AD Topic 2.2 Class Notes Rev 2 (Jul 2024) PDF

Topic 2.2: The nature of operational systems and the competitive role of operations Advanced Diploma: Operational Effectiveness 2024 2.2.1 Customer value defined Value for the customer is defined by the customer and the customer needs and wan...

Topic 2.2: The nature of operational systems and the competitive role of operations Advanced Diploma: Operational Effectiveness 2024 2.2.1 Customer value defined Value for the customer is defined by the customer and the customer needs and wants. One has to look at what the customer perceives as value, i.e. the whole buying and consumption experience, not only at the product or service that the customer is buying. The following are the typical generic considerations when a customer buys, irrespective of market segment and product or service: 1. Price to be paid by the customer 2. Quality – relates to the product or service 3. Delivery speed and reliability 4. After sales service support and moments of truth 5. Variety of product or service available 6. Consistency (absence of Murphy) of all the above 7. Brand Successfully delivering considerations 2 - 6 is primarily the responsibility of the operations function. Marketing gets you the first sale, operations gets you the subsequent sales. Marketing can promise, but it is only operations that can deliver to those promises. Marketing creates the expectation; operations meets the expectation. Even price and brand are indirectly controlled by the operations function. Considerations 2 - 6 are directly controlled by the operations function, which also provides the foundations for building a brand. The better the operations function of an organisation can execute/deliver considerations 2 – 6 to the customer, the more value is perceived by the customer, and the more he/she should be willing to pay. If anyone or combination of considerations 2 – 6 are improved, and the customer does not perceive more value, then they will not be willing to pay more (selling price). E.g., if quality is improved and the customer is not willing to pay more/perceive more value, then it was not a customer requirement at all. It must be understood that the customer’s perception of value must be defined from the customer’s perspective, not that of the producer. This requires living close to the customer and proper integration and communication between the marketing and operations functions. 2.2.2 Order qualifiers and order winners - value from the market’s perspective Order qualifiers - Those characteristics of your product, service or organisation which the customer perceives as non-negotiable, and which allows you to compete. Order qualifiers are the minimum requirements set by the customer to allow the organisation to be considered a potential supplier. Order qualifiers provide the entry ticket to play in that market. For order qualifiers one needs to be as good as the competition; being better is mostly of no benefit. Improving order qualifiers does not allow you to qualify ‘better’. Some marketing texts are referring to order qualifiers as points of parity. Order winners - Those characteristics of your product, service or organisation which your customer attaches a value to, which wins you the order, i.e. which makes the customer select your organisation to buy from. Order winners are thus the basis of competition and should be your differentiating factors. In order to win orders, your order winners need to be better than that of the competition. Improving an order winner improves the ability to compete and should be pursued. Competition is therefore driven by difference, not similarity. Some marketing texts refer to order winners as points of difference. 1 What is the relationship between order qualifiers and order winners? One is not more important than the other. Both are important but different: You first have to qualify in a market segment before you can win orders. Why is it necessary for operations to know what the order qualifiers and order winners are? If one considers the typical order qualifiers and order winners (price, quality, delivery speed and reliability, after sales service and moments of truth, variety, consistency, brand), it seems as if these are the product or service characteristics which marketing needs to keep themselves busy with. It is also marketing’s responsibility to find out from the markets what the order qualifiers and order winners are. In answering the question, consider these prophetic words from Peters : “Manufacturing [operations] must become a, if not the, primary marketing tool in the firm’s arsenal. Quality, maintainability, responsiveness (length of lead times for delivery), flexibility… are all controlled by the factory.” This is equally applicable to service companies as well. Operations need to know what the order winners and qualifiers are because it is operation’s responsibility to deliver to customer expectations. 2.2.3 Differences and similarities between products and services According to Ricketts “basic differences between goods and services are easy to see: Goods are tangible and can be consumed now or later, while services are intangible and cannot be produced in advance.” Two distinguishing characteristics (differences) are therefore highlighted: 1. Tangible vs intangible 2. Consumed now or later vs cannot be produced in advance. 2.2.3.1 Tangibility On closer inspection, tangibility (meaning something is perceptible by touch) seems NOT to be a distinguishing factor since some services are highly tangible (like electricity) even though it cannot be produced in advance nor stored. One also finds a highly tangible product like a painting (it is perceptible by touch) and can be produced in advance but the essence for its existence (being aesthetically pleasing) is not tangible. A car’s shape and colour are also non-tangible, even though a car can be manufactured in advance. This conflict is visible when certain products and services are put on a tangibility scale as in Fig 2.1. Highly - Simple parts/products/services (screws, diodes, electricity) Tangible - Commodities (tobacco, iron ore, retail banking, communication) - Simple finished goods (Furniture, fabrics) - Complex finished goods (Cars, heavy equipment, audited results) - Software (Computer programs, technical manuals) - Designs of tangible goods (Engineering design, architecture) Highly - Performance (Catering, child care, training) intangible - Ideas (Consulting, art) Figure 2.1: The tangibility scale Another limitation if tangibility is used to explain the difference between goods and services is that tangibility seems to only refer to the quality characteristics (one out of seven value characteristics) as identified in paragraph 2.1. Since the words concrete, real, evident are provided as synonyms for tangibility; the meaning of tangibility for the purpose of understanding business (rather than goods and service) can be defined as the ability to objectively measure inputs, processes or outputs. For 2 example, the output of a company is made tangible by calculating net profit and recording it in the financial statements. By using an objective measurement, the output is made concrete, real and evident without having to display the physical money as proof of the profit being tangible i.e., perceptible by touch. Lead times are also real, since it can be expressed as actual deterministic time duration. The logic as set out in Table 2.1 is used to logically arrive at the conclusion that tangibility is not a distinguishing factor between goods and services. In the table below, intangibility relates to a subjective assessment by the customer for which no objective measurement exists. Value characteristic sought by customer Tangibility (measurable) characteristic Price to be paid by the customer Tangible for products and services Brand Tangible and intangible for products and services Quality – relates to the product or service Tangible and intangible for products and services Delivery speed and reliability Tangible for products and services After sales service support and moments of Tangible and intangible for products and truth services Variety of product or service available Tangible for products and services Consistency of all the above Tangible and intangible for products and services Table 2.1: Tangibility/intangibility of value characteristics for goods and services 2.2.3.2 Consumption now or later versus cannot be produced in advance From the above it is clear that the difference between manufacturing and service companies does not lie in tangibility and should be sought elsewhere. The second distinguishing factor that Rickets (op cit) offers is the ability to consume goods/products now or later versus services which cannot be produced in advance. The difference between goods and services therefore translates to the very simple reality that in a goods (manufacturing) company, finished goods can be stored in a finished goods warehouse, whereas in a service environment, the end-product/service cannot be stocked and has to be produced/delivered on demand or at a time when it suits the producer and whoever is consuming the service. Finished goods provide the manufacturing company with capacity flexibility over time. This implies that it can produce finished goods during periods of low demand (capacity exceeds demand), keep it in stock until there is a lack of capacity during periods of high demand (demand exceeds capacity). Effectively it allows the manufacturing company to utilise and store capacity for a later time. Important however is that this advantage is only real when the correct products are available in the warehouse (Fig 2.2). Should a manufacturing company decide to keep finished goods inventory, they need a physical facility (finished goods warehouse) where the finished goods are stored until required by the market. Advantages of keeping finished goods are short lead times to customers and less investment in capacity. Dangers of following such an approach is overproduction which leads to high inventory costs, negative cash flow, obsolescence, pilferage, increased time to market for new products and quality problems. The biggest advantage of keeping finished goods for a manufacturing company is to protect them against statistical variation of both supply and demand. 3  Figure 2.2: How manufacturing companies deal with statistical variation A service company does not have the luxury of using finished goods to protect itself against variations of supply and demand. If a service company wants to meet all demand, it needs to have more capacity than the maximum demand since it cannot store unused capacity today to be utilised tomorrow when there is insufficient capacity due to high market demand (Fig 2.3). The empty plane seat or empty hotel room today cannot be sold tomorrow. Figure 2.3: How service companies deal with statistical variation 2.2.3.3 Is the goods/services classification a useful classification? As can be seen by the preceding discussion, using a goods/service classification creates more difficulties to understand how to manage operations. The ability to store or not to store the end- product also does not seem to help a lot, since many manufacturing companies behave as if they are service companies. Unlike a service company who is physically unable to stock the output it is selling, some manufacturing companies, like Boeing, makes a conscious decision not to stock finished goods, even though they can. It is thus necessary to seek more distinguishing factors other than the ability to stock or not to stock finished goods in order how to make sure that your operations function is properly designed and organised to meet the customer requirements. 2.2.4 Types of operational systems Operations are concerned with the transformation processes that convert inputs into outputs through a transformation process. One of the strategic decisions that need to be made from an operations perspective is the nature of the transformation process. Not all products or services are equally complex, and the complexity of the product will influence the technical dimensions of the process choice. More complex products and services will have more stages and more complex technical requirements than less complex products. However, the complexity of the product or service is not the only factor influencing the decision how to make the product or deliver the service. The business dimensions of the product or the service, which includes the volumes and other market requirements (i.e., order qualifiers and order winners for a specific market segment), will determine the decision how operations for a specific company will make the product or deliver the service (Figure 2.4). This decision is called process choice and is independent of the company producing goods and/or services. 4  Figure 2.4: Process choice relationship with volume and variety Table 2.2 illustrates the difference between the business dimensions, process dimensions and the technical dimensions of a product or service. If a DIY enthusiast builds a single off-road trailer himself in his garage, as opposed to a factory that supplies a sizable market, even though the actual design (technical dimensions i.e., the underlying engineering design principles) of the trailer might be the same for the two different scenarios, the business and detailed process dimensions are very different. Volumes, degree of customisation vs. standardisation, lead times, price and quality all play a role in choosing which process choice to use. Designing the detailed process dimensions of the process is primarily the responsibility of industrial engineers. The business dimension (OQ and OW, the process choice selection) should however precede the detailed process design since process choice is a strategic operational business decision which will influence the scale, layout and location of the detailed process dimension. Similarly doing the accounting for a small one-man business, even though the technical dimensions (GAAP) are the same, it will be organised different for a multi- million Rand organisation. Another example would be a tailor making individual garments for customers versus a factory making clothing in large quantities for large departmental stores. 5  Business dimensions DIY trailer Mass produced trailer Volume Low High Variety required/possible High Low Willingness to wait High Low Price sensitivity Low High Tactic to meet demand Design and make to order Make to stock Process dimensions DIY trailer Mass produced trailer Process choice Job Line Tasks and sequence Undefined Well defined, repeat Bill of Material (BOM) Undefined Defined and known Labour Multi-skilled Repeat tasks/Single skill Facility size Home workshop Large factory Facility layout Job shop Production line General purpose Dedicated equipment Type of equipment equipment Automation Finished goods inventory No Yes Management approach Project management Production line management Technical dimensions DIY trailer Mass produced trailer Weight Can be the same Load capacity Can be the same Dimensions Can be the same Road Traffic Act requirements Has to be the same Open ended but limited by Limited pre-defined Customer requirements labour/process capabilities standard options Table 2.2: Business, process and technical dimensions for two different trailer market segments Process choice has huge implications on the organisation. The operations function is like an oil tanker, requiring time and effort to change direction. Similarly, once the process choice (operations strategy) has been made and implemented, you may find yourself locked into a specific market segment. The best way to go about selecting the process choice, however, is to first decide in which markets you want to compete and make your operational choice based on the business dimensions of your market (i.e., order qualifiers and order winners), which can then, after the process choice has been made, be translated into the detailed process dimensions. However, the business dimensions (i.e., the market requirements) have to be revisited continuously to make sure that changes in the business dimensions are considered continuously. Should the business dimensions change to the extent that there is an insufficient fit between the business dimensions and the chosen process choice, then one needs to either be seeking new markets which will align with the existing process choice (new marketing strategy) or be altering the existing process choice to fit the changed business dimensions (new operational strategy). Irrespective of the choice made, the new strategy has to be communicated throughout the organisation. How the business dimensions are different for the different process choices are illustrated in Table 2.3. 6  Table 2.3: Different business dimensions for different process choices The same process choice matrix that can be found in Table 2.3 can be used for both products and services. The names of the different process choices might be altered to have a more services ‘feel’, but in essence the matrix remains the same. 2.2.4.1 Example of process mapping of two different market segments Table 2.3 shows how the order qualifiers and order winners are different for different markets segments, even though the technical dimensions might be very similar. Not all cars are built in the same way. For entry level cars (like a FIAT Panda) the distinguishing dimensions that will lead to using a line process choice are low variety and high volume. For a Ferrari supercar (incidentally Ferrari is owned by FIAT) the distinguishing dimensions leading to using the low-volume batch process are high variety and low volume. The fact that both these products are cars having four wheels and an engine does not mean they will be built on the same factory floor and in the same way. The differences in the business dimensions force you to adopt two different operations strategies for the two different market segments being served. Just consider the differences in skill levels of production staff, and how automation will play a big role in building Pandas, and how more general purpose the equipment would need to be when building Ferraris. Similarly, you will adopt different operations strategies (process choice selection) for economy class and first class on an airline carrier, even though a single airplane is used. Once the passenger has bought the ticket for a specific market segment, the split between the market segments is enforced and each segment is treated separately and differently using different operational systems. 7 Table 2.4: Mapping the market view of two different market segments onto the process choice matrix 2.2.5 Tactics to meet demand A strategy indicates ‘what’ needs to be done. Tactics indicate the ‘how’. All operations functions irrespective of process choice have the same strategy for meeting demand i.e., once an order is received, finish it ASAP in full. In order to meet demand, capacity is needed. If insufficient capacity exists demand cannot be met. The tactics employed to meet demand is the way (i.e., how) the capacity will be used to meet demand, given that sufficient capacity is available for the given process choice and whether finished goods inventory can be stored or not. The tactics will therefore be different for a high-volume low- variety environment as opposed to a low-volume high variety environment. It should be clear from Table 2.3 that the tactics to meet demand are similar for manufacturing and services companies for the same type of market segment/process choice e.g., design and make/deliver to order for a low volume/high variety market segment. On face value the tactics for manufacturing and services seem to be different in the high volume/low variety environment. It is however the same strategy i.e., that of buffering. The difference is that in manufacturing inventory (a form of stored capacity) is used as the buffer whereas in services capacity is used as the buffer. A more complete description of the process choice matrix and different process choices is found in Appendix 2. A complete description is also provided for each of the process choices. Table 2.3 however provides a broad outline of the order qualifiers and order winners mapped onto the process choice, and the implications of process choice on the tactics to meet demand and keeping inventory (or not). 8  Appendix 2: Process choice (Types of operational systems) Batch Low High Continuous Project Jobbing vol vol Line processing Large Dedicated Product/ Producer-site Manual Automa- Commodity Service nature customer-site project assembly tion product/ product or service project service range Wide Wide Wide to narrow Narrow Narrow Options within High High High to low High to low Undesirable range Mass Niche markets Mass, niche and Type of customer Single Individual individual market Mass market Individual Customer order Small Small Medium to large Large Very large size New product Many Many Medium to few Few Very few introductions Design-to- Tactic to meet Yes Yes Yes Maybe No No order demand Make-to- Yes Yes ATO 1 ATO ATO/No No order Make-to- Fast No No Seldom movers Yes Yes stock only Special Special General General Dedicated Highly automated Production system purpose purpose Manual Automa- Automated process labour ted Innovation Product/ Product/ Both Process Process orientation Service Service Std product/ Std product/ What do you sell? Capability Capability Mix service service How do we typical order Capability Capability Variety compete? (Design) (Design) Delivery spd Mostly price Price winners Delivery spd Delivery spd Maybe price typical order Delivery rel Delivery rel Delivery rel Delivery rel Delivery rel Price Price qualifiers Quality Quality Quality Quality Quality Pvt Retail Construction R&D Banking banking Cars Mining Consulting Design Fast food Brewing Appliances Electricity Examples Plant life cycle Ship yard Printing Bottling Eye surgery Telecoms extension Eng shop Health Foodstuff Voting Fuel production Event Event care Transport Table 2-A: Product, service and market implications for process choice 1 ATO: Assemble-to-order 9 1 Projects Projects are normally once-off, unique products or services on a large scale that requires the coordination of large-scale inputs to meet the customer’s requirements. The resources are taken to where the product is built or the service rendered i.e., the customer’s site, including the necessary support functions. Due to the nature of the project, some components may be produced off-site, but might require a different process choice. In this particular case, project refers to the process choice, and not the management discipline that is used to plan, execute and control the activities of this process choice. Example of projects as a process choice would be typical of the construction industry, heavy engineering and large-scale services such organising and running an election, a census, a state banquet and organisational development. 2 Jobbing Jobbing is the process used to provide for the once-off, unique requirements of a customer. Relatively high skill levels are required to interpret and deliver the customer requirements. The difference between projects and jobbing is that the product is made or the service delivered at the producer’s location. Once produced, it is transferred to the customer’s location. Examples of jobbing would include purpose made tooling, developing custom made software, composing music for a specific occasion or building a cruise liner. The once-off requirements imply that the output will not again be required in its exact form, and if it is, the demand will tend to be irregular and with long time periods in between. Therefore, investment will be most likely in people skills rather than operations equipment, which tends to be of a general (i.e., multi-purpose) nature. Jobbing can be described as that operational system where the product and process to produce it, is designed for that one occasion, which is unlikely to be repeated, therefore the product/service and process design may run concurrently. Like projects, project management as a management technique is suitable to manage this type of operation as well. 3 Batch Using the batch process choice is for products and services of a repetitive nature. This means that the volume (defined as quantity multiplied by work content) is higher than that of jobbing and projects, and the product or service design is standard rather than unique per order. Batch can be classified as low-volume batch and high-volume batch on the two extremes, as it covers a wide range of order combinations. On the low-volume end, the repeat orders are small an infrequent, whereas on the high-volume end, the orders are larger and more frequent. Batches move together from process to process i.e., production batch and transfer batch are mostly of equal size. Because of the repetitive nature of the operations, investment in operational processes and equipment tend to increase. Between batches, setups will normally occur to adjust the operations system to be able to produce the next batch of product or service. With batches, the process design normally precedes the production of the product or the delivery of the service. People working within the system tend to specialise on a small component or stage in the delivery process due to the repetitive nature. Examples of low-volume batch are sports car manufacturing, molding, printing and restaurants. Service examples would be visiting the dentist or the doctor, or applying for a loan at the bank, using the ATM. Examples of high-volume batch would be the canning of soft-drinks and brewing beer. Most FMCG’s are produced using high-volume batch. Service examples of high-volume batch are processing the payroll at the end-of the month, calculating interest on accounts, education and transportation. Batching is thus the preferred method of operation for handling larger volume repeat demand. 10 4 Line When the demand increases even further, line is the preferred method of operation where the whole operational process is dedicated to one product family. As opposed to batch, where setups are required between batches, setup is done when the line is constructed and commissioned for the product family, and never again until production of that product family stops. Product families refer to a product range where the major characteristics are similar and where the differences are such that it is ‘invisible’ to the line. In that way a large range of the product family can be produced. A good example of lines would be the assembly of motor vehicles, where all the different options within a model range are assembled on the same line. This requires that the design is such that the assembly time to fit a 6-cylinder engine to the chassis of a certain model is the same as when a 4- cylinder engine is fitted to the same chassis. This allows one many options within a limited (normally only one) choice of range but depends heavily on how well the product and process design have been integrated. Process design focuses heavily on the breaking down of the process in small, specialised, repetitive steps and automation of many of these steps. Worker skills are specialised but low, whereas investment in dedicated equipment is normally very high. Heavy emphasis is placed on designing the process in such a way that it does not allow the making of mistakes. This technique is known as fail-safing (from the Japanese poka-yoke). In line processes, the production batch is often very large whereas the transfer batch tends to be much smaller, preferably just one unit only. Service examples are not widespread but include operations such as voting in elections and renewing or applying for travel documentation. The most exceptional example is an eye microsurgery line facility at the SN Fyodorov Eye Microsurgery Complex founded by the late Dr Svyatoslav Fyodorov which treats myopia using laser technology and assembly line methods. 5 Continuous processing With continuous processing, one or a number of raw materials are processed through various sequential stages and converted into one or more products e.g. fertilizer, petrochemicals, steel and electricity. Costs of stopping and starting are often very high which means that the process has been designed with the aim of 24/7 operation and a minimum number of shutdowns. The role of people is predominantly to monitor and perform maintenance (corrective and preventive), while material is transferred automatically between the stages. Some authors believe that there are no service examples. However, some service operations are running capacity for 24/7 for large volumes of low variety output, even though the demand levels vary (often predictably) over time, but they need to have the capacity running in case demand arises e.g., a telephone exchange and power generation. In the case of services, it is not necessarily the cost of starting and stopping that is prohibitive, but the lead time to react on a new demand as well as the effects when the demand is not met. Peters, T.J. (1989). Thriving on chaos. London: Pan Books in association with Macmillan. Ricketts, J.A. (2007). Reaching The Goal: How Managers Improve a Services Business Using Goldratt's Theory of Constraints. IBM Press. Pearson Education. Kindle Edition. Kindle Location 684-686. Adapted from Schonberger, RJ. and Knod, E.M. (1997). Operations Management: Customer Focused Principles. 6th Ed. Boston, MA: IRWIN/McGraw-Hill. p330. Adapted from Hill, T. (2000). Manufacturing Strategy: Text and Cases. 2nd Edition. Hampshire: Palgrave. p115. ATO: Assemble-to-order Adapted from: Hill, T. (2000). Manufacturing Strategy: Text and Cases. 2nd Edition. Hampshire: Palgrave. p121 – 123. Hill, T. (2000). Operations Management: Strategic Context and Managerial Analysis. Hampshire: Palgrave. p120. Russell, R.S. and Taylor, W.T. III. (1998). Production and Operations Management, Focussing on Quality and Competitiveness. 2nd Edition. Upper Saddle River, NJ: Prentice Hall. p234. 11