 20% of customers – if
these 20% are not satisfied, QF looses significant
sales.
• Customer expectations for an airline span both
tangible and intangible measures, such as in-flight
entertainment, seat comfort, meal quality, and on
time performance.
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Influences: Cost-Based Competition
• This is potentially the most dangerous of the
influences for QF, because it operates on a much
higher cost base than it’s competitors.
• VA’s decision to increase capacity has forced QF to
increase its capacity and reduce its prices to an
unprofitable level.
• QF Operations has been forced to reduce its costs
by employing outsourcing, seeking economies of
scale in some areas and rightsizing in others, and
pursuing cost reductions in other areas.
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Influences: Government Policies
• The government aims to strike a balance between
allowing businesses to function productively and the
needs of the greater community; changes in
government may sway the balance from one
competing need to the other.
• Key policies that impact Qantas include:
• Environmental policy (direct action / potential future
ETS)
• IR laws (The Fair Work Act)
• The Qantas Sale Act 1992
• 25% max to single foreign investor
• 35% total to foreign airlines
• 49% total to foreign investors
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Influences: Legal Regulations
• Legal regulation for the airline industry in Australia is
some of the most strenuous across the globe.
• The Civil Aviation Safety Authority has the
responsibility for the maintenance, enhancement
and promotion of the safety of civil aviation in
Australia. CASA strictly regulates all Australian
airlines Operations.
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Influences: Environmental
Sustainability
• Environmental sustainability is about meeting the
needs of the present generation without
compromising the ability of future generations to
meet their needs.
• Qantas is a significant producer of carbon in
Australia, 218 kilograms of CO2 are emitted on a
return SYD-MEL flight per passenger.
• QF offers customers the option to offset the carbon
emissions that result from their flights for a fee.
• Fuel comprises 95% of QF’s emissions, by
purchasing more efficient aircraft, improvements will
be made in environmental sustainability.
13/07/2014
Corporate Social
Responsibility
• Qantas is likely not the best case study to use for
CSR and ethical responsibility, they do not have a
comprehensive CSR framework.
• You should seek your own case study for this
syllabus dot point.
• Recommended case studies include:
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NAB (link)
Westpac (link)
Telstra (link)
Stockland (link and next slide)
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CSR Focus on: Stockland
• Stockland is an ASX listed company just outside the
ASX200. The company generates its income from both
commercial and residential property, including shopping
centres, suburban communities, and retirement villages.
In 2013, the company generated total revenue of $1.73
bn.
• Stockland’s history began with CSR involved well before
the term became fashionable – when founded in 1952,
its vision was to “not merely achieve growth and profits
but to make a worthwhile contribution to the development
of our cities and great country.”
• Stockland faces the challenge of balancing profit and its
goals towards the community with declining profit in
FY13.
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CSR Focus on: Stockland
• CSR Achievements include the following:
• Stakeholder engagement plans for all development projects.
• Average priority stakeholder engagement plan rigour score
of 4.5/5
• A climate change action plan, including reduced emissions by
7% across offices.
• Employee volunteering programmes that saw over 9,000 hours
contributed.
• Human Resource-centred outcomes
• 89% of employees believe Stockland achieves the right
triple bottom line balance
• 94% of employees believe Stockland is socially responsible
• 28% of retail waste diverted to landfill
• The creation of green commercial and residential areas.
13/07/2014
Linking Influences &
Strategies
Globalisation
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Technology
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Quality expectations
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Competition on cost
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Economies of scale
Global sourcing
Research & development
New product design
Leading edge technology
Supply chain management
Quality control
Performance objectives
Economies of scale
Performance objectives
Outsourcing
All strategies
Government policies 
+ legal regulation
+ CSR
+ environmental sustainability
13/07/2014
Performance Objectives
• Performance objectives are key areas of focus for
operations where standards are established to evaluate
the functioning of operations.
• Qantas aims to achieve acceptable standards across all
performance objectives in an effort to maintain status as
a dominant industry leader.
• Quality
• Quality is defined as the totality of the features and
characteristics of a product or service that bear on its ability
to satisfy stated or implied needs.
• It directly relates to consumer expectations of the product
rather than the business’ perceptions of quality.
• For QF, quality is both the tangible product features and the
intangible level of customer service provided to customers.
13/07/2014
Performance Objectives
• Dependability
• Dependability is the consistency and reliability of the
product or service, for Qantas this is measured by On
Time Performance.
• The Bureau of Infrastructure and Transport releases
OTP figures on a monthly basis.
• For May 2014, Qantas led the percentage of flights on
time:
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Qantas – 90.3% OT Dept.
Virgin Australia – 88% OT Dept.
Jetstar – 85% OT Dept.
Tigerair – 80.1% OT Dept.
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Performance Objectives
• Flexibility
• Flexibility refers to how quickly and easily operations
processes can adapt to changes in the market.
• For QF, flexibility is achieved through the use of a variety of
aircraft which can suit the needs of changing markets.
• For example, on a SYD-MEL route, QF can change the
aircraft depending on the level of demand – from a 737
seating 170, to an A330 seating 290.
• Customisation
• Customisation is achieved through different fare types and
travel classes.
• QF offers discount, semi-flex, and fully flexible fares to suit
the needs of customers varying from tourists to business
customers.
13/07/2014
Performance Objectives
• Cost
• Cost is a key area where QF’s mainline brand does not
have a competitive advantage, but JQ does to some extent.
• New technologies such as the B787 reduce wastage and
better use inputs to provide for an increase in efficiency.
• Qantas is also seeking to reduce supplier costs, minimise
distribution channel conflicts, and manage the supply chain
better so as to minimise wastage in these areas.
• Speed
• Speed relates to productivity through the pace of
operations.
• For Qantas, this mostly relates to turnaround times (the time
in which it takes a plane to be serviced and read to be sent
on another route).
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New Product Development &
Technology
• Continuous improvement through the creation, design
and development of new products or services is
essential for Qantas to sustain a competitive advantage.
• Qantas has historically been at the forefront of NPD with
innovations such as the SkyBed, iPads and Qstreaming.
Today’s innovations include the B787 and it’s new
business class product on the A330.
• Today, QF is not in the business of implementing leading
edge technology due to the risks associated with them
(e.g. early 787 flaws, Concorde disaster).
• Qantas is taking part in line filling of LCCs in Asia – the
practice of filling the entire range out with products to
ensure that there are no gaps in the market left for the
competitors to fill.
13/07/2014
Outsourcing
• Outsourcing is the buying in of components, subassemblies, finished products, and services from
outside suppliers rather than by supplying them
internally.
• QF is undertaking business process re-engineering,
when specific activities are being redefined as noncore activities.
• Qantas has been criticised for its outsourcing of heavy
maintenance to companies such as Lufthansa Technik.
• Qantas announced last year that it was shutting its
heavy maintenance base at Avalon at a loss of up to
300 jobs.
13/07/2014
Outsourcing
• Advantages
• Less need for management input about non-core production
processes – rationalisation & simplification of middle
management.
• The contracted businesses can achieve economies of scale,
which can be passed on to customers.
• The capacity to focus on core business competencies after
non-core functions have been outsourced may improve inhouse performance.
• Reduces strain on cash flow (spread evenly according to
demand), optimises resource utilisation.
• Disadvantages
• Less managerial control over the processes, which impacts on
quality, reliability, and costs.
• Competitors may use the same firm, and this may eliminate a
competitive advantage.
• Poorer relationship with stakeholders – esp. unions,
employees, and their families.
13/07/2014
Supply Chain Management
• Supply chain management is the management of the
links between an organisation and its suppliers and
customers to achieve strategic advantage.
• Many of Qantas logistics and systems are in house,
including catering and some heavy maintenance, the
main variable input which Qantas must source is fuel.
• Fuel prices are highly variable, on 27 Jun the price was
$2.93 per gallon, down 1.5% from the past week, but up
2.4% vs. one month ago.
• QF has been able to source cheaper HR through its
JetConnect shell company in NZ, which operates all QF
marketed flights between Australia and New Zealand (up
to 40% cheaper wages, and no super levy).
13/07/2014
Inventory Management
• Inventory is the products or supplies of an organisation on hand
or in transit at any time. For a manufacturing company, inventory
includes raw materials, work in progress, and finished goods.
• For QF, ‘stored’ inventory includes engineering expendables,
consumable stores, and works in progress. Alternatively, the
queues of customers can represent a type of customer inventory.
• QF utilises a predetermined decision model as to how much
stored inventory to order and keep at any given time. The
dynamic lot-sized model is used where demand varies over time,
to minimises total holding and ordering costs.
• Other factors which must be considered for inventory managers in
a manufacturing business include:
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The lead time for supplies
Cartage and freight costs
Perishability of the products
Seasonal patterns in demand
Costs of handling and packaging
13/07/2014
Quality Management
• Quality management involves the development of policies and
procedures that a business puts in place to ensure customer
expectations are consistently satisfied in relation to the key
quality outcomes.
• Quality management is broadly classified as a three-tier
process including the strategies of control, assurance, and
improvement.
• QC at Qantas includes systematic inspection of inputs and
outputs, and sampling of key statistics at various stages in
Operations to ensure that acceptable tolerances are not being
exceeded.
• QA involves the design and implementation of systematic
activities aimed at preventing quality problems (e.g. IATA)
• TQM & continuous improvement is defined as the ongoing
process of improving an organisation's goods or services, with
the aim of increasing customer satisfaction. In a highly
competitive environment, QF needs to search actively for ways
of reducing costs, improving quality, and eliminating waste.
13/07/2014
Global Factors: Sourcing
• Global sourcing relates to the operations strategy that
sees the business source supplies without the constraint
of geographical location, allowing firms to take
advantage of inputs from low-cost regions.
• Boeing, in the production of the 787 used global sourcing
not just for low prices, but also for higher quality. The
787’s competitive advantage to airlines is high fuelefficiency; using 20% less than the B767/A330
generation of aircraft, and to end-users is the high levels
of on-board comfort.
• These are achieved through global sourcing of
components from firms who can offer a specialised
advantage. This includes engines from Rolls Royce (UK),
landing gear from Messier-Dowty (FR), the centre
fuselage from Alenia Aeronautica (IT), the vertical tail
assembly from Boeing AU, and cabin lighting from Diehl
Luftfahrt Elektronik (DE).
13/07/2014
Global Factors: Economies of
Scale
• Economies of scale are the factors which make it
possible for larger organisations to produce goods or
services more cheaply than smaller ones.
• Economies of scale which are internal to businesses are
due to the division of labour and equipment which brings
about higher productivity. Also, in a larger firm the
breakdown of any particular piece of equipment, or the
absence of any individual worker, causes less disruption
to production.
• QF in particular benefits from economies of scale in that
it has preferential access to airport infrastructure in
Australian airports, however it is historically
uncompetitive on an international scale.
• In order to strengthen its economies of scale, QF is
streamlining its excessively complex management and
unwieldy administrative staff.
13/07/2014
Global Factors: Scanning &
Learning
• Scanning of the global environment is essential to
identify and understand trends that may impact QF.
These trends occur on a macroeconomic basis, as well
as in the immediate industry that the firm operates.
• Amongst other things, some of the key areas that firms
must be aware of in relation to operations include:
• Global demand for the good or service, and which markets
are growing & shrinking
• New technologies and products to offer customers
• Emergence of competitors
• Changing demographic and sociocultural factors (including
institutional and legal)
• New opportunities for investment and expansion
• Qantas scanning is not scheduled or ad hoc, rather it is
continuous and ongoing.
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Global Factors: R&D
• Qantas currently does not take part in extensive
research and development – this frees up a
substantial amount of working capital.
• Historically, Qantas has undertaken R&D in
cooperation with other firms – in 2011 QF worked
with Solazyme to investigate investigate the
potential use of algal-derived sustainable biofuels.
• Qantas also trialed in flight internet on the A380 in
2012, however it axed its plan, citing a lacklustre
response from travellers – average take-up during
the commercial trial was less than 5 per cent.
13/07/2014
Operations Essay Questions
• How does globalisation influence the operations
strategies used by business in Australia?
• Why are corporate social responsibility and
environmental responsibility key concerns in
operations management?
• How does an understanding of the influences on
operations contribute to business success?
• Assess strategies that management may use to
respond to influences on operations.
• Analyse the impact of operations strategies in
sustaining a business’ competitive advantage.
13/07/2014