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Driving Operational Value: Efficiency, Output, and the Customer
Business Essentials · Chapter 8: Operations Management and Information SystemsSection 8.1 · lesson 42 of 10514 min · free with a free account
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In this lesson
Efficiency, output, and the customer: where improvement effort pays.
- Define operations management and its decision areas
- Explain the 5 competitive priorities and their trade-offs
- Match process types to volume and variety
- Identify the bottleneck in a described process
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Operations Management and Information Systems
Driving Operational Value
Every organization turns something into something else. That's what operations are. This section opens a chapter on operations, and starts with what operations management actually decides. We'll look at the five competitive priorities, and why improving one can weaken another. We'll see how process types match volume and variety. Then a counterintuitive result. Running at full capacity can make an operation worse, not better. We'll find the bottleneck in a process, and see why money spent elsewhere buys nothing. And we'll connect all of it to what the customer actually experiences. Watch for one recurring lesson. The visible problem is often not the limiting one.
What Operations Management Is
Design and Control of the Conversion
Operations management is the design and control of the process that converts inputs into goods and services. The definition has two verbs on purpose. Design is deciding, before anything is produced, how the conversion will be arranged. What steps it contains, what equipment and skills each needs, and where the work is done. Control is running that arrangement day after day, and correcting it when results drift. An operation exists in every organization. A furniture factory has one. So does a dental practice, a city library, a food bank, and a software company. Thinking operations means factories overlooks services and non-profits, which also turn resources into value. That's why operations is a subject for every manager. A marketing manager promises a delivery date the operation must keep. A finance manager approves equipment that sets what it can do. Decisions made elsewhere arrive in operations as work. Results return as revenue, cost, and customer opinion.
The Transformation Model
Inputs, Process, Outputs, Feedback
The transformation model describes an operation as inputs converted into outputs, with feedback adjusting the process. Inputs include materials, labor, equipment, energy, and information. In many services, they include the customers themselves. The process is the set of activities that changes the inputs. Outputs are the goods and services delivered. Feedback is information about results that lets the operation correct itself. It's the open-system view from section seven point six, applied to the operating core. What gets transformed varies. A manufacturer transforms materials. A hospital transforms patients' health. A delivery firm transforms the location of goods, and an accounting practice transforms information. But the questions stay the same. What goes in, what's done to it, and what comes out? And how is the gap between intended and actual results detected? Operations managers decide in recurring areas. Process design, capacity, location, and layout. Then the supply chain, covered in chapter fourteen, inventory, scheduling, and quality, the subject of section eight point two. Capacity is the maximum output an operation can produce in a period. These areas interact. Layout affects capacity, location affects supply, and inventory affects scheduling.
Table 8.1.1
5 Competitive Priorities
Competitive priorities are the dimensions an operation can compete on, and there are five. Cost is the ability to produce at a low price per unit. Standardizing products and running long, high-volume runs supports it. The usual casualty is flexibility. Quality means meeting or exceeding customer expectations. Inspection and better inputs support it, at a short-run cost. Delivery speed is how quickly the customer receives the product. Holding finished goods, or spare capacity, supports speed. But that ties up money. Delivery reliability is how consistently the operation meets the promised time. Schedule slack supports it, also at a cost. Flexibility is the ability to change what's produced, or how much. General-purpose equipment and cross-trained workers support it. But general-purpose equipment is usually slower per unit. The pattern is clear. A decision that strengthens one priority usually weakens another. An operation that doesn't choose deliberately ends up with trade-offs it never intended.
Trade-Offs
Can an Operation Be Best at Everything?
So, can an operation be best at all five at once? The trade-off proposition says no. The decisions that strengthen one priority weaken another. So an operation should decide which priorities its customers value most, and organize around them. The strongest counter-argument is the cumulative view. It says improvement in one priority can enable others. Reducing defects removes rework, which lowers cost. It also speeds delivery and makes it more reliable. The two positions aren't entirely opposed. The empirical question is when several priorities can improve together, and when gains in one must be paid for in another. Evidence suggests that removing waste and error tends to help several priorities at once. Adding resources tends to trade one priority against another. The normative question belongs to owners and managers. In a real trade-off, which priority wins? That depends on customers.
Setting Priorities
Order Qualifiers and Order Winners
A practical way to set priorities is to separate order qualifiers from order winners. An order qualifier must be met at some minimum level before customers will consider you at all. An order winner is what leads a customer, choosing among qualified suppliers, to pick one. Take a fictional budget airline, Merrow Air. Safety and punctuality are qualifiers. It must meet a minimum standard on both. But it wins customers on price. Now a fictional hospital-supplies distributor, Oakhurst Medical Supply. Competitive prices are its qualifier. Clinics won't consider it without them. But it wins orders by delivering on the promised day. Notice the same characteristic, price, is a winner for one firm and a qualifier for the other. And these can shift. Once competitors match an order winner, it may become merely a qualifier.
Process Types
Matched to Volume and Variety
Operations organize work in five broad process types, which differ in volume and variety. A project is a one-off undertaking with a start and an end, like building a bridge or staging a conference. A job shop makes small quantities of many different items, each to a customer's requirements. A print shop, for instance. Batch production makes moderate lots of a limited range, resetting equipment between lots. Rolls, then muffins. A line process makes a high volume of a narrow standardized range, along a fixed sequence of stations. And continuous flow processes material without pause, in very large volumes, like a refinery. Volume and variety decide which fits. As volume rises and variety falls, specialized equipment and fixed sequences pay off, and the process moves toward continuous flow. As variety rises and volume falls, it moves the other way. Specialized equipment can't be justified for small quantities. The types carry the trade-offs too. A line is low in cost, and low in flexibility. A job shop is the reverse. High flexibility, and a high cost per unit. A mismatch, like forcing a varied product mix through a rigid line, produces expensive changeovers, idle equipment, and late orders.
Capacity and Utilization
Why Full Utilization Means Long Waits
Utilization is the share of available capacity actually used. Actual output, divided by capacity. Low utilization looks like waste. Near full utilization looks like success. Both reactions miss something. In almost every operation, work arrives unevenly, and each job's time varies. So a busy period creates a queue, and only spare capacity can clear it. At moderate utilization, there's spare capacity, so queues shrink quickly. As utilization approaches one hundred percent, there's almost none. A queue, once formed, takes a very long time to disappear, and waiting time grows steeply. Think of a clinic booked to the last minute every day. It isn't efficient in any sense a patient would recognize. Its patients wait. And a single long appointment delays everyone behind it. So some idle capacity isn't waste. It's the price of responsiveness. How much is right depends on how variable the work is, and how costly waiting is.
Figure 8.1.1
Output Equals the Bottleneck's Output
A bottleneck is the stage in a process with the lowest capacity, and it limits the whole process. The principle is simple. The output of a process equals the output of its bottleneck. No stage can pass along more than the slowest stage lets through. Here's an example with illustrative figures. Halloran Cabinets, a fictional workshop, has four stages. Cutting handles sixty units per hour, assembly forty, finishing twenty-five, and packing fifty. Finishing is the lowest, so the process makes twenty-five units per hour, whatever the others can do. Suppose the owner pays to raise assembly from forty to fifty-five. Output stays at twenty-five. Finishing still limits it. Assembly just gets more idle time. Now suppose finishing is raised from twenty-five to thirty-five instead. Output rises to thirty-five. Finishing is still the bottleneck, since thirty-five is below every other stage. Only once finishing passed forty would assembly become the new bottleneck. So the first task in improving any process is to find the bottleneck. Money spent elsewhere buys no output.
Service Operations
4 Differences, and the Customer's Experience
Service operations differ from manufacturing in four ways. First, production and consumption happen together. A haircut or a flight is produced as it's consumed. So there's no chance to inspect the output and fix it before it reaches the customer. Second, the customer often takes part, supplying information, effort, or belongings. So results depend partly on them. Third, services are intangible. They're hard to describe in advance, and hard for customers to evaluate. Fourth, capacity can't be inventoried. A factory can build stock in a slow period, and sell it later. But an empty seat on a flight, or an idle clinic hour, is lost forever. So matching capacity to demand is a permanent problem in services. Section eight point three returns to it. Step back, and the customer's whole experience is largely an outcome of operations decisions. The wait, whether the item's in stock, whether the order is correct, consistency, and an affordable price. An advertising promise, a price from finance, or an engineering design can each be undone by an operation that can't deliver. Or made real by one that can. That's what makes operations a general management subject.
Inventory and Layout
Buffers That Hide Problems, Routes That Add Them
Inventory is the stock of materials, partly finished goods, and finished goods an operation holds. The categories are raw materials, work-in-process, finished goods awaiting sale, and supplies. Chapter fourteen develops them. Inventory has two roles. It's a buffer against variability in supply, demand, and process performance. And it's a cost. Money tied up, storage, handling, damage, theft, and the risk of obsolescence. But the deeper reason to hold less is that inventory hides problems. Picture a boat on a river. High water covers the rocks, so the boat passes safely. But the rocks are still there. Extra stock absorbs breakdowns, defects, and slow suppliers, so no one has to fix them. Lowering it exposes them. The opposing caution is that removing the buffer too early makes the operation fragile. Pace the reduction with the solving. Layout, the arrangement of work areas in a facility, sets how far work travels, and how many handoffs it meets. Every handoff is a point of delay and error. Layout is the physical version of that problem. Grouping machines by type suits a job shop, but sends each order on a long tour of the building. Arranging equipment in product sequence suits a line, shortening the route. But only when many units share it.
Case Vignette (Composite)
The Faster Filler
Here's a composite case, with a fictional company and person, and illustrative figures. Ines is a plant manager at Tolliver Bottling, under pressure to raise output on a juice line. The line has four stages. Filling handles ninety cases per hour, and capping seventy. Labeling handles one hundred twenty, and palletizing one hundred ten. Supervisors complain most about the filler. It's loud, old, and always running. So she approves a large purchase, a new filler that raises its capacity to one hundred thirty cases per hour. After installation, output is unchanged, at seventy cases per hour. The new filler spends much of each shift waiting, and unfinished bottles pile up in front of the capper. She could say the equipment needs time to settle, or buy a faster capper too, though the year's budget is mostly spent. Or she could first find out what limits the capper, and address that. The trade-off is between the visible symptom, the noisy filler, and the actual limit on output. Capping had the lowest capacity, so the line produced seventy before the purchase and after it. A sound decision would have compared capacities first, and put the effort into the capper's changeovers and stoppages.
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