Operations and Process Second edition Instructions Manual

Instructor’s Manual Operations and Process

Management: Principles and Practice for Strategic Impact

Second Edition

Nigel Slack Stuart Chambers Robert Johnston

Alan Betts

ISBN: 978-0-273-71852-9

Pearson Education Limited 2009

www.pearsoned.co.uk/slack

3 © Pearson Education Limited 2009

Contents

Part 1: Teaching Guide ........................................................................................................................................ 7 Chapter 1: Operations and processes.................................................................................................................... 8 Chapter 2: Operations strategy ........................................................................................................................... 12 Chapter 3: Supply network design...................................................................................................................... 19 Chapter 4: Process design 1 – positioning.......................................................................................................... 22 Chapter 5: Process design 2 – analysis ............................................................................................................... 26 Chapter 6: Product and service design processes ............................................................................................... 31 Chapter 7: Supply chain management ................................................................................................................ 34 Chapter 8: Capacity management....................................................................................................................... 37 Chapter 9: Inventory management ..................................................................................................................... 42 Chapter 10: Resource planning and control........................................................................................................ 44 Chapter 11: Lean synchronization...................................................................................................................... 47 Chapter 12: Quality management ....................................................................................................................... 49 Chapter 13: Improvement................................................................................................................................... 55 Chapter 14: Risk and resilience .......................................................................................................................... 58 Chapter 15: Project management........................................................................................................................ 60 Part 2: Solutions for Case Studies in the Book................................................................................................... 65 Chapter 1: AAF Rotterdam ................................................................................................................................ 66 Chapter 2: Dresding Wilson ............................................................................................................................... 73 Chapter 3: Disneyland Resort Paris (Abridged) ................................................................................................. 79 Chapter 4: North West Constructive Bank – The New Mortgage Centre A....................................................... 82 Chapter 5: North West Constructive Bank – The New Mortgage Centre B....................................................... 86 Chapter 6: Developing Savory Rosti-crisps at Dreddo Dan’s ............................................................................ 92 Chapter 7: Supplying fast fashion ...................................................................................................................... 97 Chapter 8: Blackberry Hill Farm...................................................................................................................... 102 Chapter 9: supplies4medics.com ...................................................................................................................... 119 Chapter 10: subText Studios, Singapore .......................................................................................................... 124 Chapter 11: Boys and Boden (B&B)................................................................................................................ 127 Chapter 12: Turnround at the Preston Plant ..................................................................................................... 133 Chapter 13: Geneva Construction and Risk (GCR).......................................................................................... 138 Chapter 14: The Chernobyl Failure .................................................................................................................. 143 Chapter 15: United Photonics Malaysia Sdn Bhd ............................................................................................ 146 Part 3: Solutions for Active Cases on the CD .................................................................................................. 151 Chapter 1: EleXon Computers.......................................................................................................................... 152 Chapter 2: Long Ridge Gliding Club ............................................................................................................... 170 Chapter 3: Freeman Biotest .............................................................................................................................. 179 Chapter 4: McPherson Charles Solicitors......................................................................................................... 188 Chapter 5: Action Response ............................................................................................................................. 198 Chapter 6: Getting customer #1........................................................................................................................ 213 Chapter 7: NK Fleet Management.................................................................................................................... 242 Chapter 8: Fresh Salads Ltd: The Iceberg Lettuce Harvest .............................................................................. 254 Chapter 9: Rotterdam Serum ............................................................................................................................ 260 Chapter 10: Coburn Finnegan Accountants...................................................................................................... 268 Chapter 11: Treating Ann................................................................................................................................. 276 Chapter 12: You have eight messages .............................................................................................................. 291 Chapter 13: Ferndale Sands Conference Centre ............................................................................................... 298 Chapter 14: Paterford Elevators ....................................................................................................................... 314 Chapter 15: National Trust ............................................................................................................................... 326

Slack, Chambers, Johnston, and Betts, Operations and Process Management, 2nd Edition, Instructor's Manual


Part 4: Additional Case Exercises.................................................................................................................... 336 Chapter 1: Case exercise – A business trip to Brussels .................................................................................... 337 Case exercise – Acme Whistles ...................................................................................................... 344 Case exercise – ANLG Bank.......................................................................................................... 346 Case exercise – Dealing with variety – two examples.................................................................... 351 Case exercise – Formule 1 – the most affordable hotel chain......................................................... 353 Case exercise – Swatch revolutionizes watch manufacture............................................................ 356 Case exercise – The Henry Ford of ophthalmology ....................................................................... 358 Chapter 2: Case exercise – Flexibility at Godiva Chocolatier .......................................................................... 360 Case exercise – Aldi Einkauf – Europe’s largest retailer................................................................ 362 Case exercise – Birmingham Amusement ...................................................................................... 364 Case exercise – Organically good quality....................................................................................... 369 Case exercise – Taxi Stockholm..................................................................................................... 371 Case exercise – Recycling strategy at Veka UPVC windows......................................................... 372 Case exercise – When speed means life or death ........................................................................... 374 Chapter 3: Case exercise – Why Japan invested in the United Kingdom......................................................... 376 Case exercise – Nissan wins a new model...................................................................................... 378 Case exercise – Expansion at the Café Rouge ................................................................................ 380 Case exercise – Four location decisions ......................................................................................... 382 Chapter 4: Case exercise – Electronic benefit transfer ..................................................................................... 385 Case exercise – Environmental policy at 3M ................................................................................. 386 Case exercise – Verenigde Bloemenveiling Aalsmeer (VBA) (United Flower Auctions), Aalsmeer, Holland..................................................... 388 Case exercise – Is the petrol engine dead?...................................................................................... 391 Case exercise – Recycled St Regis ................................................................................................. 393 Case exercise – Robots take over some of the repetitive work at Ecco Shoes and at Scania Trucks.......................................................................... 395 Case exercise – South West Cross Bank ........................................................................................ 397 Case exercise – Layout of Delhaize De Leeuw supermarket in Ouderghem, Belgium .................. 405 Case exercise – FMS at Yamazaki Mazak...................................................................................... 407 Chapter 5: Case exercise – Weldon Hand Tools .............................................................................................. 409 Chapter 6: Case exercise – Boeing brings its customers on board ................................................................... 417 Case exercise – Design principles at Braun AG and the new Braun Multimix .............................. 419 Case exercise – The manifold for the Ford Zeta engine ................................................................. 422 Case exercise – Troublesome technology....................................................................................... 424 Case exercise – The virtual reality of design .................................................................................. 426 Case exercise – The Royal Mint ..................................................................................................... 428 Chapter 7: Case exercise – Globalcast.............................................................................................................. 431 Case exercise – Rotterdam Fruit Port in partnership with its customers ........................................ 436 Case exercise – The Benetton supply chain.................................................................................... 438 Case exercise – Consolidated value from GP................................................................................. 441 Chapter 8: Case exercise – The British Airways London Eye (A) ................................................................... 443 Case exercise – The Perfect Pizzas Division of KT Foods............................................................. 452 Case exercise – Fine Country Fruit Cakes...................................................................................... 457 Chapter 9: Case exercise – Inventory management at Flame Electrical........................................................... 471 Case exercise – An Ideal Standard of inventory............................................................................. 474 Case exercise – Trans-European Plastics (TEP)............................................................................. 475 Chapter 10: Case exercise – Air traffic control: a world-class juggling act ..................................................... 492 Case exercise – Planning and control at ICI Chlor-Chemicals ..................................................... 497 Case exercise – Psycho Sports Ltd ............................................................................................... 499 Chapter 11: Case exercise – Just-in-time at Jimmy’s ....................................................................................... 511 Case exercise – JIT principles at Little Chef ................................................................................ 516 Case exercise – Flexibility helps JIT at L’Oréal ........................................................................... 518 Chapter 12: Case exercise – Six Sigma at Xchanging...................................................................................... 520 Case exercise – Calling Sue.......................................................................................................... 523 Case exercise – Handles and Hinges Ltd ...................................................................................... 528 Case exercise – Quality measurement of fraudulent fuels ............................................................ 535



Chapter 13: Case exercise – World-class operations in a developing country ................................................. 536 Case exercise – Lombard Direct ................................................................................................... 538 Case exercise – Raydale Conference Centre................................................................................. 543 Case exercise – Xerox benchmarking........................................................................................... 546 Chapter 14: Case exercise – Better late and happy than just late ..................................................................... 548 Case exercise – Failed philosopher............................................................................................... 552 Case exercise – Keep left.............................................................................................................. 554 Case exercise – Leading light ....................................................................................................... 556 Case exercise – Long-distance monitoring ................................................................................... 557 Chapter 15: Case exercise – The London Eye.................................................................................................. 559 Case exercise – The Channel Tunnel............................................................................................ 564 Case exercise – Lemming Television ........................................................................................... 566 Case exercise – Oxfam ................................................................................................................. 570 Case exercise – Virtual project management ................................................................................ 574


Part 1

Teaching Guide


C H A P T E R 1

Operations and processes

Introduction

Teaching the material in Chapter 1 of the book is both the most important and the most difficult part of teaching an operations (or operations and process) management course. It is most impor-tant because it is vital that students develop an enthusiasm for the subject, and this is best attempted early in the course. It is difficult because one has to establish some key principles be-fore the building blocks of the subject have been taught. We have found it useful always to work from whatever experience the students have. For post-experience students like MBAs, this should not be too difficult. One can always ask them to describe the nature of operations in the companies they have worked for. One can even explore some of the prejudices they might hold about operations management (dull, obstructive, always screwing things up, etc.) and base dis-cussions on that. Alternatively, and certainly for students who have less experience, one can ask them about recent experiences as a customer (both good and bad) and base a discussion on the importance of operations management around those experiences.

Key teaching objectives

• To enthuse students with the hands-on excitement that can be gained from an understanding of operations management (‘I want to prevent you ever enjoying a theatre performance, res-taurant meal, or shopping experience ever again. I want you continually to be looking for the operations implications of every operation you enter. You are going to be turned into sad people who cannot go anywhere without thinking of how you could improve the process’).

• To convince students that all organizations really do have an operations function; therefore, operations management is relevant to every organization.

• To convince students that all managers are operations managers because all managers man-age processes to produce outputs. (‘Even marketing managers are operations managers. What you learn as marketing in business school is really the “technical” side of marketing. Of course this is important, but marketing managers also have to produce marketing reports and information, without mistakes in them, on time, relatively quickly, flexibly enough to contain the latest information, and without using an army of marketing analysts to do so. In other words, they are producing services for internal customers’).

• To introduce the three key ideas in the chapter, namely,

(a) Operations and process managers manage transformation processes at three levels: the level of the supply network, the level of the operation itself (or the organization, if that is more understandable to students), the level of the individual process (some of which will be within the operations function, and the rest of which will be in other functions).

(b) Operations and processes differ in terms of their volume, variety, variation and visibility (the four Vs).



(c) Operations and process managers must perform four sets of activities to ensure that their operations and processes contribute to overall strategic impact – Direct operations strategy, Design operations and processes, Deliver products and services by planning and controlling operations and process, Develop the performance and capability of op-erations and processes.

Exercises/discussion points

The exercises described here do not include the Case study at the end of each chapter, or the Active cases that are included in the chapter sections of the CD that accompanies the book or the ‘Additional Case exercises’ included in this instructors manual.

There are many cases and exercises that one could use to introduce operations management. The companion volume to this book (Johnston, R. et al, 3rd edition, ISBN 0 273 65531-0) contains several useful cases. In addition, you might like to try some of these ideas, all of which we have used.

Exercise – Use the pie chart that shows the percentage of consultancy spend in various func-tional areas and shown below, to prompt a discussion. For example, ‘Operations and process management is the biggest single sector of spend in the consultancy market. Why do you think this is so?’ Try to guide the discussion to the idea that excellence in operations management both reduces the cost base of the operation and helps bring in more revenue. We call this the double whammy effect of operations. No wonder it is important when it can do both these things. ‘Remember the old adage; profit is a very small number, made up of the difference be-tween two very big numbers. It only takes a bit to be taken off costs and bit to be added on to revenue to make a big difference to profit’.



It may be a good idea to relate this discussion, not only to the influence that operations has on cost and revenue, but also to the other contributions of effective operations and process man-agement as described in Chapter 1. These are the effects that operations can have on the asset base or investment in the organization and the effect that operations and processes management has on building the capability that will allow the company to develop new products, services and processes in the future.

We find the Brussels Airport Case Example (included in the additional case examples section) useful for identifying different types of process. In class, get someone to read out the case ex-ample (or read it out yourself), then, whenever a process is mentioned, write it on the board as being either a material, information or customer transforming process. A suitable blank slide is included in the PowerPoint files.

Exercise – An exercise for demonstrating the ubiquitous nature of operations is to ask the class to identify every service they have encountered from waking up in the morning through to going to bed at night, for example, the radio alarm that wakes them up depends on the operations of the radio station; the water in which they wash was delivered (presumably) by a water utility; the public transport operation that transported them to college, etc. through to the bar, or other place of entertainment that they finish the day with.

Exercise – The four Vs dimensions of operations can be used for many types of exercise. For example, one could ask different groups to identify different types of restaurant, food retailer, car servicing operation, cinema, club or pub, etc. and plot the similar but different operations on the four dimensions. Alternatively, many television programmes can be recorded off-air, which illustrate operations. These often look behind the scenes of well-known operations such as air-ports. Any of these could be used to promote group discussions on what operations management might be like in such operations, and especially the differences (in terms of the 4 Vs) between the processes shown.

Exercise – For residential courses, especially of post-experience students, an evening could be spent on the town, where syndicates are required to sample the services of a restaurant, a retail operation and an entertainment operation, and report back the following morning. This is a great way of giving participants a change of scene on the Thursday of a one-week course.

Exercise – Remember that role-play can be used effectively in an introductory session. The lec-turer can role-play two operations managers managing separate similar but different operations. For example, the chief tailor of an expensive custom tailor and the production manager at a mass-produced off-the-peg suit factory manager. The differences in the types of resource (peo-ple and equipment), the operation’s objectives, the four Vs, etc. can all be emphasized during the role-play.

Role-play can also be used with a standard case study. For example, the Concept design services case in the Johnston, R. et al. case book lends itself to role-playing the operations manager and marketing director of the company, in order to illustrate their different perspectives.

Exercise – Perhaps one of the most important points to get across in any introductory session is the ubiquity of operations and process management. MBAs in particular need convincing that the subject is relevant for them, even if they are not going to be directly involved with the operation’s function. This is why the book has very deliberately taken an operations and process management perspective. It is vital that everyone understands that, to some extent, they are op-erations managers because they manage processes. Therefore, everyone has something to learn from operations management. The best way to emphasize this is to use Figure 1.3 from Chapter



1. Point out the space occupied by the subject when it is concerned primarily with production management. Then, point out the space that the subject occupies when we define it to include any kind of process in any kind of business.

Exercise – All the chapters start with two opening examples. It is often a good idea to ask the students to read through these examples and then use the similarities and differences between them to promote a discussion on the topic. In this chapter, the two examples are IKEA and Virgin Atlantic. Questions such as the following could be used to prompt discussion.

(a) Did either of these companies simply conform to the conventional operations model in their sectors or did they devise something new?

(b) What did each of these companies do differently to previous furniture retailers and com-puter companies?

(c). Why do you think they decided to be different from other companies in their sector in the way they manage their operations?

(d) What advantages did making these changes give them?

Exercise – It is important to get across the idea that products and services are not always very dissimilar. Indeed, it is sometimes misleading to distinguish between the two. In the study guide on the CD, the example of Rolls Royce and other manufacturing companies is used to make the point that most of these companies derive the majority of their revenue by providing services. Try giving the class an example of a company that seems to be a manufacturer (e.g. BAE Sys-tems, Caterpillar earth moving equipment, Xerox copiers, etc.) and pose the question, ‘What services would a company like this need to supply to its customers?’ Then, direct the discussion to include maintenance, training, consultancy of how best to use the equipment, updating, instal-lation of planning and control systems and other software, providing finance for purchase, and so on. A good example is BAE Systems who manufacture aircraft for the military. Rather than purchase the aircraft, many governments are choosing to buy capability. This means contracting for many thousand hours of operating capability per time period. All our Air Force has to do is provide the pilots. BAE Systems does everything else, and probably owns the aircraft also.

Exercise – It is always worth illustrating the ideas in operations and process management with reference to not-for-profit organizations. Charities, local government organizations and particu-larly health care services (although some of these are private) provide a wealth of examples. For example, try asking the students to contrast an accident and emergency (A&E) department of a hospital with a unit that specializes in cosmetic surgery. The former has to cope with very high variety, high variation and high visibility. Demand is relatively unpredictable and it must pro-vide fast and responsive service (relatively at least, it would be measured in minutes and hours rather than weeks and months). The cosmetic surgery unit, by contrast, may still have high vari-ety but, because patients are more able to wait, it is unlikely to have very high variation. Because of this, the process can be planned and scheduled in advance, so there will be far higher utilization of the process’s resources.


C H A P T E R 2

Operations strategy

Introduction

Think carefully before even including this chapter in any course in operations and process man-agement. Clearly, it is a vitally important issue for any practicing operations manager, but operations strategy is a large, and to some extent separate, topic. It is not easy to cover such a topic briefly. Also, sometimes students can be confused by the distinction between operations strategy and operations management. This is partly because there is not such a clear separation between operations management and operations strategy as we sometimes imply. In the opera-tions area especially, we need to include the accumulated learning that comes from day-to-day management of operations resources. This is why Chapter 2 includes both the bottom-up per-spective and the operations resource perspective. Notwithstanding the difficulties, if it is decided to include a session on operations strategy (usually towards the beginning of the course), we have found it best to treat it as a backdrop to the main thrust of the course.


• To convince students that operations management is not always operational. Although most of the book does deal with the more operational aspects of the operations functions’ activi-ties, operations managers have a very significant and strategic role to play.

• To show students that there is a progression of operations excellence (using Hayes and Wheelwright’s nomenclature) from Stage 1 to Stage 4.

• 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 which 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’).

• To stress the importance of how the operations function sees its role and contribution within an organization to students (‘… 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 deliv-ered 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 functions 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 …’).



• 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 operations being developed to support markets, or markets being sought that allow operations capabilities to be leveraged, does not matter. The important issue is that there should always be a connection between the two.


The exercises described here do not include the Case study at the end of each chapter, or the Active cases that are included in the chapter sections of the CD that accompanies the book, or the Additional Case exercises included in this instructors manual.

Again, there are several cases in the companion volume to this book (Johnston, R. et al, 3rd edi-tion, ISBN 0273 65531-0) that can be used to support this lesson. If not already used, the ‘Concept Design Services’ case is ideal as is the Indian Metals Corporation case.

Exercise – Putting the four-stage model into practice.

Teaching the importance of the strategic role of operations using the Hayes and Wheelwright Stage 1 to Stage 4 model is best done (we have found) by relating it directly to the students’ ex-perience. We have found it difficult to use this model within a case study. Any case study that incorporates all the relevant information would be excessively long. Instead, try the following exercise.

When Hayes and Wheelwright first proposed their four-stage model, they probably meant it to be a broad-brush conceptual tool whose main point was to demonstrate that operations should think about the extent of their contribution to the company’s competitiveness. However, it can form the basis of an analysis tool that can be used by companies to calibrate themselves in terms of where they fall on the 1 to 4 scale. One way of doing this is to deconstruct the elements of how Hayes and Wheelwright describe each stage. Their descriptions mainly cluster around four issues, namely,

• the way the operations relates with its external customers and the way it manages its internal customer relationships;

• the degree to which it has an understanding and knowledge of its operations practices;

• the way it links operations processes and resources with competitive strategy, and

• the degree of innovation shown within the operations function.

The table ‘At what stage is your operation?’ fleshes this idea out. It takes each element and at-tempts to describe the nature of each as they progress from Stage 1 through to Stage 4. So, for example, in terms of relationship with internal and external customers, Stage 1 operations are continually managing crises, Stage 2 operations are concentrating on establishing appropriate performance monitoring systems, Stage 3 operations are using the performance monitoring sys-tems as a basis for improvement, while Stage 4 operations are exploring new ways of



developing internal and external relationships through an in-depth understanding of internal and external customers and suppliers operations.

Choose an operation with which you are familiar and, using the table ‘At what stage is your op-eration?’ try to judge whether your operation is at Stage 1, 2, 3 or 4.

Hints for students

Think about how you judge the boundary of what you define as ‘the operation’. If you draw the boundaries too widely, for example, choosing the whole of Unilever plc or the entire Port of Rotterdam, you might find it difficult to generalize. Different parts of these large macro-operations may be at very different stages. Choose an operation that serves a relatively clearly defined set of customers with a reasonably coherent set of resources.

Remember the table is not a precise instrument. It is intended as a very rough guide to illustrate approximately where the organisation’s state of practice is likely to be at each stage. You may have to approximate.

STAGE 1 STAGE 2 STAGE 3 STAGE 4

Rel

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p w

ith in

tern

al a

nd e

xter

nal c

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mer

s

Frequently lets down internal and external customers (who regard them as frustrating their own improvement efforts).

The operation spends much time rectifying the results of its own failures.

Crisis relationship

The operation’s performance meets the minimum stan-dards expected by internal and exter-nal customers.

The operation only rarely lets down customers but adds little of posi-tive value.

Performance monitoring relationship

The operation starts to exceed customers’ expectations.

Frequent discus-sion with internal and external cus-tomers as to the appropriateness of performance stan-dards.

Joint planning of continuous improvement of performance with customers.

Improvement of relationship

Operations understand the needs and expectations of customers and exceed them.

Continual exploration of novel operation practice linked to customers’ future needs.

Creative relationship



STAGE 1 STAGE 2 STAGE 3 STAGE 4 U

nder

stan

ding

of o

pera

tions

pra

ctic

e

Relatively little exchange of ideas with other internal operations.

Operations man-agement have little knowledge of al-ternative ways of designing and run-ning their type of operation.

Operations staff are rarely included in discussing the incorporation of outside ideas.

Little knowledge of what makes the operation tick.

General dissatisfaction with operations practice

Regular exchange of ideas and performance with other internal operations within the organization.

Other similar ex-ternal operations used to provide benchmarks of performance and practice.

Operations staff consulted on suitability of outside ideas.

Process knowledge allows deviations from standard to be monitored.

Trying to position appropriate operations practice

Operations management takes on a facilitator role in helping other internal operations.

Operations staff are concerned with how to adapt external ideas in order to make them more appropriate.

Process knowledge gives the ability to control performance.

Continuous improvement of operations practice

Operations monitor external environ-ment to predict their future market conditions, labour and technology requirements.

Process knowl-edge gives the ability to predict behaviour under novel conditions.

Operations take responsibility for reshaping competencies and expectations of whole supply network.

Forward looking operations practice



STAGE 1 STAGE 2 STAGE 3 STAGE 4 Li

nks

with

com

petit

ive

stra

tegy

Most people in the operation are not aware of the role of their operation within the organiza-tion and its objectives.

Operations manag-ers find difficulty in identifying the trade-offs that they are required to manage.

Simplistic but little understood objectives

Operations man-agement is aware that appropriate operations per-formance will differ in different opera-tions, but is unclear how to change op-erations practice to reflect different ob-jectives.

Performance trade-offs are known, but there is no clear idea of how to overcome them.

Starting to focus on key objectives

All operations staff understand the relative importance of operations objec-tives and can debate their implications.

Key performance trade-offs are identi-fied and improvement strate-gies put in place to overcome them.

Clear explicit link between strategy and operations practice

Operations have taken a leading role in shaping competitive strategy.

Operations are seen as the prime source of the capabilities that competitors find difficult to imitate.

Performance objectives are trading-off at a significantly higher level than competitors.

Strategy driven by unique opera-tions capabilities

Inno

vatio

n w

ithin

the

oper

atio

n

Operations man-agement sees responsibility for innovations as be-ing outside the operation.

“We could do much better if it wasn’t for the others in the organisation”.

Operations are creative only in try-ing to fix the worst problems.

"Band Aid" capabilities

Operations man-agement does take on full responsibility for implementing new ideas and ex-hibits flexibility and creativity in getting things up and run-ning.

Only minor tinker-ing with methods rather than devel-oping entirely new approaches.

Project manage-ment capabilities

New approaches to operations practice developed from within the operation.

New approaches are based on a sound understand-ing of the skills needed to meet market needs and to work within re-source constraints.

Interpreting strat-egy to operations capabilities

Operations at the forefront of changing the rules of the game.

Innovations timed to give maximum competitive advantage.

Learning to net-work capabilities

If possible try to do this exercise with your colleagues or others who know the operation under analysis, after you have thought through it yourself. You can then compare your perceptions with those of others who are looking at the same operation. Do not be surprised if you find a wide range of perceptions!



Notes

Obviously there is no set answer to this exercise. Different operations will take very different positions on the Stage 1 to Stage 4 scale. Furthermore, as we implied earlier, individuals judging the same operation will nonetheless have different perceptions. It may be that you will have scored your operation at different stages for different issues or even for different points. The process of marking this table could also throw up inconsistencies. For example, under the head-ing of ‘Understanding of operations practice’, it became evident that although the company had started benchmarking themselves against other external operations, they had failed to discuss issues within their own company or even to consult their owns staff as to what aspects of prac-tice seemed to work and what did not seem to work.

Teaching hint – Teaching the nature and importance of the various performance objectives can be done in two ways.

One can look at each performance objective in turn using examples of where the particular per-formance objective has a special significance. So, for example,

• Quality – Use companies (like Bentley or Toyota) that have a reputation for quality prod-ucts 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 in hospital blood testing.

• Speed – Any accident, emergency or rescue service is useful to discuss here. The conse-quences 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 overnight courier services. Like-wise, 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 de-livery 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 in through the door next. The obvious example would be a be-spoke 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 while 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 al-lows 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 the services they offer.



Alternatively, use one or more of the extra case examples and draw out what each performance objective means for each example and which are the more important ones and why.

Teaching hint – Try establishing the market–operations link by referring to organizations fa-miliar to the students. Even the ubiquitous McDonald’s can be used (in fact, there is a very good case on McDonald’s operations in the Harvard Business School series; contact The Case Clear-ing House for details). The important issue, however, is to raise the focus of discussion from managing a single part of the organization (such as a single McDonald’s store) to managing the operations for the whole of the organization (e.g. what are the key operations strategy decisions for McDonald’s in the whole of Europe?). The discussion can then focus on the difference be-tween the two levels of analysis. Especially, the discussion can 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 organization as a whole (such as, what level of service and costs are McDonald’s franchise holders expected to work to?).

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?


C H A P T E R 3

Supply network design

Introduction

One of the more important points made in Chapter 1 of the text is the idea that operations and process management can be analysed at three levels, the level of the supply network, the level of operation itself, and the level of individual processes. Chapters 3, 4 and 5, more or less fit this model. Certainly, Chapter 3 is concerned with the design decisions relating to supply networks. Chapter 4 (Process design – positioning) concerns the design of individual processes, but from a relatively organizational level. Chapter 5 very much concerns the more detailed design deci-sions at a process level. It may be worth pointing this out when teaching this topic, if only to give students a sense of the different levels at which they will be working. Because this chapter deals with the most strategic of these three levels, many of the issues are also strategic. Indeed, if time is short on a course, and if it is not wished to teach the more strategic issues related to operations management, then, this chapter may be one candidate for omission.

The chapter covers three strategic decisions (supply networks, location and long-term capacity strategy) which are dealt with together under a general heading of network. The logic of this is important to the way it is taught. We have found it useful to describe the supply network as the highest, or most macro, level of the process design task. Configuring a supply network is, in many ways, similar to deciding which individual units of a process go where on the shop floor. The decisions are: how material, information or customers should flow between the units, where should each unit be, and how big each unit should be. Configuring a whole supply network in-volves similar decisions, but on a very much larger scale. Of course, the complicating factor is that when we are designing an operation or a single operations process we generally have con-trol of all the elements in the process, whereas we only have partial influence over much of the supply network. Nevertheless, the two tasks, one macro the other micro, are conceptually very similar.


• To establish the idea of supply networks.

• To describe vertical integration as the extent to which a company wishes to own parts of its supply network.

• To identify the main factors on the location decision.

• To stress the importance of the timing and extent of capacity change on the performance of the operations function.




The exercises described here do not include the Case Study at the end of each chapter, or the Active cases that are included in the chapter sections of the CD that accompanies the book, or the Additional Case exercises included in this Instructor’s Manual.

Again, there are several cases in the companion volume to this book (Johnston, R. et al, 3rd edi-tion, ISBN 0273 65531-0) which can be used to support this lesson. The ‘Norrköping Plant (A) and (B)’ cases are ideal.

Teaching hint – We have found that one of the most important points to come out of this chap-ter is an understanding of the whole concept of a supply network. Because of that, we tend to spend more time on this issue than on the others. One method of achieving this is to lead a dis-cussion 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 down-stream in the supply network, one can work for the consumer directly, or, assuming that the restaurant supplies events such as dances and weddings, for the wedding organizer and then for the ultimate consumer.

Teaching hint – Try tracing the development of a supply network over time. An ideal one is that of 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 al-bums 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 – The chapter contains an example of the BBC outsourcing its technology division. Divide the class into groups and ask half of them to prepare an argument in favour of outsourc-ing this department, and the other half to prepare a case arguing against outsourcing this department.

Exercise – One of the opening examples is Dell. 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 indus-tries as they 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.

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 sta-dium or a museum. The class can then be led through the criteria that 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 would you do to make the area more attractive?’

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 as-sume that location is being chosen primarily on the grounds of minimizing 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 res-taurants 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.


C H A P T E R 4

Process design 1 – positioning

Introduction

A number of issues are covered in this chapter. It is possible to cover these issues under other headings. The whole chapter deals with volume–variety and its influence on process design, in particular, its influence on process layout, process technology and job design. But these three topics could be treated separately within the overall framework of design. Also, some tutors find it useful to start out on the design part of an operations management course by having a separate lesson on design treated in general terms. This is because many students have never thought about design outside its narrow product design meaning. It is important therefore to convince them of the importance of treating design as a broad operations management activity, one that applies as much to the design of processes as the design of products and services.

This chapter includes what is a vital part of any operations management job, the role of people and human aspects of operations management. If anything, our textbook (like most in the area) devotes far too little time to the human aspects of operations management. This is not because we do not think it to be important. On the contrary, we understand that it is at the heart of any practical treatment of operations management. However, most colleges and universities do not exhibit the degree of multi-skilling and flexibility, which is described in the chapter itself. Often there are colleagues in the Organizational Behaviour or Human Resource Management areas who devote whole courses to this sort of subject. Often a typical operations management course is left to deal largely with the more technical and methodological aspects of organizations. However, notwithstanding the fact that these issues may be treated elsewhere in any pro-gramme, we are firmly of the view that no operations management course is complete without some treatment of job design and work organization.


• To convince students of the broad relevance of the design issue to processes as well as products and services.

• To stress the importance of volume and variety in design.

• To introduce the concept of process types.

• To describe the basic layout types in terms of the nature of the flow through the process.

• To stress that most real layouts are hybrids of the pure types.

• To overcome the reluctance of some students to consider process technology as anything other than what technical people do.



• To establish the three generic dimensions of technology:

(a) Automation;

(b) scale (or scalability);

(c) coupling (or connectivity).

• To stress the importance of the human contribution to operations and process management.

• To demonstrate how the same job can be designed in very different ways.


The exercises described here do not include the Case study at the end of each chapter, or the Active Cases that are included in the chapter sections of the CD that accompanies the book, or the Additional Case exercises included in this Instructor’s Manual.

Again, there are several cases in the companion volume to this book (Johnston, R. et al, 3rd edi-tion, ISBN 0273 65531-0) that can be used to support this lesson. ‘Cadbury World: ten years of improvement’ is an ideal case.

Teaching hint – We have found it useful to discuss design in general terms for related products, processes and services so that students can understand how design applies to all three. For ex-ample, start by discussing the nature of design for a television. Ask, ‘What do we mean by the design of a television?’ Students will suggest such things as the overall shape and purpose of the set, its functionality, the components that go into the product, the way the components are con-nected together, and so on. After that, move on to the design of the factory that makes television sets. Again, ask, ‘What kind of decisions will need to be made around the design of the factory that makes the TV sets?’ Students will suggest a very similar set of issues such as what is the overall purpose of the factory (in terms of its performance objectives), what machines (compo-nents) will need to be included within the factory, how are these connected together (in other words, what is the flow between the machines), and so on. Finally, describe a company that in-stalls sophisticated television and home movie equipment into (rich) people’s homes as a service. In designing this service again, ask, ‘What decisions need to be made in the design of this service?’ Students will usually suggest things like the limits that define what the service will and won’t do, the exact range of equipment they are willing to install, the range of services they offer (including after sales maintenance and so on). They may even understand that the service needs to be able to link different parts of its business together such as purchasing the equipment, installing the equipment, invoicing for payment, and so on. By doing this for a product, a process and a service, one can highlight the similarities in the design process.

Teaching hint – We find it useful to encourage students to identify operations with which they are familiar (libraries, shops, restaurants, etc.) and try and classify them as being close to one of the pure layout types. Discussions can then centre on how the layout of the operation could be changed to make its flow more or less continuous. The most commonly cited example is a res-taurant or eating area within the college or university. Discussions here could involve how to make it more assembly line-like, or more fixed position-like.

Teaching hint – Try discussing with the students how their layout and organization might change for a simple task such as making a sandwich, as volume and variety change. For exam-ple, ask the question, ‘If you were making a sandwich for a friend, how would you do it?’ The



discussion would then centre on the kind of sandwich they want (limited only by the availability of ingredients in the kitchen), when they wanted it (it could be made to order), and how much it could be customized (more salt and pepper?). Then ask, ‘If you were making sandwiches for a whole group of friends who were due to arrive in an hour’s time, how would your process change?’ (You would butter all the bread together, standardize the products to some extent and so on). Then ask, ‘If you were making 5000 sandwiches a day for a supermarket, how would you wish to organize the production system?’ (Assembly line process, etc.)

Teaching hint – The idea of combinatorial complexity is an important one to get across when dealing with process layouts. Many students do not understand how this works. A good demon-stration is to find someone in the class with a (floating point) calculator, get him or her to punch in factorial 30 (30!). Then say, ‘Supposing that a computer could evaluate and store the details of (say) 10,000 alternative layouts per second. Divide the number factorial 30 by 10,000 for the number of seconds it would take, divide that by 60 for the number of minutes it would take, di-vide that by 60 for the number of hours, etc.’. The resulting figure will still be very large. This is why generally good sub-optimal solutions are sought rather than purely optimal ones.

Teaching hint – 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 stu-dents that the changing capabilities of process technologies can open up new opportunities for operations. We find it useful, therefore, to concentrate on newer forms of technology and then try and get students to think through the implications of adopting them. In doing this, it is useful to try and identify new technologies that have not yet been fully developed. For example, secu-rity systems are starting to use scanners that take a photograph of a person’s iris in order to verify their authorization 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 (say) manufacturing 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 that 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.

Exercise – Write a list of different operations (restaurant, cinema, road side rescue service, bank, etc.) and get the students in groups to answer the following questions:

(a) What process technologies are used in these operations?

(b) What advantages does the process technology bring to the operation itself and its custom-ers?

(c) How might recent changes and innovations in process technology affect the way these op-erations use their process technology?

(d) What criteria do you think these operations would use to decide whether to invest in new process technology?

Teaching hint – 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 manag-ers in several businesses of the widespread adoption of fuel cells in cars?)

Exercise – Ask students to have a discussion on the impact of MP3 compression on record re-tailing operations. Discuss whether this is only a threat to record retailers or whether they could harness the technology in some way. Also, ask them to identify what may happen in terms of



business opportunities that could be exploited, and what new operations and process capabilities could be needed.

Alternative – Find an article from the press or from a website (there are usually several pub-lished every month), and get the students (in groups) to discuss what new operations and process capabilities could be needed.

Exercise – Send students to some part of the college (or into a town) where they can observe people working (eating place, bar, library, etc.). Ask each group to hold a discussion on some aspect of the jobs they observed. For example,

• What skills were needed?

• Was the job divided up between individuals?

• Could it be done on a team basis? How could individuals be motivated to do the job better?

• How much room for autonomy is there in the job?

• What aspects of job flexibility are likely to be important? And so on.

Exercise – One session that always proves popular on our courses is to get a team of around four people at the front of the class performing a repetitive job. We use polystyrene drinks cups with plastic lids, drinking straws and papier-mâché drinks trays. So, for example, one person could put four cups into the tray, pass the sub-assembly along to the next person who puts the lids on, this is then passed on to the third person who takes the straws out of their paper wrap-pers and inserts four straws into the cups, passes it onto the fourth person who carries the individual tray to the other side of the room and returns, etc. While this is going on, get the re-maining students in groups to time how long each product is taking to be produced. Also, give them the task of devising work standards, a suitable payment system, and suggesting any im-provements. After the job has been performed for three or four minutes, stop the workers at the front (but keep them at the front separate from the rest of the class) and allow the syndicates to devise standards, payments systems and improved work methods. Keep the workers sitting at the front while this is happening. After 10 or 15 minutes, lead a discussion on how the job could be improved. If necessary, some of these improvements could be incorporated into the job and the whole process repeated. It is our experience that, in nine out of ten times when this simula-tion is performed, no one in the class asks the workers who have been doing the job what they think. After a while, point this out to the rest of the class.


C H A P T E R 5

Process design 2 – analysis

Introduction

The analysis of processes is a challenging subject to teach. Some students find the detailed cal-culations involved a little difficult. The topic is extremely important, and can be made interesting. More than that, many of the ideas contained within this chapter such as balancing, process mapping, and especially Little’s Law, are exceptionally useful. Students need to be con-vinced that although some aspects of the topic may look daunting to those who are ‘mathematically challenged’, (a) none of the techniques involved any type of higher mathemat-ics, but only basic arithmetic; (b) once mastered they are, in fact, relatively simple; (c) the ideas are fundamental to harnessing the power of effective process management.

Throughout the book, we have made an attempt to include processes outside the operations function. This is particularly important in this topic. Any examples used in class that come from human resources process, or marketing and sales processes, or finance and accounting proc-esses, etc. can have the effect of convincing students of the importance of process management in their own functions. As tutors, if we can overcome that hurdle we have gone a long way to-wards helping students to unlock the full value of operations and process management.


• To convince students of the broad relevance and importance of the details of process design.

• To establish the idea that detailed process design must be connected to the overall objec-tives of the operation.

• To identify the “micro” process performance objectives and process design factors.

• To give experience in simple process mapping.

• To establish the advantages and disadvantages of series and parallel process configurations.

• To establish the idea of process balancing and bottleneck elimination.

• To introduce Little’s Law as a fundamental law of operations and process management.

• To demonstrate the effect of variability on process performance, especially in terms of the relationship between process utilization and waiting time.




The exercises described here do not include the Case study at the end of each chapter, or the Active cases that are included in the chapter sections of the CD that accompanies the book, or the Additional case exercises included in this Instructor’s Manual.

Again, there are cases in the companion volume to this book (Johnston, R. et al, 3rd edition, ISBN 0273 65531-0) that can be used to support this lesson. For example, the case, ‘Denby Constabulary’ by Andrew Greasley can be used here. Although there is little quantitative infor-mation, the idea of process mapping is established.

Teaching hint – We find that it is usually best to start with a case describing a service rather than manufacturing. This is because service design almost always includes both the design of the process and the design of the service product.

Exercise – Some students may question the necessity for detailed process mapping. In practice, of course, mapping is necessary to discover what is really happening in a process. The impor-tance of recording the process in the form of a process map reduces any confusion or ambiguity about the process. One way of demonstrating this is to show the figure below for a limited amount of time. Prior to doing this, tell the students ‘I’m going to show you a figure for 20 sec-onds. Your task is to follow the instructions on the figure’. Then show the figure (but not for more than 20 seconds) and ask them for the answer.

You will generally get a whole range of answers. Make no comment at all about which was right or which was wrong. That is not the point of the exercise at all. After you have found the full range of answers simply nod, say thank you and carry on with your next point. Sooner or later (usually sooner) someone will ask, ‘What was the right answer?’ Point out that there is no right answer. The instructions actually said, ‘How many squares do you see in this figure?’ The issue is, ‘how many squares do you see’. The fact that everybody saw a different number of squares emphasizes the need for establishing an agreed set of details about a process in the form of a process map. Otherwise, we all see the process in marginally different ways.



How many squares do you see?How many squares do you see?

Exercise – Obtain some simple stop-watches (electronic stop-watches are now relatively cheap – it is worth investing in some!) and allow students to time jobs. For example, get someone in front of the class doing a simple task (dealing a deck of cards into four piles, opening and pack-ing a box, emptying sweets out of tube and putting them back again, etc.). Get the students to time several repetitions of these tasks and demonstrate how much variation there is in the time taken to perform the task at each repetition. Also, prompt a discussion on how the exact specifi-cation for the job would need to be agreed before any time estimate was fixed. Discuss the boundary between defining a job (to ensure quality standards, safety, etc.) and allowing operators to adopt their own improvement ideas (to promote continuous improvement, motivation, etc.).



Exercise – The use of table-top experiments, as Gilbreth called them, can be particularly effec-tive when teaching process analysis. One of the simplest is described below:

Step 1 – Divide the students into pairs (or small groups depending on the class size). Make sure that one of them has a watch with a second hand on it (alternatively, buy some cheap stop-watches and give them out one to a group). Give the class some previously cut or torn up pieces of paper. Tell the class that you are going to give them 20 letters that one of the group must re-peatedly write on the small bits of paper.

Then, write the following letters up on the board.

O P E R A T I O N S

M A N A G E M E N T

Ask the students to time the person who is repeating the task on the different bits of paper. At this point, it may be as well to establish the fact that you will be walking round and rejecting any products that do not meet quality standards. Get the students to plot the learning curve as they improve over time and debate with them the reasons for performance (i.e. the time they take for each product) variation.

Step 2 – Tell the class that you are a consultant who has been hired by this company and have managed half the total work load for this task. Tell them that for the next round they only have to write 10 letters instead of 20. These letters are as follows:

O E A I N

M N G M N

You can point out that these letters are the words operations and management with every other letter missed out. Ask the groups to repeat the exercise. It is important at this stage that you tell them that the person writing the letters cannot copy from any template, nor should he or she be able to see the products once they are completed (otherwise they can copy). Again, get them to plot their times. Generally, the times for doing these tasks will be higher than for the larger task. Discuss with them why this should be. Debate issues of task complexity and routine as determi-nants of the actual amount of work in any task.

Step 3 – One can repeat this exercise again but this time writing operations management back-wards as below.

S N O I T A R E P O

T N E M E G A N A M

You will find that some people are better than others at doing this. This can lead to debates about natural ability and skill levels. Also, a useful discussion can be promoted on how we cope with individuals of varying abilities within a single process.

Teaching hint – We have found that the issue of series and parallel process configurations (or long-thin versus short-fat processes as we also call them in the text) is something that students respond well too. The Weldon Hand Tool exercise (described in the section of additional cases exercise) is excellent at demonstrating this, especially if one is willing to invest in two or three



of the products that can be taken apart. However other, simpler (and cheaper) products such as electrical plugs could also be used to demonstrate the same issue.

Teaching hint – There are many games and exercises available that can be used to demonstrate the reality of process behaviour and the issues that must be tackled in process design. Most of these involve students being formed into teams with a set task to perform. Sometimes this can be a series of arithmetic calculations (useful if many of the students come from financial ser-vices). Others involve making simple greetings cards. More complex games may involve using constructions toys such as Lego. Generally, one can find a colleague who has some experience of these games. However, do not dismiss the idea of making one up yourself. Sometimes it is better to have confidence in one’s own game than go through a (sometimes embarrassing) learn-ing curve with a game that you have copied from someone else.


C H A P T E R 6

Product and service design processes

Introduction

This can be a fun session. All students have bought products and all students have experienced service. 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. Bringing two or three types of the same type of product into the class and prompting a discus-sion around the design issues involved is an obvious starting point to discuss design. Similarly, comparing similar but different services that students would have experienced is a possibility. The main purpose is to clearly establish that there are many different alternative designs for any product or service and that the nature of the design chosen has a very powerful impact on the operations function that it has to perform.


• To convince students that product and service design is such an important issue in terms of its impact on operations management, and that it should be treated within operations man-agement.

• To establish the importance of design in competitive success.

• To establish the fact that the design of services is just as important as (probably more im-portant than) the design of products.

• To emphasize the process nature of product and service design (‘All operations are proc-esses which produce some mixture of goods and services. Within any organization, some of its processes will be producing designs for their own products and services. Therefore, product and service design is an operation like any other’.)

• To examine the overlap between design of products and services on one hand and the design of the processes which produce them on the other.

• To establish some of the general issues in the design process, such as the way design proc-esses start with a large number of options and finish with a single selected design, the importance of creativity in the design process, the importance of evaluation (using the crite-ria of feasibility, acceptability and vulnerability), the use of simulation in design, the increasing importance of environmental issues and so on.

• To take the students through the various stages of the design process while at the same time stressing that describing a process in this way is a great simplification of reality.

• To demonstrate the benefits of interactive design.





Again, there are several cases in the companion volume to this book (Johnston, R. et al, 3rd edi-tion, ISBN 0273 65531-0) that can be used to support this lesson. ‘Cadbury World: ten years of improvement’, is ideal for service design and ‘The development of the Hovis Crusty White Loaf’, is great for product design. Also, ‘The Reltex Project’ can be used to illustrate the (often irrational) dynamics of the development process.

Also, although rather old, we still make extensive use of the Harvard Business School case ‘Benihana of Tokyo’; it is still a great example of the nature of service design.

Teaching hint – An alternative to the Benihana case, which still uses the same idea, is to get students to visit a restaurant, shop or tourist attraction and identify for each the ‘concept’, the ‘package’and the ‘process’.

Teaching hint – One of the study activities in the chapter suggests that students can visit the website of the UK’s Design Council (www.design-council.org.uk). This is a great source for examples of good design. Examples and ideas picked up from the site can make excellent illus-trations in class and bring a lesson to life.

Teaching hint – This issue of sustainability in design is always worth discussing. It may also serve to catch the interest of students (not all of them, admittedly). 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 exercises.

Exercise – Identify a television programme that is reasonably well known and can be viewed by all students. Ask them to view the programme and then, in groups, prepare a presentation that deals with the design of the programme. Also, ask them to recommend how the design of the programme could be improved. This is a useful exercise because it encourages students to think about design in a very broad context. Design of a television programme includes not just the appearance of the programme but the way it is structured, the way it has been broken into vari-ous parts, the way it can be supported through its website, and so on. Get them to use the feasibility, acceptability and vulnerability framework to evaluate whatever improvements they recommend.

Exercise – Quality function deployment can be relatively complex to use in practice. However, a simple exercise is to choose a service (services work better than products for this exercise) and ask the students to draw up a QFD matrix for it. An obvious service is the course on which the students are registered. Try to guide students into distinguishing clearly between the ‘whats’ (what you want the service to achieve) and the ‘hows’ (the design factors that can be manipu-lated in order to achieve the service’s objectives).

www.design-council.org.uk

www.cfsd.org.uk



Exercise – Bring in alternative designs for a product with which the students will be familiar. We tend to use food products for this because they are cheap and easily recognized. For exam-ple, bring in two or three boxes of chocolate assortments and prompt a discussion on the design choices that need to be made. Use the three criteria of aesthetics, usability and producibility. The other advantage, of course, is that the chocolates can be consumed!

Teaching hint – There are plenty of opportunities to use video clips in this subject. In fact, there are several programme broadcasts on the design process itself, but, even if these are not available find a video clip that shows a product or service and then base an exercise around that.


C H A P T E R 7

Supply chain management

Introduction

The great advantage of teaching supply chain planning and control is that it has become a hot topic in business generally. Most people would have heard of it, even if they don’t know exactly what it means. The positive side of this is that there is no problem in engaging students’ atten-tion, or in finding examples of effective and ineffective supply chain management. The downside is that some of the issues are subtle, or strategic, or complex, or all three. Perhaps the most important objective of any session in supply chain planning and control is to convince stu-dents that supply chain management is not just about the movement of materials, or just a fancy term for logistics, or something that only applies to manufacturing, or something that is merely fashionable. Supply chain management is, in some ways, about a fundamental change in how we see the role of operations. It really is about integrating a suppliers’ operation with a custom-ers’ operation. In fact, it changes the nature of trading. In executive education, we now spend much of our time teaching operations management ideas to sales and marketing people! Mainly because of a supply chain perspective, they are beginning to understand that they cannot sell effectively to their business customers if they do not understand their customers’ operations. They therefore need the skills of operations management analysis to answer the fundamental question of how their operation can help their customers’ operation to be more effective.


• To demonstrate the ubiquity of supply chains in business.

• To demonstrate how an effective supply chain management has a major impact on the prof-itability of all businesses.

• To clarify the sometimes mystifying collection of terms contained within supply chain man-agement, such as logistics, materials management, and so on.

• To establish the idea of different types of relationships that can exist between pairs of opera-tions within a supply chain.

• To demonstrate the natural dynamic behaviour of supply chains over time.


The exercises described here do not include the Case Study at the end of each chapter, or the Active cases that are included in the chapter sections of the CD that accompanies the book, or the Additional case exercises included in this Instructor’s Manual.



Again, there are several cases in the companion volume to this book (Johnston, R. et al, third edition, ISBN 0273 65531-0), which can be used to support this lesson. ‘Cadbury World: ten years of improvement’, is ideal for service design, ‘The Chicken Run – The poultry supply chain case’, is great for this topic.

Teaching hint – One of the most useful examples that we use to point out some of the issues in supply chain management is that of Benetton. There is a case exercise included in this Instruc-tor’s Manual, but there is also a Harvard case that is good, but now somewhat dated. There is also an accompanying video from the Case Clearing House, which is likewise dated. However, parts of the video can be used in class to illustrate some aspects of the Benetton supply chain. Similarly, you can use the case as background material for yourself and explain the way the Benetton supply chain operates. The model answer can be handed out at the end of the session. In fact, the questions used at the end of the box are the ones we use to lead the students through discussion of the company. The important point to stress is how the three stages in the supply chain fit well together. The individual retail stores are relatively efficient little units that carry limited stock and therefore rely on fast and dependable delivery to avoid stock-outs. This means that the distribution system has to be fast and dependable, which in turn means that the manu-facturing and supply system has to be itself fast and flexible. This flexibility is given partly by the ‘dyeing in grey’ process used in the factory. The lesson being not that Benetton’s supply chain is the single best way to run any supply chain, but rather that it fits together. Increasingly, the opportunities in supply chain management lie at the boundaries between operations.

Exercise – The role of the Internet in all supply chain management, but particularly the purchas-ing activity, is a useful and interesting topic to investigate. Find different supplier interfaces by searching the websites of retail companies, choose a supplier interface, and ask the class (in groups) to draw up a list of advantages and disadvantages (from both the supplier’s and the cus-tomer’s perspective) of such mechanisms. The Tesco Information Exchange is one such interface. It is also a useful example to encourage debate. In addition, there is a useful website that the students can explore (www.tesco.co.uk/information). The frequently asked questions and answers on this website provide the basis for a good discussion. Or, use the Boxed example below.

The Tesco Information Exchange (TIE).

Tesco is one of Europe’s largest supermarket chains. In 2000, in an attempt to form closer partnerships with its suppliers, as well as improve the effectiveness of supply chain coordination in its stores, Tesco launched the Tesco Information Exchange (TIE). Devel-oped in conjunction with GE Information Services, the TIE is an extranet solution (i.e. it is based on Internet technology) that allows Tesco and its suppliers to communicate trading information. It is linked to a number of Tesco’s internal information systems in order to give suppliers access to relevant and up-to-date information. This includes EPOS data, sales tracking and an internal directory so that suppliers can quickly and easily find the right person to talk to.

Although the system was trialed initially with Tesco’s larger suppliers, such as Proctor and Gamble, Nestlé and Britvic, it was designed to be used by all suppliers, including the smallest. Security is important to the TIE. Because it uses Internet technology to ensure low cost access for its small suppliers, it is important to provide security through such de-vices as firewalls and passwords. Suppliers must also be confident that their own affairs are not visible to potential competitors. Suppliers only have access to data relevant to their own trading area.

www.tesco.co.uk/information



Information flows both ways in the system. Collaborative initiatives such as price dis-counts and other promotions can be planned jointly; tracking the progress of a sales promotion and evaluating its effectiveness can minimize stock-outs and reduce produc-tion waste. It is this immediate visibility of data that helps in supply chain coordination. One experience by Proctor and Gamble, the consumer goods manufacturer, illustrates this:

‘During the trial we spotted that the demand for one of our lines had reached 8000 units after two days, compared with an original forecast of 10,000 units for the whole week! As a result we were able to respond and increase depot stock at short notice. This resulted in a joint business gain of around £50,000 – and more importantly, we avoided disap-pointing some 15,000 shoppers’.

Exercise – The increasing importance of customer oriented Internet-based trading (B2C) pro-vides a good discussion point to demonstrate the importance of supply chain management in order fulfilment. Get students to look at examples of websites (Amazon, etc.) and then discuss the implications of this way of retailing on the whole supply chain.

Exercise – Ask the students to use Table 7.2 in Chapter 7 to work through the arithmetic of sup-ply chain fluctuations. A blank table is included in the PowerPoint slides for this chapter. Put on the OHP and work through it with the students. By getting them to calculate exactly how much needs to be produced at each stage in the supply chain during each period, they can get an idea of the amplifications in activity levels. This is increasingly referred to as the ‘bull whip’ effect.

Exercise – Supply chain dynamics also lends itself to simple gaming. Just separating groups of students into teams, each of which is a stage in the supply chain, imposing rules around order lead-times and inventory levels, and then changing demand at the end of the supply chain can lead to a very vivid example of the bull whip effect. The well-known ‘Beer game’ is an ideal example of this type of game. (Just search for ‘beer game’ using a search engine.)


C H A P T E R 8

Capacity management

Introduction

This is one of the easier topics in operations management to teach. First, it is an issue that quite clearly is important to all the different types of operations. This means that it is relatively easy to find examples with which to stimulate the class. Second, it is not difficult to persuade the class that it is a very important issue. They have all had experience of queuing because capacity cannot meet demand at banks, restaurants, etc. They can also usually appreciate the problems of excess capacity where machines are lying idle and people are underutilized. Third, there are a number of very clear approaches to managing capacity in the medium-term, which have easily articulated advantages and disadvantages. Because of this, it is not difficult to promote debate. Fourth, the issue has an interesting ethical dimension in terms of whether the use of temporary labour and part-time contracts is ethically acceptable. All of this makes it a joy to teach!


• To convince students of the ubiquitous nature of capacity management, especially in terms of its contribution to planning and control.

• To point out the importance of aggregating capacity and demand, while at the same time illustrating the accuracies that aggregation brings into the process.

• To clearly identify the alternative approaches to capacity management, together with their advantages and disadvantages.

• To explain that capacity management is a dynamic activity, where learning is vital if the activity is to be improved.



Again, there are several cases in the companion volume to this book (Johnston, R. et al, 3rd edi-tion, ISBN 0273 65531-0), which can be used to support this lesson. ‘Cadbury World: ten years of improvement’, is ideal for service design. ‘The Mandexor Memory and Holly Farm’ cases are great for this topic.




Teaching hint – For classes were the students are (or have been) in employment, try starting a class by asking any student, ‘What is your capacity?’ First, there will be discussion on what measures to use to best represent capacity. Then, there will be discussion about the ‘it depends’ issue, that is, the assumptions regarding capacity (‘For how long do I have to maintain this ca-pacity? What mix of products/services am I expected to produce? Do you expect me not to reduce the quality of service I give?’ And so on). By writing all these points on the board, one can often identify all the major problems of measuring capacity.

Teaching hint – Employ the common approach of identifying three or four operations with which students will be familiar (fast-food restaurants, libraries, bookshops, etc.) and ask them to identify

• the nature of demand fluctuation and what influences it;

• the way in which they can measure their capacity;

• the alternative ways they could cope with fluctuating demand.

Then, lead a discussion on the implications of the various ways of coping with fluctuating de-mand (cost implications, customer service implications, attitudes of staff, etc.).

Teaching hint – Examples from the food industry are usually useful. This is because demand is often both seasonal and uncertain (sales of cottage cheese at supermarkets are very much de-pendent on the weather, sales of cottage cheese with pineapple chunks are far less weather dependent!). Also, the effective supply of some foodstuff is both seasonal and uncertain. To add to this, many food products are perishable.

Teaching hint – One can start the discussion of the general issue of capacity planning and con-trol by picking an example that is clearly highly seasonal. In Europe, Christmas products or Easter products are usually a good idea. For example, draw a demand curve (approximate) for Christmas crackers. Very few are sold in January, millions are sold just before Christmas. Ask the class how it would cope with such a demand fluctuation and categorize their suggestions under the headings of the three pure plans outlined in the chapter.

Teaching hint – The outlook matrix – A useful discussion can be based on the ‘outlook ma-trix’. One of the main influences on operations managers, when they are making period-by-period capacity decisions, is their confidence in future demand matching future capacity. If they are confident that, in the long-term, demand is likely to exceed current capacity, then, irrespec-tive of the current level of demand, they will be more likely to be tolerant of policies that could lead to short-term overcapacity. Conversely, if long-term demand looks poor, it will be neces-sary to start implementing policies that will reduce long-term capacity. Overlying this are the needs of current demand. Even if long-term demand looks poor, it might be necessary to in-crease capacity if there is a short-term requirement. The next figure shows an outlook matrix, and gives examples of the types of methods that might be adopted for different combinations of long-term and short-term outlook. Here, outlook is defined as:

Outlook = forecast demandforecast capacity



Three broad states of outlook are identified for both long and short terms: ‘poor’ is when the ratio of forecast demand to forecast capacity is less than 1; ‘normal’ is when the ratio is ap-proximately equal to; ‘good’ is when the ratio is greater than 1.

The dynamics of capacity planning are governed partly by the combination of long-term and short-term outlook.

When both long-term outlook and short-term outlook are poor, there is relatively little choice but to reduce the capacity of the operation; capacity is not needed now, nor is it likely to be needed in the future. Staff lay-offs might be the only method of achieving this. When short-term outlook is normal, but long-term outlook is poor, current capacity needs to be maintained, though certainly not increased. Under these circumstances the operation is most likely to delay any decisions. Certainly it would not commit investments in capacity that is unlikely to be needed in the future. When short-term outlook is good in spite of long-term outlook being poor, the operation faces a dilemma. It does not want to make any permanent commitments to in-crease capacity because the extra capacity will not be needed in the future. However, it does need to meet current levels of demand. Under these circumstances, the use of overtime or the recruitment of temporary staff might be the least permanent method of achieving short-term ca-pacity requirements.

When long-term outlook is normal and short-term outlook is poor, capacity needs to be tempo-rarily reduced but not in such a way as to compromise longer-term requirements. The operation here is likely to tolerate a certain amount of unproductive or idle time, or might perhaps reduce the working hours of its staff temporarily. When both long-term outlook and short-term outlook are normal, no action is required. However, when short-term outlook is good, capacity will need to be increased but not in any permanent manner. Again, overtime and the use of temporary staff are likely to be appropriate methods.



When long-term outlook is good, there will be a requirement to build up capacity in some way, irrespective of short-term circumstances. So, when short-term outlook is poor, the operation will not want to do anything which compromises long-term capacity. It may even (if possible) use any short-term surplus capacity to build up inventory. It is also likely to do this when long-term outlook is good and short-term outlook is normal. Here though, it will need to start recruiting extra staff or resort to working overtime if it wants to make products for inventory. Finally, when both long-term outlook and short-term outlook are good, capacity will need to be in-creased relatively quickly and probably in a permanent manner through hiring extra staff.

Exercise – Try instructing groups to select an industry (preferably one where at least one of the group has some experience). Ask each group to explore how companies in that industry learn how to cope with seasonal fluctuations, and how they adopt other approaches.

Alternatively, suggest a company. Again, food manufacturing is good. We often use Nestlé, the Swiss-based multinational and the largest food company in the world. Either the supply of mate-rials is seasonal (frozen vegetables) or demand is seasonal (ice cream), or both (dried milk). The manufacturer of chocolate products is typical. Demand is driven partly by the weather – choco-late is less popular in summer – and partly by cultural factors – chocolate is a popular gift at Christmas and Easter in many countries. Nestlé plants use a combination of strategies to cope with these demand fluctuations. Some products can be stored in anticipation of seasonal peaks. However, there is a shelf life limit on storage time if Nestlé’s high quality standards are to be maintained. Off-peak sales volumes can also be influenced through the use of special offers and product promotions. Within Nestlé’s plant itself, output rates can be fluctuated, although differ-ent ways of doing this may be appropriate at different stages in the process. The manufacture of the chocolate itself is constrained by the capacity limits of the process technology, whereas in the packing of assortments, for example (see picture), extra staff can be hired at peak times. All this makes for a sensitive decision-making environment. If Nestlé managers get it wrong, either we run out of our favourite products or the company is left with surplus stock.

Questions that students could be asked include these two:

What are the main trade-offs that Nestlé managers have to get right in coping with the seasonality of their chocolate products?

There are a number of trade-offs, including the following:

• Adjustment costs versus inventory costs – changing the level of output continually will incur costs (as described in the chapter) but will minimize the amount of inventory stocked. Alternatively, level production volumes reduce operations costs but incur inventory related costs.

• Quality of product versus inventory costs – a further consequence of keeping high invento-ries is that the longer the products are kept in storage, the shorter the shelf life and the more likely the product is to deteriorate, affecting its quality. However, the more risks the com-pany is prepared to take with quality (in Nestlé’s case not at all), the more it can reduce its inventory costs.

• Special offers versus manufacturing costs – adjusting demand by using special offers incurs costs of its own. Extra packaging costs, the cost of introducing new products and so on, are all part of the costs associated with special offers. However, if these are used during low demand periods, manufacturing costs could be kept lower because output would be constant.



What do you think are the differences between managing seasonality for the popular snack bar type products (known as ‘count lines’) and up mar-ket chocolate assortments?

The main difference is that the degree of seasonality could be far higher. The standard products (count lines) will be seasonal of course, especially in some parts of the world. For example, in very hot countries, sales of chocolate reduce dramatically during the summer months (it melts). However, sales of chocolate assortments peak at the times of the year when they are bought as gifts (Christmas, Easter, etc.). This fluctuation is often very much higher than for the standard products. The other difference is that (as the pictures illustrate) the production of assortments is far more labour intensive because it is essentially an ‘assembled’ product. Also, quality has to be higher. Standard products, on the other hand, are made totally automatically (because of their far higher volume and simpler design). The potential for flexing capacity is greater with more labour intensive processes.


C H A P T E R 9

Inventory management

Introduction

This chapter deals with quantitative aspects. Partly, this is because the various quantitative models of stock control have within them the assumptions upon which we base most inventory management. Therefore, working through the mathematics of stock control, we are implicitly establishing the key cost drivers and principles of the subject. The other reason for taking a more quantitative approach is that it is traditional. Most textbooks in this area are expected to have the inventory models covered in this way. Perhaps this is a mistake we all make as teach-ers. It may be convenient to teach the mathematics of stock control, but how relevant is it? This is a question we can only decide individually. Our approach is to limit the use of mathematical models. So, for example, we hardly ever go beyond establishing the basic economic order quan-tity (EOQ) formula. The important point is to examine the assumptions within the models. This allows one to look at the various cost elements affected by inventory, examine issues such as cost of capital, look at how, for example. the cost of keeping inventory might affect stock con-trol decisions and so on.


• To define what we mean by inventory.

• To identify why inventory occurs in different types of operations and in supply chains gen-erally.

• To establish the underlying assumptions and cost drivers of inventory through the use of order quantity formulae.

• To establish some of the practical difficulties of managing inventories in a dynamic sense.



Again, there are several cases in the companion volume to this book (Johnston, R. et al, 3rd edi-tion, ISBN 0273 65531-0), which can be used to support this lesson. ‘The Thompson Telescope case’ can be used for this topic.

Exercise – An exercise that we have found useful is to set the class the task of investigating how much money is tied up in stocks in various companies. The easy availability of company accounts on the Internet now makes this task much more feasible. Get them to compare different



types of companies and thus identify the kinds of organization where stock control is particu-larly important from a financial point of view.

Teaching hint – Lead a discussion on how companies that have very large inventory costs manage. Examples such as gold processors and supermarkets are useful here. In some ways, both of them have stock costs, which are so large that they need to be treated separately from the day-to-day operations management costs that the operation incurs. For example, in many gold processors and precious metals companies, the value of the gold etc. does not even appear on the company’s financial statements. It would dwarf everything else. It is treated as belonging to a customer. The company then performs a service on the customer surrogate (the gold).

Exercise – The dynamics of stock control lend themselves to very simple classroom-based games. In fact, manual versions of the Rotterdam Serum active case are included on the CD ac-companying this text. For example, give a forecast to the class of how many goods are likely to be sold period by period. Also, indicate the costs of placing an order and holding stock. Devise a simple form that allows the class (in groups) to make ordering decisions and keep track of their stock levels and costs. Then (fairly rapidly) simulate a period of time, usually 20 or 30 periods, by taking values around the forecast for each period (but not exactly as forecast of course). The winner is the group with the lowest costs and the highest customer service. (It may be necessary to put an artificial cost on stock-outs to make evaluation simpler.)


C H A P T E R 1 0

Resource planning and control

Introduction

This chapter is part of our general treatment of delivery planning and control. It is a general treatment of the issues involved in managing process resources in a dynamic sense. It tries to explain some of the more commonly used terms in planning and control such as scheduling, sequencing, etc. However, it could also be used as an introductory chapter to the whole of the planning and control. Sometimes we teach this chapter as two or more separate topics (e.g. Scheduling, ERP, Control, etc.). However, more often we combine the various topics much as they are treated in the chapter. More than most topics, it does benefit from a very practical ap-proach. Students, especially those without much experience in operations, find it difficult to understand the real complexity involved in planning and control. There is limited benefit in tell-ing such students just how complex the process is. They will never fully understand until they have done it. Therefore, it is worthwhile to either devise exercises that enable them to experi-ence the complexity, or alternatively, use a simple example to prompt discussion during which time extra layers of complexity can be introduced. A straightforward example is the subText Studios case at the end of the chapter. A more complex case for those courses that specialize in manufacturing operations is the ‘Psycho Sports’ case exercise, included in this Instructor’s Manual.

A note on teaching MRP and ERP

There are two main tasks in teaching MRP (and more importantly ERP). The first is simply to explain the basic mechanics of MRP calculations. This is not difficult but it can be complex. We have found it beneficial to start with very simple examples indeed. A two or three component product plus another of similar simplicity with some common components is a useful starting point. After that, there is a decision made as to where to take the subject. On specialized courses it is then necessary to go into the details of MRP calculations. The chapter does not really get into these details because most students (other than those on specialist courses) do not need that level of knowledge. If this is the direction taken, then a more specialist text is required. We would recommend Vollmann, Berry and Whybark (reference given in the ‘Taking it further’ section at the end of the chapter). The alternative is to move the discussion on to the more topi-cal area of ERP. For the vast majority of courses, this is what we tend to do. Again, ERP is not difficult to understand in principle but hugely difficult to carry out in practice. It is as well to centre discussion around the managerial implications of investing and managing such an in-vestment.




• To describe the elements that any resource planning and control process must have, if it is to be effective.

• To make clear the separate but related nature of resource planning and control activities, such as scheduling, loading, sequencing and control.

• To emphasize the ubiquitous nature of resource planning and control activity – all opera-tions have to do it, but those in more turbulent environments find it more difficult than those in stable environments.

• To place ERP in the context of operations planning and control. Especially, to understand its role as the source of the information necessary for planning and control.

• To illustrate the importance and difficulties associated with ERP systems.

• To clarify some of the simple arithmetic that drives the MRP mechanisms.


The exercises described here do not include the case study at the end of each chapter, or the active cases that are included in the chapter sections of the CD that accompanies the book, or the Additional case exercises included in this Instructor’s Manual.

Again, there are several cases in the companion volume to this book (Johnston, R. et al, 3rd edi-tion, ISBN 0273 65531-0), which can be used to support this lesson. The ‘I’ll phone you back’ case, can be used for this topic.

Exercise –‘In-tray’ exercises can be useful in this topic. Set up a simple case where jobs have to be scheduled through four or five processes. Load some of the jobs onto the processes as deci-sions already made, and give the students a number of further jobs to schedule. This could be done in the form of a very simple Gantt chart using pieces of coloured paper. Periodically, issue information to the student groups, changing the priorities of jobs.

Teaching hint – Discuss the nature of planning and control in very different operations. For example, contrast an electricity power station with a fast-food restaurant and debate the nature of loading, sequencing, scheduling, planning and control and so on.

Teaching hint – Base a discussion around Figure 10.12. This figure points out the obvious but important fact that control is easier in some operations than in others. It identifies four dimen-sions on which the degree of control difficulty can be measured. A sensitive and political operation such as child care services is clearly more difficult to control than a simple mass pro-duction operation such as that of a food manufacturer. Debate where a university or a hospital is on these four scales.

Teaching hint – Both opening examples at the beginning of the chapter are useful in promoting debate. Try asking what Joanne has to do to be an effective resource planner and controller. Write these on the board in groups that relate to the elements of planning and control systems.



• A customer interface that forms a two-way information link between the operation’s activi-ties and its customers.

• A supply interface that does the same thing for the operation’s suppliers.

• A set of overlapping core mechanisms that performs basic tasks such as loading, sequenc-ing, scheduling and monitoring and control.

• A decision mechanism involving both operations staff and information systems, which makes or confirms planning and control decisions.

Only then, write the headings above the points. Explain what each means. And then ask the class what the equivalent activities are in the Air France case.

Teaching hint – If one is treating MRP, 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 easily understand.


C H A P T E R 1 1

Lean synchronization

Introduction

Again, this is a topic with an important, but not always obvious, message. This underlying mes-sage concerns the link between, on the one hand, an organization’s general approach to how it thinks about operations management and what it actually does in practice, on the other. In teach-ing lean synchronization, it is relatively easy to make this linkage. In other words, a company’s philosophy of operations (if it has one) really does have an impact on what it does. If it has a high tolerance of in-process inventory, it will find it difficult to identify where improvement should be taking place. If it does not value the contribution that everyone throughout the opera-tion can make to improvement, it will never release the full potential within its workforce. If it values high utilization above fast throughput time, it will not understand the real underlying costs of its operations processes. This is an important message and fortunately there are plenty of opportunities while teaching lean synchronization to continually reinforce this message – to distinguish between the different contributions of lean synchronization to operations manage-ment generally (it is a philosophy, a set of techniques, a way of planning and controlling movement through processes).


• To get students to understand the benefits of low inventory in spite of its counterintuitive feel.

• To link in lean synchronization to the topics covered in other areas of the subject.

• To explain some of the criticisms of lean synchronization.

• To demonstrate the fundamental difference between pull and push control.


The exercises described here do not include the Case study at the end of each chapter, or the Active Cases that are included in the chapter sections of the CD that accompanies the book, or the Additional Case exercises included in this instructors manual.

Again, there are several cases in the companion volume to this book (Johnston, R. et al, 3rd edi-tion, ISBN 0273 65531-0) that can be used to support this lesson. The ‘Aylesbury Pressings’ case can be used for this topic.

Exercise – Lean synchronization is one of those topics that lends itself to games of various sorts. The type of games explained in the Lecturers Guide of Chapter 5 can be reprised, this time with the intention of demonstrating the effect of between-stage inventory and/or pull



control. Different games can be devised, especially to demonstrate lean synchronization. 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 fall 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 key 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 amount of work at each stage in the line and also, one can allow design changes and improve-ments in the system more easily.

Teaching hint –There is still an old video in circulation showing the above being done at Hew-lett-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 manu-facturing operations had started to understand lean synchronization (or JIT, as they would have called it) 20 years ago. Ask them why it has taken so long to be recognized as being valuable in service businesses?

Exercise – With smaller groups such as smaller MBA classes or even executive classes, let eve-rybody 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 among them with a video camera and try and capture shots of them attempting to improve the process. It is not usually difficult to find examples of single individuals dominating a discussion, groups split-ting 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 espe-cially useful for covering the continuous improvement and human issues in lean synchronization.

Teaching hint – Lead a discussion on how lean synchronization 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 us-ing lean synchronization principles.


C H A P T E R 1 2

Quality management

Introduction

Quality management can be very difficult to teach, especially to undergraduates who may have limited work experience. It can seem very dull (especially if the topic is taught as a history les-son on quality gurus, even though much of what they had to say is still valuable). Alternatively, it may seem stunningly obvious (many of the principles of TQM, for example). The best way to deal with this topic is through cases studies and illustrations to get students to realize that:

(a) All is not well in most organizations (even good ones), and

(b) Problems of quality can be very difficult to fix.

Make full use of the boxed illustrations in the chapter and the case study at the end – see the Exercises and discussion points section.

This is also the point of time in a course to use a visiting speaker who can provide examples of real life problems and difficulties faced when trying to improve quality in an organization.


• To provide students with an understanding of how quality can impact on any business.

• To introduce the idea that quality is consistent conformance to customers’ expectations.

• To demonstrate the real difficulties in achieving a total quality approach in organizations.

• To introduce the importance of defining exactly what is meant by quality.

• To demonstrate the need to measure quality.

• To explain the role of quality systems and procedures.

• To explain the problems and difficulties of quality initiative implementation.

• To demonstrate the importance of planning and controlling quality, and experience the real problems faced in defining, measuring and controlling quality characteristics.

• To convince students of the importance of six sigma and SPC.





Again, there are several cases in the companion volume to this book (Johnston, R. et al, 3rd edi-tion, ISBN 0273 65531-0), which can be used to support this lesson. The ‘Valley District Council Cleansing’ case can be used for this topic.

Exercise

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 that 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 stu-dents to sample from the same site at different times to check whether the process is getting out of control.

• Game 3 – Use a short case study (an appropriate one is shown at the end of this section) and ask the students to draw process charts. Then show them new data, period by period, and ask them to tell you when the process goes out of control.

Exercise – Ask the students to read the example ‘Tea and Sympathy’ on page 392 of the text. In their groups, ask them:

(a) Why do you think Nicky’s rules help to make the Tea and Sympathy operation more effi-cient?

(b) The restaurant’s approach to quality of service seems very different from most restaurants. Why do you think it seems to work here?

Encourage the students to debate these issues. Some points you might like to cover are shown below.

Question – Why do you think Nicky’s Rules help to make the Tea and Sympathy operation more efficient?

In effect, Nicky’s Rules are a way of managing customers and their expectations exclusively for the benefit of operational efficiency. Customers are warned that the waitresses are always



right – in other words, waitresses do not have to negotiate in order to get customers to do things, saving time and effort. Also, customers have to wait outside the restaurant until the entire party is present – customer groups must assemble themselves before entering the restaurant so the restaurant itself does not have to organize this. Customers are asked to change tables if neces-sary – this allows a closer match between demand and capacity. Customers are told to ‘naff off’ after they have finished the meal if the restaurant is busy – this helps to achieve higher utiliza-tion in times of heavy demand. The rules are strictly enforced – very heavy management of customer expectations here!

Question – The restaurant’s approach to quality of service seems very different from most res-taurants. Why do you think it seems to work here?

Probably, it is because of the novelty of the experience. Paradoxically, really bad service makes the character of the restaurant unique. The customers seem to appreciate being treated badly. This is a service philosophy that is also adopted by many universities!

Exercise – Send students out to experience some kind of service. Ask them to define a quality measurement system for whatever operation they have experienced. Ask them to work through the diagnostic logic chain for this chapter and make recommendations to the management on the operation, as to how they could improve quality.

Teaching hint

Off-air video clips are particularly useful for teaching quality. Any short piece of video that simply shows an operation in practice will suffice. Retail organizations, hospitals, trucking com-panies 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

Organize a debate between groups of students, some of whom have to defend the proposition that ‘McDonald’s is a high quality organization’ and others who have to defend the proposition that ‘(a convenient local high-class restaurant) is a high quality organization’. Lead a debate about how the nature of quality differs between these two organizations.

Exercise – The case exercise in this Instructor’s Manual, ‘Calling Sue’, is a great means of demonstrating the quality gaps. Ask students to define the fundamental gap between customer expectations and perceptions. Then ask them to deconstruct that gap into the four quality gaps. See the gap model covered in Chapter12.

Teaching hint – We find it helpful to begin with defining quality characteristics, using an ex-ample familiar to students, or from their experiences if post-experience students. Ask them to define the quality characteristics of a product and a service. Discussion about their measure-ments, standards and how each should be controlled provides a great deal of rich debate.



SPC case – AEB Mortgage Services

‘It is quite difficult to know exactly how long operators should be spending on each call. Some-times a client really does need detailed advice or reassurance, at other times the call could be dealt with very quickly indeed. There’s a minimum amount of time just to go through the courte-sies. But there’s also an upper limit. No matter how complex the call, our systems should be able to cope with it within a set time limit. My main concern is that we really do not know how much we should expect calls to vary’. (Duncan Hindes, Mortgage Services Manager, AIB)

Duncan was speaking in early 1997 just after AIB had made a considerable investment in its new call centre information technology project. The new system had been up and running for several weeks and was generating considerable amounts of data. All of this data was monitored and stored, but Duncan felt that he should be making more use of the information. The average length of phone calls was of particular concern to him. He had a suspicion that the calls were varying too much and that operators should be able to control even the longer calls. He also felt that it should be possible, at the same level of service quality, to get the average call time down to under two and half minutes (it was a little above this at the moment).

‘If operators spend too little time with clients we can lose valuable opportunities to collect im-portant information from them, make them feel dismissed, and sometimes waste an opportunity to sell them further services. On the other hand if operators spend too much time we are obvi-ously reducing the effective capacity of our unit and wasting valuable operator time’. (Duncan Hindes)

Duncan decided that he could exploit the data monitoring system in the call centre in order to chart the average call length, and its variability, over time. As a first attempt to do this, he used the system to sample six conversations at random every hour. He then requested the system to calculate the average length of call for the sample and the range of call lengths (the difference between the longest and the shortest call in the sample) for each sample. This data is shown in Exhibit 1.

‘I’m not sure what this tells us. Certainly there is more variation in the length of call than I would have expected, but I am not sure what we can do to reduce this’. (Duncan Hindes)

Duncan was convinced that he could take actions that would both speed up the process and re-duce the variability of the length of calls. Several options were open to him. He could easily get the new IT system to reinforce the idea of the target call length in the operators minds by putting reminders on screen when the calls exceeded a certain length of time. He could even reinforce the bonus system to put greater emphasis on the number of calls handled by each cell per week (currently the payment system gave a small bonus related to both productivity and quality). More controversially, he could put pressure on the operators to make better use of the new IT system. Although the new system was much more sophisticated than the old, operators often reverted to using the old system (which was still on line) because they were familiar with it and made fewer mistakes. Finally, he could increase the emphasis on the degree of monitoring car-ried out by the supervisors. The new system could allow supervisors to sample average call lengths for each operator and flash up warning messages when average call times got above a certain level.



‘I guess what we should do now is change some of these parameters to try and reduce the vari-ability of calls. Personally, I am in favour of using all four options. In particular we could easily get the system to flash up messages to the operators if their calls exceed a certain time. At the same time, it is important that we move them quickly on to the new IT system. We can do this easily simply by accelerating our existing programme of decommissioning the old system. As it is gradually taken off line, the operators will be obliged to move on to the new system.” (Dun-can Hindes).

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C H A P T E R 1 3

Improvement

Introduction

Again, this is one of those topics that can be taught either generally from a managerial perspec-tive or as a set of techniques. Of course, we have to get both perspectives over to the students and the issue is how to mix these two elements. While in some topics (such as project manage-ment) we have found it useful to start with techniques and then draw the managerial implication out of them, this topic of improvement seems to work best the other way round. Getting straight into improvement techniques without discussing any broad managerial context has not worked particularly well for us. Rather, it is better to discuss improvement generally to begin with. Most students, after all, have an idea of how important improvement is. Furthermore, they can recog-nize what improvement actually means. Even in their own everyday lives they can see that better scheduling of tasks, routing themselves round the shops in a logical manner, getting things right first time, providing check lists to stop you from making mistakes and so on, can all make life easier. The contrast between the differing philosophies of continuous improvement and breakthrough improvement, in particular, can stimulate lively debate. The solid and virtuous approach of continuous improvement, often involving the skills of all people in the operation, versus the drama and glamour of a major breakthrough project can provide very stimulating de-bate. Similarly, the topics of performance measurement and benchmarking are both readily understandable even by students with little previous experience, especially if related to everyday life. In a very similar way, the idea of trade-offs can be integrated into any treatment of opera-tions improvement.


• To convince students about the fundamental importance of performance improvement to any process or operation.

• To describe improvement in terms of closing the gap between required and actual performance.

• To relate performance measurement and benchmarking, both to each other and to the overall topic of operations improvement.

• To get over the idea that improvement must be prioritized in some way.

• To contrast continuous against breakthrough improvement.

• To describe a number of the more useful techniques that can help the improvement activity.





Again, there are several cases in the companion volume of this book (Johnston, R. et al, 3rd edi-tion, ISBN 0273 65531-0), which can be used to support this lesson. The Eurocamp Travel, and Prye, Byll and Runne cases are ideal for this topic.

Exercise – The idea of performance measurement is relatively easy to devise an exercise around. For example, get students to identify an operation with which they are familiar (fast-food restaurants, shops, public transport systems, etc.) and task them with devising suitable per-formance 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 should measurements be taken and 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!

Teaching hint – Get students to devise benchmarking strategies for different types of opera-tions. For example: ‘How could a retail bank benchmark itself against its competitors’ levels of branch service’?

Exercise – The importance–performance matrix can be taught particularly well. Of all the tech-niques 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 common sense, but the way in which it is structured seems to enable students to understand the nature of prioritization in op-erations improvement. There are a number of ways it can be approached. The obvious approach is to use the case exercise ‘Raydale Conference Centre’ in the Additional case exercise section of this Instructor’s 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–performance matrix, where students have some industrial experience, is to devise an exercise around that experience. For example, see the following steps.

• Step 1 – Choose an operation with which at least one of your groups is familiar. The opera-tion 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 source 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 objective as a starting point in doing this. So, use qual-ity, 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-point 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.


C H A P T E R 1 4

Risk and resilience

Introduction

Most of the topics covered in this chapter are relatively easy to teach. Failure, especially, is a topic that most students respond to. Usually, the popular press is full of failures (real and also the ones made up in order to sell newspapers). Any of these can be used to prompt a discussion on why the failures occurred, how they could be recovered from and what the operation should learn from the failure. Maintenance is a slightly less dramatic subject but nonetheless can usually be put in such a way that it engages students’ interest. Those students with cars will understand the costs and benefits of regular maintenance, while those without cars will appreciate perhaps a more domestic analogy such as cleaning the apartment (not always, some students have never maintained their apartments or themselves and have yet to understand the consequences!).


• To demonstrate the importance of risk, resilience and failure to operations management.

• To identify different types of failure and different levels of seriousness of the consequence of failure.

• To establish the three aspects of risk and resilience: failure prevention, failure mitigation and failure recovery.

• To establish the idea of maintenance, and, especially, the importance of distinguishing be-tween the more reactive run to breakdown maintenance, the proactive preventive maintenance and the contingency approach of reliability-centred maintenance.

• To introduce the concept of risk mitigation in an operations management context.

• To demonstrate the importance of failure recovery from both dramatic failures and more routine failures.



Exercise – Utilize the fact that newspapers continually refer to failures. Just go through any of the broadsheet papers and cut out examples of failure. Give a separate one to each group of stu-dents and ask them to analyse the 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 may be catastrophic failures such as major acci-dents and 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 that demonstrates failure. The next morning this can be used as a case study. An ideal example is the Apollo 13 movie starring Tom Hanks. It is a great example of failure and failure recovery. All manner of lessons come out of this including the importance of improvisa-tion, the use of fail-safe devices, the concept of balancing risks, the role of creativity in failure problem solving, and so on.

Exercise – Both examples at the beginning of the chapter work well as a class discussion or ex-ercise. They represent the two types of failure. The Cadbury’s salmonella outbreak case is a particularly serious quality problem. It is serious, but there are well-established mechanisms in most businesses that are designed to deal with this type of problem. The example of the ‘rogue trader’ Nick Leeson is different. It is an example of deliberate or malicious failure. The lack of operations control at Barings Bank allowed his fraudulent activity to eventually sink the com-pany. Although many financial service businesses have, for many years, had processes in place that should detect fraud of this type, for other sectors it is a new threat. Not just individuals at-tempting fraud, but hackers, single-issue extremists, terrorists and so on, all now fall into the potential hazard category. An exercise can be built on the identification of such risks and what is needed to prevent, mitigate and recover from them.

Exercise – Ask each group to identify a service one of them has recently experienced. Get them to chart the service and identify potential failure points. Also, ask them to explore how fail-safe poke-yokes could be used to prevent failures by groups.

Exercise – Set each group a separate poke-yoke exercise. For example, how to prevent acciden-tally phoning the emergency services if a mobile (cell) phone is left unlocked. Other examples of poke-yokes can be found at the web address, http://csob.berry.edu/faculty/jgrout/ pokayoke.shtml the poke-yoke page of John Grout.


C H A P T E R 1 5

Project management

Introduction

Project management is a relatively easy topic to teach. With only a little explanation, most stu-dents will realize that project management is something that they do themselves all the time (even if they did not understand that they did it) and that it clearly has relevance in all types of operation. The dilemma is not how to make it relevant. Rather, it is how to manage the two halves of project management. The first half is the qualitative aspect of project management, which deals with such things as project environment, project objectives, managing the people within projects, understanding what can go wrong and so on. The second half is the way we use models (usually network models) to help with the project planning and control process. The first half that deals with the qualitative aspects is, as most of us who have managed projects know, by far the more important. Yet, the quantitative side of the subject is in some ways easier to teach. Students with relatively little experience may especially find it difficult to fully appreciate the qualitative aspects of project management. Even with more experienced MBAs, a purely qualitative approach can become unstructured. What we tend to do is to start by introducing the nature of projects and project management and then, relatively quickly, get into network plan-ning in a (very simple) quantitative sense. This allows us to get into the qualitative elements later. When exercises are set on the more quantitative aspects of network planning, one can move on to the managerial and qualitative issues later.


• Demonstrate the ubiquitous nature of project management in everyday life as well as in op-erations and process management.

• To provide an understanding of how projects always differ from one another in some way or other.

• To introduce the overall stages involved in project planning and control.

• To provide a basic understanding of network planning techniques, together with the associ-ated mathematical manipulations.



Exercise – The Lemming Television Case in the Additional case exercises section of this In-structor’s Manual is particularly good at providing a relatively simple introduction to network



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A c t i v i t y a

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planning. While an obvious simplification of the real project, it can be broadened out to cover whatever managerial topic is required, and is useful in provoking discussion.

Exercise – Get students to identify major projects that have failed and have been described in the press. Get them to identify what aspects of project management appear to have gone wrong.

Teaching hint – Explaining the basic idea behind network planning is often the biggest hurdle for students. It is one of those ideas that, when they understand it, is perfectly straightforward and clear. However, until that point arrives they can be very confused. We use a simple example to introduce the idea of a network model. The details of the project in the example are not par-ticularly important, but just understanding the three basic pieces of information for any network diagram is important. These three basic pieces of information are:

• the activities which the project consists of;

• the time estimate for each of these activities;

• the relationship between the activities (usually best illustrated by the idea of the immediate predecessor).

All this information is shown for the simple example in the attachment. Try working from ac-tivities (a) and (b) (no immediate predecessor) forward just for the first few activities.

Teaching hint – For some students, the idea of representing the relationships between activities as a network is not immediately obvious. One way of demonstrating this is to draw a simple network diagram on several sheets of OHP transparency, but with each activity on a separate sheet. Show the details of the project as shown here.

Then build up the relationships between the activities by placing each layer of transparency, starting with Activity a, then b and so on.



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Eventually, the (rather confusing) figure will look as depicted.

Eventually, when (in this case) Activity g is reached, it will become clear that the arrows need to be extended in order to conform to the logic. As shown in the next diagram.



Explain that, simply by drawing the arrows in a slightly different way, the diagram can show the same relationships in a more ordered manner. Then align the transparencies to show the ordered version of the network diagram, as shown next.

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Part 2

Solutions for Case Studies in the Book


C H A P T E R 1

AAF Rotterdam

Case synopsis

This case deals with a theatrical services company based just outside Rotterdam in The Nether-lands. Small when it was founded in 1999, the company has now grown to employ 16 full-time and 20 freelance employees and has a revenue of slightly over €3 million. Two types of services have emerged. The first concerns the sale and hiring of stage equipment (mainly lighting, sound and staging equipment). The other involves production services, including designing, construct-ing and installing entire sets for shows and conferences. The case describes the various departments within the company and the nature of both types of services. The company seems to be reaching the point where the requirements and objectives of both types of services, to some extent, conflict with each other. Yet both types of services are still mutually dependent. The underlying issue in the case is how to reconcile the needs of the two services.

Using the case

This is a general introduction case to operations and process management. It is not a case where there is a ‘correct answer’, or even a clear and well-defined decision to be made. Rather it is a case that can be used to illustrate both the general approach to understanding operations as em-bedded in the diagnostic logic chain used in Chapter 1, and the nature of some general operations management issues such as focus. Because of this, the case is best used at the begin-ning of a course in order to set the agenda for the topics that will be covered in the course. The case is sufficiently general for tutors to draw out from the case, whichever topic they are going to cover in the course. For example, although inventory management is not explicitly empha-sized within the case, it is clear that the inventory of lighting and other equipment is a key decision for the hire and sales part of the company. Students can be encouraged to discuss this issue generally during the case debrief so that its inclusion in the course can be justified.

While the case can be set as a group assignment prior to presentation and discussion, it is also suitable for individual reading by students who then can contribute to the discussion in class. So, at the first session, one could simply ask the students to read through the case and then use it to promote a general discussion on operations and process management during the session.



Notes on questions

Questions 1 – Do you think Marco Van Hopen understands the importance of operations to his business?

This question can be used to discuss the issue of what a full understanding of operations and process management means in any business. During this discussion it is useful to point out the difference between the technical knowledge that is embedded in any operation or process on one hand, and the tasks that are necessary to run the operation or process on the other. Marco Van Hopen is clearly knowledgeable and certainly enthusiastic because of his knowledge of the task. He regards production services in particular, as being an exciting and high adrenalin business to be in. This is why he started the company. As the company has grown he has become aware of how important it is to organize the company’s operations internally. This has been forced on him because of the growth of the company. What was acceptable for a relatively small group is no longer viable for a large business. Individual processes and the needs of the customers they service (internal or external) must be identified, and they must be designed and organized to meet these needs. From the various statements attributed to Marco, he is now coming to see this. He is also beginning to understand the nature of the relationships between the various processes within his business. In particular, the sometimes-conflicting needs of sales and hiring on one hand and production services on the other are becoming evident.

So the answer to the question, ‘Does he understand the importance of operations’? most likely is, ‘Yes, but not as yet fully’.

Question 2 – What contribution does he seem to expect from his operations?

Chapter 1 of the text identifies four contributions of operations management.

1. It should attempt to control (or minimize) the cost base of the business.

2. It should attempt to increase the revenue of the business through its ability to serve customers.

3. It should do these two things without needing to invest an excessive amount of capital in the business, and

4. It should be able to develop the capabilities that will bring it more business in the future.

Although these points are not addressed explicitly (they rarely are in any organization) there is enough evidence from Marco’s statements to make some judgement. See the table below.

Contribution of Operations Any Evidence?

Operations’ contribution to reducing costs

Yes, there is some evidence. For example, ‘….. by working together more we could increase our ability to take on more work without increasing our cost base’.

Increased revenue through serving customers

Again, yes. ‘…… we have succeeded in differentiating our-selves through offering a complete design, build and install service that is creative, dependable, and sufficiently flexible to incorporate last minute changes’.



Contribution of Operations Any Evidence?

Minimize the investment needed

This is less clear. However, Marco is clearly aware of the amount he has invested. ‘…. We have over €1 million in-vested in the equipment….’ Also, he sees maintaining investment in new equipment as being vital to the com-pany’s future success. ‘….we need access to the latest equipment in order to win production services contracts’. This is used as a justification for retaining the sales and hire part of the company but there is no explicit discussion of the trade-off between the benefits this investment brings and the costs (including opportunity costs) in a period when the company is growing quickly.

Develop the capabilities to secure future business

There is very little evidence that Marco is yet thinking about the future in terms of operations capabilities. He sees the company as growing and that changes will have to be made, but it is growth that is central to his thinking rather than developing unique capabilities that will protect him from competition in the future. Of course, he may just wish to develop the business to a certain size and then sell it.

Question 3 – Sketch out how you see the supply network for AAF and AAF’s position within it.

This question can be used to explore the issue of ‘Who exactly is the customer’?, and to estab-lish the idea of the three levels of operations and process management analysis.

• The level of the supply network

• The level of the operation or business

• The level of the individual process.

There are many ways of drawing the supply network for any type of business and this is also true for AAF. However, the diagram below is one way of illustrating the various relationships between some of the significant players in the supply network, where the double-headed arrow means that either the flow of service is both ways or the nature of the relationship is one of col-laboration rather than a straightforward supply of service.



AAF supply network

AAF Equipment

hire and sales

AAF Production

services

Other Equipment hire and sales

companies

Production company

Final clients

Other ‘suppliers’ (venue,

performers, etc)

Other production companies

AAF Rotterdam

AAF supply network

AAF Equipment

hire and sales

AAF Production

services


companies

Production company

Final clients


performers, etc)


AAF supply network

AAF Equipment

hire and sales

AAF Production

services


companies

Production company

Final clients


performers, etc)


AAF Equipment

hire and sales

AAF Production

services

AAF Production

services


companies


companies

Production company

Production company

Final clients


performers, etc)



AAF Rotterdam

The first point to make is that within AAF Rotterdam there are two important collections of op-erations processes, one for each of the service groups that AAF supplies. There is also a relationship between them insomuch as production services rely on equipment hire and sales having the very latest in sophisticated technology, while Marco sees production services as be-ing the major customer for the equipment hire and sales part of his company.

There are several suppliers to AAF, but the ones mentioned explicitly in the case are other equipment hire and sales companies. These are important because maintaining relationships with similar hire and sales companies allows AAF to supply its own customers even when it has run out of its own equipment. And, although the other equipment hire and sales companies are competitors, it is in their interests and AAF’s interest to cooperate because it allows all of them to maintain supply without over investment in equipment.

There is a similar ambiguity on the demand side of the network. Much of AAF’s work comes from production companies who are in turn taking responsibility for supplying services to the final clients. Yet AAF themselves will also take on this role for some clients. In other words, at times, AAF finds itself a competitor to its own customers. Of course, this is not unusual, but it is worth exploring the implications of this with students. Similarly, AAF will act as a supplier to other production companies, so its customers will also be in competition with each other. Ideas of partnership, supply, dual sourcing, 100 per cent supply agreements and so on can be brought in at this point, if considered relevant.

There may also be other suppliers to the final clients and/or the production company, such as the companies that own the venue for the conference or performance, the performers or compère, and so on. These organizations may be serving the final client or the production company, but it is almost always important for AAF to develop some kind of relationship with them because they will be (or should be) collaborating to provide the final service.



Low

High

High

High

High

Low

Low

Volume

Variety

Variation

Visibility

Low

Production servicesDesign

Administration

Equipment hire and sales

Four of AAF’s processes on the 4Vs

Low

High

High

High

High

Low

Low

Volume

Variety

Variation

Visibility

Low


Administration



Administration


Four of AAF’s processes on the 4Vs

Question 4 – What are the major processes within AAF, and how do they relate to each other?

There are four processes mentioned explicitly in the case. They are:

• The production services process

• The equipment hire and sales process

• The design studio process

• The administration process.

In fact each of these processes is probably composed of other, smaller processes, but we will treat them at this level. There are a number of ways of distinguishing between these processes, but the important point to bring out in the discussion is that the processes do differ. Therefore, because they differ, they would need managing in different ways. Perhaps the most important way of distinguishing between the processes is to use the four Vs explained in the text. The fig-ure below summarizes each of these processes on the four V dimensions.

Production services are of low volume but each job is different and so the variety is high. Varia-tion is high (more lumpy as it says in the case) and because much of the value is added with the eventual customer, visibility is high.

Design will be very similar to production services because it is an essential part of production services. Volume may be lower because not all clients require design services. Variety may even be higher than design services because not all designs will be accepted by the clients. Variation is likely to be similar to production services, as is visibility, although much of the de-sign will take place without the client being present.

At the other end of the scale, equipment hire and sales is of far higher volume, and although in one sense variety is also high, the real effective variety is lower because every transaction is



Demand predictability

Need for close relationship

Average value of each job

Average margin

Service customisation

Production services


Charting the differences between the two services at AAF

Demand predictability

Need for close relationship

Average value of each job

Average margin

Service customisation

Production services


Charting the differences between the two services at AAF

very similar, even if what is actually being hired or sold is different. Variation is more predict-able and, although some clients require installation, the degree of visibility or value-added with the client present is relatively low.

Administration is surprisingly similar to equipment hire and sales. The volume of transactions is likely to be very high (possibly several transactions for each client), and although every transac-tion will be different, the broad type of transaction is essentially the same. Sending an invoice is sending an invoice even if each invoice is different, sending an invoice is very essential. Varia-tion is difficult to assess for the administration process. A fair assumption is that peaks and troughs could coincide for both the services offered by the company, and therefore variation could be relatively high. Visibility is likely to be similar to equipment hire and sales. The ad-ministration process is very much a back-office process.

An alternative analysis is to use a polar diagram such as the one below.

You can make the axes of the polar diagram anything you like. The main point is to demonstrate that the two main processes are different.

As a follow-up to this discussion it is useful to ask the questions, ‘How will the various man-agement decisions for these processes differ’? For example, to what extent can each of these processes be strictly defined? (Less so with production services and design, where, creativity is important, and more so with administration, equipment hiring and sales, where, outputs are more standardized). What kind of job designs, do the staff involved in each of these processes require? (Low volume, high variety, variation and visibility processes generally require flexible multi-skilled staff with good customer-facing skills; processes at the other end of the dimen-sions require, staff who understand the importance of dependability, adhering to the process and promoting efficiency). Other aspects of operations management can also be raised such as



planning and control, capacity management, quality management and so on. In each case, the approach for the two main processes will be slightly different. This is a very important point to discuss at this stage in a course.

Question 5 – Evaluate Van Hopen’s idea of increasing the flexibility with which the different parts of the company work with each other.

Try and guide the class towards two alternative approaches to organizing the business:

(a) Promote flexibility between the two main processes.

(b) Separate the two main processes so that each can focus on its own requirements.

This is a fundamental decision for Marco Van Hopen. The idea of treating the organization as one large flexible process that can perform any of the business’s services is fine when the com-pany is small (indeed it is the characteristic of most small companies). Yet, when the company grows there is increasingly a need to segment the organization to match the segmentation of the markets being served. In other words, move towards option (b) by focusing each process on what it should be good at.

Try to guide the class towards identifying the advantages and disadvantages of each of the two approaches. Ask them how small operations are usually organized (one big flexible process) then ask them how large operations are organized (separated processes).

Ask them to identify the dangers of moving towards a more segmented and focused set of proc-esses. Any student of the class who has worked in large organizations will point out the lack of flexibility and the communications problems that arise with very separate processes. Although the term ‘silo mentality’ has become very much a cliché, it is probably the term that most stu-dents will recognize as summarizing some of the dangers with approach (b).


C H A P T E R 2

Dresding Wilson

Case synopsis

Dr Laura Dresding, a clinician, founded this company in 1991. It supplied cardiovascular and heart-function monitoring devices, manufactured in the south of England. One of the company’s earliest decisions was to remain highly vertically integrated. In 1995, the company bought a Danish medical equipment company that produced neurological stimulators. Dresding was also offered technology consultancy as well as taking on some development work for other original equipment manufacturers (OEMs). In 1997, it spun off this activity and formed a separate tech-nology solutions division to develop new, in-house products and licence the technology solutions to other OEMs. It also developed the Insight monitoring system that allowed central-ized patient monitoring and surveillance.

In 2002, the company took control of Ryder Wilson, a US manufacturer of monitoring systems that also had a clinical management activity. This allowed the company to shift its focus from being a product innovator to being a systems innovator. Most recently, growth has come from the company’s service and management division because hospitals and clinics are increasingly outsourcing some of their activities.

Using the case

This case is primarily intended to demonstrate the dynamics of how strategies can develop over time into businesses, especially in companies that are growing and taking opportunities offered by changes in their market. Because of the emphasis on changes in strategy over time, the case is essentially a chronology of significant events over a 13-year period. Therefore, it is important to make sure that all the students understand the significant events in the company’s develop-ment over time. This is why the first question addresses this issue directly.

Notes on questions

Question 1 – What are the significant strategic events in the history of the company from its foundation to the present day?

The significant events mentioned in the case, although not quite described in chronological or-der, are very close to it. It is important to not only guide the class towards identifying the key events, but also to explore the reasons for and the implications of, each event. This will stop the discussion being simply a retelling of the case. Furthermore, there will be some discussion as to what is exactly a significant strategic event. Try not to let the class get too obsessed with this. The key objective of this part of the discussion should be to develop an understanding of what happened and why it happened.



1991 – The company was founded by Dr Laura Dresding to manufacture and sell cardiovascular and heart-function monitoring devices, capitalizing on Dr Dresding’s previous experience and knowledge as a clinical adviser to other medical equipment companies. The business started with a small factory and laboratory in Bracknell in the south of England.

1994 – The company ceases selling other manufacturers’ products and concentrates on the de-velopment and sale of its own expanding product range. Why might this be? Presumably because of the combination of two factors, (a) Dresding’s products were either technically supe-rior and/or more profitable than selling other businesses’ products and (b) the product range had expanded sufficiently to cover a reasonable part of the market. Also note that the company de-veloped a preference for vertical integration around this time with the motive of avoiding outsourcing so as to maintain control over quality. What does this tell us about the market for this type of product? It tells us that there is significant reputational risk if the company produces anything other than very high quality products.

1995 – Dresding buys a Danish medical equipment company producing neurological stimula-tors. Why? It does not seem that they bought them for their market potential, as the growth of neurological products is relatively slow at this time. Other reasons could include (a) sheer opportunism, the Danish company just happened to be for sale, (b) a desire to expand geo-graphically on the assumption that a continental European plant would help with sales in that region, (c) perhaps, because the Danish plant was needed to expand the capacity of the existing business, after all growth had been strong prior to the acquisition.

1997 – A new plant in Winchester was acquired, and the two-year quality programme was started. Why was the new plant in Winchester acquired? Presumably because of the need for extra capacity. Why in Winchester? Maybe because it is relatively close to Bracknell in the south of England but otherwise the reason is unclear. One could promote a discussion of one large site as opposed to several smaller sites at this point. Why did the company start its quality programme? They started the quality programme because of the supreme importance of quality to the reputation of the company. What was a major part of this quality programme? The major part was visiting other companies to learn from their successes and mistakes. This included fac-tory tours for all managers and team leaders. Was this successful? Yes, very successful, partly because it also stimulated debate and bonded the management teams from all three locations. Do you think this idea of learning from other organizations could be used in any business? To some extent yes. Whatever a business does, someone else will do something very similar and possibly better. Also remember, that there are other advantages of looking outside one’s own organization.

1997 (late) – Dresding decides to separate a part of the business to form a ‘‘technology solu-tions’’ division. This division develops both new in-house products and licenses technology to other companies. Was this a success? It was a success as within 18 months they had increased their revenues by 350 per cent. Why was it a success? Presumably because they have significant technical knowledge, but also because they developed into a motivated and tightly knit team. Were there any other advantages of separating the technology division? Yes, they started to think of themselves very much as a service business (which of course is what they are) rather than simply an appendage to the main manufacturing business.

1998 – The technology division develops the ‘‘Insight’ monitoring system. This was launched early in 1999. How was this development different? It was different because it was a total sys-tem rather than an individual product. Why does that pose challenges? It poses a challenge because it requires the development and integration of software and other new technical develop-ments. Was it a success? It was a success in the sense that they were immediately overwhelmed



by clients expressing interest. How did they respond to this? They employed new staff and tried to expand this part of the business rapidly. Did this lead to problems? Yes, it led to some fail-ures in component development. Also, they promised the delivery of technology solutions to the market and sometimes failed to deliver on time. So did this prove a disaster? Not entirely, be-cause the system is good in itself; it was just that they mismanaged the capacity expansion.

1999 (end of) – The company launches the Dresding Assurance – a brand building initiative. What was this exactly? It was a process of bringing customers’ attention to some of the internal quality processes used by Dresding. The company was selling its products by pointing out the excellence of its processes? Exactly! Was this a success? Yes, it was a success, especially in the Asian markets where sales growth increased by 70 per cent.

1999 (end of) – Dresding opens technical support facilities in Singapore to deal with growth in that region. Was that the only purpose of the Singapore facility? No, within a year the support office had been upgraded to become a development centre within the technical division of the company. Why is that significant? It is significant because the company now has another source of technical innovation that can be stimulated by a different set of market conditions.

2000/2001 – Period of fast growth. The technology division at last overcomes the problems of fast expansion created two years earlier. So was everything fine with the company? Not exactly; revenue was growing strongly but profitability was shrinking significantly. Why was that? In-creasing variety and complexity were having a significant effect on costs. How did they try and overcome this? They repeated the approach they had adopted with the quality initiative earlier. They systematically identified companies to visit from whom they might learn how to reconcile high variety and low cost. In particular, what did they identify as being possible solutions to their problem? They identified modular design principles and flexible manufacturing cells. At this point, it might be useful to hold a discussion on these two issues.

September 2003 – Dresding buys Ryder Wilson in the United States, its biggest acquisition to date. What did they do? They manufacture and also offer a service in clinical management. How did Dresding incorporate Ryder Wilson? They made Ryder Wilson the medical service division of the company (and renamed the company Dresding Wilson). Did they have problems? Not in terms of integrating the two manufacturing operations. What about the service and management division? They did have some problems. Because of market interest they very quickly found themselves in the position in which they were offering a full service including designing, install-ing, arranging leasing, providing staff and providing training programmes. In many of these activities they had little or no experience. All this came on top of the reorganization process that was necessary after the acquisition. So, was it two things occurring simultaneously that gave them problems? Partly yes. It would have been a difficult thing to do in any circumstance. What is the challenge facing the medical services division now? Integrating the various services into a single package and possibly, in the future, expanding their service as an outsourced provider of monitoring and surveillance services.

Question 2 – What do you see as the operations strategies for each of the three divisions of the company?

This is a fairly difficult question to answer. Nevertheless, some discussion is profitable around the strategies of the three divisions – manufacturing, technology and medical services.



Mar

ket r

equi

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ents

Operations capabilities

Line of fi

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Equipment manufacturing

Quality initiative

Dresding assurance brand building

Variety out of control

Adopt flexible cells and modular design

Mar

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Line of fi

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Equipment manufacturing

Quality initiative

Dresding assurance brand building

Variety out of control

Adopt flexible cells and modular design

Manufacturing – The company is still vertically integrated in the sense that it makes many of its own components. It has also adopted a strategy that stresses on absolute quality. This is proba-bly sensible because it supports the brand positioning of the group as a whole. The manufacturing division also has several sites for manufacturing. It is worth holding a discussion about whether this is sensible. A discussion on the relative advantages and disadvantages of one large versus several small sites could be useful.

The technology division – The main problem for the technology division is whether to exploit any technological innovation by developing the company internally, or licensing it to another OEM. While the revenue from licensing seems to have levelled off, the activity of innovation for in-house exploitation is still seen as important. A key issue for this division is, how to make the most of its technological expertise. It is not only the manufacturing division that can now use this, but also the medical services division. A danger is that the technology division sees itself as a separate business rather than a support unit for the rest of the company.

Medical services division – In some ways this is the most exciting division in terms of future developments. This division is taking the company into the service sector. In effect, it is a pro-vider of outsourced medical services both in Europe and in the US. Yet, in the short to medium-term, the company is getting more involved in providing services before it has had the time to develop the expertise to integrate the various service sub processes. There is constant pressure to cut costs. Basically, they cannot win business unless they can significantly cut down the cost of the services provided by the in-house teams. The question here must be (a) can the division develop sufficient expertise without taking too many risks? And (b) does it make sense for part of the company to do so? A key question is, ‘Is there any advantage in the medical services group being part of Dresding Wilson’? The answer is, in the affirmative if either, (a) the group can benefit from the reputation of the Dresding Wilson brand, or (b) the technical expertise of the group, can be exploited by the medical services division in some way.

Question 3 – How has the development of each division’s operations re-source capability developed in relation to the requirements of its market over time?

An ideal model for illustrating the development of each division is by charting the fit between market requirements and operations capabilities as described in Chapter 2. The following dia-grams illustrate a possible interpretation of the trajectory of each division’s development.



Medical services

Mar

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Line of fi

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Publicity raises market expectations but company has little experience

Starting to gain experience

Medical services

Mar

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Line of fi

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Publicity raises market expectations but company has little experience

Starting to gain experience

The key discussion point here is to guide the class into judging whether, at any point of time, the capability of the division was lagging or leading in what the market expected.

Question 4 – What do you see as the strengths and weaknesses of the company’s approach to developing its operations strategy?

The underlying point here is whether the company had any planned strategy at all, or whether it was simply opportunistic in making acquisitions and rationalizing them later. The truth is probably somewhere between these two extremes. It would be difficult to carry out conventional strategic planning in such a dynamic and developing market. Yet, simply acquiring companies merely because they are available is not sensible either. The strengths of the company over the last 12 or 13 years seem to have been that it does take advantage of the opportunities that are presented to it and that given the various changes they have eventually made a success of things. The weakness is that they give no indication that they have any overall preferred plan.



Question 5 – What challenges does the move to becoming a ‘service pro-vider’ pose for the company?

The development of this company (like many companies of this type) is one of moving from a manufacturer to a service provider (which may or may not include manufacturing physical products). The challenges of doing this are:

(a) Understanding that it is happening.

(b) Understanding that it is now a service company of which manufacturing is one part.

(c) Learning how to be a service company.

(d) Learning how to learn from and develop their service expertise, and

(e) Integrating the various elements of the service package.


C H A P T E R 3

Disneyland Resort Paris (Abridged)

Case synopsis

This case charts the history of Disneyland Resort Paris (originally called Euro Disney) from its opening in 1992 through to the resort reporting relatively healthy financial returns in August 2006. The original objectives for the resort are described together with some of the rather sig-nificant problems that the resort faced before, during, and through its first few months of existence. The remaining fourteen years of the resort’s history are described in less detail, but the significant stages of development and investments are identified.

Key issues include the following:

• Site location

• Service design

• International operations strategy

• The dynamics of service development

Using the case

The great advantage of this case is that almost everyone has heard of the Disney resorts and theme parks, and very often many within the class will have visited at least one of them. However, this can also be a disadvantage. Individual students may be overly influenced by their own personal experiences of one park at one point in time. It may be necessary to point out that although one individual may have suffered queuing for long periods in the rain on a cold and windy Paris Mon-day, many millions of people have enjoyed a great experience and pleasant weather! Nevertheless, because so many students have some kind of experience of opinion of Disney resorts; this is one of those cases that can be used at any point in a session. For example, it can be used at the beginning of a session on capacity location to identify the main factors that influence location. One does not have to have covered the theory of location prior to using the case.

Notes on questions

Question 1 – What markets are the Disney resorts and parks aiming for?

There are a number of ways of getting students to identify the various markets at which a theme park is aimed. Arguably, the best tactic is to simply get people to shout out the types of visitors who may go to a theme park. Usually, these fall into three main groups.

• Short stay/day visitors who are visiting the park as part of an extended stay in the region generally. These visitors are usually staying in a nearby major city (for example, Paris) rather than staying specifically in or adjacent to the theme park.



• Visitors who are intending to spend more than one day in the park and are either staying in one of the Disney hotels within the park or at an adjacent hotel. Very often these visitors are families.

• Conference visitors. This is the least obvious category of visitor, but is an important and growing segment for theme parks. Of course, this market is dependent on the theme park having hotel accommodation built within the park.

Question 2 – Was Disney’s choice of the Paris site a mistake?

This question is best tackled by asking students to identify alternative sites to the Paris site that was eventually chosen. Obviously, students cannot do this in any great detail, but five general locations are mentioned in the case (France, Germany, Britain, Italy, and Spain). Students can then be asked to identify the various criteria that could be used to evaluate each site. After dis-cussing this with students, their criteria can be grouped into the categories that are identified in the text. These are:

• Capital requirements – are some sites intrinsically more expensive to purchase and develop than others? Included in this could be the level of government support on offer.

• Market factors – there are a number of issues here. Perhaps the most important will be loca-tion’s closeness to its markets. Paris is itself a large city but is also relatively close to (or has good communication links with) the major European centres of population. The proximity to Paris itself is also an advantage. Potential customers may be more attracted to the park if there are other attractions to visit, (although there is some dispute as to whether there is much over-lap between customers for a Disney theme park and those who may want to visit the art galleries of Paris). The climatic conditions of each location could also fall in this category.

• Cost factors – this relates to the cost of providing the service. Primarily this means the cost of labour (both paying and accommodating staff). If not already discussed, again, govern-ment assistance/tax breaks etc. could be discussed under this heading.

• Future flexibility – is there space to expand on any available site? Clearly, less densely populated sites and countries will have an advantage here.

• Risk factors – political, economic, and social risks are probably the most important issues here. One could discuss whether any of the sites are susceptible to any of these risks.

Question 3 – What aspect of its parks’ design did Disney change when it constructed Euro Disney?

Here, it is worth discussing the difference between the ‘core’ and the ‘peripheral’ aspects of the traditional (American) Disney offering. Core issues are those concerned directly with the very essence of what Disney is offering – imagination, innocence, fantasy, association with well-known cartoon characters, friendliness, etc. More peripheral issues are such things as the food offerings, merchandising, etc.

A discussion with students soon brings out the fact that Disney actually changed the core issues rather than the peripheral ones. So, for example, it adapted the essence of some stories that formed the basis of themes and rides to make them more acceptable to a French audience. Yet



its (again American) insistence of no alcohol being served in the park was not adapted to suit local conditions.

Question 4 – What did Disney not change when it constructed Euro Disney?

As described above, there were many operational issues that did not impact directly on the Dis-ney offering that were not changed to suit local conditions. Amongst these were….

• Attitudes to queuing – the park’s designers assumed that Europeans (particularly Southern Europeans) had the same attitude to queuing as North Americans and Japanese (and Northern Europeans). This led to some frustrations.

• Serving alcohol – although less common than at one time, wine is generally served with lunch in France and several other parts of Europe. The lack of this service caused some dis-satisfaction amongst European customers.

• Eating habits – in North America, customers tend to ‘graze’, that is, eat little and often for much of their visit. In Europe, by contrast, there is still the habit of eating a single meal in the middle of the day. This has a major impact on capacity planning for the various food outlets within the park. Rather than a relatively constant demand for food (which does increase in the middle of the day to some extent) any European park is likely to have to cope with a very sig-nificant increase in demand during the lunch period. One could have an interesting discussion here on the nature of capacity management under the two sets of conditions.

Question 5 – What were Disney’s main mistakes from the conception of the Paris resort through to 2006?

This is an opportunity to summarise previous discussions. It is also an opportunity to discuss other issues such as the various risks involved in the start-up of any new operation. (Reference to other major start-up disasters such as Heathrow Airport’s Terminal 5 may also be included at this point).

Certainly, Disney underestimated the cultural opposition within the French media to its pres-ence. It also underestimated the habit of the French to take direct political action. It certainly did not seem to be prepared for the negative publicity during its initial period of opening. But not only did it underestimate the nature of the French reaction, it also seemed not to have fully un-derstood the extra difficulties posed by having customers from many different nationalities (and speaking many different languages) and having staff from a similar variety of backgrounds and countries. The turnover of staff during the first nine weeks of operation created operating prob-lems and seemed to have seriously undermined the image of quality service that had been built up in many customers’ minds by their experience at American parks.

One of the interesting dynamics of the period after the opening was that several times the park was hit by rumours of bankruptcy and financial problems. This itself tends to corrode the brand image that Disney would have wanted to project. The case also points out that a park of this na-ture cannot afford to delay or cut back on its investment. Theme parks rely on novelty and the investment in new rides, especially when these new rides have the advantage of the extra public-ity provided by a movie’s release.

A suitable finishing point for discussion may be to ask the students whether the park would have been more successful in a location such as Spain. What would have been the effect of less resis-tance in the local media, sunnier weather, etc.?


C H A P T E R 4

North West Constructive Bank – The New Mort-gage Centre 1

Case synopsis

Andy Curtis, the Mortgage Operations Manager for North West Constructive Bank (NWCB), is receiving criticism because of the average turnaround times (the time between the mortgage ap-plication arriving and the customer being notified of a decision) in his mortgage-processing centre, in spite of the withdrawal of the (too) popular ‘discount rate’ product that was overload-ing the centre. For 12 months, he had led a project team that had been planning the consolidation of the bank’s original three mortgage-processing centres into one new site. Prior to the consolidation, the bank’s mortgage business had been divided into three regions, ‘North-ern’, ‘Southern’ and ‘Western’ applications. The motive was to achieve economies of scale and make savings by giving up city centre leases on the three old sites, and consolidating all their operations on a single floor of the bank’s main headquarters building. Applications for new mortgages could arrive through three channels, further advances applications from existing cus-tomers that came direct from the mortgage businesses sales, applications coming via the branches of the bank and applications coming from independent sales agents. Demand fluctu-ated, particularly from agents who chased the best deals for their clients.

The processing of a mortgage application involved four sets of activities:

• ‘Input’, where applications were received, keyed into the computer and initial checks about accompanying evidence carried out;

• ‘Underwriting’, where the decision to lend was made;

• ‘Offer’, where the team liaised with surveyors to obtain surveys;

• ‘Completion’, where sanction letters were sent to solicitors.

When the processes were moved to the new centre, the only significant change from the old way of working was the grouping together of all the keying in activities associated with the input stage. This was felt to be a fairly risk-free move because all three centres were already using a standardized preliminary information screen. All teams had to process a range of products. Every staff member was trained to deal with standard mortgages, but more experienced staff were used for more specialist mortgages such as ‘Buy to Let’.

Andy Curtis believes that the centre has three sets of problems, the disruption of the move itself, the high level of demand for the discounted rate product and the new process and layout that it is not working as well as it should.



Using the case

This is a useful case to introduce the idea of process design. It deals with some overall issues about how an operation can be designed when the volume–variety characteristics are changed. The case continues in the next chapter (North West Constructive Bank B), where some more detailed aspects of process design are raised. An underlying issue in the case, and one that can be emphasized if required, is the extent to which process design disrupts existing operations. We find it useful to emphasize this point because, in reality, most process designs have to be done in the context of ongoing operations.

The case is designed to be used either individually or in groups, away from the classroom. The length of the case and the nature of the topics covered both make it difficult to be debriefed in class, unless some time has been allocated for students to discuss and reflect the issues involved.

Notes on questions

Question 3 – How would you recommend that Andy sets about improving the performance of his processes?

Notes on question

The single question in this case has deliberately been left broad. Part of the learning from the case should be to understand how it is important to form a view on what is happening within the organization. In this particular case, several things are coming together. In fact, Andy Curtis is making the point that it is not the issues themselves that are causing the main problem; rather, it is the combination of several things happening simultaneously. So, a useful place to start is to make sure that the students understand:

• why the move to one centre was taken in the first place;

• what the move did to affect the volume–variety characteristics of the operations;

• what the market and competitive context in which the move took place was;

• what else they could have done.

As regards the motivation for bringing the centres together in one location, it may be worth in-cluding a discussion on the role of technology in industries such as banking. Whereas several years ago, it would have been important for each regional office to be within its region, informa-tion technology and communications technology have made it possible to replace several regional centres with one large processing centre. This discussion can be useful because of the three substantive topics included in Chapter 4 (Layout, process technology and job design); process technology is the least important part of the case. Yet, without developments in infor-mation technology, the move would not have been possible in the first place.

The implication of moving into one centre is that, taking the operation as a whole, the volume–variety characteristics have shifted from a relatively low to a relatively high volume, with a cor-responding reduction in the effective variety that the centre has to cope with (because of the volume increase). It is worth having a discussion with the class about what one would generally



expect in any kind of operation when there is this shift towards higher volume and lower effec-tive variety. After this discussion, ask the class whether this has really happened in the case. The answer is that, with the exception of the keying stage, there do not seem to have been any major changes in the design of the processes. In effect, the three regional teams still operate as though they were in geographically separate centres rather than in a combined operation.

It is worth discussing why this may be so. Ask the class to identify as to why further change was not attempted. Try to get the class to distinguish between legitimate reasons (trying to minimize disruption) and reasons that cannot be easily supported (a lack of understanding of the potential to change the nature of the processes).

A number of problems were identified within the case. Andy Curtis and his team drew up a list that identified these. The main points to emerge from this list were as follows:

• Staff had to move about more than at the old centres. There, the information was within easy reach of all staff. Now, the files had been consolidated to avoid duplication, so the fil-ing room was further away for most staff.

• This led to another problem. To avoid repeated efforts at retrieving a file, staff were devel-oping a habit of keeping it out of the filing system for longer than necessary. They were keeping it on their desk ‘in case it was required again’. This made it unavailable to any other member of staff who could need it.

• All the fax machines were located together in one location. This helped to maintain a high utilization of the machines, but again, meant that staff had further to walk. Even the south-ern area team for whom the fax machines are most convenient, resented the other teams constantly walking through their area.

• There was no clarity of flow. The high level of in-process inventory of partially processed applications (both physical files and virtual files on the IT system) had resulted in the ‘black hole syndrome’, with applications disappearing into peoples’ in-trays.

• There was a significant amount of rework required within the system. Putting together the data from the three old centres for the previous year showed that 22.5 per cent of all offers made were either returning to the process for adjustment or were recycled in some way within the process, sometimes more than once. This problem seemed to be continuing at the same rate in the new centre.

In fact, these problems fall into two categories. The first is concerned with layout and its conse-quences for the flow of information and the flow of staff. The second category concerns the last point that is made about the recycling of work. This must cause confusion and difficulty in con-trolling the flow of work through the processes.

Ask the students why the flow now seems to be more confused than it was when the centres were separate.

The reason is that the new centre does actually consolidate two types of resources into single units that serve all three regions. These resources are the files and the fax machines (fax ma-chines are used because many of the documents used to judge a mortgage application date from many years ago and exist only in ‘hard’ form). This means that the layout is something of a hy-brid. This is not unusual, but in this case, it has had the effect of causing extra movement.



Generally, there are two ways of dealing with this. Either the facilities are separated so that each team has its own, or a facility is located where it is convenient for everyone who needs to use it.

Ask the students which they would choose:

a. for the location of the files

b. for the fax machines.

In fact, there is probably not enough information to be definitive about this question. Yet, one can make a strong case for relocating the files in the centre of the area so that they are accessible to all teams and buying more fax machines so that each team has its own (fax machines are not expensive).

However, if a member of the class does not raise the point, remind the class that a more com-prehensive review of the process design is almost certainly going to be needed. Therefore, why make minor adjustments to layout when the process will need to be redesigned if it is to be im-proved?

The recycling issue is a different type of problem. With this, it is not the layout that can result in improvements; rather it is the fact that information is defective when it enters the process. This can lead to a discussion over process boundaries. The point being that improving one part of the ‘supply network’ may not improve the performance as a whole. Get the class to list ways in which the integrity of information (particularly that coming from agents) could be improved. Most of these will include educating agents to be more accurate (‘It’s your clients that suffer remember’) and maybe even financially motivating them (prizes etc. for agents who maintain good information accuracy).

Possibly, the most important idea for improving the operation’s performance is to totally redes-ign it to reflect the needs of the product (that is, the mortgage application) rather than the transforming resources. This, after all, is a central idea of process design. In other words, al-though the volume–variety characteristics have changed, the processes themselves have not been sufficiently changed.

Ask the students how a new process might be designed. Most will identify the idea of exploring Andy’s suggestion of having four stages (input, underwriting, offer and completion), with every application (irrespective of which region it comes from) moving through the same sequence of stages. Explore with the students some of the implications of this, particularly in terms of ad-vantages and disadvantages (for example, get them to focus on why mass processes are often designed like this, and guide them into discussing the implications for efficiency and the effect on the staff’s jobs).


C H A P T E R 5

North West Constructive Bank – The New Mort-gage Centre 2

Case synopsis

This case is the continuation of the North West Constructive Bank – The New Mortgage Centre A case, which is the case study for Chapter 4. It provides more details concerning the nature of the new mortgage applications process. The centre manager Andy Curtis has initiated an inves-tigation that has provided some basic data on the current mortgage centre’s processes. This has identified 13 stages, not all of which are needed for every application. It has also estimated the allowed time and the minimum and maximum times needed for each stage as well as the skills needed to perform each task. Andy’s team is considering three design options. The first, option 1, involves keeping the process as it is. The second, option 2, involves reorganizing the process on a more ‘series’ (long-thin) process. The third, option 3, again involves reorganizing on a long-thin basis, but with some parallel processing to reduce throughput time. Some of the ad-vantages and disadvantages as perceived by the team are described. In addition, the recycling problem is described. Slightly less than 30 per cent of all applications require some recycling during their processing. The reasons for this are described and the consequences explored. Fi-nally, the issue of staffing levels is raised.

Using the case

This case should not be used except in conjunction with the North West Constructive Bank A case. An understanding of the background to the detailed process design issues discussed in the case is necessary and is contained in the A case. The A and the B cases can be treated together if that is convenient, although it makes a combined case relatively long (but no longer than most typical Harvard Business School cases). How (or indeed, whether) the case is used depends on the time available for the issue of process design to be treated in the course. If time is limited, the A case could be used and supplemented with some simple process design exercises (see the Teaching Guide for this chapter) as an alternative to using this case. However, this case high-lights the interrelationship of several issues important to process analysis. In particular, it can be used to discuss the relationship between input quality and process design and how to judge the appropriateness of staffing levels in processes.

Notes on questions

Question 1 – Does it matter that Andy and his team cannot allocate all the time necessary to process a mortgage application to individual activities?

This is an interesting question to debate in class. When process analysis was confined to manu-facturing processes, it would have been almost unthinkable to have such a high level of unallocated time within the process. Yet, in reality, in many processes like this one, it is inevita-ble that some activities cannot be either predicted or sufficiently well defined to allow for every



Input16 minutes

Underwriting35 minutes

Completion25 minutes

Offer36 minutes

Input16 minutes

Underwriting35 minutes

Completion25 minutes

Offer36 minutes

part of the process to be allocated precisely. Nevertheless, it is important to point out that the inability to allocate time to tasks is a result of incomplete process knowledge. As process knowledge accumulates, it should be possible to reduce the proportion of unallocated time. So, an important measure for this kind of process may be whether unallocated process time is being reduced. A further point to debate is the likelihood that learning will occur and therefore unallo-cated process time reduced. It is likely that process design Options 2 and 3 will maximize the ability of the process to accumulate process knowledge and improve performance as well as reduce unallocated time. A possibility at this stage is to get the class to identify a series of proc-esses on a scale from relatively easy to define and allocate time at one extreme to processes with difficulty in predicting activities, possibly involving considerable amount of discretion. For ex-ample, from simple repetitive manufacturing processes at one extreme to medical diagnostic tasks at the other extreme.

Question 2 – Should the process be redesigned, and if so, which option should be adopted?

One of the options being considered by Andy and his team is to keep the design of the process as it is. It is worth trying to guide the class towards debating whether this is a good idea. Al-though most students will reject this as an option (probably quite rightly), it is worth thinking about some of the advantages of doing nothing. These include minimizing disruption in a period when performance is already suffering, and taking time to understand exactly what is happening in the process. This latter point is important, as we shall see later. In fact, the whole process seems to be overstaffed (again, see later), and it may be important to establish to what extent this is a function of the way the process is designed, and to what extent it is simple overstaffing.

Nevertheless, it is likely that class discussion will, relatively quickly, move on to how to redes-ign the process. This is best started by considering Option 2, redesigning the process, so as to eliminate the regional teams and to replace them with teams representing the four major steps in the process.

Start out by asking the class to consider what balancing problems there might be between the four stages. From the figure in the case, the amount of allocated time for the tasks carried out at each stage is as follows:

Input – 16 minutes

Underwriting – 35 minutes

Offer – 36 minutes

Completion – 25 minutes

Draw this up on the board as below and ask the students if there is a clear bottleneck.

Process diagram for the mortgage process



Many students will identify the offer stage as the bottleneck. However, the more perceptive ones may see that, even though there are so many people at each stage, the balancing issue is not simple. By adjusting the number of staff at each stage, it should be possible to balance the flow between stages. Some students may be surprised that in circumstances like this where so many people are involved at each stage, balancing is not a matter of allocating individual activities between stages but allocating an appropriate number of resources to each stage so that it has approximately equal capacity (in terms of the number of applications that can be processed per period of time).

Now is the time to consolidate some data from the case.

The total work content (including unallocated time) is 152 minutes.

Demand – the number of applications received last year = 76,250.

However, only 61,000 mortgages were issued. We do not know how far the rejected applica-tions progressed through the process; therefore, it is not possible to determine the exact load (in terms of applications) on the process.

Nevertheless, if we work with 76,250 applications, this represents the most pessimistic loading, assuming that demand will be the same as last year’s.

Number of staff employed by the process – the total number of staff (in all regional teams) em-ployed in the process is as follows:

Input – 12

Underwriting – 46

Offer – 68

Completion – 34,

making a total of 160 staff in the process as a whole.

Working time per year = 7 (hours) × 5 (days) × 45 (weeks) = 1575 hours.

Throughput time = 21 days (on average) = 21 × 7 = 147 hours = 8820 min.

Work in progress (WIP) (from Andy’s survey) = 5000 applications.

Using Little’s law,

Throughput time = WIP × cycle time.

So,

throughput time = WIP × (work content/number of staff).

So,

number of staff = WIP × (work content/Throughput time) = 5000 × (152/8820) = 86.17.



But the process actually employs 160 staff, significantly more than the ‘theoretical’ figure.

So, does this mean that either there are many tasks unreported in the case that need to be in-cluded in the work content of the total task, or (more likely) the process is inefficient? Possibly, but ask the class why the process may need more staff than the above calculations suggest.

Reasons may include the following:

• Significant demand fluctuations during the year

• The need to maintain minimum response time, irrespective of demand levels

• Extra tasks needed in the process (such as audit, checking, etc.).

Ask the class, ‘What is the actual time being used to process each application’?

Again, throughput time = 21 days (on average) = 21 × 7 = 147 hours = 8820 min and

WIP (from Andy’s survey) = 5000 applications. Using Little’s law, throughput time = WIP × cycle time. So, cycle time = throughput time/WIP = 8820 / 5000 = 1.764 min (from the whole process) and, because cycle time = work content/number of staff, work content = cycle time × number of staff = 1.764 × 160 = 282.24 min. So, the actual time being devoted to each applica-tion is, in reality, 282.24 min.

Question 3 – How could the recycling problem be reduced and what bene-fits would this bring?

Ask the class, ‘Why is recycling a bad thing’?

Make a list on the board. A number of points will be raised in the class discussion, with a high-light on two in particular. These are:

• the extra work that is involved in terms of processing applications more than once;

• the general disruption and fragmentation of work caused by having to manage the redirec-tion and recycling of applications.

This latter point can be used as a reason to revisit and re-emphasize the importance of under-standing the effect of variation on process performance, as described in the text.

The first point is more easily dealt with.

It appears that, of the (maximum) 76,250 applications received, 21,735 are recycled at least once during their processing. No information exists as to where they are recycled too, but the table in the case does give some indication of how many applications are recycled from each stage. In fact, there appears to be a discrepancy between the number stated as being recycled in the case text and the number being recycled taken from the case. Even if no application is recy-cled more than once (unlikely), over 35 per cent are still being recycled.

It is important to point out to students that this type of discrepancy is not at all unusual when investigating process design issues (or most issues in operations management, in fact). Some



!28.5 %

28.5 %

!00 %!00 %

!00 %

Input Output

The total process

Recycling assumptions

!28.5 %

28.5 %

!00 %!00 %

!00 %

Input Output

The total process

Recycling assumptions

students may be upset that the data is not clearer. Point out to them that, in real life, they will have to make assumptions on the basis of the data that they have gathered. The real issue is the nature of the assumptions that they make.

So, because in this case, it has been suggested that investing an extra 20 minute activity at the beginning of the process could significantly reduce or even cut down the need for recycling, it is sensible to take the lesser of the recycled figures. Then, if this option of investing an extra 20 minutes still seems sensible, it will certainly be sensible if the larger recycling figure holds true.

So, assume that the percentage recycled = 21,735/76,250 = 28.5%.

Assume for simplicity that the average point of recycling is halfway through the process and that recycling takes the application back to the beginning of the process. This is clearly a simpli-fication, but not an unreasonable one, especially as much of the recycling appears to be weighted towards the second half of the process. See the figure below.

So, the average work done will be (128 + 100)/2 = 114% of what is really needed.

Therefore, if recycled work was eliminated, the work would be cut by

100/114 = 87.7%.

That is, 12.3% of the time would be saved.

The actual cycle time seems to be 282.24 min (see preceding text).

Saving 12.3% therefore would save 34.7 min.

In other words, even with these assumptions, it is worth exploring the possibility of adding the extra activity. However, in practice, it would also be worth:

• investigating further to clarify how much is really being recycled.

• investigating further to clarify exactly where recycling is happening.

• investigating how much recycling can be realistically reduced by including this extra activity.

• checking if a 20-minute allowance for pre-scanning applications is realistic.



• putting in some mechanism to ensure that the option (if adopted) is monitored closely to see that it really is working as expected.

Of course, the above analysis regarding recycling assumes that the problem is tackled exclu-sively inside the process. This is clearly not the case because many of the causes of recycling occur before applications reach the process.

The actual proportion of applications being recycled for different reasons is not stated in the case. Show the students the figure below (which is the actual ‘root cause of recycling’ data) and ask them to comment on it.

Recycled applications by reason

Information/ documents

missing

Information inaccurate or inconsistent

Loan amount changed

Other details changed

In-process error initiated

change

1000

5000

4000

3000

2000

Reason for recycling

Customer initiated errors

Branch initiated errors

Agent initiated errors

In-process initiated errors



missing


Loan amount changed



change

1000

5000

4000

3000

2000








missing


Loan amount changed



change

1000

5000

4000

3000

2000






The root cause of recycling data

Clearly, the major reason for recycling lies in errors that are made either by the agents, or by the bank’s own branches or by the customer (for which the agents or the branch can be held partly responsible).

Debate with the class the implications of this. Most students will recognize that this is a supply chain issue.


C H A P T E R 6

Developing Savory Rosti-crisps at Dreddo Dan’s

Case synopsis

This case exercise covers many issues found in new product and service development projects. In particular, the case examines a new type of product that is to be launched in an uncertain and unpredictable market and also carries some development risks. Above all, the project is a sig-nificant development for the company, with both the potential for major competitive benefits and some downside risk.

Monica Allen, the Technical VP of PJT’s snack division, has defined the questions in her analy-sis 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 organize the resources that will be devoted to developing the new project.

Using the case

Case studies are arguably at their least effective when dealing with operations management is-sues that have a high technological content. This is why our product and service design cases are relatively less common than those covering other topics. The important perspective needed to take on any case in this area, particularly this one, is that one does not need to have absolute mastery of the technical aspects of the case in order to make useful comments. And while most students will accept this, it is usually necessary to keep reminding them that, because they do not know much about the technical issues covered in this case, they cannot either make wildly convenient assumptions about the case, or giving up completely because they do not know enough about the technical issues. For this reason, this case is best used later on in the course when students have understood some of the base issues about operations and process manage-ment. It may even be used as an integrative case towards the end of the course.

However, its main purpose is to be used in conjunction with lessons on product and service de-velopment. It is important to stress throughout the case debrief that we are concerned with the process of developing products rather than other issues (important though they may be) of prod-uct and service design, such as aesthetics and creativity. This is why the questions deal with process objectives and process resourcing.



Notes on questions

Question 1 – How would you rank the product development objectives for the project?

The first point to emphasize is that this is a very significant project for the company. It is the development of an existing product, but it also represents an even greater degree of process change. 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, but it is also being launched into a market for which the product will be totally new. Further-more, the process, although similar to processes used elsewhere, is totally novel to the company. This means that learning and knowledge acquisition within the development project will be par-ticularly 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.

Safety – Project Orlando involves dairy products, a material with which the company is not fa-miliar and which poses considerable microbiological risk. Not only does the company have a moral obligation to ensure product safety, but any health-related issues close to the product launch would also be a marketing disaster.

Quality – the quality of the product must be absolutely on specification from Day 1 of its 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 the standard, they probably will not buy a second one. So the quality of development decision making must, likewise, be high.

Speed – in this case, speed would mean the time from the development being approved to the time that the product could be launched in the market.

Dependability – in this project, dependability means being able to finish the development pro-ject in time for the agreed launch date.

Flexibility – there are several areas of uncertainty within this development project. There is un-certainty around the timing of the launch. There is uncertainty as to exactly what final form 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 the volume of production and the variety of products will not become clear until later 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 com-pany. 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.

In terms of how these objectives rank in this project, it is worth debating this with the class, and different classes may come up with different rankings. However, one could reasonably justify the following ranking.

1. Safety – this is an absolute. The reputation, not only of the brand but also of the whole company, could be severely damaged in addition to all the ethical reasons for safety being important.



2. Quality – again there is significant reputational risk associated with poor quality decision making in this project.

3. Flexibility – given the degree of uncertainty surrounding this project, it will be particularly important to be able to change plans and refine decisions in the light of experience.

4. Cost – it is reasonable to assume that the group would not have decided to invest in a pro-ject like this, were it not important. And therefore, they must be expecting to have to invest an appropriate amount. Nevertheless, it will be important to maintain control on the costs so as to adhere to the budget.

Speed and dependability have relatively little meaning at this stage of the project. Because there is so much uncertainty, it would be better to concentrate on achieving sufficient flexibility to be able to move quickly and dependably when it is necessary.

Question 2 – What are the key issues in resourcing this product develop-ment process?

The four questions posed by Monica Allen cover four decision areas.

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 in-house 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 we usually refer to any technology (such as computer-aided design, CAD) that is used in the development process itself, we can include the decisions over the pilot plant also in this category in this context. This is because the pilot plant will be used to build knowledge around the nature of the product itself.

Development and organization – the main issue here is how to organize the development proc-ess. Will the existing functional organization be sufficient? Or should a dedicated team be formed?

Question 3 – What are the main factors influencing the resourcing deci-sions?

One method of exploring the factors affecting the resourcing decisions is to use the operations strategy matrix as described in Chapter 2 of the text. In the figure below, we illustrate briefly what such a matrix might look like, with the key resourcing decisions (described in the preceding text) taking the place of the Design, Delivery and Development categories used in Chapter 2.



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 is 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 ad-vantages in doing so. It is important that the development team build up their knowledge of both the product and the process. This is more difficult when much of the development is subcon-tracted. Where any development is subcontracted, consider identifying a dedicated member of the development team to work with the experts from outside.

A pilot plant could have significant advantages, provided 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.

Safety

Quality

Flexibility

Cost

Perf

orm

ance

Obj

ectiv

es

Mar

ket C

ompe

titiv

enes

s

Resource Usage

Decision areas

Figure 1Operations strategy matrix for Project Orlando

** *

* **

***

*Capacity

Size of team?

Supply Network

Subcontract any development?

Process Technology

Build pilot plant?

Development and organisation

Dedicated team?

No significant relationship.


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.

Is the company willing to subcontract anyresponsibility for safety?

Strict quality standards need to be communicated to any subcontractor.

Does subcontractor development imply reduced flexibility?

Subcontracting development to specialists may reduce total development cost.

Pilot plant may enable potential hazard to be detected.

Pilot plant may enable better quality learning.

Pilot plant would be dedicated so increase flexibility, but may have scale-up problems.

Pilot plant is likely to be more expensive that using partners’ capacity.

Dedicated team may help reinforce safety objective.

Dedicated team may help to reinforce quality objective.

Dedicated team likely to be more flexible if all necessary skills are represented in it.

Dedicated team likely to be more expensive, functional organisation usually gives higher utilisation of staff.

Safety

Quality

Flexibility

Cost

Perf

orm

ance

Obj

ectiv

es

Mar

ket C

ompe

titiv

enes

s

Resource Usage

Decision areas

Figure 1Operations strategy matrix for Project Orlando

** *

* **

***

*Capacity

Size of team?

Supply Network

Subcontract any development?

Process Technology

Build pilot plant?

Development and organisation

Dedicated team?



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.

Is the company willing to subcontract anyresponsibility for safety?

Strict quality standards need to be communicated to any subcontractor.

Does subcontractor development imply reduced flexibility?

Subcontracting development to specialists may reduce total development cost.

Pilot plant may enable potential hazard to be detected.

Pilot plant may enable better quality learning.

Pilot plant would be dedicated so increase flexibility, but may have scale-up problems.

Pilot plant is likely to be more expensive that using partners’ capacity.

Dedicated team may help reinforce safety objective.

Dedicated team may help to reinforce quality objective.

Dedicated team likely to be more flexible if all necessary skills are represented in it.

Dedicated team likely to be more expensive, functional organisation usually gives higher utilisation of staff.



It may even be worthwhile considering both building a pilot plant and using the spare capacity of the full-scale processes of other companies. This may reduce the scale-up risks associated with using the pilot plant.

For a project of such importance, a dedicated team is likely to be superior to using the existing, largely functional (by specialism) structure. However, it is important to ensure that the team maintains contacts with their specialist colleagues in order to be able to deploy the whole com-pany’s knowledge as and when required.

Question 4 – What advice would you give Monica?

The main reason for this question is to prompt a debate among students about how the project should be managed. There is no right answer as such. But it is important to debate in the class as to what would constitute good advice to Monica. This prevents the case discussion becoming purely theoretical. Generally, there is sufficient disagreement to prompt a reasonable discussion.


C H A P T E R 7

Supplying Fast Fashion

Case synopsis

This case uses publicly quoted information (usually from the companies’ own websites) to compare three well-known fashion retailers, all based in Europe. These three retailers are Benet-ton, based in Northern Italy, H&M, based in Sweden, and Zara, based in Spain. The three companies are described in the context of what has come to be known as ‘fast fashion’. The fast fashion phenomenon is relatively new and is based on the idea that consumers increasingly re-quire high fashion clothes at a relatively cheap price, and are indifferent to how long the clothes may last because ‘who wants to be wearing yesterday’s trends’? A general background to each company is provided and then the operations practice of each company is examined under the four stages of garment supply chains, namely, design, manufacturing, distribution and retail.

Using the case

This case is relatively strategic to the context of the chapter that supports it. Chapter 3 in the text examines what might be termed the more strategic aspects of supply network design. Chapter 7 (this chapter) treats some of the more operational issues. Yet, the boundary between what is strategic and what is operational in supply network/chain management is somewhat arbitrary. And although this case does not examine the very operational issues of how each of these com-panies supply chains operates, it does provide a starting point for a debate on what, in practice, the operational issues would be. The virtue of the case is that all three companies are relatively well known. How well known they are to a postgraduate class will depend on the make-up of the class. Although the stores do not deal exclusively in women’s garments, it is more likely that women would have heard of the stores and are aware of the differences between them. Also, the older the class the less likely they are to be interested in fashion. So, some explanation may be necessary. This is not difficult. Press adverts can be used, catalogue images can be shown, and so on. The one problem with using companies like these is that some class members may have their own individual views on the companies’ products (I hate the stuff Benetton sells, etc.). This can be destructive and can inhibit discussion. It is important to be very clear with the class that their personal preferences should not cloud the issues involved here. The fact that all three companies have been (more or less) successful over a number of years is testament to the fact that somebody is buying their products.

Notes on questions

In fact, there is only one question attached to this case in the text. This does not mean that the class debrief of the case needs to be centred only around this one question. Nevertheless, given the nature of the information in the case, it does lend itself to a very broad ‘compare and con-trast’ mode of analysis.



If required, the case debrief can be broken down into smaller segments such as the following:

• How would you class the three companies in terms of the markets they serve?

• How do they differ in terms of their approach to the design stage of the supply chain?

• How do they differ in terms of the manufacturing stage of the supply chain?

• How do they differ in terms of the distribution stage of the supply chain?

• How do they differ in terms of the retail stage of the supply chain?

• How would you summarize the general differences between the companies in terms of their approach to supply chain management?

Here, we will address these questions in roughly this order.

The markets occupied by these companies (or rather, brands) could be analysed in several ways. But this is not a marketing case, and all that is necessary here is to establish (approximately) the similarities and differences between the three brands. A diagram similar to the one below is use-ful for doing this.

The next illustration shows approximately the degree of ownership that each company has at each stage in the supply chain. In this diagram, the manufacturing stage, as it is called in the case, is divided into two parts, the supply of parts and the manufacture of the garment. This is not strictly necessary, but can be used to prompt a debate about what exactly the company has chosen to own. There is, after all, a difference between how much of the finished garment to manufacture and assemble, and how many of the components that go into the finished product they want to supply internally.

Benetton

H & M

Zara

Contrasting the market positioning of Benetton, H&M and Zara

High fashion Conservative fashion

High priced

Low priced

Benetton

H & M

Zara

Contrasting the market positioning of Benetton, H&M and Zara

High fashion Conservative fashion

High priced

Low priced



Design Suppliers Manufacture Distribution Retail

Benetton

H & M

Zara



Contrasting the degree of vertical integration at Benetton, H&M and Zara

Total ownership (no outsourcing) No ownership (total outsourcing)


Benetton

H & M

Zara



Contrasting the degree of vertical integration at Benetton, H&M and Zara

Total ownership (no outsourcing) No ownership (total outsourcing)

Design

Notable here is that all three companies do the majority of their own design. In fact, Benetton and Zara do virtually all of their own design in-house, while H&M are using guest designers, but mainly to exploit the reputation of these designers.

It is worth debating with the students why, of all the stages in the supply chain, it is design that these companies are the most reluctant to outsource. Students may well conclude that, in an in-dustry concerned with fashion and aesthetic value, the design stage is the operation that contributes the most to the market image of the company. At this point, try and broaden the de-bate from looking at the aesthetics of design towards thinking of design as one process in the total supply chain. Ask the class what they think are the main process objectives for the design part of the supply chain. Most will agree that speed is very important, as is quality (in terms of fitness for purpose). Similarly, where distinctive seasons are still used (more so at Benetton, less so at Zara), dependability, that is, having designs finished in time for the clothes to be put through the supply chain and reach the stores in time for the season, is also relatively important. Flexibility may also be raised as an issue. In the discussion here, try and draw the distinction between flexibility and agility. The concept of agility (being flexible, fast and responsive) is probably a better way of thinking about fast fashion. The issue of cost is worth discussing. Here, we are not talking about the cost of the finished garment (this is important, but part of quality, as fit for purpose) but the cost of producing the designs. While this cannot be allowed to get out of control, each company seems to understand the importance of not under-resourcing the design process.



Suppliers and manufacturing

Benetton does not own any of its suppliers. It does not make cloth or spin yarn. However, be-cause it is involved in some stages of the garment-making process, it will have an interest in relationships with suppliers. As regards the manufacturing stage, Benetton has plants both in Italy and around the world, but relies significantly on a large number of contractors who per-form most of the manufacturing. The interesting point here is that these contractors are often owned and managed by ex-Benetton employees. This may be worth discussing in class, espe-cially in terms of the advantages and disadvantages of this practice (close relationships and loyalty versus complacency and conflict of interest).

H&M does not own any part of the supply and manufacturing stages of the supply chain. This is quite a deliberate policy. Of the three companies, they are the only one to keep totally clear of these activities. It is well worth having a discussion with the class about why this might be so. Several suggestions could be made including the following:

• It means they do not require the capital to invest in expensive manufacturing plant.

• They are specialists in designing and selling rather than manufacturing, so it is best to stick to what you know best.

• There are plenty of companies around the world who can make garments, increasingly these are in relatively cheap labour cost economies. Managing these factors is a specialized task.

• Generally, there is more margin in service activities than in manufacturing activities.

While all of these points are valid, it is worth facing the class with the question of why the other two companies (particularly Zara) have invested in these stages of the supply chain. Discussion here usually centres on the idea of control and speed of throughput.

Of the three, Zara is characterized by very significant investment in both these stages. Partly, this may be because, unlike the other two companies, Zara started out as exclusively a manufac-turing organization. Mainly, though, it is because Zara believes that it acquires distinct capabilities by owning so much of these stages (and other stages) of the chain. Try and avoid debating this issue at this point with the class. Generally, it is best left for the overview of the whole case.

Distribution

Very few companies of this type still perform all their own distribution. All three have ware-house facilities. In particular, Zara has put in significant investments into warehousing. Ask the class why warehousing is important to companies like this. The debate should focus around the concept of speed. Ask the question, ‘What is a warehouse for’? Answers usually start by de-scribing warehouses as places where inventory is stored. Ask whether this is what happens with Zara (as the company with the most investment in automated warehousing). The answer is that for fast fashion companies, increasingly, a warehouse is not a storage place as such; it is rather a sorting operation, similar to a post office. Goods should not stay for long in the warehouse (if at all); rather, the warehouse is to split batches up and reassemble them for delivery to the retail stores. To that degree, it is an extension of the factory.



The other part of distribution is the physical logistics of moving the goods around the world. This is a part of any company that is most likely to be outsourced. As far as one can gather, all three companies outsource a very significant part of this activity.

Retail

Here, we have a contrast between Benetton on one hand (that owns very few of its own retail stores) and H&M and Zara on the other hand (who own them all, except for partnerships in countries where this is a legal necessity). Again, ask the class why this should be so. The discus-sion may initially focus on the advantages of not owning your stores but relying on franchising them instead. This is what Benetton does. The main advantage here is that the company can ex-pand without investing too much of its own capital. So, why have Zara and H&M chosen not to franchise at all? This is where the discussion can be moved on to discuss the more general is-sues concerning the broad differences between the three companies.

Overview of the three companies

The main point here is that, although all three companies are in (more or less) the same segment of the market, they have chosen to organize themselves in different ways. One point here is that there is no obvious best answer in the design or management of supply chains. However, there are differences between the companies, and these are reflected in the design chain choices they have made.

Benetton can be seen primarily as a brand. This is supported by the nature of its clothes (the United Colours of Benetton), which is why it retains control over the design process. But apart from that, its main concern is to establish the brand in the market by building on its image (hence the concentration on advertising, not entirely successful in every market). But the focus is always on the brand and the image. It does not, therefore, need total control of the rest of the supply chain in order to achieve this. All it needs is sufficient control through the factories that it does have and the stores and franchise agreements that it operates, to exert a guiding influence on the store’s brand image.

H&M is again primarily a design-led company, but one that has chosen to manage its market growth by investing in retail. This may be partly because H&M generally sells at a lower price point than Benetton. One would assume, therefore, that its margins are less. Therefore, it may wish to retain the entire retail margin for itself rather than give some of it to franchise holders. To an even greater extent than Benetton, it does not invest between the design and the retail stages of the supply chain. In this, it is similar to many other companies operating in this part of the market, Gap, for example.

Zara is the most interesting of the three in many ways. It has a far higher degree of vertical inte-gration and it also has the fastest throughput time from design to retail store. These two facts are not unrelated. Zara focuses on speed through control. It believes that controlling a large part of the supply chain is the only way to guarantee very fast supply chain throughput. Also, because Zara produces a huge number of new designs every year (it is more likely to modify a garment or design it afresh than it is to repeat an order), it places even more emphasis on the need to con-trol the total throughput.


C H A P T E R 8

Blackberry Hill Farm∗

Synopsis

Blackberry Hill Farm (BHF) has developed two businesses to complement their traditional farming activity over the last 6 years. The first is a service operation opening up the farm to paying visitors who can observe farming activities and enjoy tours, walks and exhibits; the sec-ond is a facility manufacturing preserves.

The case allows students to explore capacity constraints in a service business and to compare the capacity with demand forecasts. The teacher will be able to highlight the dangers of ignoring changes in ‘mix’ of demand and the inappropriate use of averaged data. Students can explore options for flexing capacity, managing demand and target marketing to achieve a better balance between capacity and load in a highly seasonal business.

They can also examine the role of inventory, personnel issues and seasonality in the manufac-ture and supply of preserves in which there are constraints in production.

The case should allow students to focus on trade-offs between conflicting organizational priori-ties, forcing them to examine compromises and make appropriate decisions that may (or may not) please differing stakeholder groups.

Key issues

Capacity management in services and manufacturing in a seasonal business

Quality

Inventory

Marketing/operations interaction

Strategy in small businesses

Questions

1. What are the current capacity constraints of the farm?

2. How would you improve the operation of the farm? Focus on the: a. long-term strategic issues; b. medium-term planning and control; c. short-term operations issues as appropriate.

∗ Teaching note by Nicholas Wake Warwick Business School



3. What are the strengths and weakness of the proposed new ventures (School room versus Maize maze)? What advice would you give Jim and Mandy regarding this year’s new venture?

4. How do you rate their preserving operation in terms of:

a. inventory control;

b. productivity;

c. capacity planning;

d. awareness of staff issues;

e. availability for visitors.

5. What improvements would you recommend?

Discussion

1. Introduction

Most students should be well prepared to provide data and calculations on all the details pro-vided in the case. However, before this, it is important to overview the business, its objectives and constraints.

Objectives

Both Mandy and Jim want to improve the profitability of their business.

Jim does not want to disturb the farming business and is concerned that they do not turn it into a theme park.

Constraints

The Walker’s do not want to invest more capital into the existing business, although they are considering one of two projects for expansion.

They do not want to grow that much more since the operation is becoming complex and more difficult to manage.

Although it is possible to hire casual labour in the summer months (students), there is a tight labour market for good quality permanent employees.

2. Analysis of demand for the farm visits

While Question 1 asks the student to analyse various capacities, this is only relevant in the con-text of knowledge of demand. The data on farm visitors is expressed in numbers. The first task is to highlight the pattern of the demand for the service.



Seasonality

Exhibit 1 highlights the seasonality of the service over the year, while Exhibits 2 and 3 show visitor numbers on a daily and hourly basis. It is evident that demand is subject to substantial fluctuation. It is governed partly by factors that one can forecast (the season, weekday/weekend, time of day) and partly by factors such as the weather (rain/shine) and other activities in the area (fêtes, festivals, etc.) over which the Walkers have no control.

Although the Walkers would not recognize the terminology or indeed have sophisticated plan-ning software, they are effectively using an MPS containing a demand forecast that is based on historic data to plan their human resources and inventory levels throughout the operation. In attaining the objective of improved profitability, it is worth questioning whether better planning at a high level (MPS) and detailed level (MRP) would be beneficial. For example, are 80 staff needed on August weekdays when visitor numbers can be as low as 100 compared to a weekend peak of 1250?

Managing capacity/demand

Generally trying to manage demand better (i.e. smooth it) would be beneficial.

Ideas for how this could be done would include:

• a booking system

• promoting Mondays

• alternative services

• filming/video recording preserve manufacture

• talks in the evenings/off-peak periods

• prices and discounts

• special late opening in summer

• promoting ‘early morning’ tours with alternative attractions

• open up midweek for specific coach parties with the help of kitchen staff (during off-peak periods).

It would also be beneficial to start recording other information that would help manage capacity better, such as:

• records of coach/car demand

• effect of weather patterns on visitors and sales

• customer’s tolerance to queuing

• price elasticity of demand for entrance fee



• customer survey needed – what service package they want (customers and non-customers)

• demographic data on target customers.

3. Capacity analyses

(1) Car parking

The maximum capacity of the car park is

85 cars × 4 people = 340

4 coaches × 40 people = 160

Maximum = 500 people

A discussion should note the following:

This is mix dependent (cars and coaches).

This assumes that the average number of people in a car is 4, and that the coaches arrive full.

The maximum theoretical capacity of the car park can be calculated after noting that the parking spaces may be used more than once a day (average time spent at the farm is 3.1 hours, open for 10.5 hours in summer). This would suggest that if the spaces go through three cycles of usage during the day, the maximum capacity being 1500.

Given that people are parking dangerously in the local roads, it is clear from the daily demand peaks and the wrong mix of cars/coaches, combined with inaccurate assumptions on the number of people per vehicle, that the capacity is being exceeded. This may also be because some of the 80 staff arriving daily may be taking up some of the parking slots.

Discussion on management of the car park would include ideas such as the following:

• Increasing the capacity by:

• making coach drivers drop passengers off before parking elsewhere; this would free up additional parking spaces,

• making staff park elsewhere.

• opening up a field for overflow parking in peak season.

• Managing demand by:

• charging for stays over 3 hours.

• offering discounts to people arriving on cycles.

• selling discounted early bird/late arrival tickets on weekends.

• increasing weekend prices/discounting mid-week prices.



The trade-offs associated with each of these ideas should be discussed; for example, charging for parking may prove unpopular and might mean people rush their visits and hence buy less in the shop/café. Higher prices at peak times might reduce demand and hence improve visit qual-ity; however, cheaper off-peak tickets might reduce revenues overall.

(2) Preserves

In examining this operation, it is important to review the manufacturing and service sides sepa-rately.

(2.1) Manufacturing efficiency

For summer months (April–September)

actualoutput 5751Efficiency 96%

effective capacity 6000 = = =

However, we are told that on a busy day, output can fall to 5000 kg, that is, an efficiency of 83%.

In the winter months (October–March), efficiency is 86% (including downtime). When the downtime of October and November is taken out of the calculation, efficiency is 105%.

This analysis reveals that there are significant efficiency improvement opportunities such as:

• scheduling in preventative maintenance

• changing the customer interaction model on busy days.

(2.2) Manufacturing capacity

BHF currently uses a mixed capacity plan (Exhibit 4). Exhibit 5 shows the demand variation of the product, which results in fluctuating inventory levels (Exhibit 6).

The current issues are:

• a request for more stable employment from the kitchen ladies;

• high inventory levels that peak at almost 16,000 kg and average 7879 kg.

Given that preserves retail at £5–£15/kg (2005 figures), the average inventory value equates to almost £80,000 with a peak of £160,000.

The impact on inventory and capacity of a level capacity and chase demand capacity plan are shown graphically in Exhibits 7 and 8 and are summarized in the table below.



Current Level Capacity Chase Demand

Average Inventory (kg) 7780 7387 4224

Average Inventory (£) 77,800 73,870 42,240

Maximum Inventory 15,234 14,484 11,500

Maximum Inventory (£) 152,340 144,840 115,000

In making recommendations on an alternative approach, students are faced with a classic trade-off between lower WIP and hence working capital requirements on the one hand and employ-ment stability on the other. In recommending a solution, issues such as annualized hours, safety stock levels, preventative maintenance, etc. are likely to be discussed. Another issue that may be discussed could be that a level capacity plan (which would mean working perhaps 6 days a week) would mean that the kitchen is not open as a visitor attraction all the time. This would change the dependability variable on a polar diagram.

(2.3) Viewing area

The cycle time varies between 7 minutes in the winter and 14 minutes in the summer, with a batch size of 15. While winter demand can be accommodated at 64 visitors an hour, this area could be a bottleneck in the summer, with visitors baulking/reneging when they see the queue.

There are operational benefits to better management; firstly, a higher throughput might lift pre-serve sales and secondly, there is a need to improve kitchen efficiency. This could be achieved through ideas such as:

• having information signs on the process outside;

• having a three-stage process (read signs, visit kitchen, move to tasting area) with signals to pull customers through the process on a reduced cycle time;

• reducing interaction with kitchen staff, for example, through having a guide dressed up in period costume during peak demand times or a tape-recorded/video commentary with a short cycle time;

• increasing the size of the viewing area.

(3) Tractor rides

The maximum capacity for rides is 90 persons/hr; this is insufficient when, at peak hour, there are 360 people on site. There are a number of options for managing demand/capacity such as:

• having it as a separate chargeable ride;

• giving visitors a ticket with the time of their ride on it (also limits them to one ride each);

• stopping the hop-on, hop-off service;

• putting the start/stop near the fixed exhibits (queue theory states that the spent riding the tractor feels shorter than time spent queuing);



• hiring another tractor for peak times;

• adding a second trailer;

• changing the flow of passengers on/off the trailer so there is a separate entrance and exit (Exhibit 9).

(4) Pick your own (PYO) area

There are various ideas for managing peak time queues without resorting to the additional ex-pense of employing packers. These ideas might include:

• making customers weigh and price their own goods;

• selling empty containers that visitors fill (no need for weighing);

• planting and selling a wider range of seasonal products (e.g. winter root vegetables as well as summer fruits).

(5) Petting zoo

A number of ideas may improve the operational efficiency of the petting zoo, such as:

• implementing a cycle time by running the service for 20 minutes before letting the animals rest for five minutes;

• changing to lower maintenance animals (e.g. guinea pigs) to reduce staff costs;

• looking at flow improvements around the exhibit (i.e. look for bottlenecks).

(6) Bakery

Since the donut machine is creating bottlenecks, it should either be moved behind the line of visibility or into the café (where visitors experience delays).

(7) Café and shop

Since this is the most profitable area, it would seem appropriate to maximize the space given to the café and shop, for example, by removing the display area at peak times. The idea of manag-ing demand by allowing customers to pre-order may work, but could be problematic if, for example, they turn up late or early for their orders (particularly if it is hot food). The café should look at the volume/variety mix, and reduce their offering at peak times.

The case study simply states that congestion is a problem, but is unspecific about where (in the kitchen, the tills, the sitting area, etc.). It would be quite straightforward to examine where the bottlenecks were and implement an improvement programme that involved employees (a Kai-zen approach).



4. Analysis of new venture

Maize Maze School Visits

Advantages Profitable

Less Outlay (£20,000)

Fast ROI

Produces a harvestable crop

Utilizes assets when demand for farm services is slack

Can schedule arrival time to suit service

Uses vacant farm building

Membership of National Association of Farms for Schools should mean free publicity

Already have staff skilled at interacting with kids

Demand manageable since tours would be pre-booked

Outlet for preserves in off-peak time

Free publicity – kids may bring parents back

Will come even if weather is bad

Could be programmed for Monday only

Occupies less car parking space/person

Simple target market

Could have specially designed service package

Disadvantages Will add to peak time congestion

Easy to imitate

Passing fashion

Adds to complexity of operation

More expensive – £35,000

Payback time may be longer

Discounted admissions

Lumps of demand may overload service at various times/points.

There are some key issues to be considered when determining which of the two projects to im-plement. Maize mazes are generally open from mid-July until the end of August/first week in September when the maize is harvested. This means that the 10,000 extra visitors will be visit-ing the farm in the peak months of July and August, resulting in an increase in demand of around 1/3. What is clear from the case is that full capacity is already being reached in several areas and that additional demand could not be accommodated easily.

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Exhibit 9: Layout of Tractor Ride



Single entrance and exit leads to congestion and sub-optimal flow.

A separate entrance and exit will facilitate a quicker turn around since the trailer loading can commence while passengers from the previous trip are still alighting.


C H A P T E R 9

supplies4medics.com

Case synopsis

Supplies4medics distributes a range of around 4000 SKUs of medical and safety item supplies across Europe. The case highlights increasing problems with inventory shortages and declining service levels at the same time that total inventory levels were at a high level. The company needed to borrow cash to fund both growth and increasing inventory. This case allows students to explore the underlying reasons for this situation, and there is adequate numerical data that can be analysed.

Issues include the analysis and estimation of stock-turns, Usage Value (UV), Economic Order Quantity (EOQ), Pareto (ABC) analysis, the effect of inventory on service levels, cash flow and overall inventory holding requirements.

Using the case

This case provides an ideal introduction to the topic of inventory management in the service sector, and is at a level to be of use on both undergraduate and Masters/MBA courses. It pro-vides sufficient information for the students to prepare spreadsheets for ABC analysis and inventory classification. This would be a good case for assessing work, but may be too long and difficult for a traditional examination.

Notes on questions

Prepare a spreadsheet-based ABC analysis of UV.

Classify as follows: A Items: top 20% of UV

B Items: next 30% of UV

C Items: remaining 50% of UV

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0.00

16

10

0 —

83

.2

Sub

tota

l —

—

26

,307

—

—

—

—

10

,943

2.

40

21.6

—

—

—

—

—

—

—

—

—

—

—

Tota

l —

—

44

7,41

0 44

7,41

0 —

10

0.00

—

83

,386

5.

37

9.7



Table 1 completes this analysis. The sample size is 20 SKUs out of a total of 4000 – a 0.5% rep-resentative sample – students may note that the total UV of the sample is 447K, in comparison to 0.5% of the stated turnover (sales) of 120 million, which is 600K. We can conclude that the sample is probably representative of the whole, taking account of the retail mark-up. Note that the UV is based on purchase prices for inputs to the company, whereas turnover is based on in-voiced value for outputs to customers, which must be a higher figure.

Four A items account for 81% of UV.

Four B items account for a further 14% of UV.

Twelve C items account for the remaining 5% of UV.

Calculate the inventory weeks for each item, for each classification, and for all the items in to-tal. Does this suggest that the OM’s estimate of inventory weeks is correct? If so, what is your estimate of the overall inventory at the end of the base year, and how much might that have in-creased during the year?

These calculations are also shown in Table 1, and to summarize,

A items = 9.5 weeks

B items = 5.7 weeks

C items = 21.6 weeks

Overall = 9.7 weeks.

The stated inventory cover is 10 weeks, in line with the analysis.

This would imply an average inventory value of about 20% of UV. Since we only know total turnover (output value), we must calculate the inventory level from the input data in Table 1, by scaling up by a factor of 4000/20 = 200.

Inventory = 83,386 × 200 = 16.68 million

Annual Holding Cost = 16.68 × 0.15 = 2.5 million

This is probably growing at least in line with turnover, by 25% per year, and so must be sub-jected to a tight control.

On the basis of the sample, analyse the underlying causes of the availability problem described in the text.

Students will usually notice that two SKUs are out of stock, both C Items. In addition, the in-ventory (Stock Weeks) shown in the last column of Table 1 is less than two weeks for a further three items, two of which are B Items. Thus, there is a significant risk of delivery failure for around 25% of the items, if demand fluctuations occur. Indeed, Pierre Lamouche states that around 500 (of 4000) SKUs or 12.5% are out of stock at any given time.



Pierre gives some of the reasons that he considers are responsible for this problem, and the main cause must be failure to update Reorder levels and Reorder Quantities (ROQ) in line with changes in demand as the company has grown. With the multitude of new products, sales fore-casts are likely to be inaccurate, leading to a temptation (or need) to over-order, just in case.

Calculate the EOQs for the A Items.

Table 2: EOQ Calculations

Sample # Unit Cost Ch D 2 × CoD/Ch EOQ Old ROQ

19 430.00 64.50 430 666 26 50

4 3.50 0.52 35,400 6,807,692 2609 10,000

13 1.40 0.21 22,500 10,714,285 3273 8000

2 3.60 0.54 6000 1,111,111 1054 1000

Notes: Ch = Unit Cost × 0.15

Co = 50

What recommendations would you give to the company?

Conduct ABC analysis at least annually, to keep track of changes in volume.

C Items can safely be purchased in sufficient quantities to last a considerable period (say 6 months, which would give an average inventory level of 13 weeks). This will reduce the risk of stock-outs. Two bin systems should be used to trigger reorders.

B Items should be subject to more care and more frequent ordering, based on forecasts where practicable.

A Items: Reorder levels should be based on EOQ, which is shown in Table 2. For the first three items in Table 2, this would result in at least a halving of expensive average inventory levels. The savings would be more than adequate to fund the increased inventory of C Items. These A Items should be subject to tight managerial control, close relationships with suppliers and fre-quent stock checks.

Availability levels should be monitored by category and regularly reported to senior manage-ment. Maximum inventory levels should be set and monitored.


C H A P T E R 1 0

subText Studios, Singapore

Case synopsis

C.K. One founded subText in the South-East Asian computer-generated imaging (CGI) market three years ago. The case opens with him (the first time) needing to apologize to some clients, because of the failure of the business’s resource planning and control system (in fact, there is not much of an adequate system). Till this time, he had not fully realized how much reputational and financial risk there was in failing to meet schedule dates. Yet, imagination, expertise and reliability, all figured prominently in the business’s promotional literature.

subText Studios operated in the small, but growing, market for computer-generated imaging services in the advertising industry.

At the heart of the company are the three core departments that deal sequentially with each job: pre-production, production and post-production. Pre-production is concerned with refining the brief as specified by the client, checking with and liaising with the client to iron out any ambi-guities in the brief, storyboarding the sequences and obtaining outline approval of the brief from the client. In addition, pre-production also acted as account liaison with the client and was re-sponsible for estimating the resources and timing for each job. They also had nominal responsibility for monitoring the job through the remaining two stages. Production involves the creation of the imagery itself, a complex and time-consuming process involving state-of-the-art workstations and CGI software. Around 80 per cent of all production work is carried out in-house, but for some jobs, other specialist workshops were contracted.

Post-production has two functions; first is to integrate the visual image sequences produced by production with other effects such as sound effects and the second is to cut, edit and generally produce the finished product in the format required by the client. Each of the three department employs teams of two people.

The case focuses on the fifty three slash F, the source of chaos, confusion and recrimination. The job is late by 3 days, but has caused the client to postpone a presentation; also, subText had given only 5 days’ notice of late delivery.

Using the case

This case is relatively straightforward in that it deals with a small organization with relatively few jobs and where the technology is relatively easy to understand. Perhaps, very few people understand the details of computer-generated imagery, but almost all students will have an idea of what it is. It also is set in a business that is not as off-putting to many students as the conven-tional manufacturing-based examples that are used to illustrate scheduling.

We use the case as a general introduction to resource planning and control. Because the case explains a failure in the company’s planning and control procedures, it is relatively easy to sim-ply ask, ‘What went wrong’? in order to start a general discussion. Furthermore, the case can be



used to discuss all the important elements of any resource planning and control system. For that reason, the case can be used at the beginning of a session on resource planning and control as well as be used as an opportunity to consolidate learning at the end of such a session.

Notes on questions

Question 1 – What went wrong with the fifty three slash F job and how could the company avoid making the same mistakes again?

One could summarize the mistakes made with the fifty three slash F job under two categories. First, there was a general failure to estimate the time that each part of the job would take. Sec-ond, there was a failure to understand the urgency of the job and make appropriate decisions sufficiently early.

For example, the total time estimated for this job was 32 days, whereas the actual time taken was 49 days. Examining Table 10.1 in the case, this is not at all unusual. There seems to be a general bias towards optimistic estimation in almost all of the jobs completed in 2004. The pro-duction and pre-production stages in particular seem to be very bad at estimating time and almost always underestimate the time needed. It would seem to be necessary to investigate why this is so. Also, there is evidence in the case that it should have been clear that the fifty three slash F job would be a problem when it arrived. Simply by looking at the jobs that had already been started at day 18 (the day on which the fifty three slash F job arrived) one can see that, without rescheduling other jobs, it could not have been completed in time. For example, job D was started by the production department, notwithstanding the fact that it would obviously have to interrupt the job and devote more resource to the job F.

This is best illustrated by using a schedule drawn on the board similar to Figure 10.13 in case. Alternatively, an animated PowerPoint schedule can easily be constructed to show the sequence of events and decisions that preceded the launch of the fifty three slash F job into the process.

A major learning point here, and one that some students have difficulty in grasping, is the time dependency of jobs as they are scheduled through different stages of the process. It may be ob-vious to some that it is unlikely that one could start processing a job on one stage until it has been finished on the previous stage, but not to everybody. We find that some students have a blind spot regarding this issue. Using a schedule such as that in Figure 10.13 and slowly build-ing it up is the best way to overcome this problem.

The other problem with the fifty three slash F job was the need to subcontract more of the job than was necessary. This goes beyond simply underestimating the time for the job. It means that insufficient attention was paid to the requirements of the job when it first came into the opera-tion, or alternatively, that there is insufficient knowledge within the operation to make an appropriate judgement regarding how much of the job could be done in-house. Either way, this caused significant problems. These problems were made worse by the business’ inability to find an appropriate subcontractor. It would appear that subText had been relying on one subcontrac-tor, who was unable, in this case, to help out. It obviously needs to develop a more extensive network of potential suppliers who could carry out this kind of work. This is a failure of the supply side interface of the planning and control system.

Avoiding making the same mistakes again leads on to Question 2.



Question 2 – What would you suggest that subText do to tighten up its planning and control procedures?

The best way to debrief this question is to work through the various elements that are the essen-tial parts of any resource planning and control system, as described in the chapter. These are as follows:

• a customer interface that forms a two-way information link between the operation’s activi-ties and its customers;

• a supply interface that does the same thing for the operation’s suppliers;

• a set of overlapping core mechanisms that perform basic tasks such as loading, sequencing, scheduling, and monitoring and control;

• a decision mechanism involving both operations staff and information systems that makes or confirms planning and control decisions.

Under each of these headings, discuss with the class the effectiveness of the current resource planning and control system used by subText.

There seems to have been no effective customer interface. C.K. himself seems to play a large part in liaising with customers, but one suspects that the communication is not helping the resource planning and control activity. There seems to have been no indication of just how important the delivery data was on the fifty three slash F job, nor did the customer interface give any kind of indication to the customer that the job might be late. Of course, this is not uncommon in many businesses. One often hears the same excuse as is used in the case, namely, ‘I didn’t want to upset the customer and I was trying my best to complete the job on time’. Delivery integrity (keeping the customer informed) can be just as important as delivery reliability (delivering on time).

Nor does there appear to be an effective supply interface in subText’s resource planning and control system. It failed to provide an understanding of the availability of subcontracting re-sources in the fifty three slash F job, and there seems to have been no alternative list of suppliers readily available.

There seems to have been a very crude set of core mechanisms to calculate the basic data for re-source planning and control but they did not perform even the most fundamental of tasks, such as indicating that a job is likely to be late. In fact, here, all four activities (loading, sequencing, scheduling, and monitoring and control) seem to have failed. The production stage of the process is clearly overloaded, and the ability to sequence jobs in a different order at each stage has not been considered. Only when there were clear problems were jobs sequenced in any order other than the one in which they had arrived. The business did not seem to have even the simplest scheduling device (such as the Gantt chart shown in Figure 10.13) that could have predicted the problems. Finally, there seems to have been no effect of the monitoring and control that enabled the operation to make decisions in time to minimize the problems, nor does there seem to be a clear decision mechanism for bringing human judgement and information together. There seems to be little clarity about who has overall responsibility for managing the jobs through the proc-esses. Many other similar operations (such as creative and advertising agencies) have a separate section, sometimes called traffic that manages the processing of the job through the operation. This is what seems to be required here. Certainly the idea expressed by C.K. at the end of the case, that the problem is mainly one of estimating, after which ‘Each of the core departments can be responsible for their own planning’, would seem to be inappropriate.


C H A P T E R 1 1

Boys and Boden (B&B)

Case synopsis

Boys and Boden (B&B) is a small, independent building materials company that also undertakes the production of specialist, bespoke joinery items such as windows, doors and staircases for local and regional customers. The newly appointed General Manager is considering whether the production of staircases would be improved by the creation of a ‘staircase cell’ that is run on lean synchronization principles. He learnt about these manufacturing approaches in his MBA Operations Management course but in the context of high volume, repetitive manufacture, a very different environment to the ‘one-off’ situation at B&B. He aspires not only to improve delivery reliability, but also to regain control of costs, in order to restore profitability. It may also be possible to reduce the lead time (the case suggests that 6 weeks is needed for a special staircase), providing a further potential competitive advantage.

Key issues include the following:

• cellular manufacturing;

• JIT (lean synchronization); and

• management of change.

Using the case

This case is best used after a lecture on lean synchronization, and preferably after the students have a reasonable understanding of issues such as cellular manufacturing. If students understand these issues, then they should have little difficulty in tackling the case. A particularly important point to bring out throughout the case is the idea that this particular part of the company is of relatively low volume and high variety. This is a useful issue to debate in class, because most students will assume that just-in-time and lean synchronization are only applicable to high vol-ume, mass processes.

Notes on questions

Question 1 – To what extent could (or should) Dean expect to apply the philosophies and techniques of JIT described in this chapter to the run-ning of a staircase cell?

Most students will be familiar with the general appearance and design of a typical staircase. The main components are as follows:

• Strings (the two long sides of the flight)



• Treads (what you stand on)

• Risers (blank off the back of the treads)

• Newels (the posts that hold the handrails)

• Handrails (what you hold on to)

• Spindles (fill in the sides between the handrail and the strings)

• Other small parts such as wedges, joining blocks and infill pieces.

Standard staircases are produced by specialist manufacturers in large quantities, using standard softwood timber and at very low cost; they are made to stock, for immediate ex-stock delivery. In contrast, B&B make bespoke (special) staircases; the size, shape and materials vary widely from order to order. Normally, no two staircases are exactly the same, although they often differ only in their dimensions or type of timber (e.g. oak, pine).

At the date of the case, B&B produced staircases in a general-purpose jobbing process (Chapter 4), mixed with a wide range of other special products (doors, door frames, windows, etc.). Stair-cases are usually large and cumbersome, getting in the way of the flow of other smaller products, (the case refers to ‘… joiners almost climbing over each other to do their work’). Al-though every qualified joiner (carpenter) had been trained to make a wide range of products, in practice, the less experienced ones were slow with unfamiliar work, simply because of the lack of repetition, and often failed to complete their work within the estimated times. In contrast, Dean (the General Manager) had already found that the door expert who specialized in special doors kept to the estimated times. So, it seems that the learning curve applies even in a jobbing environment.

Simple product structures that have routings with high repeatability are prime candidates for pull control. Staircases certainly meet both these criteria; the product structure is really only a simple three-level bill of materials (BOM) (timber, component, final assembly). The routing is standard for all stairs, as described in the case.

The high product variety ensures that batch production would not be feasible, so the existing jobbing process is conducted one order at a time, akin to ‘batch of one’. Because volumes are low, there has been little need for the division of labour; each joiner completes a whole stair-case, but using the general-purpose machines (process layout) which are also needed for all other products. As Dean had noticed, this resulted in long process routes and interference be-tween the processing of different products… that is, waste.

Thus, although this is an unusual context for the application of lean synchronization and cellular manufacturing, it does have many of the suggested pre-requisites. Looking at the philosophy of lean synchronization that aims to meet demand instantaneously, with perfect quality and no waste, it certainly does have the aim of:

• improving productivity;

• eliminating waste;

• delivery of the parts at the right quality, right time, right place;



• minimum use of facilities, equipment, materials, human resources;

• employee involvement;

• team work;

• simplification.

These elements of the philosophy of lean synchronization are generally consistent with Dean’s requirements for the new system. But its commercial feasibility will depend on gaining suffi-cient extra volume for the cell to be viable as a team-based operation with some division of labour and with dedicated machinery and facilities. To an extent, therefore, it is a strategic in-vestment with longer-term potential benefits.

The main objectives of the system would be to:

• increase capacity;

• reduce lead time significantly (including the provision of quotations);

• maintain or improve quality;

• reduce costs;

• create a simplified workflow;

• reduce/eliminate non-value-added activities;

• develop a team culture for continuous improvement;

• create a relatively autonomous business unit.

Turning to the techniques of lean synchronization, students will quickly appreciate that not all of them will apply to the proposed staircase cell. Taking each in turn,

Lean Synchronization Technique Applicability to Staircase Cell

Basic working practices All elements can be applied usefully

Design for manufacture Only a limited opportunity to use (details only)

Operations focus Very relevant; basis of learning and competence

Small, simple machines Yes, but only using existing types of machine

Layout and flow Main basis of the development: cell-based layout

Total productive maintenance Important, but not yet considered by Dean

Set-up reduction Set-ups not considered as element of tasks

Total people involvement Important element linked to the philosophy

Visibility All very relevant and applicable

Just-in-time supply JIT component manufacture part of system



In conclusion, most of the pre-requisites for implementation of the philosophies and techniques of lean synchronization do (surprisingly) apply to the staircase cell. However, the main re-quirement to make it viable is extra volume, which could be generated by customers being increasingly satisfied with the price, quality and delivery performance of B&B’s staircase op-eration.

Question 2 – What are likely to be the main categories of costs and bene-fits in establishing the cell? Are there any non-financial benefits that should be taken into account?

The case does not provide any actual costs or forecasts related to this development. In practice, only a few could realistically be determined in advance. In particular, the benefits were of a qualitative nature, underpinned by the strategic intent outlined above. The benefits are all poten-tial ones, dependent on the successful management of the implementation.

Costs Benefits

Financial • Moving of equipment

• Duplicated equipment

• Training

• Dedicated support infrastructure

• Increased productivity

• Reduced waste (rework, scrap)

• Increased orders/capacity

• Better flow for other products

Non-Financial • Disruption during change

• Managers distracted

• Reduced employee flexibility

• Personal (Dean) risk of failure

• Vehicle for change

• Employee development

• Better identification of market potential

• Continuous improvement

Question 3 – At what stage, and how, should Dean sell his idea to the Joinery Manager and the workers?

Students may wish to debate the different views on this. Some will argue that it is best for Dean to have a fully worked-out and costed plan, which he would announce to the manager and workers sequentially on the same day, just prior to implementation. This would signal that no dissent was welcomed, and that the change was non-negotiable. It would only directly affect a few of the joiners, and those would be asked to volunteer for positions in the new cell.

Others would argue that this could provoke negative reactions from the manager and staff alike. Most would conclude that the manager should be involved in the feasibility analysis from early on. At the very least, there will be technical issues requiring early resolution (e.g. what type of machines should be used and/or purchased?). Others will argue that there are also similar advan-tages in involving the joiners from an early stage too, and this can help break any resistance to change. Either way, most people would not have heard of cellular layout and would have dis-torted views about the meaning and applicability of lean synchronization. These may be best addressed by an educational process (case studies, videos, games).



Question 4 – How different would the cell work be to that in the main Join-ery Department?

It is quite apparent that the introduction of the staircase cell will radically alter employees’ working life and individual job designs. It is natural (and hence should be anticipated) that peo-ple will exaggerate the negative aspects and underestimate the positive aspects. If these are not addressed, the cell is virtually destined to fail. In the end, Dean will have to use the very best of his interpersonal and analytical skills to win support at all levels. Early success in implementa-tion will be vital.

Comparing the work in the staircase cell and in the main Joinery department, the main work of the Joinery department is a jobbing process, employing about 10 skilled jobbers, who have ex-tremely wide skills, and a very high degree of autonomy to plan and control their work. They usually work independently, and are fully accountable for the quality of their outputs. Because they share key equipment and workspace, they have to be adept at working out of sequence when certain machines are already in use. They are accustomed to carrying materials around the department (Dean recorded 5 km per day!) and using the full range of equipment. They experi-ence an enormous variety of products, materials and finishes. The link to estimating appears to be weak, since many jobs exceed their estimated times and costs.

In comparison, the staircase cell would employ a smaller number of joiners, working as a team. Their skills and experience could vary, since the potential division of labour would make it pos-sible for at least one to concentrate on assembly and any other lower skill tasks. The team (rather than the individual) would have responsibility and relative autonomy to plan and control their work. There would be a fixed working sequence, fixed quality control procedures, and am-ple (excess) capacity at each workstation. Material would flow in a fixed sequence, eliminating the need for many of the long carries. Task variety would be much lower, and the differences between orders often being simply variations in some dimensions and/or the type of timber. Es-timated times would be closely linked to actual times, putting pressure on the team to improve output speed and productivity. Waste would be tightly controlled and improvement practices should be endemic.

This does not mean that the staircase cell would be unattractive to all the joiners. Some might see it as an advantage in terms of the following:

• Working in a team

• Good learning environment

• Developing deeper, specialized skills

• Existing work too complex and demanding.

Question 5 – Should Dean differentiate the working environment by pro-viding distinctive work-wear, such as T-shirts and distinctively painted machines, in order to reinforce a cultural change?

Students will be quick to recognize the symbolism of such approaches, and may feel that this will contribute to team identity and the clear formation of a separate identity. Many companies have found benefits in this way.



In the case of B&B, it is important that Dean ensures that the attitudes of all the joiners are fa-vourable. It is quite common for new groups formed by the management to be perceived as management’s pets, leading to tribal-style behaviour. This can include ostracizing members of the tribe, name-calling, and even sabotage! The consequences can range from unhappiness to complete disruption.

If the whole workforce has been bought-in to the change, these effects are less likely, and the use of symbolism may assist in the smooth operation of the cell.

Question 6 – What risks are associated with Dean’s proposal?

Most of these have been covered in Question 2 above.

Perhaps, the greatest risk is the failure to achieve the volume growth necessary to sustain a spe-cialized, sizable cell.

In practice, this volume growth was achieved and the cell was a commercial success. Its further development is described in the Boys and Boden (B) case published in the companion casebook Cases in Operations Management, Johnston R, et al, Pearson Education.


C H A P T E R 1 2

Turnround at the Preston Plant

Case synopsis

This case is essentially a story of how a relatively small factory, supplying ink jet paper to Hew-lett Packard and other customers, moved itself from being a loss-making operation into a profitable position by gaining control of its processes. The case covers a period from late 1998 through April 2001, with the case relating events in chronological order. The company buys in large rolls of paper from paper manufacturers, applies very precise coatings of chemicals to the paper that enable it to take ink jet printing at high quality levels and then slits and shears the paper into standard sizes. This paper is then packed, with the packaging dependent on the cus-tomer for whom the paper is being produced. The most difficult operation is the coating process and it is this process that is out of control (in the Statistical Process Control (SPC) sense). Dur-ing the case, the plant is sold by one group and bought by another. Its new owners, the Rendall Graphics Company, take the decision to close the plant. However, over a period of time, Tom Branton, the Managing Director of the plant, takes a series of actions that improve quality and reduce cost in the plant. Eventually, the closure decision is reversed.

Using the case

This case can be used as a general introduction to the importance of process control. It is useful if students have at least a broad understanding of process control before tackling the case. They do not need to have an in-depth familiarity with the statistics involved (although this is useful), but they should understand the nature of how process control tackles variation in process per-formance. The case can then be used to demonstrate how the idea of variation reduction is fundamental to improving the performance of processes. An important issue that can be drawn out of the case is that the distinction between detailed process management on the one hand and strategic impact on the other hand is not that great. In other words, although some of the details of process control may seem to be detailed and technical, its impact can be very strategic indeed.

Note on questions

Question 1 – What are the most significant events in the story of how the plant survived because of its adoption of quality-based principles?

The best way to debrief this question is simply to ask the class to call out the most significant events in the order that they occur in the story. As each point is written down on the board, one can make comments appropriate to the point but also to whatever else is being covered in the class. Some of the main points are discussed below.

The curl problem (late 1998) – Hewlett Packard (HP), the plant’s main customer, said that they had encountered a problem with paper curling under conditions of low humidity. Ask the class,



‘Had HP received any complaints’? No. Then, ‘What does that tell you about the nature of HP as a customer’? Most students will say that HP is a difficult or demanding customer. Ask them, ‘Is it good to have demanding customers’? Many experienced students will say ‘yes’ to this question. It may be useful to remind them, ‘Of course it is good to have demanding customers because you can learn from them’. However, it does not always feel like that when you are ac-tually dealing with demanding customers. The important issue is to make sure that their complaints really are treated as a learning opportunity.

The curl problem solved (January 2000) – The curl problem obviously took a long time to solve. Why was this so? Either it was a particularly difficult problem (unlikely) or the Preston Plant did not seem to be fast on its feet in responding to customer requests (more likely). Also, during this period (1999), the plant had been making a loss and scrap and rework levels were continuing at unacceptable levels. Ask the class, ‘What was the response of the company to this’? The plant’s operations management team increased the speed of the line and made a number of changes to operating practice in order to raise productivity. Ask the class, ‘Was this a good or bad thing to do’? It was a bad thing because it did not tackle the underlying causes of the problems. In fact, it made them worse. Speeding up a process that is already out of control and making unrecorded changes to the process while it is operating will only make things worse. Also, there was clearly no understanding of the nature of process variation. (If it is within specification, then it is OK). In fact, the plant was only shipping product that was within specification to Hewlett Packard, and throwing the rest away. They seemed surprised that HP (because of their understanding of process variation) could see that this was happening.

The plant asked to bid for the Vector project (Spring 2000) – This was an important new contract that would have secured work for several years.

The plant is bought by Rendall (Spring 2000) – However, the acquisition was part of a larger acquisition and Rendall were not impressed with either the strategic importance or the perform-ance of the Preston Plant. Productivity and quality issues were still very problematic. Ask the class, ‘How did people in the plant view HP’s concerns’? They could not really understand them (‘Look, we are making roll after roll of paper, it’s within specification. What’s the problem’?).

The crisis becomes evident (June 2000) – Tom Branton is told by an HP engineer that their processes are not in control. Ask the class, ‘Why do you think this had such an impact on Tom Brandon’? Possibly because this engineer at HP, probably sitting hundreds of miles away from the Preston Plant, could tell Tom more about his processes than Tom understood, and he was working right next to them. This is the real power of process control charts. By looking at varia-tion in performance, one can understand the nature of the processes even if you have not seen them. Ask the class, ‘What did Tom do then’? He went back and did three things.

• He developed shut-down rules with the operators. These unambiguously stated when a process must be shut down because there were doubts about the quality levels of the proc-ess. How did the operators feel about this? It removed the ambiguity from their job. No on could criticize them if they shut the line down provided that they had obeyed the shut-down rules.

• Each production team started holding daily reviews of control chart data. Why do you think this was a good thing? Because it meant that each team had a chance to reflect on what had happened that day and how it could be improved. Furthermore, the control charts became the centre of discussion. This would mean that significant training in SPC would be neces-sary, but this would add to the skills of the operators.



• One day a month all three shifts got together to discuss progress. Why was this a good thing? All three shifts could get together and learn from each other. It also showed how committed the plant was to putting things right. Ask the class, ‘Apart from the three shifts, who else was at these meetings’? Personnel from HP. Ask the class, ‘What are your reac-tions to that’? Many of the class will remark that it is a very brave thing for the Preston Plant to do. Ask them why they think Tom Brandon did this. Probably desperation. He had already realized that HP fully understood how bad they were, so what was there to lose?

Starting to show results (September 2000) – There was a real sense that things were changing, and people were starting to think with an emphasis on quality. In spite of stopping the line peri-odically, the efficiency of the plant was also improving. Ask the class, ‘Why do you think this was so’? Because stopping the plant meant that the operators and the management had to tackle the problems, which in turn prevented them from happening again, and so quality and produc-tivity would improve.

Failure to get the Vector project (September 2000) – The recent quality problems had under-mined HP’s faith in the company.

Rendall decides to close the plant (September 2000) – Ask the class, ‘Do you think this was a reasonable decision’? There may be some debate about this. But, bring out the point that Ren-dall’s head office would judge the plant primarily in financial terms and these had not improved. At an operational level, it was clearer that something was happening but it takes time for these to work through to the financial measures. Ask the class, ‘What did Tom decide to do’? He did not despair! In fact, he carried on trying to improve the plant. Ask the class, ‘Why do you think he did this’? Perhaps he figured that he could get Rendall to reverse their decision. Also, it was probably a matter of professional pride. The management team had already started to turn the plant round; so, what else were they going to do? Just let all their hard work fade away? Ask the class, ‘What did he do to continue the improvement’? He did three things.

• He continued the quality initiative, making even more use of SPC.

• He reduced operating costs by taking people out of the plant (ceasing to employ them). He used a zero-based approach to this. It might be useful to discuss the nature of zero-basing as an approach to making staffing decisions. It is a radical but effective method of determining exactly how many people are needed from first principles rather than from historical prece-dent. Ask the class, ‘Which department downsized the most’? It was the quality department (ironically). Ask the class, ‘Why was that so’? Because if you are not making garbage you do not need to check it all the time.

• The plant developed new products. Ask the class, ‘Did the improvement in their process performance help them develop these new products’? Yes, it did. The Protowrap product could not have been made without the improvement in technical capability that came from the SPC initiative.

The plant makes a profit (Christmas 2000) – This means increasing optimism within the plant.

HP asks the plant to bid for a further new product (Spring 2001) – Because HP had recog-nized the changes that had taken place in the plant.

HP gives the new contract to the Preston Plant (April 2001) – More good news.

Rendall reverses the closure decision (April 2001) – and everybody lived happily ever after.



Question 2 – The plant’s processes eventually were brought under con-trol. What were the main benefits of this?

Ask the class a series of questions and encourage them to identify the various benefits. For example:

• How did gaining control of the process help to cut costs?

• How did gaining control of the process improve their prospects of earning revenue in the future?

• How did gaining control of the process help them to develop new products?

• How do you think gaining control of the process would help them to retain their best staff in the future?

• How could gaining control of the process help in their relationships with suppliers? and so on.

At each question, emphasize the multiple benefits of having an efficient and predictable process. Try and finish up each discussion with a clearly strategic consequence. This helps with the next question.

Question 3 – SPC is an operational-level technique of ensuring quality conformance. How many of the benefits of bringing the plant under control would you class as strategic?

If the previous question has been thoroughly discussed, it will become evident that there are several strategic level benefits from process control. For example:

• a lower cost base;

• security of future demand;

• enhanced customer relationship skills;

• enhanced staff retention;

• better in-house product development;

• a firm basis for continuous improvement;

• the ability to form partnerships with suppliers.

The diagram below can be used to make this point. Note how, in the centre of the diagram, gain-ing control of the process is a highly operational issue. However, the consequences of this on the outside of the web of consequences are all very strategic.



Customer trust in process

stability

Confidence to give new

orders

Customer willing to invest in relationship

Security of demand and

revenue

Better understanding

of process capabilities

Gain control of the

process

Less downtime and waste

Lower cost base

Higher capacity utilisation

Internal process

predictability

Control charts become focus

of process discussions

Enhanced organisational

learning

Sense of professionalism

“being in control”

Staff confidence in own abilities

Can offer knowledge insights to suppliers

Reduced decision making ambiguity

Less chance of arbitrary

decisions

Increased job satisfaction

Develop basis for in -house

product development

Forms basis of continuous

improvement

Allows formalisation of

routines ( eg . ISO9000)

Partnerships notwithstanding

power imbalance

Ability to cope with variety

without excess cost

Develop customer

relationship skills

Enhanced staff retention

Process control can lead to strategic benefits


stability


orders



revenue



Gain control of the

process

Less downtime and waste

Lower cost base


Internal process

predictability




learning



Staff confidence in own abilities

Can offer knowledge insights to suppliers

Reduced decision making ambiguity


decisions

Increased job satisfaction


product development


improvement




power imbalance


without excess cost

Develop customer

relationship skills



stability


stability


stability


orders


orders


orders





revenue


revenue


revenue







Gain control of the

process

Gain control of the

process

Less downtime and waste Less downtime and waste Less downtime and waste

Lower cost base


Lower cost base Lower cost base

Higher capacity utilisation Higher capacity utilisation Higher capacity utilisation

Internal process

predictability Internal process

predictability Internal process

predictability








learning


learning

Enhanced organizational

learning







Staff confidence in own abilities Staff confidence in own abilities Staff confidence in own abilities

Can offer knowledge insights to suppliers Can offer

knowledge insights to suppliers Can offer

knowledge insights to suppliers

Reduced decision making ambiguityReduced decision making ambiguityReduced decision making ambiguity


decisions Less chance of

arbitrary decisions


decisions

Increased job satisfaction Increased job satisfaction Increased job satisfaction


product development


product development


product development


improvement Forms basis of

continuous improvement


improvement Forms basis for

continuous improvement





Allows formalization of



power imbalance


power imbalance


power imbalance


without excess cost


without excess cost

Develop customer

relationship skills

Develop customer

relationship skills

Develop customer

relationship skills




Process control can lead to strategic benefits


C H A P T E R 1 3

Geneva Construction and Risk (GCR)

Case synopsis

Geneva Construction and Risk (GCR) is an insurance company that specializes in providing insurance for construction projects, especially complex, high-risk projects, where contractual and other legal issues, physical exposure and design uncertainty need customized insurance re-sponses. 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 total quality management (TQM) initiative. It had done this in a very prescriptive way by issuing a handbook with de-tailed instructions on 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 with-out 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 to be more effective. 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 consists of relatively inexperienced students with little knowledge of the realities of improvement initiatives such as these, the case is used to in-troduce some of the main characteristics of TQM and Six Sigma. Where the majority of the students have experience of this type of initiative, it can be used to treat some of the more or-ganizational 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 re-garding each approach are as follows:

TQM

• The handbook said that everyone must be involved.

• The handbook said that all companies in the group must organize the TQM initiative in the same way according to the handbook.

• Emphasis was placed 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 organized groups and quality training. It also evaluated whether the suggestions for improvements should be implemented and allocated the budget for their im-plementation.

• Eventually, the evaluation procedures were taking up so much time and effort that the com-pany 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 maximizing 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 varia-tion, and the normalization of processes using the defects per million opportunities (DPMO) principle.



• GCR also wants 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-standardized processes.

• They believe that the Six Sigma approach fits well with the other initiatives in the company.

• They accept that Six Sigma is not new as such.

• They see a major advantage in Six Sigma, being that it engages the 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. These two lists should be developed on different parts of the board. At this point, we find it useful not to comment too much 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 would 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 previ-ously and to have a debate on them individually. For example, see the following:

• Both TQM and Six Sigma can be interpreted in different ways. TQM was characterized by several quality gurus, all of whom had a slightly different approach and emphasized 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 the 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 funda-mental 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 au-thorities 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 seen in this way, it does have a number of themes running through it that cannot be com-promised, 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 debate on the side on the nature of improvement initiatives generally. All improvement approaches reflect the time at which they emerge. Because of this, TQM now seems dated; yet it still contains many good points, 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 is 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 challeng-ing 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 others. Insurance, for example, is essentially a quantitative industry that relies on ac-tuarial 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 com-pany, 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 suf-fering 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 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, 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 is the way it was implemented. Again, at this point, a debate about the nature of improvement ini-tiatives could be useful.

Middle management did not accept because they felt threatened – Middle management often feel threatened by these initiatives for a simple reason – they are threatened. The idea of devolv-ing improvement decision making down the hierarchical structure of the organization 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 im-provement 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 felt that because theirs was 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 proc-ess-focused initiative, it should be able to recognize differences between processes. Certainly the DPMO idea within Six Sigma is partly a recognition that processes are different and there-fore 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 focused very much on the cus-tomer 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?


C H A P T E R 1 4

The Chernobyl Failure

Case synopsis

The case consists of an introduction to the Chernobyl nuclear reactor and the events leading up to the accident there. More specifically, it examines all the significant events that took place between 1.00 pm on 25th April 1986 and 1.24 am on 26th April 1986 when the explosion took place. Actions, and the lack of action, which contributed to the final disaster, are classified as either violations or failures. Finally, the case makes some general points about why the disaster happened.

Issues include failure prevention, safety, accident investigation and adherence to set procedures.

Using the case

This case exercise can be used at any point in a general operations management course or even in more general management courses. It is usually well received primarily because most people have heard of the accident and are interested in the details of why it occurred. Although a par-ticularly dramatic failure, it is possible to draw out some more general issues that apply to less disastrous failures. More specifically, debate can be encouraged on the relative contributions of:

• specified rules and procedures designed to ensure that failure does not occur;

• the skills necessary both to prevent failure and to recover from it; and

• the intrinsic knowledge and learning that are required to minimize the chances of serious failure.

Some notes on the Chernobyl Failure case

For those who are not familiar with the safety issues at stake, it is best to start the case by sum-marizing the nuclear threat. The essential difference between a nuclear reactor and an atomic bomb is one of containment.

In an atomic bomb the nuclear chain reaction, whereby each atom of U 235 yields two fresh neutrons, continues unabated.

In a nuclear reactor, the nuclear chain reaction is moderated by the insertion of graphite rods that soak up excess neutrons and allow the reaction to continue at a controlled pace. This liber-ates energy in the form of heat, which is transferred by heat exchangers and used to drive steam turbines as in fossil-fuelled power stations.

The operators at Chernobyl had so interfered with the control mechanisms of the reactor that the chain reaction ran away and an atomic explosion ensued.



The case also distinguishes between violations (V) and errors (E) that occurred in the vital hours prior to the explosion. This is a useful distinction that can be used when examining any complex failure. A violation occurs when a rule or procedure exists, but it is ignored or not executed as it should be. An error is when the mental or physical judgement of someone is not as it should be or is expected to be. Serious failures in complex operations are usually the result of both viola-tions and errors. An analogy for the distinction between these two elements of failure is that of a high wire circus performer. Errors are mistakes in judgement that make it more likely that the performer will fall. Violations are failures to observe the necessary precautions such as wearing a harness or using a safety net.

Question 1 – What were the root causes which contributed to the ultimate failure?

The root causes of this failure can be categorized as those resulting from:

• the design of the reactor;

• the design of the experiment;

• the execution of the experiment.

As regards the design of the reactor, most importantly, it was an old piece of equipment, over 30 years old. Any updating of the equipment seems to have been done in a relatively haphazard fashion. Certainly, the most serious technical failure of the design appears to have been its in-ability to operate safely below 20 per cent loading. In an environment where the reactor was being switched in and out of the electricity supply base, being unable to operate below 20 per cent loading without the reactor running away would have been a serious problem. Also, the lack of modern controls meant that the reactor relied heavily on the skills of the operators who normally ran the equipment. Even if the operators are particularly skilled, a lack of backup safety systems placed too much reliance on the operators avoiding human error. Such a design would have been prohibited in most other countries.

As regards the design of the experiment, the electrical engineers themselves who designed the experiment did not seem to have been familiar with some aspects of nuclear power generation. In fact, the experiment had not been approved by the Russian Atomic Energy Authority. Nor did the engineers and technicians appear to talk to the operators who might have been able to point out some of the problems with the experiment. Certainly, the design of the experiment did not seem to have taken into account the possibility of the time available for the experiment being reduced. Even if everything had gone according to plan, the experiment required the reactor to be operated dangerously close to the prohibited operating zone.

As regards the execution of the experiment, the delay that caused a narrowing of the window of opportunity seems to have put considerable pressure on the people carrying it out. It could well have both tired the experimental team and led them to take short-cuts. After the initial problems, the reactor was stabilized at only 7 per cent loading. This is well into the danger zone, and it was clear at this point that continuing with the experiment would pose considerable dangers. The fact that the operators proceeded beyond this point illustrates their ignorance of the physics of the reactor. It is almost as though errors of judgement led to more violations of procedures in a desperate attempt to try and recover from earlier errors. Instead, the experiment spiralled out of control. Yet the operators did not seem to understand that this was happening. Partly, this was due to the can-do attitude of the operators, and partly it might have been due to their pride in



their ability to handle unusual situations (This, in fact, is a common problem in all technically oriented operations). Perhaps the most serious issue here is that there seems to have been many procedural violations and a disregard for safety procedures. The case itself puts this down to operators losing their sensitivity towards the hazards that really were involved in the operation. Familiarity was breeding contempt.

Question 2 – How could failure planning have helped prevent the disaster?

Even simple techniques such as failure modes and effects analysis (FMEA) would have raised very serious doubts about the use of this reactor. At the time of the explosion, there were four reactors operating at Chernobyl, with two more in the process of being constructed. It may be that cost considerations and political pressures led to continuing use of the reactor. Certainly, any future design must be less reliant on human factors. FMEA would also have highlighted deficiencies in operating procedures. It could have focused management attention on the danger of using short-cuts and unsafe procedures. It would also have focused on the need for good management, rigorous discipline and in-depth knowledge and training.

‘A Chernobyl type accident is impossible in a British nuclear power station; the Chernobyl de-sign would not have been licensed here, nor would its methods of operation prior to the accident have been permitted’ (British Nuclear Industry).


C H A P T E R 1 5

United Photonics Malaysia Sdn Bhd

Case synopsis

The United Photonics Groups is a US-based corporation that manufactures lenses and precision instruments. It has a reputation for technical excellence and its products are amongst the most technically advanced in the global market. Recently, the instrumentation side of the company has grown faster than the lens manufacturing part of the company and now dominates sales.

The case is set in the Malaysian facility of the United Photonics Corporation. This is located just outside Kuala Lumpur (KL) in Malaysia. Starting by manufacturing sub-assemblies for its American instrumentation parent, it soon developed a laboratory for the modification of United Photonics’ products for customers throughout the Asian region. Within its short life, the Malay-sian facilities have developed a reputation within the company for technical expertise and enthusiasm.

In particular, the case focuses on the Laz-skan project that has been developed by T.S. Lim’s customer service unit team in KL. It is an optical metrology device that, although complex, is seen as having significant market potential. T.S. Lim is given a 3-month period in which to overcome any fundamental technical problem, assess the feasibility of the project and plan the development tasks that will lead to the prototype stage. The case contains details of the project and includes a list of all the activities and a network diagram. Although the main board of United Photonics is enthusiastic about the project, it does have some concerns regarding both the management and the feasibility of the project.

Using the case

This case can be used to bring out issues of project management (which is why it is contained in Chapter 15), or alternatively, it could be used in the part of the course that treats new product and service development (We use it for both purposes). We will assume in this teaching note that it is to be used to demonstrate some principles of project management.

Unlike most of the cases in this text, it is difficult to use this one as a general introduction to project management. Because the case depends on an understanding of network planning, it would be difficult to discuss some of the problems within the project unless students were able to interpret the project network. Therefore, it is recommended that this case be used after (at least) the fundamentals of network planning have been covered.

Within the case, the network technique used is a version of the project evaluation and review technique (PERT). This uses optimistic, most likely, and pessimistic time estimates in order to give an idea of the inherent risk in various parts of the project. We have found that (surpris-ingly) one need not have covered this issue prior to the case. Although it is very important to understand the nature of network planning, it is not strictly necessary for students to fully under-stand probabilistic time estimates. In fact, this case can be used to demonstrate the value of this.



Also, because there is some detail in this case, it is better if it can be tackled in groups prior to the debrief, rather than it being analysed by students individually. However, although individual analysis may miss out some of the case’s richness, it is still possible to use the case in this way.

Notes on questions

Question 1 – Who do you think should manage the Laz-skan Development Project?

There is obviously no definitive answer to this question. What is important is that the class gets a chance to debate the criteria that can be used to choose a project leader. First, ask the class to suggest criteria that can be used to select a project leader. This can lead to many different sug-gestions; the most common are shown below:

• Technical competence

• Enthusiasm and commitment to the project

• Organizational influence

• Project management skills and/or experience

• Ability to devote time to managing the project

• Location of the individual.

It is then useful to ask the students who the candidates might be. Obviously, this is going to be limited by the individuals who have been mentioned in the case. These are as follows:

• T.S. Lim, whose idea the Laz-skan project originally was.

• Anuar Kamaruddin, the CEO of the Malaysian facility.

• Bob Brierly, the Vice President of Development.

• Halim Ramly, the Asian Marketing Vice President.

• George Hudson, Head of Instrument Development.

• As an alternative to any of these, students may suggest bringing in an outside professional project manager.

Draw up a matrix on the board with the criteria as one dimension and the various candidates as the other. Mark the characteristics of each candidate using each criterion, using some kind of a simple scale. We use a 0, 1, 2, or 3 star rating system. The purpose of this is to generate a debate about which characteristics are important for project management. Try to guide the discussion towards what is important for this particular project. In fact, this will demonstrate how difficult the selection is. Because this is a novel project generated by a relatively small part of the group, technical competence and enthusiasm should rate highly. However, because it is also a very dif-ferent project to ones that have been developed before, it may be that organizational influence is



also very important. No single candidate has all of these qualities. In the end, most students come round to the conclusion that T.S. Lim should be appointed as project manager but with very strict reporting relationship to someone else such as Bob Brierly.

Question 2 – What are the major dangers and difficulties that will be faced by the development team as they manage the projects towards its completion?

There are several issues that can emerge from discussing this question. Some of these relate to general managerial issues while others relate to the nature of the project specifically.

General managerial issues

The first danger is related to the previous question, namely, that there are insufficiently developed project management skills deployed on the project. This is where the relationship between Lim and whoever is supervising him becomes vital. The other general issues include the following:

• Outsourcing some components. This is being done because time for the development is short. It may be that keeping development in-house, even if it means missing the Geneva show, may be preferable. At least, the point would need to be debated within the company.

• The general approach of Lim and his team to defining the architecture of the project.

• Lim admits that he has not consulted widely in determining this. He believes that, although he would have liked to consult more widely, he would have taken too much time, and any-way ‘we can change our mind later’. This is generally true only up to a point. Very often, some of the fundamental nature of the development is embedded within assumptions that are contained in the architecture.

• Security and knowledge leakage. Lim recognizes this as being a danger when any part of the development is outsourced. It would be necessary to investigate how real a threat this really is.

• How the development of this project is going to work in the context of the team’s other commitments. This is worth debating thoroughly and is a general issue of project manage-ment. Although projects are often described in isolation, they are nearly always part of an ongoing set of other responsibilities and projects. We have no details of these, but it is worth bringing out the issue in class.

Problems associated with the project specifically

Many of these can be obtained from a careful examination of the network diagram (Figure 15.16). They include the following:

• The lens is a particularly risky sub-component of the development project. Particularly, the activity 13–14 has an optimistic time of 9 weeks, a most likely time of 12 weeks, and a pes-simistic time of 30 weeks! It is worthwhile debating T.S. Lim’s statement that he is happy that the lens is not part of the critical path. Of course, many students will realize that, al-though it is not part of the deterministic critical path, it could easily become critical if this lens activity moves close to its pessimistic estimate.



• The vision support system part of the project contains the critical path. It is worthwhile ask-ing the students how it is obvious that this contains the critical path. Those who have remembered their network planning will realize that where events have the same earliest and latest event time, there is no float and therefore the path must be critical. It may be worthwhile also debating whether the project could be completed in time, assuming that the critical path remains critical. In fact, it is not entirely obvious from the case whether it can. The project starts at the end of February (say, beginning of March) 2005 and must be com-pleted before April 2006. This allows just over one year, that is, 52 weeks to finish the development. The total project time is 48 weeks, allowing a margin of 4 or more weeks. However, in the context of a one-year project, this is very small, especially, given that many of the elements are relatively risky. In fact, for all practical purposes, this project will be very difficult to complete in time for the Geneva show.

• The control software poses a different problem. Although this part of the project is not at all on the critical path, and although most of the activities within it are not particularly risky compared to others in the project, it is still a complex task. In fact, it has been noted as the most difficult part of the project to plan and estimate. Therefore, maybe we should treat these estimates circumspectly. However, the major issue may be that the activities within this part of the project are new to the group and they have recruited a young software engi-neer with some experience of this type of work. Two points that would be sensible to explore in practice and debate with the class are, first, if he is young does he have sufficient experience to be so confident, and second, if there is only him with the skills, what if he leaves/gets ill/proves incompetent/is run over in a traffic accident, and so on?

• Documentation seems relatively straightforward except that most of it is subcontracted and therefore will be partially outside the control of the project team. It is important therefore that they should incorporate these subcontractors into the planning process.

• The display system seems to be the only part of the project that does not have potential problems.

At this point, it is useful to guide the class towards identifying three main causes of time-related risk within projects. These are as follows:

• High levels of risk. That is, a big difference between the most likely and the pessimistic time. The lens is typical of this type of problem. It is not a complex part of the project in terms of the number of interrelated activities, and the risk has been clearly stated, and yet, it is significant.

• High levels of uncertainty (as opposed to risk). The control software is a good example of this. There may, or may not, be problems in this part of the project, we simply do not know.

• Long activities time. This is the conventional critical path of the project. In this case, the vision support system represents this. The problem is simply that there may not be enough time to finish all the activities.

Question 3 – What can they do about these dangers and difficulties?

The general managerial issues discussed previously are all worth debating in the class. How-ever, it is as well not to spend too long on this because the discussion can become unfocused, and some of the issues are not strictly associated with project management as such.



More interesting is to debate with the class the specific project-related problems. Write up on the board three headings, risk, uncertainty and shortage of time, in the way they have been de-fined previously in this teaching note, and ask for possible solutions for each of these generic problems.

• Risk (the lens) is probably the most difficult to deal with. Possibly, the only solution (apart from making sure that the Photonics lens division really does understand the importance of this development) is to subcontract some lens manufacture in parallel with doing it in-house. There is probably little point in simply subcontracting the job and not doing it in-house, because Photonics are supposed to be one of the leading companies in the world at this activity. However, this is a very expensive option.

• Uncertainty is a more common problem (in this case it is the control software) and most solutions to the problem involve adequate control. It is particularly important where there is such a high degree of uncertainty in a project that control mechanisms and control points (mile stones) are fully integrated into the project management activity so that any indication of unforeseen problems emerging can immediately be detected.

• A long critical path (the vision support system) is a more straightforward issue. Conven-tionally, this is tackled by accelerating (sometimes called crashing) activities that are on the critical path. At this point, it is worth discussing with the class how to prioritize different acceleration opportunities. Most will soon understand that there is no point in accelerating any activity initially that is not on the critical path. However, eventually the critical path could be shortened to the point where another path becomes equally critical. After this any further reduction in the project time requires acceleration on both these paths, and so on. Ask the class to identify the activities in Table 15.5 that are on the critical path. In fact, only two activities (5–6 and 33–34) lie on the critical path. Between them these can shorten the project path by 6 weeks.


Part 3

Solutions for Active Cases on the CD

(Note: For the convenience of tutors, some parts of the active case and statements by the characters have been included, as is the feedback logic used in response to the various choices presented to students.)


C H A P T E R 1

EleXon Computers

Case summary

EleXon computers have developed from assembling PCs for the UK home computer market into a broader and more international company that also sells complete IT infrastructure systems and the support and management of these systems, including the design, installation, commissioning, and support of what are called ‘infrastructure solutions’. This type of service commands higher margins than supplying PCs and also ‘‘pulls through’ the sales of hardware (known as ‘boxes’). PCs and laptops are becoming commodity items, and although the products are state of the art and of good value, they are under price pressure from better-known brands with far higher sales. Future growth is likely to come from ‘infrastructure solutions’.

Most of the discussion in the case centres around the relationships between the various departments. Some of the relationship problems are caused by the differences between serving the customers who are simply buying computers and peripherals and those who are largely business customers, who are buying infrastructure solutions–type services. Students are asked to address these differences and then decide whether the sales, service and development departments should be reconfigured into ‘end-to-end’ business processes.

The company faces two challenges – should they reorganize themselves because they have grown, and how should they deal with the tensions between the sales, service and development departments?

Pietro Marolli, a visiting MBA student, is asked by Steve, the CEO, to give some guidance on how some of the company’s problems could be resolved.

Appendix 1 summarizes the work carried out by each department and some of the problems between the departments. Appendix 2 contains the scripts of the interviews between Pietro Marolli and the selected managers at EleXon.

Using the case

This case is designed to be used at the beginning of an operations (and process) management course. It stresses the idea that all the processes in the company can be analysed and treated in a similar manner, whether they are conventional ‘operations’ processes or not. As with all the active cases associated with this text, this can be used as a stand-alone learning experience, or students can be asked to work on the case (individually or in groups) and then debriefed in a relatively conventional manner in the class. The class debriefs of active cases should focus not only on the ‘content’ of the decisions but also on how the students went about making a particular decision. This teaching note assumes that all students will have worked through the case, which is then debriefed in class.



Some of the main issues covered in the case

The underlying issue in this case is the use of ‘end-to-end’ business processes. It is based on the idea that different processes should be managed differently. This is a theme of several of the examples and exercises used in Chapter 1. The case revisits the issue of whether to separate processes and whether the advantages of focussing processes on their individual tasks or markets outweigh the disadvantages of breaking up conventional department. It explores the idea that it is not always sensible to include everything in the end-to-end processes.

Opening question (a)

How has the company developed and changed since it was founded?

It has moved from being a manufacturer of PCs that compete with high-brand products such as those made by Dell and IBM to a manufacturer and retailer of computers and peripherals and to a provider of whole infrastructure systems (infrastructure solutions, as the company calls it), and there is some hint in the case that they may be moving towards managing IT systems for clients in the future. The discussion of this question could centre around the implications of this transition for how the operations and processes within the business are managed. The first point to make is that the transition will be considerably more complex. Several different product and service flows will have to be reconciled and the conflicting needs of functions and/or processes within the company managed. The next point is that the company is moving from being a manufacturer to being primarily a service provider. At the moment, it seems clear that the company’s ability to manufacture (or at least assemble) products is helping it to deliver infrastructure solutions. However, maybe in the future, as PCs become increasingly commoditized, the company may be tempted to give up assembling products and concentrate exclusively on designing, installing and managing whole infrastructure systems. Implications for this are largely concerned with understanding the nature of service processes (higher visibility) and being able to integrate service processes (such as those that design, install, maintain, advise and support clients) to provide an integrated service package.

Opening question (b)

Do you think the managers interviewed in the case understand the power of operations and process management?

From the case study and from observing extracts from interviews with Steve Kerousky, CEO; Hilary Soat, Head of Service, and Dean Roe, Head of Development, determine what evidence there is of

• an understanding of the importance of Operations Management;

• what contribution operations is making towards

• reducing the cost of products and services;

• increasing the revenue from products and services;



• better use of the capital employed;

• developing the capability for future innovation;

• whether the operation contributes to the overall supply network.

The perceptions of Elexon’s management regarding the contribution of operations.

Is there an understanding of the importance of Operations Management?

What contribution should operations be making?

Does the operation contribute to the overall supply network?

Steve Kerousky – CEO

Steve sends mixed messages – on one hand he talks about the pre-eminence of sales and at the same time talks about the importance of the expertise of the technology team.

Steve does not seem to expect a lot from the operation. He wants them to make the boxes well, but purchasing and sales are seen as being more important.

Steve enjoys the conflict between sales and service. He wants some closer cooperation between service and development, without taking development away from what they are good at.

Hilary Soat – Service

There is an implication in Hilary’s statement that keeping the customer happy is the role of the service department.

Hilary talks about the importance of cost control, revenue generation and building capability.

Hilary talks about the problems with sales and development but understands the complicated issues around the supply chain for infrastructure solutions.

Dean Roe – Development

Dean is enthusiastic about the leading edge technology but perhaps only from a personal interest point of view.

Dean does not seem to follow a proper process.

Dean feels that there is little evidence of the importance of cost control, revenue generation, control of investment and capability building.

Dean is reluctant to help other parts of the operation – ‘we don’t have the staff’.

Operation works well with outside providers of cutting edge technology.



Volume Low High

Variety LowHigh

Variation Low

Visibility LowHigh

Boxes Infrastructure solutions

Low High

Low

High Low

Low

Boxes Infrastructure solutions

Question 1 in the case

The first question Pietro looked at was “Should all processes be managed in the same way?’

He wanted to focus on the two key products, infrastructure solutions and boxes; he specifically decided to look at the processes for dealing with these two products in the service department. He used the four Vs model. From the information provided, what do you think is the relative position (low or high) of volume, variety, variation and visibility for infrastructure solutions and boxes in the following departments?

In fact, in all the three departments, the requirements of the two products (boxes and infrastructure solutions) are very different. Boxes always have a relatively high volume and low variety, variation and visibility. Infrastructure solutions are always the opposite – relatively low volume, and high variety, variation and visibility.

It may be useful to go through what is meant by these ‘four Vs’ using the figure below.

A four Vs analysis for the two product groups


Although Pietro could now see that the requirements of home and home-office boxes were very different from those of infrastructure solutions in all the three departments he had studied, he was still not sure whether it would be feasible or practical to totally reorganize everything. There could be advantages in abolishing the separate sales, service and development departments totally and reorganizing their work into two parallel and integrated departments, one carrying out sales, service and development work for the home and home-office market and the other doing the same for the infrastructure solutions market. Yet Pietro knew that not everyone would be happy with such a radical solution.



The decision was whether to recommend that all the departments, none of the departments, or some of the departments should be split up and put into separate ‘market-facing’ processes.

Think about the advantages and disadvantages of splitting some or all of the departments so that each part could focus exclusively on boxes or infrastructure solutions. When you have debated the advantages and disadvantages, click the appropriate cells in the following table to suggest to Pietro what he should recommend.

Feedback is provided for the six possibilities as shown in this table

Should the department be split to focus on each market’s needs?

Departments

Yes, split it into two

No, keep it as one department

Sales

Service

Development

There are eight possible responses to the first question. The student is given the reactions of the heads of sales (he does not want his department to be split into ‘product-focussed’ processes), service (she is happy for her department to be split into ‘product-focussed’ processes, provided she is in charge!), and development (he does not want his department to be split into ‘product-focussed’ processes). Feedback on their reactions is given to the student.

Then, the question, ‘Given the reactions of the three heads of department, you have two options, as given below:

• Press ahead with your original recommendations in spite of the resistance, or

• Back down as gracefully as you can and keep the current organizational structure, at least for the time being.

Which do you want to do?’ is asked.

The feedback given in this case question and the logic governing the responses are included in Appendix 3.



Overview question

What are the cases for and against splitting each of the three main departments – sales, service and development?

The sales department seems to be by far the easiest of the three to split, largely because it is already split into two independent teams, one for boxes and one for infrastructure solutions. Furthermore, the tasks of each of these teams are very different. The argument for splitting the service department is slightly less clear-cut, but nevertheless sensible. There is some overlap between the resources used for the two products, and this would probably continue to be there even in an organization with two separate end-to-end processes. Again though, the argument that the two products are so very different should probably outweigh the problems that would be associated with different processes sharing some resources. The case for splitting development is slightly different. Development currently has two roles, investigating new components and deciding how they can be developed in order to be incorporated into EleXon products and as a kind of ‘repository of knowledge’ on all technical matters that can be referred to by any other part of the business. Nevertheless, if infrastructure solutions are going to grow, there could be some advantages in having someone with the same level of technical knowledge as the development staff within the infrastructure solutions team.

It is worth stressing in this case that, although some sets of decisions clearly are not sensible, there is no single right answer. As is usually the case in reality, there are a number of different solutions, all of which have advantages and disadvantages. The role of the discussion is to help the class understand this and move them towards accepting an approach to decision making that weighs up advantages and disadvantages before making decisions.

Appendix 1

Details of the company’s six main departments, as presented in the case

Purchasing

Purchasing places orders on all component suppliers using the sales forecasts provided by marketing. Because the company’s products are state of the art, there is a high risk of component obsolescence, so inventory levels should be kept low while still being sufficient to meet demand. ‘It is particularly important that we get purchasing right. We have over £3,000,000 tied up in inventory at any one time, a lot of which is worthless within 60 days of it being bought because our designs have moved on from using those components. That is why we have to work particularly closely with both Sales and Marketing and Development’. (Howard Thompson, Purchasing Officer)

Assembly

The assembly department is a relatively small part of the company, employing 25 staff who assemble and test the company’s products. Adjacent to the inventory store, the operators work from a printed ‘parts list’ for each customer’s order, pick the appropriate parts from the inventory store on to a ‘kit trolley’ that they wheel back to their assembly station and assemble and test the product. Further tests and calibrations are carried out by a separate employee before the product is certified as finished and packed. It is generally regarded as an efficient and



responsive process that can have completed products ready for shipping within 48 hours of orders being placed.

Finance

The finance department is concerned with budgeting, invoicing and the general financial management of the company. It is becoming evident that the expansion of the company in recent years, together with the growth in infrastructure solutions business, has left the company’s financial procedures, particularly its costing system, unable to provide adequate information. ‘I’m ashamed to say that we have a relatively poor grasp of the individual cost centres of the business. At a company level we are fine. It is when I am asked questions such as, ‘How much of our total cost is spent on producing service for infrastructure solutions?’, that I am unable to answer accurately’. (Jo Westin, Finance Manager)

Sales and marketing

The company distributes its products directly to its home and home-office customers by advertising in the computer magazines and selling directly by cold calling from its sales call centre. Business and infrastructure solutions sales are the responsibility of a small commercial team within sales. ‘We are a market-driven company. We feel that we understand the needs of our customers and we go to great effort to satisfy them by incorporating the very latest technology into our products. We know that we can match Dell for value for money, have products that are just as reliable as those from IBM, and we have more state-of-the-art functionality than either of them’. (Ash Venuprad, Sales Manager)

• All sales staff are co-located but split into two teams (‘home and business’ and ‘infrastructure solutions’). There used to be some movement of staff between the teams, but it ‘does not happen much now’.

• The department has 22 staff dedicated to home and business sales of hardware. Most of these are staffing sales order lines, taking orders from customers who are responding to press advertising. When not doing this, they are ‘cold calling’ potential customers.

• Eight people work as a team, exclusively selling infrastructure solutions. Some of their time is spent following up sales leads from various sources, but most of their time is spent making targeted calls or visiting prospective clients.

• The whole sales department has a strong ‘motivation culture,’ and everyone in the sales team is incentivized to maximize sales value. Ash Venuprad is very keen to maintain a positive ‘can-do’ culture.

• Typically, the home and business sales team selling hardware products (or Boxes as they are known internally) speak to between 500 and 1000 customers every week. Majority of their interactions are routine and involve simply taking customers’ orders.

• The infrastructure solutions team may only speak to one or two separate customers each day (although sometimes they may be dealing with up to 25 separate potential customer accounts each day), and most contacts are long and detailed, often involving visits to customer sites.



• Infrastructure solutions sales are responsible for coordinating all contact with customers for these products, and they receive constant feedback from service technicians and field engineers.

• The infrastructure solutions team believes that their colleagues in the service department are sometimes a little slow to arrange follow-up visits to potential clients to perform a systems analysis. ‘They don’t seem to understand that you really do need to keep prospective clients interested. We do our bit by calling them regularly, but if they are not visited within days of us making contact, a hot lead can quickly go cold’.

Service

Headed by Hilary Soat, the service department is increasingly central to the company’s operations. Service comprises a call centre and technical service. The call centre responds to customers’ technical queries regarding their machines or any issues with business clients’ infrastructure solutions. Technical service comprises 36 service technicians and field engineers. The role of the service technicians is to respond to some of the more technically demanding calls to the call centre, author the company’s service manuals, visit and manage the design, commissioning and servicing of infrastructure solutions. In fact, now, the work of infrastructure solutions accounts for 60 per cent of the service technicians’ time. Within Technical Service, the company has also invested in a network of support centres throughout the United Kingdom, Ireland, Netherlands, Belgium, Denmark, Sweden and Norway. Each centre employs between two and five field engineers. The role of the field engineers is to resolve queries that are beyond the scope of the call centre by visiting the customer’s premises.

• The service call centre takes between 550 and 840 calls each day, the majority of which are relatively simple technical queries regarding hardware problems.

• In addition, between 3 and 20 calls a day are from infrastructure solutions customers.

• The infrastructure solutions calls are less predictable, both in terms of the number of calls received per day and the time taken to deal with the customer’s enquiry.

• Call centre staff can answer 91 per cent of routine enquiries themselves but sometimes need to escalate the call to service technicians and, for very difficult questions, to the development team. Problems that cannot be solved over the phone (such as requiring a new part for a PC) are passed on to field engineers who will visit the customer to resolve the problem.

• By contrast, 56 per cent of infrastructure solutions calls need to be passed through from the call centre through to service technicians. Sometimes these require follow-up calls from field engineers.

• Infrastructure solutions servicing is seen as particularly difficult. ‘Less than 5 per cent of our calls are concerned with infrastructure solutions, but 50 per cent of our headaches come from these few clients’.

• Twenty-seven field engineers, working from home, cover the service region where the company operates (United Kingdom, Ireland, Netherlands, Denmark, Sweden and Norway).



• There is a strong feeling in the service department that sales do not manage customers’ expectations well. It is believed that sales people are guilty of overpromising on the level of service that customers can reasonably expect.

Development

The company has always placed great emphasis on developing relationships with technology partners. Its PCs use state-of-the-art components, and its servers are based on Intel’s technology platform plan. It now has formed partnerships with other IT solution providers and field service organizations, some of which were competitors in some other parts of the market. ‘We are at the very early stages of forming relationships with these service partners. It is fair to say that we are all a little cautious of each other at the moment. Unfortunately we have had one or two problems lately in delivering service and support to some customers and we are conscious that our failure also reflects badly on our partners’. (Dean Roe, Head of Development)

• The department has seven staff, all of whom are dedicated hardware designers.

• The department is regarded as the ‘repository of all higher-level technical knowledge’ in the company.

• Their main role is to ensure that hardware designs are always ‘at the cutting edge’ of commercial PC design. Nevertheless, they are consulted by the rest of the organization (particularly service) because of their technical expertise.

• They develop the boxes and do not get involved directly with the design of infrastructure solutions, but their knowledge of the technical capabilities of the boxes that make up the systems is a valuable asset to the company.

• Most of their job is to evaluate new components that are sent to them by component suppliers, usually before these are available to the general public, and often when they are at the design stage. They then decide whether these components should be incorporated into future EleXon models.

• Each development technician will usually get involved with testing, evaluating around 20 to 30 new components each week.

• Recently, technical queries from the service department have been averaging between 8 and 10 each week. ‘Each query is different and, because the service people have not been able to deal with it, they are rarely straightforward.’

• Relationships with other departments (particularly service) are deteriorating. Requests for technical information are seen as a distraction to the department’s core role because such requests have to be dealt with quickly.

• The department has a staff retention problem. ‘Getting really good people is always a problem. We pay them well of course, but it’s the opportunity to work at the cutting edge of computer design that makes most of them stay’.



Appendix 2

Extracts from Pietro’s interviews with Steve Kerousky, CEO; Hilary Soat, Head of Service, and Dean Roe, Head of Development

Pietro’s interview with Steve

PIETRO: Steve, you’re a relatively small player in an industry dominated by big ones. How have you survived?

STEVE: Yes, you are right; we are small, but we’re astonishingly good at two things. Number one, because we’re small, we are able to configure a better box – we are more state of the art – and people are increasingly wanting that cutting edge and we are able to do that because we are small. And second is we have an extraordinarily good sales force – they really know the business, and they go out there and sell.

PIETRO: Can you just explain how the sales operation is set up?

STEVE: Well, historically, we mainly do direct sales, so we put adverts in, and people phone up the call centre, and increasingly, of course, people are using the Internet and using our web site. Predominantly, it was looking at the home market and the small business, who just wanted one or two boxes. More recently, we have had another development, which is the infrastructure solutions, and this is very different – and selling solutions to companies is very different from selling the boxes. It is about really getting to know the client at a very deep level and really understanding their issues and designing something specifically for them.

PIETRO: Is infrastructure solutions more profitable than simply selling the boxes?

STEVE: Yes.

PIETRO: Significantly more profitable?

STEVE: Yes, very significantly.

PIETRO: What about the operations function within the business?

STEVE: The operation is about making the boxes, and we do it well, and we need to do it well. Because the consequence of not doing it well means we get a lot of calls in and it is very costly to put things right, we have got to do it well and we are good at it. The key thing really is about getting the right sort of components in stock. If you have components in stock for more than 60 days, well, they are of more historical value than anything else, and you can just them away. Now, we are cutting edge, and as such, we need to make sure that our components are up-to-date, and so it’s the buying and ordering and control of those that is really critical.

PIETRO: What about infrastructure solutions, how is that likely to develop?

STEVE: We see this as the real growth area, and of course, it has the added advantage that growth in these systems gives the opportunity of selling more boxes. But, fundamentally, we are seeing that within a couple of years or so, this is going to be at least half our income – well, at least half our profit will come from infrastructure solutions.



PIETRO: And what will make you successful? Why will it grow so much?

STEVE: It’s a bit of a truism, and you hear these things about selling solutions and it sounds a bit trite, but the thing is that the client does not really know what they need – they know that they have problems to resolve. Our expertise is in understanding that and in being able to design something that works specifically for them, and we are small enough to do that but clever enough to do it well.

PIETRO: The relationship between development and service – could they be merged in some way?

STEVE: There are tensions there. The difficulty is if you take people away from their core purpose, which is about thinking great thoughts, but at the same time if we could get some element of moving them together – some people from the development team to work more closely with the service team – then that could give us an edge.

Pietro’s interview with Hilary

PIETRO: Hilary talk me through what happens when a call comes in to the help desk.

HILARY: When a customer has a query or a complaint or a problem with a computer, the calls come in to the call centre, and in about 91 per cent of cases we manage to deal successfully with all those queries. The staff work from fairly structured diagnostic scripts and, in general, that manages to deal with any normal queries. If it is more technical than is within the scope of those scripts, then the call is put through to the technical staff – the in-house technical staff who in general will deal with it. If it is related to a hardware replacement, then the parts are couriered overnight to the field service engineers, who will visit the customer the next day and replace the parts. But of course, that is a very expensive option, and we would always try to resolve the query through the call centre first.

PIETRO: The infrastructure solutions product – do you service that in the same way or is that very different?

HILARY: No, that is very different because there is much less of those types of jobs coming through – there is much greater variety involved – each job is very different. What happens with these is the in-house technicians design and develop each project separately, and although these customers do use the customer help desk, they do tend to have a much closer relationship with the technicians who they often ring directly rather than coming through the help desk.

PIETRO: What is it that the company looks to you to provide?

HILARY: Primarily, of course, they look to us to keep the customer happy, and obviously, they would like us to do that in the most cost-effective manner possible, and I understand there are going to be some trade-offs, but when push comes to shove, my role is to keep the customer happy and in that way we gain repeat business – we want them coming back and buying our services and systems again. That’s our main task. Of course, one of the things that is important about customer service function is that it is not just reactive; we also gain a lot of knowledge about the systems that we work with, the people that we work with and the solutions we provide, and all that knowledge we gain from each project is taken back into the organization, and one of our roles, our tasks, is to retain that knowledge within the organization.



PIETRO: So what are the problems, if any, in service?

HILARY: Well, I suppose I would say our main problem is an overenthusiastic sales team.

PIETRO: OK, why is that?

HILARY: Well, I suppose not many people would complain about it, but I would have to say they do too good a job. The business in infrastructure solutions is growing more than we had anticipated due to their good works. But unfortunately, the lead times that were applicable at the start of this are no longer applicable because we now have too much business. So, I think they are overpromising in their lead times.

PIETRO: The only internal issues you have now is with sales?

HILARY: Well, I would say we are now getting a growing problem with development people mainly because the infrastructure solutions work occasionally presents my technicians with some issues they cannot easily resolve themselves, and occasionally they have to resort to the development people whose main job is in hardware development, and therefore it can cause some friction. But we are going to have more of a need for this sort of back-up in the future.

PIETRO: I know it has been suggested that there be a dedicated infrastructures solutions department – how do you react to that?

HILARY: I would be very happy to have all these resources in a service-led integrated department. It would allow us to provide a seamless and fast response to our clients needs.

Pietro’s interview with Dean

PIETRO: Dean, can you briefly tell me what you do?

DEAN: We build and spec the machines that people buy.

PIETRO: And how many people do you have doing that?

DEAN: Six and myself.

PIETRO: What do your people have to be really good at in order to do the job well?

DEAN: They have got to be enthusiastic and they have got to be really interested in the subject – a lot of them are gamers and so it is just knowing leading edge technology and so it is just being able to put that into practice.

PIETRO: Do your guys get to know some of the supply companies quite well?

DEAN: Very well – we use their equipment and we feedback to them we are always using their latest equipment, and so it’s a good relationship both ways.

PIETRO: We are talking about processes here – is there a standard process here for development?

DEAN: There are standard processes, but in reality, things happen so quickly that you just have to go with it.



PIETRO: But do you follow certain steps at all?

DEAN: Yes, but it would be very hard to formalize it and write it down.

PIETRO: I understand that you are also being asked to help the technical operation as well these days?

DEAN: Yes, we keep being asked to help the infrastructure solutions and configure machines and fault find.

PIETRO: Is that a problem for you?

DEAN: Yes, basically we don’t have the staff, and it’s just an extra load.

PIETRO: But you can provide that technical help when asked?

DEAN: We can, but it is just not what we are really here for.



Split

Sal

es

Don’t split Sales

Split Service

Don’t split Service

Split Serv

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Split Development

Don’t split Development

Split Development


Split Development


Split Development


Stick with decision

Change your mind

Stick with decision

Change your mind

Stick with decision

Change your mind

Stick with decision

Change your mind

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Feedback A

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Point X

Split

Sal

es

Don’t split Sales

Split Service


Split Serv

ice


Split Development


Split Development


Split Development


Split Development


Stick with decision

Change your mind

Stick with decision

Change your mind

Stick with decision

Change your mind

Stick with decision

Change your mind

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Feedback 8

Feedback A

Feedback B

Feedback C

Feedback D

Feedback E

Feedback F

Feedback G

Feedback H

Split

Sal

es

Don’t split Sales

Split Service


Split Serv

ice


Split Development


Split Development


Split Development


Split Development


Stick with decision

Change your mind

Stick with decision

Change your mind

Stick with decision

Change your mind

Stick with decision

Change your mind

Stick with decision

Change your mind

Stick with decision

Change your mind

Stick with decision

Change your mind

Stick with decision

Change your mind

Feedback 1

Feedback 2

Feedback 3

Feedback 4

Feedback 5

Feedback 6

Feedback 7

Feedback 8

Feedback A

Feedback B

Feedback C

Feedback D

Feedback E

Feedback F

Feedback G

Feedback H

Point X

Appendix 3

The feedback given in case question 2

The feedback given in case question 2 is governed by the following logic.



Feedback 1

Good choice. Sales clearly have very different tasks to perform for its two markets. Ash’s arguments are not strong. The sales techniques and knowledge, culture and process should be different for boxes and infrastructure solutions. Hilary’s comments regarding service may be well intentioned, or may just be empire building, but she does recognize the advantages of market-focussed processes. Dean is opposed, but largely, it seems, on the grounds of inadequate resourcing. He may have a good point. His department is important, and if revenue from infrastructure solutions is to grow, the company may need more deep technical expertise. So, it may be appropriate to hire someone to start a technical expert capability for a separate infrastructure solutions department. Alternatively, someone from the existing development department may wish to do this.

Our expert’s opinion – ‘Excellent choices here, well analysed. Marks 10/10’.

Feedback 2

Why back down? Your original analysis was good. Sales clearly has very different tasks to perform for its two markets. Ash’s arguments are not strong. The sales techniques and knowledge, culture and process should be different for boxes and infrastructure solutions. Hilary’s comments regarding service may be well intentioned, or may just be empire building, but she does recognize the advantages of market-focussed processes. Dean is opposed, but largely, it seems, on the grounds of inadequate resourcing. He may have a good point. His department is important, and if revenue from infrastructure solutions is to grow, the company may need more deep technical expertise. So, it may be appropriate to hire someone to start a technical expert capability for a separate infrastructure solutions department. Alternatively, someone from the existing development department may wish to do this. You should have stuck to your original recommendations.

Our expert’s opinion – ‘A good initial analysis, but poor self-belief. If you think you are right, stick to it’. Marks 7/10

Split sales, split service, don’t split development

Feedback 3

OK, reasonable choice. Sales clearly have very different tasks to perform for its two markets. Ash’s arguments are not strong. The sales; techniques and knowledge, culture and process should be different for boxes and infrastructure solutions. Hilary’s comments regarding service may be well intentioned, or may just be empire building, but she does recognize the advantages of market-focussed processes. Dean is happy, but largely it seems because he does not have to change. Maybe you should have split development also. The skills in his department are important, and if revenue from infrastructure solutions is to grow, the company may need more deep technical expertise. So, it may be appropriate to hire someone to start a technical expert capability for a separate infrastructure solutions department. Alternatively, someone from the existing development department may wish to do this.

Our expert’s opinion – ‘Some good analysis. Probably a very good case for splitting development as well, assuming that more resources can be provided’. Marks 9/10



Feedback 4

Why back down? Your original analysis was OK. Sales clearly has very different tasks to perform for its two markets. Ash’s arguments are not strong. The sales; techniques and knowledge, culture and process should be different for boxes and infrastructure solutions. Hilary’s comments regarding service may be well intentioned, or may just be empire building, but she does recognize the advantages of market-focussed processes. Dean is happy, but largely it seems because he does not have to change. Maybe you should have split development also. The skills in his department are important, and if revenue from infrastructure solutions is to grow, the company may need more deep technical expertise. So, it may be appropriate to hire someone to start a technical expert capability for a separate infrastructure solutions department. Alternatively, someone from the existing development department may wish to do this. You should have stuck to your original recommendations.

Our expert’s opinion – ‘A reasonable initial analysis, but poor self-belief. If you think you are right, stick to it’. Marks 5/10

Feedback 5

You have made a strange choice. Sales clearly do have very different tasks to perform for its two markets, so you are right in splitting sales. Ash’s arguments are not strong. The sales; techniques and knowledge, culture and process should be different for boxes and infrastructure solutions. Hilary’s comments regarding splitting service may be well intentioned, or may just be empire building, but she does recognize the advantages of market-focussed processes. You seem to disagree. But service is already operating almost as two teams, so why not split it? Dean is opposed, but largely, it seems, on grounds of inadequate resourcing. He may have a good point. His department is important, and if revenue from infrastructure solutions is to grow, the company may need more deep technical expertise. So, it may be appropriate to hire someone to start a technical expert capability for a separate infrastructure solutions department. Alternatively, someone from the existing development department may wish to do this.

Our expert’s opinion – ‘Strange choice really. Probably a very good case for splitting service as well’. Marks 5/10

Feedback 6

The quality of your analysis depends on why you backed down. Your original analysis was a little strange, incoherent even. So, if you changed your mind because you realized this and wanted to go ahead later with a more radical reorganization, it is OK. On the other hand, if you just backed down because you were frightened by the opposition, well, shame on you! None of the arguments opposing your plan were really strong. Sales clearly do have very different tasks to perform for its two markets, so you are right in splitting sales. Ash’s arguments are not strong. The sales techniques and knowledge, culture and process should be different for boxes and infrastructure solutions. Hilary’s comments regarding splitting service may be well intentioned, or may just be empire building, but she does recognize the advantages of market-focussed processes. You seem to disagree. But service is already operating almost as two teams, so why not split it? Dean is opposed, but largely it seems, on grounds of inadequate resourcing. He may have a good point. His department is important, and if revenue from infrastructure solutions is to grow, the company may need more deep technical expertise. So, it may be appropriate to hire someone to start a technical expert capability for a separate infrastructure



solutions department. Alternatively, someone from the existing development department may wish to do this.

Our expert’s opinion – ‘Strange choice really. Probably a very good case for splitting service as well’. Marks 5/10 if you realized this, but only 3/10 if you chickened out.

Feedback 7

Slightly strange choice. Sales clearly have very different tasks to perform for its two markets. Ash’s arguments are not strong. The sales techniques and knowledge, culture and process should be different for boxes and infrastructure solutions. So, it is surprising that you have chosen not to split the sales department. Hilary’s comments regarding service may be well intentioned, or may just be empire building, but she does recognize the advantages of market-focussed processes. Dean is opposed, but largely, it seems, on the grounds of inadequate resourcing. He may have a good point. His department is important, and if revenue from infrastructure solutions is to grow, the company may need more deep technical expertise. So, it may be appropriate to hire someone to start a technical expert capability for a separate infrastructure solutions department. Alternatively, someone from the existing development department may wish to do this.

Our expert’s opinion – ‘Strange choice really. Probably a very good case for splitting sales as well’. Marks 5/10

Feedback 8

Slightly strange initial choice, but why back down? Was it because you realized that the sales department clearly have very different tasks to perform for its two markets? Ash’s arguments are not strong. The sales techniques and knowledge, culture and process should be different for boxes and infrastructure solutions. So, it was surprising that you chose not to split the sales department. Hilary’s comments regarding service may be well intentioned, or may just be empire building, but she does recognize the advantages of market-focussed processes. Dean is opposed, but largely, it seems, on the grounds of inadequate resourcing. He may have a good point. His department is important, and if revenue from infrastructure solutions is to grow, the company may need more deep technical expertise. So, it may be appropriate to hire someone to start a technical expert capability for a separate infrastructure solutions department. Alternatively, someone from the existing development department may wish to do this. If you realized the inadequacy of your original decision and wanted to rethink, OK. If you were challenged by Dean’s opposition, shame on you!

Our expert’s opinion – ‘Strange choice initially. Probably a very good case for splitting sales as well’. Marks 5/10 if you realized this, but only 3/10 if you chickened out.

Feedback H

The three departmental managers reacted as follows …

Ash Venuprad (Sales) – ‘Yeh, OK. This is the right thing to do as far as I’m concerned. Keeping sales together helps us promote a culture of positive salesmanship. It allows us to encourage



competition between the two sales teams. It also allows us to develop the younger and less experienced sales people and teach them the various ‘tricks-of-the-trade’ involved in sales’.

Hilary Soat (Service) – ‘What a waste of an opportunity. Why should we stay as we are when it is obvious that two market-facing ‘super-service’ department are needed? Just staying where we are ignores the problems and is storing up trouble for the future’.

Dean Roe (Development) – ‘Yes, OK, thanks for telling me’.

So, initially everybody is happy except Hilary. Later on, however, they might all blame you for wasting an opportunity. The company’s problems have not gone away, and they will need addressing sooner rather than later. If you chose not to do anything because you wanted to persuade some of the managers (particularly Ash and Dean) that reorganizing is necessary, well OK, but don’t leave it too long. If you just could not see why reorganization was necessary, go back and read the case and listen to the recorded interviews again.

Our expert’s opinion – ‘Cannot understand why you stuck with the status quo. Probably a very good case for splitting all three departments to make two market-focussed teams’. Marks 5/10 if you wanted more time, but only 2/10 if you chickened out of making any change.


C H A P T E R 2

Long Ridge Gliding Club

Case synopsis

Long Ridge Gliding Club has facilities that are simple but comfortable, with a membership of nearly 300 pilots, ranging from novices to expert pilots. The club has two different types of customers: club members, and casual flyers that come for one-off trial flights, holiday courses and corporate events. It has six employees, including a full-time flying manager, and two flying instructors. Many essential tasks are undertaken on a voluntary basis by club members. It takes a minimum of five experienced people to be able to launch one glider. When club members fly, they are expected to arrive by 9.30 a.m. and be prepared to stay all day, helping other club members and any casual flyers. On a typical summer’s day, there might be 10 club members and four casual flyers. Club members are charged a ‘winch fee’ each time they take to the air, plus a charge per minute that they are in the air, if they are using one of the club’s six gliders. The club offers trial flights that are popular as birthday or Christmas presents, evening courses and flying courses. Casual flyers are ‘profitable’ to the club, but the revenue they bring is small when compared with membership income, and the club views casual flying as a ‘loss leader’ to generate club memberships. Although the policy of encouraging casual flyers had proved successful in terms of the number of customers, not all the casual flyers were happy with their experiences because of the perceived indifference of regular members. The club chairman is under some pressure from members to end trial flights. Although they provide a very useful source of income for the hard-pressed club, only a handful have been converted into club memberships.

Using the case

Although this case is included in Chapter 2, which is concerned with operations strategy, it could also be used more generally. For example, as an introductory case to operations management, it could be used to identify the simple processes that comprise the club’s operations. It could also be used to introduce the idea of different markets having different requirements, without moving the discussion on to any strategic issues as such. Nevertheless, the main purpose of the case is to provide a link between the differing requirements of different parts of the club’s market and their ability to reconcile these differing requirements at an operational level. As with all the active cases associated with this text, it can be used as a stand-alone learning experience, or students can be asked to work through the case (individually or in groups) and then debriefed in a relatively conventional manner in class. The class debriefs of active cases should focus not only on the ‘content’ of the decisions, but also on how students went about making a particular decision. This teaching note assumes that all students would have worked through the case before it is debriefed in class.

This case could also be used as a role-play exercise, with one (unfortunate) student being asked to play the role of the Chairman, while the rest of the class is split into two groups, one representing club members, the other representing casual visitors.



Opening question

What does operations strategy mean for an organization like the Long Ridge Gliding Club?

The purpose of this opening question is to guide the students into debating the nature of operations strategy. Some students will have difficulty in accepting that such a small organization can have a ‘strategy’. At this point it is worth reminding the students of the definition of operations strategy used in the text. Operations strategy is the pattern of decisions and actions that shape the long-term vision, objectives and capabilities of the operation and its contribution to overall strategy. It is the way in which operations resources are developed over the long term to create sustainable competitive advantages for the business.

So strategy is a relative term. In small organizations such as this one, it may not comprise a very complex set of plans, but it should articulate the vision of the organization and what it is trying to achieve.

In fact, this is the underlying issue that runs all the way through the case. The organization does not seem to have any firm grip on what it is trying to do, or if it does, it is afraid to face the consequences of choosing a clear direction for the club.


The question posed is, ‘What is the operations strategy for the Long Ridge Gliding Club’?

• To provide a low cost and enjoyable day out for the visitor.

Response, if this is chosen – only partly true. The most appropriate answer is probably (d), ‘All of the above’. There are elements of all three answers present. Judging by the actual decisions made by the club, it seems unlikely that there is a clear operations strategy and as such the operation strives to cope with a range of different demands and, as a consequence, probably fails (a little) with each.

• To provide members with a high quality, professional facility where they can enjoy their sport.

Response, if this is chosen – only partly true. The most appropriate answer is probably (d), ‘all of the above’. There are elements of all three answers present. Judging by the actual decisions made by the club, it seems unlikely that there is a clear operations strategy and as such the operation strives to cope with a range of different demands and, as a consequence, probably fails (a little) with each.

• To provide members with a flexible facility to enable them to enjoy gliding in any way they choose.

Response, if this is chosen – only partly true. The most appropriate answer is probably (d), ‘All of the above’. There are elements of all three answers present. Judging by the actual decisions made by the club, it seems unlikely that there is a clear operations strategy and as such the operation strives to cope with a range of different demands and, as a consequence, probably fails (a little) with each.



• All of the above.

Response, if this is chosen – yes. There are elements of all three answers present. Judging by the actual decisions made by the club, it seems unlikely that there is a clear operations strategy and as such the operation strives to cope with a range of different demands and, as a consequence, probably fails (a little) with each.

• None of the above.

Response, if this is chosen – not really. The most appropriate answer is probably (d), ‘All of the above’. There are elements of all three answers present. Judging by the actual decisions made by the club, it seems unlikely that there is a clear operations strategy and as such the operation strives to cope with a range of different demands and, as a consequence, probably fails (a little) with each.


The question posed is, ‘Consider the following set of scales on which the club’s performance can be judged’.

Measuring the club’s performance

1 5

Price High price Low price

Dependability Not likely to be able to fly Able to fly as arranged

Flexibility Single product Do anything anytime

‘Product’ quality, i.e. the gliders and the quality of instruction

Dangerous gliders and poor instruction

Well-maintained gliders and Excellent instruction

Quality of facilities Very basic facilities Five Star facilities

Service quality, i.e. the quality of the pre- and post-flight care.

Non-existent service Helpful, attentive and available staff

Speed Wait all day Fly immediately

Chart the five performance objectives (on the 1 to 5 scale) to show the differing expectations of

• club members and

• casual flyers,

and then compare these with the actual service delivered (again use the 1 to 5 scale).

The response (irrespective of what the answer is) is…



The suggested scores for the performance objectives

Club member expectation

Casual flyer expectations

Service delivered

Cost 3 1 3

Dependability 3 5 2

Flexibility 5 2 4

Product quality 5 5 5

Quality of facilities 1 4 1

Service quality 2 5 2

Speed 3 5 3

The chart shows clearly that the needs and expectations of the club members are really quite different from those of the casual flyers. The former are enthusiasts who want to develop their skills in the sport, whereas the casual flyers tend to be one-time thrill seekers. Club members just get on with the job and know what to do, whereas the casual flyers need customer service – friendliness, attention, explanation and reassurance. Also, the following polar diagram is given as feedback.

(Low price)

(Reliable flying)

(Change and choice)

(High quality glidersand instruction)

(High quality facilities)

(High quality careand attention)

(Fly immediately)

0

1

2

3

4

5

Cost

Dependability

Flexibility

Product qualityQuality of facilities

Service quality

Speed

Club member expectations Casual flyer expectations Service delivered

Polar diagram for different customers and actual service delivered



It is worth debating on the use of polar diagrams. The example can be used to demonstrate the need to try to be logical by devising scales along which agreement about the five performance objectives can be assessed. The tables below show possible scales, their ratings and the resultant polar diagram not only for each customer type but also for the service delivered. (‘Quality’ refers to product quality, i.e. the gliders and the quality of instruction, the quality of facilities and the quality of service – quality of the pre- and post-flight care.)

The trial flights are sold as a loss leader, so they can be considered to generate marginal income and profit, with all fixed costs (winches, instructors, clubhouse, office, hangar, gliders, staff etc.) allocated to member flights. Indeed these causal flights compensate for the overall loss the club makes on its operations. Its income from trial flights results in the club making a small annual profit. Despite expecting to attract new members through trial flights, only less than 5 in 750 (0.7%) resulted in new members.

Casual members choose gliding because it is available. They might consider hot air ballooning too, for example, if it were available nearby. Price is also important. Since many flights are bought as presents, too high a price would put many off; the current cheap rate (compared to hot air ballooning, e.g. at nearly £80 per person) results in high sales. For the enthusiast, the club needs to be within a reasonable travelling distance so they can fly regularly without too much difficulty, so location is critical. Members are concerned about the price of membership and being able to turn up whenever they want. The table below can be used in class to summarize the differences between the casual flyers and the club members.



Differences between club members and casual fliers

CLUB MEMBERS CASUAL FLYERS

Product Provision of facilities and instruction to pursue the sport

To experience gliding

Customers Enthusiasts Thrill seekers

Product range Novice to competition gliding Short introductory flights

Design changes None Variety of packages

Delivery Club/team activity – co-producer of product

Dependable flight

Quality Good flying conditions Support, care and attention

Volume per service type 300 members 750 trial flights

Profit margins Negligible Mostly profit

Competitive factors

Order winners Location Price Availability

Qualifiers Price

Flexibility

Dependability

Range of products

Quality of service

Location

Less important

Internal performance objectives

Cost

Flexibility

Dependability

Speed

Dependability

Flexibility

Quality

It is clear that the operation (i.e. the service delivered) is more attuned to the needs of the club members. This should be of no surprise, because club members run the operation (through the committee).



Indeed, many club members see the casual flyers as a nuisance who take up their precious airtime and reduce instructor availability with little benefit to the club.

Club members are expected to help for a full day at the club, whereas members of the public are not required to help at all.

Members hope to fly sometime during the day, whereas casual flyers expect to have a flight almost immediately.

Casual flyers have paid for their flight and have to be flown (weather permitting), but members pay later and are not guaranteed a flight.

Club members can spend three or four hours on the airfield hard at work flying other club members, members of the public and visiting pilots before they get their turn to fly. In fact, on some occasions, the weather conditions change for the worse, and they do not get to fly at all.

And, as a result,

they feel pushed out of flying by the casual flyers;

they consider the club is grabbing money from casual flyers at the expense of their flying;

they feel that the casual flyers change the nature of ‘club’;

they come and work all day for the benefit of the casual flyers and may not get a flight;

they feel like cheap labour.

Similarly, the casual flyers perceive that they have a raw deal.

They see unfriendly and unhelpful people.

They feel ignored and unloved.

They enjoy the flight, but it can be very short (five minutes).

They experience very poor service.

The following extract of a letter received by the club is not unusual:

‘The flight was a 60th birthday present from my wife. I drove to the club with great excitement and apprehension. There was no one in the clubhouse or office, and I had no idea where to go. I walked around for a long time and saw people at the far end of a field. When I got there, no one spoke to me. I approached a man in a land rover who reluctantly found someone to fly me. I was in the air for less than five minutes, and was then pushed out of the plane as soon as we landed’.




What advice would you give to the chairman?

There are five possible options that have been suggested. Check one of them.

1. Do nothing.

Response, if this is chosen – by continuing as it is, the club will continue to alienate its members for whom the ‘clubby’ atmosphere is the key. The club is hard pressed, indeed its membership is declining, and if nothing is done, the implications could be serious. Casual flyers, although somewhat alienated by their experience, will at least get a flight and the thrill they were seeking, though that may not make them recommend it to others. However, with a large population within a few hours’ drive of the club and with substantial numbers of tourists in the area, the numbers of casual flyers may not be at risk. However, without enough members to launch or fly them, the casual flyers might not even get their quick thrill. This could have a significant effect on the club’s reputation.

2. End trial flights.

Response, if this is chosen – this would certainly make things better in the short term for club members. There would be no casual flyers taking up winch time or more importantly instructor time that the club members could use. The main problem is the reduction in income. The casual flyers are keeping the club afloat, though most members are blissfully unaware of this. To make up for this shortfall and thus pay for the improved service to members, they would either have to pay an additional membership fee or an increased launch fee, or both.

3. Create two processes to look after the two types of customers.

Response, if this is chosen – by providing dedicated staff and facilities for each customer type, club members and casual members would have their own winch crews, instructorsand, experience. Casual members could have administrative staff who greet them, and a warm, pleasant room where they could be met and briefed by their instructor. A minibus could take them to the launch point for their flights and provide some shelter from the wind. Although this appears to be an idealistic solution, it is employed only at some gliding clubs. However, it might be inappropriate for Long Ridge because they probably do not have the staff or finances to support this approach, although the casual flyers might well tolerate an increase in fees that might pay some of the costs.

4. Amend the process

Response, if this is chosen – amend the process to deal better with the casual flyers without unduly affecting the members. Define the product for the casual flyers, such as the meeting and greeting of the casual flyers, a flight briefing and an agreed minimum flight time. Inform club members of the (financial) importance of casual flyers and the need to give them a good experience.



5. Better manage casual flyers’ expectations

Response, if this is chosen – bring the casual flyers’ expectations in line with the service delivered. Change the literature to give the impression that they will have to wait, may only get a short flight, and are expected to help with winching and glider preparation. Some possible quotes for the brochure might include the following:

Dependability ‘We advise a phone call first’.

‘Subject to availability and weather conditions’.

Flexibility ‘Phone up and we will see if we can do it’.

Quality ‘Gliding needs teamwork, the cooperation of all the people involved. Everyone is needed, keeping a log on the field, driving the winches or bringing back gliders’.

‘The club has all the basic necessities’.

Speed ‘Plan your trial lesson in advance’.

‘While you wait for your flight you have the chance to help the launch crews’.’

Recommendation

A mixture of 4 and 5. This strategy could also help convert more casual flyers into members.


So what is the fundamental problem with Long Ridge Gliding Club’s approach to the strategic management of its operations?

(a) Its strategy has not been ‘operationalized’ in the optimum way.

Response, if this is chosen – it is true that all strategies need to be translated into operational practice but that does not get to the root of the issue.

(b) Both groups (visitors and members) have fundamentally different needs and therefore require different operations strategies.

Response, if this is chosen – absolutely. This is the main issue: the two groups have fundamentally different needs and, as a consequence, both require different strategies.

(c) There is a different strategy that can be developed.

Response, if this is chosen – of course a different strategy can always be developed, but the fact remains that the two different groups (visitors and members) have different needs which cannot be met with one strategy.


C H A P T E R 3

Freeman Biotest

Case synopsis

Freemann Biotest is 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 accounts for only 25 per cent of total company sales, which now is slightly over €100 million.

The problem in the case relates to the replacement of one of the process lines used to manufacture FBXX. Currently, two such process lines are used, both designed and installed by Brayford Corp., a process equipment manufacturer. It is the older of the two Brayford lines that is giving trouble. High breakdown figures, with erratic quality levels, mean that output level requirements are only just being reached. The problem is: 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, which would be manufactured by a relatively new company, Bi-Line Inc. The VP for Technology has drawn up a comparison of the two units, shown in the Table.

A comparison of the two alternative process line configurations

Process Line Configuration Brayford Bi-Line 8

Capital cost €5,900,000 €8,800,000

Processing costs Fixed: €150,000/month

Variable: €750/kg

Fixed: €300,000/month

Variable: €550/kg

Design capacity 1050 kg/month

98% ± 0.7% purity

1400 kg/month

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

The group considering the problem is the newly formed Management Committee. The committee consists of the VP for Technology and the VP for Marketing, who have been with the firm since its inception, together with the V.P.s for Operations and Finance, both of whom joined the company only six months ago. What follows is a condensed version of the information presented by each manager to the committee, together with their attitudes to the



decision. As with all the active cases associated with this text, it can be used as a stand-alone learning experience or students can be asked to work through the case (individually or in groups) and then debriefed in a relatively conventional manner in class. The class debriefs of active cases should focus not only on the ‘content’ of the decisions but also on how students went about making a particular decision. This teaching note assumes that all students have worked through the case, which is then debriefed in class.

Appendix 1 gives the views of senior managers in the company.

Using the case

The provision of capacity cannot always be separated from the characteristics of the technology that provides the capacity. It is so 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.

Notes on questions

Questions 1. What is the current annual sales value of FBXX?

The purpose of this question is simply to make sure that students have understood the nature of demand

€20 million.

Response, if this option is chosen – no, look at the material again.

€25 million.

Response, if this option is chosen – yes.

€30 million.


Question 2. What is the current average price per kg of FBXX?

The purpose of this question is simply to make sure that students have understood the nature of demand.

€1000.


€1025.




€1050.


Question 3. So, what is the current annual sales volume (in kg) of FBXX?

Again, the purpose of this question is simply to make sure that students have understood the nature of demand.

2000.5 kg.

Response, if this option is chosen – no, divide the sales value by the average price.

2001.5 kg.

Response, if this option is chosen – no, divide the sales value by the average price.

23809.5 kg?


Question 4. Use the information in the case and a breakeven diagram to compare the following two options (read Chapter 3 again if you cannot remember what a breakeven diagram is).

1. Buy another Brayford line and a third if demand eventually justifies it.

2. Buy a Bi-line 8 (and load it first, using the Brayford for the balance of the production required).

This is the main question in the case. It is an exercise in using breakeven principles, but should also include other types of analysis. The class debrief of this case should probably focus on the multifaceted nature of this decision. However, start out by checking the students’ basic understanding of demand.

The market

Current sales value of the FBXX product = €25 million

Average price = €1050/kg

Therefore, annual sales volumes = 25 million ÷ 1050

= 23809.5 kg per year

= 1984 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 their current market share, one would expect monthly volumes to rise to around 2400 kg over this period. This is greater than the combined capacity of the two existing lines, that is, 2100 kg per month.

Any evaluation of which facility to invest in will need to examine both technical and financial capacity criteria.

Technical 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. Often there will be several functional capabilities 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. Along with absolute capacity, variation in capability can be important, that is, 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, without 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 Bi-line 8 facility gives more capability if needed (1400 kg per month, against 1050 kg per month).

• 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.

• 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.

• As regards after-sales service, again little information is available on the Bi-line 8, but the Brayford is likely to be better.

• It could be seen as if 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.

• 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.

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 which, although 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 required 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 the financial performance. Benefits are usually expressed in profit terms or saving terms, 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.

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.

The figure shows the breakeven (or cost-volume-profit) curves for the two alternative strategies.

1. Buy another Brayford.

2. Buy a Bi-line 8 (and use it first, bringing in the Brayford when demand exceeds 1400 kg a month).

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.

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 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.



1000 2000 3000 4000

150000

4m

3m

2m

1m

€

Monthly volume (kg)

Break even curves for two alternative capacity strategies

3 Brayford facilities

1 Bi - line 8 facility 1 Brayford facility

Current volume

Revenue

1000 2000 3000 4000

150000

4m

3m

2m

1m

€

Monthly volume (kg)

Break even curves for two alternative capacity strategies

3 Brayford facilities

1 Bi - line 8 facility 1 Brayford facility

Current volume

Revenue

From the figure:

• Up to 1050 kg a month, the Brayford option has lower costs.

• Between 1050–1400 kg a month, the Bi-line 8 option has lower costs.

• Between 1400–2100 kg a month, the Brayford option has marginally lower costs.

• Over 2100 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 1400 kg a month) or a reasonably optimistic view (2000–2400 kg a month) favours the Bi-line 8 option. A very little growth marginally favours the Brayford.

If we take an optimistic view based on a doubling of sales because of a successful modification of the product, the decision then involves a third and fourth facility. Several combinations 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 = €150,000 + €(750 × 1050)

= €937,500

Cost per kg = €937,500 ÷ 1050

= €892.86

Bi-line 8 cost at full capacity = €400,000 + (€600 × 1400)

= €1,240,000

Cost per kg = €1,240,000 ÷ 1400

= €885.71

The Bi-line 8 provides a lower cost solution although the difference in cost is relatively small, around 1 per cent. Nevertheless, the company may still regard a 1 per cent difference on a €5 or €6 million production cost as significant.

Other factors

• The spares issue is worth mentioning. A mixture of two types of facilities doubles the spares and the quantity of maintenance knowledge that the firm would have to carry.

• The effect of introducing new technology into the production system must be recognized. In this case it would involve some new training to use the Bi-line 8, but also in the long run would de-skill the jobs of the people operating them.

• 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, that is, whether to lead or lag demand, or whether to go for small capacity increments (Brayford facilities) because these can be more readily used to tailor capacity to demand.


A P P E N D I X 1

Opinions of senior managers

The Marketing Vice President

Currently the market for this type of preservative has reached a size of €50 million, of which Freemann Biotest contributes approximately 48 per cent. There have, of late, been significant changes in the market – in particular, many of the users of preservatives are now able to buy products similar to FBXX. This is due to the evolution of a much more price-sensitive market than had previously been the case. Further, market projections are somewhat uncertain. It is clear that the total market will not shrink (in volume terms) and best estimates suggest a market of perhaps €60 million within the next three or four years (at current prices). Although the food preservative market has advanced by a series of technical innovations, real changes in the basic product are now few and far between. FBXX is sold in either solid powder or liquid form, depending on the particular needs of the customer. Prices tend to be related to the weight of the chemical used, however. Thus, currently the average market price is approximately €1,050 per kg. There are, 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. Also, if demand does increase, the Bi-line 8 will give us the extra capacity. And anyway, this company should really be at the cutting edge of process technology. This new company who supplies the Bi-line 8 line is young and hungry for business. We could get some real development help from them if we manage the relationship right’.

The Vice President for Technology

The major part of the VP-for-Technology’s budget was devoted to modifying basic FBXX so that it could be used for more acidic food products such as fruits. 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 which will be in all similar technologies in the future. We have to start learning how to exploit them sooner or later. Of course, both machines can do the job adequately, but variation in capability can also be important. Most processes exhibit some variability in performance and a certain level is normally tolerable. However, especially if we do succeed in modifying the product for more acidic foods, less variation in quality levels is likely to be important. Variation both in the sense of reliability, and the process variability in performance that the facility displays, are likely to be better in the Bi-line machine’



The Operations Vice President

The FBXX Division is self-contained as a production unit, located at the smaller of the company’s two sites. Production requirements for FBXX are currently at a steady rate of around 1900 kg per month. The Operations VP is anxious regarding the effect of introducing new technology into the production system. Using the Bi-line 8 would not only involve some new training, but also, in the long run, de-skill the jobs of the people operating the machine. The technicians who staffed the FBXX lines are the only technicians in Freemann Biotest who did all their own minor repairs and full quality control. The reason for this is largely historical, since when the firm started, the product was experimental and qualified technicians were needed to operate the plant. Four of the six have been with the firm almost from the beginning.

‘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 spares issue is also 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 cope with’.

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. The capital cost of the Bi-line 8 was seen as a problem because it was 50 per cent more expensive.

‘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. As I see it, the Bi-line 8 will only be more profitable at higher levels of demand than we have currently. It just is not worth the risk’.


C H A P T E R 4

McPherson Charles Solicitors

Case synopsis

McPherson Charles, based in Bristol in the west of England, has grown rapidly to be one of the biggest law firms in the region. Comprising 21 partners and a total of 652 staff, it is an ambitious partnership aiming to maintain its impressive growth record. The firm is managed through 15 teams, each headed by a partner. Some of these partners are discussing ‘plans for the future’, a programme to improve the effectiveness of the firm’s operations.

The three partners attending the meeting with Grace were Simon Reece (Family law), Kate Hutchinson (Property) and Hazel Lewis (Litigation). Grace asked for ideas on what the firm should prioritize if it was to improve its performance even further. Appendix 1 contains the scripts of the expressed views of these three partners.

The following point was made – The key issue here is that the partners are in charge of operations that are very different and, as a consequence, they have their own perception of what is important. To help overcome this, it can be helpful to understand the different volume-variety profiles. Until they can have a sensible conversation based on understanding their differences in a structured manner, it will be very difficult for Grace to achieve consensus on the way forward. They need to understand more about each operation. The partners give a profile of their operation. The scripts for these are given in Appendix 2.

Using the case

This case can be used to guide students towards appreciating the role of volume and variety (what is called process design – positioning in the text) as a key determinant in the design of any process. The setting is unusual in so much as it is a professional service. In any class debrief, try to exploit this. In many ways, professional services are the most difficult to apply conventional operations management theory to. Yet, here is an operation that can be analysed (more or less) in the same way as any other operation.

The most difficult part of the case, and therefore the part that may take the most class time in debriefing, will be in identifying the policies adopted by each team as regards their layout, process technology and job design. There are sufficient clues within the case, but these may have to be drawn out in class discussion.

As with all the active cases associated with this text, it can be used as a stand-alone learning experience, or students can be asked to work through the case (individually or in groups) and then be debriefed in a relatively conventional manner in class. The class debriefs of active cases should focus not only on the content of the decisions but also on how students went about making a particular decision. This teaching note assumes that all students will have worked through the case that is then debriefed in class.



Notes on questions

Question 1. Consider the information available and estimate the volume and variety of work that each of the three teams has to cope with. Try and quantify the relative volumes.

• Tick the volume–variety positions that seem to apply to each team.

• If a team deals with different product/service groups, then you will need to tick more than one box.

The feedback given is contained in the following table.

Very low volume.

High levels of variety or customization

Fairly low volume.

Some degree of significant variety or customization

Fairly high volume.

Relatively little variety or customization

Very high volume.

Low levels of variety or customization

Family law YES. The work that deals with high-value clients is of very low volume compared with the firm’s other processes (2/week)

YES. The work that deals with even lower-value clients is of relatively low volume compared with the firm’s other processes (20/week)

NO. Neither low nor high-value client work is of high volume compared with the firm’s other processes

NO. Neither low nor high-value client work is of high volume compared with the firm’s other processes

Litigation No. The work that the litigation team does is of very high volume compared with the firm’s other processes

No. The work that the litigation team does is of very high volume compared with the firm’s other processes

No. The work that the litigation team does is of very high volume compared with the firm’s other processes

Yes. The work that the litigation team does is of very high volume compared with the firm’s other processes (872/week)

Property No. None of the work that the property team does is of very low volume compared with the firm’s other processes

Yes. The special work that the property team does is of relatively low volume compared with the firm’s other processes (25/week)

Yes. The domestic work that the property team does is of relatively high volume compared with the firm’s other processes (100/week)

No. None of the work that the property team does is of very high volume compared with the firm’s other processes



The main point here is to convince the students that volume and variety can be assessed from the information given in the case. Admittedly, it is far easier to understand volume, but there are some indications within the case information that variety is inversely related to volume.

While there is some discretion as to how the four points on the volume–variety scale can be defined, the volume of transaction figures given in the case also lend themselves to four categories as follows:

• Under 10 transactions per week

• Between 10 and 50 transactions per week

• Between 50 and (say) 200 transactions per week

• Over 200 transactions per week.

This allows the various services offered by each team to be categorized.

One method of going through this in class is to make a matrix (using the board or an OHP transparency) and asking the students to identify the various services offered, and where they would put them in the matrix.

There are two key findings at this stage. First, the volume–variety profile of the work done by each team is very different; therefore their approach to issues of process design should presumably be different. Second, two of the teams seem to have processes that deal with distinctly different groups of clients and have different volume–variety characteristics.

Question 2. The volume–variety characteristics of a process are related to three basic issues of process design:

• Process layout

• Process technology

• Process job design.

The next activity should therefore give an indication of whether the three teams have organized their processes in an appropriate manner.

For each team, click on one of the cells of the matrix that best represents their

• process layout,

• process technology and

• process job design.

Depending on the student’s choice, the following feedback is given.



Process layout

Process technology

Process job design

Family law Litigation Property law

Similar resources and activities grouped together

Little and/or general purpose technology

Very flexible, task-based skills, high discretion

Yes. The family law process has a very flexible layout, uses no sophisticated technology and gives its staff considerable discretion

No. The litigation process has a highly product-based layout, uses sophisticated technology and uses less qualified staff doing fairly repetitive jobs.

No. The property law process has a relatively low product-based layout, uses sophisticated technology, and uses less qualified staff doing fairly repetitive jobs.

Not really. The family law process has a very flexible layout, uses no sophisticated technology and gives its staff considerable discretion.

No. The litigation process has a highly product-based layout, uses very sophisticated technology and uses less qualified staff doing fairly repetitive jobs.

Not really. The property law process has a relatively product-based layout, uses some sophisticated technology and uses less qualified staff doing fairly repetitive jobs.

No. The family law process has a very flexible layout, uses no sophisticated technology and gives its staff considerable discretion.

Not really. The litigation process has a very product-based layout, uses very sophisticated technology and uses less qualified staff doing fairly repetitive jobs.

Yes. The property law process has a relatively product-based layout, uses some sophisticated technology and uses less qualified staff doing fairly repetitive jobs.



Table continued

Process layout

Process technology

Process job design

Family law Litigation Property law

Layout based around stage by stage needs of product/service

Dedicated and/or specialized technology

Specialized, process driven, highly defined

No. The family law process has a flexible layout, uses no sophisticated technology and gives its staff considerable discretion

Yes. The litigation process has a product-based layout, uses highly sophisticated technology and uses less qualified staff doing fairly repetitive jobs.

Not really. The property law process does not have a totally product-based layout, only uses sophisticated technology and less qualified staff.

As mentioned previously, this is one of the most difficult issues for students to understand. It is best not to be too prescriptive about the feedback given in the active case. There really is some room for differences of opinion here. However, it would be difficult to justify any answers that are very far from the ones given in the feedback. In particular, process layout is difficult for students to understand. Try to identify the extremes by starting with the type of layout used first for the family law team and then for the litigation team. Family law has an open plan office that is laid out for the benefit of the staff within the team, rather than for the benefit of the flow of information as such. So it is the requirements of the people in the process rather than the requirements of the various stages of the task that are dominating. There is no obvious single flow of information for all jobs. In effect, this is a kind of fixed position layout. Then contrast this with the layout used for the litigation process. This goes through a series of stages that are defined by the needs of the jobs that are processed. Property law could be placed anywhere between these two extremes, but it is probably closer to the high volume end of the scale, because that is how the process has been designed according to its senior partner.

Question 3. You have now assessed both the volume and variety characteristics of the jobs that each team has to work on, and the types of processes that each team has designed. The next task is to check that their processes fall on the diagonal of the product–process matrix.

Students are asked to drag and drop the jobs for the three teams into their respective cells of the product–process matrix. The correct positions are shown in the matrix below.



Process layout

Process technology

Process job design

Very low volume

High variety

Fairly low volume

Some variety

Fairly high volume

Little variety

Very high volume

Low variety

Similar resources and activities grouped together

Little and/or general purpose technology

Very flexible, task-based skills, high discretion

Family law High-value clients

Family law Lower-value clients

Property law special jobs

Property law domestic jobs

Layout based around stage by stage needs of product/ service

Dedicated and/or specialized technology

Specialized, process driven, highly defined

Litigation jobs

Question 4. So, what do we do when a process is off the diagonal of the product–process matrix?

Students are given a number of options for the advice they would give each team. Depending on their choice, the feedback is as follows:

Family law

What would you advise the family law team to do? Their lower-value clients seem to be off the diagonal. That is, the family law process seems to be designed for high-value, high-variety and complex cases. But much of the family law team’s work is more routine, higher volume and lower variety. Examine the following recommendations that you could give to the family law team. You can choose one recommendation. Check which one you would advise.

Limit the volume of low-value clients.

Feedback, if this option is chosen – why would you want to reduce the number of low-value clients? Just because they are low value, it does not mean to say that they are not profitable. Given the volume of low-value clients, it is reasonable to assume that this kind of work makes a reasonable contribution.



Employ more staff.

Feedback, if this option is chosen – yes. But how would you use them? Just throwing more staff at a confused process may disguise the problem, but it won’t solve it.

Explore the possibilities to reduce the variety of tasks in high-value clients’ jobs

Feedback, if this option is chosen – you can not try and systematize the high-value client’s jobs. By their very nature, they are all different and these clients require and expect personal service.

Treat all jobs the same, irrespective of whether they are for high-value or low-value clients.

Feedback, if this option is chosen – you cannot treat all jobs the same because they have very different requirements. High-value clients’ jobs are more complex, and they require a personal service.

Automate the process.

Feedback, if this option is chosen – it is very unlikely that there is any potential for automating the process. Family law is a sensitive task and clients require personal service whether they are high or low value.

Do not do anything. Accept that, although low-value work could be put through a more specified process, the advantages of letting junior staff learn from senior staff is too good a benefit to loose.

Feedback, if this option is chosen – yes, this is probably a reasonable idea. In these circumstances, one could make a good argument for accepting the fact that lower-value clients are off the diagonal and putting up with the extra processing cost because it gives other advantages.

Split the team into two smaller teams, with one focused on high-value clients and the other focused on lower-value clients.

Feedback, if this option is chosen – yes, you could do this. However, you would have to find some way of giving experience to the more junior staff engaged on the lower-value clients’ work. An alternative would be to continue as family law is organized at present, and accept that lower-value clients will be off the diagonal.

Property law

The property law team has two types of jobs, special jobs and domestic jobs. They have set up a system that seems to be appropriate for domestic jobs, but since they try and use the same system for processing special jobs, special jobs are off the diagonal. Examine the following recommendations that you could give to the property law team. You can choose one recommendation. Check which one you would advise.

Abandon doing the special jobs.

Feedback, if this option is chosen – why? There is no indication that these jobs are not profitable, and it would be foolish to abandon them merely because they did not fit into the existing process.



Employ more staff.

Feedback, if this option is chosen – yes. But how would you use them? Just throwing more staff at a confused process may disguise the problem, but it will not solve it.

Split the property team into two, with one process focussed on the special jobs and another process focussed on the domestic jobs.

Feedback, if this option is chosen – yes. This is probably a good idea. Both jobs are valuable and yet their needs are very different. Furthermore, there seems to be little advantage to be gained in trying to do both types of jobs in the same process.

Treat all jobs the same, irrespective of whether they are special or domestic jobs.

Feedback, if this option is chosen – this is exactly what they are trying to do at the moment and it is not working. You cannot ignore the genuine differences between the requirements of the two types of jobs.

Automate the process.

Feedback, if this option is chosen – the property law team already has a process that is insufficiently flexible for some of its work (the special jobs). So automating the process further (if this is possible) would make the position worse.

Continue to use the same process for both types of jobs, but if one of the special jobs proves too difficult, take it out of the process and give it to a special team.

Feedback, if this option is chosen – this would probably give you the worst of all worlds. It would confuse the process and require decision making throughout the process as to whether to take a job out and give it to the special team.

This question can lead to some interesting debate in class. Some of the options posed are not very sensible, but there is not always one very clearly right answer. This allows for the advantages and disadvantages of each option to be debated in class. In general, the debate usually centres around the fact that there are advantages in having separate processes for the different services offered. The real question is whether each team is willing to pay the price of not separating into two distinct processes. The family law team could make a very good case for not separating out the processes for high-value clients and normal clients. The advantage of allowing relatively junior staff to gain experience by acting as assistants to senior staff on high-value client cases is deemed to be a sufficient advantage for keeping the processes together. No such argument can easily be made in the property law team. Here, it seems sensible to separate the processes.



Appendix 1

Simon, ‘I think the first thing we need to agree on is that, for any professional service firm like ourselves, the quality of our people will always be the most important issue. We must be absolutely confident that our staff have the best possible understanding of their own branch of the law, and also have the necessary client relationship skills to instil confidence in our clients. Clients are getting very much more demanding. They expect to be advised by experts who carry a great deal of personal authority’.

Hazel, ‘I’m not so sure. OK, I agree that the quality of our staff is an important issue, but that’s always been true. What’s new is the help we can get from some serious investment in technology and software. Just getting our systems and processes sorted out, I’m sure would save us a lot of time and effort. More to the point, it would reduce our cost base and make us more efficient’. <with slightly ironic emphasis> Which may be of interest to you Grace’?

Simon <coming in quickly> ‘Come on Hazel. We really can’t just throw money at all our problems. I really don’t think spending more money on technology is the answer. What we really need is just more time to really understand our clients. Being ‘process’ and ‘IT’ focused, just won’t work for us. We need another way of managing. The key is increasing revenue, not penny pinching about costs. And to do that, we need to really concentrate on relationship skills. Family law is like walking through a minefield. You can easily offend clients who are, almost by definition, in a highly emotional state. I think we need to make sure that senior members of staff with experience of managing client relationships pass on their knowledge to those who are less experienced’.

Kate Yes. OK. That may be partly true, but some of our clients really are getting far more cost conscious. And if we don’t deliver value for money, believe me, word will spread and our business will start to dry up. I think that a lot of the time we over-engineer our services. We always seem to be giving clients more than they really need. Look, why should we use highly qualified and expensive lawyers for almost every single thing we do? I know that with training, non-qualified people could do much of our work. I’ve already started to use more clerical staff in my department, and there’s been no fall off in service’.

Appendix 2

Simon Reece, Family law

‘We are called the ‘family law’ team but basically what we do is to help people through the trauma of divorce, separation and break up. Our biggest ‘high-value’ clients come to us because of word of mouth recommendation. Last year we had 89 of these ‘high-value’ clients, and they all valued the personal touch that we were able to give them, getting to know them well and spending time with them to understand the often ‘hidden’ aspects of their case. These interviews cannot be rushed, because this type of client tends to be wealthy, and we will often have to drop everything and go off half way round the world to meet them and discuss their situation. There are no standard procedures. Every client is different, and everyone has to be treated as an individual. So we have a team of individuals who rise to the challenge each time and give great service. Of course, not all our clients are the super-rich. About a third of our fee income for the year comes from about 750 relatively routine divorce and counselling cases. This work is a lot less interesting, and I try to make sure that all my team have a mix of interesting



and routine work over the year. I also leave it up to their discretion on whether they call in me or one of the more senior members of the team for advice. It is important to give this kind of responsibility to them so that they see themselves as part of a team. We are a ‘people’ team. Computers will never be able to do our job. We are also the only part of the firm that has adopted an open plan office arrangement centred on our specialist library of family case law’.

Hazel Lewis, Litigation

‘The litigation team provides a key service for its commercial client base. Our primary work consists of handling bulk collections of debt. The group has 17 clients of whom 5 provide 85 per cent of our total volume. We work closely with the accounts departments of our client companies and have developed a semi-automatic approach to debt collection. Staff input into the system data received from their clients, letters are produced, queries responded to and debt collected ultimately through court proceedings. Work tends to come in batches from clients and varies according to economic conditions, time of year and client sales activities. At the moment, things are fairly steady; we had 872 new cases last week. The details of each case are sent over by the client, our people input the data onto our screens and set up a standard diary system for sending letters out. Some people respond quickly to the first letter and often the case is closed within a week or so, other people ignore letters and eventually we initiate court proceedings. We know exactly what is required for court dealings and have a pretty good process to make sure all the right documentation is available on the day’.

Kate Hutchinson, Property law

‘We are really growing fast and are building up an excellent reputation locally for being fast, friendly and giving value for money. Most of the work is acting for individuals buying or selling their home, or their second home, a part of the business that has really taken off recently. Each client is allocated to a solicitor who becomes their main point of contact. But, given that we can have up to a hundred domestic clients a week, a lot of the work is carried out by the rest of the team behind the scenes. There is a relatively standard process to property sales and purchases and we think we have it well sorted. We have four separate sections, one dealing with land registry searches, one liaising with banks who are giving mortgages, one making sure surveys are completed and one section that finalizes the whole process to completion. We believe that our process with this degree of specialization helps us achieve the efficiencies that are becoming important as the market gets more competitive. Sometimes we get an unusual property and there are times when fast completion is particularly important and that can throw us a bit. Also we have seen an increase in ‘special’ jobs that are more complex than the domestic work. These are things like ‘volume re-mortgage’ jobs; rather complex ‘one-off’ jobs, where a mortgage lender transfers a complex set of loan assets to another lender. Also, the firm has recently formed partnerships with two large speculative builders, so we are getting into special ‘plot sales’. All these ‘specials’ do involve a lot of work and can occupy several members of the team for a time. We are now getting up to 25 of these ‘specials’ each week, and they can be somewhat different from our normal work but we try to follow roughly the same process with them as the normal domestic jobs’.


C H A P T E R 5

Action Response

(Note: For the convenience of tutors some parts of the active case and statements by the characters are included, as is the feedback logic used in response to the various choices presented to students.)

Case synopsis

Action Response is a London-based charity dedicated to providing fast responses to critical situations throughout the world. The charity receives requests for cash aid usually from an intermediary charity and looks to process the request quickly and provide funds where they are needed, when they are needed.

The charity is facing two key issues.

1. There are complaints about the speed of their response.

2. Costs are beginning to spiral.

There are differing views within the charity about ‘what is to be done’. The purpose of the case study is to assess and reconfigure the processes employed within Action Research to improve responsiveness and efficiency.

The full case study is detailed in Appendix 1.

Using the case

This case can be used in conjunction with Chapter 5 and illustrates the diagnostic logic chain questions. It provides an opportunity to ensure there are the right links between the strategic objectives of an operation and how the operation’s processes are configured. The case also calls for students to demonstrate Process Mapping skills. From our experience, students easily grasp the theoretical principles behind process mapping but often struggle to put those skills into practice. This case provides them with the opportunity to test their theoretical knowledge.

The case also asks the students to advise the Chief Executive of the actions she should take. As with all the active cases associated with this text, it can be used as a stand-alone learning experience or students can be asked to work through the case (individually or in groups) and then debriefed in a relatively conventional manner in class. The class debriefs of active cases should focus not only the content of the decisions but also on how students went about making a particular decision. This teaching note assumes that all students will have worked through the case that is then debriefed in class.



Notes on questions


The first question demonstrates how different people within any organization can have different perceptions of what it is that they are trying to achieve. Understanding those differences and aligning the people into a common shared view is important.

1. The first step is to ask, ‘Are process performance objectives understood’? So, what objectives should the ARCPU process be trying to achieve?

Consider these three statements from Susan, Jacqueline and Stephen.

Which of the statements best summarizes the most appropriate objectives for process design?

Statement A: Susan N’tini – ‘I know we must never compromise the quality of our assessment or the accuracy of claims processing, but if we cannot turn round applications fast enough, then we are not fulfilling our very basic mission. It doesn’t matter how good our judgement or advice is if our answer comes too late’.

Statement B: Jacqueline Horton –‘Many of the people who apply to us have never formally asked for aid before. They are not professional ‘form fillers’. Often we have to read between the lines and interpret what they really need. Because of this, the key objective must be to retain a flexibility of decision making that will prevent us rejecting applications that we should really be accepting’.

Statement C: Stephen Nyquist – ‘It’s the quality of our feedback and advice to applicants that we need to concentrate on. I see us as moving towards becoming a new breed of ‘charity consultants’. Of course, we must continue to fulfil our primary role of giving short-term funding, but we must also allow ourselves to develop new roles’.

After the students choose the statement, they receive the following response:

Response to statement A – Yes. Although many of the other points made are interesting and probably worth considering, the very basic aim of the charity is to provide short-term aid. Therefore, unless the process can turn around applications fast, it is failing to fulfil its primary aim. The other objectives may (or may not) be desirable, but they are not currently the most important. Note, however, that organizations will often hold views that, to some extent, are conflicting. Especially in charitable organizations in which objectives are not always straightforward, defining appropriate process objectives can be problematic.

Response to statement B – Not really. Although the statement is interesting, and may (or may not) be an appropriate longer-term aim, the primary objective of Action Response is to provide short-term funding fast. So, statement A is the most appropriate statement of objectives for the process design activity. Note, however, that organizations will often hold views that, to some extent, are conflicting. Especially in charitable organizations in which objectives are not always straightforward, defining appropriate process objectives can be problematic.

Response to statement C – Not really. Although the statement is interesting, and may (or may not) be an appropriate longer-term aim, the primary objective of Action Response is to provide short-term funding fast. So, statement A is the most appropriate statement of objectives for the process design activity. Note, however, that organizations will often hold views that, to some



extent, are conflicting. Especially in charitable organizations in which objectives are not always straightforward, defining appropriate process objectives can be problematic.


Question 2 allows a debate about the amount of depth that is appropriate for a process map. It also provides an opportunity to get the students themselves to map the process first and then compare it with the suggested answers. Although quite lengthy, the latter activity is a great way to involve the students in a seemingly straightforward task but one that demonstrates the time commitment needed to process map appropriately.

2. The second step is to ask, ‘Are current processes configured appropriately’?

A process map is necessary before any decision can be made regarding the appropriateness of the process. Susan asked three of her staff to sketch out what they regarded as being the key steps and details that would explain the process.

Which of the three process maps seems to you to be the most appropriate for analysing the current process?

ARAPU process map B

300 per week

300 per weekReceive and assess claims

Complete applications (accept

and decline)

Dispatch

ARAPU process map A

Write for further information

Check recommendations

Accept and make payment

Decline and inform

Dispatch

Open and check post and Input data

Assess applications



After the students choose a map, they receive the following response:

Response to choosing map A: This process map does not tell you very much. It aggregates the activities to such an extent that each description contains very little information. Also, there are no indications of the rate of flow of claims through the process. Perhaps more seriously, the map is misleading in so much as it simply shows the activity ‘write for further information’ as leading to no final conclusion. In fact, one-third of the initial claims that take this route are recycled into the process. This is a particularly important piece of information for designing the process that this map does not show at all. Map C is far more appropriate. In map C one can notice the number of store triangle symbols there are. Each of these is an accumulation of applications. Whenever applications wait in one of these, it is slowing their progress through the process.

Receipt clerks × 4

Opening and checkingpost

Coding clerks × 5

Inputting data

Secretaries × 3

Writing for furtherinformation

Assessors × 7 Assessing applications

Committee meets every Thursday To check recommendations

Accepted Declined

300/week

100/week

ARAPU process map C

Decline officers × 3

Payment officers × 4

Dispatch clerks × 2



Response to choosing map B: This map is both far too aggregated (high level) and somewhat misleading. Although it identifies three stages and the output from the process (300 claims per week), it is misleading to state that the input to the process is 300 per week. There are 300 new claims per week, but also the process must be averaging a further 100 claims per week that have been returned for further information. Map C is far more appropriate. Looking at map C one can notice the number of ‘store’ triangle symbols there are. Each of these is an accumulation of applications. Whenever applications wait in one of these, it is slowing their progress through the process.

Response to choosing map C – Yes, this is by far the best process map. It gives a good indication of exactly what each stage does and it uses symbols to denote what each activity contains (storage, operation, or inspection). Moreover, it gives a good indication of the flow of claims through the process, most importantly identifying the recycling activity that loads the first four stages (as identified in this process map) with an extra 100 claims per week to process. The map also identifies the current capacity (in terms of number of people) of each stage. Notice the number of store triangle symbols there are. Each of these is an accumulation of applications. Whenever applications wait in one of these, it slows their progress through the process.


Question 3 considers the details of balancing and bottlenecks. This is again a simple task but one in which students often struggle to come up with the right answers. To do justice to this question means time spent on crunching the numbers. The benefits are a real grasp of the issues that a cursory glance at the operation in action would not have revealed. It is the point of ‘the devil in the detail’ that needs to be emphasized here.

3. The third step is to ask, ‘How is the process task and capacity configured’?

This is where we need to look at issues such as flow, balance and bottlenecks.

In order to find out whether the process is well balanced (an equal allocation of work at each stage) we need to know how many claims each stage has to process, how many people are available at each stage, how long each person is available for processing and how long, on average, each claim takes to process.

If we take the average 300 applications per week, and recycle 100 after the assessment stage, how much ‘value-added ’ work is being done at each stage?

At the receipt stage

• 12.50 hours per week <No>

• 66.67 hours per week<Yes>

• 52 hours per week<No>


• 25 hours per week <No>

After the students choose one of the above, they receive the following response.



If the answer is correct, the feedback is as follows:

Yes. The receipt stage gets 300 new applications and 100 recycled applications per week. The time needed for each application is 10 minutes and the value-added workload is 400 × 10 minutes of work (4000 minutes), which is 66.67 hours.

If the answer is wrong, the feedback is as follows:

No. Have you forgotten the recycled applications? The receipt stage gets 300 new applications and 100 recycled applications per week. The time needed for each application is 10 minutes and the value-added workload is 400 × 10 minutes of work (4000 minutes), which is 66.67 hours.

At the coding stage

• 12.50 hours per week<No>





After the students choose they receive the following response.


Yes. The coding stage gets 300 new applications and 100 recycled applications per week. The time needed for each application is 20 minutes and the value-added workload is 400 × 20 minutes of work (8000 minutes), which is 133.33 hours.


No. Have you forgotten the recycled applications? The coding stage gets 300 new applications and 100 recycled applications per week. The time needed for each application is 20 minutes and the value-added workload is 400 × 20 minutes of work (8000 minutes), which is 133.33 hours.

At the assessment stage





• 288.87 hours per week <Yes>





Yes. The assessment stage gets 300 new applications and 100 recycled applications per week. The time needed for one-third of the applications is 10 minutes, and for the other two-thirds is 60 minutes. The average work time of (1/3 × 10) + (2/3 × 60) is 43.33 minutes and the value-added workload is 400 × 43.33 minutes of work (17,332 minutes), which is 288.87 hours.



No. Have you forgotten the recycled applications? The assessment stage gets 300 new applications and 100 recycled applications per week. The time needed for one-third of the applications is 10 minutes, and for the other two-thirds is 60 minutes. The average work time of (1/3 × 10) + (2/3 × 60) is 43.33 minutes and the value-added workload is 400 × 43.33 minutes of work (17,332 minutes), which is 288.87 hours.

At the payment stage



• 152 hours per week<No>





Yes. The payment stage gets 150 applications per week (half of the 300 that emerge from the assessors). The time needed for each application is 50 minutes and the value-added workload is 150 × 50 minutes of work (7500 minutes), which is 125 hours.


No. The payment stage gets 150 applications per week (half of the 300 that emerge from the assessors). The time needed for each application is 50 minutes and the value-added workload is 150 × 50 minutes of work (7500 minutes), which is 125 hours.

At the decline stage



• 82.50hours per week<No>




• 75 hours per week <Yes>

After the student chooses one of the above, they receive the following response.


Yes. The decline stage gets 150 applications per week (half of the 300 that emerge from the assessors). The time needed for each application is 30 minutes and the value-added workload is 150 × 30 minutes of work (4500 minutes), which is 75 hours.


No. The decline stage gets 150 applications per week (half of the 300 that emerge from the assessors). The time needed for each application is 30 minutes and the value-added workload is 150 × 30 minutes of work (4500 minutes), which is 75 hours.

At the dispatch stage




• 50 hours per week <Yes>




Yes. The dispatch stage gets 300 applications per week. The time needed for each application is 10 minutes and the value-added workload is 300 × 10 minutes of work (3000 minutes), which is 50 hours.


No. The dispatch stage gets 300 applications per week. The time needed for each application is 10 minutes and the value-added workload is 300 × 10 minutes of work (3000 minutes), which is 50 hours.


One of the great joys of Little’s law is in revealing how easy it is to determine how long it will take items to go through the system. It is a shame that this very simple equation is so rarely used in business. Many students will be aware that there is a great deal of difference between the



amount of value-added time and the actual throughput time and this equation shows how inventory plays a big part in showing this difference.

4. Using Little’s Law, one can calculate how many claims must be held as inventory and ‘work in process’ within the process.

A reminder: Little’s Law states that

throughput time = work in progress × cycle time.

Hint: Think at the level of the whole process rather than the level of the individual stages. The whole process output is 300 claims processed per week and from the sample taken by Susan N’tini, there are around 2000 claims in process at any given time.

Is the throughput time

23.33 days? – No

33.33 days? – Yes

43.33 days? – No

53.33 days? – No

63.33 days? – No



Yes. This process outputs 300 applications each week (35 working hours). The cycle time of the whole process is (35 / 300) = 0.1167 hours. Little’s Law states that

Throughput time = work in progress × cycle time.

In this case

Throughput time = 2000 × 0.1167 = 233.33 hours = 33.33 days (assuming 7 hour days).

This is substantially longer than the target response (throughput time of 20 days).


No. This process outputs 300 applications each week (35 hours). So cycle time of the whole process is (35 / 300) = 0.1167 hours. Little’s Law states that

Throughput time = work in progress × cycle time.

In this case

Throughput time = 2000 × 0.1167 = 233.33 hours = 33.33 days (assuming 7 hour days).

This is substantially longer than the target response (throughput time of 20 days).




Question 5 challenges the students to advise actions. The key issue that should now be clear to students working through the case is that the rework loop needs attention. Far too much time is spent on reprocessing applications and overcoming this issue is the priority.

5. Susan N’tini needs help to improve the responsiveness and the efficiency of the ARAPU process.

After reviewing the analysis so far, her team is divided. One group thinks that the main problem to solve is the lack of balance in the process. ‘Only after getting the process in balance can we see what to do next’, is how this group believes Susan should proceed.

The other group sees the high proportion of applications needing to be recycled (for more information) as being the main problem. ‘I am concerned that the work is not allocated equally, the first part of the process is dealing with more work than it should , eliminate this and then we can really see what part of the process needs rebalancing’, is their preferred way forward.

Which of these first steps would you advise Susan to take?

(a) Start by attempting to balance the process, or

(b) Start by attempting to eliminate applications that need further information.

If the initial response is (a), ‘Start by attempting to balance the process’, the feedback is as follows.

OK, Susan took your advice and balanced the process by hiring two more assessors. After almost three months of working with the improved process, her comments are… ‘well the process is better and we are getting more throughput. It is now up to 330 applications per week, and a spot check last week revealed a reduction in work in progress to 1700 files. But we are still disappointingly slow in getting the applications processed. Also, our costs are now even higher because of the extra assessors we have hired. Perhaps you were wrong and we should have tried to reduce the recycling as a first step after all. What do we do now? We can either look at each stage in the process and try to make each part more efficient, or alternatively, we can admit that we were wrong and try to cut down the recycling by a process of educating the applicants so that they are less likely to miss out vital information when they apply for aid’.

These are the only two choices that Susan will allow you. What would you do?

(a) i Carry out some detailed studies of each stage in the process to try and make it more efficient, or

(a) ii start a process of educating potential applicants so that they are less likely to miss out information, and therefore less likely to have their application recycled.

If the response is (a)i ‘Carry out some detailed studies of each stage in the process to try and make it more efficient’, the feedback is as follows.

OK, Susan took your advice again and you did have some success in making the process more efficient. After a month of improvement, there are now 1,600 files in work in progress and an



average output of around 330 applications per week. But the average throughput time is a disappointing 24 days. This is Susan’s verdict on your performance. ‘Well, we are better than we were, but I am a little disappointed that we have not brought down our response time further. Our costs are higher than they were which worries me, and we are still carrying too much work in progress. I know that you have got the output rate up to 330 applications per week, but our average demand is only 300 applications per week. The extra output rate has been ‘pulling’ more of the work in progress through the system, but it will take months before we reach our goal. Also, we will then have an output rate that is higher than we need. Maybe we should have started by cutting down the amount of work that is recycled. That would have allowed us to improve throughput time and efficiency simultaneously’.

If the response was (a)ii ‘start a process of educating potential applicants so that they are less likely to miss out information, and therefore less likely to have their application recycled’, the feedback is as follows.

OK, Susan again took your advice. Initially progress was slow, but now your efforts are showing results and only 20 per cent of applications are now being recycled at the assessment stage. This has meant that one of the assessors could be ‘saved’ (not replaced when someone leaves). Susan is pleased. ‘I guess the lesson here is that balancing is important, but not wasting time unnecessarily by recycling work is even more important. There is now less workload on the first three stages of the process and that has allowed us to save on labour costs. Because we are not recycling applications, the amount of work in progress has dropped dramatically. At the last count, the number of files in the process had dropped to 1200. A quick reference to Little’s law (yes, I have been reading!) tells me that with our output rate level at 300 applications per week, cycle time is 35 / 300 = 0.1167 hours, and work in progress of 1200, our throughput time will be 0.1167 × 1200 = 140.04 hours, which is 20 days. So (eventually) you are on the right track! Well done’!

If initial response is, (b) ‘Start by attempting to eliminate applications that need further information’, feedback is as follows.

OK, Susan again took your advice. Initially, progress was slow, but now your efforts are showing results and only 20 per cent of applications are now being recycled at the assessment stage. This has meant that one of the assessors could be saved (not replaced when someone leaves). Susan is pleased. ‘I guess the lesson here is that balancing is important, but not wasting time unnecessarily by recycling work is even more important. There is now less workload on the first three stages of the process and that has allowed us to save on labour costs. Because we are not recycling applications, the amount of work in progress has dropped dramatically. At the last count, the number of files in the process had dropped to 1200. A quick reference to Little’s law (yes, I have been reading!) tells me that with our output rate level at 300 applications per week, cycle time is 35 / 300 = 0.1167 hours, and work in progress of 1200, our throughput time will be 0.1167 × 1200 = 140.04 hours, which is 20 days. The next decision is whether it is worth reducing the amount of recycling even further. We could adapt our website to make it virtually impossible for applicants to miss out information when they apply for aid. That would mean investing about the equivalent of a year’s salary for an assessor. But is it worth it? I rely on you for advice’.

What would you advise Susan?

(b) i Yes, go ahead and eliminate the need for recycling completely. It’s worth it.



(b) ii No, the cost of eliminating recycling completely cannot be saved by any more increases in efficiency. So it’s not worth doing it.

If response is, (b)i ‘Yes, go ahead and eliminate the need for recycling completely. It’s worth it’, feedback is as follows.

Susan is delighted. Eliminating all recycling has saved significant amount of work. For example, at the assess stage, processing 400 applications per week (300 new ones plus 100 recycled ones) took 43.33 minutes (the average process time) multiplied by 400 = 17332 minutes per week i.e. 288.87 hours a week. With a 35-hour week, that means, 288.87 / 35 = 8.25 assessors are needed. But without any recycling the workload for the assessors is 43.33 × 300 = 12999 minutes, that is 216.65 hours. So now only 216 / 35 = 6.19 assessors are needed. Eliminating all recycling could pay for itself in less than 6 months. Well done, two good decisions.

If response is, (b) ii ‘No, the cost of eliminating recycling completely cannot be saved by any more increases in efficiency. So it’s not worth doing it’, feedback is as follows.

Susan is disappointed. She really did want to eliminate all recycling. What you have to hope is that she does not find out that you are wrong until after you have left Action Response. You see eliminating all recycling can actually save significant amount of work. For example, at the assess stage, processing 400 applications per week (300 new ones plus 100 recycled ones) took 43.33 minutes (the average process time) multiplied by 400 = 17332 minutes per week i.e. 288.87 hours a week. With a 35-hour week that means 288.87 / 35 = 8.25 assessors are needed. But without any recycling the workload for the assessors is 43.33 × 300 = 12999 minutes, i.e. 216.65 hours. So now only 216 / 35 = 6.19 assessors are needed. Eliminating all recycling could pay for itself in less than 6 months. So you got the first decision right but then made the wrong decision at the next stage. If you do not understand why, try reading Chapter 5 again.

Appendix 1

Case study

Introduction

Action Response is a London-based charity dedicated to providing fast responses to critical situations throughout the world. The charity receives requests for cash aid usually from an intermediary charity and looks to process the request quickly and provide funds where they are needed, when they are needed. It was founded to provide relatively short-term aid for small projects until they obtain funding from larger donors. Generally, Action Response is regarded as one of the success stories in the charity world. The consensus of opinion is that it has filled an important gap in aid provision to relatively small-scale recipients.

Susan N’tini Chief Executive of Action Response explains the background. ‘Give a man a fish and you feed him today, teach him to fish and you feed him for life, its an old adage and it makes sense but, and this is where Action Response comes in, he might starve while he’s training to catch fish’.



Nevertheless, Susan does have some worries about how parts of her enterprise are managed. She faces two major issues, in particular. First she is receiving complaints that funds are not getting through quickly enough to where they are needed. Second the costs of running the operation are starting to spiral. She explains. ‘We are becoming a victim of our own success. We have striven to provide greater accessibility to our funds, people can access via the internet, by post and by phone. But we are in danger of losing what we stand for. It is taking longer to get the money to where it is needed and our costs are going up. We are in danger of failing on one of our key objectives: to minimize the proportion of our turnover that is spent on administration. At the same time we always need to be aware of the risk of bad publicity through making the wrong decisions. If we don’t check applications thoroughly, funds may go to the ‘wrong’ place and if the newspapers gets hold of the story we would run a real risk of losing the goodwill, and therefore the funds, from our many supporters’.

Susan N’tini held regular meetings with key stakeholders. One charity that handled a large number of applications for people in Nigeria told her of frequent complaints about the delays over the processing of the applications and they felt there was a danger of losing the key purpose for which the charity was founded. A second charity representative complained that when he telephoned to ascertain the status of an application the ARAPU staff did not seem to know where it was or how long it might be before it was complete. Furthermore, he felt that this lack of information was eroding his relationship with his own clients, some of whom were losing faith in him as a result. This was affecting the other work the charity was doing; ‘trust is so important in the relationship’ he explained.

Some of Susan’s colleagues, while broadly agreeing with her anxieties over the organization’s responsiveness and efficiency, took a slightly different perspective.

Jacqueline Horton, Applications Assessor

‘One of the really good things about Action Response is that we are more flexible than most charities. If there is a need and if they need support until one of the larger charities can step-in, then we will always consider a request for aid. I would not like to see any move towards high process efficiency harming our ability to be open-minded and consider requests that might seem a little unusual at first’.

Others saw the charity as performing an important advice and counselling role.

Stephen Nyquist, Applications Assessor

‘Remember that we have gained a lot of experience in this kind of short-term aid. We are also often the first people that are in a position to give advice on how to apply for larger and longer- term funding. If we developed this aspect of our work, we would again be fulfilling a need that is not adequately supplied at the moment’.

The Action Response Applications Processing Unit (ARAPU)

Potential aid recipients, or the intermediary charities that represent them, are required to apply (or claim as Action Response termed it) using a standard form. These application forms can be downloaded from the Internet or requested via a special help line. Sometimes the application will come directly from an individual but more usually it will come via an intermediary charity that is aware of Action Response and can help the applicant to complete the application form.



The application form is then sent to the Action Response Applications Processing Unit (ARAPU)

The ARAPU employs seven applications assessors with three support/secretarial staff, a pool of nine clerks who are responsible for data entry, coding and filing and nine completers (staff who prepare the final paperwork and send the money, or explain why no aid can be given). In addition, a board of honorary trustees meets every Thursday, to ratify (approve) the applications.

Action Response’s IT system maintains records of all transactions. It provides an update of the number of applications (by week, month and year), the number and percentage of applications approved, number and percentage of those declined and the number and amount of payments allocated. These reports identified that the unit received about 300 applications per week (the unit operates 35 weeks per year) and while the unit’s financial targets were being met at the moment, the trend clearly indicates that costs as a percentage of applications handled were increasing. Most internally set operations performance criteria were being met. The target for the turnaround of an application, from receipt of application to the issue of funds was 20 days. Accuracy had never been an issue as all files were thoroughly assessed to ensure that all the relevant and complete data was collected before the applications were processed. Productivity was also high and there was always plenty of work waiting for processing at each section with the exception that the completers were sometimes waiting for work to come from the committee on a Thursday. Susan had conducted an inspection of all the section in-trays that revealed a rather shocking total of about 2000 files waiting within the process.

Processing applications

The processing of applications is a lengthy procedure requiring careful examination by applications assessors trained to make well-founded assessments in-line with existing charity guidelines and values. All applications arriving at the unit are placed in an in-tray. The incoming application is then opened by one of the four receipt clerks who check that all the necessary forms have been included in the application; the receipt clerks take about 10 minutes per application. This is then placed in an in-tray before collection by the coding staff. The five coding clerks allocate a unique identifier code to each application and enter the information of the application into the computer. The application is then given a front sheet, a pro forma, with the identifier code in the top corner. This coding stage takes about 20 minutes for each application. The files are then placed in a tray on the senior applications assessors’ secretary’s desk. As an applications assessor becomes available, the senior secretary provides the next job in the line to the assessor.

About 100 cases seen by the assessors each week are put aside after only 10 minutes scanning because it is clear that there is a need for further information. The assessor returns these files to the secretaries, who write to the applicant (usually via the intermediate charity) requesting missing or additional information, and return the file to the receipt clerks who store the file until the information eventually arrives. When it does arrive, the file enters the process and progresses through the same stages again. Of the applications that require no further information, half are accepted and half declined. Some applications either clearly fit the charity’s criteria, or clearly do not. But others could take more time to assess. On an average, the applications which are not ‘recycled’ for further information take around 60 minutes to assess.



All the applications, whether approved or declined, are stored prior to ratification. Every Thursday the Committee of Trustees meets to formally approve the applications assessors’ decisions. The committee’s role is to sample the decisions to ensure that the guidelines of the charity are upheld. In addition, they review particularly unusual cases highlighted by the applications assessors. Once approved by the committee, the file is taken to the completion officers. There are 3 declines officers whose main responsibility is to compile a suitable response to the applicant pointing out why the application failed and offering, if possible, to provide helpful advice. An experienced declines officer takes about 30 minutes to finalize the file and write a suitable letter. Successful files are passed to the 4 ‘payment’ officers where again the file is completed, letters (mainly standard letters) are created and payment instructions are given to the bank. This usually takes around 50 minutes, including dealing with any queries from the bank about payment details.

Finally the paperwork is sent, with the rest of the file, to two dispatch clerks who complete the documents and mail them to the applicant. Each part of the process has trays for incoming work. Files are taken from the bottom of the pile when someone becomes free, to ensure that all documents are dealt with in strict order. The dispatch activity takes, on average, 10 minutes for each application.

The feeling among the staff is generally good. When Susan consulted the team they said their work was clear and routine, but their life was made difficult by charities that call on phone expecting them to be able to tell them the status of an application they had submitted. It could take them hours, sometimes days, to find any individual file. Indeed, two of the receipt clerks now work full time on this activity. They also said that charities frequently complained that it seems to be taking a long time to decide and send the money.


C H A P T E R 6

Getting Customer #1

Case summary

Rellacast AG is based in Hamburg Germany, and is one of the world’s leading businesses specializing in the precision die casting of zinc, magnesium and aluminium alloys, with a smaller business in precision plastic injection moulding. The four main business sectors in which Rellacast operates are automotive, telecoms, consumer electronics and computers and peripherals.

The head office of Rellacast has been asked to develop a component for a large telecoms and Internet systems supplier known internally as Customer #1. For some time, it has been Rellacast’s most important target customer. The component that Customer #1 had asked Rellacast to develop is a combined cable connector and high frequency shield that could become an essential part of their Internet systems hardware. The component has to be capable of providing shielding from a range of frequencies, because network cable and connectors are being asked to carry increasingly high frequency signals and are being required to provide increasingly effective noise immunity. No other supplier was being asked to develop this component, and Customer #1 was giving detailed design control to Rellacast. However, there would be a programme of trials for the component conducted by Customer #1, after which a decision would be made on ordering high volume production runs. Customer #1 would pay a development cost to Rellacast of €300,000 and expect delivery of a trial batch of the developed component in 10 months’ time.

Using the case

As with all the active cases associated with this text, it can be used as a stand-alone learning experience or students can be asked to work through the case (individually or in groups) and then debriefed in a relatively conventional manner in class. The class debriefs of active cases should focus not only on the content of the decisions but also on how students went about making a particular decision. This teaching note assumes that all students would have worked through the case that is then debriefed in class.


Students are asked to make four decisions. These are as follows:

Decision 1 – which of two alternative design approaches to use.

Decision 2 – how to organize the product development team.

Decision 3 – whether to outsource part of the development activity.

Decision 4 – whether to devote extra resources to the project.



The decision logic of this case

After the second and the third decisions, feedback is given to the student as to the current state of the project at the two-month (after decision 2) and six-month (after decision 3) points. This results in 16 alternative sets of decisions, and feedback is given dependent on which chain of decisions the student took. The logic that governs the feedback is shown in the decision–logic diagram.

Decision 4 Extra

resources?

Feedback 1

Feedback 2

Feedback 3

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Feedback 7

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Feedback 16

6 month status a

6 month status b

6 month status c

6 month status d

6 month status e

6 month status f

6 month status g

6 month status h

Decision 3 Out-

source?

2 month status

A

2 month status

B

2 month status

C

2 month status

D

Zinc only

Zinc

and

plas

tic

Functional

Functional

Team

-bas

ed

Team

-bas

ed

Yes

No

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Yes

No

Yes

No

Yes

No

Yes

No

Yes

No

Decision 1 Alternative

design approaches

Decision 2 Organ-isation?


Decision 3 Out-

source?

Decision 3 Out-

source?

Decision 3 Out-

source?

Decision 4 Extra

resources?

Decision 4 Extra

resources?

Decision 4 Extra

resources?

Decision 4 Extra

resources?

Decision 4 Extra

resources?

Decision 4 Extra

resources?

Decision 4 Extra

resources?

Decision 4 Extra

resources?

Feedback 1

Feedback 2

Feedback 3

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6 month status a

6 month status b

6 month status c

6 month status d

6 month status e

6 month status f

6 month status g

6 month status h

Decision 3 Out-

source?

2 month status

A

2 month status

B

2 month status

C

2 month status

D

Zinc only

Zinc

and

plas

tic

Functional

Functional

Team

-bas

ed

Team

-bas

ed

Yes

No

Yes

No

Yes

No

Yes

No

Yes

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Yes

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Yes

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No

Yes

No

Decision 1 Alternative

design approaches



Decision 3 Out-

source?

Decision 3 Out-

source?

Decision 3 Out-

source?

Decision 4 Extra

resources?

Decision 4 Extra

resources?

Decision 4 Extra

resources?

Decision 4 Extra

resources?

Decision 4 Extra

resources?

Decision 4 Extra

resources?

Decision 4 Extra

resources?



Opening question

Get the students to go over the case and identify the key decision that they had to make. Then ask the question, ‘Why were you asked the decisions in this order’?

Guide the discussion towards a rationale that goes like this:

Decision 2 – what kind of organizational structure? This seems to be the first decision, yet it was asked second. This is because the nature of the organization depends at least partly on the approach to the design. The risky zinc-only design implies a different approach to organizing the project than the more conventional zinc and plastic design. Therefore, organizational structure cannot be decided sensibly until the design approach has been settled.

Decisions 3 and 4 are both concerned with resourcing the development process.

Decision 3 – whether to outsource part of the development depends to some extent on the organizational structure adopted, but it is also a response to the status of the project after two months.

Decision 4 – whether extra resources should be provided. Again, it is a response to the status of the project at six months.

Case decision 1 – Alternative design approaches

The first move by Rellacast was to put together a steering committee that would oversee the development of the component. The steering group would not get into the detailed design decisions, but it would meet periodically to assess progress. It consisted of representatives of the four major functional areas of the business that would be involved in the design. These four functions are:

• product design, which is responsible for the technical design of all components;

• process development, which develops the precision die casting machines and moulds;

• marketing, which is responsible for all communications and liaison with customers;

• manufacturing management, which manages the production of components after designs have been approved by customers.

The first decision to take is related to the overall approach to developing the shielded connector. Two alternative approaches had been suggested.

• The component could be assembled from separate subcomponents of injection-moulded plastic and die cast zinc. This represented the conventional approach to shielded connectors. In this case, the assembly itself would be complex, and the zinc alloy shielding components would be particularly difficult to both design and manufacture. Nevertheless, this approach to developing the component is not radically different to previous designs that Rellacast and other competitors had done before, but it was more complex.



• Alternatively, the component could be designed entirely in zinc alloy and cast into its final net-shape. Nothing like this had been done before on this type of component, but Rellacast’s process development engineers were convinced that it could be done. If successful, the advantage of an all-zinc alloy design would be significantly lower production costs. But, could the idea be made to work?

Some characteristics of the two different approaches to designing the component are shown in the following table.

Design approach A – Plastic and zinc assembly

B – Zinc net-shape

Risk of failure Medium/low Medium/high

Development cost €300,000 Uncertain, approx. €450,000

Cost to manufacture component

€5.00 per component €3.50 per component

In-house product knowledge requirements

Medium/high High

In-house process knowledge requirements

Medium/low Very high

What we must get right Shield design and connector ease and robustness

Integration of novel product and process design

‘The decision we face is clearly one of balancing risk with reward. If we go for the conventional plastic and zinc assembly we know we can keep within the budget and we don’t need to push our process knowledge much beyond its current state. Also, the risk of failure is relatively low. However, if we do succeed, manufacturing the component will be expensive at €5 per component. On the other hand, the zinc net-shape design would be more risky, both in terms of success and in the development budget. We almost certainly will have to invest some of our own money in the development. Also, we would need to push the boundaries of our knowledge well beyond current levels. But, it does play to our strengths, because if we can’t do this, nobody else can, and it brings the cost of making the component right down to €3.50’. Klaus Schmidt

What you must decide

Think about the information that you have been given so far and decide whether

(a) you would advise going ahead with the development based on a plastic and zinc assembly.

(b) you would advise going ahead with the development with a zinc net-shape approach.



Case decision 2 – Organization of the development project

Even after deciding on an appropriate design approach, the work of the steering group is still not finished. It now has to decide on how the development project should be organized. Although it is difficult to be precise about the commitment needed by each of the four departments that will be involved, the group estimates that the contribution from each department will approximately be as follows:

• Product design department (located at Lübeck) – 35 per cent.

• Process development department (located at the company’s head office in Hamburg) – 35 per cent.

• Marketing department (located at the company’s head office in Hamburg) – 20 per cent.

• Manufacturing management (located at the manufacturing headquarters in Hamburg, but the trial batch and long-term manufacture could be at any of the company’s three plants at Hamburg, Lübeck, or Bremen) – 10 per cent.

Two proposals for organizing the project have been put forward.

• Relying on a traditional functionally based organization, where development tasks are allocated to the four functional departments involved in the design and coordinated through a project manager.

• Putting together a dedicated team with staff seconded from all four departments under the leadership of a more senior project manager who would carry the entire responsibility for the development project but would still be required to report to the steering committee. The advantages of each type of organizational structure, as seen by the steering group, are shown in the table below.

Functionally based organizational structure

Team-based organizational structure

• Good at development; deep but relatively narrow knowledge.

• Maintains specialist skills, because individuals can draw on the knowledge of the whole department.

• No need to relocate anybody.

• Do not have to reorganize existing lines of authority and communication just for one project.

• Requires project management skills to coordinate the various departments.

• Gives potential to integrate the knowledge bases of each department, particularly product design and process development.

• Good at reassuring the customer that marketing staff with whom they communicate really do have a good knowledge of the project.

• Fast at reacting to any changes in the design specification.

• Good when interdepartmental creativity is required, especially in very novel designs.



Which of the two organizational designs for this project would you recommend?

• Functionally based organizational design.

• Team-based organizational design.

The feedback given to students is shown in Appendix 1.

Case decision 3 – The outsourcing decision

Three months into the design period, it became clear that the design of a suitable shield was going to be more difficult than had been envisaged. Although Customer #1 had been accommodating as far as other aspects of the design were concerned, it had actually tightened the specification as regards the range of frequencies that the shield must be able to cover. The difficulty was in devising a shield geometry that was not too bulky and yet gave high levels of protection. This involved both devising a novel component geometry, and developing the process so that very thin sections could be die cast.

It has been suggested that part of the design task be outsourced to Xennon Inc, an engineering consultancy based in Chicago, which specializes in high frequency shielding. Although Xennon has no knowledge of the die casting process, it does have the experience of designing shields for assembled frequency shielding components.

There was some resistance to the idea of outsourcing any part of the design amongst some of the engineers involved in the project. In particular, the criticisms of outsourcing were as follows:

• It would be expensive when compared with doing it in-house.

• How can we really keep control of the project, if part of it is outsourced?

• Xennon is thousands of miles away, and although many of the project engineers and all of the marketing people involved speak some English, not everybody involved in the design is fluent in the language, and this could lead to technical misunderstandings.

• Xennon has no understanding of advanced zinc alloy die casting, especially designing net-shaped components.

• It would be difficult for all functional heads to maintain communication with a third party.

• It would cost at least €100,000, which is a substantial part of the budget.

• Can we really trust a third party not to divulge what we are doing to potential competitors?

However, some saw advantages in the outsourcing proposal. In particular,

• Xennon has good product knowledge, especially in designing high frequency shields.

• its experience in similar applications with other manufacturers would increase the chances of the project being successful.



• it would bring extra resources into the project, and it was already clear that the project was consuming a lot of Rellacast’s engineers’ time.

• If the project did fail, Rellacast would not shoulder all of the blame.

The decision that you have to make is whether to outsource part of the shield design activity to Xennon. If Xennon is not brought in at this stage, there will be no opportunity later, because it would not have time to make any significant contribution.

Yes, outsource part of the design to Xennon.

No, do not outsource any of the design to Xennon.

The six-months status feedback given to students is shown in Appendix 2.

Case decision 4 – Should extra resource be provided at this stage?

The steering group needs to consider whether it is worth providing extra engineers so that the project can be completed on time. It knows that simply devoting more engineers to the project will not guarantee that the project finishes on time. It also knows that even if no extra engineers are provided, it is still possible for the schedule slippage to be made up and the test batch of components finished in time for the trial. Providing extra resources will almost certainly mean that the project exceeds its budget.

You now have to recommend to the steering group whether they should provide enough extra engineering resources to try and bring the project back on schedule or not.

Yes, provide extra engineers.

No, do not provide extra engineers.

At this stage, the final feedback is given. This is shown in Appendix 3.


A P P E N D I X 1

Two month-status feedback

Two-month status A

• Representatives from Customer #1 have visited the team, and good relationships have been established.

• The design process has not yet really progressed very far, but some early issues that will need to be tackled have been identified.

• Spending on the project is a little over the budget already and the steering group is somewhat anxious about this. The team still believes that the budget is realistic and points out that expenditure will slow down during the development period.

• The design team’s morale is high with good working relationships being developed between the team members.

• The steering group, although not overly disturbed by the general lack of progress and budget overruns, is a little anxious. However, it has been reassured by the team leader that, initially, the development team needs time and money to start the project, but then the benefits will come later.

• A total number of 15 slightly different initial designs have been produced, which will be evaluated and tested over the next few weeks.

Two-month status B

• Customer #1 has been informed of how the design is to be developed. They seem happy with the situation.

• Some progress has been reported from process development, and no problems are envisaged in modifying current processes. As yet, it is too early to tell how much progress is being made in the component design itself.

• So far, development costs are within the budget.

• Generally, the steering group is happy with the progress so far, although they do realize that it is very early to make any definite judgement of how well the project is progressing.

• A total number of four slightly different initial designs have been produced, which will be evaluated and tested over the next few weeks.



Two-month status C

• Representatives from Customer #1 have visited the team, and a very good relationship seems to have been established. Some possible areas where the design specification may be changed have been identified.

• Some progress has been reported from process development, and no problems are envisaged in modifying current processes. As yet, it is too early to tell how much progress is being made in the component design itself.

• Spending on the project is a little over the budget already and the steering group is somewhat anxious about this. The team still believes that the budget is realistic and points out that expenditure will slow down during the development period.

• The design team’s morale is high with good working relationships being developed between the team members.

• The steering group, although not over disturbed by the general lack of progress and budget overruns are a little anxious. However, they have been reassured by the team leader that initially, development teams need time and money to start the project but then the benefits will come later.

• A total number of 10 slightly different initial designs have been produced which will be evaluated and tested over the next few weeks.

Two-month status D

• Customer #1 has been informed of how the design is to be developed. They seem happy with the situation.

• The product design has not yet really progressed very far, but some early issues that will need to be tackled have been identified.

• Little progress has so far been made on process development.

• So far development costs are within the budget.

• Generally, the steering group is happy with the progress so far, although they do realize that it is very early to make any definite judgement of how well the project is progressing.

• A total number of two slightly different initial designs have been produced, which will be evaluated and tested over the next few weeks.


A P P E N D I X 2

Six-month status feedback

Six-month status A

Some very useful progress in designing the product has been made. The steering committee is particularly pleased with the test results from the prototype shield designs.

The relationship with Xennon is going surprisingly well. They do seem to know what they are talking about, and already have provided a number of insights.

The project is behind schedule, probably by two or three weeks.

To get back onto schedule, it is estimated that the company will need at least two extra engineers.

The steering group is anxious about the delay. The team leader has reassured them that the project is in control even though it is a little behind schedule.

Although behind schedule, the team is still united and confident that the project can be pulled back on schedule. In fact, morale within the team is relatively high.

Six-month status B

• Progress in the design of the product seems to be reasonably good. However, it is difficult to evaluate progress precisely, because several alternative designs are currently being tested.

• The project is behind schedule, probably by two or three weeks.

• To get back onto schedule, it is estimated that the company will need at least two extra engineers.

• The steering group is very anxious about the project falling behind schedule. Although they have been reassured by the team leader, they are now of the opinion that some of the work should have been outsourced to Xennon. At least that would have provided extra resource into the project.

• Although behind schedule, the team is still united and confident that the project can be pulled back on schedule. In fact, morale within the team is relatively high.

Six-month status C

Progress in the design of the product seems to be doing reasonably well. However, it is difficult to evaluate the progress precisely, because several alternative designs are currently being tested.



The relationship with Xennon seems to be OK. However, there has been relatively little contact as yet, even though it has provided some useful information.

The company is not sure how far behind schedule the project has become. It thinks it is somewhere between one and four weeks.

To get back onto schedule, it is estimated that the company will need at least three extra engineers.

The steering committee is extremely anxious about the slippage in the schedule. No one seems to be sure exactly why the project is falling behind schedule, and it is now of the opinion that it should have outsourced some of the work to Xennon. At least that would have provided extra resources.

Arguments have started to break out between the various functional heads over who is to blame for the delay. The project manager is trying to avoid everyone blaming each other, but does not want to take sides so as to maintain good relationships with the functional heads.

Six-month status D

• Progress in the design of the product seems to be reasonably good. However, it is difficult to evaluate the progress precisely, because several alternative designs are currently being tested.


• To get back onto schedule, it is estimated that the company will need at least three extra engineers.

• The steering group is anxious about the delay. The team leader has reassured them that the project is in control even though it is a little behind schedule.

• Arguments have started to break out between the various functional heads over who is to blame for the delay. The project manager is trying to avoid everyone blaming each other, but does not want to take sides so as to maintain good relationships with the functional heads.

Six-month status E


• The relationship with Xennon is going well, and they have provided some useful ideas. However, they have had to go down quite steep learning curves themselves to understand the nature of designing net-shape components.




• To get back onto schedule, it is estimated that the company will need at least one extra engineer.



Six-month status F

• Progress in the design of the product seems to be reasonably good. However, it is difficult to evaluate the progress precisely, because several alternative designs are currently being tested.


• To get back onto schedule, it is estimated that the company will need at least one extra engineer.


• The steering group is very anxious about the project falling behind schedule. Although they have been reassured by the team leader, they are now of the opinion that some of the work should have been outsourced to Xennon. At least that would have provided extra resource into the project.


Six-month status G


• The relationship with Xennon seems to be OK. However, there has been relatively little contact as yet, even though they have provided some useful information. However, they have had to go down quite steep learning curves themselves in to understand the nature of designing net-shape components.

• The company is not sure how far behind schedule the project has become. It thinks it is somewhere between one and four weeks.




• The steering committee is extremely anxious about the slippage in the schedule. No one seems to be sure exactly why the project is falling behind schedule, and they are now of the opinion that they should not have outsourced some of the work to Xennon. It seems to have simply confused the design process.


Six-month status H




• The steering committee is extremely anxious about the slippage in the schedule. No one seems to be sure exactly why the project is falling behind schedule, and they are now of the opinion that they should have outsourced some of the work to Xennon. At least that would have provided extra resources.



A P P E N D I X 3

The final feedback

Feedback 1

The decisions made were as follows:

• It chose the conventional zinc and plastic design.

• It chose to organize the development project using a team-based organizational structure.

• It chose to outsource part of the design to Xennon.

• It chose to invest in extra resources at the six-month stage.

This is what happened.

• The project produced a design that passed all of Customer #1’s tests.

• It decided to award the contract to Rellacast for the ongoing production of the component.

• The total budget for the project eventually totalled €450,000.

• Customer #1 was very impressed with the overall approach of Rellacast to designing the component and has indicated that it will be placing more design work with Rellacast.

At each stage in this project, it was required to take decisions that increased or decreased the risk of the project not finishing on time. On a scale of 0 to 5, where 0 represents the lowest cumulative risk and 5 represents the highest cumulative risk, it scored 0.

Our expert comments…

Given that you opted for a relatively conventional design approach, either team-based or functionally based organizational structures could have been appropriate. However, given the importance of the project, maybe a team-based structure was slightly more appropriate. And given that you opted for a team-based organizational structure, your decision to outsource was probably also appropriate. The relationship with Xennon could be more effectively controlled with this type of organization. Your decision to bring in extra engineering resources to the project was wise given the fact that you were behind schedule at the six-month stage. Of course, it pushed you over the budget, but getting the job done on time is more important than adhering strictly to the budget.



Feedback 2

The decisions you made were as follows:




• It chose not to invest in extra resources at the six-month stage.


• The project produced a design that did not quite meet all of Customer #1’s specifications.

• It provisionally awarded the contract to Rellacast for the ongoing production of the component, but insisted that Rellacast come up with a better design within six months at Rellacast’s expense.




Given that you opted for a relatively conventional design approach, either team-based or functionally based organizational structures could have been appropriate. However, given the importance of the project, maybe a team-based structure was slightly more appropriate. However, your decision not to bring in extra engineering resources is, frankly, extraordinary. You knew that you were behind schedule, and the extra resources may have helped you get back on track. OK, you saved a bit of money, but that is a minor consideration when compared to potentially missing the promised design delivery date.

Feedback 3

The decisions it made were as follows:



• It chose not to outsource part of the design to Xennon.






• It provisionally awarded the contract to Rellacast for the ongoing production of the component, but insisted that Rellacast come up with a significantly better design within six months. Extra design work was to be at Rellacast’s expense.




Given that you opted for a relatively conventional design approach, either team-based or functionally based organizational structures could have been appropriate. However, given the importance of the project, maybe a team-based structure was slightly more appropriate. Also, given that you opted for a team-based organizational structure, your decision not to outsource was slightly strange given that team-based structures are good at controlling the relationship with third party contributors to the design. Your decision to bring in extra engineering resources to the project was probably wise given the fact that you were behind schedule at the six-month stage. Of course, it pushed you over the budget, but getting the job done on time is more important than adhering strictly to the budget.

Feedback 4




• It chose not to outsource part of the design to Xennon.




• It provisionally awarded the contract to Rellacast for the ongoing production of the component, but insisted that Rellacast come up with a better design within six months. Extra design work was to be at Rellacast’s expense.






Given that you opted for a relatively conventional design approach, either team-based or functionally based organizational structures could have been appropriate. However, given the importance of the project, maybe a team-based structure was slightly more appropriate. Also, given that you opted for a team-based organizational structure, your decision not to outsource was slightly strange given that team-based structures are good at controlling the relationship with third party contributors to the design. Your decision not to bring in extra engineering resources is, frankly, extraordinary. You knew that you were behind schedule, and the extra resources may have helped you get back on track. OK, you saved a bit of money, but that is a minor consideration when compared to potentially missing the promised design delivery date.

Feedback 5



• It chose to organize the development project using a conventional functional organizational structure.







• Customer #1 was broadly satisfied with the work that Rellacast had done on the design, but was not totally convinced that their project management skills were adequate, or that it had been kept fully informed of the progress of the design.





Given that you opted for a relatively conventional design approach, either team-based or functional organizational structures could have been appropriate. However, given the importance of the project, maybe a team-based structure might have been slightly more appropriate. Also, given that you opted for a functionally based organizational structure, your decision to outsource was slightly suspect, because this type of organization sometimes finds it difficult to maintain control over a third party contributor to the design. Your decision to bring in extra engineering resources to the project was probably wise given the fact that you were behind schedule at the six-month stage. Of course, it pushed you over the budget, but getting the job done on time is more important than adhering strictly to the budget.

Feedback 6














Given that you opted for a relatively conventional design approach, either team-based or functionally based organizational structures could have been appropriate. However, given the importance of the project, maybe a team-based structure might have been slightly more appropriate. Also, given that you opted for a functionally based organizational structure, your decision to outsource was slightly suspect because this type of organization sometimes finds it difficult to maintain control over a third party contributor to the design. Furthermore, Xennon would have only a limited contribution to make to such a radical design using a process of which they have no knowledge. Your decision not to bring in extra engineering resources is, frankly, extraordinary. You knew that you were behind schedule, and the extra resources may have helped you get back on track. OK, you saved a bit of money, but that is a minor consideration when compared to potentially missing the promised design delivery date.

Feedback 7




• It chose not to outsource any of the design activity.






• Customer #1 was broadly satisfied with the work that Rellacast had done on the design, but was not convinced that their project management skills were adequate, or that it had been kept fully informed of the progress of the design.

At each stage in this project it was required to take decisions that increased or decreased the risk of the project not finishing on time. On a scale of 0 to 5, where 0 represents the lowest cumulative risk and 5 represents the highest cumulative risk, it scored 2.




Given that you opted for a relatively conventional design approach, either team-based or functionally based organizational structures could have been appropriate. However, given the importance of the project, maybe a team-based structure might have been slightly more appropriate. Also, given that you opted for a functionally based organizational structure, your decision not to outsource may have been appropriate, because functional structure will find it more difficult to control third party contributors to the design. However, you cut yourself off from a source of expertize that may have been useful. Your decision to bring in extra engineering resources to the project was probably wise given the fact that you were behind schedule at the six-month stage. Of course, it pushed you over the budget, but getting the job done on time is more important than strictly adhering to the budget.

Feedback 8










• Customer #1 was not convinced that Rellacast’s project management skills were adequate, or that they had been kept fully informed of the progress of the design.





Given that you opted for a relatively conventional design approach, either team-based or functionally based organizational structures could have been appropriate. However, given the importance of the project, maybe a team-based structure might have been slightly more appropriate. Also, given that you opted for a functionally based organizational structure, your decision not to outsource may have been appropriate because functional structure will find it more difficult to control third party contributors to the design. However, you cut yourself off from a source of expertize that may have been useful. Your decision not to bring in extra engineering resources is, frankly, extraordinary. You knew that you were behind schedule and the extra resources may have helped you get back on track. OK, you saved a bit of money, but that is a minor consideration when compared to potentially missing the promised design delivery date.

Feedback 9

The decisions you made were as follows:

• It chose the novel zinc-only net-shape design.








• Customer #1 is delighted with the design, especially the fact that it will be so cheap to produce. It also is impressed that Rellacast has provided such a radically new approach to the component. It can see other applications for net-shape designs and is very keen to work with Rellacast on other projects.





Given that you chose the more radical design approach, your decision to adopt a team-based organizational structure was very appropriate. Also given that you opted for a team-based organizational structure, your decision to outsource was probably appropriate. The relationship with Xennon could be more effectively controlled with this type of organization. Nevertheless, outsourcing work on such a radical design may only have been of limited value. Your decision to bring in extra engineering resources to the project was probably wise given the fact that you were behind schedule at the six-month stage. Of course, it pushed you over the budget, but getting the job done on time is more important than adhering strictly to the budget.

Feedback 10










• Customer #1 was broadly satisfied with the work that Rellacast had done on the design, especially the fact that it will be so cheap to produce. It also is impressed that Rellacast has provided such a radically new approach to the component. It can see other applications for net-shape designs and is very keen to work with Rellacast on other projects. But it was not convinced that Rellacast’s project management skills were adequate, or that it had been kept fully informed of the progress of the design.





Given that you chose the more radical design approach, your decision to adopt a team-based organizational structure was very appropriate. And, given that you opted for a team-based organizational structure, your decision to outsource was probably appropriate. The relationship with Xennon could be more effectively controlled with this type of organization. Nevertheless, outsourcing work on such a radical design may only have been of limited value. However, your decision not to bring in extra engineering resources is, frankly, extraordinary. You knew that you were behind schedule, and the extra resources may have helped you get back on track. OK, you saved a bit of money, but that is a minor consideration when compared to potentially missing the promised design delivery date.

Feedback 11










• Customer #1 is delighted with the design, especially the fact that it will be so cheap to produce. It also is impressed that Rellacast has provided such a radically new approach to the component. It can see other applications for net-shape designs and is very keen to work with Rellacast on other projects.

At each stage in this project, it was required to take decisions that increased or decreased the risk of the project not finishing on time. On a scale of 0 to 5, where 0 represents the lowest cumulative risk, and 5 represents the highest cumulative risk, it scored 3.




Given that you chose the more radical design approach, your decision to adopt a team-based organizational structure was very appropriate. And, given that you opted for a team-based organizational structure, your decision not to outsource may seem slightly strange given that team-based structures are good at controlling the relationship with third party contributors to the design. However, outsourcing work on such a radical design may only have been of limited value anyway. Your decision to bring in extra engineering resources to the project was probably wise given the fact that you were behind schedule at the six-month stage. Of course, it pushed you over the budget, but getting the job done on time is more important than adhering strictly to the budget.

Feedback 12










• Customer #1 was broadly satisfied with the work that Rellacast had done on the design, especially the fact that it will be so cheap to produce. It also is impressed that Rellacast has provided such a radically new approach to the component. But it is not convinced that Rellacast’s project management skills are adequate, or that they have been kept fully informed of the progress of the design.





Given that you chose the more radical design approach, your decision to adopt a team-based organizational structure was very appropriate. Also, given that you opted for a team-based organizational structure, your decision not to outsource was slightly strange, because team-based structures are good at controlling the relationship with third party contributors to the design. However, outsourcing work on such a radical design may only have been of limited value. Your decision not to bring in extra engineering resources is, frankly, extraordinary. You knew that you were behind schedule, and the extra resources may have helped you get back on track. OK, you saved a bit of money, but that is a minor consideration when compared to potentially missing the promised design delivery date.

Feedback 13










• Customer #1 was not convinced that Rellacast’s project management skills were adequate, or that they had been kept fully informed of the progress of the design.





Given that you chose the more radical design approach, your decision to opt for a functional-based organization structure was relatively risky. Generally, functionally based organizations are less good at integrating the knowledge bases within the company that this type of design required. Also, given that you opted for a functionally based organizational structure, your decision to outsource was slightly suspect, because this type of organization sometimes finds it difficult to maintain control over a third party contributor to the design. Furthermore, Xennon would have only a limited contribution to make to such a radical design using a process of which they have no knowledge. However, your decision to bring in extra engineering resources to the project was probably wise given the fact that you were behind schedule at the six-month stage. Of course, it pushed you over the budget, but getting the job done on time is more important than adhering strictly to the budget.

Feedback 14








• They provisionally awarded the contract to Rellacast for the ongoing production of the component, but insisted that Rellacast come up with a better design within six months at Rellacast’s expense.


• Customer #1 was not at all convinced that Rellacast’s project management skills were adequate, or that they had been kept fully informed of the progress of the design.





Given that you chose the more radical design approach, your decision to opt for a functionally based organization structure was relatively risky. Generally, functionally based organizations are less good at integrating the knowledge bases within the company that this type of design required. Also, given that you opted for a functionally based organizational structure, your decision to outsource was slightly suspect, because this type of organization sometimes finds it difficult to maintain control over a third party contributor to the design. Furthermore, Xennon would have only a limited contribution to make to such a radical design, using a process of which they have no knowledge. Your decision not to bring in extra engineering resources is, frankly, extraordinary. You knew that you were behind schedule, and the extra resources may have helped you get back on track. OK, you saved a bit of money, but that is a minor consideration when compared to potentially missing the promised design delivery date.

Feedback 15










• Customer #1 was not at all convinced that Rellacast’s project management skills were adequate, or that it had been kept fully informed of the progress of the design.

At each stage in this project it was required to take decisions that increased or decreased the risk of the project not finishing on time. On a scale of 0 to 5, where 0 represents the lowest cumulative risk and 5 represents the highest cumulative risk, it scored 4.




Given that you chose the more radical design approach, your decision to opt for a functionally based organization structure was relatively risky. Generally, functionally based organizations are less good at integrating the knowledge bases within the company that this type of design required. But, given that you opted for a functionally based organizational structure, your decision not to outsource may have been appropriate, because functional structure will find it more difficult to control third party contributors to the design. Furthermore, Xennon’s contribution may have been limited, given that your design approach involves a net-shape process of which they have no experience. Your decision to bring in extra engineering resources to the project was probably wise given the fact that you were behind schedule at the six-month stage. Of course, it pushed you over the budget, but getting the job done on time is more important than adhering strictly to the budget.

Feedback 16



• It chose to organize the development project using a conventional functionally based organizational structure.







• Customer #1 was not at all convinced that Rellacast’s project management skills were adequate, or that they had been kept fully informed of the progress of the design.





Given that you chose the more radical design approach, your decision to opt for a functionally based organization structure was relatively risky. Generally, functionally based organizations are less good at integrating the knowledge bases within the company that this type of design required. But, given that you opted for a functionally based organizational structure, your decision not to outsource may have been appropriate, because functional structure will find it more difficult to control third party contributors to the design. Furthermore, Xennon’s contribution may have been limited, given that your design approach involves a net-shape process of which they have no experience. But your decision not to bring in extra engineering resources is, frankly, extraordinary. You knew that you were behind schedule, and the extra resources may have helped you get back on track. OK, you saved a bit of money, but that is a minor consideration when compared to potentially missing the promised design delivery date.


C H A P T E R 7

NK Fleet Management

Case synopsis

Founded in 1999 by Ulrike Ramberg, who is now the CEO, NK Fleet Management is now into its second five-year contract with a major Japanese car manufacturer. The company’s business is servicing fleets of vehicles such as those used by car rental companies and large businesses. The vehicles are sold by the sales organization of the vehicle manufacturer, who usually is also the legal owner of the vehicles. However, the vehicles are prepared, maintained and eventually disposed of by NK Fleet Management on behalf of the vehicle manufacturer. In more detail, NK’s activities consist of the following:

• De-docking – collecting the imported vehicles from the docks, removing protective materials from the car body, carrying out all pre-delivery servicing, valeting the vehicles and delivering them into the appropriate car fleet.

• Routine servicing and repair – carrying out any routine checks on the vehicle during its time as part of a fleet, repairing damage that might have occurred to the vehicle during its use.

• Preparing demonstrator cars – fitting out cars with a specified range of equipment so that they can be used as demonstrator models in the vehicle manufacturers’ showrooms.

• Preparing press cars – preparing cars for review by motoring journalists or for display at car exhibitions, etc.

• De-fleeting vehicles – at the end of their fleet life (often as little as six months), checking and servicing cars prior to selling them into the used car market.

NK Fleet Management is based near Gothenburg in Southern Sweden, where it has an extensive workshop with servicing bays, a body and paint shop, a large valeting area and a total of 50 employees. It services more than 35 fleets of cars around Sweden, Norway, Finland and Denmark, processing almost 20,000 vehicles each year from the Japanese vehicle manufacturer and around 2,000 vehicles per year for two other vehicle manufacturers with whom they have contracts to prepare demonstrator fleets.

NK Fleet Management’s relationship, both with its main customer and with the individual fleets that it services, is governed by a set of service level agreements (SLAs) covering such things as maximum response times, minimum quality levels of servicing, fees for different tasks, exactly what tasks NK Fleet Management is expected to perform, payment terms and so on. Both NK Fleet Management and their main customer accept that they cannot include every possible aspect of the relationship. Both parties understand that there is still a considerable degree of discretion that can be exercised in the interpretation of the agreements. This is the central issue of the case.



Using the case

This case explores the nature of relationships, particularly when involving ‘partnership’ arrangements between companies. The case is designed to be used to support lessons in supply chain management that include consideration of managing the broad relationships between parts of the supply chain as well as the more conventional logistical details of supply chain management. It can also be used on an operations strategy course, or within an operations strategy session, to illustrate the responsibilities and consequences of developing partnerships within supply networks. If so, it is best used as an introductory case rather than one that will test out previously learnt principles. So, for example, one might wish to set this case prior to a lesson in supply chain management so that it can be used to develop various learning points regarding relationship management. Some of the points made in the text on page 216 under the heading ‘Long-term partnership relationships’can then be structured around the various issues raised by the case. As with all the active cases associated with this text, it can be used as a stand-alone learning experience or students can be asked to work through the case (individually or in groups) and then debriefed in a relatively conventional manner in class. The class debriefs of active cases should focus not only the ‘content’ of the decisions but also on how students went about making a particular decision. This teaching note assumes that all students will have worked through the case that is then debriefed in class.

Notes on questions

The decisions (called ‘dilemmas’ in the case) that will be posed by the students are introduced as follows.

Although NK does not yet know it, the next year will involve a number of difficult dilemmas in managing the relationship with their major customer. It is your job to advise Ulrike on how to respond at each stage. At the end of the year, you will be given feedback on the consequences of your decisions.



The decision logic for this case

Dilemma 2

Consequence 2(a)

(a) Break trust

(b) Keep trust Consequence 2(b)

Dilemma 1

Consequence 1(a)

(a) Break trust


Dilemma 3

Consequence 3(a)

(a) Break trust


Dilemma 4

Consequence 4(a)

(a) Keep trust

(b) Break trust Consequence 4(b)

Final Consequences

Dilemma 2

Consequence 2(a)

(a) Break trust


Dilemma 2

Consequence 2(a)

(a) Break trust

(a) Break trust

(b) Keep trust


Dilemma 1

Consequence 1(a)

(a) Break trust


Dilemma 1

Consequence 1(a)

(a) Break trust

(a) Break trust

(b) Keep trust


Dilemma 3

Consequence 3(a)

(a) Break trust


Dilemma 3

Consequence 3(a)

(a) Break trust


Dilemma 3

Consequence 3(a)

(a) Break trust

(a) Break trust

(b) Keep trust


Dilemma 4

Consequence 4(a)

(a) Keep trust


Dilemma 4

Consequence 4(a)

(a) Keep trust


Dilemma 4

Consequence 4(a)

(a) Keep trust

(a) Keep trust

(b) Break trust


Final Consequences

There are four dilemmas described sequentially in the case. There is no particular reason for presenting each of the four dilemmas in this order except that Dilemma 1 does have some general characteristics. First, it is an important decision for NK Fleet Management. The offer of expanding their business in the UK market has important financial considerations. Second, it is not against the current SLA that they have with their Japanese customer, so in a purely legalistic sense, there should be no problem about taking up the UK opportunity. Third, notwithstanding this, they do know that their major Japanese customer will be unhappy if they did take up the opportunity. Therefore, this dilemma is typical of many of the more strategic decisions that are taken within the context of partnership relationships. It also ‘sets the scene’ for the remaining dilemmas. What is important in this dilemma is the reaction of the customer. In fact, irrespective of which option is chosen, the customer does not seem to be unhappy. The issue here is whether this should be taken as meaning that the customer will be similarly tolerant in the future. In fact, the consequences of the further three dilemmas are such that any transgression of the spirit of the agreement between NK and the customer does affect the relationship and ultimately the likelihood that the Scandinavian contract will be renewed.



Dilemma 1

NK is approached by a Scandinavian vehicle manufacturer. They are looking to award the contract for fleet management services in their UK market. This is a significant opportunity for NK. It will involve setting up a similar business in the United Kingdom to handle the Scandinavian manufacturer’s vehicles. There will be some initial costs involved in doing this, but the UK fleet market is very large. It is estimated that accepting this offer would result in an additional $500,000 annual profit. However, there is one major drawback with this idea. Their current main customer will be unhappy at NK entering into such a significant deal with one of its rivals. They do not have a problem with NK dealing with other vehicle manufacturers as such, but they very much want to remain their single most important customer. Furthermore, in two years’ time they will be ending their own contract with their current UK fleet services provider (because it has been bought by a rival company) and would like NK to bid for that contract. They are not willing to offer any guarantees that NK will be awarded the UK contract, but their view is that if NK wants to expand, they should wait two years for the opportunity to become their UK fleet service provider. If NK did get the UK contract it will be worth about the same as the Scandinavian vehicle manufacturer’s contract. This would mean waiting two years, and even then, they may or may not get the contract.

What are you going to recommend that Ulrike should do?

(a) Take the Scandinavian vehicle manufacturer’s UK contract.

(b) Turn down the offer and wait for two years to be their current main customer’s UK contract.

If the student chooses (a), the following feedback is given:

Consequence 1(a)

The consequences of making that decision for Dilemma 1

Your main customer seems to be reasonably happy with your decision. In fact, they have made very little commitment to you. However, they have made it clear that they would welcome a bid for the UK contract from you in two years’ time.

If the student chooses (b), the following feedback is given:

Consequence 1 (b)


Your main customer seems to be reasonably happy with your decision. In fact, they have made very little commitment to you. However, they have made it clear that they would welcome a bid for the UK contract from you in two years’ time.



Dilemma 2

Ulrike receives an e-mail from Lars Lindberg, her technical manager. It reads as follows:

From: Lars Lindberg To: Ulrike Ramberg Subject: Permanent failure data Date: 11 June Hi Ulrike,

Sorry I couldn’t catch you yesterday, I was in meetings most of the day and I will be most of today, so it seemed sensible to put my thoughts in an e-mail.

As you know, we have been trying to do a deal with our main customer for months regarding the analysis we have done with our component failure data. Our argument has always been that we are in a unique position to understand exactly how the components they design into their vehicles fail in practice. We not only know what is likely to fail, we can also analyse why it is failing. We have also pointed out to them that this information is valuable and they should be willing to pay for it. As you also know, they do not see it that way. I think they have been persuaded of the value of the data, but they seem to think that we should provide it to them for free. Personally, I think that they will come around to agreeing to pay an annual fee for our analysis of this data, but they may take some time to decide. Also, I doubt if they would pay more than around $100,000 per year for the service.

Now the exciting news. I was reviewing some of the latest technical specifications with the Steinberg engineers yesterday, and Stefan Mayor, their technical VP, says that they would be happy to buy the information from us. They would be willing to sign quite quickly, and when I mentioned a fee of $150,000 they didn’t seem to think it at all unreasonable.

I’ll phone you tomorrow because Mayor wants to get verbal agreement within the next couple of days.

All the best

Lars

Ulrike is not sure how to respond to this. She can see the attraction of selling the data to Steinberg. It is probably more than what they would get from their main customer and Steinberg is willing to commit immediately. However, the main customer will probably not be happy with the arrangement. They will see the fact that NK Fleet Management had been talking to them about buying the data as being equivalent to agreeing to make the offer on an exclusive basis. Yet they have been prevaricating over the issue for months. Surely, NK cannot be reasonably asked to wait any longer?



What will you advise Ulrike to do?

(a) Accept Steinberg’s offer and sell the data to them.

(b) Refuse to sell the data to Steinberg and carry on persuading the main customer to buy the analysis of the data.


Consequence 2 (a)


In fact, Steinberg agreed to $200,000 per year for a more detailed analysis of the data, with a contract running for four years. And, as forecast, the main customer was not at all pleased. In fact, they went as far as to formally state that they would, in future, not enter into any similar agreement with NK and would be careful in sticking to the letter of the service level agreement.


Consequence 2 (b)


The main customer eventually did agree to buy the data, as forecast for an extra fee of $100,000 per year, to run for the remainder of the five-year contract. Over the time, they developed a full appreciation of how valuable the information and the analysis were.

Dilemma 3

It was the middle of the night and Ulrike was awoken by the phone. It was Mr Ando, the main customer’s head of service. He appeared to have forgotten the time difference between Japan and Sweden. He also appeared to want the impossible. A product recall had to be organized, and quickly. Product recalls did, very occasionally, happen, usually when a component had to be replaced for safety reasons. Because of the main customer’s high quality and reliability levels it was a very rare occurrence. Possibly, this was why Mr Ando was reacting with something close to panic. ‘Of course Mr Ando San’, Said Ulrike, ‘we would be happy to carry out all work connected with the recall in our region. But you must give me some time to think about the details. I understand the need for urgency, but I’m not sure we can just go ahead and sort out all the cost implications later. Please let me think about what it would entail and I will get back to you within the next two or three hours’.

This time it was Ulrike’s turn to make calls. She phoned two of her colleagues. In both cases, after they had fully woken up, and after she had apologized for waking them, they were happy to give their views. The first colleague was in no doubt what do to. ‘Well, when they want us to do something they can make up their minds quickly enough. It’s different when we’re asking them for a decision. Then, they take forever to reach a decision. In this case, they know they have no choice but for us to do the recall work. No one else has the expertise or the network in the Scandinavian region. Of course, we will do it but make sure we get them to agree a price



upfront. They won’t want to of course, and it’s the holiday period so they won’t be able to have their interminable meetings. But don’t be put off. Tell them it will cost them at least $100,000 to do the job, and do get them to agree upfront. Tell them also that if they do that, we can be processing the recalled vehicles within twenty-four hours’.

Her other colleague had a different view. ‘Just phone Ando back and tell him that we’ll do it. No reservations, no conditions, just say we’ll do it. They’re in trouble, and they need support. Give them that support and sort the details out later’.

What would you recommend Ulrike to do?

(a) Drive a hard bargain with Mr Ando and get him to agree to the fee before agreeing to handle the recall.

(b) Offer unconditional help immediately and sort out the details later.


Consequence 3 (a)


The main customer did agree to pay $100,000 and the product recall was carried out satisfactorily. However, they have made clear their intention to negotiate a separate ‘recall’ deal with a separate company to cover all recall work in the future.


Consequence 3 (b)


Mr Ando was exceedingly grateful and very complimentary about how well the recall incident had been handled. He was responsible for negotiating a chance to the SLA that included any recall work and introduced an extra fee for covering this kind of work.

Dilemma 4

It was coming up to what would normally be a quiet period for NK. However, this year several of their staff had requested their annual breaks in this period. Also, NK planned to carry out some changes to the internal arrangement of their servicing bay area. So they were pretty busy. Then came the request.

The main customer was launching one of their new models at a major launch occasion, high in the Swiss Alps. The company, that they normally use to prepare and run the press and demonstrator vehicles in Switzerland, had let them down. At very short notice they wanted NK to send a team to Switzerland to prepare the vehicles and manage that aspect of the whole event. Ulrike was exasperated. Doing jobs like this was not in their contract and it could not have come at a worse time. The main customer was willing to pay for the service, but they did not seem to



fully understand all the costs that would be involved. The real cost of agreeing to do this would be far higher than whatever the main customer was willing to pay. Ulrike knew that she could not refuse, but she did have a choice about how much effort and money she could devote to the event. Her options were as follows:

(a) Do the job properly, dedicate a full budget to the job and persuade the appropriate staff to delay their vacations by a week and go out to Switzerland instead.

(b) Do the best job possible with the staff who would have been working on the internal rearrangement job and hire in any extra staff they would need. If they were careful they could do this for around $50,000 less than option (a).


Consequence 4 (a)


The customer was hugely impressed with the way NK responded. Also, the journalists attending the launch got to hear about the story and many of them wrote it up as an extra piece. So NK got some very good publicity. The main customer also sent bottles of champagne to all the staff who had delayed their vacation in order to go out to Switzerland.


Consequence 4 (b)


The launch event went OK; at least there were no disasters. It may not have been the best-organized effort and some of the hired people were not totally familiar with the product. The main customer felt a little bit ‘let down’. Mr Ando sent a formal letter to Ulrike saying that, while he understood the problems, he was a little disappointed that NK had not helped them more.

Final Consequences

After working through these four dilemmas, the ‘final consequences’ are given.

This feedback is irrespective of what decisions were made.

A note on making the decisions posed in each dilemma

Each time you were asked to make a decision, you were always choosing between the options of either,

• Keeping faith with the spirit of the agreement that you had with your main customer, or

• Breaking trust with them, even if you were keeping within the letter of your agreement, in order to maximize the gain for yourself.



Making decisions like these goes right to the heart of the problem in maintaining partnership relationship in supply networks. Put simply, are you prepared to sacrifice possible short-term advantages in order to build long-term trust? This is not always a straightforward decision because, even if you are prepared to always keep trust with your partner, they may not keep trust with you. In this particular case, there was a relatively simple rule that governed the main customer’s response to your decisions. In the first dilemma, the main customer reacted benignly irrespective of which decision you made. However, after that first dilemma, the main customer made a decision that matched yours. So, if you broke trust, so did they. If you kept to the spirit of the agreement, they responded positively.

How did you do?

We can measure this in two ways; first, in terms of the effect of your decisions on short-term profitability and second, in terms of the degree of trust that you have built with your main customer.

In your case….

The effect of your decisions on short-term profitability has been to adjust them by the following.

See table for how profitability is calculated

And as regards the trust builtup, the consequence was...

See table for how ‘partnership points are calculated’.

If partnership points are between –19 and +5, the feedback is as follows:

Your main customer has lost faith in you and will not be renewing your contact for the Scandinavian region again.

If partnership points are between +6 and +15 the feedback is as follows:

Your main customer is broadly pleased with the way the relationship has developed and has told you that they will award you the Scandinavian contract again.

If partnership points are between +16 and +21 the feedback is as follows:

Your main customer is delighted with the relationship, and will award you the Scandinavian contract again and the even more valuable UK contract.



Consequences of your choice Dilemma Options Ulrike can choose

Effect on short-term profits

Partnership points earned

Take the Scandinavian vehicle manufacturer’s UK contract.

+ $500,000 – 5 Dilemma 1

Turn down the offer and wait two years to be for their current main customer’s UK contract.

0 +5

Accept Steinberg’s offer and sell the data to them

+$200,000 –3 Dilemma 2

Refuse to sell the data to Steinberg and carry on persuading the main customer to buy the analysis of the data.

+$100,000 +3

Drive a hard bargain with Mr Ando and get him to agree to the fee before agreeing to handle the recall.

+$100,000 –3 Dilemma 3

Offer unconditional help immediately and sort out the details later.

0 +3

Do the job properly, dedicate a full budget to the job and persuade the appropriate staff to delay their vacations by a week and go out to Switzerland instead.

–$50,000 + 5 Dilemma 4

Do the best job possible with the staff who would have been working on the internal rearrangement job and hire in any extra staff they would need.

0 –3

Agree to play a leading part in the seminar, put on a really good show and take one of their best service technicians out there to demonstrate how the company involves everyone in making the business a success.

–$100,000 +5

Tell the main customer that you will help them, but they must organize the event, not you. Then send out three or four people as speakers at the seminar.

–$10,000 0

Dilemma 5

Politely refuse to get involved because NK is particularly busy at the moment, and it will cost them money, and they have no knowledge or interest in the North American market.

0 –3



To some extent, the consequences as shown in the table above are arbitrary. The profitability figures are generally described to students prior to their making each decision. However, the ‘partnership points’ are obviously a device for trying to quantify the nature of the relationship. Although the consequences of each decision are given in a qualitative manner within the case, there is no hint regarding any scoring. And while it is obviously not the case that businesses evaluate their suppliers in such a simplistic manner, it does provide a mechanism for giving feedback that is commensurate with the decisions that have been taken.

What is important at this point is that the class has the opportunity to discuss the nature of the dilemmas made on an ongoing basis during the case (and indeed, during most of the time in any partnership arrangement). These may often involve a short-term trade off between short-term profitability and long-term relationship building. Partnership is very much a risk on both sides of the arrangement. However, as is discussed in the text, if there is no sacrifice in a partnership arrangement then, it is not a partnership arrangement. This is the main point to bring out in the debrief.

At this point, we often use the simple Prisoners Dilemma illustration from game theory to illustrate the nature of decision-making in partnership arrangements.

An extra dilemma (if you should want one)

If time allows, it is sometimes useful to pose the class with an extra dilemma. We use the one below.

Dilemma 5

Ulrike did not know whether to be flattered or irritated. The main customer had recently awarded contracts to several companies for fleet management services in its North American markets. Its North American service team was organizing a seminar for these new contract holders and had invited NK to jointly organize the seminar in the United States. They wanted NK to do this, they said, because ‘you are seen as the experts’. However, it would involve all the senior management team going over to the United States for the seminar. It would also take some time to prepare. The main customer will pay reasonable expenses, but Ulrike knew that the real cost in terms of disruption would be much higher. She also knew that, because NK had no interest in the United States market, there would be no possibility of ever getting any direct payback for putting the effort into organizing the seminar. She believed she has three options.

(a) Agree to play a leading part in the seminar, put on a really good show and take one of their best service technicians out there to demonstrate how the company involves everyone in making the business a success.

(b) Tell the main customer that you will help them, but they must organize the event, not you. Then send out three or four people as speakers at the seminar.

(c) Politely refuse to get involved because NK is particularly busy at the moment, and it would cost them money, and they have no knowledge or interest in the North American market.



This is an interesting dilemma in so much as it does not involve directly any cost or revenue, but does involve indirect cost in terms of the effort needed by NK. In some ways therefore, it is one of the more difficult dilemmas to treat, because costs and benefits cannot easily be compared. Discussion of this dilemma also allows the case to be concluded and some of the learning points that you wish to get from your treatment of the topic to be established.


C H A P T E R 8

Fresh Salads Ltd: The Iceberg Lettuce Harvest

Case synopsis

This case concerns the harvesting of iceberg lettuces. It describes a process that involves a team of 17 operators who manually carry out separate stages of the task, although it is partially mechanized. Students will discover that this is actually a mobile factory, with some specialization of tasks; it is a mass process on a product layout. Because most students will have seen and handled an iceberg lettuce and the picking/packing processes are easy to understand, this case provides an excellent opportunity for students to discover some Operations Management (OM) issues arising from this choice of process design. It also raises the opportunity for a tutor to discuss the general appropriateness of mass processes in other high-volume, repetitive contexts such as retail banking.

Using the case

The case can be used very early in an OM course to illustrate simple concepts such as the elements of the input-transformation-output process model, and the role of the operations manager. It also lies somewhere between manufacturing and service, dispelling the view that an operation does either one or the other. I usually refer to it as a material-processing operation, with critical elements of information processing to satisfy diverse market requirements in short lead-times. I usually begin the analysis with a discussion on the overall (macro) operations objectives, which sets the context for the choice of process and introduces discussions on the need for some buffer finished-goods inventory in a cold-store. The main purpose of the case is to introduce the students to capacity and balance. Having calculated the individual and overall capacities, they can compare this with the actual output detailed in the case. They should quickly realize that the capacity is mix-dependent, a critical issue for the planners. Finally, the students will discover that both demand and output are affected differently by the weather, posing further difficulties for the operations manager.

Overall, the case highlights the complexity and challenge of operations management in a context of a perishable product, high variation of demand environment.

Key issues

• Process model

• Operations objectives

• Process design

• Mass processes



• Balancing capacities

• Capacity planning.

Notes on questions

Question 1 from the case

The first of the two questions needs number crunching. This first question illustrates that there are different capacities for the different parts of the operation. The answers are basic arithmetic, but there are a variety of assumptions that could be explored such as downtime, fatigue etc. Wherever possible, getting the students to complete the calculations themselves will lead to a better understanding. Students may comment that the times given in the case are only given to the nearest second, on very short cycle times, leading to a large measurement error.

1. What is the current capacity of the operation? Calculate the capacities for each part (micro-operation) of the iceberg rig, and from this, estimate the total capacity.

1a. The cutting capacity per rig is

a. 15,000 lettuces.

b. 30,000 lettuces.

c. 45,000 lettuces.

The correct answer is (b); in each case, do the calculation given below.

Cutting Capacity:

Per worker

8 seconds per lettuce = 60 / 8 = 7.5 per minute

8-hour day = 480 minutes

but 5% allowances and occasional activities 2% downtime

Productive time = 480 × 0.93 = 446 minutes Daily output per worker = 446 × 7.5 = 3345 lettuces

Per rig 9 workers = 3345 × 9 = 30105 lettuces

1b. The packing capacity per rig is

a. 26,000 lettuces.

b. 34,000 lettuces.

c. 38,000 lettuces.

The answer is (a); for each answer, do this calculation.



Packing Capacity:

We need to know the proportion of each type of lettuce, and the case gives the following information on average daily output:

Supermarket 1,800 trays of 10 = 18,000

Wholesale 230 trays of 12 = 2760

Process 200 crates of 20 = 4000

Total 2230 = 24760

Analysed as a percentage of the total,

Supermarket 72.7%

Wholesale 11.1%

Process 16.2%

The task involves only applying tape and putting in trays. This applies to the supermarket and wholesale products only, that is, 83.8 per cent of the picked crop. The remaining proportion is not handled by the packers, so, on average, the capacity is:

Per worker:

5 seconds per lettuce = 12 per minute

Productive time = 446 minutes

Daily output per worker = 446 × 12 = 5352 lettuces

Per rig

5 workers = 5 × 5352 = 26,760

This activity applies to 83.3% of the crop, so the total equivalent output capacity is 26,760 / 0.833 = 32,125 lettuces at current mix.

1c. The capacity per person for labelling is

a. 10,000.

b. 13,000.

c. 16,000.

The answer is (b); for each answer, do this calculation.



Labelling

Only the supermarket lettuces are labelled, taking 2 seconds per label.

Per worker:

2 seconds per lettuce = 30 per minute

Productive time = 446 minutes

Output capacity = 446 × 30 = 13,380

This is insufficient for the average supermarket output of 18,000 per day. Therefore, we could assume that 1.5 workers are used on average.

Output capacity = 1.5 × 13380 = 20,070


This question leads on from the first question and links capacity to demand.

2. How closely does capacity match demand?

2a. Picking capacity exceeds demand by

a. 8%

b. 11%

c. 22%

The answer is c; picking capacity (30,105) is 22% greater than demand (24,760).

2b. Packing capacity exceeds demand by

a. 8%

b. 11%

c. 22%

The answer is (a); packing capacity (26760) is only eight percent greater than demand (20,760).

2c. Labelling capacity exceeds demand by

a. 8%

b. 11%

c. 22%

The answer is (b); labelling capacity (20,070) is 11% greater than the demand (18,000).




The purpose of this question is to draw conclusions from the first two questions.

3. So, the next question must be, what should the base level of capacity be?

a. 20,070

b. 26,760

c. 30,105

The answer is (b); the three main tasks are relatively well balanced at the product mix on a specific day. Although the actual capacities calculated range from 18000 to 24760, this range is not relevant to the question, since the three tasks apply differently to the different product types. What matters here is the range of capacity utilizations; from 78 to 92 per cent . This indicates a relatively good balance at this mix, although it might have been possible to reduce the number of pickers to eight, resulting in a picking capacity of 26,760, which is only 8 per cent above demand.

In practice, of course, the operators can move between the three or more tasks, and create a balance in real-time operations. Another issue is that the times given in the case are only given to the nearest second, on very short cycle times, leading to a large measurement error.


This final set of questions asks students to apply common sense to real life situations. The figures used so far will be accurate most of the time but, of course, demand and capacity will change for a whole host of reasons. A couple of potential changes are identified here, but there are many more. You may like to get the students to explore other changes and then to discuss whether the present capacity level is appropriate.

4. How should potential demand-capacity mismatches be managed?

4a. What weather conditions will create the biggest challenge in matching capacity to demand?

a. hot and sunny weather.

b. Wet and cold weather.

c. Wet weather followed by hot and sunny weather.

d. Hot and sunny weather followed by wet cold weather?

The answer is (c); each of the weather patterns creates some issues, but the worst combination is wet weather followed by hot and sunny weather. When the weather is hot, demand for salads and sandwiches increases, quickly leading to larger orders from the retailers. Because of the perishable nature of lettuces, this means more must be picked. On wet days picking slows down by 25 per cent.

When demand is high, but it is wet weather, the rigs will have to work LONGER hours, and it is difficult to maintain morale and productivity. Fortunately, there is some buffering from finished-goods stock in the cold-stores that can help reduce this dilemma.



In practice, however, teams are occasionally asked to work twelve-hour days, in non-ideal conditions. The customers will not tolerate incomplete or late deliveries, and require almost immediate volume flexibility.

4b. What would happen if the mix of demand changes and only supermarket lettuces were required?

a. Capacity will increase.

b. Capacity will stay the same.

c. Capacity will decrease.

The answer is (c); the balance will be affected by a change in the proportions (mix) of the three market types. For example, if ONLY supermarket lettuces were required, in the same total volume (quantities) as in the example,

24,760 lettuces picked = 2476 trays

Labour requirements per day (original allocation in brackets)

Cutting = 3345 lettuces / operative = 7.40 operators (9)

Packing = 5352 lettuces / operative = 4.62 operators (5)

Tray-making = 1710 trays / operative = 1.45 operators (0.5)

Labelling = 13,380 lettuces / operative = 1.85 operators (1.5)

Tray carrying = 1464 trays / operative = 1.69 operators (1.5)

Supervision = 1.00 (integrated)

Total labour required = 18.01 people (18).

While this is just possible with the existing crew, the utilization is now 100 per cent. The balance of tasks has changed, with more pressure on tray-making and carrying. The labelling task has increased the most, putting these two operators under pressure.


C H A P T E R 9

Rotterdam Serum

Case summary

This case is centred on the plight of Anders, a senior technician for the antibody serum laboratory of Rotterdam Serum. This is his first managerial job since graduating three years ago. Rotterdam Serum is one of the world’s primary suppliers of antibody and other serums to the veterinarian and animal care sector, located within the port of Rotterdam. Anders’ duties include the general supervision of the testing and analysis work within the laboratory and the ordering and storage of serum prior to its distribution to the company’s customers around the world. The serum is stored using very low temperature (VLT) storage techniques in cryogenic containers, known as cryogenic banks.

Anders has experience in the analysis and testing work that he will be supervising but has never been responsible for the ordering, storage, and supply of serums.

The script of Anders’ discussion of his dilemma is shown in Appendix 1.

Using the case

This case is best used to introduce some of the important issues in managing inventories of this type. It is not designed to test the students’ ability to either design inventory control systems or optimize their inventory decision making. Rather, it is designed to give them a simulated experience of some of the forces that act upon inventory controllers when they make decisions. For this reason, the case is best used either before or at the beginning of that part of the course that deals with inventory management. The case should be set as a group exercise prior to the lesson. Then the students’ experience of balancing the various costs should be used to develop whatever inventory models are going to be included in the course.

If the case is used after the lesson on inventory management, it is important to point out to the students that whatever models they may apply, the simulation in this case is only a sample from an on-going task and therefore the best inventory policy may not always lead to the best outcome.

As with all the active cases associated with this text, it can be used as a stand-alone learning experience or students can be asked to work through the case (individually or in groups) and then debriefed in a relatively conventional manner in class. The class debriefs of active cases should focus not only on the content of the decisions but also on how students went about making a particular decision. This teaching note assumes that all students would have worked through the case that is then debriefed in class.




Essentially, this case is set around a simple inventory simulation (or game). There is nothing particularly complex in the simulation; in all that the students are required to do is to order items on a month-by-month basis. The two elements of uncertainty that are introduced are

• the demand during the next month, and

• the time it takes for the order to arrive.

The simulation then simply applies probabilities very similar to those implied by the data given in the case to generate a series of demand and delivery data.

The case is in two parts. The first part gives students enough information on the nature of the inventory control task to decide how to approach the simulation. If it is possible to brief the students prior to their tackling this case, it is worthwhile stressing that they should reflect upon the information given in the case and decide on what approach they are going to take before they start playing the simulation. Simply guessing is unlikely to produce as much learning as testing out some previously thought through approach.

Anders receives advice from Ann and Jens, both of them who held the job before him, and who are still working in other sections of the company.

Appendix 2 shows the scripts of Ann and Jens’ advice to Anders.

Anders is determined to try and operate the serum inventory so that both the costs of the inventory and the risk of running out of stock are minimized. He starts by setting down what he knows about the inventory task.

Note on cryogenic serum inventory

Three types of serum are stored; these are known as AHX, AHH, and AHA.

Expensive to store, approximate costs €1.8 per l per month.

Limited storage facility, maximum storage = 9000 l.

Cost of hiring extra storage if this amount is exceeded = €9.5 per l per month.

The serum is ordered from suppliers around the world. They generally pay transportation costs themselves (factored into the price) but we are responsible for insurance and security costs. Including the administrative costs of placing orders, approximate cost per order = €5500.

Availability can sometimes be variable. This means that although over 50 per cent of orders placed in one month will arrive the next month, there is a chance that orders could take between one and three months to arrive. (See Table 1 for the previous order lead-time statistics).

Demand is also variable, especially for AHX and AHH serum. (See Table 2 for recent demand statistics).



Table 1 Order lead-time statistics for last year

Lead time Percentage of orders placed

1 month 52%

2 months 42%

3 months 6%

Table 2 Last year’s demand

Demand (l) Month

AHX AHH AHA

1 1540 1780 1450

2 2630 2100 1200

3 1980 1290 1750

4 1060 1630 1660

5 1770 1910 1500

6 870 1070 1440

7 1660 2300 1380

8 1370 1810 1290

9 790 2650 1660

10 2020 1400 1580

11 1490 1740 1280

12 910 2280 1470

Average demand 1507 1830 1472

Feedback given to students from the Rotterdam Serum simulation

If total costs are above €2,000,000, the feedback is as follows:

This is an abysmal performance. I mean really bad. If you want career advice, never apply for a job as an inventory controller. Try it again and you can really do better than this.

If total costs are between €1,500,000 and €2,000,000, the feedback is as follows:

A poor result. You could have been worse but only if you were really trying to be bad. Go on, try again and you can do better than this.



If total costs are between €1,000,000 and €1,500,000, the feedback is as follows:

Not good, but you could have been worse. Either you need to do your homework and understand both the EOQ and the safety stock issues in this case or you just were not paying attention when placing orders.

If total costs are under €1,000,000, the feedback is as follows:

Good, well done. It is not easy to achieve this score unless you were either lucky or have calculated the EOQ and safety stocks correctly and executed your plan well.

The second part of the case asks the students to choose between a number of proposals that Anders believes could help make the inventory management task more effective. The question is framed in this way:

Question 1

After his first few months at controlling the serum inventory, Anders is not a happy person. ‘It’s a nightmare, OK. Whatever I do there are costs involved. Try and reduce the costs of placing orders and stockholding costs go up. Try and reduce stockholding costs and we are ordering every month and still having shortage. We really have to do something, OK’?

Anders drew up a list of actions the company could take to reduce the total cost of managing the serum inventory. After you have explored Anders’ problems by playing the inventory control simulation, choose just one from the list below that you think should be implemented as a matter of priority.

Option 1 – Outsource the whole inventory management task to a professional inventory management subcontractor.

The feedback given, if this option is chosen, is as follows:

Why? The problem of managing serum inventory is difficult, but not impossible, outsourcing problems hardly every work. You would be outsourcing from a position of weakness and therefore would be unable to control the relationship. Score out of 10 – 0.

Option 2 – Negotiate with the insurers who issue the policies for transporting the serum in order to try and reduce the cost of placing orders.


This may work and would reduce inventory management costs, but only if a relatively substantial reduction in order costs resulted. Score out of 10 – 3.

Option 3 – Invest in extra storage facilities. Anders has calculated that increasing the company’s storage capacity by 50 per cent would cost approximately €200,000.


This is a good idea. The extra storage cost of hiring additional cryogenic facilities can be very big (as you may have discovered). The investment in extra storage facilities of at least 50 per cent should pay back relatively quickly. Score out of 10 – 10.



Option 4 – Form a partnership with other suppliers so that they can supply when you are out of stock.


This is a good idea. In effect, you are pooling your inventory and sharing the risk. Any arrangement would have to be reciprocal and there would be some loss of profit. Nevertheless, it is an idea that is worth exploring. Score out of 10 – 7.

Option 5 – Try out other methods of storing serum that would be less expensive than cryogenic storage.


Even if this is a good idea in the long term, it will not help your problem in the short term. So, as a priority action, it really is not a good idea. Score out of 10 – 2.

When they have chosen one of the above options and have been given a feedback, the students are asked the following question.

You can have another choice. Of the remaining options, which one would you choose?

They are then put through the same procedure and their score calculated from the two choices. Feedback is given as follows:

In total, your two choices scored ‘X’. The maximum score would have been 17, the minimum score 2.

Opening question a

To debrief the case in class, try the following opening question.

So, what are the main factors that influence the decision of how much of each serum to order each month?

Having played the simulation, most students should find it relatively easy to identify the main influences on their decision making. These are as follows:

• The cost of ordering

• The cost of holding stock

• The cost of hiring extra storage facilities if stock exceeds a certain point.

• The cost of shortage (running out of any of the serums)

• The average demand

• The variation in demand



• The average delivery time

• The variation in delivery time.

From this point, the nature of the class debrief needs to be aligned, however, with the subject is going to be taught. If the subject is going to be presented as a quantitative exercise in building inventory models, then the case can be used to justify the importance of having models that include the factors (and probably others) that have been listed above.

If the subject is to be taught to emphasize the need to develop inventory management systems, then one can ask the students what a system must be capable of doing to take the burden of decision off Anders or, alternatively, what the system should be doing in order to advise Anders on the consequences of making various ordering decisions.

If the subject is to be taught in such a way as to articulate a general appreciation of the importance of the topic and the nature of how inventory decisions are made, then one could ask the students the following questions:

• Why is it important to have a clearly thought out approach to inventory decision making?

• In the Rotterdam Serum case, what do you see as the main constraints on Anders in keeping inventory costs to a minimum?

• How does inventory management affect the strategic position of the company?

• What would you expect any inventory management system to do?

• Do you think it is possible to entirely automate the inventory management decision making in this case, or will it always involve some kind of human judgement?

Overview question

As an overview or ending question, try to relate the inventory management decision to other contexts. Explore how inventory management might differ in other types of businesses such as the following:

• Retail management

• Airline management

• An oil refinery

• Banking (this is a difficult one, but try and get students to think of the flow of cash in inventory terms).


A P P E N D I X 1

Script of Anders discussing his task

Anders –‘OK, so I can handle the laboratory stuff, no problem. What is concerning me is managing the ordering of serum, OK? It’s not like stocking potatoes you know. This stuff is really delicate, and very, very expensive to keep in cryogenic storage. It’s sensitive stuff, so it has to be stored properly. My job is to maintain effective storage without shifting the serum vials around all the time. I also have to maintain effective supply so that our customers are not going short. And I have to keep the total cost of this storage down, OK. It seems simple, but it isn’t. I guess you could say that all I do is place orders every month for each type of serum. But supply is not always guaranteed, OK. Also, demand can vary quite a lot you know, especially the AHX and AHH serums’.


A P P E N D I X 2

The scripts of Ann and Jens’ advice to Anders

Ann –‘Serum is stored in small polymer vials. Each time one of these vials is moved, it increases the risk of the quality of the serum deteriorating. Serum quality is best when it is left undisturbed. Cryogenic storage increases the life of the serum, but it does make it sensitive to vibration. Under normal circumstances it's OK, but too much handling can give us problems. That is why I think Anders should try and minimize the disturbance to the serum by avoiding continual small deliveries being added to the store. When I was doing the job my biggest mistake was placing small orders that kept disturbing the inventory of serum. I once lost a whole batch of AHA by doing this. However, Anders must also avoid running out of stock. Often our clients order mixed batches. So if we run out of one serum we can lose the whole order’.

Jens –‘Anders has more of a problem than when I did the job. Cryogenic costs are escalating, I guess because more and more industries are using very low temperature storage these days. That may eventually bring the cost of cryogenic storage down but, at least in the short term, costs will go even higher. And remember, this stuff is hugely expensive to store. Fortunately, when I was doing the job, we invested in compartmentalized storage. This means that storage costs are always more or less directly to proportional to how much is being stored. We can just close some banks down to save cost if they are not required. However, storage is limited. We can only store so much at a time. When our cryogenic banks are full we need to hire extra storage. Not only is this cripplingly expensive, it increases the risk of transportation-related deterioration in the serum. No, I don’t envy the guy. But hey, he’ll have an interesting time’!


C H A P T E R 1 0

Coburn Finnegan Accountants

Case synopsis

This case explores the issues in resourcing an operation. In this case, a small accountancy practice in the Republic of Ireland with offices in Cork, Limerick and Galway. The case starts with a planning meeting for the week ahead. On the face of it, the resources are appropriate to the task to be performed, but in practice, it can only be achieved with careful resource planning. Then, of course, Monday morning comes, and the plan is blown out of the water.

Using the case

The setting for the case is a long way from that of a big manufacturing operation, and yet the same kinds of issues appear. Accountants are rarely trained in operations and process management, and yet this is the sort of story that occur each week in every professional practice. A side product of this case is that this kind of process approach is needed everywhere and it is a vital skill for every manager. For the case to be successful, students need to work with the Gantt charts provided to come up with the most appropriate schedules to meet all the demands of the case. There are many ways that the original schedule can be met, but students will take a little time to find an approach that fits. When reviewing their approaches, scrutinize the results as, often, students can overlook precedence rules.

Notes on the questions


This first question asks students to complete a tricky, but achievable, schedule. Donna is the bottleneck in the process, and so to achieve the schedule, she has to be provided with work as soon as possible and not made to wait until after the initial delay on Monday.

1. Mark describes it as ‘a busy week ahead’. All of the staff is prepared to work a maximum of 10 hours overtime per week, if and when necessary, but not more than 3 hours on any one night. From the information provided, create a workable schedule for the coming week by scheduling activity on the excel spreadsheet.

Question 1a – Does the schedule allow Declan two days for studying?

(a) Yes – well done.

(b) No – try again.

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Question 1b – How much overtime has to be paid in total?

(a) Less than 12 hours – although there are millions of ways of scheduling, we do not believe this is possible without breaking some sequencing rules. Have a look again.

(b) 12–16 hours – there are millions of ways of scheduling. Our best effort came out at 15 hours overtime.

(c) More than 17 hours – there are better ways of scheduling to reduce overall overtime.

Question 1c – Who has to work the greatest amount of overtime?

(a) Megan – Megan will have to work some overtime early in the week to enable the schedule to work, but Donna will need to work more.

(b) Declan – no, Declan does not need to work overtime.

(c) Donna – yes, Donna is under the greatest amount of time pressure.


As is always with the best-laid plans, something happens to disrupt them; in this case, an urgent job from Delstarr Industries. The first question to be answered is a strategic one – should the plan be disrupted because of the urgent demand, or should it be turned aside.

2. Should Mark tell Aidan

(a) that it will be difficult, that they were very busy, that they would do their best to meet the time scales, but ‘no promises’? Answer – Mark needs to think of the message he is sending out to the client. He needs to reflect that whatever he says will create a lasting perception in the client’s mind. He needs to think in a strategic way, considering how he wants to position his business in the eyes of the client. Whilst tempting to say ‘no promises’, it may well leave the client with a lack of confidence for the future relationship.

(b) that, yes, they will do it, and will complete the task on time. Answer – Mark is making a decision about how he wants his business to be perceived by the client. This response seems to be the more appropriate one although before delivering this verdict, he does need to re-plan to ensure that this task can be delivered on time. In addition, he may want to consider premium pricing the work although this too needs to be considered in line with the strategic long-term relationship with the client.


Focusing on loading first gives an insight as to whether the schedule is possible. If the loading does not work out, no amount of clever scheduling will resolve the problem.

3. The first step when looking at whether planning and control activities are effective is to consider loading. Is there any load that will cause problems this week after agreeing to take on the Delstarr Industries work?



(a) Megan’s load? – no. Megan has 35 hours of work scheduled. So, on the face of it, she can complete work in her normal week.

(b) Declan’s load? – no. Declan has 23 hours of work although if he is only working for three days, he will need to work some overtime.

(c) Donna’s load? – yes. Taking into account the two roles that Donna has, her total workload is 43 hours. In addition, she has to supervise Megan and Declan and because of the timing of activities, she will be unable to start any work until last thing Monday at the latest, meaning that 43 hours would have to be accomplished in four days (and work precedence will make that worse).

(d) Mark’s load? – no. We do not know the full amount of his other responsibilities, but from the information provided, he has 18 hours of work.


This part of the question is to ensure that there is a logical sequencing decision made. It also provides the opportunity to discuss the other ways of sequencing and the pros and cons of each.

4. Which sequencing approach should be used? Mark considered three approaches:

Due date. Work is prioritized according to when it is due for delivery – regardless of the size of the job or the importance of the customer.

First in first out (FIFO). Often a default operational setting. For instance, in an ‘out of balance’ paper intensive operation, priority systems break down and people resort to working from the top of the pile.

Shortest operation (total job time) first. The shortest task is completed first, then the next shortest etc.

Which approach should Mark take?

(a) Due date? Yes. This seems the most appropriate approach given the amount of flexibility required.

(b) First in first out? No. Seems a ‘fair and equitable’ approach, but it does not give the flexibility needed in the situation.

(c) Shortest operation first? No. It does have benefits in terms of getting work completed and improve the cash flow, but it will not provide the flexibility required.


This final set of questions enables the student to make practical choices about what should be done to overcome the problem. The answer takes a pragmatic, common-sense approach that can be debated in the class.

5. Given the discoveries about loading and the decision about sequencing, what actions should be taken by Mark and the team?



(a) Check with Donna that she is prepared to work sufficient overtime to complete the tasks?

(b) Approach all the other clients and negotiate later meeting dates?

(c) Consider which dates can be moved, approach clients to rearrange, look at Donna’s workload and see if it can reduced.

A possible answer – this shows the amount of overtime Donna would have to work if no rescheduling takes place – note the excessive amount of overtime on Friday.

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If answered (a)

Donna confirmed that she is prepared to work overtime.

How much overtime must Donna do on Tuesday, Wednesday, Thursday and Friday to meet the present deadlines and complete all the work by the end of the week?

(a) 10 hours or less. There are many ways of scheduling. Our estimate is that Donna would need to be working 15 hours overtime loaded to the end of the week. This would seem to be excessive and certainly not sustainable over a long period. Your original choice seemed shortsighted.

(b) 10–20 hours. There are many ways of scheduling. Our estimate is that Donna would need to be working 15 hours overtime loaded to the end of the week. This would seem to be excessive and certainly not sustainable over a long period. So while your calculations are accurate, your original choice seemed shortsighted.

(c) 20+ hours – There are many ways of scheduling. Our estimate is that Donna would need to be working 15 hours overtime loaded to the end of the week. This would seem to be excessive and certainly not sustainable over a long period. Your original choice seemed shortsighted, and your scheduling skills need improving.

If answered (b)

Jones and Farrar and Mr and Mrs Gore agreed to move their times back. Complete a schedule to achieve the best position to complete the necessary work in the time permitted without excessive overtime.

How much overtime does Donna have to work this week?

(a) 10 hours or less. There are many different ways to schedule. Our best result indicates that Donna will be working around six hours of overtime, so you have scheduled well. This is a better result (that if you had chosen ‘a’ in the previous question), but it is not the best result as any delays in the completion of the work of Megan, Declan or Mark will have an impact on Donna and on the clients.

(b) 10–20 hours. There are many different ways to schedule. Our best result indicates that Donna will be working around six hours of overtime. This is a better result (that if you had chosen ‘a’ in the previous question), but it is not the best result as any delays in the completion of the work of Megan, Declan or Mark will have an impact on Donna and on the clients. In addition, you may not be scheduling as effectively as possible.

(c) 20+ hours. There are many different ways to schedule. Our best result indicates that Donna will be working around six hours of overtime. This is a better result (that if you had chosen ‘a’ in the previous question), but it is not the best result as any delays in the completion of the work of Megan, Declan or Mark will have an impact on Donna and on the clients. In addition you may not be scheduling as effectively as possible.

If answered (c)

Jones and Farrar and Mr and Mrs Gore agreed to move their times back. What would you do about Donna’s workload?



(a) Employ another senior. Your original choice was the best one available, and it may be that the ultimate solution might be another senior, but from the information provided, this does seem to be leaping to a conclusion a bit too fast.

(b) Ask Mark to take up the responsibility of drawing up the accounts after he has checked them. Your original choice was the best one available, and it may be that the ultimate solution might be for Mark to take on other duties, but pushing work up for more expensive staff to complete relatively routine work is rarely the best choice.

(c) Call for more information. Your original choice was the best one available, and again you have chosen well. There are many possible solutions with regard to redistributing the work, and at the present time, there is insufficient evidence to make a decision. Accordingly, a review of the processes and who completes the tasks is called for.


C H A P T E R 1 1

Treating Ann

Case synopsis

This is a case in two parts. The first part is a month-by-month account of Ann’s attempt to get treatment for the lump in her forearm from the state ‘National Health Service’ (NHS). (NHS is a free service. The United Kingdom has a relatively small private healthcare sector).

This story details a lot of frustration for Ann and countless examples of waste in the system.

The second part of the case details Ann’s visit to a Belgium hand clinic where treatment is swift and successful.

Using the case

This is a lengthy case; the first part helps to illustrate many different kinds of waste and the second part shows an operation that is closer to achieving lean synchronization. In the first part, students can be encouraged to identify as many different kinds of waste as possible – there are plenty!

Summary of key events in the first part of the case; for further details see Appendix 1

April – Two visits to her GP – referred to specialist

July – Specialist advises surgery

November – Pre-assessment for surgery

January – Arrives for surgery, but it is cancelled

April – Further X-rays and examination

August – Told she would have to wait until October/November

Notes on questions

Question 1

This first question focuses on the amount of waste in the NHS system as evidenced in this case. Waste is a key barrier to achieving lean synchronization. To help the students identify the



specific monetary value of waste a spreadsheet is attached but this probably only scratches the surface of the waste involved.

1. The case of Ann highlights a great deal of waste in the system, one of the main barriers to achieving lean synchronization. One of the major wastes was the amount of time spent by NHS staff who have not added any value to Ann. To access this identify approximately the direct time costs of the healthcare staff. Insert the approximate amount of minutes spent by each member of the staff within the NHS. The spreadsheet shows the calculation of the cost using an approximation of salary costs.

£50 – No – you are underestimating some of the time spent; have another look

£100 – Yes – looks about right; of course there will be other costs as well

£500 – No – this looks high in terms of just the direct time costs of the staff; have another look

£1000 – No – this looks very high in terms of just the direct time costs of the staff; have another look

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Question 2

In the second part of the case, Ann takes the case to a Belgium clinic that deals with the situation swiftly and successfully. To see the details of the Belgium part of the case study, see Appendix 2. In the first question, students are asked to consider ways of improving the UK approach. The answers given are, of course, a simplification of the many issues involved and focus, out of necessity, more on the Operation side than the political side of the arguments.

2. The first part of Ann’s case highlighted a great deal of waste in the system, one of the main barriers to achieving lean synchronization. In the second part of the case detailing the experience in Belgium there was less evidence of waste, and from the limited information, it appears that the Belgium model is closer to achieving lean synchronization.

What steps are appropriate to improve the UK operation?

(a) The NHS should create a range of specialist clinics on the basis of the Belgium hand clinic.

(b) The NHS should maintain the present structure but look to reduce the waste that is present in the system.

(c) The NHS has to accept that because of the range of services provided and the constraint on resources and that it cannot hope to compare favourably with the Belgium model.

(d) A mixed model of private and public health facilities would be the best approach with the private sector offering services similar to the Belgium clinic.

If answered (a):

This does seem to be an attractive idea, it will help set up focused clinics that should provide a better service to patients and set up correctly, there should be less waste. What will be the next main problem in achieving lean synchronization if this approach was taken?

Does supply exactly meet demand?

Answer – All are issues to be considered but on balance this does seem to be the biggest issue. Getting the right level of supply to meet demand in a small specialized clinic and still provide ‘value for money’ will be a challenge.

Are processes flexible?

Answer – All are issues to be considered but on balance this does not seem to be the primary issue as the clinic will be very focused and so may not need so much flexibility. Getting the right level of supply to meet demand in a small specialized clinic and still provide ‘value for money’ will be a challenge.

Is variability minimized?

Answer – All are issues to be considered and the variability issue will be one that will have to be closely considered but on balance getting the right level of supply to meet demand in a small specialized clinic and still provide ‘value for money’ will probably be the biggest challenge.

Is lean synchronization applied throughout the network?



Answer – All are issues to be considered and the issue of the whole network issue will be one that will have to be closely considered but on balance getting the right level of supply to meet demand in a small specialized clinic and still provide ‘value for money’ will probably be the biggest challenge.

If answered (b):

Tackling the waste is a good idea. What will be the next main problem in achieving lean synchronization if this approach was taken?

Does supply exactly meet demand?

Answer – All are issues to be considered but on balance this does not seem to be the biggest issue. The network of suppliers will still be present, so, on balance it would seem that tackling lean synchronization throughout the network will be the biggest and most important challenge.

Are processes flexible?

Answer – All are issues to be considered but on balance this does not seem to be the biggest issue. If the choice was just to reduce waste, there will still be the present infrastructure of multi-purpose health facilities and so on balance it will seem that tackling lean synchronization throughout the network will be the biggest and most important challenge.

Is variability minimized?

Answer – All are issues to be considered but on balance this does not seem to be the biggest issue. If the choice was just to reduce waste, there will still be the present infrastructure of multi-purpose health facilities, which have experience of coping with variability. On balance it will seem that tackling lean synchronization throughout the network will be the biggest and most important challenge.

Is lean synchronization applied throughout the network?

Answer – Yes, you are right. All are issues to be considered but on balance this does seem to be the biggest issue.

If answered (c):

This does not seem to be a very positive response; all operations have to seek to continuously improve. Review your thoughts and try a different approach.

Students are asked to think again.

If answered (d):

This might be part of the solution although there are many political and economic arguments on both sides of the solution but by itself it does not actually tackle the problem. Review your thoughts and try a different approach.

Students are asked to think again.


A P P E N D I X 1

Part 1 of the case

April (first week)

Ann lived in the United Kingdom and sought treatment from the state ‘National Health Service’ (NHS). (The NHS is a free service. The United Kingdom has a relatively small private healthcare sector.) She phoned the receptionist at her local general practitioner’s (GP’s) surgery to make an appointment. The waiting list for nonurgent consultations was one week. But on the day of her visit the receptionist told her that her usual GP had been replaced that day with a visiting doctor. He spent no more than 5 minutes examining her, and advised her that the lump was probably a ‘ganglion’ caused by the continuous strain of the floor sanding. She should not worry, as this would probably go away naturally within a week. She accepted this diagnosis, although she did not know, and was not told, what a ganglion was. She continued with her normal life and work. After three weeks, there had been no improvement in her condition. She made an appointment to see her own GP. After a week’s wait she attended the surgery and her doctor examined her hand and wrist, again for a total of about 5 minutes. He advised that she should see a consultant orthopaedic surgeon (referred hereafter as Consultant A) who occasionally held his clinic at a local small hospital in the town. The GP did not know how long she would have to wait for this visit. No treatment was prescribed to help her sleep.

July

Ann received an appointment to attend the clinic three weeks later. After a long wait in the reception area, his secretary showed her into the consultant’s room. He talked to her about the problem, and examined her hand and wrist. He said that the lump could be removed at a ‘Day Surgery Unit’in the nearby larger regional hospital. An appointment would be sent to her in due course, for an operation in about 6 months time. He did not say what he thought the lump was, but said that he was sure that it was not a ganglion. He gave no details as to how she should prepare for this operation, or how long she would be unable to work afterwards. She would be prepared to come in for the operation at short notice; for example, if a cancellation arose, she said, because of the continuing pain. This consultation took about 10 minutes. She continued to work as best as she could.

October

By late October the pain in her wrist was becoming even more severe, and she had numbness in her fingers. In order to sleep, she regularly applied packs of ice to her arm for a period before going to bed. No information was received about her operation.



November

In early November, she phoned the Orthopaedic Reception at the hospital. She was asked whether she had attended her ‘pre-assessment’ yet. She replied that she knew nothing about this, and Consultant A had not made any mention of a pre-assessment. Moreover, she wondered why her records didn’t say whether she had one. ‘You should have had a letter from the Hospital to arrange this,’ said the receptionist. Helpfully, she immediately arranged for the pre-assessment at the Day Surgery Unit on 19th November.

This visit was quite straightforward. After she checked in with a receptionist, she waited a while. Then a nurse recorded her weight, and helped her complete a questionnaire that asked for details of her current health. This process took a total of 15 minutes. She was then informed that she should have already received a letter, telling her to stop taking contraceptive pill at least 5 months prior to surgery. This oversight could delay the surgery unless the surgeon and the anaesthetist felt that it was safe to proceed. She again asked whether she could be considered for any cancellations, since she needed the operation urgently. This request was noted. Finally, she was sent for X-rays of her hand and wrist at the Radiology Department of the hospital. It took about 10 minutes for the four A4-size films to be taken. Her whole visit lasted no more than an hour.

December

In mid-December, she was informed in writing of the date for her surgery. She was booked in at the Day Surgery Unit for the 2nd January, at 1:00 pm, and would be able to leave by a 7:00 pm. The letter also reminded her not to eat on the day of the operation. She ensured that she had no scheduled work (or income!) on that day and for the subsequent week, although she had not been advised how long she should not work.

January

On the day of the operation she arrived at the hospital and was told that the anaesthetist will see her in 10 minutes. Dressed in a hospital gown, she waited for the operation to commence. She was then informed by the nurse that the surgery will not proceed. A junior surgeon, Consultant B, who was going to be operating on her that day, had looked at the X-rays and decided that the condition was too severe for him to operate. This was apparently the first time that any surgeon had looked at the X-rays, taken in November. Ann experienced a moment of severe shock. She had mentally prepared herself for the operation, and it was cancelled at the very last moment. Her reaction was such that the nurse decided to ask Consultant B to come to see her. The nurse stayed with her throughout, comforting her as best she could.

‘I am really sorry that we cannot operate on you today…you are actually the second one this morning that we have had to postpone! You see, the X-ray seems to show a small piece of bone, a bit like a tiny chip, which has come away below the lump, which is probably causing the problem. I could go ahead and remove the lump, but this would not be the final solution; and because of the scar tissue, it would make later surgery more difficult. I would recommend that you see Consultant C, who is our hand and wrist specialist. Leave it to me, and I will make the necessary arrangements for you to be seen by him. You should hear from the hospital in no



more than two weeks, but you should phone the Department if you haven’t. You can dress and go home now!’

Early February

Three weeks passed without any contact from the hospital, so she phoned as instructed. After a long wait (about 10 minutes) while the patient notes were being retrieved, the administrator told her that no referral had been made, and furthermore, there was no reference to any of the events of 2nd January on the notes. In addition, one form that required full details of the reasons for cancelled procedures had not been completed by Consultant B. Ann asked whether she could speak to the consultant, but she was advised that he had gone on a holiday for 6 weeks, and could not be contacted. ‘Then could I speak to Consultant A, who is the Head of Department, isn’t he? Surely he could arrange for me to see Consultant C? I can’t wait 6 weeks, I’m suffering severe pain, you know.’

‘That isn’t possible, you are now Consultant B’s patient, and he must deal with it, it’s his responsibility. All the consultants are so busy, they don’t like dealing with others’ problems… it’s Consultant B’s job to fill out the records of your visit and to arrange further treatment. I really don’t know why he didn’t do this before he went away, but I will see that he contacts you when he gets back.’

About a week later, in desperation, Ann tried phoning the Department again (three times), and after re-explaining the situation and expressing her anger at the delays, she was eventually passed to Consultant A’s secretary. It was arranged for her to see Consultant C on the 15th April, at the Orthopaedic Department, almost exactly 1 year after the original symptoms had first been experienced.

April

Consultant C was friendly and sympathetic. He examined her hand and arm, and read the patient notes. ‘Unfortunately, the staff have been unable to find all your X-rays. The only one we have found does not show any problems with the bones. So, you should go to X-ray with this note and get some more taken. I’ll see you later’.This consultation had taken about 10 minutes. After a further delay of an hour, a new set of four X-rays was taken, and Ann returned to the clinic with the folder. Eventually, she was shown back into the consultant’s room. Having examined the X-rays he said:

Consultant C – ‘Your lump certainly isn’t a ganglion; it’s in the wrong place to be a ganglion! Why were you told it was a ganglion? I really can’t be sure what the lump is, or why it hurts. There isn’t any evidence at all of any slithers of bone coming away, either! Why did consultant B say that was your problem’?

Ann – ‘I don’t know why my GP thought it was a ganglion, or why Consultant B told me the bone was a problem…I’m only the patient! Why don’t you ask them, anyway’?

Consultant C – ‘To make any further progress I will need an MRI (magnetic resonance imaging) scan of your wrist, and a blood test’.



Ann – ‘Right then…I’ll go right now. Phone them to let them know I’m coming. That will save you having to write letters, and save them having to send me an appointment. I’ve taken the day off work, so it’s a good time for me to go now’.

Consultant C – ‘You must be joking! The waiting list is 4 months. You are really lucky that you live in an area that has one, it’s a very expensive bit of equipment’.

Ann – ‘I don’t want to buy it, I just want to use it for a few minutes! Why do I have to join the end of the queue when this should have been done 6 or even 12 months ago? Why can’t you explain this to Radiology, and try to get me to the front of the queue? I need to get this pain resolved because it’s affecting my ability to work. I’m desperate now, you must appreciate that’.

Consultant C – ‘I can’t do that, there are much more urgent cases to be seen, some of which are potentially life-or-death situations. What is your job, anyway’?

Ann explained her work. (The consultant did not seem to be impressed.) ‘It’s important to ME…its how I earn a living. I hope you will try to get something done for me soon’. she said. The second meeting with the consultant had taken around 10 minutes.

Back at home, and increasingly angry and frustrated about her lack of treatment, she wrote a short letter to Consultant C, which included the following paragraph:

I am pleased that further investigation of the lump is underway, but I am dismayed to have to wait a further four months for a scan. I am self-employed. I am in pain. I have very restricted use of my wrist and hand. This is having a very negative impact on my life. I have been a patient under Consultants A, B and you for 10 months, and nothing has yet helped me get better. I therefore hope that you will arrange an emergency appointment for the scan.

May

The reply, nearly two weeks later, was as follows:

Dear Ann,

Thank you for your letter regarding the MRI scan. I will make your feelings known to the Radiology Department.

Consultant C

June

In late June, she made a further appointment to see her GP on the 28th June. She told him that she was still suffering from severe pain, and that no treatment had taken place. She asked him to write a letter to the hospital. Would it be any faster if she paid privately? His response was curt.

‘What good would writing do? They are very busy in the Radiology Department, and everyone must wait their turn for the scanners. A private MRI scan would cost around five hundred pounds, so you are better to wait your turn, like everyone else’.



August

On 12th August, four months after the MRI scan had been ordered; she telephoned the Radiography Department to check on the progress. She was told that the Department had received the request on 16th April, and the waiting list was 26 weeks. She should therefore expect to be seen in October or November.


A P P E N D I X 2

Part 2 of the case

The story continues

August

By August, Ann was in despair. She was in almost continual pain; but more importantly, she was losing any hope of achieving a pain-free future. Not one person who was treating her in the United Kingdom had ever said anything positive about the prospects for her full recovery. There also seemed to be no consistent diagnosis of the medical condition from which she was suffering.

Day 1

By coincidence, a friend came to hear about an orthopaedic consultant in Brussels who specialized in hands! Doctor Philippe Hoang ran a private clinic (The Brussels Hand and Microsurgery Clinic) that had earned a reputation for both clinical excellence and customer care. It apparently treated people from all backgrounds, including those who relied fully on Belgian Social Security to pay for the treatments. Ann phoned Dr. Hoang, and discussed the symptoms. He was very sympathetic, conveyed a sense of cautious confidence, and immediately arranged an appointment for her in just under two weeks’ time. He suggested that she came to Brussels for 2 days, so that if an operation was necessary, it could be conducted on the second day.

Day 2, 10:50 hours

Ann arrived very late at the clinic, because there had been delays to all early morning flights into Brussels, due to fog at the airport. She apologized profusely to the receptionist, who replied (in English), ‘Its no problem at all…the Neurologist has just finished seeing another patient and he will be able to see you next, at around eleven’. Five minutes later, after providing her personal details and confirming her means of payment, she was shown into a small consulting room. She was greeted by the Neurologist, and after a short but thorough examination of her wrist, he discussed her work and leisure activities.

‘I will be testing the nerves in your arms and hands, as well as your legs, using slight electric stimulation. This is because I need to get a full understanding of whether there is any wider problem than just your right hand. I am really sorry, at times it may hurt a bit, but these tests are essential for us to get to the cause of your problem. Just tell me if the pain is too bad, and I will stop for a moment’.



12:30 hours

The Neurologist finished the examination. The tests had not been too bad. He explained the wave patterns that appeared on his laptop computer, and showed her any differences between the speed of nerve responses on the left and right side. The Neurologist continued with his tests. When he had finished, he called in Dr. Hoang and explained his findings that were apparently not as clear-cut as he had hoped; the nerve problems detected did not fully explain the patient’s description of the location of pain and tingling in the fingers. They briefly discussed the possible explanations for this, and Dr Hoang decided to examine the lump using ultrasound scanning. They all then walked directly into the main operating room and Ann was shown to a seat beside the small ultrasound machine that was operated by Dr Hoang. The Neurologist watched the monitor and discussed this diagnosis.

‘We will transmit some harmless sound waves through your skin into the lump area. The sound is reflected back from hard surfaces like bone, but is partially absorbed by soft tissue. This will show us the structure just below your skin…Ah, yes, here’s a dark area that is certainly a lot of fluid around the tendon. It’s a bit like a bubble full of synovial fluid, which we could call a cyst, although in the UK it’s often referred to as a ganglion. When you move your hand, it must be pushing against the nerves in your wrist and causing them to be trapped and inflamed. This is almost certainly leading to the pain you are experiencing’.

He discussed this preliminary diagnosis with the Neurologist, who agreed that this was consistent with his tests. He continued:

‘First, I must be sure that there is no other problem, for example with the bone, so you must have an X-ray. After that, if everything is okay, I will give you a steroid injection to reduce the inflammation and swelling, and the Orthesists will prepare a splint for your wrist. This should definitely solve your problem, but you should be careful with your work for six weeks. Try to avoid hard or repetitive use of this hand, and wear a firm leather wrist-strap if you take off the splint to work. Do you have any questions…? No, then I’ll see you again in a few minutes’.

12:40 hours

Ann was asked to wait. Minutes later, a nurse came in to the operating room and prepared her for the X-ray. The machine seemed smaller and simpler than the ones she had seen in the UK hospital. The nurse then called in Dr. Hoang who made minor adjustments and took just two X-rays, staying in the room for only about 3 minutes, before going off the see another patient. The nurse then processed the X-rays in an adjacent room, and called back the doctor, who examined them carefully for a minute or so.

‘You will be glad to hear that there is no other problem to worry about. I am now very sure that the injection will clear up your problem! Please come this way, and I will prepare you. You will first have a local anaesthetic, which may hurt quite a bit. Then I will come back in a few minutes to give you the steroid’.

Ann was led to a small room adjacent to the operating theatre, and was seated in a small chair. The nurse had already arranged a tray with the required syringe and vial of anaesthetic. Immediately, Dr. Hoang prepared the injection and administered it. This was painful, but the doctor sympathized.



12:55 hours

After a few minutes away, dealing with another patient, Dr. Hoang reappeared and injected the steroid. At 13.00 he introduced her to the Orthesist, who began to prepare the splint, the material was cut and moulded around her wrist and hand, leaving the fingers exposed. When it was in the right shape, the Orthesist removed it and made minor modifications. By about 13.30, the splint was completed and fitted.

13:35 hours

The Orthesist then asked Dr Hoang to complete his consultation. He asked how she felt, and provided her with painkilling tablets.

‘I am very confident that this will solve your problem. However, if you are still in pain in four weeks, give me a call and come back to the clinic. In those circumstances we would probably have to conduct a minor operation. I will write you a letter to give to your GP, explaining the treatment you have received. Your condition was certainly severe, and is called ‘Extensor Carpi Ulnaris Tendosynovitis’…a bit difficult to remember, so just call it Tendonitis! I am very glad you came here for your treatment, and hope you recover quickly. You can now go and explore Brussels’.

Finally, before leaving, she settled her account, which was broken down as follows:

Specialist consultation €40

Neurologist examination €31

Electromyography €116

X-rays €40

Ultrasound (Echography) €28

Injection fee €11

Steroid drug €8

Splint and spare felt €76

TOTAL (Euro) €350

The secretary told her that a Belgian resident in her financial situation would pay much less; since most of the (non-private rate) €350 would have been reimbursed directly to the Clinic by Social Security.

14:00 hours

The secretary passed her an envelope, explaining that it contained a full report on the examinations and treatments: this should be given to her GP. She left the clinic, and walked to her hotel, where she ordered a coffee and took an afternoon’s rest.



Day 3

The next day, she explored Brussels and enjoyed some tourist activities. She then took her return flight to the United Kingdom, where she slept a full 7 hours without waking.

Later…

Ann was immediately able to care for herself and could continue light painting work one week later. After six weeks, she felt fully recovered; but was careful to avoid any activities that could cause a reoccurrence of the condition. She has had no further pain since and has resumed all normal work and leisure activities.

Note

Doctor Hoang says that the entire treatment was conducted in the ‘normal’ way for his clinic. Some 17,000 consultations are conducted per year by two consultants, within the clinic of only 200 square metres. Because there is a very wide range of conditions presented by patients, the clinic must tailor each treatment to the patient’s needs. Doctor Hoang emphasized that his clinic is certainly not a production line


C H A P T E R 1 2

You have eight messages

Case synopsis

The case is set in the De Noorman, a four-star hotel in Amsterdam. The scenario is that Andries Claessen, the hotel General Manager, has just picked up messages on his phone after a day off. He is passionate about quality and believes that quality is the way to differentiate his hotel. The messages are from his boss Hans Brietling, Sofie the Conference Manager, Arabelle the Housekeeping Manager and Alfons the Head Chef. The task is to determine what evidence there is that the people leaving the messages are as committed to quality as Andries believes he is.

Appendix 1 has a transcript of the messages

Using the case

This is designed as a relatively light-hearted case that can be used to discuss the application of ‘quality’ideas in the workplace. A good way of running this particular case is to set the scene and then play the messages. You may need to play the messages twice and/or provide a transcript. Students can then be asked to discuss the questions supplied below. As with all the active cases associated with this text, it can be used as a stand-alone learning experience, or students can be asked to work through the case (individually or in groups) and then debriefed in a relatively conventional manner in class. The class debriefs of active cases should focus not only on the ‘content’ of the decisions but also on how students go about making a particular decision. This teaching note assumes that all students will have worked through the case that is then debriefed in class.

Notes on questions

Question 1

This first question asks students to find evidence from the small phone messages as to whether the people leaving the messages really appreciate the issues around quality management. Try to get students to link their thoughts to specific ideas from the quality ‘gurus’. Deming’s 14 points in particular are a very good starting point.

1. Andries was passionate about quality. He reflected on the eight calls he had received and wondered whether those individuals understood and applied the ideas of quality management.

Consider each of the four individuals and assess whether or not, from the limited amount of information available, you feel that they understood and applied the ideas and principles of quality management.



(a) Does Hans Brietling understand and apply the ideas and principles of quality management?

Yes?

Response – No, two key aspects in making TQM work are gaining top management support and recognizing success. It is vital therefore that more is forthcoming from Hans Brietling with regard to the Employee of the Month Award. In addition, the aggressive tone of his second call is unlikely to enhance quality management.

No?

Response – That is correct. Two key aspects in making TQM work are gaining top management support and recognizing success. It is vital therefore that more is forthcoming from Hans Brietling with regard to the Employee of the Month Award. In addition, the aggressive tone of his second call is unlikely to enhance quality management.

Mixed messages or insufficient evidence?

Response – No, two key aspects in making TQM work are gaining top management support and recognizing success. It is vital therefore that more is forthcoming from Hans Brietling with regard to the Employee of the Month Award. In addition, the aggressive tone of his second call is unlikely to enhance quality management.

(b) Does Sofie, the Conference Manager, understand and apply the ideas and principles of quality management?

Yes?

Response – No, there are mixed messages being given out. It is good that the Sales department is letting you know what is happening, because in TQM, it is crucial that every department must work properly together. On the other hand, the second call does not demonstrate a willingness to work problems out together.

No?

Response – No, there are mixed messages being given out. It is good that the Sales department is letting you know what is happening, because in TQM, it is crucial that every department must work properly together. On the other hand, the second call does not demonstrate a willingness to work problems out together.


Response – Yes, there are mixed messages being given out. It is good that the Sales department is letting you know what is happening, because in TQM, it is crucial that every department must work properly together. On the other hand, the second call does not demonstrate a willingness to work problems out together.



(c) Does Arabelle, the Housekeeping Manager, understand and apply the ideas and principles of quality management?

Yes?

Response – No, there are mixed messages being given out. There is some evidence of high standards but, on the other hand, one of Deming's 14 points is to ‘drive out fear’, and there are indications that she may be guilty of managing by fear. In addition, although Arabelle has dealt with the immediacy of the issues (rightly or wrongly), she has not demonstrated the desire to get at the root causes of the problems.

No?

Response – No, there are mixed messages being given out. There is some evidence of high standards but, on the other hand, one of Deming's 14 points is to ‘drive out fear’ and there are indications that she may be guilty of managing by fear. In addition, although Arabelle has dealt with the immediacy of the issues (rightly or wrongly), she has not demonstrated the desire to get at the root causes of the problems.


Response – Yes, there are mixed messages being given out. There is some evidence of high standards but, on the other hand, one of Deming's 14 points is to ‘drive out fear’ and there are indications that she may be guilty of managing by fear. In addition, although Arabelle has dealt with the immediacy of the issues (rightly or wrongly), she has not demonstrated the desire to get at the root causes of the problems.

(d) Does Alfons, the Head Chef, understand and apply the ideas and principles of quality management?

Yes?

Response – No, there are mixed messages being given out. Alfons talks a good game but does seem to be blaming everything and everyone else. He should be taking responsibility for managing with the resources at his disposal.

No?

Response – No, there are mixed messages being given out. Alfons talks a good game but does seem to be blaming everything and everyone else. He should be taking responsibility for managing with the resources at his disposal.


Response – Yes, there are mixed messages being given out. Alfons talks a good game but does seem to be blaming everything and everyone else. He should be taking responsibility for managing with the resources at his disposal.



Question 2

The next three questions put the student into the position of Andries as he talks to the different members of the staff and seeks to get the students to apply the principles of quality management in a practical setting. Again, these are good questions to discuss and debate.

2. One of the first things that Andries did when he arrived at the hotel was to talk to the housekeeping staff. He was told in no uncertain terms that they had been told the week before that they had to spend no more than 20 minutes in cleaning each room. So they did what they were told and then they were shouted at by Arabelle, because a customer had complained.

What should Andries do?

(a) Explain the financial reasons for the need to have a focus on productivity and inform the staff (in a pleasant manner) that they will need to work faster? Answer – No, if carried out tactfully, this might keep a lid on things for a little longer, but it does not tackle the real quality issue.

(b) Take the staff’s complaints back to Arabelle and see if a longer period per room can be agreed? Answer – No, this will keep the staff happy (for the time being), but there will be cost implications and there is the possibility that quality may still not be of the required standard.

(c) Define what is expected of the housekeepers in terms of quality and work with them to determine the most effective way of achieving the standard. Answer – Yes, it will take longer, it is not a quick fix, but it is the right way to go.

Question 3

Next, Andries went to the kitchen to speak to Alfons. Alfons was very upset because the banquet had been a disaster. The meat had been tough and overcooked. The ovens were unreliable with fluctuating temperatures, which meant that his team had been unsure how long to cook the meat and, as a result, he had received a flood of complaints.

What should Andries do?

(a) Explain the need to keep food costs to 33 per cent of the price and offer more training and support for his team. Answer – No, the target for cost is all well and good, but the instruction does not help Alfons. In addition, to provide quality food there has to be a mechanism for measurement and control, and this has not been provided.

(b) Investigate in more depth the supply situation to see if better quality food can be obtained, provide thermometers to enable the chefs to check the temperature of the meat. Answer – Yes the best solution. One of Dr. Deming's principles may have been broken here –‘end awarding business on price’. The implication is that you may well be receiving supplies of a lesser quality. Investigate the possibility of obtaining better quality raw materials at the same time exploring whether there may be ways of changing the menu to make use of cheaper cuts of meat. The thermometers should be a relatively cheap way to enable the chefs to measure and control the quality.



(c) Buy new ovens and pay more for the raw materials. Answer – Well, it would probably work but it is a very expensive solution and there probably is a better way.

Question 4

Then Andries went to talk to Arabelle. What should he say to her?

(a) Thank her for dealing with the issues while he was away and give her coaching on the decisions she made. Answer – A fair response and maybe appropriate, but the more important point of getting to the root causes of the problem and improving the processes may be overlooked.

(b) Reprimand her for creating the problem with the housekeeping staff and for making decisions outside her discretion. Answer – No, if Arabelle did exceed her discretion, it is more appropriate for Andries to consider how he delegates authority.

(c) Thank her for dealing with the issues, and coach her on getting to the root cause of issues. Answer – Yes, the key here is that quality management should lead to improvement, and spending time coaching in this area is most likely to have the best long-term results.


A P P E N D I X 1

The voice messages

Message 1

From: Hans Breitling, Chief Executive of the Jansen Group

Time: Yesterday 9.54 a.m.

Hello Andries, Hans Breitling here. I am unable to attend the Jansen Employee of the Month Award next Thursday. Can you do the presentation on my behalf? My secretary has all the details.

Message 2

From: Sofie, Conference Manager

Time: Yesterday 10.30 a.m.

Hi Andries, Sofie here. Good news – thought I would just let you know that the Baacke Group has booked a conference for 75 next Monday and Tuesday.

Message 3

From: Arabelle, Housekeeping Manager

Time: Yesterday 12.24 p.m.

Andries, Arabelle here. I need to talk to you as soon as you get in. Two of my best housekeepers have walked out after I gave them some feedback from a customer who was not happy about the room. I told them it is my way or the highway. They seem to have chosen the latter.

Message 4

From: Alfons, Head Chef

Time: Yesterday 10.56 p.m.

It is not good enough Andries. How can I be expected to cook properly when the temperature of the ovens keeps going up and down. I need new ovens and I need them now. Oh, it is Alfons here, by the way.



Message 5

From: Hans Brietling

Time: Today 7.58 a.m.

Call me immediately. I have just been berated by an angry customer of yours. I thought you prided yourself on quality at De Noorman.

Message 6

From: Sofie


I go to all this trouble filling the hotel and now Arabelle tells me I have to cancel the booking. It is just not good enough.

Message 7

From: Alfons


If I could buy the meat from where I wanted, we would not be in this mess, but no, you insist on cutting costs. How can you expect me to present quality food when I have to worry about budgets? If customers complain, it is hardly my fault is it. Oh, it is Alfons here.

Message 8

From: Arabelle


Andries, Arabelle. Relax, I have sorted it out. I have told Sofie to cancel next week’s conference. I have told the housekeepers that I am sorry, and I have given a refund after last night’s disastrous banquet.


C H A P T E R 1 3

Ferndale Sands Conference Centre

Case synopsis

Ferndale Sands Conference Centre is a conference venue of 52 rooms in Victoria State, Australia outside Melbourne. Established initially as a hotel, it was re-launched as a conference centre 4 years ago. The centre had managed to establish a presence in the fast-growing and profitable conference, ‘the executive retreat’ market, hosting events from 1 day duration to 2 weeks.

Marco, the owner, is upset by an article in a journal that had claimed to uncover administrative complacency and inefficiency at some of the State’s conference centres including Ferndale. Yet the same edition had run another piece, comparing four conference centre facilities in and around Melbourne and had generally given a good rating for Ferndale Sands. The table shows the summary of the four conference centres reviewed.

Extract from the Conference Centre Journal’s survey of conference venues in and around Melbourne


Collins International

The Yarra Conference Centre

St Kilda Conference Centre

Price ($$$$$=very expensive, $$$$=expensive, $$$=average, $=budget)

$$$$ $$$$$ $$$ $

Size of menu Extensive Standard Standard Limited

Decor Traditional, luxurious and tasteful

Modern, very luxurious and stylish

Modern but basic Needs renovation

Style and quality of food

Modern, best in the State

International, modern and slightly standardized

Varies, undistinguished but acceptable

Varies, very basic

Quality of service Excellent, friendly and relaxed

Good Limited Enthusiastic but limited

Administration and support

Variable, some problems recently

Good Good OK



Table continued


Collins International

The Yarra Conference Centre

St Kilda Conference Centre

Flexibility of accommodation

Poor Very good Acceptable OK

Off-peak price discounts

None offered

Some in summer, none in winter

Willing to negotiate

Willing to negotiate

Equipment Normal range Normal range Normal range Requires notice for ‘anything unusual’

Recreational facilities

Full range, gym, tennis, golf, swimming pool, etc.

Gym, swimming pool

Gym only Gym only

Ease of access Good, will pick up from airport and city

City centre, no airport shuttle to hotel, but bus service, taxies, etc.

Close to city centre

10 km from city centre

Both Mario and his front-of-house manager Robyn Wells disputed the article’s rating of their administrative capabilities. However, they also were aware that administrative support was seen as being fairly important when they surveyed their clients (the next table shows Ferndale Sands’ own survey results).

Percentage of Ferndale Sands’ clients reporting factor as important or very important

Percentage of customers reporting factor as important or very important

Price 72%

Size of menu 16%

Décor 55%

Style and quality of food 58%

Quality of service 89%

Administration and support 56%

Flexibility of accommodation 85%

Off-peak price discounts 16%

Equipment 72%

Recreational facilities 21%

Ease of access 73%



Mario calls for a meeting between himself, Nick Godfrey, who is in charge of catering and recreational facilities, and Robyn Wells, the front-of-house manager who is also in charge of all client relations.

Scripts of the meeting between Mario, Nick and Robyn are included in Appendix 1.

Using the case

This case is relatively straightforward insomuch as it guides students, step-by-step through the procedure for using the importance-performance matrix. It can be used either before or after explaining the technique in class. Whichever way it is used, it is worthwhile at some point talking with the class about the nature of techniques such as the importance-performance matrix. They should understand that, although very useful in practice, this type of technique is not in any way intended to give an ‘answer’. Rather, it is a systematic approach that can promote useful discussion around improvement priorities.

As with all the active cases associated with this text, it can be used as a stand-alone learning experience or students can be asked to work through the case (individually or in groups) and then debriefed in a relatively conventional manner in class. The class debriefs of active cases should focus not only on the ‘content’ of the decisions but also on how students went about making a particular decision. This teaching note assumes that all students will have worked through the case that is then debriefed in class.

Notes on questions

Opening question – What is the underlying rationale behind the approach you are shown in the Ferndale Sands Conference Centre case?

The discussion here can focus on the nature of gap methodologies. All the importance-performance technique does is to examine the required performance in the form of ‘what customers find important’ and then compare it with the actual performance of the operation and display it in a convenient form. So, it is following the simple underlying idea of all round improvement, that it is driven by the gap between what is required and what is being achieved.

Question 1. How would you rate the relative importance of each of these factors to Ferndale Sands’ customers?

Students are asked to review all the information in the case and consider what the conference centre’s customers seem to regard as important and click in the cell of the matrix that they think best corresponds to the relative importance of each factor.



The responses are shown in each cell.

1

Regarded as very

important with

customers

2

Regarded as fairly

important with most customers

3

Medium importance

to most customers

4

Only occasionally

rated as being

important

5

Relatively rarely rated

as being important

by customers

Price No, quality of service and flexibility are more important

Yes No, probably rates as fairly important (2)

No, probably rates as fairly important (2)


Choices on menu

No, it is one of the very least important factors (5)




Yes

Decor No, it is one of the middle rated factors (3)

No, it is one of the middle rated factors (3)

Yes No, it is one of the middle rated factors (3)


Quality of food No, it is one of the middle rated factors (3)




Quality of service

Yes No, it is one of the most important factors (1)

No, it is one of the most important factors (1)



Administration support






Yes No, it is one of the most important factors (1)






Table continued

1

Regarded as very

important with

customers

2

Regarded as fairly


3

Medium importance

to most customers

4

Only occasionally

rated as being

important

5


as being important

by customers






Yes

Equipment No, quality of service and flexibility are more important.

Yes No, probably rates as fairly important (2).








Yes

Ease of access No, quality of service and flexibility are more important

Yes No, probably rates as fairly important (2)



One can go through this matrix in class and discuss the students’ reactions. Try and discuss the nature of techniques such as this one. It is important to stress that

(a) We are essentially quantifying qualitative data in an informal manner and

(b) Some of the data is highly subjective

(c) Yet unless we do this we cannot progress much, so provided we are aware of our assumptions, the procedure, although technically flawed, is appropriate.

Question 2. How would you rate Ferndale Sands’ relative performance in each of these factors compared with their competitors?

Students are asked to review all the information in the case and consider what the conference centre’s performance seems to be when compared with their competitors (at least those in the Melbourne area that they have some information on) and click in the cell of the matrix that they think best corresponds to their relative performance in each factor.



The responses are shown in each cell.

1

Clearly better than

local competitors

2

Probably better than

local competitors

3

About the same as

local competitors

4

Probably a little worse than local

competitors

5

Clearly worse than

local competitors

Price (Worse = more expensive)

No, only one other is more expensive (4 is a more appropriate score)



Yes No, at least one other is more expensive (4 is a more appropriate score)

Choices on menu

Yes No, it has the most extensive menu (1 is a more appropriate score)

No, it has the most extensive menu (1 is a more appropriate score)



Decor Possibly. One other centre is seen as better. So a rating of (2) may be more appropriate

Yes Possibly. One other centre is seen as better. So a rating of (2) may be more appropriate

No, one other centre is seen as better. So a rating of (2) may be more appropriate

No, one other centre is seen as better. So a rating of (2) may be more appropriate

Quality of food Yes No other centre is seen as better. So a rating of (1) is more appropriate

No other centre is seen as better. So a rating of (1) is more appropriate



Quality of service

Yes No other centre is seen as better. So a rating of (1) is more appropriate




Administration support

No, it is rated as the worst in the survey. A rating of (5) is probably more appropriate




Yes



Table continued

1

Clearly better than

local competitors

2


local competitors

3

About the same as

local competitors

4


competitors

5

Clearly worse than

local competitors






Yes






Yes

Equipment No, seems the same as most competitors, so a rating of (3) is probably appropriate

No, seems the same as most competitors, so a rating of (3) is probably appropriate

Yes No, seems the same as most competitors, so a rating of (3) is probably appropriate

No, seems the same as most competitors, so a rating of (3) is probably appropriate


Yes No other centre is seen as better. So a rating of (1) is more appropriate




Ease of access

Yes probably, although one could argue that it is actually not quite as convenient as a city centre hotel

Yes probably, although one could argue that it is actually the best

No, it is either better or much better than the others surveyed. So a rating of (1) or (2) would be more appropriate



The same discussion described previously could be had at this point, if desired.



Question 3. How would you position the various factors on the importance-performance matrix?

Students are asked to review their responses to questions 1 and 2, and click in the cell of the matrix that they think best corresponds to the appropriate position for each factor.

They should be producing a matrix similar to the one below.

1

Clearly better than

local competitors

Menu choice


Quality of food

Quality of service

2


local competitors

Décor Access

3

About the same as

local competitors

Equipment

4


competitors

Price/cost

5

Clearly worse than

local competitors

Discounts Administration Room flexibility

1

Regarded as very

important with

customers

2

Regarded as fairly


3

Medium importance

to most customers

4

Only occasionally

rated as being

important

5


as being important

by customers



Question 4. What would you do to improve Ferndale Sands’ performance?

Students are told that Robyn and Nick have decided to draw up an individual list of potential improvement initiatives. They also decided that, to begin with, only two of these improvement initiatives should be chosen.

Review the importance-performance matrix, and consider the centre’s potential improvements.

Read each suggestion, and choose only two of them. Once you have done this, you will be able to hear Mario’s reaction to your suggestions and also a comment from our expert.

The reactions of the characters are shown in Appendix 2.

Robyn’s suggestions

• Increase prices

• Reduce menu choice

• Close the golf course

• Renovate outbuilding to provide flexible conference rooms

Nick’s suggestions

• Promote food and facilities more effectively

• Cut in-house staff numbers and replace part-time staff with a smaller number of full-time staff

• Invest in more equipment, both relaxation equipment and presentation equipment

Submit your two improvement actions by clicking here

The feedback screen at this point has three elements: (a) Mario’s comments (audio) on one of the improvement actions chosen, (b) Mario’s comments (audio) on the other improvement action chosen, (c) ‘Experts comments’.

Mario’s responses to each of the improvement suggestions are shown in Appendix 3

The expert’s comments will depend on whether the two actions chosen conflict, do not conflict, or support each other. This is shown in the next table.



Table ‘Is there a conflict between the improvement options chosen’?

Increase prices

Reduce menu choice

Close golf course

Renovate outbuildings

Promote food and facilities

More equipment

Cut in-house staff levels

Increase prices

Conflict Conflict No conflict Support Support Conflict

Reduce menu choice

No conflict

No conflict No conflict

No conflict No conflict

Close golf course

No conflict Conflict No conflict No conflict


Support No conflict Conflict


Support Conflict

More equipment

Conflict

Cut in-house staff levels

Feedback to the students is as follows:

Response for improvement actions that conflict

‘I’m sure that these two choices of improvement initiative really fit together. There is some conflict, or potential conflict, between them. Remember, it is not just the appropriateness of the individual improvement action that is important, it is whether the portfolio of actions that you have chosen support or conflict with each other’.

Response for improvement actions with no conflict

‘Well, irrespective of Mario’s view of the improvement actions that you have chosen, they do not conflict with each other. This is important. Remember it is not just the appropriateness of the individual improvement action that is important, it is whether the portfolio of actions that you have chosen support or conflict with each other’.



Response for improvement actions that support each other

‘Well, irrespective of Mario’s view of the improvement actions that you have chosen, they do support each other. This is important. Remember it is not just the appropriateness of the individual improvement action that is important, it is whether the portfolio of actions that you have chosen support or conflict with each other’.

Closing question – What might be the biggest problem in using a technique such as this in your organization?

Students are likely to list several points. These may include the following:

• Getting the right people together who have the appropriate information

• Getting them to agree on an appropriate ‘score’ for importance and performance (either because they have different perspectives or they are defending their own interests)

• Just straightforward lack of knowledge (we don’t know how good we are compared with our competitors)

• Difficulty in scoring importance because different customers will have different priorities

• Difficulty in scoring performance because our performance varies so much

• Difficulty in scoring performance because we have different competitors in different markets and therefore our relative performance score will vary.

The point here is not so much to tackle every single difficulty raised by the students, but rather to show that, by using techniques such as this, these points will be addressed. By doing exercises such as this, managers are forced into facing the problems and (hopefully) will therefore be more likely to address them.


A P P E N D I X 1

Scripts of the meeting between Mario, Nick, and Robyn

Nick –‘OK Mario, I know you’re not pleased, but I think you are in danger of overreacting. The best way to respond is just to ignore it. It’s the survey that will be saved by potential clients, not a minor article at the front of the journal. And it’s the survey that reflects what we really are’.

Mario –‘Yeh, but even that gets it wrong. It shows administration and support as uneven. What do they mean uneven’?

Robin –‘I don’t know, I guess they must have talked to a couple of clients with some kind of grudge. But look, two things always come out as the most important things for our customers: quality of service and the flexibility to accommodate their needs for different configuration of rooms. We’re great at service quality. We’re always getting extravagant praise; it’s a real winner for us. I’ve got files full of compliments. It’s room flexibility that’s our problem. Most clients accept that you can’t mess around with a historic building like this, but that doesn’t get round the fact that we can’t reconfigure our rooms like you could in a modern hotel with sliding room partitions’.

Mario –‘Well, maybe that’s something we could minimize by making it clear to clients what we can and can’t do when they make a reservation’.

Robyn –‘True, and we do that when demand is very high. But you can’t ask us to turn away business by stressing what we can’t do during quiet periods’.

Mario –‘Well, maybe we should. But that’s not my main concern right now. What worries me, are the things that always show up as mid-range factors in our customer surveys. We tend to forget about these. They may not be the most important things in the clients’ eyes but there not unimportant either. I’m talking about things like the quality of our food and the décor of the rooms, and also Robyn, the administrative support we offer. If we get these things wrong it can almost cause us as many problems as the really important things. That’s why I’m upset about the poor administrative score we get in the journal. We score 5 for décor, and really good for food, but poor for administration’.

Robyn –‘But as we said, that’s just unfortunate. I still have every confidence in my administrative staff’.

Nick –‘Before we get into that again, can I raise the question of our recreation facilities? It’s one our best assets yet it never rates as important with clients. It’s the same with the choice we offer on our menus. Both these things are expensive to provide, and yet we don’t seem to get the benefit. Why don’t we make a real effort to really promote both of these things? You know, really convince the clients that great facilities and a wide choice on the menu are things that are worth paying a little more for’.

Mario –‘It’s not our pricing that’s the problem. Although it’s a fairly important issue with most clients, we can command relatively high prices. It’s out costs that worry me more. Our general running costs are higher than they should be. Talking to the guys over at Parramatta Pacific in



New South Wales; they are very similar to us, but their costs are a good 10 per cent less than ours’.

Robyn –‘So, what is more important, raising our revenue or cutting our costs’?

Mario –‘They are both equally important of course. The point is, what do we do about attracting more business and keeping our costs down’?

Robyn –‘OK, we’ve got to do something, but remember we’ve also got the centre to run. Our busy period is just coming up and I don’t want everyone distracted by lots of little improvement initiatives’.

Nick –‘Absolutely. We have to limit ourselves to one or two actions that will have a noticeable impact’.

Mario –‘I think you’re probably right. But I would also add a further comment. And that is, that if what we choose to do requires investment, then, it must be guaranteed to have an impact. I need to go now, but why don’t you two draw up a list of things that we could do. I’ll review them later. OK thanks everyone’.


A P P E N D I X 2

The reactions of the characters to the improvement suggestions.

Robyn’s suggestions

• Increase prices – ‘Why not? Although demand is variable, the general trend is rising as the conference market expands. At this top-end of the market I don’t think we are that price sensitive. It would also bring in the revenue that we need to make further reinvestments to the centre’.

• Reduce menu choice –‘This really is a left-over from what menus used to be like. It goes back to the time when “more” was considered “better” instead of just “more”. It is also very expensive to maintain that range of food while still maintaining quality’.

• Close the golf course – ‘The golf course is probably the most expensive facility we have outside the house. It isn’t rated by customers, so why do we keep it on’?

• Renovate outbuilding to provide flexible conference rooms – ‘We can’t easily change the inside of the house, but we do have outbuilding that could be converted into conference suites. They could be equipped with moveable partitions that would enable the space to be configured however our clients wanted it. OK, it would be expensive, but in the long-term it’s necessary’.

Nick’s suggestions

• Promote food and facilities more effectively – 'We have a great reputation for food and for having marvellous facilities. Ferndale Sands is just a beautiful place, yet we’re not exploiting it fully. A campaign from a good public relationship company could really establish us as the premier conference centre, not just in the state, but in the whole of Australia’.

• Cut in-house staff numbers and replace part-time staff with a smaller number of full-time staff – ‘Having so many part-time staff is expensive. We pay them the same hourly rate as full-time staff yet there is all the extra personnel costs. Also, I think we are over-staffed in the house. Staff costs are a major part of our expenditure. It’s the obvious area to look for cuts’.

• Invest in more equipment, both relaxation equipment and presentation equipment – ‘We have great sporting facilities but they could be better. If we are going to exploit them more it may not be a bad thing to invest even more heavily in them. Also, we could make sure that we are ahead of the game in terms of the very latest audio-visual equipment. Both these things would help us to promote ourselves as the premier conference centre in Australia’.


A P P E N D I X 3

Mario’s responses to each of the improvement suggestions

Increase prices

‘I’m very reluctant to do this before we have made improvement to what we offer, or after some investment in promotion has had time to take effect. I really don’t think it would work. It’s also a lazy way of trying to get out of trouble. Anyone can suggest increasing prices. But it only works if you really do convince people that you’re worth it’.

Reduce menu choice

‘Yes, good idea. Most people, especially at the level of the guests we attract, are interested in authentic and well-prepared food, not in a huge choice of dishes. They know that a huge menu usually means undistinguished food. This would also cut down significantly on our catering running costs’.

Close golf course

“Why an earth would I want to do that? OK, so it’s expensive to run, but it’s also one of our major assets. Far better to exploit what you are good at. The real question is how can we get our guests to appreciate and use the golf course, not close it. Anyway, what would we do with the land?”


‘Yeeeees, (said slowly) maybe. It would be expensive but I can see how it would overcome our main structural issue concerning room flexibility. But I would only want to invest such a large amount if, first, there were no other cheaper things we could do, and second, if we were sure that it would really bring long-term benefits. Maybe we should try something cheaper first’?


‘Yes. Really think this is a good idea. We have assets that are better than our competitors, but clients don’t yet value them. So, we should either persuade them that they are something to be valued, or we go for a part of the market that would appreciate them, or both. Remember that our food and facilities are things that competition would find difficult to copy’.



Invest in more equipment

‘OK, Maybe, I guess this might work if we promoted the fact that we had state-of-the-art equipment, but it would be expensive and we would need to make sure that we have the technical skills in-house to maintain it. This would mean hiring more staff I guess. Perhaps this should be a second stage initiative’.

Cut in-house staffing levels and reduce number of part-time staff

‘No! Absolutely not! Don’t you understand how important our staff are to us? Look at the reputation we have for quality of service. This isn’t because they are always asking you if you’ve had a nice day, it’s because they are really good people who want our guests to be well served. Cutting staff levels would simply undermine their confidence in being part of Ferndale Sands. Also there are a lot of really good people who only want to work part-time or who have family commitments. What do you want us to do, staff the place with spotty teenagers who know nothing and care less’?


C H A P T E R 1 4

Paterford Elevators

Case synopsis

Paterford Elevators started as a manufacturer of industrial goods elevators, but is now exclusively in refitting and servicing business. The ability to keep its elevators working smoothly depends on a detailed understanding of how and when they might fail. Constant monitoring and updating of failure data provides input to their maintenance programmes. Like all elevator companies, Paterford knows that without effective maintenance elevators would literally be death traps. Their philosophy of maintenance is the ‘Paterford Maintenance System’ (PMS), a programme that takes into account its clients’ elevators maintenance needs. Using this system, Paterford can customize, in advance, inspection and maintenance schedules for up to 10 years of operation or four million trips. Maintenance procedures are determined by each elevator’s individual pattern of use. Frequency of trips, the load carried by the elevator and conditions of use, are all incorporated to determine the frequency and nature of maintenance activities. Paterford also monitors the life cycle characteristics of all its customers’ elevators components. This information on wear and tear and failure is made available to its customers via its 24-hour communication centre and web site.

In some areas, Paterford offer its customers a call service for any elevator problem that may arise. Should an emergency occur, Paterford has an emergency telephone service that can be programmed to call customer service representatives who are trained to deal with such emergencies. Within the shortest possible time customer service representative sends a technician to the customer’s facility. It is a 24 hours a day, seven days a week service that handles thousands of calls a year and organizes service technicians who can get the elevator back in service, on average, within two and half hours.

Using the case

This case can be used either before or after a lesson covering risk, failure and maintenance. However, the main issues in the case deal with maintenance procedures and the understanding and measurement of failure. As with all the active cases associated with this text, it can be used as a stand-alone learning experience or students can be asked to work through the case (individually or in groups) and then debriefed in a relatively conventional manner in class. The class debriefs of active cases should focus not only on the ‘content’ of the decisions but also on how students went about making a particular decision. This teaching note assumes that all students would have worked through the case, which is then debriefed in class.



Notes on questions

Opening question

There are three questions posed within this case.

• Should Paterford develop an on-site monitoring service?

• If it is developed, to whom should it be offered first?

• How should the decision be operationalized?

The logic for the case is shown in the decision tree diagram.

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Question 1. Should Paterford develop an on-site monitoring service?

A new type of service that is being offered by some of the large elevator companies is generically referred to as ‘on-site monitoring’. This is a sophisticated interconnected system of sensors, monitors, hardware and software that collects, records, analyses and communicates hundreds of different systems functions. If the system detects a problem it automatically makes a service call, calling out a technician who is provided with the information collected by the system that will be used to help identify the component causing the problem. ‘Around-the-clock response is important’, says Ed Paterford, ‘because problems don’t keep office hours. The remote sensing system can detect deteriorating components, identify intermittent anomalies and note the small changes in elevator operating characteristics that otherwise could have gone undetected. It can identify most potential problems before they occur’.

The idea of providing an on-site monitoring service has been actively discussed within Paterford. Most of the company’s managers are in favour of providing the new service, at least to some customers. However, not everybody is in favour.

The arguments in favour of providing this service can be summarized as follows:

• It provides customers with the ultimate service. Their elevators would never break down as potential failures can be spotted before they happen. Once it is working well, we could guarantee to eliminate failure.

• Ignoring the potential for offering this service would mean allowing ourselves to fall behind the leaders in this industry. Once we do that, we are consigning the business to be a second rate player status in an industry that is increasingly using high-technology solutions.

• If this system is successful, it will not only provide a great service to our customers, it will provide data about the failure characteristics of all our customers’ elevators. This will help us to provide other services to our customers.

• Given the advantages of the service, we could charge a premium for offering it.

The main arguments used against the idea of adopting on-site monitoring are as follows:

• It’s very expensive to set up. It is calculated that even on the most optimistic projections, it would take over four years to pay back the investment needed. This compares with an average pay-back period in this company of less than 2 years.

• It is technically very difficult and we are not sure that our current staff, have the capability of analysing the data that the system would collect. We could finish up just having a better knowledge of why something failed rather than being able to get to the elevator before it fails.

• It’s OK for the big elevator manufacturing companies to offer this service on their own equipment because they only have to collect data on their own equipment. We service many different types of elevator that are manufactured by different companies. The database we need to make this service effective would need to be far larger than the ones our main competitors would be using because they would restrict the service to their own equipment.

• It’s a new technology. Let the other companies make all the mistakes, and then we can learn from them and introduce the service later if it seems sensible to do so.



What would you recommend to Ed Paterford?

Go ahead and authorize the investment to develop and offer the on-site monitoring service.

Do not invest in the capability to offer the on-site monitoring service, at least for the time being.

Irrespective of which choice is made, the following feedback is given.

‘Well thanks for your advice’, said Ed Paterford, ‘After thinking about it and listening to everybody’s opinion, I have decided that we should go ahead and develop the on-site monitoring service. So that’s the decision taken, I want everyone to put any disagreement behind them and let’s all work together to make this a success’.

For the next three months, Paterford’s engineers worked on how the service could be offered. This involved trial of some of the sensors, making sure that the data transmission interfaces were sufficiently robust, buying, modifying and developing the software that would be used to predict failures and so on. At the end of this period the company is now confident that they have a working system, at least in theory.

Question 2. How should they launch the service?

The next decision the company needs to take is how to launch the service. There is consensus around the idea that they would not offer it to all their customers. This would be highly expensive and the service would not be beneficial to all their customers. Three approaches to identifying the customers to whom the service should be offered have been suggested.

(a) Offer the service only to customers with relatively common types of elevator system so as to restrict the need for immediately developing a database for all kinds of equipment.

(b) Offer the service to those customers who would benefit the most from minimizing the chances of their elevators failing.

(c) Offer the service to those customers who have elevators systems in which failure is particularly difficult to predict.



The advantages of each of the approaches are detailed in the table below.

(A) Offer to those with certain common types of elevator only

(B) Offer to those who will get most benefit from the service

(C) Offer to those in which failure is difficult to predict

• It will limit the amount of data that has to be analysed

• We can buildup our knowledge of what operating characteristics will predict imminent failure

• By choosing which types of elevator to offer the service on, we can control the rate at which we expand this service

• This service could drastically reduce the incidence of elevator downtime, this is more important to some of our customers than to others, therefore let us limit it to those customers to whom downtime really does matter

• By focussing the service on the customers who benefit most, it will allow us to charge a suitable premium because those customers will recognize the value of the service

• Choosing this approach allows us to have the biggest impact on the service that we give our customers, and therefore on our reputation in the industry

• Some types of components have relatively predictable failure rates, therefore they do not need this sophisticated approach to identify when failure is likely to occur, so do not waste this approach unless we are going to use it to tell us things that we did not know before

• Choosing elevator systems that have a high number of components in which failure is difficult to predict allows us to have the biggest impact on the customers where our service (and that of other elevator service companies) has been the least effective

• Doing this would significantly increase our knowledge of how these components behave in practice

Consider each of these approaches and decide which one you are going to recommend to Ed.

Feedback is given as in Appendix 1.

Question 3. How should Paterford measure their service performance?

The company regularly monitors their service performance for all their service offerings. They will survey customer satisfaction annually, and in addition, they will use other performance measures as well. The most common of these are listed below.

1. Mean time between failures (MTBF). The average time between two failures of the elevator (where failure is anything other than full operation).



2. Response time. The elapsed time between the customer reporting failure and the service engineer arriving at the customer’s facility.

3. Mean time to repair (MTTR). The average elapsed time between the failure and the elevator resuming full operation.

4. Mean reported time to repair (MRTTR). The average elapsed time between the failure being reported by the customer and the elevator resuming full operation.

5. Reliability of service visits. The proportion of service visits where the service engineer arrives within 15 minutes of the agreed time.

6. Overall equipment effectiveness (OEE). A method of judging the effectiveness of how operations equipment is used. It is the product of the equipment’s availability, speed of operating and quality of operating. (See Chapter 8.)

7. Cost per service engineer visit.

8. Total service cost per quarter.

9. Average utilization of service engineers.

10. Number of service engineer visits per quarter.

For the sake of simplicity, Ed Paterford has decided that they must concentrate on five key performance measures.

Your task is to decide which 5 of the following 10 performance measures should be used on a regular basis to assess the performance of the on-site monitoring service.

Students are given the ability to check 5 options only, and give feedback as below depending on what they check.

Mean time between failures (MTBF)

Feedback if this option is chosen – You chose mean time between failures (MTBF). This is a good measure for the on-site monitoring service. The whole purpose of the service is to anticipate failure and prevent it before it occurs. Ideally, the MTBF measure should be infinity.

Response time

Feedback if this option is chosen – You chose response time. This is not a very appropriate measure. The whole purpose of the on-site monitoring service is to get a service engineer to the elevator before it fails, so response time should be irrelevant.

Mean time to repair (MTTR)

Feedback if this option is chosen – You chose mean time to repair (MTTR). This is probably an appropriate measure to use here. Ideally, the MTTR should be zero because service engineers should prevent the failure occurring before it takes place.



Mean reported time to repair (MRTTR)

Feedback if this option is chosen – You chose mean reported time to repair (MRTTR). This is probably not an appropriate measure because the whole purpose of the new service is to detect potential failures before they occur, or at worst, to detect failures when they occur. Therefore, the idea of customers having to report failure should not be relevant.

Reliability of service visits

Feedback if this option is chosen – You chose reliability of service visits. This is probably not a primary measure for this kind of service. The idea is that service engineers will visit before failure occurs. It may have some relevance in terms of arranging servicing visits, so it is not entirely inappropriate. However, at best it may be a secondary measure.

Overall equipment effectiveness (OEE)

Feedback if this option is chosen – You chose overall equipment effectiveness (OEE). This may be appropriate, and it is often used to measure maintenance effectiveness. However, it is likely to be relevant if the concepts of ‘slow working’or ‘poor quality working’are appropriate for the application for which the elevator is being used.

Cost per service engineer visit

Feedback if this option is chosen – You chose cost per service engineer visit. It is difficult to see how this could be appropriate. The frequency of visits may be appropriate and Paterford may want to keep their servicing costs down, but they would never do this at the expense of equipment reliability.

Total service cost per quarter

Feedback if this option is chosen – You chose total service cost per quarter. Yes, this is a very appropriate measure. The idea of this service is to prevent elevator failure occurring while at the same time minimizing the cost to Paterford for providing the service.

Average utilization of service engineers

Feedback if this option is chosen – You chose average utilization of service engineers. This may be an appropriate measure, and is one component of the total service cost per quarter. So, at least to begin with the total service cost per quarter is likely to be a more appropriate measure.

Number of service engineer visits per quarter

Feedback if this option is chosen – You chose number of service engineer visits per quarter. This may be an appropriate measure of performance, but it is really part of the total maintenance cost per quarter. So, to begin with, it may be more appropriate to use the measure of total maintenance costs per quarter.


A P P E N D I X 1

Feedback for questions 2 and 3 (see previous logic diagram)

How to do it (A)

The approach you have chosen has some merits. It means you will be starting by analysing elevators with relatively well known characteristics, and then as you gain experience you can offer the service to those customers with more problematic elevator systems. This approach is particularly relevant where the effectiveness of the new service is itself difficult to predict. It is worth noting, however, that although you have chosen a sensible approach, the other two approaches also have merit. In fact, this is one of those decisions where there is no right answer as such. Each approach has its own advantages and disadvantages.

Ed also agrees with you. So, the company policy is now to offer this new service only to those with certain types of elevator. The decision now is exactly how to do this. Two options have been suggested.

(a) Offer the service only to those customers with Paterford elevators. Although Paterford no longer manufacture elevators (they are exclusively a service company now) the largest single group of customers for their services is still those who have ‘legacy’Paterford systems. The advantage of offering the service to these customers is that we know more about Paterford elevators than any other type and so our knowledge of failure characteristics is high for these systems.

<If they choose this, give feedback 1>

Feedback 1

You have chosen an option that gives you a relatively easy start. Presumably, because of the existing knowledge concerning Paterford systems, your rate of learning of how to predict failure using the new service will be high. This probably means that you are going to make relatively few mistakes in terms of either failing to see the sign of breakdown before it occurs, or sending your engineers out when no breakdown is likely to occur. So, although you may be sending your engineers out very frequently (because Paterford systems are unreliable) you are probably not wasting your time in doing so. Also, because Paterford systems are relatively unreliable, you will have a significant impact on the reliability of your customers’ systems. This approach seems relatively sensible.

(b) Offer the new service only to those customers with the most reliable elevator systems. Unfortunately, Paterford elevators are not the most reliable. Two other manufacturers, in particular, have significantly ‘above average’ reliability compared with other manufacturers. Therefore, it could be argued that it is sensible to offer the service initially only to those customers who have these types of elevator. There are about the same number of customers with these types of elevator as there are with Paterford elevators.




Feedback 2

Well, limiting this service to customers with relatively reliable systems will mean that you will not be sending your engineers out very often. This is not entirely a good thing. Although it minimizes the cost to you, it will be very difficult to persuade customers that the service is worth adopting. They do not have many breakdowns anyway. Also, because the systems are so reliable, there is likely to be little breakdown information for you to build your database on. So, while there is nothing wrong with your initial decision to limit the service to customers with certain types of elevators, it is difficult to see any advantages in doing it this way. You would have been better off offering the service initially to customers with Paterford systems.

How to do it (B)

The approach you have chosen has some merits. It means that you should find the new service relatively easy to sell because it will be bring clear benefits to the customers you are targeting. The cost-benefit argument of adopting the new service should be relatively easy to make. However, you are making life difficult for yourself in terms of the number of different elevator systems that you will have to learn about. There is no indication that the customers you are targeting predominantly use any one particular make of elevator system, therefore you will have to buildup databases on a wide variety of systems and develop a wide variety of predictive models. This could be costly. More importantly, it will slow down the learning that you go through in terms of becoming effective at predicting future breakdowns. This option therefore is relatively of high returns (because you can charge these customers a high premium) but also of high cost (because of the necessity to develop many different databases) and high risk (because of the time it will take to develop predictive models). Nevertheless, it is a feasible way forward, as indeed are the other two options. In fact, this is one of those decisions where there is no right answer as such. Each approach has its own advantages and disadvantages.

Ed also agrees with you. So, the company policy is now to offer this new service only to those with certain types of elevator. The decision now is how exactly to do this. Two options have been suggested.

(a) Offer the service initially to customers whose facilities are remote from Paterford’s service centres. These customers generally have the longest response time because it takes a long time for Paterford’s service engineers to reach them. The on-site monitoring service would therefore shorten the response time to these customers.


Feedback 3

In choosing to offer the on-site monitoring service to customers whose sites are remote from your own service centres you are obviously going to have an impact on the service that you can give them. However, this is a rather strange way to do it. The fact that they are remote from your service centres is your fault not theirs. They could reasonably argue that they should not have to pay extra for this service just because your service centres are far away. It would have been a lot easier to demonstrate the advantages of this service by targeting those customers where the cost of disruption is high. So, in summary, although your initial decision to limit the service to those customers who will get the most benefit was sensible, this way of implementing it is probably not.



(b) Offer the service initially to those customers where the cost of disruption to their elevator systems is high. In other words, look at the impact of elevator failure and offer the system to those customers where failure has a severe impact. This would include customers with no back-up elevator system, hospitals where disruption to patient movement is potentially very serious and so on.


Feedback 4

Choosing to offer this service to customers where the cost of disruption is high is probably a sensible way forward. It means that persuading the customers to adopt the service will be relatively easy and you should be able to charge a premium for such a service. However, the service really does have to work. You are making big promises to the customers and, if the service does not prove effective, they are likely to feel very let down. Unfortunately, this risk is increased by the fact that you will be dealing with many different elevator systems and so building up the database and predictive models is not going to be easy. Nevertheless, this option is better than the alternative of choosing customers who have remote sites.

How to do it (C)

The approach you have chosen has some merits. The great advantage of on-site monitoring is that it should make predicting breakdowns far easier. Therefore, if you sell the new service to customers who have systems in which breakdown is difficult to predict, you are clearly giving some advantage to those customers. This should make the argument for adopting the service relatively straightforward. In other words, it should be relatively easy to sell. In fact, this is one of those decisions where there is no right answer as such. Each approach has its own advantages and disadvantages.

Ed also agrees with you. So, the company policy is now to offer this new service only to those with certain types of elevator. The decision now is exactly how to do this. Two options have been suggested.

(a) Offer the service initially to those customers with newly introduced elevator models or novel elevator systems in which predicting failure is difficult because little data exists.


Feedback 5

You chose to offer this service initially to those customers with new introduced or novel systems. Frankly, this is a dumb idea. First, you have very little understanding of the failure characteristics of such new technologies. Second, your customers will have relatively little experience of how reliable their systems are and therefore you may find it difficult to persuade them of the benefits of this new service. So, while your initial decision to limit the service to those customers where failure is difficult to predict was relatively sensible, this way of implementing the decision is not. You would have been better off to choose to offer it to those customers who have flat bath-tub curves because that means that failure is difficult to predict.



Time

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Flat Curve

Bath-tub curves for two types of elevator system

Infant mortality stage

Normal life stage

Wear out stage

Time

Failu

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Flat Curve

Bath-tub curves for two types of elevator system

Infant mortality stage

Normal life stage

Wear out stage

(b) Offer the on-site monitoring service initially to those customers whose elevator systems have relatively flat ‘bath-tub curves’. See the diagram below.


Feedback 6

You have chosen to offer this service initially to those customers with flat bath-tub curves. This is a very sensible way forward. A flat bath-tub curve, in effect, means that the likelihood of failure is not high correlated with time. This is exactly the type of technology that will benefit most from predictive maintenance of the type that on-site monitoring provides. However, there are some downsides with your decision. Probably the most significant is that, because of the uncertainty of breakdown, it may take time to develop the databases and predictive models to a high level of effectiveness.


C H A P T E R 1 5

National Trust∗

Case synopsis

This case focuses on the project by the National Trust of England, Wales and Northern Ireland to transform ‘The Workhouse’ from a derelict site into a visitor attraction. In particular, this case focuses on the importance of stakeholder management.

For details of the case see Appendix 1

How to use this case

The beauty of this case is that most people can imagine the type of project and can identify a range of stakeholders who may have an interest in the project. This case allows them to develop their thoughts about how to identify and manage stakeholders. Having completed the case, it is easy to widen the debate about the role of stakeholder management in the project environment. As with all the active cases associated with this text, it can be used as a stand-alone learning experience or students can be asked to work through the case (individually or in groups) and then debriefed in a relatively conventional manner in class. The class debriefs of active cases should focus not only the content of the decisions but also on how students went about making a particular decision. This teaching note assumes that all students would have worked through the case, which is then debriefed in class.

Notes on the questions

Question 1

This first question demonstrates some of the diversity of the stakeholder groups. The list is not exhaustive, and students may well be able to identify other stakeholders. A good way of running this particular question is to ask the students to identify the different stakeholders and rate their relative importance to the project’s success. The responses given below are more elaborate responses than are given on the CD.

1. Having drawn up plans and obtained funding, work started in earnest. Leigh Rix and his project team understood from their previous experience that stakeholder management was key to the success of the project. Stakeholders are those individuals or groups who have some kind of interest in the project. The team decided to draw up a list of stakeholders and set out to win them over with their enthusiasm for the project. A brainstorming session within the project team generated a list of people and groups that could be considered as stakeholders for the Workhouse Project.

∗ Note – This case is based on the actual National Trust Workhouse project, but some details have been disguised and some dialogue reconstructed.



Some of the stakeholders identified are detailed on the list shown below. Which of the individuals and groups on this list do you think are important stakeholders? (Choose up to five from the list.)

Who are stakeholders for the Workhouse project?

Response if this group/individual is chosen

The local population

Yes, to some extent, the local population is a stakeholder in that they are likely to be affected by the Workhouse Project. They are also important in the sense that, other things being equal, it is good to keep local people on-side. In the short term, however, they may not be able to affect the project significantly if local planning authorization has already been given. Nevertheless, they should be regarded as an appropriate stakeholder group.

Other heritage groups

Other heritage groups could be considered to be stakeholders, but probably not very important ones. Nevertheless, keeping other heritage groups informed could stop duplication of effort and could lead to some useful learning for the Workhouse Project team if other heritage groups have experience of similar projects.

National Trust members

National Trust members are certainly a stakeholder group, though probably not amongst the most important. Given that it is (partly) their subscription fees that will have gone towards some of indirect funding for this project, there is arguably an ethical as well as a practical reason to include them in the stakeholder groups. Nevertheless, they may not be amongst the most important stakeholders.

National Trust volunteers

National Trust volunteers are certainly amongst the stakeholders in the project. However, not all of them will be directly involved in the project. In fact, only a few will be. Nevertheless, an interesting project such as this might help to engender enthusiasm amongst National Trust volunteers throughout the country.

Local media organizations

Local media organizations are stakeholders in the sense the way in which they cover the project could influence more important stakeholders.

Traffic authorities and road builders

Traffic authorities and road builders are stakeholders, but only if the Workhouse Project, when running, results in an increased volume of traffic in the area.

Local government Local government is a stakeholder in so much as they will have to give permission for things such as landscaping, car parking and so on. Also, secondary effects of the project such as increased traffic could affect them.

The individual builders

The individual builders involved in the project are a very important stakeholder group indeed. We already know that their skills and enthusiasm could have an important effect on the success of the project.

Funding bodies Funding bodies are important stakeholders. It is they who have been persuaded to provide the funding that makes the project possible. Even if they have already agreed to provide the funding and cannot change their mind, they are still worth managing carefully. If they regard the project as being successful, they are more likely to fund other projects in the future.



Stakeholder powe

Stakeholder interest

Keep satisfied Manage closely

Monitor Keep informed

Low High

Low

High

The power – interest grid



The families of former residents

National Trust Members




Local government

The individual builders The printers who will publish the brochures

Funding bodies

Suppliers of audio visual equipment that will be used in the attraction

Local businesses

Stak

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Stakeholder interest

Keep satisfied Manage closely

Monitor Keep informed

Low High

Low

High

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National Trust Members




Local government

The individual builders

Funding bodies

Suppliers of audio visual equipment that will be used in the attraction

Suppliers of audio-visual equipment that will be used in the attraction

Suppliers of audio-visual equipment that will be used in the attraction will only be stakeholders if there is some aspect of the equipment they are supplying (or its delivery) that could have a significant impact on the project. More likely, the equipment will be relatively standard and so regarding them as stakeholders is not very useful.

Question 2

The second question builds upon the first and introduces a way of discriminating between different groups of stakeholders. This particular exercise will generate a lot of discussion and disagreement but that is the point of it.

2. Stakeholder management can be particularly important both to avoid difficulties in the project and to maximize its chances of success. But stakeholders are different. The previous question demonstrated that almost any group could (just) be regarded as having some connection with a project. So, any project team needs to discriminate between different stakeholder groups. The approach of managing stakeholders that is described in the text distinguishes between their power to influence the project and their interest in doing so. Stakeholders who have the power to exercise a major influence over the project should never be ignored. At the very least, the nature of their interest, and their motivation, should be well understood. But not all stakeholders who have the power to exercise influence over a project will be interested in doing so, and not everyone who is interested in the project has



the power to influence it. The power–interest grid that classifies stakeholders in this way is shown below.

Although there will be gradations between them, the two dimensions are useful in providing an indication of how stakeholders can be managed in terms of four categories.

This is a click-and-drag exercise – the answer is given below.

Question 3

This question takes a practical approach with one of the stakeholder groups and seeks to determine the actions that could be taken with them. The consequences of their decisions are played out.

3. One of the groups that is likely to need careful managing is the builders who would be carrying out the work. Different members of the project team took different views about how this should be managed.

One view was that the most important thing was to make sure that the builders were well trained, both in terms of the specification of the restoration work and in terms of what would need saving if found during the work. A small training pack or even some encapsulated cards could be prepared identifying the do’s and don’ts in restoration work of this kind. Perhaps the pack could also include examples of well-executed restoration work and poorly executed restoration work.

Another view was that the builders should be treated in the same way as the important people that they had already shown round the site. They should get the same presentation about the social importance of the building, the same talk from the social archaeologist who was advising the project, and the same tour of the site.

The third view was that, because artefacts and old building materials would be hidden or buried around the site, the builders should be financially encouraged to identify these and hand them in. A reward system could be devised that would make small payments for any found item that was likely to prove useful during the restoration or when the attraction was up and running.

Which of these three approaches do you think is more appropriate for managing the builders?

(a) Provide a training pack.

(b) Give them the same tour as the VIPs.

(c) Reward them for any useful finds.

The following feedback is given

This next question asks the student to consider why they chose their particular decision. This creates nine different possible feedbacks. Feedback is given by following the decision logic below:

Your idea for managing the builders is being taken very seriously by the regional director of the National Trust who is ultimately responsible for the project. However, he wants you to identify exactly why your idea is appropriate. Is this because



(a) It will enthuse the builders and encourage them to fully participate?

(b) It will prevent the builders making mistakes and damaging the chance of a good restoration?

(c) It will stop wastage and help to keep costs down?

Enthuse

Trai

ning

pac

k

Financial rewards

VIP tour

Prevent mistakes

Prevent wastage

Enthuse

Prevent mistakes

Prevent wastage

Feedback

1

Feedback

2

Feedback

3

Enthuse

Prevent mistakes

Prevent wastage

Feedback

4

Feedback

5

Feedback

6

Feedback

7

Feedback

8

Feedback

9

Enthuse

Trai

ning

pac

k

Financial rewards

VIP tour

Prevent mistakes

Prevent wastage

Enthuse

Prevent mistakes

Prevent wastage

Feedback

1

Feedback

2

Feedback

3

Enthuse

Prevent mistakes

Prevent wastage

Feedback

1

Feedback

2

Feedback

3

Enthuse

Prevent mistakes

Prevent wastage

Feedback

4

Feedback

5

Feedback

6

Enthuse

Prevent mistakes

Prevent wastage

Feedback

4

Feedback

5

Feedback

6

Feedback

7

Feedback

8

Feedback

9



Feedback 1

You wanted to provide a training pack… because it would enthuse the builders.

The training pack has some merits. It will help compensate for what is reported to be a weakness in the building company’s staff. The danger is that it is seen as being a little patronizing to the builders. Therefore, any training pack would have to be very carefully designed and introduced so as not to cause a negative reaction. This approach may be appropriate but it has little to recommend in terms of enthusing the builders. The main advantage of this approach is that it could prevent mistakes occurring. By preventing mistakes occurring, this approach may stop some wastage.

Feedback 2

You wanted to provide a training pack… because it would prevent mistakes.

The training pack has some merits. It will help compensate for what is reported to be a weakness in the building company’s staff. The danger is that it is seen as being a little patronizing to the builders. Therefore, any training pack would have to be very carefully designed and introduced so as not to cause a negative reaction. The main advantage of this approach is that, as you imply, it could prevent mistakes occurring. But it has little to recommend it in terms of enthusing the builders-although, by preventing mistakes occurring, this approach may stop some wastage.

Feedback 3

You wanted to provide a training pack… because it would stop wastage.

The training pack has some merits. It will help compensate for what is reported to be a weakness in the building company’s staff. The danger is that it is seen as being a little patronizing to the builders. Therefore, any training pack would have to be very carefully designed and introduced so as not to cause a negative reaction. The main advantage of this approach is that it could prevent mistakes occurring. But it has little to recommend in terms of enthusing the builders. Not only by preventing mistakes from occurring, this approach may also stop some wastage.

Feedback 4

You wanted to give them the VIP tour… because it would enthuse the builders.

Providing a VIP tour for the builders is an interesting approach. In fact, it is the approach that the team eventually did take. Here is how it went… ‘Before work started, we took all the building staff on the same tour of the site as they had taken the various groups of VIPs who provided the funding. Involving the builders in the project sparked a real interest in the project and the archaeological history of the site. Often, they would come across something interesting, tell the foreman who would involve an archaeologist and so preserve an artefact that might otherwise have been destroyed. They took a real interest in their work, they felt involved’. (Project manager)



The main advantage of this approach is that it enthused the builders, who then felt more involved with the project and were less likely to make mistakes or to condone wastage.

Feedback 5

You wanted to give them the VIP tour…. because it would prevent mistakes.


A good approach, but not quite for the right reason. The main advantage of this approach is that it enthused the builders, who then felt more involved with the project. This did mean that they were less likely to make mistakes or to condone wastage.

Feedback 6

You wanted to give them the VIP tour…. because it would stop wastage.


A good approach, but not quite for the right reason. The main advantage of this approach is that it enthused the builders who then felt more involved with the project. However, this did mean that they were less likely to make mistakes or to condone wastage.

Feedback 7

You wanted to reward them for finds…. because it would enthuse the builders.

The problem with relying exclusively on financial inducements of this type is that it encourages the builders to see the project in purely commercial (and probably mercenary) terms. If it does enthuse them, it is likely to be for the wrong reasons. It is also unlikely to prevent the builders from making mistakes; in fact it may sufficiently divert them from the main purpose of the project that they are more likely to make mistakes. Arguably, it could stop wastage, but there will be the additional problem of managing the scheme especially in deciding how much each find is worth.



Feedback 8

You wanted to reward them for finds…. because it would prevent mistakes.


Feedback 9

You wanted to reward them for finds…. because it would stop wastage.


Question 4

This final question looks at another stakeholder group, the local population, and again questions why they were important.

4. One stakeholder group that the National Trust team identified was the local population.

Why was the local population an important stakeholder group?

(a) Because the National Trust wanted potential employees from the locality when the operation was up and running

(b) Because the National Trust wanted to avoid planning objections from local people

(c) Because the National Trust wanted help with the historical significance of the site

(d) All of the above

Feedback irrespective of which option is chosen

In this case, although the expectations were that the purpose of engagement was primarily aimed at avoiding planning objections with the secondary possibility of attracting employees the real bonus was that when they invited local people to attend meetings, explained the vision and took them to look round the site they met people with knowledge of the history of the site and sometimes with a personal connection with the building. Remember the woman in her 90s who had worked there since the age of 14 and the woman who had lived there in the 1970s. Finding



these links allowed the project team to re-examine their interpretation of the building and incorporate real peoples’ stories into the presentation of the building’s history.

Postscript

The project was completed on time and within the original budget, but Leigh Rix was particularly pleased with the quality of the finished project, ‘It may seem like a time-consuming and expensive activity to involve all stakeholders’ right at the start of a project, particularly when they seem to have conflicting needs and interests. Yet, as with many of our projects, it is worth the effort. Looking back, identifying and involving the stakeholders not only allowed the project to be completed on time and within the budget, but also improved the eventual quality in ways we could not have anticipated’.


A P P E N D I X 1

‘Our projects can be funded by a variety of sources, involve the sensitive restoration of literally irreplaceable buildings, need a clear vision of how to reconcile historical integrity with commercial viability and rely on the support of volunteers, our members and the community. It isn’t surprising that we need to involve many different groups all the way through the project’. (Leigh Rix, Project Manager, The Workhouse)

The National Trust of England, Wales and Northern Ireland was formed in 1895 with the objective to preserve places of historic interest or natural beauty permanently for the nation to enjoy. ‘The Workhouse’was one of its more intriguing projects. Originally built in 1824, for over 150 years it housed the local poor. When this nationally important protected building came under threat of being turned into residential apartments, the National Trust purchased it. Their purpose, they said, was to ‘aid the understanding of poverty for this, and future generations with the intention of bringing this important part of social history to a modern generation.’ ‘Our vision for the Workhouse is to take a building that originally nobody wanted to enter and create a heritage facility that anyone would want to visit and where everyone is welcome’. (Leigh Rix, Project Manager, The Workhouse)

The project environment was intrinsically difficult because of the scale of the project – this was a very large, run-down building – the degree of uncertainty – whilst the National Trust was used to dealing with stately homes this was the first time the organization had tackled such a property – and the complexity – a whole host of different organizations and groups of people had an interest in the project. Also, the nature of the restoration work was such that some decisions regarding the type of restoration necessary would have to be made as the project moved forward. Much of the funding came from the UK government’s Lottery Heritage Fund, but other funding bodies and the National Trust itself made contributions.

They invited local people to attend meetings, explained the vision and took them to look round the site. Out of these meetings, they met people with knowledge of the history of the site and sometimes with a personal connection with the building. A woman, now in her 90s, had worked as an assistant when she was aged 14, in the 1920s. More surprisingly a woman, only in her 30s had lived there as recently as the 1970s when her family was homeless. Finding these links allowed the project team to re-examine their interpretation of the building, and incorporate real peoples’ stories into the presentation of the building’s history. In particular, the experiences of the woman who had spent part of her childhood there in the 1970s were incorporated into an exhibit that demonstrated how the Workhouse had been used in relatively recent times.

With the need for so much, often technically difficult building work, the choice of a building contractor was very important. ‘The builders are crucial to making a project like this successful, they must be skilled at all the usual trades, but also be able to perform some very sensitive restoration. At the same time we are on a strict budget, so the estimated cost of each building firm’s bid is an important factor’. (Project assistant)

Eventually a local building company was chosen, partly because of their price estimate, but also because they had done some domestic restoration work in the area within the last year. The main drawback of using this local company was that this project would be larger than their normal projects, and they had no experience of restoration projects in which technical decisions would need to be made as the project progressed.


PART 4

Additional case exercises


C H A P T E R 1

Case exercise – A business trip to Brussels

My flight to Stockholm would be late landing. The pilot told us that we were in a ‘stack’ of planes circling above the snow clouds that were giving Brussels its first taste of winter. Air traffic control had closed the runways for a short period at dawn, and the early morning flights from all around Europe were now being allocated new landing slots along with the long-haul jumbos from the Far East and the US. After a 20-minute delay, we descended bumpily through the clouds, and landed on a recently cleared runway. Even then there was a further ‘hold’ on a taxiway; we were told that the de-icing of the apron was being completed so that planes could proceed to their allocated stands and air bridges. All around the airport, I could see the scurrying flashing beacons of snow-clearing vehicles, catering suppliers’ vans, aviation fuel trucks, baggage trailers, buses transporting crews and passengers, security police cars and an assortment of other vehicles all going purposefully about their work. Brussels airport always looks busy, with over 10 million passengers a year, but this morning the complexity and scale of the operations were particularly evident.

Finally, about an hour late, we pulled up to the gate, the engines were turned off, and we disembarked onto an icy-cold air bridge, leaving behind a particularly untidy plane strewn with litter from a full cabin of restless passengers. We passed the team of cleaners and maintenance staff waiting just outside. ‘They will have a hard time this morning; more mess to clear and probably less time than usual to do it, as the airline will want a quick turnaround to get back on to schedule’, I commented to my colleagues. We could just hear the sounds of frantic activities going on below the plane: baggage and cargo being unloaded, catering vehicles arriving, fuel being loaded and technicians checking over the engines and control surfaces – everyone trying to get their work completed quickly and correctly, not least so that they could get back indoors out of the biting cold wind!

From the air bridge, we walked past the crowded seating areas, where plane-sized groups were gathering anxiously, awaiting the signal from the gate staff to board their much delayed flights. Then on to the moving walkways, conveyed leisurely past other departure lounges, equally overfilled with passengers. Anxious to get ahead of the crowd, we took to a running pace past the rows of cafés, bars and shops, hoping to avoid the usual morning queue for Passport Control. I should have remembered the old saying ‘more haste, less speed’, because my next visit was to the First Aid room! I had slipped on some spilt coffee that had not been cleaned up in the haste of the morning and fallen awkwardly, straining my ankle and breaking my duty-free brandy. ‘At least, they would clean the floor after that’, I thought, sadly.

Suitably patched up, I hobbled with my colleagues and joined the long queue for Passport Control, and eventually through to Baggage Reclaim. Even with the excellent new baggage-handling systems in Brussels, the passengers usually get there first, but the accident had changed all that! Scanning the video screens, we found no reference to our flight arrival; the remaining bags from our flight had apparently already been removed from the carousel and were stored in an adjacent office. After a simple signing ceremony, we were reunited with our belongings, and hastened (slowly in my case) to the taxi rank. Our hopes of a quick ride to the city were dispelled when we saw the long queue in the icy wind, so we made our way to the station below, where a dedicated ‘City Express’ train departs every 20 minutes for the Gare de Nord and Gare Centrale. We just missed one!



After a busy and successful day at our Brussels office, a taxi was called, and we were back at the airport in the thick of the evening rush hour. The departures check-in area is the upper floor of a vast new terminal extension, and is very orderly and well equipped. Facing you on entry from the taxi drop-off point is a huge electronic display that lists all departures scheduled for the next few hours and showing the appropriate check-in desk number for each flight. The speed of the check-in systems has been improved dramatically, so there was no queue at our desk, and the three of us were issued with boarding passes in only a couple of minutes. Our baggage sped away on conveyors down to the new sorting hall two storeys below. Brochures explain that the new terminal extension was designed to make it possible to go from check-in to final boarding in only 20 minutes, which has involved investment in a state-of-the-art automated baggage-handling system. On my last visit, following traffic delays on the way to the airport, I found that this system works, but I doubt that it would if everyone arrived only 20 minutes before departure! It is no wonder that they advise checking in one hour before; it also gives passengers much more time to spend money in the duty-free shops, restaurants and bars!

By this time, my injured leg had swollen up and was throbbing painfully. This seemed to be a routine situation for the check-in staff, who arranged for a wheelchair and attendant to take me through Border Control and security checks. While my colleagues travelled down to the departures hall by escalator, I took the slower route by lift, meeting just outside the duty-free shops where the attendant left me to their care. We had some time to spare, so we replenished the brandy, bought some Belgian chocolates and headed for a café-bar. While Brussels is renowned for its excellent cuisine, we did not expect to find high standards of food in the quick-service environment of an airport, but we were wrong! The delicious aroma of freshly prepared food attracted our custom, and we were not disappointed. After a welcome glass of speciality raspberry-flavoured beer to round off the meal, we headed for the airline’s executive lounge.

The view across the airfield was not promising! After a bright, crisp day, more snow-laden clouds had arrived and a chill wind cut across the tarmac. De-icing crews were working on the parked aircraft and others were treating the runways, taking quick action between the aircraft movements. Concerned that we might be delayed and miss our connection at Oslo, we checked with the staff at the airline’s flight information desk. After some phoning, they confirmed that, although there could be some delays, Oslo had arranged to hold connecting flights, as many passengers originated from Brussels. Their professional and friendly advice made us feel much more at ease, and they even offered to allow us to send fax or phone messages to our destination. They couldn’t have been more helpful.

Announcements of the minor delays were made over the speaker system, but it was not long before we were directed to the departure lounge and were preparing to board. Outside, in the gloom around the aircraft, the baggage trucks were pulling away and the giant push-off tractor was being connected up to the nose-wheel. Ten minutes later, we were at the end of the runway, ready for take-off.

‘Today must have been a very busy one for everyone involved in keeping the airport open’, I thought, ‘but perhaps every day has its own challenges in such a complex operation’.

Questions

1. Identify all the processes and their activities that are mentioned. Classify them in accordance with their type.



2. Which of these processes were most affected by the severe weather?

3. Approximately how many different organizations are involved in delivering the goods and services described in this report? What are the implications of this?

Teaching note – A business trip to Brussels

Question 1. Identify all the processes and their activities that are mentioned.

The processes are categorized in their order of appearance in Attachment 1. In class, this stage may be skipped, going straight on to the analysis matrix. For assessed work, both steps could probably be used.

Classify them in accordance with their type.

Refer again to Attachment 1. Try drawing up a matrix that allows the processes to be identified and classified in some way. This could be according to the 4-Vs (volume, variety, variation and visibility) characteristics of each process. Alternatively, a more straightforward classification could be based on what is being transformed in the process (materials, information or customers) and what exactly is changing (shape, location, ownership, psychological state, etc.). Starting with the blank matrix, one could fill out activities on the board or overhead projector, which is a really good way of getting to interact with a big class early on a course. Everyone has an opinion, and there is a lot of debate about where each activity should fit. Often, of course, there are many places to put some activities, so we may decide to classify only dominant types of processing. In each case, ask what is being processed (material, information, customers) and how it is being transformed to give value-addition. The downside of this approach is the time it will take: allow at least half an hour for about 20 activities to be filled in.

Question 2. Which of these processes were most affected by the severe weather?

The case study describes the effects of severe weather on the daily processes within the airport. All the processes listed in Question 1 have a challenge to meet because of the weather conditions, but in the majority of cases this is not caused directly by the weather. Rather, the severe weather affects some processes that in turn cause problems in other processes. This creates an operational ‘chain reaction’. Refer to Attachment 2.

Air Traffic Control (ATC) reacts to the severe weather, first by closing and later reopening the airfield. This process then uses the limited flexibility of its operations by rescheduling aircraft take-off and landing slots. Meanwhile, on the airfield itself, runway clearance and de-icing operations commence as a direct consequence of the severe weather.

The ongoing rescheduling of the flights has consequences for information processing operations (general flight information, inter-airport communications and customer announcements) and operations involved in aircraft turnaround. ATC cannot, however, break the safety rules for separation of aircraft, and often increases effective capacity by batching groups of landings and then of takeoffs. One may therefore, assume that many flights have been compacted, shortening



the time between them. Consequently, many operations have to increase their speed and flexibility to meet this challenge.

The processes affected are in-flight catering, aviation refuelling, baggage handling, cabin cleaning, servicing units, technical maintenance, passenger/crew transport, departure gate control, check-in desk and push-off tractors.

Further consequences of ATC’s rescheduling are flight delays. This means that capacity within the airport is stretched – more people are waiting in the airport for flights, so this area becomes a bottleneck.

A number of processes are affected by an increase in people Work in Progress (WIP). This can be a problem – for example, airport catering facilities need to increase the speed and flexibility of their operations to increase the volume of customers served. There may also be a shortage of seating in departure lounges. However, this situation can also be advantageous, as trade will increase for catering and retail facilities. Frustrated customers may complain more, taking scarce capacity away from providing more service.

In this case, the processes affected are customer waiting areas, customer transportation, airport catering, shops, first aid, airport cleaning, border control, customs, left luggage, flight information desk and customer announcements.

Rescheduled flights and flight delays are not necessarily caused by the severe weather. Other causes could be the ATC going on strikes or technical problems. Similarly, flight delays will increase the number of people waiting in the terminal, but this can also occur for other reasons, for example, busy holiday periods.

Therefore, the processes that are most affected by the severe weather are those that are affected directly – ATC, de-icing and runway clearance.

Question 3. Approximately how many different organizations are involved in delivering the goods and services described in this report?

It appears that there is a different organization for each process listed in Question 1. The table given here, although by no means exhaustive, lists the majority.

What are the implications of this?

The airport appears to operate as a cooperative of different organizations that are located in the same area. The airport itself will have some overall management, but this will not be directly responsible for all the separate organizations. Consequently, cooperation between all the organizations is necessary to ensure that the macro operation of the airport itself is effective.

Despite all of the organizations forming part of the airport’s macro operation, each organization has its own individual objective. These objectives may sometimes conflict. For example, the objective of the ATC organization could be to ensure that all flights safely leave and land on time with minimal disruption to the crew, passengers and technical staff, and the objective of a gift shop would be to maximize profits. In the case study, ATC has failed to meet its objectives because the weather has caused flight delays, yet the gift shop may have increased its sales for the day because the delay has resulted in more passengers waiting in the terminal.



The typical passenger may be unaware of the number of separate organizations involved in the airport macro operation, seeing each process as an indication of the level of service in the airport itself. Therefore, if a particular organization fails to meet its objectives, this will reflect on the customer’s perception of service in the airport as a whole. For example, the writer of the case study may identify the service at Brussels Airport in general as being careless because he/she slipped on spilt coffee, rather than associating the problem with just the cleaning company.

Attachment 1 – Processes and Activities (order of appearance in case)

M = this activity transforms materials

I = this activity transforms information

C = this activity transforms customers

Note * Indicates the type of transformation process

** This activity is not explicitly mentioned in the text but could be mentioned in teaching discussions

Process Activity/activities What is being transformed?*

Passenger in-flight info Information passed to passengers from pilot during flight (e.g. reporting of flight delays).

I C

Air Traffic Control Control and diversion of air traffic during landing and take-off.

I M

Runway clearance Clearing snow and ice from apron, taxiways and runways.

M

De-icing De-icing aircraft. M

In-flight catering Preparing meals and loading onto aircraft. M

Aviation refuelling Refuelling of aircraft. M

Servicing units** Servicing aircraft water and sanitation units. M

Baggage handling Receiving, weighing, labelling luggage.

Security checks.

Distribution: loaded onto aircraft, unloaded, delivered to receiving area, and storage facilities for unclaimed luggage.

M

Passenger/crew transport

Buses from departure gate to aircraft, and from aircraft to arrivals gate.

C

Airport security Maintaining safety of passengers, crew, airport and terminal staff.

I C

Cabin cleaning Cleaning of aircraft cabin and flight deck. M

Technical maintenance Pre/post flight checks, minor repairs, decisions on airworthiness of aircraft.

M



Customer waiting areas Departure lounges (landside and airside), executive lounges.

C

Departure gate control Control of departing customers. C

Customer transportation Automated walkways and lifts. C

Catering (airport) Cafes, bars and restaurants. M C

Shops Gift and general shops, duty-free shops. M

Passport control Control of departing customers. I

First aid First aid to passengers, crew and airport staff. C

Airport cleaning Cleaning airport. M

Taxi rank Transport to Brussels. C

City Express (train) Transport to Brussels. C

Check-in desk Flight, baggage and ticket control. M I

Departure/arrivals display board

Information to passengers. I

Border control Immigration checks (passengers). I

Security checks Passenger security audit. C

Customs Enforcement of Customs and Excise laws. C

Flight information desk Extraordinary information to passengers. I C

Airport communications Arranging flight alterations between airports. I

Customer announcements

Information to passengers. I C

Push-off tractor Towing aircraft to taxiway. M

M = this activity transforms materials

I = this activity transforms information

C = this activity transforms customers

Note * Indicates the type of transformation process

** This activity is not explicitly mentioned in the text but could be mentioned in teaching discussions



Attachment 2: Organizations at Brussels Airport

The organization Operator

Airport catering (including bars, restaurants and cafes)

Private catering company or companies.

Shops (concessions) Individual retailers of chains.

Duty-free shops Airport authority or concession.

Airport cleaning Private cleaning company.

Security Belgian police force.

Customs Belgian Customs and Excise.

Check-in desk Individual airlines (there are many).

Departure gate control Individual airlines.

Passport/border control Belgian government.

First aid Belgian health service or private company.

Flight information desk Individual airlines.

Customer announcements Airport authority.

Air Traffic Control Belgian Air Traffic Control.

Ground Control Belgian Air Traffic Control.

Aviation refuelling Petroleum companies.

Servicing units Private company or airline.

In-flight catering Individual airlines or contractors.

Cabin cleaning Private company or airline.

Technical maintenance Airline.

Baggage handling Airport authority or contractors.


Case exercise – Acme Whistles

Acme Whistles can trace its history back to 1870, when Joseph Hudson decided he had the answer to the London Metropolitan Polices’ request for something to replace the wooden rattles they used to attract attention and sound the alarm. So, the world’s first police whistle was born. Being in the height of the British Empire, many other police forces adopted the same police whistle as that of the London Police. Hence, Acme Whistles grew to be the premier supplier of high-class whistles for police forces around the world. Within a year, Joseph Hudson had moved from having no employees to having fifty. The success of his company continued from that point. ‘In many ways’, says Simon Topman, owner and Managing Director of the company, ‘the company is very much the same as it was in Joseph’s days. The machinery is more modern, of course, and we have a wider variety of products, but many of our products are very similar in design to their predecessors. For example, football referees seem to prefer the traditional snail-shaped whistle. So, although we have dramatically improved the performance of the product, our customers want it to look the same. Most importantly, we have also maintained the same manufacturing tradition from those early days. For example, the original owner insisted on personally blowing every single whistle before it left the factory. We still do the same, not by personally blowing them, but by plugging each whistle into an airline and subjecting it to the equivalent of normal lung pressure. This means that the same tradition of quality has endured’.

The company’s range of whistles has expanded to include sports whistles (they provide the whistles for the soccer World Cup), distress whistles, (silent) dog whistles, novelty whistles, instrumental whistles (used by all of the world’s top orchestras) and many more types. Although the whistle may seem to be a somewhat old fashioned object, both the whistle and the technology behind it, are undergoing a resurgence. For example, although police use mobile radios predominantly, these can be lost, damaged or stolen. A whistle, on the other hand, is simple and robust as well as compact and therefore provides a useful back-up. Less expected, perhaps, is the use of whistle technology in such high-tech applications as monitoring the airflow into protective fire-resistant suits. Any variation in airflow makes a whistle embedded in the air pipe sound and provides an audible warning. ‘We are always trying to improve our products’, says Simon, ‘it’s a business of constant innovation. Sometimes I think that after 130 years surely there is nothing more to do, but we always find some new feature to incorporate. You cannot find a single decade since the company was founded where we have not produced a novel and patentable innovation’.

‘Managing the operations in a small company is, of course, very different to working in a large one. Everyone has much broader jobs; we cannot afford the overheads of having specialist people in specialized roles. But this relative informality has a lot of advantages. It means that we can maintain our philosophy of quality amongst everybody in the company, and it means that we can react very quickly when the market demands it’. Nor is the company’s relative small size any barrier to its ability to innovate. ‘On the contrary’, says Simon, ‘there is something about the culture of the company that is extremely important in fostering innovation. Because we are small we all know each other and we all want to contribute something to the company. It is not uncommon for employees to figure out new ideas for different types of whistles. If an idea looks promising, we will put a small and informal team together to look at it further. It is not unusual for people who have been with us only a few months to start wanting to make innovations. It is as though something happens to them when they walk through the door of the factory, which encourages their natural inventiveness’.



Question

1. What is the overlap between operations, marketing and product/service development at Acme Whistles?

Teaching note – Acme Whistles

Question 1. What is the overlap between operations, marketing and product/service development at Acme Whistles?

This exercise can be used specifically to address the nature of operations and process management in smaller companies. It can be used to emphasize that, while the type of decisions taken in small operations are essentially similar to those taken in large operations, the way in which decisions are taken will differ. Most notably because the scale of the operation will not warrant the development of very separate functions, each with the capability to fully analyse and make their own functional decisions.

The simple answer to this question is, ‘There is a very significant overlap between these functions’. The underlying question is: ‘Why?’ The reason partly is size. As Simon Topman says in the example, small companies cannot afford specialist functions, so at a managerial level everyone does everything to some extent. This becomes especially true when the boss of the company is also the owner. It is literally his money that is being spent when creating any new managerial roles. Partly also, the tradition and competitive stance of the company has an influence. This is a company that competes on quality and innovation. Both these aspects rely on informal communications within the organization and a fast moving, agile ability to check out and implement new ideas.

It is interesting to note that Acme Whistles has used the flexibility that is inherent in the overlap between functions to obtain orders that larger companies may not have been able to fulfil. For example, Simon Topman spends time at trade fairs talking with potential customers. Because he is the multi-functional head of the company, he can make decisions as to whether the company can fulfil an order without having to refer back to the company’s factory. Again, because of the cross-functional nature of his (and other managers’) roles, he can overcome most of the organizational barriers and respond quickly to customers’ requirements. It is this organizational agility that gives small companies the potential to move quickly in a market as opportunities arise.


Case exercise – ANLG Bank

‘We have grown and reorganized so much in the last five years that it has become difficult to maintain a common approach to our operations. We have to get it right, never before have we been so dependent on how we manage our service delivery in all parts of the bank. Large retail banks like us are under immense pressure from the niche companies. They will take just one part of our range of services, such as loans or insurance or home mortgages, and really concentrate their operation on providing specifically what that market wants. They can be focused and single minded on just one part of the financial services market. Compared with them we can seem slow and unresponsive. Our advantages are the recognition our brand gets in the market, our ability to “cross-sell” (that is., use the contact with customers in one service, e.g. a simple current account, to sell other services, e.g. a credit card) and our potential to achieve economies of scale. The challenge for us is to do two things at the same time. First, we need to deliver exceptional customer service. Big banks do not have the best reputation for their quality of service, so the first to really develop a genuine reputation for quality could reap substantial benefits. Second, we need to exploit our size to keep costs down. We are several times larger than most of the specialist financial service providers, we should be able to do things substantially cheaper than them’ (Jan Krechner, Operations Director, ANLG Bank).

The problems faced by ANLG were not unusual in the banking industry. ANLG operated largely in the Netherlands, but big retail banks all over Europe faced the same issues. They had to attempt to get the best of both worlds by improving customer service while reducing the costs of providing that service. Jan knew that the only way to do this was through improving the performance of all the operations processes that produced and delivered the bank’s services. Most banks, including ANLG, had moved progressively towards organizing themselves around a network of large processing centres. This was very different to how banks were organized only a few years earlier. Then, each branch of a bank was far more self-contained. Managers had considerable discretion and each branch had its own back-office operation. This would record customer requests, process all financial transactions such as cheques and standing orders, issue cheque books, purchase stocks and shares for their customers and so on. Only a limited number of activities such as cheque clearing, or the physical movement of cash, were organized centrally by the bank’s headquarters.

Now, branches have mainly sales operations. They have managers but with generally far less individual discretion. Back-office operations are now entirely centralized. Account management centres open accounts and set up standing orders, printing departments manufacture cheque books, voucher processing centres process cheques and other documents, call centres deal with various services such as loans or credit card queries and so on. ANLG, like most banks, had saved considerable sums from reorganizing in this way. However, Jan knew that more needed to be done. ‘I am sure that we have barely scratched the surface in terms of exploiting the cost savings, which are possible from the reorganizations, but just as important, we have to overcome some of the quality issues that have arisen because of the communication problems between the back-office centres’.

To help him do this, Jan had organized an ‘operations development programme’ (ODP). Initially, this was a working group that had been asked to develop some core principles for improving operations performance. One of the first problems the working group faced was that different parts of the bank regarded themselves as being distinct from all the other parts.



To stimulate thought and debate, Jan asked managers of four different back-office centres to attend a working group meeting and present their thoughts on ‘My biggest issue’. The four people chosen were a Call Centre manager dealing with customer service enquiries, a manager in charge of Credit Control for personal customers, a manager running a Voucher Processing Centre and a manager who works in a subsidiary company dealing with ‘High Net worth’ (rich) clients.

Call centre

‘My biggest issue is the Inbound Calls Screen. That tells me the amount of calls being handled by the operators and the amounts queuing. Monday morning just after 9 a.m. the screen is going crazy, that is when we are at our busiest. Sometimes, during the night shift it is a real surprise when the phone rings. The next biggest issue is staff turnover as it takes usually 4 weeks to recruit and a similar time to train someone, as we look to handle 15 basic banking enquiries from our customers, and people need a fair amount of background knowledge’.

Credit control

‘Very occasionally we will speak to a customer, but really we are a back office operation. We monitor the “Out of Control” accounts. Every day we get a list of customers who have exceeded their overdraft levels and it is our job to decide whether to bounce the cheque or send a letter. The number of lines on the printout varies a little bit but not really that much. I look after the personal team who basically work to strict rules while corporate credit control is monitored by a different team as there is a need for more interpretation’.

Voucher processing

‘It is really about keeping the cheque encoding machines rolling. Cheques come to us by courier from branches in a wide geographical area and we process them through four large and extremely expensive machines. They start arriving around lunchtime and carry on until around 7 p.m. Monday is our busiest day as shopkeepers deposit their weekend takings. Sometimes, running up to Christmas it can be manic and we really struggle to get the work on before cut-off time. If a machine breaks down on the Monday before Christmas we are in real difficulty’.

High net worth banking

‘I guess flexibility is the key word. Our customers are extremely wealthy and extremely demanding. We never know what the next phone call will bring, but we have to be able to deal with it because if we cannot, we know someone else will. Sometimes it is a small query but the customer will ask for their regular point of contact, sometimes it is a really big issue and one of our account executives will have to get over to the customer’s workplace – or often their home – straightaway. It is the personal touch that really matters’.



Jan thanked the managers for their presentations and summarized:

‘I am coming to see that the issue of “similarities versus differences” as being the key to our future improvement. On one hand, we must have a common set of principles that all the business can use to continuously improve its operation’s performance. On the other hand, we have to recognize that not all parts of the business are the same. And because they are different they will need to develop different skills and possibly even different approaches to “fine tuning” their operation’s improvement activities’.

Questions

1. What are the inputs, transformation processes and outputs from the processes described in the case?

2. Determine the similarities and differences between the four back-office units using the ‘4-Vs’ approach.

3. In the light of your findings, to what extent do you believe that common sets of principles apply?

4. What do you think are the different skills and different approaches to ‘fine tuning’ the improvement activities that Jan speak about?

Teaching note – ANLG bank

This exercise is best used as an introductory exercise towards the beginning of any operations management course. It is a ‘soft’ exercise in that much of the data are in the form of opinion.

The ANLG Bank case highlights the range of different operations within one organization and can be used early in the course.

Primarily, ANLG Bank demonstrates the differences and similarities of different operations through the use of the ‘4-Vs’ typology. The overview ‘commentary’ by the Operations Director aims to show how these differences need to be understood and strategies and plans adapted rather than adopting a ‘one size fits all solution’.

The case can also be used to stimulate a debate on the range of processes within an industry such as Financial Services.

At the end of the case exercise, students should be able to understand the 4-Vs typology and be able to apply it in different circumstances. This in turn should facilitate a better understanding of the need to manage different types of operations in differing ways later in the course.

Using the ‘4-Vs’ approach helps to crystallize the differences and similarities.

The Call Centre is essentially a mid to high-volume operation. This is not necessarily true of all call centres, and is largely determined by the call length. There is some variety, the human



volume

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Call Centre Credit control Voucher Processing


volume

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interaction determines this in part as does the fact that 15 basic enquiries are handled. Variation is certainly present in terms of variation within the day, between different days of the week and seasonal variation. Having said that, the variation is to a large part predictable. Visibility is in the mid range; on one hand the operators are dealing directly with the public, but on the other they are following laid down procedures and scripts.

Credit Control is a lower volume business than the call centre and has relatively low variety (this would not be the case in the corporate credit control function). Variation is largely predictable and easier to manage as there is a known lag between increased customer spending and appearance on the ‘out of control’ list. Direct customer contact is unusual.

Voucher Processing is a classic high-volume, low-variety operation. Variation does occur, but it can be predicted with a degree of accuracy. Visibility is very low.

High Net worth Banking is at the other end of the scale. The volume is low, with each customer having a named point of contact for any query. The queries vary enormously from one customer to the next and the staff needs a broad range of knowledge and life skills to deal with them effectively. Variation in demand is high, although there is some predictability in terms of activity before the end of the tax year. Visibility is very high.

One of the strengths that the large bank has against its smaller competitors is the issue of ‘brand’. This can be a double-edged sword, however, as mistakes and subsequent bad press in one part of the bank can quickly stick to other parts of the organization. So, no matter where you are in the organization, issues about quality and customer service are vital.

In the case of the various back-office functions, each has a role to play in supporting corporate strategy, and in addition, the interactions between the functions mean that working together is vital to maintain these aspects of quality and customer service.

For example, a High Net worth customer’s cheques will be processed by the Voucher Processing Centre and any difficulties will need to be swiftly resolved. Likewise, a customer’s first point of query may well be the Call Centre, and the customer’s perception of the bank’s service will be affected by the manner in which the Call Centre and other departments work together.



Guiding principles, about understanding the demanding issues of other departments, communication and of working together, need to be developed to ensure quality and customer service.

So, while there needs to be common sets of principles to ensure that the different units communicate and work together to ensure quality and customer service, the 4-Vs analysis dictates that different approaches are needed.

For example, different strategies for exploiting cost savings will need to be considered. The flexible requirements of High Net Banking will result in lower productivity than, say, the Voucher Processing Centre.

Different skills will be needed by the managers of different units. A Manager in charge of the Voucher Processing Centre will be primarily concerned with keeping the big machines fully utilized, while the Manager of the High Net worth Banking will be more concerned with the ability of the staff to be responsive to their demanding customer’s requests.

Likewise, the customer service skills needed in the Call Centre environment are not required to the same degree in Credit Control.

Identifying the differences in the four back-office operations will lead to a number of different decisions in the design and running of the operation.

Location decisions will be affected – The High Net worth unit will need to be close to customers, and therefore local outlets will probably be the case. The Voucher Processing Unit does not need access to their customers, but as the unit requires the actual voucher to process, and bearing in mind the small operating window, it must be within a certain range of its suppliers. The call centre and credit control units could be located anywhere.

The size of operation will be related to the location decision. The High Net worth unit will probably be small, the Call Centre and Credit Control units can make use of economies of scale. The Voucher Processing unit is more difficult to locate as it has to be sufficiently local to receive and process the vouchers, but also large enough to make use of their large machines and create continuous flow that is required in a high-volume, low-variety operation.

Likewise, the staff’s skills will need to be different. In the High Net worth unit, staff will need to be flexible to deal with a variety of customers with High Net worth and also possess customer service skills of the highest order. This will not need to be the case in the Voucher Processing unit.

Each of the units has some variations of demand. In all cases, managing this degree of variation is important. In operations such as those in Financial Services, the key to managing demand is usually connected to the flexibility of the staff. In the High Net worth unit in particular, the staff will need to be multi-skilled, and a good deal of thought will need to go into the staff scheduling to ensure that the unit can still provide the high level of customer service required at times of peak demand.

Approaches to controlling the operations are likely to vary. There is more likely to be a greater reliance on approaches such as Statistical Process Control (SPC) in those operations where the volume is higher. Conversely, project management type skills are likely to be more widely required in units where there is low volume and high variety.

The list could go on. It is of importance that students are able to play with a framework such as the 4-Vs to have a greater insight into the practical issues of managing an operation.


Case exercise – Dealing with variety – two examples

The Bombay Tiffin Box Suppliers Association (TBSA) operates a service to transport home-cooked food from workers’ homes to office locations in downtown Bombay. Workers from residential districts must ride commuter trains some 30–40 km to work. Typically, they are conservative diners, and are also constrained by strong cultural taboos on food handling by caste, which discourage eating out. TBSA arranges for food to be picked up in the morning in a regulation tin ‘tiffin’ box, deposited at the office at lunchtime, and returned to the home in the afternoon. TBSA takes advantage of public transport to carry the tins, usually using the otherwise under-utilized capacity on commuter trains in the mid-morning and afternoon. Different colours and markings are used to indicate to the (sometimes illiterate) TBSA workers, the process route for each tin.

For as long as ships have navigated the seas, ports have had to handle an infinite variety of cargoes with widely different contents, sizes and weights, and, while in transit or in storage, protect them from weather and pilferage. Then the transportation industries, in conjunction with the International Standards Organization (ISO), developed a standard shipping container design. Almost overnight, the problems of security and weather protection were solved. Anyone wanting to ship goods in large volume only had to seal them into a container, and they could be signed over to the shipping company. Ports could standardize handling equipment and dispense with warehouses (containers could be stacked even in the rain if required). Railways and trucking companies could develop trailers to accommodate the new containers. Such was the success of the new design that very soon specialist containers were developed, which still conformed to the ISO standard module sizes. For example, refrigerated containers provide temperature-controlled environments for perishable goods.

Questions

1. What are the common features of these two examples?

2. What other examples of standardization in transport operations can you think of?

Teaching note – Dealing with variety – two examples

This example can be used to promote a discussion on the nature of variety and its implications for operations (and other) processes. It can even be used as an introduction to the concept of mass customization. Although it could be used anywhere within a general introduction to operations and process management, it may best be exploited during the discussion on how processes differ in terms of the 4-Vs (volume, variety, variation and visibility).

Question 1. What are the common features of these two examples?

As the title of the box implies, both are methods of dealing with complexity. Both address an operations problem in which there are, theoretically, a vast variety of transformed resources to



be processed into a wide variety of products (different destinations). Anything that can control this complexity must have very significant operational advantages.

Both also addressed what was a growing need of the time. The TBSA catered for the growing number of clerical workers who were needed to staff the huge Indian government bureaucracies. The ISO container was developed to cope with the growing volume of world trade.

A third commonality is that both deal with the considerable complexity mentioned earlier. Quite simply, the services could not operate at an affordable cost if variety was not controlled.

Another similarity is that the return journey of the containers is simply a mirror image of the outward journey. The routing information on the containers allows for simple routing and enables the containers to be returned to the same place (far more important in the example of TBSA than in the case of ISO containers).

Finally, both types of containers provide ‘protection’ for their cargoes. Containers can be left out in the rain and tiffin boxes keep the food warm and protect it from contamination.

Question 2. What other examples of standardization in transport operations can you think of?

The transport industries of the world often focus on standardization so as to limit exposure to variety. For example, some document courier services will limit the size of the package that they will carry. They may also provide a standardized package free of cost to their customers to ensure standardization of size, labelling and so on. Similarly, a passenger airline will transport multiples of basic units like people and ensure that cabin baggage conforms to a maximum size and weight. Attempting to take a wheelchair, a bicycle or a llama (!) on a scheduled flight causes problems because of their non-standard nature.


Case exercise – Formule 1 – the most affordable hotel chain

Hotels, by the nature of their services, are high-contact operations – they are staff-intensive and have to cope with a range of customers, each with a variety of needs and expectations. So, how can a highly successful chain of affordable hotels avoid the crippling costs of high customer contact? Formule 1, a subsidiary of the French Accor group, is able to offer outstanding value by adopting two principles not always associated with hotel operations – standardization and innovative use of technology. Formule 1 hotels are usually located close to the roads, junctions

and cities, which make them visible and accessible to prospective customers. The hotels are made from state-of-the-art volumetric prefabrications. The prefabricated units are arranged in various configurations to suit the characteristics of each individual site. The figure shows some configurations. All rooms are nine square metres in area, and are designed to be attractive, functional, comfortable and soundproof. Most important, they are designed to be easy to clean and maintain. All have the same fittings, including a double bed, an additional bunk-type bed, a washbasin, a storage area, a working table with seat, a wardrobe and a television set.

Some configurations of Formule 1 pre-manufactured room units



The reception area of a Formule 1 hotel is staffed only from 6.30 a.m. to 10.00 a.m. and from 5.00 p.m. to 10.00 p.m. Outside these times, an automatic machine sells rooms to credit card users, provides access to the hotel, dispenses a security code for the room and even prints a receipt. Technology is also evident in the washrooms. Showers and toilets are automatically cleaned after each use by using nozzles and heating elements to spray the room with disinfectant solution and dry it before it is used again.

To keep things even simpler, Formule 1 hotels do not include a restaurant as they are usually located near existing restaurants. However, a continental breakfast is available, usually between 6.30 a.m. and 10.00 a.m., and of course on a ‘self-service’ basis!

Questions

1. What is the role of technology in allowing Formule 1 to keep its costs down?

2. How does the concept of ‘standardization’ help Formule 1 to keep its costs down?

Teaching note – Formule 1 – the most affordable hotel chain

Question 1. What is the role of technology in allowing Formule 1 to keep its costs down?

Technology is harnessed in the manufacture of the self-contained bedroom units in the factory prior to assembly on the site. Because of standardization, conventional factory automation can be used to some extent. More obviously, during the running of normal operations at the hotel, technology, in the form of the automatic ‘booking in’ machine at the reception, allows the hotel to remain open for customers even while it is not staffed for much of the day. This saves labour. Similarly, labour is saved by the use of automatic cleaning in the washrooms. This also ensures that high standards of cleanliness are maintained throughout the day, even when the hotel is not staffed. Although not mentioned in the text, Formule 1 hotels also have automatic drinks and snacks dispensers that allow guests to stave off hunger and thirst even though the hotel does not provide food in a conventional restaurant setting.

Question 2. How does the concept of ‘standardization’ help Formule 1 to keep its costs down?

The main benefit of standardization is in the manufacture of the individual room units. All room units are exactly the same size. Because they all have identical fittings, the fittings can be partly installed at the factory. This allows the company to buy furniture, curtains, carpets and so on in large volume, keeping costs down. The standardized nature of the units also allows the hotel to be constructed quickly (which itself saves costs) using standardized methods of construction, which are cheaper than building entirely different hotels at each site. Standardization of rooms also allows a standardized procedure to be adopted for cleaning and maintenance, so staff can be easily trained using a standardized training package. Finally, standardization of the room units, paradoxically, allows all Formule 1 hotels to adapt to the geography of the site. By putting the standard units together, like children’s building blocks, they are able to use unusually shaped pieces of land, which tend to be cheaper than regularly shaped sites.



Look at how the Formula 1 hotels compare with for example, a luxury island vacation hotel.


Case exercise – Swatch revolutionizes watch manufacture

In the early 1980s, the Swiss watch industry was nearly dead. Competition from cheap but often high-quality products from Far Eastern manufacturers such as Seiko and Casio had almost obliterated the traditional Swiss industry. Trying to protect their investments, the Swiss banks organized a merger of the two largest companies on the advice of Nicolas Hayek, now the boss of Swatch’s parent company SMH, which was formed from the merger. He saw the potential of a new plastic-cased watch that was already being developed by one of the companies. One of its major advantages was that it could be made in large volumes at very low cost. The quartz mechanism was built directly into the all-plastic case using very few components, less than half the number in most other watches. Fewer components also meant that the manufacture of the watch could be fully automated. This made ‘Swatches’ cheap to produce even in Switzerland, which has one of the highest labour costs in the world.

The innovative design, some creative marketing, but above all else the operation’s success at producing the watch cheaper than anyone else, brought the company significant rewards. In the early 1980s, the total market share for all Swiss watches was around 25 per cent; ten years later, it had more than doubled. The ability to offer a good watch at a low price had released the potential of the watch to become a fashion accessory. Swatch’s operations reaped the benefits of high volume but had to cope with an ever-increasing variety of product designs. Through automation and rigid standardization of the internal mechanism of the watch, the company managed this increase in variety without a crippling effect on costs. It is the success of the company’s operations managers in keeping their costs low (direct labour cost is less than 7 per cent of the total cost of production) that has allowed Swatch to succeed. Not that everything the company has done has been successful. Some designs never caught the public’s imagination and some distribution and marketing mistakes were made, especially in the US. However, continuing with innovations and maintaining high quality and low costs made it much easier to overcome such problems.

Questions

1. What do you think has been the contribution of the marketing function, the product design function and the operations function to the success of Swatch?

2. How do you think Swatch compares with most watch manufacturers?

Teaching note – Swatch revolutionizes watch manufacture

Question 1. What do you think has been the contribution of the marketing function, the product design function and the operations function to the success of Swatch?

Swatch is a good example of the way three sets of competitive abilities in a company relate to each other. The three key contributions to Swatch’s success (or the three important micro operations) are:



• the way they have developed their products and services,

• the way they have positioned themselves in their market,

• the way they have created their products and services.

The original stimulus for Swatch’s success lay in its product design. The Swatch design was particularly innovative, incorporating plastic and designed with relatively few parts. This resulted in a watch that was robust, capable of being adapted to changes in fashion and requiring relatively inexpensive parts and materials. This allowed the product to be positioned in the market as an item of ‘mass fashion’. It was easily recognizable and stylish and yet sufficiently affordable to sell in large numbers. The design was also eminently manufacturable. Parts were standardized and the design intrinsically easy to make. This manufacturability, combined with higher volumes, further reduced the cost of manufacturing the product. The revenue implications of an attractive, high-volume product, together with the cost implications of high volume will generate the revenue for further product development which, because of the volume, will not significantly add to the costs of variety.

Question 2. How do you think Swatch compares with most watch manufacturers?

Swatch has a range of products that are essentially very similar, but customized ‘at the last minute’. This allows it to operate at relatively high volume and low variety for much of its manufacturing process. It therefore, has a relatively simple and cheap manufacturing operation, while at the same time allowing ‘mass fashion’ orientation of its marketing. Given this, Swatch will have a higher degree of automated machinery (because of the high volume and the standardized parts) and rely less on skilled labour. Almost certainly, it will put more effort into its design activities than most watch manufacturers.


Case exercise – The Henry Ford of ophthalmology

High-volume operations can be found in some surprising places – even surgery. Not all surgery conforms to our preconceptions of the individual ‘super-craftsperson’, aided by his or her back-up team, performing the whole operation from first incision to final stitch. Many surgical procedures are, in fact, fairly routine. There can be few examples, however, of surgery being made quite as routine as in the Russian clinics of eye surgeon, Svyatoslav Fyodorov.

He has been called the ‘Henry Ford of ophthalmology’, and his methods are indeed closer to the automobile assembly plant than the conventional operating theatre. The surgical procedure in which he specializes is a revolutionary treatment for myopia (short-sightedness) called radial keratotomy. In the treatment, the curvature of the cornea is corrected surgically – still a controversial procedure among some in the profession, but very successful for Fyodorov. From his Moscow headquarters, he controls nine clinics throughout Russia.

The source of his fame is not the treatment as such – other eye surgeons around the world perform similar procedures – but the way he organizes the business of the surgery itself. Eight patients lie on moving tables arranged like the spokes of a wheel around its central axis, with only their eyes uncovered. Six surgeons, each with his or her ‘station’, are positioned around the rim of the wheel so that they can access the patients’ eyes. After the surgeons have completed their own particular portion of the whole procedure, the wheel turns around to take the patients to the next stage of their treatment. The surgeons check to make sure that the previous stage of the operation was performed correctly and then go on to perform their own task. Each surgeon’s activity is monitored on TV screens overhead and the surgeons talk to each other through miniature microphones and headsets.

The result of this mass production approach to surgery, according to Fyodorov, is not only far cheaper unit costs (he and his staff are paid for each patient treated, so they are all exceptionally wealthy, as a result) but also a better success rate than that obtained in conventional surgery.

Questions

1. Compare this approach to eye surgery with a more conventional approach.

2. What do you think are the advantages and disadvantages of this approach to eye surgery?

Teaching note – The Henry Ford of ophthalmology

Question 1. Compare this approach to eye surgery with a more conventional approach.

One way of comparing these two processes is to use the 4-Vs. The figure below positions each process on the four dimensions.



Low

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Conventional eye surgery Fyodorov method

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Conventional eye surgery Fyodorov method

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Volume – the Fyodorov method is devoted to a single type of surgical procedure of the eye carried out at large volume. Conventional eye surgery is likely to have far lower volume for each type of eye surgery, partly because of a higher variety of surgical procedures.

Variety – as implied above, conventional eye surgery could deal with any sort of eye complaint, Fyodorov specializes in one type.

Variation – some types of eye surgery will be performed as emergencies, trauma injuries to the eye, for example. These cannot be predicted in advance and are likely to cause interruptions in planning and some variations in demand level. Fyodorov’s method, on the other hand, is used on non-urgent cases that can be queued (stored) as inputs to the process, which will level the demand on the process.

Visibility – both processes have relatively high visibility because the patient has to be there to be a part of the ‘processes’. However, the extra diagnostics and possibly multi-stage surgery required in conventional eye surgery could be seen as having a higher visibility.

Question 2. What do you think are the advantages and disadvantages of this approach to eye surgery?

The advantages are largely concerned with the low cost of processing patients under the Fyodorov method, which will result in lower prices for the surgery. The repetition involved may also allow industrial process control methods to improve the process technically, and ensure a high level of conformance in the operation (i.e. fewer mistakes). The limitations are that the process is extremely inflexible; it cannot cope with high variety. It could also be boring for surgeons, a class of labour who usually prefer the excitement of variety.

The advantages of conventional surgery are the mirror image of the disadvantages mentioned earlier. Namely, that conventional eye surgery can cope with a wide variety of possible eye complaints. The diagnosis procedure may also be more sophisticated, and therefore more likely to detect non-obvious symptoms. The disadvantages are that because of its low volume, high variety, high variation and high visibility, it will be expensive.


C H A P T E R 2

Case exercise – Flexibility at Godiva Chocolatier

The world-famous chocolate maker, Godiva Chocolatier, is situated right in the heart of Brussels, Europe’s centre of quality chocolate manufacturing. Godiva is a relatively small producer, which makes more than 100 different types of chocolates and packs them in a wide range of cartons and bulk packs. Over the last few years, the company has invested to achieve improvements in productivity through automation while at the same time ensuring that flexibility is built in at every stage of production. There are two basic methods of production used at Godiva: enrobing and moulding.

Enrobed products begin as extruded strips of hard fillings such as marzipan, which are cut into short pieces and passed through a machine, which coats them in liquid chocolate. The enrobing department operates by linking together the various pieces of equipment (extruders, guillotines, depositors, enrobers, decorators, etc.) in different sequences and combinations to suit the individual product designs. Sometimes, where the volumes justify the effort involved in repositioning them, this is done by using moveable conveyors to form the link between the machines. Otherwise, the products are transferred around as required in plastic trays, allowing the equipment (and the skilled staff) to be decoupled and thereby work at different speeds and times. Only small tanks of liquid chocolate are used at the enrobing machines so that changeovers can be fast. Typically, it takes only 20 minutes to disconnect the tank and clean out the enrobing machine prior to starting on another colour. Because of the wide variety of products, planning is complex, with the sequence of products being critical to productivity and quality. Normally, it is considered uneconomic to produce less than 300 kg of a particular colour of chocolate, but where possible, longer runs of different products with the same chocolate coating are planned so that the colour change can be carried out at the end of the day’s production.

Most moulded products are produced on a new and complicated 80-metre long production line, which was designed to handle almost the full range of moulded products. It can mould all three colours with a 20-minute changeover of the liquid chocolate. These are normally done only at the end of a day’s production. Moulds can be changed without stopping the line, using a simple operator-assisted device. Filling the shells with creams, fondants, etc. is carried out using computer-controlled depositing machines. Three of these depositors are available, allowing one or two to be in use while the third is moved aside for cleaning, programming and setting up with the next batch of filling. It is possible, therefore, to change product in less than one minute, and to use two depositors simultaneously for products in which nuts or cherries are to be incorporated in the middle of cream. After demoulding, the chocolates can be routed to an automatic individual wrapping machine, but most are conveyed directly to a packing robot, which picks and places the products on blister packs for bulk sales to shops, or on flat plastic trays for transfer to the assortment packing lines.

The most flexible part of the operation is the assortment packing section. Here, the finished chocolates are packed according to the appropriate mix and positions in the various retail cartons. These pass along a conveyor, where each individual chocolate is added to the pack by hand. Although it is technically possible for this to be done by a robot, Godiva engineers have found that people are less expensive and can also continuously inspect the quality of every chocolate packed. Many of the staff are also very adept at adding value-added features to the packaging, such as ribbons, bows and labels.



Questions

1. Why is flexibility so important to a company like Godiva?

2. What does the company appear to have done to enhance its flexibility?

Teaching note – Flexibility at Godiva Chocolatier

Question 1. Why is flexibility so important to a company like Godiva?

There appear to be two drivers of flexibility for this company. The first is the range of products it has to make. Clearly, the wider the range of products, the more flexible its production processes need to be. If a different technology was needed for every single variety of chocolate, the whole process would be prohibitively expensive. That brings us on to the second driver – cost. Although Godiva does not compete on low price (it competes on very high quality and range), cost is not unimportant to it. Much of the flexibility described in the box seems to have the ability to reduce the cost of changeovers. In effect, this means that the company can produce its variety of chocolates without incurring prohibitive costs. A third type of flexibility, which is not mentioned in the box as such but would be important to a product such as a high quality chocolate, is volume flexibility. This type of product is likely to be relatively seasonal. It is bought on occasions such as Christmas, Easter and so on. The operation must be able to adjust its output levels to some extent in order to cope with this seasonal demand.

Question 2. What does the company appear to have done to enhance its flexibility?

A number of flexibility enhancing methods are mentioned in the case. These include the following.

• Separating the various processes in the enrobing department so that batches can be moved between the processes in different ways.

• Using only small tanks of liquid chocolate so that changeovers can be speeded up without waste of chocolate.

• Changing the colour of chocolate at the end of the day so as not to waste production time.

• Adopting a flexible, integrated line for moulded products that can change over chocolate colour in 20 minutes.

• Incorporating the ability to change moulds without stopping the line.

• Adopting computer-controlled depositing machines to change the fillings.

• Allowing one of the depositing heads to be cleaned while the other one or two are still in use.

• Using flexible robots to pick and pack products into blister packs.

• For assortments, using that most flexible of processes, people, to pack the boxes.


Case exercise – Aldi Einkauf – Europe’s largest retailer

The operations of this company started in Germany and then spread to Denmark, Holland and Belgium. Soon the cut-price retailers were taking larger shares of the market throughout Europe. Cut-price retailers include companies such as Netto (Danish) and Lidl and Schwartz (German), but perhaps the best known is Aldi (also German). Aldi has carefully focused its service concept and delivery system to attract customers in a highly competitive market. It has developed and maintained its own unique style of operation and is continuing to expand in Europe – over the last few years at the rate of 15 per cent per annum – so, it now operates in 12 countries within Europe.

The Aldi operation challenges the norms of retailing. It is deliberately simple, using basic strip lighting in its stores, stocking only a limited range of goods (approximately 5000 in comparison to the 15,000/20,000 stocked by retailers such as Sainsbury’s in the UK or Mammouth in France) and using cut-open cases of goods rather than expensive display shelves. The company has formidable buying power (as Europe’s largest retailer) and stocks mainly its own brand of goods. Its highly effective distribution channels and low overhead costs also help to keep prices low. Aldi has deliberately followed a ‘keep it simple, keep it cheap’ concept of service operations, aiming to make life for the customer as easy as possible. Aldi believes that by accepting only cash sales (no cheques or coupons) and by having such a limited range of goods (so that cashiers can remember all of the prices and so work at a higher speed than scanners) they can process customers quickly and reliably.

Question

1. How do companies like Aldi seem to keep their costs down?

Teaching Note – Aldi Einkauf

Question 1. What are the main ways in which Aldi operations try to minimize costs?

Aldi do two sets of complementary things to keep costs down; they minimize input costs and reduce process complexity.

Minimizing input costs includes specializing in ‘private label’, that is, Aldi branded products. This means that they can specify the composition (e.g. recipe) of products to keep costs under control. They do not have to support the brand marketing that is necessary with branded products. They are also a large organization that can order products in very large quantities, thereby keeping prices down. Nor do they use complex and costly fittings in their stores. Using ‘open carton’ displays and deliberately not supplying grocery bags both eliminate costs that other supermarkets incur.

The system is also simple. An ordering and stock management system that only has to cope with 700 items is much easier to design and operate than one that has to cope with 30,000 items.



Supply chain, stock movement, quality management and other systems are therefore simpler and cheaper. By using simple customer management devices, such as returning the deposit only when a cart is brought back to the store, the job of collecting and returning trolleys is eliminated.


Case exercise – Birmingham Amusement

Birmingham Amusement Machines was a company that manufactured gaming and video-amusement machines. The company sold its products to an operating company, which distributed them to bars, country clubs, casinos and pubs. Both the companies were started by Bob Greenwood, an engineer who was fascinated by the design of the early mechanical gaming machines. Largely through innovative design, the company had grown to be one of the four largest in the market with a 30 per cent market share.

Four years ago, Bob Greenwood sold the company to a large industrial group, but he was retained as chief executive of the manufacturing company. The new owners were happy to let Bob indulge his talent for design, especially since the company had entered the video-amusement market. Video-amusement machines did not pay out cash prizes like gaming machines, but allowed the player time on the machine to play a game. The company manufactured all parts for the gaming machines and assembled them in its factory. However, many of the components for the video-amusement machines were imported and only assembled into the outer casings in the factories.

Recently, the owners became dissatisfied with the company’s performance. The market for its goods was still growing, but the company’s profitability had failed to match expectations. The owners decided to appoint a new chief executive and to fire Bob, who was predictably upset at being replaced:

‘It’s always been the combination of high technology and fashion that’s fascinated me about this industry. You have to be first in the field with every advance in technology, especially now video amusements are a big part of our business, but you also have to keep an eye out for the fashionable trends. On average, we’ve brought out a new product every four months, for the last five years. You can’t run a company like this by putting an accountant as its boss – you need an innovator’.

In fact, the owners had appointed an accountant as the head of the company. On his first day, the new boss made a tour of the plant, after which he called the manufacturing manager into his office and began to criticize what he had seen of the production set-up: ‘It seems to me that the whole plant is totally disorganized. There are part-finished goods everywhere, and no one seems to know exactly what they’re going to do next. I found some parts of the plant clearly overworked, and other parts with nothing to do. I am sure, with a bit of tighter management, you could get your unit production costs down dramatically’.

The production manager was defensive. ‘Of course I’d like to get my unit costs down, and of course I could rearrange the whole plant to make it more efficient. The trouble is, the design department are getting me to change products every few months, so I never really have time to let the production system settle down. At the same time, marketing department are wanting me to give them instant delivery on new products, almost as soon as I have the drawings from the design office, and they insist on quality being of the highest standard at all times’.

The new boss called in the marketing manager to explain these demands that were placed on the production system. The marketing manager was equally forthright. ‘I couldn’t care less about his unit costs. It’s not low cost that sells these machines. Look at it this way: in a heavy gambling club one of these machines can pay for itself in less than three months. Under those circumstances, nobody in this industry is competing on price. It’s not totally unimportant, but



plus or minus 10% isn’t going to make much difference to our sales. What sells machines is a new product on the books every few months or so and almost instant delivery – many of the club owners buy on impulse – and an unimpeachable reputation for the highest product reliability’.

After listening to the testimony of his managers, the new boss was a lot less certain on how he should proceed to reshape the business.

Questions

1. What do you think were Bob Greenwood’s objectives when he ran the company?

2. List what you think might now be the priority objectives of:

(a) The production manager;

(b) The marketing manager;

(c) The new boss.

Teaching note – Birmingham Amusement

This case exercise described the views and objectives of various managers in a company that manufactures gaming machines. It highlights the contributions made by three sets of people within the organization:

• The research and development people, who are responsible for incorporating the latest technology ideas into the products.

• The marketing people, who are keen to understand the trends in the industry and meet them before any of the competitors do.

• The production operations staff, who are somewhat squeezed between conflicting objectives of speed and cost.

Question 1. What were Bob Greenwood’s objectives?

Bob seems to be an enthusiast who derives satisfaction from the incorporation of novel technology into the company’s products. He sees product development as the main driver of the company, a process that combines ‘high technology and fashion’. The key organizational linkages under Bob’s vision of the company are likely to be those between marketing (who should understand the trends in the market) and product development (who understand the potential of new technologies). He seems to give a lot of time to considering the cost consequences of continual product design changes. See the figure below.



Question 2. What were the production manager’s objectives?

The production manager sees himself as being squeezed between two sets of pressures. The first, from Product Development, is represented by a series of product changes. No sooner has the production system been set up to make one list of products when it is replaced by another. This continual change prevents the production operation from moving down the learning curve and achieving the stability that will let them reduce costs. The second set of pressures comes from Marketing, who want fast delivery both of existing products and new products.

The production manager must therefore try to achieve:

• low costs;

• fast delivery;

• short ‘time-to-market’ of new products.

Product Development

Marketing

Market trends

New technologies

Marketing Marketing

Market trends

New technologies

Product

Development

Marketing

Production

Delivery and quality

New designs

Marketing Marketing

Production Production

Delivery and quality

New designs



What were the marketing manager’s objectives?

The marketing manager certainly does not seem to be interested in costs. Customers for these products are making so much profit from them that they are relatively indifferent to the price they pay. However, the availability of new products is crucial to making a sale. This has two aspects. Firs, the existing product must be delivered quickly to any customer who places an order. Unless prompt delivery is promised, the customer could go elsewhere. Second, the company must be first onto the market with any new fashion or technical development. Being second in following a trend might substantially reduce sales. The quality of the products is also briefly mentioned, as is product reliability. The market manager therefore requires

• fast delivery;

• short ‘time-to-market’ of new products;

• product reliability;

• product quality.

What should be the objectives of the new boss?

The new boss faces something of a dilemma. On the one hand, competitiveness in the market clearly requires innovation and product reliability. On the other, although the company is not under price pressure, profitability seems to be unsatisfactory. The only explanation for this is that costs are too high.

The key to this problem must be the development of enhanced flexibility. What Slack et al. call response flexibility (i.e. the ability to change rapidly and without excessive cost) must be of importance to the production manager. Yet, nowhere in the case exercise is flexibility mentioned by the various managers.

Two types of flexibilities are likely to be important – new product flexibility and volume flexibility.

• New product flexibility means that the operation must be able to introduce new or modified products quickly, and depends on a close collaboration between the product and product development departments.

• Volume flexibility means that the output of the operation can be adjusted quickly. This will be important because of the intrinsic unpredictability of such a fashion-oriented market, and depends on a close collaboration between production and market.



Product

Development

Marketing

Production

The flexibility to adapt to a fast changing

market

Marketing Marketing

Production Production


market


market


Case exercise – Organically good quality

‘Organic farming means taking care and getting all the details right. It is about quality from start to finish. Not only the quality of the meat have we produced but also quality of life and quality of care for the countryside’. Nick Fuge is the farm manager at Lower Hurst Farm located within the Peak District National Park of the U K. He has the day-to-day responsibility for the well being of all the livestock and the operation of the farm on strict organic principles. The 85-hectare farm has been producing high-quality beef for almost 20 years but changed to fully organic production in 1998. Organic farming is a tough regime. No artificial fertilizers, genetically modified feedstuff or growth-promoting agents are used. All beef sold from the farm is home bred and can be traced back to the animal from which it came. ‘The quality of the herd is most important’, says Nick ‘as in animal care. Our customers trust us to ensure that the cattle are organically and humanely reared, and slaughtered in a manner that minimizes any distress. If you want to understand the difference between conventional and organic farming, look at the way we use veterinary help. Most conventional farmers use veterinarians like an emergency service to put things right when there is a problem with an animal. The amount we pay for veterinary assistance is lower because we try to avoid problems with the animals from the start. We use veterinaries as consultants to help us in preventing problems in the first place’.

Catherine Pyne runs the butchery and the mail order meat business. ‘After butchering, the cuts of meat are individually vacuum packed, weighed and then blast frozen. We worked extensively with the Department of Food and Nutrition at Oxford Brooks University to devise the best way to encapsulate the nutritional, textural and flavoursome characteristics of the meat in its prime state. So, when you defrost and cook any of our products you will have the same tasty and succulent eating qualities associated with the best fresh meat’.

After freezing, the products are packed in boxes, designed and labelled for storage in a home freezer. Customers’ order by phone or through the internet for the next day and the delivery is done in a special ‘mini deep freeze’ reusable container that maintains the meat in its frozen state. ‘It isn’t just the quality of our product that has made us a success’, says Catherine, ‘We give a personal and inclusive level of service to our customers that makes them feel close to us and maintains trust in how we produce and prepare the meat. The team of people we have here is also an important aspect of our business. We are proud of our product and feel that it is vitally important to be personally identified with it’.

Questions

1. What does Lower Hurst Farm have to get right to keep the quality of its products and services so high?

2. Why is Nick’s point about veterinarian help important for all types of operations?



Teaching note – Organically good quality

Question 1. What does Lower Hurst Farm have to get the right to keep the quality of its products and services so high?

It is first important to understand what is meant by ‘quality’ in this case. Of course, it means the same as for any other product, namely, that it consistently meets its specification. But, there are also other issues with this organization. First, there is a matter of trust. The people who buy this meat are doing so, at least partly, because it is organic. Therefore, they must have trust that the operation maintains everything that is associated with organic farming. This includes both the way the animals are reared and cared for and the stewardship of the countryside. The operation therefore must do everything it can to demonstrate that it is doing this and build the trust of its customers. Second, there is a significant ‘quality of service’ issue. Catherine points out that customers like to have personal communication with her when they are ordering their meat. Quality of service therefore, means not only the courtesy and responsiveness that we would expect from any service but also the feeling that the customers are ‘part of the system’.

Achieving these different aspects of quality means devoting considerable attention to how the farm manages its processes. In effect, there are three processes here: rearing the cattle, butchering the cattle and packing the meat, and taking orders and despatching to customers. Rearing the cattle under organic conditions is clearly a rigorous and demanding process. The inputs to the process (the land, cattle, feed, absence of artificial fertilizers and drugs etc.) must all be checked for quality and the day-to-day care of the cattle must conform to organic farming rules. The butchering must be done so as not to cause too much distress to the animals, and the freezing process should be designed (with specialist help) to maintain the quality of the meat. Finally, the ordering process must be conducted, not just with courtesy but with a level of friendliness appropriate to customers’ expectations. Similarly, transportation of the products must be fast and dependable (Catherine always calls customers to make sure that they have received their order and that it is in good condition).

Question 2. Why is Nick’s point about veterinarian help important for all types of operations?

Nick distinguishes between how most farmers use veterinarian help (as an emergency service) and how organic farmers use it (as a method for preventing problems happening in the first place). This issue applies to almost all operations. Nick’s view is very close to the modern philosophy that, because the true cost of breakdown in any part of an operation is far higher than most people imagine because of the disruption it causes, it is usually best to try and put some effort into preventing breakdowns from happening in the first place.


Case exercise – Taxi Stockholm

Taxi Stockholm may be over 100 years old and organized as a cooperative, but it has become one of the largest and most technically advanced taxi companies in the world. ‘They are absolutely trustworthy’, according to one satisfied customer, ‘I am not the only one who chooses them even when they are not first in the taxi queue’. The company has a policy of choosing reliability over speed, according to their CEO Anders Malmqvist. ‘Compared to some of our rivals, productivity in our call centre is low. Our workers don’t answer as many calls per hour, but that’s our choice. The focus of our business is not how many calls we can answer but how many customers we can satisfy’.

Such dependability is helped by Taxi Stockholm’s automatic routing technology. Phone for a cab and a voice response system identifies your location (verified by pushing the appropriate buttons on the telephone) and the system finds and instructs the nearest available cab to your location. Plans include extension of the technology to provide precise estimated times of arrival every time a cab is called and automatic call back to confirm each reservation. ‘My job’, says Malmqvist ‘is to get the fleet out when customers demand it, not the other way round’.

Question

1. How can Taxi Stockholm keep its dependability high during those times when demand is high and traffic is congested?

Teaching note – Taxi Stockholm

Question 1. How can Taxi Stockholm keep its dependability high during those times when demand is high and traffic is congested?

Taxi Stockholm seems to use two methods of keeping its dependability high. First, they ensure a high level of communication with the customer through their call centre. They deliberately do not emphasize productivity so that call centre operatives can keep the customer informed regarding the level of service they should expect to receive (e.g. how long they will have to wait for a taxi). This also allows call centre operators to manage customers’ expectations. Remember, it is not speed that they are competing on but dependability. It is more important to Taxi Stockholm that, even if the taxi is not expected to arrive for half an hour, it really does arrive within half an hour. The second method they use involves some very advanced technology. Taxi Stockholm is known for its investment in state-of-the-art identification, positioning and automatic routing technology. Again, this enables the operation to obtain accurate information that helps it to make reasonable estimates of time of arrival and journey times.


Case exercise – Recycling strategy at Veka UPVC windows

Although customers and competitors are the main drivers of market pressures, other factors can affect even a ‘mature’ product. The legislative environment, for example, may create new pressures and opportunities. Germany’s tough environmental laws, for example, limit disposal of waste in landfill sites. The final disposal of end-of-life products is severely constrained, encouraging disassembly into component materials that can then be re-used.

UPVC windows have been used in Germany for several decades, and many are now being replaced. At one time, some 100,000 windows were deposited in landfill sites in Germany, but legislations were enacted to curtail activities. Veka, the world’s largest producer of UPVC windows, recognized the potential impact of this legislation on the entire business and set about the development and design of a recycling process for discarded windows. The new DM 30 million plant, constructed in Behringen, shreds complete windows into fragments, which are then sorted into the reusable component materials of glass, metals, rubber and UPVC. The latter is used by Veka itself in new products, completing the cycle of materials; less than 3 per cent of the materials go waste.

Veka’s strategy of environmentally friendly operations has not only been a logical response to a changing legislative environment but has also created a new competitive advantage. Purchasers of new windows could not fail to be impressed with the product and processes, which allow valuable materials to be recycled. In addition, Veka has also gained a sustained source of cheap materials, insulating itself from the fluctuating price of new plastic.

Questions

1. What have been the major pressures on Veka that caused it to change its operations strategy?

2. What opportunities for the operation do you think were created by the move to recycle?

Teaching note – Recycling strategy at Veka UPVC windows

Question 1. What have been the major pressures on Veka that caused it to change its operations strategy?

Primarily it appeared that the motivation for Veka was entirely due to the changes in the legislative environment in its home market, Germany. The new environmental laws put responsibility onto manufacturers to ensure the collection and recyclability of their products. Companies like Veka just had to do something. However, it may have also been the case that Veka understood that the new environmental laws were just the first step in a continual process of extra legislation on environmental sustainability. Perhaps there was no point in trying to get round the new regulations when there would be even tougher regulations round the corner? Perhaps, it was also true that the executives of Veka were motivated by genuine concerns regarding environmental sustainability.



Question 2. What opportunities for the operation do you think were created by the move to recycle?

This is a great example of how a company’s operations capabilities can influence its market strategy. Once it had mastered the operations processes that were necessary for UPVC recycling (and especially if it was better at doing this than any of its competitors), it could actively exploit that in its market place. Positioning itself as the ‘environmentally friendly window maker’ could actually win it extra business. Not only this but also the intrinsic advantages of recycling became more apparent once the company had developed its recycling capabilities. More particularly, it had an assured supply of material available at a predictable price.


Case exercise – When speed means life or death

Of all the operations that have to respond quickly to customer demand, few have more need of speed than the emergency services. In responding to road accidents especially, every second is critical. The treatment you receive during the first hour after an accident (what is called the ‘golden hour’) can determine whether you survive and fully recover. Making full use of the golden hour means speeding up three elements of the total time to treatment – the time it takes for the emergency services to find out about the accident, the time it takes them to travel to the scene of the accident, and the time it takes to get the casualty to appropriate treatment.

Alerting the emergency services immediately to an accident is the idea behind Mercedes-Benz’s new TeleAid (Telematic Alarm Identification on Demand), offered initially to drivers of their S-class cars in Germany. As soon as the vehicle’s air bag is triggered, an on-board micro computer reports through the mobile phone network to a control centre (drivers can also trigger the system manually if not too badly hurt). The on-board satellite facility then allows the vehicle to be precisely located, and the type of vehicle and owner identified (if special medication is needed).

Getting to the accident quickly is the next hurdle. Often the fastest method is by helicopter. When most rescues are only a couple of minutes’ flying time back to the hospital, speed can really save lives. However, it is not always possible to land a helicopter safely at night (because of possible overhead wires and other hazards), so conventional ambulances will always be needed, both to get paramedics quickly to accident victims and to speed them to hospital. One increasingly common method of ensuring that ambulances arrive quickly at the accident site is to position them, not at hospitals but close to where accidents are likely to occur. Computer analysis of previous accident data helps to select the ambulance’s waiting position, and global positioning systems help controllers to mobilize the nearest unit. At all times, a key requirement for fast service is effective communication between all those who are involved in each stage of the emergency. Modern communications technology can play an important role in this.

Questions

1. Draw a chart that illustrates the stages between an accident occurring and full treatment being made available.

2. What are the key issues (both those mentioned above and any others you can think of) that determine the time taken at each stage?

Teaching note – When speed means life or death

Question 1. Draw a chart that illustrates the stages between an accident occurring and full treatment being made available.

Although there is not really enough information to draw any definitive chart, it is important to get students to attempt it. Doing this emphasizes the potential to reduce throughput time at all the stages of the total ‘process time’ from start to finish.



Question 2. What are the key issues (both those mentioned above and any others you can think of) that determine the time taken at each stage?

Looking at the list of all the activities in the charts drawn by the students, one should be able to see that minimizing the time between each stage depends on a number of factors.

• Information flow – The faster the information moves between the three parties (the victim, the vehicle with its staff and the hospital), the faster decision processes can start. Automated systems of accident notification, such as that described in the box, are useful but more common means such as the advent of widespread mobile phone ownership will have helped reduce information transmission times.

• Decision making – Although partly dependent on the quality of information provided, it is important that all staff are trained to make decisions (in this case usually diagnostic decisions) as quickly as possible. Training will need to be designed to promote fast and accurate diagnostic decision making.

• Skills availability – This is related to the above point. If the necessary skills are available in the vehicle, diagnosis and treatment can be speeded up. At its extreme, this would involve a full medical team and all equipment being carried on board the vehicle. But this is clearly impractical. However, the decision on what skills to have aboard the vehicle (there are doctors carried on the helicopter) and what equipment to have on-board (a trade-off between weight and availability of equipment on the helicopter) are key issues.

• Journey times – The location of hospitals at areas that are particularly accident-prone can reduce journey times. Probably, the most significant move of recent years is to position ambulances away from their home base and near potential accident zones, as mentioned in the box (it is a lot cheaper than moving hospitals).

Capacity management – The problem with accidents is that they cannot be planned in advance. Some periods of time are known for being dangerous (a rainy Friday evening when people are returning home from work, for example). But there will always be some element of uncertainty. Providing plenty of resources to cover such times minimizes the chance that ambulances, doctors etc. will be busy, but this will obviously be expensive. To some extent, this decision will always come down to how much, as a society, we are willing to pay to minimize accident trauma.


C H A P T E R 3

Case exercise – Why Japan invested in the United Kingdom

The 1990s saw hundreds of Japanese companies setting up operations in Europe. Manufacturing companies particularly have recognized 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. Large 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 government-funded financial support and tax concessions in regional development areas. They recognized 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 large number 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 English language is the first foreign language of most business people. Drawings of products and processes, instruction sheets and computer programmes 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 the 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 criticizing 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 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 (as in most advanced economies) cumbersome, 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.



Questions

1. Summarize what you see as being the major factors, which favoured the UK in attracting inward investment from Japan.

2. Nissan, Toyota and Honda all now have plants in the UK. What factors do you think will influence whether these plants expand or not?

Teaching Note – Why Japan invested in the UK

Question 1. Summarize what you see as being the major factors which favoured the UK in attracting inward investment from Japan.

• Initially, generous government financial support and tax concessions were important.

• A relatively well-educated workforce was available.

• A critical mass of Japanese companies had developed in some areas so facilities such as schools for Japanese staff already existed.

• English is the second language of most Japanese and the first (and often only) language in the UK. Documents therefore did not need translating.

• Cost of labour was low compared with Continental Europe.

• Corporate tax is relatively low in the UK.

• Communication links and infrastructure from the UK are good.

• The political and social environment is relatively stable.

• Corruption levels are low and decision making relatively transparent.

• The Japanese found it a good place to live, especially with its golf courses!

Question 2. Nissan, Toyota and Honda all now have plants in the UK. What factors do you think will influence whether these plants expand or not?

Demand in Europe generally will be an important factor because the UK plants mainly serve the European market. In particular, demand in the UK is important because transportation costs to this market are obviously low. Currency levels and fluctuations are also likely to be an issue. At the time of writing (2005), several Japanese companies are still keen for the British government to become part of the European single currency. Being outside the Euro zone does not allow them to plan ahead with any degree of certainty. But given the well-publicized problems for some Euro zone economies in the first two or three years of its existence, the pressure from Japanese manufacturers to join the Euro is easing.


Case exercise – Nissan wins a new model

In the global automobile industry, multinational car manufacturers think very carefully before choosing where to spend the money needed to build new models. Cost factors, local taxes, proximity to markets and expansion opportunities are all issues that influence such decisions. Just as important is each plant’s track record of operations improvement. It was (at least partly) its excellent operations performance that has secured Nissan’s Sunderland plant in the UK its new models. The Sunderland plant’s improvement programme had reduced delivery times and the number of rejected components from its suppliers significantly, from an already low level. It also included a programme to help suppliers enhance their own product development skills. People development activities within the plant embraced improved career development, job rotation to give variety at work and ergonomically inspired changes to job designs on the shop floor. All this helped push performance up to Japanese averages in many areas – unusual for a European plant. One initiative– called Next 21 aimed to bring all of Nissan’s European operations up to the best Japanese performance levels.

Questions

1. One of the improvement initiatives that helped to win the Sunderland plant a new model was a four-year programme. It started eight years before the new model was due to start production. Why do you think it takes eight years for initiatives like this to come to fruition?

2. What did Nissan do to help its suppliers? Why do you think it is so important to put time and effort into developing a good supply base?

Teaching note – Nissan wins a new model

Question 1. Why do you think it takes eight years for initiatives like this to come to fruition?

Two important factors are very long-term in their nature. The first is the reputation of the plant. Operations do not gain a reputation for excellence overnight. They must demonstrate that they can sustain improvement over a long period. Also, in an already excellent company, improvements occur slowly over time. It can take a number of years for major improvements to accumulate. The other factor is the planning period for new investment. Once a decision is taken to invest in a plant it can take several years to plan for the changes, design the new processes, install them in the plant and get them into working order. Both these factors make such a decision as this one a long-term issue.

Question 2. What did Nissan do to help its suppliers? Why do you think it is so important to put time and effort into developing a good supply base?

Nissan helped its suppliers to reduce delivery times and improve quality in terms of the number of rejected components. It also designed a programme that helped suppliers enhance their product development skills. Putting time and effort into these supplier development issues is important for a number of reasons. The first and most obvious one is that Nissan will benefit



from the improvements made by its suppliers. Production and costs or lead times and improvements in quality levels are all to Nissans’ advantage. Secondly, Nissan is a large and experienced organization, usually bigger than its smaller suppliers. The help and assistance has to flow from the larger to the smaller company. Finally, whether suppliers are getting consultancy help as well as business from their customers, they are more likely to give those customers priority should there be any need to do so.


Case exercise – Expansion at the Café Rouge

Café Rouge was founded in the UK in the late 1980s when they opened their first ‘French-style café’ in Richmond, Greater London. During the 1990s, the café saw a phenomenal growth. As one senior manager recalls:

‘We started with a theme and developed that theme into a service package that would easily fit into any suitable building. We would experiment with café layouts and with menu designs and choices until we had everything as we wanted it. We then documented all of our standard practices so that new locations could quickly learn how to operate. The choice of new sites is a matter of assessing the potential market and considering the structural constraints of any potential properties. Some areas have a better profile of regular restaurant users than others. Also, we needed to locate reasonably close to other restaurants. Our learning curve was quite rapid and now we can recognize whether or not a site will be appropriate and have also got the period from moving in to opening up down to less than two weeks. The restaurant staff are trained in other cafés and the furniture and fittings are all standardized, so it is really just a matter of adding the final touches and we are in and running. We also have to make sure that we can keep up with the rapid pace of expansion. Opening a new site needs both financial and management resources. We put a lot of effort into working out the cash flow and workload implications of each step in our expansion’.

Questions

1. What seem to be the main expansion-related issues for Café Rouge?

2. Why do they like to locate close to other restaurants?

Teaching Note – Expansion at the Café Rouge

Question 1. What seem to be the main expansion-related issues for Café Rouge?

The factors that Café Rouge included in their expansion plans were:

• Detailing standard practices so that when a new location was set up it could quickly learn how to operate properly;

• Assessing the potential market. The potential market of a location;

• Considering the structural constraints of potential locations;

• Considering the proximity of other restaurants;

• Being able to move trained staff from other restaurants to the new location;

• Standardizing all fixtures and fittings to speed up the commissioning of a new location;

• Making sure that expansion does not overstretch financial or managerial resources.



Question 2. Why does Café Rouge like to locate close to other restaurants?

This is a ‘clustering’ effect as described in the Study Guide on the website for this chapter. Customers will be attracted to an area where they know there are several restaurants. They may not have decided specifically to go to Café Rouge rather they may have decided to go out for a meal without specifying the restaurant. If Café Rouge is located close to other restaurants they will pick up this ‘undecided’ part of the market. Locating away from other restaurants would limit their customer base only to those people who were going specifically for their restaurant.


Case exercise – Four location decisions

In practice, companies are driven by a whole variety of motives when they make their location decisions. Here are four examples, which illustrate a diversity of operations objectives.

Example 1 – In 1994, the Ford Motor Company embarked on one of its most radical reorganizations, on a worldwide scale. Part of its plan was to establish five vehicle programme centres (VPCs). Each VPC was to take responsibility for the design of a particular type of vehicle, worldwide. The idea of forming these five VPCs was to avoid costly duplication of design and development effort. For example, the Ford Escort launched in the early 1990s had been developed separately for the US and European markets. Although both cars were of almost the same dimensions and aimed at very similar parts of their respective markets, entirely unrelated versions were built in the US and Europe. Ford figured that locating all design and development of each class of vehicle in one place would prevent this kind of waste. The location of its five VPCs was based on which part of its organization had the greater experience and expertise. For example, the European VPC would take worldwide responsibility for the design, development and engineering of all of Ford’s small and medium front-wheel-drive cars. North America, by contrast, had the greater experience in larger cars, trucks, higher displacement engines and automatic transmission.

Example 2 – The Polish government has been engaged in its strategy of returning formerly state-owned industries into private hands. One industry in particular has attracted considerable interest and investment from Western companies. The country’s car- and truck-making capacity was the focus of attention from such car giants as Fiat, PSA (Peugeot and Citroen), Ford, Volvo, General Motors, Mercedes-Benz and Volkswagen. The cause of all this interest was only partially due to Poland’s lower manufacturing costs (anyway, exports from Poland were sometimes restricted: e.g. the European Union allowed only a certain number of models to be imported free of its 30 per cent customs duty). The car companies were playing a longer game. They had in mind the potential growth in the East European market in the medium- to long-term. When Fiat bought 90 per cent of the former state-held FSM car maker based in Bielsko-Biola in southern Poland, it was not only investing in the experience and under-utilized resources of the company, it was seeing its investment as a longer-term gateway to other East European markets.

Example 3 – When Hyundai moved its personal computer operations to America, its market share had shifted from 5 per cent in the late 80s down to 1.5 per cent in the 90s. It seems, therefore, an unusual decision to move to a country with higher labour and accommodation costs. In fact, Hyundai reckoned that the increased costs were more than offset by savings in time and inventories. When it manufactured in Korea its goods used to take two months to reach the US, after which its sales operations used to hold the stocks for around three months of sales. After the move, the amount of stock was reduced to less than a third and being far closer to the market itself enhanced responsiveness to market trends. Also, product development time that had been between 12 and 18 months was reduced to 5 months after the move.

Example 4 – In 1994, the domestic appliance manufacturer Hoover (owned by the American Maytag Corporation) closed its French vacuum cleaner manufacturing operation and relocated production to its Scottish plant. The decision was primarily influenced by cost of manufacture. The company had figured that, to remain competitive in its global business, all vacuum cleaner production for Europe should be concentrated on a single plant in order to gain economies of scale. Hoover’s workers in Scotland were also paid lower wages than their French counterparts.



Furthermore, non-wage costs such as health insurance were a much lower percentage of overall costs in Britain than they were in France. Reportedly, the company also believed that the workforce in its Scottish plant had demonstrated more flexibility in adapting to new working methods that would help it to keep manufacturing costs down in the future.

Questions

1. For each of these four location decisions, rank what you think are the main factors that influenced the location decision.

2. What do you think the companies described in each of these four location decisions were trying to improve and why?

3. In the decision by the Ford Motor Company to establish vehicle programme centres, do you think the factors influencing the location of design centres are different from those that influence the location of manufacturing operations?

Teaching Note – Four location decisions

Question 1. What influenced the location decisions?

The Ford Motor Company, in establishing its five vehicle programme centres (VPCs), was choosing between existing sites. So their choice of options seems to have been limited at the start of the decision. This is in fact very common. Few organizations want to go through the disruption of establishing totally new sites (especially when they are going to be VPCs) unless it is strictly necessary. Clearly, the main criteria seems to have been (a) the experience of different potential VPCs in designing particular classes of automobile and a related issue, (b) the proximity to markets where particular types of vehicles were popular. Thus, Europe where the market for small and medium-sized cars is relatively large when compared with the US, is put in charge of this type of vehicle.

Fiat’s ‘location’ decision to invest in FSM at Bielsko-Biola seems to have been looking to the future of its sales. One would imagine their thinking went something like this. ‘Eastern Europe is going to be certainly a growing market and hopefully, eventually, a large market. We therefore should consider having plants in this region. Of course, we could export cars from Western Europe (which we will do until we can get satisfactory product out of our Eastern European plants) but there are also intrinsic advantages of locating in Eastern Europe. The most obvious of these are exceptionally cheap labour and proximity to the growing market. It may take us some time to get the plants up to an acceptable level and it may take some time for the markets to develop, but unless we start now we will be too late when the times comes. Furthermore, of all the potential Eastern European locations, this one in Poland seems to present us with fewer difficulties than many of the others. Anyway, as some Eastern European countries approach membership of the EU, Poland is likely to be in the first wave of new entrants. Thus, the Polish plant could be well sited both for Western European markets and Eastern European markets’.

The move by Hyundai to America is an illustration of how proximity to a powerful market can be for some operations. At first sight, Hyundai’s decision is based on (a) shortening the supply chain between the manufacturing plant and its main market that both saves the costs of



inventories in the pipeline and improves the responsiveness of delivery times to the markets, and (b) keeps the company’s product developers close to the centre where product development ideas are generated. It may be that both of these advantages clearly outweighed any additional cost of labour and accommodation. However, it should also be noted that labour costs, as a proportion of total costs in products such as personal computers, have been decreasing over the years. Most personal computers are assembled from components that are freely available to any manufacturer. Hyundai’s labour costs then will be restricted, more or less, to assembly costs. Even these are being reduced as volumes of this product continue to rise, making automated assembly the norm in most assembly tasks. Thus, the perceived disadvantages of high labour costs may be far less of an issue now than they might have been several years ago.

In some ways, the Hoover example is a direct contrast to the previous example. Here we have a company presumably suffering from some over capacity in the European region, who had the choice of closing one of its European plants. Its decision to close the French plant and transfer work to the Scottish plants seems to have been based on two factors. First, the low wage and non-wage labour costs of Britain when compared with France. Second, their perception of the readiness of employees of each plant to adapt to new working methods. This latter factor gives the company confidence that it will face fewer problems in the future if it has invested in a location that will adapt to changing circumstances.

Question 2. What was each company trying to improve?

Ford, seemingly, was trying to put some clarity into its globally complex organizational structure by identifying certain design responsibilities with specific locations.

Fiat, by investing in Poland, was looking to secure what could be large markets in the future, as well as establishing experience in what may continue to be a low cost production area.

Hyundai was getting close to the market to improve responsiveness of supply and responsiveness in product development.

Hoover was reducing their overall capacity in such a way as to simultaneously reduce costs of manufacture and flexibility for the future.

Question 3. Is the Ford location decision different from the others?

The Ford location decision is different in two important respects. First, it is very clear that ‘location of responsibility’ type decisions are being taken in the context of the existing operations within the company. In other words, it is not a single-location decision; it is a highly complex set of interrelated decisions which include not only location but product development strategy, organizational structure, focus of decision-making responsibility and overall operations configuration. Secondly, this decision, as opposed to the others, concerns location of a service. Of course, the service is within a manufacturing company but it is a service nonetheless. Furthermore it is a service that relies heavily on embedded expertise within the existing resources of the company. Ford is making quite a subtle assessment of each alternative site’s experience, and more importantly, potential by not only doing the job of designing motor vehicles, but also of coordinating the global network in helping them to do so.


C H A P T E R 4

Case exercise – Electronic benefit transfer

Even social programmes around the world are being revolutionized through the use of technology. For example, electronic benefit transfer (EBT) is making pension books and welfare cheques obsolete. Countries as diverse as South Africa, Italy, Finland and Namibia are all starting to use cash-dispensing machines to issue state pensions. Pensioners simply use a government-issued card and a personal identity number (PIN) to obtain their cash. A similar system, shortly to be widespread in the United States, can issue food stamps and other welfare payments to poor families through the card. One such system enables welfare recipients to swipe their cards through a terminal at the retail checkout, enter their PIN number, and the cost of their food is automatically deducted from their entitlement and added to the retailer’s account.

Question

1. List what you see as being the major advantages and problems as social programmes become more dependent on the type of technology described above.

Teaching note – Electronic benefit transfer

Question 1. List what you see as being the major advantages and problems as social programmes become more dependent on the type of technology described above.

The major advantage of using this kind of technology is its cost. Administering social programmes is often very expensive because of the amount of labour involved in processing information. Also, because benefits must be distributed to where the recipients are, it is often necessary to establish small offices close to customers. This prevents the programme achieving significant economies of scale. Using technologies such as electronic benefit transfer needs fewer people and allows the information to be consolidated centrally, thus achieving economies of scale.

However, there are a number of problems. The biggest one is often the reluctance of benefit recipients to use such technology. Often, people receiving benefits are not lead users of such technology. This is partly because they are economically disadvantaged but also may be because they are educationally disadvantaged. The use of this type of technology, therefore, can be unsettling or even distressing. In some cases, there may also be issues concerning security and fraud. However, in other cases, the technology can be more secure than more manual processes.


Case exercise – Environmental policy at 3M

Although the need for organizations to have an environmental policy has become increasingly evident in the last few years, for many years some progressive companies have been aware of their ethical and environmental responsibilities to the community. Back in 1974, 3M published an official corporate environmental policy. This policy articulated the principles by which 3M aimed to solve any environmental pollution it might cause, as well as addressing conservation problems. It also set itself measurable environmental goals. These have been updated regularly, for example, 3M’s goal is to reduce emissions to air, land and water by the year 2000 to 10 per cent of its 1987 levels. One of the company’s early programmes was called Pollution Prevention Pays (3P). Its aim was to reduce or even eliminate the sources of pollution for which 3M was responsible, through its processes or products. In its first 14 years of operation, this programme cut 3M’s pollution in half. However, although its original programmes are still in place (albeit updated) the company’s approach to pollution control has changed. In the early period of the 3P policy, the company controlled pollution largely through ‘end-of-line’ control. In other words, its basic processes remained largely unchanged but any emissions and pollution were captured and controlled before they could damage the environment. This approach usually requires capital expenditure on the technology that captures, cleans and disposes of emissions. 3M found that a cheaper and fundamentally sounder approach to its environmental management was to focus on prevention rather than containment. The concept is to stop all pollution at source, through prevention measures. The 3P programme now seeks to prevent pollution at source, as follows:

• Product reformulation – using different raw materials to reduce the polluting effect of the products.

• Process modifications – physically changing the technology of manufacturing processes to reduce the creation of by-products and pollutants.

• Equipment redesign – changing the design of tools and equipment so that they operate more effectively under the specific manufacturing conditions in which they are used.

• Resource recovery – the recycling of waste and by-products, either for sale to other organizations or for use in 3M products.

Questions

1. How does 3M’s 3P policy differ from operations management as we have defined it in this book?

2. Do you have any suggestions for improving the 3P programme?



Teaching note – Environmental policy at 3M

Question 1. How does 3M’s 3P policy differ from operations management as we have defined it in this book?

Clearly, 3M’s approach to environmental protection is deeply embedded in its operations management practices. In some ways one could see environmental management as operations management with slightly changed objectives. In particular, if one defined quality to include environmental protection, then 3M’s policy could be described using many conventional operations management categories. For example, examine 3M’s four approaches to preventing pollution at source.

• Product reformulation – is an important issue within product and service design.

• Process modification – is a combination of operations layout, job design and process technology.

• Equipment redesign – is a combination of process technology design and job design.

• Resource recovery – is a combination of quality planning and control, total quality management and failure prevention and recovery.

Question 2. Do you have any suggestions for improving the 3P programme?

Since the foundation of 3M’s 3P policy several new ideas have emerged on how environmental policy can be improved. Two of the more important are the ideas of green or environmental reporting and the set of standards known as ISO 14000. Both of these could usefully be incorporated in the 3P policy as described in the box.


Case exercise – Verenigde Bloemenveiling Aalsmeer (VBA) (United Flower Auctions),

Aalsmeer, Holland

VBA is the largest flower auction operation in the world. It consists of two main parts. The first is the sellers area known as the ‘auction section’ where flowers are received, held in cooled storage areas and auctioned. The second is the ‘buyers’ section’ where around 300 buyers, exporters and wholesalers rent space to prepare flowers for shipment. Trucks leave Aalsmeer every working day with destinations (including airports) throughout Europe. On a typical day there are about 10,000 people working at the centre (1800 of whom work directly for VBA), together handling 17 million cut flowers and two million plants. This large and complex operation is held together by its information processing technology.

Flowers are extremely perishable, so dealing with them in such large quantities makes speed, accuracy and dependability of the operation critical. During the evening and overnight, flowers are brought into the operation in standard containers that are subsequently handled in standard wheeled cages (there are over 124, 000 of these ‘trolleys’ in circulation – see picture). Each lot of flowers is assigned a reference number, VBA staff makes a quality inspection and a description is entered on the ‘delivery forms’ attached to each trolley. The trolleys are then held in cold storage until they are collected for the auctioning process the following morning.

The auction takes place every weekday in five separate halls, specialized by the category of flowers or plants. The largest flower auction hall has tiered desks for up to 500 buyers, each linked to the auction computer. Each buyer has an uninterrupted view of the flowers (that are automatically conveyed through the auction halls in their trolleys) and of the four auction-price ‘clocks’ behind the auctioneers. Buyers can then choose the clock of their choice at any time using a selection switch. The auctioneer in charge of each clock may give brief information on the quality of a particular lot, relayed to the appropriate bidders’ desk speakers, but most of the important information about the flowers is shown automatically on the clocks’ displays (see picture). Flowers are sold by ‘Dutch auction’, whereby the clock scaled 100 to 1 at its rim is started by the auctioneer and moves rapidly downwards. The first bidder to press his desk button stops the clock and becomes the buyer of that lot. This type of bidding is particularly suitable for automation because only one bid needs to be recorded for each transaction. All the details are recorded by computer and printed out on a ‘distribution voucher’ that is attached to the appropriate trolley. The whole bidding process, including the processing of the information, takes only a few seconds. The lots are then distributed on the trolleys to the appropriate packing or loading areas. For each buyer, the VBA computer prints an invoice for all the purchases made, which must be settled daily by a bank letter of credit or by cash drawn at one of the four banks adjacent to the cashier’s office.

The high levels of computerization and automation of material flow allow VBA to operate with very low costs (about 5 per cent of the turnover), at high speed and dependability. Each of the 13 clocks handles about 1000 transactions per hour. Almost all the business takes place between 7.00 am and 10.00 am so that fresh flowers can be in the shops as early as possible – by lunchtime in Holland, by early afternoon in London, Paris and Berlin and by early morning the next day in New York.



Questions

1. Which of the five operations performance objectives (quality, speed, dependability, flexibility and cost) are the most important to build into the design of VBA process, and why?

2. How does process technology help this operation to achieve its objectives?

3. Sketch the flow of flowers in the VBA operation. What do you think are the critical points in this flow?

Teaching Note – VBA (United Flower Auction), Aarlsmeer, Holland

The advantage of this case exercise is that it is an unusual operation with many different aspects. It could be used in three ways. The first is as an introductory case relatively early in the course. The various operations issues could then be simply noted as things that will be studied later in the course. The second way is to use it as a specific ‘design’ case and explore the various design issues within the case. For example, one could use it to demonstrate how the operation had placed itself on the ‘4-Vs’ (volume, variety, variation and visibility) dimensions. The third way of using the case is to use it as a concluding case towards the end of a course. One would stress here the more strategic and overall aspects of the organization. Issues in this case include, process design, process mapping, operations objectives and process technology.

Some notes on the VBA (United Flower Auction) case exercise

Question 1. Which of the five operations performance objectives (quality, speed, dependability, flexibility and cost) are the most important to build into the design of VBA process and why?

To some extent, this is a matter of opinion. However, the company itself would place quality very much at the top of the list and flexibility towards the bottom. So, placing the operations objectives in the order that the company would recognize, one can justify their relative importance as follows:

Quality – VBA service is based on the trust that it has established both with growers and buyers. This involves an implicit guarantee of the quality and freshness of the flowers. For example, VBA invests time and money into the laboratory services, which give them the ability to assess flower quality levels. Without this quality guarantee buyers would not be willing to use the service.

Cost – Cost is an important objective primarily to the company itself. The whole operations of the company are based on high volume. It is, after all, the largest operation of its type in the world. Also, the company has invested in information technology and materials handling technology, which standardizes the services, thus reducing costs further. However, cost is also important to the buyers. If the operation was not efficient, the buyers then may find it cheaper to buy directly from the growers. The transaction costs of VBA must be sufficiently low to prevent this happening.



Dependability – In this case dependability means that a range and quantity of flowers are available for buyers to purchase if they wish and also that the company is able to guarantee to the growers that flowers will be available for sale at the time promised. Lack of dependability in terms of interruption to the supply of flowers would destroy the trust of both buyers and growers.

Speed – Speed is only important up to a point. Obviously the flowers cannot be kept within the total supply chain for too long, otherwise it would reduce their ‘shelf life’ when they eventually reach the shop. However, after a certain point, no further advantage is gained by rushing the flowers to the market. (Note – while this is generally true, there are some species of plants, which, being more delicate, do have to be shipped from growers to the shops relatively quickly).

Flexibility – The flexibility of this operation is not high. If it was, they could not achieve the economies of scale and efficiencies of standardization.

Question 2. How does process technology help this operation to achieve its objectives?

It helps in two main ways. First, information technology acts as an interface between the buyers and the operation itself. So, while sitting in the auction hall, buyers can indicate (to a fraction of a second) when the price is at a level where they wish to purchase. They are able to do this because information about the flowers has already been conveyed to them electronically and the purchase can be recorded because the information system detects their bid and immediately allocates those flowers to their account. This efficient process substitutes for the verbal exchanges and communications that normally take place at an auction. The second way where technology helps the process is by transporting the flowers from the loading bays through the warehouse to the auction hall and eventually to the trucks, which will ship them to their destination. This technology uses standardized trolleys for ease of handling and again, is integrated with the information technology system in order to keep track of which flowers are where.

Question 3. Sketch the flow of flowers in the VBA operation. What do you think are the critical points in this flow?

In fact there is not sufficient information in the case to draw a definitive flow chart. That is not the point of the question. This question is best used to get students to debate what the flow might be and distinguish between the nature of the activities at different stages. So, some stages will be critical. For example, the check-in recording of the flower as they enter the warehouse and are loaded onto the trolleys is the basis for inspection, acceptance and documentation of the characteristics of the flowers. It is a point at which failure would have a profound impact on the integrity of the whole system.


Case exercise – Is the petrol engine dead?

It is the usefulness of the motor car that has made it so dangerous to the environment. When it was a product affordable only by the relatively affluent in rich countries, it posed little threat. But its advantages of mobility, both for leisure and to increase earning power, made it one of the first purchases of aspiring consumers as nations around the world increased their wealth during the latter half of the twentieth century. In the most developed nations, attempts to control and reduce the environmentally damaging emissions from motor engines have centred on strengthening environmental legislation, especially in the world’s largest car markets. Car makers realized that existing engine technology could, in the foreseeable future, become redundant. Even though modern engine technology has improved the emissions from car engines dramatically, many believe that conventional engines are nearing the limit of their refinement in this area.

Leading car companies around the world, especially Daimler-Chrysler, Toyota, Ford, General Motors and Honda, are all working towards the same solution – the fuel cell. Fuel cells combine hydrogen and oxygen to form water and electricity. The electricity is then used to drive an electric motor. Theoretically a fuel cell could be at least twice as efficient, in terms of fuel economy and CO2 emissions, as internal combustion engines. Most car makers and even fuel providers agree on this. Where they disagree is on how the hydrogen needed by a fuel cell should be provided. Some manufacturers, such as Daimler-Chrysler and Ford, believe the best solution is to use methanol. This could be provided at existing filling stations and converted to hydrogen within the car’s engine. However, this would require a new fuel-delivery infrastructure. It also has some health and safety problems. Others believe the best solution is to use hydrogen directly, while others believe that some method of extracting hydrogen from gasoline would be the better and safest way forward.

These disagreements (often likened to the disagreements between the VHS and Betamax formats in early video recorders) have led some companies to believe that the age of the fuel cell is still some years away. Hiroyuki Yoshino of Honda Motors is one of these: ‘in our view, fossil fuels will continue as the primary source of energy for the next few decades’.

Even when fuel cells do make an impact, this may not be with domestic motor cars. Trials in Washington, Vancouver and São Paulo have demonstrated that roof-mounted hydrogen cylinders can be safely and economically re-fuelled in the controlled environment of bus depots. With a range of 300 kilometres, fuel cells have ideal characteristics and may be a practical solution for urban buses.

Questions

1. What effect do you think fuel cell technology will have on the further development of conventional internal combustion engines?

2. From an operations management perspective, what are the implications of hydrogen-based fuel cells for a bus company?



Teaching note – Is the petrol engine dead?

Question 1. What effect do you think fuel cell technology will have on the development of future conventional internal combustion engines?

One could take a sceptical view of this and claim that the chances of successfully developing fuel cells are so low that it is unlikely that there will be any impact on the development of internal combustion engines. For example, only a tiny proportion of motor vehicles are powered by liquid petroleum gas (LPG), a cleaner and cheaper fuel than petrol. Petrol is still relatively cheap (in fact, cheaper than mineral water in most parts of the world). However, most of the world’s leading vehicle manufacturers (and petrochemical companies) do acknowledge the possibility of fuel cell powered vehicles in the future. Some companies, such as Ford, have relatively large investment budgets devoted to research in this area. However, the first production fuel cell cars are likely to be very expensive. Nevertheless, the existence of fuel cells and the reality of research into fuel cells are likely to provide background pressure on engine manufacturers to improve efficiencies faster than they would otherwise do. Certainly, as the likelihood of workable fuel cells becomes greater, the pressures on internal combustion engine manufacturers will also become greater. What is less certain is whether the threat from fuel cells is likely to provide greater pressure than, say, higher taxes on petrol.

Question 2. From an operations management perspective, what are the implications of hydrogen-based fuel cells for a bus company?

Currently, there is a well-developed and very extensive network of operations devoted exclusively to extracting, refining, storing, transporting and selling petrol. These operations have not developed overnight. They work efficiently because they have developed over practically a century of use. Attempting to establish a parallel distribution supply chain for hydrogen or methanol is going to be exceptionally difficult. Gases are generally more difficult to handle and transport than liquids. A whole new set of safety implications will need to be explored and built-in as failsafe mechanisms to any supply chain. It is for this reason that the case mentions the possibility of using fuel cells initially in vehicles in which the distribution system is more controlled. The customer end of the distribution chain for petrol is broad, (any of us can go and buy petrol at any of millions of petrol stations) and subject to the uncertainties of the normal market. A supply chain to provide hydrogen or methanol to a small number of identified bus stations, for example, would be far easier to control.


Case exercise – Recycled St Regis

The trend towards material recycling in many countries can have a significant impact on the way in which some products are manufactured. Perhaps the industry which has had to adjust the most is paper-making. St Regis Paper is one of the largest manufacturers of recycled paper in Europe, producing almost a million tonnes of finished product a year. Its mill in Kemsley, in the UK, is one of the most modern, efficient and environmentally friendly plants in Europe. Two paper machines running at speeds of up to 900 metres per minute each makes 250,000 tonnes a year of high-quality brown ‘liner grades’ (used to make corrugated boxes).

The raw material is 100 per cent recycled paper, which is treated on a state-of-the-art stock preparation plant. This process cleans and sorts the individual paper fibres. When this material is used on the paper machines, it produces a product which is practically indistinguishable from conventional paper made from wood pulp.

Questions

1. What production problems would you anticipate from using waste papers?

• in the stock preparation plant?

• in the paper-making process?

2. In what ways would you expect recycled products to differ from their conventional counterparts? What steps could you take in the production process to minimize these differences?

3. Given that a paper machine is likely to make several products, each at different grammage (i.e. weight per unit area), would you regard paper-making as a continuous or a batch process? What difficulties would you anticipate in the scheduling and production processes and what is the effect on stock preparation likely to be?

4. What key production issues would you anticipate that are associated with the speed at which paper runs through a paper machine (bearing in mind that the paper is very wet at the beginning of the process)?

Teaching note – Recycled St Regis

Question 1. What production problems would you anticipate from using waste paper?

In the stock preparation plant one difficulty could be the uncertainty inherent in mixing papers of different origins, with different coatings. Presumably, careful control is necessary to ensure that the final mixture is within the tolerance limits in terms of its chemical and physical composition. In the paper-making process any inconsistency in stock will become evident. It may be possible to adjust parameters in the paper-making process to compensate for changes in the composition of the stock.



Question 2. In what way would you expect recycled products to differ from their conventional counterparts?

The two most obvious characteristics must be the visual appearance of the paper and its physical strength. The visual appearance issue could be even more of a problem when dealing with writing or printing papers (fine papers). With packaging paper of this sort it might always be critical although major variations would detract from the perceived quality of the product. Physical strength is more important. One would imagine a company such as this would have developed considerable expertise in being able to adjust its production processes to compensate for any small variations in its raw material.

Question 3. Would you regard paper-making as a continuous or batch process and what are the difficulties?

Although within a batch of production the line moves continually, overall the process is a batch production process. Like any batch production process, the various batches need to be scheduled on the production process in such a way as to meet delivery targets but also keep the utilization of the processes as high as possible. Techniques such as those mentioned in Chapter 10 can be used to achieve this. Because ‘stock preparation’ is also a batch production process, the scheduling of batches through both stock preparation and paper-making would need to be coordinated.

Question 4. What production process issues would you anticipate are associated with the speed at which paper runs through the paper machine?

Mainly, this will be an issue of quality. Because paper is wet at the beginning of the process, any variation in the quality (composition, consistency, and so on.) of the stock or any deviation in the speed of the machine could result in paper that does not meet the quality standards.


Case exercise – Robots take over some of the repetitive work at Ecco Shoes and at Scania

Trucks

Ecco, a Danish shoe company, produces over seven million shoes each year and has invested in extensive robotic facilities in the manufacturing operation, primarily to improve its quality consistency. Initial manufacturing stages are still processed by hand. The soft leather upper is cut and sewn together in the Indian and Indonesian factories before being shipped to the more automated plants for completion. A robot is used to cut a 5-mm track around the leather upper, which is then transferred by a second robot to the sole-forming machine in which the leather upper is moulded onto a flexible sole. A third robot is employed to cut away any excess material from the sole, without damaging the upper. Each robot is programmed to operate according to the recognized size and model of the shoe being processed. Ecco operations managers believe that the working environment is much improved by using robots for the more physically demanding or boring tasks, as well as giving increased productivity and enhancing quality.

The Swedish truck group Scania decided to build a new painting facility for its axle factory at Falun. The decision to use robots in the paint shop was based on their ability to meet precise customer requirements for paint type, colour and specification. The robots are easily and quickly changed over and are adaptable to new products. Two operators can run the whole system from a control room, where computer screens depict the movements and settings for each of the robots. The robot first prepares and cleans the parts, then dries off the moisture by blowing compressed air into the cavities and remaining holes; the parts are then primed and finally painted, all by robots. The axle parts on Scania trucks are shaped differently, which means that the spray guns on the painting system need to be adjusted continually during the process. There is an integrated computer control system that coordinates all these adjustments, controlling the amount of paint being sprayed and thus reducing spillage (both an environmental- and cost-benefit). Essentially, the main feature of the robots is their flexibility. Scania is confident that it can adapt the systems as necessary to suit its precise needs in the future. The use of robots has also improved the working conditions of the employees and has assisted in reducing waste and solvent emissions.

Questions

1. In Ecco’s shoe factories, why are some manufacturing stages performed by hand and some by robots?

2. What are the advantages of using robot technology to paint axles at the Scania plant?



Teaching note – Robots take over some of the repetitive work at Ecco shoes and at Scania trucks

Question 1. In Ecco’s shoe factory, why are some manufacturing stages performed by hand and some by robots?

The stages that are still performed by hand are those that a robot finds difficult to perform. Leather is a difficult material to handle in sheet form. It relies on human ability to sense the degree of movement and elasticity in the material. Cutting and sewing the soft leather upper is although, a relatively simple task for a human being it requires a degree of sensory skill and dexterity, beyond most robots, abilities. Robots do the more physical and boring tasks.

Question 2. What are the advantages of using robot technology to paint axles at the Scania plant?

Painting axles is not a task that requires manual dexterity. It is a task, which once optimized, can be repeated many times and performed more consistently by a robot than by a human being. The small adjustments in the spray guns can be programmed into the controlling computer which coordinates the movements of the various robots. Thus, several different axle types can be accommodated using the same robot. As long as the controlling computer knows what type of axle is in front of the robot, it can be instructed to perform the correct sequence of movements with exactly the right amount of paint coming from the spray guns. This reduces paint wastage. Most importantly the environmental conditions in a paint spraying operation can be very unpleasant. Using robots prevents having to ask humans to put themselves in such conditions.


Case exercise – South West Cross Bank

Towards the end of the 1990s, much of the European retail banking industry was facing unprecedented levels of competition. This was partly the result of excess capacity (many towns had four or more bank branches within 100 metres of each other) and partly triggered by the presence of aggressive new entrants, including insurance companies and other retailers, such as supermarkets. Many of the new retail banks concentrated on a few simple financial products such as current accounts, deposit accounts and mortgages, in contrast with most conventional banks that offered hundreds or even thousands of different products. At the same time, new delivery systems such as telephone and Internet banking were being introduced.

South West Cross Bank (SWX) had not performed well and was in the lower quartile of the big banks in Europe. However, it did have a strong retail brand image, high market shares in some sectors (such as small business loans) and a reliable but unspectacular profit record. But it was perceived to be late in recognizing the importance of developing its operations. Many large banks had been much quicker to install the latest information systems, allowing automation of many routine activities. Several competitors had experimented with centralization and/or regionalization of routine operations, such as telephony and correspondence that had previously been carried out in the branches. This had freed up staff time for selling financial products and at the same time had introduced efficiencies that could never have been achieved at branch level. Some banks, however, had paid a price to pay. Not all customers were satisfied by the changes and some banks had received bad publicity. This letter to a national newspaper was typical:

‘My bank recently introduced, without warning, a bizarre system whereby a customer cannot telephone his branch manager, or write to him and expect him to receive the letter and reply to it. A London customer now has to ring a number in Wales, where a call will be diverted to some central point which deals with general inquiries, balances, standing orders, statements and so on. If the customer writes to his branch manager, he does not see the letter and it frequently seems to disappear. When the customer does not receive a reply, he has no idea whom to ring to check up. In other words, there is no one point of contact within the bank. This appalling treatment is being meted out to all customers of, however long standing. Everyone I know is complaining bitterly about it’.

The appended editor’s comment was:

‘Everyone I know is complaining too! I sympathize wholeheartedly and have commented about it before in this paper. In an attempt to cut costs, all the big banks have introduced customer service call centres to deal with routine enquiries, frequently with automated recorded messages that require you to punch in numbers to access information on your account. These are known in the industry as “factories”’. As a late implementer of operational change, SWX had the advantage of being able to learn from competitors’ mistakes. It decided that radical change was required to make the retail operation more efficient in driving down costs and more effective in improving customer service quality. These were to be achieved simultaneously, using the latest ‘state-of-the-art’ equipment.

SWX embarked on one of the most extensive operational change programmes ever conducted in the European banking industry. The project, budgeted at around three billion euros, was planned to roll out over two years and would redesign almost every process in the retail bank division. Most processes that had previously been carried out at branches were to be transferred to large,



specialized processing centres, allowing head-count reductions and space saving at every branch. Valuable back-office space could then be sold or rented to other businesses, whilst more space could be devoted to front-office, customer-facing activities. Branch staff had previously been involved both with dealing with customers and with a wide variety of back-office tasks. These included cheque processing, cash balancing, answering phone calls from branch customers, letter writing, setting up direct debits and other payment processes. One long-serving branch employee Christina Kusonski summed up her feelings about the proposed changes.

‘With the expected halving of the branch-staff numbers, those of us who have been asked to stay will see major changes to our jobs. We currently have to do a variety of tasks, including some boring ones like cheque processing. But these routine jobs only last for around half an hour and then we can do something else, as directed by the Assistant Manager. Every day is different, because the mix of work changes and we work with different people when they need help. For example, Fridays are usually busy on the cash desk, with people drawing money for the weekend. On Mondays we get more cheques paid in and more phone calls too. Under the new system, there will be hardly any back-room jobs, so we will be “on show” from morning to night. We won’t be able to have a chat out of sight of the customers like before when we were doing some routine office jobs! And the pressure will be on being nice to the customers and taking every opportunity to sell them insurance, or some other product. And what about lunchtime when so many customers come in? Almost everyone used to come to serve at the counter, but now there won’t be anyone to call forward! To be honest, I’m not looking forward to it at all and I only hope the customers are very patient and loyal to our bank. Our manager has given us a number of briefings and has assured us that we are his selected team, but I am not convinced. Each of us will be responsible for serving just one customer at a time, so I can’t see how we will be working as an empowered work team as he described! Actually, I think it will be a worse job – we will be very isolated from each other and constantly under pressure. I will give it a try, but if my fears come true, I will apply to work in the new call centre down the road. There are more than 300 staff members there and they work in close teams of 10. It has already got a reputation as a good place to work ... the latest telephone equipment, a nice office and managers who are listening to suggestions from teams and individuals. I don’t think there is much future for us in the branches!’

The same evening, at a social event in the local pub, Christina met a former colleague, Silvia Lowener, who had been the first to leave the branch three weeks earlier. She now travelled daily to the new cheque-processing centre (CPC) some 20 km away. Inevitably, they soon began talking about work and Silvia was full of enthusiasm for the new job.

‘At first I found the job rather boring, but at least we don’t get any problems with customers; they could not get anywhere near the place! We work in teams and I am in the data entry department, where we read digital images (electronic photographs) of the cheques and key in the amount shown. We are only keying the ones, which the automated optical character recognition (OCR) system has not been able to read, which includes many with terrible handwriting. Most of the work comes in from the retail branches from lunchtime onwards, so we are all on afternoon or evening shifts. I work six hours, from 4 o’clock in the afternoon. I am in a team of eight and our workstations are on an octagonal layout facing in, so we can see each other. The team leader is one of the eight and is responsible for our output and quality performance that can be compared with other teams here and the other CPCs. When working, we are required to key 12,000 characters per hour, which is around 3000 cheques, so we have to concentrate hard! We all have a 15-minute break every two hours; some of the staff go for a smoke, while others socialize over a coffee. We meet as a team for 10 minutes at the beginning of every shift. We are encouraged to join process improvement teams, both in our own areas and covering the whole process. We have already made lots of good suggestions for improvements,



but most involve re-programming, so there are long delays in getting the changes we want. I think we will also soon run out of things to do!

We are near the end of the process here. The polythene-wrapped parcels of cheques are delivered periodically from the branches by a security firm, the bar codes are scanned and the parcels are check-weighed and signed for in the Reception Department. They are then accumulated in a wheeled trolley until it is full. The trolley is then wheeled through to the Preparation Room where the parcels are cut open and the bundles of cheques are extracted. Individuals then sort through them, looking for and extracting any metal staples, rubber bands and perforations at the edges, all of which can cause blockages in the OCR machines. When this has been done, the bundles of cheques are vibrated in a special “joddle” machine to align two edges in preparation for feeding the OCRs. The prepared bundles are placed in trays and then on shelved trolleys to be moved, when full, to the OCR machine room, where they wait in a queue until an operative prepares them (further joddling!) for the machine. The first “capture pass” through the machine records the image and print encodes the cheques for subsequent identification. The digital image is either successfully read by the computer or passed to us for manual keying. Once this is done and the batch balances (credits and debits must match exactly), the cheques are then re-fed into the machines. This second-pass sorts by the origination bank in preparation for clearing in London. Sorted cheques are packed (by bank), taken to the Reception Department and then taken by courier to London’.

Questions

1. How would these changes affect the job of a branch manager? What new skills would be required?

2. What would the effect be on the job design of branch employees?

3. Compare the extent to which empowerment is feasible and desirable at a branch and at a CPC.

4. Prepare a process flow chart for the cheque-processing operation. How many of the steps are value-adding?

Teaching note – South West Cross Bank

The case describes a rapid and profound change from branch-based back-room operations to centralized processing. The impact on work design both at the branches and at the processing centres is outlined. Key issues include job design (both at managerial and staff levels), empowerment and process design.

The changes described are representative of those that are being implemented (to a varying extent and pace) in most large western retail banks. The urgency of these changes has been driven both by pressures to reduce operating costs and by the availability of new, fast and reliable processing technologies. The case also allows students to explore the extent to which empowerment is applicable to mass services. Finally, it provides a description of a process that can be transferred to a process flow chart, allowing assessment of value-added and non value-added activities.



Question 1. How changes will affect the job (design) of a branch manager, and the new skills required.

Class discussions can be directed to reveal the main changes in job design experienced by the branch managers. Experience suggests that most students tackle such questions in a random and unstructured way, so the tutor’s role is to direct their analysis into a structured and hence more useful format. See Table 1 below.

Table 1: Comparisons of Branch-Staff’s Job Design (Before/After Change)

Ref Element of

Job Design

Before Change After Change

A Tasks allocated to individuals

Wide variety of tasks Front-desk tasks only

B Sequence of tasks allocated

Dictated by daily routines, procedures and deadlines

More dependent on customer flows into branch

C Location of jobs Front and back Mainly front, briefly back (e.g. packing vouchers)

D Groups / Interactions

Informal, employees move between groups in branch and their work flows between sections

Less work-related interaction. Individuals dealing with customer’s specific requirements

E Use of facilities and equipment

Wide range of equipment, some low utilization

Narrower range, front office only

F Environmental conditions

Some tasks conducted out of sight of customers, allowing informal social interaction

All tasks visible to customers, limiting social interaction between staff

G Level of autonomy Low, staff follow approved and trained method

Higher, staff interpret customers’ requirements and provide advice

H Staff skills variety and development

Most staff are trained in a wide range of tasks involving both product and process knowledge

Focus of staff training in product knowledge, plus limited front-office processing.

J *Job rotation Throughout the day Not possible, front desk tasks only

K *Task significance Low, many repetitive, short cycle tasks

Higher, fewer, longer interactions with customers

L *Focus of activity Operations and Sales Mostly Sales

M *Number of staff Large Smaller

N *Volume flexibility at front office

High Low



Table 1 compares the job designs for the branch staff, but does not specifically for the branch manager. We can now deduce the ways where the changes will have affected the branch manager’s job, using the above framework:

Tasks allocated to manager. Back-office tasks such as cash balancing, standing orders and cheque processing were no longer done at the branch (C). These tasks had to be completed on a daily basis, even when the branch was busy. That implied a need for maintaining a certain level of excess staff, to ensure completion of tasks by set time windows. Removal of the back-office tasks would put pressure on the manager to reduce staffing levels to the minimum required to cope with the remaining front-office tasks (M). With a much smaller number of staff and reduced volume flexibility (N), the manager would be more exposed to variations in customer demand and in certain overload situations would need to assist with basic tasks at the service desks. Some would see this as a severe loss of status (less staff and a return to service desk activities)

Sequence of Tasks– Prioritization and Scheduling: Customers can enter a branch at any time, requiring either routine, fast transactions (such as paying in cheques, drawing cash) or one-off, longer transactions (such as enquiring about a loan, mortgage or insurance). During busy periods, the competing requirements of these sources of demand for the limited and inflexible capacity (N) could lead to potential conflict. The manager must then prioritize and/or persuade the loan/mortgage/insurance customer to make an appointment. Since this type of business is of significant potential value to the bank, it is critical that this process does not inconvenience the customer (or is completely put-off), so it is likely that the manager will take personal responsibility this activity. This is likely to be a more frequent occurrence than previously because of the smaller staff numbers (M) and reduced volume flexibility (N). Negotiating skills may help here.

Location of Tasks: Because almost all activities now take place in the front office (C), the manager’s responsibilities are much more directed towards selling and customer service (L) and away from back-office production-type tasks. Training in sales management and selling techniques may be required in order to be successful in this competitive marketplace.

Groups and Interactions (Management and Motivation of): Because of the apparently reduced interdependence of staff in their work processes (D) and because of the reduced opportunity for informal interaction they could have an increasing feeling of social isolation, even within the single front-office environment. The manager will have to take account of this in the way the staff members are managed, by providing opportunities for the group to interact. For example, daily team briefings, improvement taskforces and training sessions could be used, supplemented by occasional less formal social events, where applicable. The remaining small back-room tasks could be rotated amongst the staff.

Facilities and Equipment: The only changes here will be reduction in branch size and the removal of back-room equipment. The main impact on the manager will be the increasing importance of ensuring that the work is prepared properly for the processing centres (e.g. staples, pins, bands and so on. removed from cheques), since this would have previously been done irregularly, on an as-needed basis in the back room, where problems and omissions could have been rectified locally.

Environmental Conditions: There will be significant changes to the manager’s working environment. Previously, there would have been some periods of relative privacy, but the changes will require significantly more time to be spent in the front office, in the sight of customers. Some managers might consider this to be a significant negative factor in their job.



Level of Autonomy: The (intended) increased proportion of the staff time spent with customers in selling the bank’s products and services (L) implies that they will need greater skills in interpreting customers’ needs and in interpersonal interaction. Thus, despite the necessary constraints of approved processes to be followed, staff will have to take more responsibility and autonomy for the way they interact with customers. The manager will therefore, need to support this as a coach, trainer, mentor and an advisor. (S) He may have to delegate some of the autonomy previously the preserve of the manager.

Skills Variety and Development: As well as the changes described above, there has been a major shift away from managers being responsible and skilled in high variety loan decisions, towards these being increasingly systematized, automated and/or centralized. Having relinquished most of this major responsibility, managers skills must be directed towards customer service and process adherence (quality of the way transactions are performed). This will require development of new interpersonal and leadership skills and improved understanding of the bank’s routine processes.

Question 2. What would the effect be on the job design of branch employees?

Modifications to the jobs as described in the case include the following.

• Combining Tasks: There is no indication in the case that the number of separate elements or activities allocated to individuals has increased. In fact, because back-office duties have virtually disappeared, the number of tasks has reduced!

• Forming Natural Work Units: The remaining staff members are concentrated in the front office, where there is little focus on any coherent whole set of tasks. Inconsistency is highlighted in the Sequence of Tasks section in Section 1 above. Certainly, the changes have not improved this element of job design.

• Establishing Client Relationships: ‘Internal customers’ have been relocated at processing centres, and so this type of influence on the employees has been significantly reduced. However, client relationships with external clients has been increased somewhat, perhaps providing some job design enhancement (but only for those that like customer contact work!).

• Vertical Loading: There is no evidence in the case that there has been any increase in the staff’s indirect activities such as maintenance or scheduling. In fact, most of this work has been removed from branch activity altogether.

• Opening Feedback Channels: There is no description in the case on how staff members are told about their overall performance.

Overall, the changes described do not appear to have improved the design of branch jobs and are probably adverse. However, the increased level of autonomy (interpreting customer requirements and providing limited advice) may provide some compensation to employees. Tutors could use this analysis to open discussions on:

How branch managers can continue to motivate staff in such jobs?



The viability of using temporary employees should be used to supplement capacity at busy times and the motivational issues involved,

How widespread is this type of industrialization of services, with such consequential impact on job design?

Question 3. Compare the extent to which empowerment is feasible and desirable at a branch and at a CPC

Some degree of autonomy will be feasible and desirable at branches particularly since the front-office staff can learn (from each other) better ways of dealing with and selling to customers. Although, also important at CPCs, the potential for rapid exploitation may be much less, because of the highly systematized processes and high dependence on IT.

It is unlikely that it would be feasible to empower individual branch employees to redesign their jobs, except in the most trivial of ways (e.g. layout of their desks). However, it may be both feasible and desirable to generate some team involvement in job redesign. At CPCs, empowered job redesign seems improbable and undesirable, because of the size and complexity of the operation.

Question 4. Prepare a process flow chart for the cheque-processing operation. How many of the steps are value-adding?

Process Flow Chart for Cheque-Processing Operation

Activity Oper Trans Delay Inspn Store

Cheques from branches ***

Scan bar code ***

Check-weighed *

Sign *

Put in trolley *

Delay until trolley full *

Move trolley to preparation room *

Open parcel *

Inspect for foreign bodies *

Joddle *

Place in trays *

Move to trolley *

Place in trolley *



Table continued

Activity Oper Trans Delay Inspn Store

Delay until trolley full *

Move trolley to OCR machine room *

Wait in queue *

Take bundle to joddler *

Joddle *

Fill OCR machine *

First pass on OCR ***

Delay *

Fill OCR machine *

Second pass on OCR ***

Pack and label for destination bank ***

Move to Reception *

Delay awaiting courier *

Collected and signed for by courier ***

Transport to London ***

Value-adding activities (*** in table) 5 2 0 0 0

Non value-adding activities 9 5 5 2 0

There may be some debate about what adds value and what doesn’t. However, as a rule of thumb, value-added activities are those that must be done to satisfy the needs of the customer and hence are those that could not be eliminated without radical re-negotiation with the customer. The other activities are the result of the way we choose to do the task, some of which might be eliminated by process redesign (e.g. using new layout, new handling systems, or by combining steps).


Case exercise – Layout of Delhaize de Leeuw supermarket in Ouderghem, Belgium

The Delhaize Group operates many retail outlets in Belgium, including local Delhaize de Leeuw supermarkets. Delhaize supermarkets compete both by choice of location, being convenient for frequent shoppers and by the quality of the products and service. To remain profitable, every Delhaize manager must not only maximize the revenue and contribution per square metre but must also minimize the costs of operating the store, in terms of material handling and checkout productivity, for example.

The Ouderghem supermarket has a somewhat unusual layout, having two entry points and two exit points. In common with most supermarket designs, the checkouts are positioned near the outside wall, but during most of the day only a few are used. Newspapers are sold near the checkout queues so that customers can catch up with the news while waiting. Checkout operators face into the store, towards the queue, to emphasize the need to work quickly when there is a queue. The store has 10 checkouts – a very large number for a store of only 1500 square metres. This is because there is a high peak of sales in the early evening, and long queues at the checkout would be unacceptable.

Delhaize uses relatively wide aisles between the shelves, to ensure good flows of trolleys, but this has been at the expense of adequate shelf space, which would allow a wider range of products to be stocked. The actual location of all the products is a critical decision, directly affecting the convenience to customers, their level of spontaneous purchases, and the costs of filling the shelves. The overall layout of the supermarket has separate, clearly marked self-service areas for packaged food, drinks, fruits and vegetables, and household items. The served delicatessen area (sells products with above-average margins) is positioned centrally so that most shoppers must pass it. The displays of fruits and vegetables are located adjacent to the main entrance, as a signal of freshness and wholesomeness, providing an attractive and welcoming point of entry.

High-turnover, essential, known-value items such as rice, pasta, sugar and oil, are positioned centrally and visibly, so that they are easy to find. Profitable, fast-moving items are displayed at eye level, both to help the customer and to make restocking easier for the employees. Conversely, low-margin and low-turnover items are placed lower down. Bulky or heavy products, such as packs of beer, are located near the storage area to facilitate restocking. Frozen foods are located at the ends of aisles, near the checkouts, so that they can be purchased last. In some supermarkets, these positions are only used for promotions, as customers move slower around the ends of aisles and the goods on display can be seen from most directions.

Questions

1. What is the basic layout type used by this supermarket?

2. Are the objectives in designing a supermarket layout broadly similar to the objectives in designing a high-variety manufacturing operation? If not, what is the difference?



Teaching note – layout of Delhaize de Leeuw supermarket in Ouderghem, Belgium

Question 1. What is the basic layout type used in this supermarket?

Predominantly, the layout is a process layout in that all similar goods are grouped together. So, for example, all frozen food is stored using its specialized technology (freezers), canned food is stored using its specialized technology (shelves), etc. Customers with different needs will move along different paths through the supermarket, assembling themselves to whatever goods they wish to purchase.

Question 2. Are the objectives in designing a supermarket layout broadly similar to the objectives in designing a high-variety manufacturing operation? If not, what is the difference?

In some ways, the objectives are similar. Planning for the movement of materials in a high-variety manufacturing operation, one would be concerned with ensuring that the quality of products was not affected in any way through damage, etc. Similarly, in the supermarket one is concerned that customers do not damage themselves by having to reach too high or stoop too low, etc. However, the main objective of a supermarket layout is very different from that of a manufacturing operation. In fact, it is the opposite. Whereas in a manufacturing operation one is usually trying to minimize the distance travelled (to make the process more efficient), in a supermarket one is often trying to deliberately get the customer to walk past certain areas (in order to encourage them to buy certain products).


Case exercise – FMS at Yamazaki Mazak

The Japanese tool manufacturers Yamazaki have in their European factory, one of the most advanced machine tool manufacturing operations.. Their four FMS systems allow overnight un-staffed production and so allow the company to make the most from its investment. Of course, the Yamazaki products are built by Yamazaki FMS systems (see picture). With a wide range of over 60 products, individual volumes are small. Because of this, the company wanted an operation that would be so flexible it would not matter in which order items were processed. High utilization would be maintained by having very fast set-ups that would also reduce the need for large batches. The operation can make individual pieces to suit the tight production schedules. This enables the company to offer typical order lead-times of only four weeks, in comparison with competitors’ lead- times of eight or more weeks for similar products. All component work pieces are loaded into fixtures mounted on special pallets. The operators prepare enough work to enable the system to run overnight and unsupervised. At the centre of the FMS is a host computer, which schedules and controls the activity of each machining centre and the materials-handling devices. The computer predetermines the pallet locations and as the machining centres become free, an automatic pick/load device will select the next work piece from the waiting queue and will place it into the available machine. Each machine is capable of handling almost any of the components so that bottlenecks do not develop at any point in the system. Spare tools used for the machining centres are stored in a central tool bank at the ends of the area and are transported to the required machine by a holding device on a highway that runs above the machining centres. At the end of the shift, the incoming operator can consult the computer for a printout of the tools that may need to be replaced in the tool bank. Many of the materials are delivered from the warehouse to the factory by AGVs, which pick up the items when requested by the central scheduling system.

Questions

1. What seem to be the benefits of Yamazaki’s investment in its highly automated plant?

2. What do you think are the main problems with un-staffed overnight operation and what has Yamazaki done to avoid them?

3. What type of flexibility does Yamazaki’s FMS give them?

Teaching note – FMS at Yamazaki Mazak

Question 1. What seem to be the benefits of Yamazaki’s investment in its highly automated plant?

The automated plant gives many of the expected benefits with such advanced manufacturing systems. Quality high and flexibility are high. Although, the capital cost of the plant itself is high the operating costs will be relatively low. However, an additional advantage is that Yamazaki’s factory, because it is full of its own machines, can be used as a showroom for potential customers. The factory is both a showroom and a laboratory for the company. New ways of using its technologies can be tried out first in its own factories. Potential customers can be taken round the plant to demonstrate exactly what Yamazaki’s machines can do.



Question 2. What do you think are the main problems with un-staffed overnight operation, and what has Yamazaki done to avoid them?

The main problem is that of machine failure while there are few humans around in the system. Yamazaki systems seem to overcome this by having sufficient flexibility to re-route components around any bottleneck or machine that is down for some reason or other. In the same way, Yamazaki can programme its machine tools to replace its own tools should one break or wear out. Neither of these capabilities guarantees that no problems will occur overnight, but it does help avoid them.

Question 3. What type of flexibility does Yamazaki’s FMS given them?

The two main types of flexibility are mix flexibility and volume flexibility. Mix flexibility is high because the machine can process a very wide range of different products. Volume flexibility is high because the automated nature of the technology means that it can be run up to 24 hours a day to cope with unexpected peaks in demand.


C H A P T E R 5

Case exercise – Weldon Hand Tools

(Note: A shortened version of this case exercise is included in the ‘Applying the Principles’ Section of Chapter 4)

Weldon Hand Tools, one of the most successful of the European hand tool manufacturers, decided to move into the ‘woodworking’ tools market. Previously, its products had been confined to car maintenance, home decorating and general hand tools. One of the first products that it decided to manufacture was a general-purpose ‘smoothing plane’, a tool that smooths and shapes wood. Its product designers devised a suitable design, and the company’s work measurement engineers estimated the time it would take (in standard minutes) to perform each element in the assembly process. The marketing department also estimated the likely demand (for the whole European market) for the new product. Its sales forecast is shown in the table below.

Table – Sales forecast for smoothing plane

Time period Volume

Year 1

First quarter 98,000 units

Second quarter 140,000 units

Third quarter 140,000 units

Fourth quarter 170,000 units

Year 2

First quarter 140,000 units

Second quarter 170,000 units

Third quarter 200,000 units

Fourth quarter 230,000 units

However, the marketing department was not totally confident of its forecast.

‘A substantial proportion of demand is likely to be export sales, which we find difficult to predict. But whatever demand does turn out to be, we will have to react quickly to meet it. The more we enter these parts of the market, the more we are into impulse buying and the more sales we lose if we don’t supply’.

This plane was likely to be the first of several similar planes. Another model had already been approved for launch about 1 year after this, and two or three other models were in the planning stage. All the planes were similar, merely varying in length and width.



Designing the manufacturing operation

It has been decided to assemble all planes at one of the company’s smaller factory sites where a whole workshop is unused. Within the workshop, there is plenty of room for expansion if demand proves to be higher than that forecasted. All machining and finishing of parts would be performed at the main factory and the parts shipped to the smaller site, where they would be assembled at the available workshop.

Partially exploded view of the new plane

An idea of the assembly task can be gained from the partially exploded view of the product (see the figure). The following table gives the ‘standard time’ for each element of the assembly task. Some of the tasks are described as ‘fly press’ operations. A fly press is a relatively simple tool, about a metre high, which has two weights mounted onto a screw thread. When the two weights are rotated, they give momentum to the downward action of the screw thread, which applies a downward force. This force is used for simple bending, riveting or force-fitting operations. A fly press is not an expensive or sophisticated piece of technology.



Table – Standard time for each element of assembly task in standard minutes (SM)

Fly press operations

Assemble poke S/A 0.12 SM

(LH poke, RH poke, poke bush)

Fit poke S/A to frog 0.10 SM

(poke, S/A, poke pin, frog)

Rivet adjusting lever to frog 0.15 SM

(adjusting lever, rivet, frog)

Press adjusting nut screw to frog 0.08 SM

(frog, adjusting nut screw)

TOTAL PRESS OPERATIONS 0.45 SM

Bench operations

Fit adjusting nut to frog 0.15 SM

Fit frog screw to frog 0.05 SM

FROG S/A COMPLETE

Fit knob to base 0.15 SM

Fit handle to base 0.17 SM

Fit frog S/A to base 0.15 SM

Assemble blade S/A 0.08 SM

Assemble blade S/A, clamp and

label to base and adjust 0.20 SM

PLANE COMPLETE

TOTAL FOR PRESS AND

ASSEMBLY OPERATIONS 1.40 SM

Make up box, wrap plane,

pack and stock 0.20 SM

TOTAL WORK TIME FOR

ASSEMBLY AREA 1.60 SM

S/A = sub assembly

Costs and pricing

The standard costing system at the company involves adding a 150 per cent overhead charge to the direct labour cost of manufacturing the product, and the product retails for the equivalent of around €35 in Europe, where most retailers sell this type of product for a price about 70–120 per cent more than price at which they buy it from the manufacturer.



Questions

1. How many staff should the company employ?

2. What type of facilities and technology will the company need to buy in order to assemble this product?

3. Design a layout for the assembly operation (to include the fly press work) including the tasks to be performed at each part of the system.

4. How would the layout need to be adjusted as demand for this and similar products builds up?

Teaching note – Weldon Hand Tools

This case exercise deals with the design of a manufacturing process to produce a relatively simple hand tool. Details of the product, together with times for each element that constitutes the assembly task, and sales forecasts for the product are all given in the case exercise. The product itself is a new design that is intended to sell at the lower end of the market in relatively high volume. Issues include layout, job design, mass production, objectives of process design and volume flexibility. This case exercise makes an excellent ‘hands-on’ experience for students. It has been designed around a product that is readily available in most do-it-yourself stores. Each syndicate group of students can be given a product (we have found the Stanley Handyman plane to be both economical and useful!) together with a screwdriver. They usually find the product very easy to disassemble, and they can go through the various elements of the assembly task outlined in the case themselves when reassembling the product. It is usually unnecessary to point out to them that they are taking considerably longer than the 1.6 standard minutes specified in the case.

Although in any class different groups of students will come up with different process designs, there is usually a tendency to go for what Slack et al. call ‘long–thin’ systems, which are relatively long assembly-line–type systems. They do this in the mistaken belief that any efficiency gains that derive from this process are in line with the company's performance objectives. In fact, after discussing the relative merits of long–thin and short–fat systems with students, it is useful to examine the economics of a product such as this, as outlined in the teaching notes. Students are sometimes surprised to find that saving small amounts of labour cost is relatively unimportant compared to keeping down the inventory and maintaining flexibility.

Question 1. How many people are needed to assemble the product?

Assume (for simplicity) that staff work 35 hours per week for 48 weeks per year.

In the first quarter (12 weeks), the forecast requires 98,000 products to be assembled.

The time available = 12 × 35 × 60 minutes= 25,200 minutes

So, a product should emerge from the assembly operation every 25,200/98,000 = 0.257 minutes.



The figure is called the cycle time of the operation and is important in all process design activities.

The total ‘work content’ (amount of work) of the assembly operation is 1.6 standard minutes (see earlier for the idea of a ‘standard minute’).

The theoretical number of people required to assemble products at a rate of one every 0.257 minutes is therefore 1.6/0.257 = 6.226 people.

The number of people required at the end of the two-year forecast period can be calculated in a similar manner.

Cycle time = 25,200/230,000 = 0.11 minutes

Number of people required = 1.6/0.11 = 14.55 people

The forecast sales per quarter do not increase smoothly from 98,000 to 230,000; there is clear evidence of seasonality contained within the increasing sales. This poses a problem for any job design for the assembly operation. The design must be capable of accommodating increasing output requirements, with possible occasional short-term reductions in output.

Question 2. Designing the production system

The design decision here is largely concerned with the extent of job specialization (or put another way, the extent of the division of labour).

There are a large number of ways of allocating all the elements in the assembly task to the assembly staff. Let us examine just two extremes, one that uses a high degree of specialization and the other that goes as far as possible to minimize specialization.

Option A – high specialization – the ‘long–thin’ design

Numbering the 12 elements in the total assembly task from 1 (assemble poke S/A) to 12 (make up box, wrap plane, pack and stock)

Assembler 1 performs elements 1 and 2; total time = 0.22 SM



Assembler 4 performs element 7; total time = 0.15 SM







Note that because of the difficulty in allocating elements equally between all assemblers, eight people are needed to meet the required cycle time (even then we have not quite made the necessary cycle times although we are probably close enough to make up any shortfall through a little overtime).

Option B – no specialization – the ‘short–fat’ design

The design would merely require all assemblers to perform all the elements (1 to 12) needed to make and pack a complete product. Nominally at least, only seven assemblers would be needed because no inefficiencies are introduced through uneven allocation of work elements.

The arguments in favour of option A are:

• Learning the tasks will be faster (although these assembly tasks are unlikely to take much learning as such).

• Parts of the task might be more easily automated (e.g. the press elements).

• Low levels of non-productive work will almost certainly mean that actual work times will be less than the standard minute values indicated.

• The equipment does not have to be supplied to every assembler (e.g. only two people need fly presses).

• Parts need only be moved to one point of the system (where they are being assembled).

The arguments against option A are:

• It is very monotonous.

• Losses due to uneven allocation of tasks are high.

• The arrangement is not robust in so much as one person stopping work will eventually stop all output.

• It is volume inflexible in so much as it is difficult to add extra assemblers to the arrangement.

The arguments in favour of option B are:

• Allocation losses are reduced to zero.

• The arrangement is robust; one person stopping will not affect the other assemblers.

• It is flexible in so much as extra people can easily be added to the arrangement (each making a different type of product if this becomes important).



The disadvantages of option B are:

• Non-productive work may mean that the actual work times are longer than the ‘standard minute’ values.

• Each assembler will need every piece of equipment, for example, seven fly presses.

• The logistics of getting all parts of the product to all individual assemblers may be complex.

Question 3. How can the process be changed as volume changes?

The flexibility arguments above are key to understand how job designs may have to change as volumes increase. The highly divided (specialized) arrangements are particularly difficult to rearrange so as to increase the capacity of an operation. There are two reasons for this. First, the introduction of each new person to the system will require the allocation of tasks to people to be changed, which itself may disrupt its smooth running. Second, as each new person is added to the production ‘line’, the losses associated with unequal allocation of work tend to increase.

To illustrate the second point, take just the first four elements of the Weldon Hand Tools assembly tasks – the press operations. The figure shows how the elements will need to be allocated to each assembler as the number of people allocated to the work is increased.

The simple efficiency of job design can be measured by what is termed as the ‘balancing loss’ of the arrangement. Put simply, it is the percentage of labour time invested in producing each product that is wasted because of unequal allocation of work.

With one person performing all the work, no time is wasted and the cycle time of the system is 0.45 minutes.

With two people sharing the tasks allocated as shown, the slowest person (who has the collection of elements with the largest total time) will determine the output (and hence cycle time) of the whole system, in this case 0.23 minutes. The total ‘investment of labour’ is 2 × cycle time, that is, 2 × 0.23, of which only 0.01 (the time the faster person has to wait each cycle) is wasted. So the balancing loss = 2.17 per cent.

With three people sharing the work as shown, the balancing loss increases to 16.7 per cent.

With four people sharing the work as shown, the balancing loss increases further to 23.3 per cent.

The only way of introducing a fifth person is to allocate two people to the largest of the four elements (effectively reducing the time taken to carry out that element to half its time, i.e. 0.075). The balancing loss increases further to 25 per cent.

Question 4. What objectives should the layout achieve?

It may seem as if the most important operations objective for a consumer product of this type is cost. Indeed, it is very likely that the product competes largely on the basis of price. However, examine the economics of the product:



• Retail price on average is around £25.

• With a retail margin of say 100 per cent, this means that the company will sell the product to retailers at around £12.50.

• Although we do not know the exact breakdown of costs, the assembly labour cost will be 1.6 minutes at whatever the employment cost per unit time is.

• Assembly labour cost therefore is unlikely to be large (probably around £0.25–£0.30 per product).

• It is therefore very unlikely that saving small amounts of cost through the job design will be relatively important.

• Far more important will be the need to be flexible because:

• the product is new and therefore demand levels are uncertain

• seasonal effects on top of (uncertain) volume growth will need to be accommodated

• further products in the same range are likely to be introduced.


C H A P T E R 6

Case exercise – Boeing brings its customers on board

Arguably the most innovative new passenger aircraft to enter service over the last few years was the Boeing 777, a new twin-engined aircraft, in the 300-plus seats category, to compete with established models from McDonnell and Airbus. The existence of established competitor products is important. When Boeing developed the 747 ‘Jumbo’ jet aircraft, it had no direct competitors. The company’s customers either wanted the product or they didn’t. Not so for the 777; Boeing knew that it must consider its customers’ requirements. The company had to take a new course – to understand its customers’ needs and then to incorporate that knowledge into an aircraft that could best meet those needs.

Boeing has always maintained close involvement with its customers, but this project called for a new depth of listening and understanding. Initially, eight large potential customers (including British Airways, Japan Airlines and Qantas) were invited to participate in creating the design concepts. It soon became clear that the customers did have important requirements, the most vital of which was that the aircraft should be around 25 per cent wider than the 767. In fact, Boeing had originally hoped to lengthen the 767 fuselage to give the extra capacity, thus avoiding some of the costs involved in a completely new fuselage. The customers also wanted much more flexibility in the configuration of the passenger space. Conventionally, cabin space had been divided into sections, separated by fixed galleys and toilets at predetermined positions, fixing the ratio of passenger capacity of each class. However, all the airlines indicated that they wanted to be able to configure the cabin to their own requirements. Finally, the airlines insisted that the new design should be free of the usual level of minor, but irritating faults that had bugged the early operations of some of the other aircraft.

Boeing did meet its customers’ requirements and even improved upon them in some ways. They achieved this by using ‘design/build teams’ (a concept similar to the interactive design principle described in Chapter 6), and by a particularly powerful computer-aided design (CAD) system (CAD is described in Chapter 6). Customers were closely involved right from the start of the design. They even came up with some good suggestions. For example, one airline suggested a new layout for the rear galley, which allowed for an extra 12 seats to be included in the aircraft.

Questions

1. What problems do you think might be associated with bringing customers together in the way that Boeing did?

2. Why do you think that Boeing’s customers wanted the flexibility to configure passenger space?



Teaching note – Boeing brings its customers on board

Question 1. What problems do you think might be associated with bringing customers together in the way that Boeing did?

Although there are obvious advantages in talking to customers in the formal way in which Boeing did, there are also some problems that Boeing must have addressed.

The sheer organization of bringing many customers together would have been time consuming and may even have slowed down the design project.

Selecting which customers to include would have been an issue for Boeing. Presumably they chose the more important customers (so the technique was being used partly as a sales promotion), but they might have also wanted to include potential customers who, although not large, had a reputation for expertise.

Managing customer expectations must have been a problem. Just because you ask a customer what they want does not mean that you can give it to them.

These customers also are commercial rivals. They compete amongst themselves. They may not have been entirely open when talking to Boeing. After all, the benefits of any suggestions they make are automatically also conferred on their rivals.

Question 2. Why do you think that Boeing’s customers wanted the flexibility to configure passenger space?

Different aircraft routes have different requirements. For example, routes to popular holiday destinations are unlikely to require much first class cabin accommodation and probably not too much business class accommodation. Most holidaymakers fly economy class. On the other hand, popular business routes will require more space devoted to first and business class. Being able to adjust cabin proportions relatively easily allows the airlines to shift planes from one type of route to another more easily.


Case exercise – Design principles at Braun AG and the new Braun Multimix

Braun, the leading European manufacturer of small appliances, is renowned for the innovative and functional designs of its products (over 60 per cent of the company’s sales are of products that were launched within the last five years). The company has 150 of its products in the permanent collection of the Centre Pompidou in Paris and has 40 products on exhibition at the New York Museum of Modern Art. But Braun’s design principles go beyond the aesthetic. Its designers follow their ‘10 principles of good design’. We will describe the design of the Braun Multimix, the design brief of which was ‘to combine three specialist kitchen appliances (blender, food processor, kitchen machine) in such a way that the new single product performs, at least, as well in each of the applications as the best equivalent specialized product’.

Braun’s 10 industrial design principles applied to the Multimix

1. Usefulness. The functionality of a product is the central reason for its existence. It was decided to align the motor, gears and attachments in a single vertical direction (competitive products have horizontal motor and vertical attachments, requiring a complex gearbox). The’form’ of the product then follows its ‘function’.

2. Quality. Braun designers emphasize four aspects of quality. First, its versatility provides a full range of tasks required in cooking: mixing, blending, kneading and chopping. Second, the high mechanical efficiency of the appliance and the seven speed settings provide high performance across the range of tasks. Third, many unique safety features have been included to prevent contact with moving parts and to prevent accidents. Fourth, the application of advanced process technology has enabled many integrated elements to be incorporated in a single moulding. A complex production-moulding tool was developed to produce two housings in one injection-moulding step.

3. Ease of use. Great emphasis was placed on ‘human engineering’ to ensure that the Multimix is convenient, comfortable to use and easy to clean.

4. Simplicity. Braun engineers believe in achieving maximum results with minimum means: what is relevant is stressed, what is superfluous is omitted.

5. Clarity. Particular emphasis is placed on eliminating the need for complex instructions: the Multimix controls ‘speak for themselves’. For example, insertion of the attachments automatically sets the appropriate speed range of the drive.

6. Order. All details of a product should have a logical, meaningful place with nothing arbitrary or coincidental.

7. Naturalness. Braun designers strive to avoid any forced, contrived or artificial decorative elements. Braun refers to a principle of ‘understatement and modesty’.

8. Aesthetics. Although aesthetic quality is not a primary objective of the Braun designers during the development process, it is achieved through attention to detail and the quest for order and naturalness.



9. Innovation. Braun is committed to achieving long-lasting appeal in its designs, so innovations are carefully developed and brought together for new appliances such as the Multimix.

10. Truthfulness. A principle followed by Braun is that ‘only honest design can be good design’, so any attempt to play on people’s emotions and weaknesses is avoided.

Questions

1. Braun is proud of its success in aesthetic design. What benefit do you think this gives the company with the domestic appliance buying public?

2. Braun’s 10 industrial design principles are applied above to a domestic appliance. How do you think they might change if they were applied to an industrial product such as a machine tool?

3. Pick a service with which you are familiar in an educational operation (such as your university, school or college) and evaluate it against Braun’s 10 principles. Which of these 10 principles do you think were the most useful in making your evaluation?

Teaching note – Design principles at Braun AG and the new Braun Multimix

Question 1. Braun is proud of its success in aesthetic design. What benefit do you think this gives the company with the domestic appliance buying public?

Image, image and image! Two issues, in domestic appliances such as those Braun makes influence consumers. The first is how easy they are to use and the second is what they look like. Increasingly, the latter is becoming important, as consumers become more style conscious. This is a consequence of increasing affluence in many markets. It is important for Braun to have their brand associated with stylish design. A succession of aesthetically pleasing products does more to establish the brand value of Braun than any amount of advertising.

Question 2. Braun’s 10 industrial design principles are applied above to a domestic appliance. How do you think they might change if they were applied to an industrial product such as a machine tool?

1. Usefulness – important for Braun but even more important for a machine tool.

2. Quality – again important for Braun but even more important for a machine tool, especially the ideas of functionality and reliability.

3. Ease of use – also important for a machine tool, however, the user of a machine tool can be assumed to have some specific skills that will help him or her perform tasks such as routine maintenance.

4. Simplicity – again important but possibly not as vital as with a domestic appliance.



5. Clarity – controls on a machine tool have to be clear but not ‘idiot proof’ as on a domestic appliance.

6. Order – perhaps not as important in a machine tool.

7. Naturalness – again, not as important for the machine tool.

8. Aesthetics – again not as important but not totally unimportant either. The looks of a machine tool must reflect the image that the manufacturer is trying to project. Precision and reliability for the machine tool rather than style and sophistication for the domestic appliance.

9. Innovation – just as important for the machine tool as for the domestic appliance.

10. Truthfulness – again an important principle for both.


Case exercise – The manifold for the Ford Zeta engine

The development of the 1.6 Zeta engine by Ford was one of its most important design projects for years. Like any engine design, it was a huge and complex task. Indeed, each part of the engine needed to go through all the stages of the ‘concept through to market’ design activity. Take, for example, the air intake manifold. This plays a particularly important role in the engine because it re-circulates exhaust gases from the engine, re-burning some of them and thus reducing the overall emission levels from the engine.

In the Zeta engine, the manifold (unusually) is made not from metal but from a glass-reinforced nylon resin. The advantages of using this material include its strength, impact resistance, heat resistance and ease of processing. However, there were many design problems to sort out, including noise and vibration, the dimensional stability of the product and the ability of the material to stand up to the very high temperatures involved.

The design of the engine manifold took almost three years and was organized using all the interactive design principles. First of all, the various stages in the design were compressed and run in parallel (what Ford calls ‘concurrent engineering’). Secondly, the various fundamental design problems were sorted out right at the beginning of the process. Thirdly, a design team was put together, involving not only various personnel from the Ford Motor Company, but also the more significant suppliers. Those involved included design representatives from the Du Pont chemical company who were supplying the material, Dunlop who were to perform the moulding operation, and several specialist suppliers including Dowty who were designing the seals, Elring who were involved in gasket design, Elm Steel who were involved with supplying tubing and so on.

Design technology also played a large part in the development of this product. For example, Du Pont used CAD techniques to study the effects of engine vibration on the manifold. By simulating engine conditions, the various stress levels in the manifold could be estimated. This allowed the team to explore different design solutions without having to devote time and cost to manufacturing too many alternative prototypes – particularly important, because the design of the manifold had to fit in with the overall design of the engine itself. Prototype manifolds were needed to be supplied to the main engine design team who wanted to start engine testing several months before the end of the manifold design process.

By involving its suppliers, using them to resolve the considerable technical problems early on in the project, and solving the technical problems in an interactive and simultaneous manner, the team managed to get a highly complex and very novel product designed to fit into the overall engine project more quickly, more cheaply and more dependably than it could otherwise have done.

Questions

1. In developing this product, Ford put together a team of suppliers. Do you think it would do the same for every single supplier of every part in every product? If not, how should it choose the suppliers, parts and products to be subjected to this sort of treatment?

2. Should Ford have included its suppliers’ suppliers as well?



Teaching note – The manifold for the Ford Zeta engine

Question 1. In developing this product, Ford put together a team of suppliers. Do you think it would do the same for every single supplier of every part in every product?

No. Clearly, the engine is one of the most important parts of the car. It is vital that it is designed quickly and efficiently while harnessing the skills of all its suppliers. It is unlikely that Ford would do the same thing for a floor mat, for example.

If not, how should it choose the suppliers, parts and products to be subjected to this sort of treatment?

• Parts – the parts that are either particularly expensive or connected with many other parts of the motor car or have a significant impact on the car’s performance are likely to be subjected to this sort of design.

• Suppliers – the more important suppliers who provide a significant input to the part or product would be chosen and also those who the company feels have some specific skill to contribute.

Question 2. Should Ford have included its suppliers’ suppliers as well?

Possibly, but there must be a limit somewhere. If a supplier to a supplier has a very significant impact on the supplier’s performance, and that supplier has a significant impact on the Ford product, then, yes, it might be a good idea. However, including suppliers from further up the supply chain would get increasingly complex.


Case exercise – Troublesome technology

Failure to understand the needs of customers and work these thoroughly into the design can cause problems that only emerge after the product or service is in use. This can be especially true when designers are motivated solely by the exciting possibilities offered by a new technology. For example, many of the so-called ‘intelligent buildings’ that incorporated extensive information technology, have suffered initial teething problems. One building incorporated ‘intelligent blinds’ on its windows. These were supposed to go up and down in response to the amount of sunlight falling on the windows. The outside light was sampled every seven minutes. On a sunny day, the blinds were supposed to remain down and when it was cloudy they would stay up to let in more light. Unfortunately, when the sun passed behind a small cloud the blinds could go up and stay there for seven minutes. On intermittently cloudy days the blinds would be forever going up and down, to the considerable annoyance of staff, especially those with computer screens. The problem was eventually ‘solved’ when staff piled books on the bottom of the blinds until the motors blew up. Another building had conference rooms in which the lights were activated by sensors in the ceiling, which reacted to movement and heat. The lights went on automatically when people entered the room. Unfortunately, this was the only mechanism by which the lights went on and off, so if someone wanted to show slides, everyone in the room had to sit still until the lights went out.

Questions

1. Why were each of the systems described in this box regarded as a failure?

2. How would you have ensured that the mistakes made by the designers of these systems could not have occurred?

3. Was it just incompetence that led the designers to install these systems or were they falling into a fairly predictable design trap?

Teaching note – Troublesome technology

Question 1. Why were each of the systems described in this box regarded as a failure?

Failure was primarily because they did not work in practice. Some essential element of what they were expected to do had been overlooked by the designer. Most products and services have to operate under a very wide range of conditions. Ensuring that all potential operating conditions are accounted for is a major task, even for the simplest of products and services.

Question 2. How would you have ensured that the mistakes made by the designers of these systems could not have occurred?

The obvious answer to this one is to ask the people who are going to use the product or service. Systematic questioning of the staff members that were going to use these ‘intelligent buildings’ may have revealed that the designs were inadequate. The other action would be to ensure that



the designers themselves spent some time either as customers of, or users of, the products and services. The third approach would be to develop pilot products and services, which could be used in a simple way to explore potential problems.

Question 3. Was it just incompetence that led the designers to install these systems, or were they falling into a fairly predictable design trap?

Well, it was both incompetence and a design trap. The whole issue of ‘usability’ is one that is much discussed by designers. Ignoring it was, to some extent, incompetence. Yet it is surprising how often failure to consider usability issues occurs.


Case exercise – The virtual reality of design

Virtual reality, once seen solely as a high-technology arcade entertainment medium, has established itself as a powerful, three-dimensional professional design tool, with applications including architecture, car design and planning of delicate surgical operations. It gives designers a much clearer concept of the relative positions of the individual elements than is possible with static, two-dimensional representations. Perhaps even more importantly, it also allows others, in particular the ‘non-technically’ trained user, to visualize and suggest modifications to the design before any work is done on the physical entity concerned. An architect can allow a client to roam around the virtual building, walking along corridors and entering rooms at will. PERA, the European consultancy, R&D and a technology transfer company, uses a ‘virtual reality center’ to help its clients visualize the implications of their operations designs. Powered by a Silicon Graphics Onyx Infinite Reality supercomputer, the world’s most powerful graphics supercomputer, the centre offers visualizations of real-time data.

‘Virtual reality offers significant benefits in industrial applications, from market testing and design to training and maintenance planning. The virtual reality centre bridges the gap between software vendors and potential users by delivering tailored applications to address specific needs’, says Gary Eves, Business Manager at PERA.

For example, Barclaycard, the bank card company, has employed reality centre technology to let some of its 2500 staff in Northampton walk through and help design its new offices. Barclaycard staff could view the new building, as it would look, with groups of staff encouraged to give feedback on the design of the offices including floor layout and accessibility.

Questions

1. What are the advantages of ‘visualizing’ operations before they are constructed?

2. PERA’s virtual reality centre cost £2 million using the latest Silicon Graphics technology. How do you think it justified such an investment?

Teaching note – The virtual reality of design

Question 1. What are the advantages of ‘visualizing’ operations before they are constructed?

Several advantages are mentioned in the box. These include:

• market testing to gauge customer reaction;

• training for operators;

• the planning of maintenance;

• detailed design work to improve process flow;



• explaining new processes to staff;

• obtaining staff views on how processes could be improved;

• safety planning in the event of fire; etc.,

• customizing designs together with customers, etc.

Question 2. PERA’s virtual reality centre cost £2 million using the latest Silicon Graphics technology. How do you think it justified such as investment?

Presumably, the market for design help is sufficiently large to make the investment worthwhile. With all the advantages listed above it is not surprising that customers such as Barclaycard are willing to pay substantial fees to check out new designs. After all, the consequences of changing a design once a system or process has been constructed would be very large indeed. Fees paid for simulations at the design stage could be considered a kind of ‘insurance’ payment to minimize the risk of more expensive failure in practice.


Case exercise – The Royal Mint

A unique manufacturing operation in the UK is the Royal Mint at Llantrisant in South Wales. The Royal Mint is designated as an executive agency responsible to the Treasury of HM Government. The Chancellor of the Exchequer is appointed (ex-officio) as Master of the Mint. Its objective is to provide the Government with coinage at a competitive price. The Royal Mint has the capacity to handle all of the UK business and still be able to bid for contracts from those countries that do not have their own minting operation. It serves over 60 countries in any one year and produces in excess of three billion coins annually. Its manufacturing requirement ranges from high volumes of standard coinage to individual service medals or commemorative coins.

In the UK, the Treasury contracts with the Royal Mint on an annual basis for the likely requirements for coins in the following 12 months and the Treasury is also responsible for decisions on any changes to the coinage. The last coin that was introduced was the new, smaller 10p coin; this involved an issue of over one billion new coins and the withdrawal of all the old coins from circulation. This represents one of the largest single projects undertaken and a massive logistics exercise to coordinate the movement of the coins. The Mint meets every three months with executives from the UK clearing banks to discuss their requirements for currency in the shorter term. These estimates are then updated at weekly planning meetings. The Mint would like to work to a ‘just-in-time’ schedule, but because of the nature of the product and the implications of the money not being available, they are obliged to keep a predetermined safety stock to cover any shortfalls.

As in any manufacturing operation, the unit cost of the product is a critical factor in measuring performance and in the case of the Royal Mint, there is a unique cost ceiling, in that their cost base must always be less than the face value of the coins being produced. Therefore, this mass manufacturing process must focus on monitoring its operating costs. The issue of payment for the product is an interesting concept within the ‘minting’ industry and in the UK. The clearing banks pay the face value of the coins to the Treasury and the annual contract agreement with the Royal Mint is on the basis of the Treasury agreeing to cover a fixed percentage of their fixed costs and the variable cost of each unit then purchased over the year. The Royal Mint can then invoice the Treasury for the currency produced.

The costs of the coins are estimated in terms of pounds per thousand pieces. Of that cost, approximately 40–50 per cent consists of the raw material cost, with the next 20–40 per cent coming from the production process, which transforms the raw metal into a blank coin. The actual stamping of the die onto the coin and the simultaneous milling of the edges form an almost insignificant part of the overall process cost, mainly because of the vast economies of scale at this stage. The efficiency of the stamping process is nominally determined by the life expectancy of the die; and the research at the Mint is involved in initiatives to improve the materials being used both in the coins and the dies to extend this period of use. The coining machines used in the manufacturing process are flexible in that they can run to produce any of the UK and most overseas coins without long changeover periods and orders vary from 1000 million coins for a large country to an order of 5000 for a small island. The machines are able to operate at speeds of up to 750 coins per minute and therefore the nature of a 5000-coin run is very costly, but all the same still viable.



One issue has been the threat of the intrinsic raw metal cost exceeding the face value of the coin: something that has been most prevalent in those countries facing high inflation and which leads to coinage being withdrawn from circulation by those wishing to capitalize on the returns available from the base material. In the UK, the smaller denominations were reaching that point and the Mint had to change the composition of the 2p and 1p coins to a steel core with an electroplated copper outer layer. This reduced the unit cost of the coin and also added to its expected lifetime because it used a less-expensive base metal. This new format of coin represents the biggest change in the manufacturing process of coins to occur over the past few years and the pioneering of the electroplating technique, whereby a mild steel core is electroplated with copper, nickel or brass, resulting in a process that will aid the conservation of materials. The reduction in costs is also being achieved without a noticeable reduction in the recognized value of the coin. Another consequence of the electroplating procedure is that the coins have magnetic properties because of the presence of a mild steel core and this has caused initial problems for vending machine manufacturers.

Questions

1. What is the ‘concept’ of the Mint’s products?

2. Explain the criteria that the Mint will need to take into account when it designs new coinage.

3. How might the concept of simultaneous design be applied in the design of coinage?

Teaching note – The Royal Mint

Question 1. The ‘concept’ of Royal Mint products

One definition of the ‘concept’ of a product or service is that which identifies its form, function, purpose and benefits. In this case, one statement of the concept of coinage might be as follows:

It should be a unit of exchange which is portable and easily recognizable (form), accepted as having its face value (function), can be used in purchase transactions, some of which might involve automatic mechanisms (purpose) and is convenient for medium to low-value transactions (benefits).

Question 2. The criteria for design of new coinage

The basic requirement of the coinage system is that it is easy and convenient to use and the Mint and Treasury together invest in a considerable level of market research to assess how easily individuals can distinguish between the coins by feel and appearance, that is, it is important that the coins should be distinguishable in the dark and to the blind by the use of milling on the edge of the coin and a well-defined face print.

In the past, some countries have seen high levels of counterfeiting and the Mint has to build measures into the manufacturing process to ensure that the coins are difficult to copy and unlikely to be copied with any accuracy.



The implications of introducing new coins in terms of their use and suitability for slot machines and various vending apparatus is becoming a more relevant issue with the wider use of such equipment. Any new coinage would have to be suitable for such use.

As in any manufacturing operation, the unit cost of the product is a critical factor in measuring its performance. In the case of the Royal Mint there is a unique cost ceiling, in that the cost base must always be less than the face value of the coins being purchased.

In the UK, the smaller denominations were reaching that point of imbalance in cost and subsequently, the Mint has changed the composition of the 2p and 1p coins to a steel core, with an electroplated copper outer. This has radically reduced the unit cost of the coin and has also added to its expected lifetime by using a more durable and lighter base metal.

In summary, the Mint has to bear in mind several key design factors when considering any new currency proposals.

These are as follows:

• Must be suitable for use in vending machines,

• Must be easily distinguishable,

• Design must command respect,

• Information in the design must be easily understood,

• There must be at least a 3-mm difference in diameter of each different coin type,

• Should take account of size and shape considerations with reference to the needs of sight-impaired and manually less-dexterous users,

• The cost price must be less than the coins’ face value,

• Must take into account anti-counterfeiting,

• Must not be too large,

• Must not be too heavy.

Question 3. The use of simultaneous development in coin design

Especially when new materials and/or production processes are being introduced, the idea of simultaneous development should be particularly relevant. This is certainly the case at the Royal Mint. The use of two types of metal in a single coin (as is becoming more common in some parts of the world) and electroplating techniques have implications that impact on the potential for new forms of product design as well presenting new process challenges to the operation. Close and concurrent decision making between product and process design (always desirable) must be even more so under such conditions.


C H A P T E R 7

Case exercise – Globalcast

Globalcast was one of the world’s largest manufacturers of metal and plastic moulded components associated with almost every industry, including automotive, consumer durables, telecommunications, computers and power tools. With over 100 manufacturing facilities, it operated in every continent, usually in areas of established or emerging industrialization. In Europe, there were large factories in the UK, Germany, France, Spain and Italy, and smaller ones in Scandinavia, Austria, Turkey and Israel. Every factory was considered to be a semi-autonomous profit centre and was headed by a general manager. Each general manager reported to a regional manager of one of the divisions (e.g. plastics division). New business was generated both by national marketing and by word-of-mouth recommendations from existing customers, but most orders were for regular repeat business or for new designs from existing customers. The role of the small technical sales team at each factory was to follow up enquiries with technical advice visits to the customer followed by the preparation of quotations. In many cases, Globalcast provided design assistance to the customers. It was the role of the advisor to suggest ways of simplifying the overall design, which would be cheaper for the customer, while being fast, easy and profitable to be produced in the factory. Mould costs were calculated and quoted too, and in most cases the customer would pay for the moulds from the outset, retaining ownership. Globalcast organized the purchase of the moulds, each costing up to £50,000, and made a small profit on this activity.

In the late 1990s, the market started to change rapidly. First, major customers such as Hewlett Packard, Dell, Ford, GM and Black and Decker started building new factories in developing countries. These were being established both to exploit the benefits of lower wages and overheads and as market-entry points for these rapidly developing economies. In most cases, however, large proportions of their output would serve existing markets throughout the world. Because Globalcast was one of the most important suppliers (only about five competitors had worldwide coverage), it was often encouraged by its customers to establish supply factories in the same regions, ideally on adjacent sites. Customers explained that business was, in part, being transferred to their new sites and since Globalcast had been selected as a preferred supplier, it had the opportunity to benefit from ongoing business development and growth. Attractive forecasts were provided, but not guaranteed. ‘Partnerships’ would be established where Globalcast had the benefit of sole-supplier status to the customer’s local plant.

The second change was the trend for customers’ products to be of globally standard designs. This allowed buyers to purchase components for their factories around the world, from virtually any approved supplier anywhere. Therefore, they were in a powerful position to restrict the number of suppliers, as well as demand a single global, low price. For Globalcast, this provided a new set of problems; its costs had varied widely around the world, depending mainly on local labour and overhead costs. Selling prices had varied according to costs and local commercial conditions, but detailed costs of production had never been disclosed to customers. However, customers would now be able to ‘shop around’ and find the lowest Globalcast price for themselves. At the same time, each Globalcast general manager had tried to defend his or her business, even if that involved buying in the components from other company sites and adding a profit before selling to the customer. This was now becoming too obvious to large customers. The third significant market trend was that customers increasingly wanted suppliers to do more assembly (‘value-added’) work. At its simplest, this could involve simply snapping together two



parts. Alternatively, it could require complex purchasing, assembly and testing of major sub-assemblies. To do this, Globalcast would need to invest in assembly lines, testing equipment, storage, component and finished goods inventory and systems to support purchasing and logistics. Specific approved suppliers were usually dictated by customers. Lead times from these global suppliers could be up to 12 weeks. Customers’ initial delivery schedules were often stable and close to the forecast levels but could vary wildly as competitive forces affected customers’ sales. But, overall, this type of work did appear commercially attractive, typically bringing in up to 10 times the revenue of a simple moulded part. The opportunity to become a ‘first-tier’ supplier to some of the world’s leading manufacturers was hard to resist. Indeed, supplying global customers was the mainstay of the strategic plan for the new decade.

Questions

1. Evaluate the company’s relationships with its large global customers. What does this imply about Globalcast’s potential to support its customers’ requirements in intensely price-sensitive global markets?

2. Would you describe Globalcast’s strategic supply chain management decisions as more proactive or reactive and why?

3. Are there other ways in which the company could organize itself to meet the challenges and market trends described in the case?

Teaching note – Globalcast

The case describes major changes experienced by a large, globally operating manufacturing company. Until recently, each of its manufacturing operations had (with virtual autonomy from the parent group) supplied the needs of its local customers, including the manufacturing subsidiaries of global blue-chip customers. Each site was expected to make a good profit on the basis of its local entrepreneurial skills, supported by access to group resources (technical and financial). Recently, some of the larger customers were seeking global ‘partnerships’, which would inevitably undermine the conventional local–local relationships and which would highlight the urgent need for a group review of its policies concerning such partnerships. Students will be able to consider these issues and assess the risks and rewards of partnerships. Key issues include, global sourcing, relationships in a global supply chain, partnering and lean supply.

Question 1. Evaluate the company’s relationships with its large global customers. What does this imply about Globalcast’s potential to support its customers’ requirements in intensely price-sensitive global markets?

The types of customers described in the case are all high-volume global manufacturers of consumer durables. Students could assume that such customers will be very cost conscious and will constantly be looking for ways of reducing their overall costs of production, not just the purchase price.

Nature of competition – Both Globalcast and all its key global customers have operations throughout the world. Customers will have (trading) presence in virtually every country, but



their manufacturing operations will be confined to fewer sites in order to gain economies of scale. Globalcast supplies smaller local customers too, competing by providing design support and lower-volume production services to a multitude of users, and so it is able to operate factories in smaller markets where its large customers may have no operations. When dealing with large customers, Globalcast’s competitors will increasingly comprise the few global manufacturers mentioned in the case, and competition will be more on the basis of price. However, to achieve truly minimum costs, customers will need value-engineering design support from its suppliers.

Thus, suppliers such as Globalcast will be expected to make significant contribution to product technology, which reduces costs (e.g. design for assembly)

It is not clear to what extent alliances and collaboration will be a pre-requisite for trading in these markets, although is seemed to be an irresistible trend at the time of the case.

Selection of suppliers by customers – The case gives scanty information on this process, but we can infer the following:

• There has always been a close technical and commercial involvement between large customers’ and Globalcast from the inception of new products.

• Such customers were often seeking sole sourcing arrangements.

• Globalcast would provide benefits (e.g. cost saving, design support) over the entire customer’s operations.

Exchange of information – There is little information on this in the case. However,

Globalcast was slow in appreciating that the customers would ‘shop around’ within the group, exposing the lack of a global pricing structure applicable to key accounts. Cost transparency was being forced on Globalcast.

Volume discussions centred on ‘attractive’ forecasts (which, it transpired were usually optimistic). Students could debate this point…since the customer wants to get the lowest price supplies and wants a supplier who can cope with exceptionally high levels of demand; these forecasts will inevitably be rather on the high side. Within Globalcast, the sales managers will also tend to go along with this optimism in order to secure sufficient capacity for their client and knowing that high volume equals lower costs! In a true partnership, honesty should prevail, and different volume scenarios would be discussed, along with their implications for the supplier (e.g. capital budget, volume/cost/price relationships).

Management of capacity – The case implies that the group was not yet experienced at coordinating capacity globally. This would require new approaches to communication between different factories producing standard components for global customers.

Because of the inflated forecasts, there would be some volume flexibility to cope with fluctuations in demand.

Delivery practice – No information in the case.



Dealing with price changes – The case suggests that the customers had taken the initiative to shop around within the group, so mechanisms for price reductions were probably not yet established.

Joint efforts to reduce costs – not reported.

Attitude to quality – No information in the case.

Question 2. Would you describe Globalcast’s strategic supply chain management decisions as more proactive or reactive and why?

Most students will recognize that the changes described have been imposed on the company (i.e. are reactive) rather than forming part of a holistic plan for dealing with major global customers. The reason why this happened is because the company had been organized around country-based operations, formerly dealing with global customers on a local–local basis. The local control was even creating internal competition and pricing problems between plants, some of which had enjoyed taking trading profits for work carried out by sister factories!

The company had come to realize that new structures would be needed to support any increase in such global business.

Question 3. Are there other ways in which the company could organize itself to meet the challenges and market trends described in the case?

Given the scale of Globalcast’s operations (over 100 factories), any changes in organization are likely to create large-scale management of change issues. It is clear that the trend towards more globally coordinated purchasing by global customers would impact the extent to which local general managers could continue to make any commercial decision relating to these accounts. For the first time, their local needs would have to be subordinate to those of the group. This implies that decisions taken at group level would for the first time have an impact on local profitability and performance. However, changes towards more centralization of decision-making could de-motivate these formerly very entrepreneurial individuals and their teams.

There is, however, a strong case for centralization of relationship management for each global account. This would provide:

Single commercial point of contact for contract negotiations

Single point of technical support and value analysis

Uniform pricing structures

Clarity of capital requirements for new machines and facilities

Cash management

Capacity planning between appropriate regional factories

Forecasting and volume negotiations.



One approach, actually the one adopted by Globalcast, was to have a Global Account Manager for each major account, based at Head Office. This manager was responsible for all the above requirements but had to work in partnership with local general managers in the locations appropriate for delivery to customers’ operations. This arrangement brought some control over the situation but added significantly large overhead costs (salary, travel, subsistence), which had to be recovered in the selling prices. More seriously, there was a degree of defensive opposition to this in principle, since most of the global accounts had been developed over the years by local managers who considered the customer to be theirs!

Other models may be suggested by students. One is to allocate global customers to select general managers, perhaps on the basis of the volumes/revenues processed. They would then be the ones responsible for global coordination, but it could be argued that they would inevitably favour their own operation, even at the expense of group success. It would also be time consuming and potentially distracting, taking attention from the many other lower-volume but profitable opportunities.

No one model proves to be the ‘solution’, so students are encouraged to examine the pros and cons of each alternative.


Case exercise – Rotterdam Fruit Port in partnership with its customers

The port of Rotterdam, the largest and busiest in the world, covers nearly 5000 hectares and has over 60 km of dockside berths. Around 32,000 ships use the port each year, handling nearly 300 million tonnes of cargo. Apart from being a vital link in the supply chains of countless organizations, the port provides services to the transportation companies that ship goods through it. It is in this role – as provider of services – where it sees its future, as developing ‘partnership’ arrangements with its major customers. Competition in the port business is fierce. Rotterdam is acutely aware of the intense competition from other large European ports such as Hamburg, Antwerp, Zeebrugge and Bremen. Forming partnerships with its customers is a response to such competitive pressures.

In order to focus on its customers’ needs, the port has created dedicated areas of distinct competence, which can support the needs of particular customers. One of these is the recently developed Fruit Port, where most of the port’s fruit-, fruit juice– and vegetable-related businesses are located, sharing the specially developed modern facilities and infrastructures. This development involves 70 hectares of new land, created by filling in redundant harbour basins. The internal logistics of the site have been re-designed to ensure rapid flows of these highly perishable products between vessels, storage facilities and land-based transport systems. The advantage of concentrating its fruit-related business in one part of the docks is that all the different operations that provide services related to fruit handling can now link together to ensure the speed of handling of both produce and paperwork. The Fruit Port administration, forwarding agents, customs officers, inspection companies, traders, auctioneers at the fruit exchange, the managers of the temperature control warehouses and the distribution companies themselves are ‘partners’ who, by understanding each other’s professional needs, form an effective link in their supply chain.

Questions

1. How is the port of Rotterdam trying to influence its relationship with its customers?

2. What do you think are the advantages and disadvantages of developing the Fruit Port?

Teaching note – Rotterdam fruit port in partnership with its customers

Question 1. How is the port of Rotterdam trying to influence its relationship with its customers?

The port of Rotterdam is demonstrating its commitment to its partners by understanding the special needs of their businesses. It actively seeks to encourage the various companies, who together share responsibility for the storage and transportation of a particular type of product to work together effectively. Partly, this means that the port of Rotterdam is providing appropriate services for its customers. But it also partly means encouraging and facilitating the other companies in co-operating with each other.



Question 2. What do you think are the advantages and disadvantages of developing the Fruit Port?

Advantages – specialist expertise and facilities can be developed together in one area. For example, fruit is easily damaged and perishable. It therefore needs cool storage facilities and specially designed equipment that does not damage the produce. Storage facilities and handling facilities needed for (say) concrete slabs would be very different indeed. Also, specialist knowledge can develop. So, the customs authorities stationed in that part of the port will presumably develop an expertise in the customs regulations surrounding fruit and vegetables.

Disadvantages – investing in facilities and organizations that are specific to one particular trade makes it difficult for those facilities to be used for other customers. If, for some reason, the trade in fruit and vegetables decreases sharply, what is Rotterdam to do with this surplus capacity? It would be inappropriate to use it for the transportation of concrete slabs!


Case exercise – The Benetton supply chain

One of the best-known examples of how an organization can use its supply chain to achieve a competitive advantage is the Benetton Group. Founded by the Benetton family in the 1960s, the company is now one of the largest garment retailers, with stores that bear its name located in almost all parts of the world. Part of the reason for its success has been the way it has organized both the supply side and the demand side of its supply chain.

Although Benetton does manufacture much of its production itself, on its supply side the company relies heavily on ‘contractors’. Contractors are companies (many of which are owned, or part-owned, by Benetton employees) that provide services to the Benetton factories by knitting and assembling Benetton’s garments. These contractors, in turn, use the services of sub-contractors to perform some of the manufacturing tasks. Benetton’s manufacturing operations gain two advantages from this. First, its production costs for woolen items are significantly lower than some of its competitors because the small supply companies have lower costs themselves. Second, the arrangement allows Benetton to absorb fluctuation in demand by adjusting its supply arrangements, without itself feeling the full effect of demand fluctuations.

On the demand side of the chain, Benetton operates through a number of agents, each of who is responsible for their own geographical area. These agents are responsible for developing the stores in their area. Indeed, many of the agents actually own some stores in their area. Products are shipped from Italy to the individual stores, where they are often put directly onto the shelves. Benetton stores have always been designed with relatively limited storage space so that the garments (which, typically are brightly coloured) can be stored in the shop itself, adding colour and ambience to the appearance of the store. Because there is such limited space for inventory in the stores, store owners require that deliveries of garments are fast and dependable. Benetton factories achieve this partly through their famous policy of manufacturing garments, where possible, in greggio, or in grey, and then dyeing them only when the demand for particular colours is evident. This is a slightly more expensive process than knitting directly from coloured yarn, but their supply-side economies allow them to absorb the cost of this extra flexibility, which in turn allows them to achieve relatively fast deliveries to the stores.

Questions

1. Draw out the Benetton supply chain.

2. What are the major objectives of

• The Benetton’s retail operations?

• The Benetton’s physical distribution operation?

• The Benetton’s factory and its suppliers?

3. How well do these three interconnecting sets of operations fit together?



Sub-contractors

Contractors

Benetton plants

Agents

Retail operations

The Benetton supply chain

Sub-contractors

Contractors

Benetton plants

Agents

Retail operations

The Benetton supply chain

Teaching note – The Benetton supply chain

This case exercise can be used as an alternative to the Fast Fashion case included in Chapter 7 of the text.

Question 1. Draw out the Benetton supply chain.

Question 2. What are the major operations objectives of each part of the chain?

Operations Objectives for…

Manufacturing and supply operations

Physical distribution operations

Retail operations

Quality of products

Speed of response

Flexibility (through the ‘dyeing in grey’ process)

Cost

Speed of response

Dependability of delivery

Cost of transportation process

Sales/m2

• space productivity

• staff productivity

• stock productivity

Image of store

Brand

Quality of service



Question 3. How well do these three interconnecting sets of operations fit together?

Very well indeed. Think about it this way.

• The use of contractors and sub-contractors saves Benetton cost because they have lower wage rates than in their own factories. This cost saving can be invested in the ‘dyeing in grey’ process (which is more expensive than knitting the garments from colour yarn).

• The flexibility that the dyeing in grey process gives allows operations to respond quickly when it gets orders to replenish stocks in its warehouse.

• The ability to replenish warehouse stocks quickly allows the physical distribution operation to respond quickly to the orders placed by the retail operation.

• Fast response allows the retailers to operate without storerooms, keeping all their (limited) stock on the shelves.

• This has a number of effects. Most particularly, it saves the storeroom space so that all the shop space can be used for selling. This gives good space productivity. It also means the staff do not have to frequently return to the storeroom to check on stock; this gives good staff productivity. Also, because there is relatively little stock kept in the shop. The shop owner does not have to fund the working capital to keep the stock and therefore gets good stock productivity.

• Also, the image of the store itself is enhanced by having all products on display (the United Colours of Benetton).

• This enhances the brand image.

Of course, there are other issues as well. The quality of the products and service is important, and the cost of transportation likewise. However, the thread that runs through the three stages of the supply chain is to do with the movement of materials. Although Benetton has good factories, efficient physical distribution and good retail operations, their real strength lies in the way these three stages fit together seamlessly.


Case exercise – Consolidated value from GP

The GP Group is a global trading and shipping company based in Bangkok. This company, a family firm, was established 125 years ago in Burma and comprises over 20 companies worldwide, specializing (amongst many other things) in commodity trading, ship chartering and ship management. Kirit Shah, the Chief Executive Officer and owner of the Group, explains the size of their trading operations: ‘We charter about 200 ships a year, so at any given time we have 20 or 30 ships somewhere in the chain between loading, sailing and discharging’.

One key capability of the Group is filling ships by consolidating cargoes. Mr Shah explains:

‘We consolidate lots of small buyers into filling as large a vessel as possible. Let me give an example. Take soya bean meal for India. A typical Indian seller is capable of delivering between 500 and 1000 tons. However, the ship is going to load 20,000 tons, so we put together a dozen or so sellers and five to seven buyers at its destination. So, what we have effectively done is consolidate a region’s supply and consolidate a destination’s demand. We manage this by having our own facilities at the port. We have our own warehousing, we have our own berths, and we carry it on our chartered ships. All the cargo is consolidated at our warehouse in the port and we ship it only when it is ready in terms of quantity and quality. That way we have been able to control shipments better than other traders. It takes a great deal of planning to have a shipment ready by a certain date. From experience, we know we have to “call forward” (give notice for) the goods from different sellers at different times. For some suppliers, you have to call forward the goods 30 days, others 15 days or 10 days, depending on how well organized they are. We have to make sure the shipment goes on time because there are large penalties for lateness. This is not easy because we are dealing with originators and purchasers from around the world’.

The GP Group also helps suppliers in developing countries to meet the exacting standards imposed by many buyers. ‘The quality of goods such as rice is set by the purchaser, usually in a developed country. However, it is very difficult for a poor farmer, 600 miles from a port, to meet those standards’, explains Mr Shah. ‘So we try to help producers to do this. What typically happens in less developed countries is that sellers have to be very careful about how much they spend. As a result they have a tolerance for imperfection. But purchasers, such as a large Japanese food company, always want things 100 per cent right. So, for example, when packing the rice, the supplier may use 100-g polypropylene bags when he should have used 110-g bags, just to save 15 cents a ton. Instead of double stitching the bags he single stitches them, again saving 15 cents a ton. When printing the bags he did not use fast enough colours, so with multiple handling those marks are erased; once again he saved 15 cents. The problem is that a buyer would readily pay $300 for top quality rice. But for the same quality rice from India or Indonesia, Vietnam, parts of Africa or parts of the former Soviet Union, he will only pay $270, 10 per cent less. Why? Because although it is good rice, when he buys from India he buys a whole horde of uncertainties. Will the shipment be on time? Will every bag be perfect? The markings correct? The bags stitched correctly and the weight of each bag correct? These uncertainties add to my selling cost, so generally I have to sell at a discount. Also, I have to handle it more and spend more money at the destination putting things right. As a result, the seller might get $30 a ton less for something on which he had tried to save 50 cents’.

‘This is an area in which we believe our company helps. We charge our buyers $280 for the rice. Some buyers will pay this when they have experienced the product, our delivery and reliability because we control the port and the warehouse, and we have people in the chain



supervising at various stages, which all costs a little money. But, they will pay us $10 above the market price. This allows me to pay $5 to my supplier not to take the shortcuts and it allows me to make $5. This is how I can add value to the supply chain’.

Questions

1. What are the important tasks that the GP Group has to get right if it wants to maintain the performance of its ‘consolidating’ business?

2. How does the GP Group add value to each stage of the rice supply?

Teaching note – Consolidated value from GP

Question 1. What are the important tasks that the GP Group has to get right if it wants to maintain the performance of its ‘consolidating’ business?

The major task appears to be ensuring that both quantity and quality of supply is appropriate for the market to which the company is selling. This means bringing together an interested group of buyers, but far more importantly, it means bringing together and managing the activities of a larger group of suppliers. The group has to understand the different reliability of its various suppliers – what they can and cannot do, how much they can be developed, and so on. It then has to guarantee supply in an appropriate way. This is often done by asking for the supply to arrive for consolidation before it is actually needed. In effect, this acts as an insurance buffer against the chances of delayed supply.

Question 2. How does the GP Group add value to each stage of the rice supply?

At each stage, the Group adds value through information. Initially, it is information about who is growing the right product and, therefore, who could be included in the supply group. After that, it is information regarding the level of understanding and capabilities of each of the supply farmers. Then, it is understanding the best way to convince the farmers of what is needed (the right cloth to use for the bags, the way the bags need to be constructed and marked, etc.). Finally, the company takes responsibility for the quality and quantity of supply.


C H A P T E R 8

Case exercise – The British Airways London Eye (A)

The British Airways London Eye is the world’s largest observation wheel and one of the UK’s most spectacular tourist attractions. It’s height is over twice that of the famous Prater Wheel in Vienna, but has three key design differences compared with any such conventional Ferris wheel: firstly, the passenger capsules are fully enclosed and air conditioned; secondly, they are positioned on the outside of the wheel structure and do not hang down; and thirdly, the entire structure is supported on an A-frame from one side only, so it can be cantilevered out over the River Thames.

The 32 passenger capsules, fixed on the perimeter of the 135-metre diameter rim, each can hold 25 people. The wheel rotates continuously, so, to enter, customers have to step into the capsules, which are moving at 0.26 metres per second, which is a quarter of the normal walking speed. One complete 360-degree rotation takes 30 minutes, at the end of which the doors open and passengers disembark. Boarding and disembarkation are separated on the specially designed platform that is built over the river.

This tourist attraction is operated on behalf of British Airways by the Tussauds Group, and it is their only attraction that uses a ‘timed admissions booking system’ (TABS) for both individual and group bookings. This allocates requests for ‘flights’ on the basis of half-hour time slots. At the time of writing, the BA London Eye is open every day except Christmas Day. Admission is from 10.00 a.m. to 9.30 p.m. (for the 9.30–10.00 p.m. slot) in the summer, from the beginning of April to mid-September. For the rest of the year, the winter season, admission begins at 10.00 a.m., and the last admissions are for the 5.30–6.00 p.m. slot. Prices were set initially at £7.45 for adults, £4.95 for children and £5.85 for senior citizens. There is a 10 per cent discount for groups of 10 or more, plus one free flight for every 16 paid admissions. For credit card pre-booking, there is a charge of £0.50 per person, and these tickets must be collected from the adjacent ticketing office, where purchases can be made in person. Prices were set to rise by £0.50 for the period from June to December 2000.

The BA London Eye forecasts anticipated that 2.2 million passengers would fly the London Eye in 2000, excluding January, which was reserved for final testing and admission of invited guests only. An early press release informed journalists that the London Eye would rotate at an average rate of 6000 revolutions per year.

Questions

1. What do you think were the main design issues during the design of the London Eye?

2. Calculate the hourly, weekly and annual design capacities of the London Eye on the basis of the planned operating time. How does this compare with the maximum theoretical design capacity if it operated 24 hours a day? How accurate is the annual number of revolutions mentioned in the press release?



3. On the basis of passenger numbers, what is the anticipated capacity utilization in the first year of operation? Explain why this is less than 100 per cent.

4. Stating your assumptions, estimate the revenue (£) that might be earned by the BA London Eye in its first year on the basis of the forecast passenger numbers. What might have to be done to increase the yield in subsequent years? What information should be collected during 2000 by the operators (the Tussauds Group) that would help develop a yield management strategy to maximize revenue and profits? Would these be consistent with the marketing objectives of the sponsor, the British Airways?

Teaching note – The British Airways London Eye (A)

The British Airways London Eye is the world’s largest passenger observation wheel. It was opened to the public in February 2000, and has been an unqualified success, with passenger numbers in excess of 150 per cent of forecast levels. It is a new London landmark and is already a ‘must do’ tourist attraction, on par with the Eiffel Tower in Paris.

This case allows students of OM to consider design issues relating to mass services, in particular, how concepts can be translated in product, service and process designs, from a managerial (non-technical) perspective. It then provides an introduction to capacity management, allowing students to calculate capacities at different times of the year, and for the season. It also allows students to consider demand management and its relationship to yield management. There are some marketing/operations interface issues that are discussed in this chapter.

Analysis

The main design issues for the design of the BA London Eye

Many students living in the UK or continental Europe will be familiar with the now famous landmark of the BA London Eye, and a proportion would have had personal experience of a ‘flight’. These can be a useful source of input to any class debate on this question, but are not essential. Hopefully, some students would have looked at the web site. Given this basic knowledge of the wheel, it should be possible to tackle this first question with sufficient background knowledge amongst the class groups.

The initial design concept

This was totally the brainchild of two young London architects who wanted to create something very special and spectacular for London to celebrate the millennium. Their concept was to build the world’s largest diameter passenger-carrying wheel. But it was to be totally different from a normal Ferris wheel in several main ways – these should be easily identified by the students:

• The cabins were always to remain outside the wheel rim structure to improve visibility and therefore could not be conventionally ‘hung’ between two rim elements.

• They would be fully air conditioned, fitted with high-quality audio systems, and would have a high-tech stylish appearance.



• They would have unusually large areas of laminated, curved glass to provide the widest possible viewing angles, and a sense of flying.

• The wheel was to be supported on one side only.

• The supporting structure (an A-frame) was to be cantilevered out at an angle over the Thames.

• (Later addition to the concept) The rim of the structure would be supported by tensioned steel cable spokes, eliminating the need for a mass of rigid steelwork lattices within the wheel. Because the cables are relatively thin, the rim would appear (particularly at night) to float in the air with very little support.

• The wheel would rotate continuously, NOT stopping for passengers to board or disembark. This dictated the speed of rotation, and hence the flight time for the initially proposed diameter, which was about 30 minutes per rotation.

Clearly, the main design objectives of the architects were to create a unique, aesthetically pleasing but practical tourist attraction, and to provide a spectacular new landmark for London. But the final product also had to be effective as an operations technology, handling millions of customers in a year. Consideration, therefore, had to be given to the needs of the customers (passengers).

• Explicitly safe (there can be 800 customers on board…2 Boeing 747s!).

• Easy to board (e.g. good customer flow).

• Enough time to enjoy the view and listen to the guide

• Performs well (e.g. air conditioning and audio always working).

• Potentially delights, exceeds expectations.

• Reasonable cost.

• Should be completed, and in operation by 31 December 1999.

Trade-offs in the Design

To achieve all design objectives simultaneously, there are usually many trade-offs, and some of these can be easily identified by students. For example:

• For a given diameter, the rotation speed affects the capacity (passengers per hour). Faster rotation will increase capacity, reducing the cost per passenger (most operating costs are fixed), but will reduce the journey time and make boarding marginally more difficult, particularly for old and/or disabled people.

• For a given rotation speed, more capsules (e.g. 64, as originally conceived by the architects) would provide greater capacity, without the disadvantages described above. However, because of the complexity and sophistication of the capsules, this would very significantly increase the capital cost of the project, and would have required a stronger, heavier, and more expensive wheel structure. This would have affected the aesthetics of the wheel, and



would have created a narrower vertical viewing angle for the passengers at certain points in the flight.

• Underlying these decisions is also a question of what the demand levels will become; there is little point in providing more capacity if there will only be sufficient demand to fill the BA London Eye capacity on a few days a year. (This is a long-term capacity issue discussed in Chapter 3)

• Although the large areas of glass in the capsules would provide the best possible view, this would be an expensive choice of material compared with the more rectangular and largely metal-based construction of conventional Ferris wheel ‘gondolas’. However, the high-tech aesthetic design should enhance the public image of the wheel, increasing demand and improving value…perhaps allowing higher ticket prices.

• There may be extra capital costs involved in completing the project by a totally fixed target date. Project objectives are discussed in Chapter 15. However, since this is a ‘millennium’ project, there is high value to the main sponsor (British Airways) of completing on time. Conversely, there could be adverse publicity associated with project failures and late completion.

Operations-based design objectives

The above design objectives for the BA London Eye could also be re-classified into the five operations performance objectives. Examples are shown in Table 1 below:

Table 1: Examples of design objectives for BA London Eye

Performance objective

Design of the product / service Design of the process

Quality Exceptional aesthetics

Strong, durable

Good, uninterrupted views

Unquestionably safe

Comfortable ride (no sway)

Resembles air travel

Professional, smart staff

Informative

Capsules regularly cleaned

Clear reservation system

Speed Short lead time for the design and construction

No long queues

Clear, fast and fair flows while boarding/disembarking

Dependability Available as advertised

Completed by target date

Boarding as per timed ticket

No unscheduled downtime

Flexibility No product flexibility required.

Volume flexibility to cope with seasonal demand

Caters for all ages / abilities

Individual questions answered

Cost Affordable, good value Low operating costs



Process Design Principles

The BA London Eye was designed as a high-volume, low-variety, high-variation, high-visibility service operation. The process design implications are therefore that a mass service will be required with the following characteristics:

• There will need to be a great emphasis on process design, including elements such as the ‘timed admissions booking system’, customer flow management around and onto the ‘flight’, the service processes during the flight, cleaning routines, etc.

• The processes will be highly standardized, with little opportunity (or time) for customization.

• Flow (of customers) will be continuous, and is in reality a circular product layout. There are no alternative routes, and every customer will be forced to follow the same sequence of events. No time is lost at change-overs (unlike conventional Ferris wheels, which stop for customer unloading/loading).

• Dedicated process technology: the BA London Eye was designed for one purpose only and is not adaptable.

• The staff can be trained with the skills needed to operate the prescribed system. There may be significant division of labour and specialization (e.g. flight attendant) All eventualities, including emergencies, are rehearsed.

Variation in demand would be anticipated for any tourist leisure attraction, although London is a popular destination throughout the year. Shorter-term weather conditions will influence levels of casual demand. The operation, therefore, must be able to operate to the same quality standards even when demand is significantly below the design capacity. Conversely, demand levels must be managed to avoid excessive queue forming and blocking access by the customers who have made a reservation. The particular skills required for running such an operation were provided by a specialist leisure company, Tussauds.

Capacity Analysis

Hourly capacity

The wheel rotates one full revolution per 30 minutes. Thus, the hourly capacity is:

2 revolutions × 32 capsules × 25 passengers/capsule = 1600 passengers/hour

Summer weekly capacity (April to mid-September)

The first passengers can board at 10:00 am, and boarding can be scheduled continuously up to 10:00 pm (the end of the 9:30 to 10:00 p.m. slot). Thus, there are 12 hours of boarding, giving a weekly capacity:

7 days × 12 hours × 1600 passengers = 134,400

Winter weekly capacity (mid-September to March)



The last slot is brought forward to end at 6:00 pm. Thus, the capacity is

7 days × 8 hours × 1600 passengers = 89,600

Annual design capacity

There are 365 days/year = 52 weeks + 1 day

The attraction is closed on Christmas Day (winter).

There are the following days in each summer month:

Apr 30

May 31

Jun 30

July 31

Aug 31

Sep 30 (half month =15)

Total summer period = 168 days = 24 weeks

Thus, the annual capacity is Summer: 24 × 134,400 = 3,225,600

Winter: 28 × 89,600 = 2,508,800

Total = 5,734,400 (say 5.7 million)

Maximum theoretical design capacity

Assuming 52 weeks at 168 hours per week

Capacity = 52 × 168 × 1600 = 13,977,600 (say 14.0 million)

Number of rotations in normal year:

Summer: 24 weeks × 7 days / week × 24 revolutions/day = 4032

Winter: 28 weeks × 7 days / week × 16 revolutions/day = 3136

Total = 7168

The press release referred to 6000 revolutions per year, perhaps in anticipation of the need for planned maintenance periods, or unplanned breakdowns.



Capacity Utilization

Utilization of equipment (such as the BA London Eye attraction) is usually considered particularly important in high-volume, low-variety, capital-intensive operations. It is a crude measure of the revenue-earning performance of the asset.

The definition of utilization is not explained until Chapter 11, page 346 However, students should be able to follow the formula:

Utilization = actual output/design capacity

(In this case, the actual output is not known, but is forecast.)

Anticipated passenger numbers for 2000 is 2.2 million.

Design capacity = 5.7 million for a whole year, but this must be adjusted for the late start (not

ready until February).

January, at 31 days, provides 31 × 8 hours × 1600 passengers / hour of capacity,

= 396800 (say 0.4 million)

Thus, annual capacity for 2000 = 5.7 – 0.4 = 5.3 million

Thus, anticipated utilization = 2.2/5.3 = 41.5%

Students will usually understand that the only reason for the anticipated low utilization is the forecast lack of demand at off-peak times. However, much of this is based on sound market research, the population’s and tourists’ actual behaviour may in practice provide more (or less) demand. It is possible, for example, that people may be prepared to visit at off-peak times simply to get a flight, although there is no price incentive for them to do so!

Once the facility is operating, there could be loss of utilization for operational reasons. For example, there may have to be periods of non-operation caused by:

• urgent maintenance requirements;

• security alerts;

• unsuitable operating conditions (e.g. high winds, blizzards).

Students may not realise that utilization is also affected by incomplete occupancy of each capsule, even during busy periods. This can be caused by a number of factors, each of which should be managed, to a greater or lesser extent. Examples include:

• Group bookings; some passengers may be unwilling to travel with large groups of strangers, particularly if the latter are intoxicated! Conversely, large groups (e.g. corporate events) may resist the inclusion of small numbers of strangers on the flight.



• Late arrivals due to travel problems; insufficient numbers available for a given time slot.

• Shortage of passengers at the beginning of a time slot, since some passengers may believe that they can simply turn up anytime during the slot.

• Slower loading of disabled passengers, and possibly reduced capsule occupancy due to space taken by wheelchairs.

• ‘No-shows’ (customers who do not turn up). These are not a problem as they would have paid in advance. Care must be taken in recording loss of utilization, since they effectively allow other fare-paying passengers to occupy their slot (double earnings!).

Revenue-earning potential and yield management

This question could be excluded if the students are only working on basic OM analysis. However, it is useful for students studying more general courses with marketing content, or if the tutor wants OM students to consider demand management issues.

Answers to this question would require the students to make a number of assumptions, which they should explicitly state. Students should not, therefore, expect to arrive at accurate answers, but they could maybe aim for an accuracy of 90 per cent .

2.2 million customers were expected for 2000.

Assuming that:

50% (1,100,000) are full fare adults @ £7.45 revenue =

40% (880,000) are children @ £4.95 =

10% (220,000) are senior citizens @ £5.85 =

Estimated Total Revenue =

Students may wish to check the sensitivity of this to varying percentages of children and senior citizens. The actual proportions were not known in advance, and could be judged only by the experience with similar attractions in London, such as the Tower of London.

Students should also make some assumptions about the proportion of passengers receiving each type of group discount, and the proportion paying the fare increase post-June 2000.

The purpose of this analysis is to raise students’ awareness of the importance of yield management for 2001 onwards. With an operating capacity of 5.7 million and utilization of only 41.5 per cent, there is huge potential for yield management to increase revenue, contribution and profit. Students will suggest a range of approaches, similar to those used by airlines, but not all will be appropriate (e.g. different classes and service types), and some will even risk overall loss of revenue (e.g. off-peak discounting at the walk-in ticket office). Students should quickly come to appreciate that successful yield management requires good levels of data on demand patterns for different segments, and very careful planning. It also needs a clear understanding of the



price elasticity of demand for each segment, and some market research on specific potential markets not targeted in 2000.

Information requirements for yield management include:

• hourly, daily, weekly, monthly volumes;

• sources of this demand: bookings (by origin, such as by phone, booking agent, etc.) and at the on-site ticket office, as above;

• segment volumes, as above;

• demographics of passengers, as above;

• weather conditions including the forecast;

• records of other events likely to affect demand;

• records of advertising and promotional activities (time, date, spend);

• results of experiments with price changes (including the one in June 2000)

• others.

There is no information in the case on the actual fluctuation in demand during 2000. However, experience will indicate that demand, and hence utilization will peak during the middle of the day, during weekends and holidays, and spring through autumn. There will be spare capacity at other times, when pre-booking discounts and promotions could be used to stimulate demand. Specific targets such as school parties could be encouraged by these mechanisms and perhaps also by using special educational service packages. Corporate bookings can be targeted for weekday evenings.

Care has to be taken to avoid any impression that BA London Eye was desperate to get more customers (sending out adverse signals such as happened with The Millennium Dome at Greenwich). It must also be consistent with BA’s image of premium quality travel, so any large influx of groups looking like charter flight passengers heading for The Canary Islands should be avoided!

It is questionable why group discounts are offered at all times, including peak seasons. Students could debate the practicability of offering discounts only at off-peak times. They could also discuss the applicability of ‘standby’ passengers and the use of ‘bucket shops’, which sell spare capacity at very low prices.


Case exercise – The Perfect Pizzas division of KT Foods

KT Foods is a multinational American food and beverage company. In November 1993, Mr Frank C Matischek was promoted as plant manager of the Company's European Pizza Division, located outside Lyon. He was an American and had been given the job for two reasons. First, the parent company in the US was concerned at the poor record of the Lyon plant in terms of meeting production targets, which, it was felt, he could improve. Second, the whole of the European operation was about to reorganize. The reorganization would take away each division's sales and marketing function and centralize them into a marketing division. It was hoped that this new division would rationalize distribution, reduce overall stock investment, and improve the quality of sales forecasts. Each manufacturing division would then sell to the sales division at cost plus a small percentage. The marketing division would take responsibility for all finished goods stocks. This form of organization had been used by the US company for some years and they particularly wanted an American plant manager during the changeover period.

Previously, Frank Matischek had been the production controller of a similar plant in the States. His experience there had led him to hold some very definite ideas about the programming of manufacturing operations. At his first management meeting in December 1993, he had made the following remarks:

‘Every manufacturing business has a production scheduling problem at the heart of which lies a series of unknowns. The primary unknown is the sales forecast, with other unknowns being the various costs such as the cost of carrying the inventory, the cost of lost sales due to running out of inventory or failure to meet promised delivery dates. Manufacturing people have been wrestling with these problems for years with a tendency to blame all their troubles on insufficient or inaccurate forecasting. I think that putting the blame on something beyond your control is an easy way to avoid taking action to solve your own problem. We in the Pizza Division of KT raised particular hell with our marketing people for poor forecasting which had caused the factory to jump around haphazardly like a marionette attached to a perpetual motion machine. We screamed about the high cost involved in rapid and radical changes in schedule, the need for production levelling to keep the union out of our hair, and the general inability of people to predict next month's sales with any reasonable degree of accuracy. It is the conflict of three basic but divergent interests which results in these problems, and these lie in the areas of marketing, finance and manufacturing’.

‘Marketing is concerned only with having goods available at all times and in the proper mix to prevent any possibility of a lost sale from inability to deliver. Thus their interest in sales forecasting for production scheduling is normally selfish, that is, forecasting need only be done to provide ample finished goods inventory. Finance, on the other hand, wants accurate forecasts to prepare budgets and profit estimates, and wants zero, or minimum, finished goods inventory, to keep carrying cost low and return on investment up. Manufacturing, however, is interested primarily in keeping one schedule and mix running as long as possible’.

Marketing considerations

Perfect Pizzas produced and sold three basic types of pizza adapted only slightly for different markets: a ‘Pepperami-mixed’ type, a vegetarian pizza, and a basic cheese type.



Forecasting was notoriously difficult because of the marked seasonality of pizza sales. Typically, the August low point was around 60 per cent of the December peak. Forecasts of the retail sales of each pizza were made every month for a four-month period ahead. Also, every quarter, a four-quarter forecast was made. At the monthly sales/production meeting, these forecasts were used to agree on a month-by-month production plan with the plant manager.

Manufacturing considerations

The production process consisted of three stages – dough manufacture, assembly, and packing/freezing. Dough manufacture was capital intensive with a capacity limit of 2.5 tonnes per hour. The assembly process was labour intensive with capacity depending on how the lines were staffed, up to a maximum with the current line configuration of 4 tonnes per hour. The packing/freezing stage was mainly automated with a capacity of 4 tonnes per hour. Frank Matischek had said his plant now had a five-day capacity of about 165 tonnes per week (working with 2 eight-hour shifts per day).

The plant was heavily unionized but labour relations had been generally good for the last few years. The company's employment record had been good, with no redundancies and a minimum of 4 weeks’ notice given for any working practice change or overtime. Wage rates were about average for the area, but fringe benefits like canteen facilities were better than average. The whole plant shut down for the last 2 weeks in July and the first in August.

Fixing the production programme

January 1994 saw the formation of the sales division and Frank Matischek's first production budget meeting. This was the meeting at which the guidelines would be agreed upon between production and sales for production volumes over the coming year, and a preliminary overall production plan ‘penciled in’.

Frank Matischek rather shocked the meeting by making what some regarded as a ‘delaying’ proposal.

‘I am firmly convinced that we could save considerable amounts of money by examining our production schedules. I propose that we set up a small working party to examine the costs involved in adopting a number of strategies, namely:

(a) keeping production levels constant and absorbing demand fluctuations by varying finished goods stocks;

(b) using overtime on an extensive basis in peak periods and allowing under-utilization of labour during slack periods;

(c) hiring an extra shift for peak production and laying them off later in the year, if necessary;

(d) exploring ways with sales and marketing that would even out the demand fluctuations’.

In the meeting, it was rather reluctantly agreed to postpone any decisions for 2 weeks while the working party examined Matischek's alternative ‘strategies’.



The working party

The Working Party met five days later and consisted of one representative from each of production, factory accounts, sales and marketing, and distribution (now in the Marketing Division) divisions. They had for consideration two documents – a sales forecast for 1994 and some brief information prepared by the factory’s accounts department concerning each strategy. These two documents are shown in Appendices 1 and 2. In addition, the production control representative tabled a preliminary analysis of production requirements based on the 1994 forecast.

This is shown in Appendix 3.

The production control representative put in his view of the problem:

‘We have to tackle this problem in the right order; first we need to look at the actual level of output which will be needed over the year, then we can decide how ideally, we might like to meet this output requirement. Lastly, we need to have some idea of how to increase or decrease output if our forecasts change, and under what circumstances we would break away from the production plan’.

Appendix 1

Average weekly demand forecast for 1994(as of January 1994)

Month Economy (t/week)

Standard (t/week)

Deluxe (t/week) Total (t/week)

JANUARY 59 89 29 177

FEBRUARY 60 95 32 187

MARCH 60 95 31 186

APRIL 65 97 32 194

MAY 58 84 29 171

JUNE 50 75 25 150

JULY 50 75 25 150

AUGUST 50 75 25 150

SEPTEMBER 50 80 25 155

OCTOBER 55 82 28 165



Table continued

Month Economy (t/week)

Standard (t/week)

Deluxe (t/week) Total (t/week)

NOVEMBER 56 85 29 170

DECEMBER 80 120 40 240

Appendix 2

Preliminary Costings

Cost of stocks

Finished goods stocks are no longer a factory item. Previously we have charged at an annual rate of 30 per cent of factory cost to include all warehousing and handling costs.

Current refrigerated warehouse capacity is 300 tonnes. Occasionally, extra storage capacity is rented.

Overtime

Current union agreements require 4 weeks’ notice for any overtime. However, in practice, on some weekdays overtime can be arranged at shorter notice. Up to 2 hours a day can be worked over the 16 (2 × 8) hour weekday shifts. Weekday and Saturday overtime rates are 150 per cent of standard rates. Sunday rates are 200 per cent of standard rates.

Hire Temporary Workers

Recruitment would incur costs but much of the ‘personnel’ effort required could come from existing resources. Productivity of new workers would also be low, but again this is difficult to quantify.



Appendix 3

Perfect Pizza 1994 Volume Planning (All Figures are in Tonnes)

FORECAST

Production weeks

Sales weeks

Average weekly demand

Average monthly demand

Total cumulative demand

JANUARY 4 4 178.8 715.2 715.2

FEBRUARY 3 4 188.6 754.4 1469.6

MARCH 4 5 187.0 935.0 2404.6

APRIL 4 4 196.0 784.0 3188.6

MAY 5 5 171.5 857.5 4046.1

JUNE 4 4 150.0 600.0 5246.1

JULY 3 4 150.0 600.0 5346.1

AUGUST 3 5 150.0 750.0 5996.1

SEPTEMBER 4 4 155.0 620.0 6616.1

OCTOBER 5 5 165.0 825.0 7441.1

NOVEMBER 4 4 170.0 680.0 8121.1

DECEMBER 4 4 240.0 960.0 9081.1


Case exercise – Fine Country Fruit Cakes

September 2004 was a year to remember for Jean and Dave Fulbright! Their twin sons, Michael and Alan, then 5 years old, started school, and in the same month, Dave, a 29-year-old master baker at a large bakery, was made redundant. Jean, who had a part-time secretarial job with a local builder, saw this misfortune to be an unrepeatable opportunity. They had always wanted to work together, and it seemed to be a good chance to set up a small speciality business, based on Dave’s skills and financed by his redundancy payments plus a small loan.

Traditionally, small local baking and confectionery businesses produce a wide range of breads, cakes, biscuits, etc., many on a daily basis. This involves a very early start (4 am), high complexity and considerable risk. Dave wanted a ‘simpler business that would involve relatively normal hours of work, for both himself and his wife’. Neither wanted to be employers; the business would be run by just the two of them. Dave felt that his greatest satisfaction came from producing high-quality decorated fruit cakes, so together they decided that there was an opportunity to specialize in this product. Using an old family recipe, samples were made and packaged. ‘Market research’ was confined to taking these samples to various retail outlets in the area; the reaction was so overwhelming, and the potential margin seemed so high, that by January 2003 they were in business. They rented a small modern factory near home, modestly equipped with weighing and preparation equipment, a large 15 kg food mixer, two small catering ovens, a small cool room and sundry utensils. Later, Dave recalled:

‘In early 2005, we only made one size: beautiful 2 kg cakes, symmetrically decorated on top with a pattern of almonds, cherries, and walnuts and ginger. We sold most to cafés and restaurants; their customers loved portions of them with their teas/coffees. Demand ran at about 150–200 cakes a month, which wasn’t enough to make much of a living, but we had time to visit our customers and to try new outlets. Although sales were growing, it gradually became clear that we should be selling a smaller cake to retail shops for family purchasers – one that could be bought as a treat, or as a gift for friends. We introduced the 1 kg cake (with the same recipe) in July 2005. We had no problems selling these, and demand soon exceeded all our expectations. The delicatessens in the area heard about our products and soon sales of the 1 kg cake overtook those of the original 2 kg cake. Somehow, however, it’s not been so easy running the business since then; we can only just cope every day making the cakes. Jean can go to get the children from school at about 3.30 pm (a neighbour takes them in the morning) but I rarely get back before 7.00 pm in the week; and we usually do our selling and prospecting for new customers on Saturdays. We certainly don’t want to start production at weekends; we couldn’t cope with that! Anyway, although we’re making a reasonable profit now, I feel we could do a better job somehow. There were times last year (2006) when we had over-produced and we had to sell off some stock at a discount because of its age. Tests have shown that this recipe of rich fruit cakes ensured that the products last up to 12 months, but for best flavour and texture, they should really be eaten within 6 months. The retailers demand at least 3 months of this, so I can’t keep stocks more than 3 months here at the factory. Anyway, I only have space for about 3000 kg in the cool room, allowing for stock rotation’.

Jean’s view of the business was somewhat different:

‘I think we are chasing the wrong markets! The delicatessens demand big discounts and are always expecting us to deliver at short notice, particularly around Easter (March/April) and at Christmas (November/December), when the cakes are apparently popular gifts. I have found that craft shops and visitor centres of local tourist spots (such as castles and historic houses) can



also sell our 1 kg cakes and, moreover, they don’t expect much discount! We were really pleased with the level of orders from these outlets last summer, but we don’t hear from them much during the winter. I really should go and take some more samples! I also feel we should open a factory shop where regular users could come and buy directly, but I am sure we would need to provide a bigger range of cakes. We could develop lots of different types in the two sizes – then we would get a lot more repeat business!’

Production

Preparation

In order to simplify weighing, mixing and baking, all the production is done in nominal 10 kg batches of one size at a time. Thus, a batch is either ten 1 kg cakes or five 2 kg cakes. For each batch, dried fruits (raisins, sultanas, currants, cherries, crystallized ginger, etc.) are weighed and cleaned as necessary, other ingredients are prepared and measured, and a cake mixture is made in the mixer. Tins are greased, and the mixture is weighed and filled into each; the top surface is then decorated with carefully selected types of dried fruits and nuts, and brushed with a glaze. This complete preparation stage takes almost exactly 30 minutes per batch for Dave and Jean working as a team, for either size of cake. Each batch is prepared just before the oven is ready to accept it, to avoid contamination and to maintain consistency of method, and hence of texture.

Baking

The ovens are turned on at 8.00 a.m. and are ready by 8.30 a.m. when the first batch is loaded (which only takes a few minutes). A 10 kg batch of cakes fills one oven; baking time is 3 hours for the 1 kg cakes, 41/2 for 2 kg cakes. When ready, the cakes are removed from the hot oven, which is ready for a further batch in a quarter of an hour. For convenience, Dave has always baked the 1 kg cakes in the oldest oven (Oven 1) to avoid having to carry 10 tins to Oven 2, which is further away from the workbench. Each oven normally bakes only two batches per day. Dave thinks that the temperature control on Oven 1 is inaccurate, which would be a particular problem for the larger size cakes!

Packing

Cakes are turned out onto racks to cool overnight. The next day, once the first batches are in the oven, the previous day’s cakes are inspected, packed in a film, a decorative ribbon and an outer-wrap, and then labelled and dated. Packed cakes are then carried to the cool room and stacked according to size. These processes take two people six minutes per cake (either size). The couple take one hour for lunch from 12.30 to 1.30 pm (when Oven 2 is ready to unload).

Planning

‘The only periods in 2006 that we changed production were in March, April, November and December, when we increased the 2 kg output only by 50 per cent (one extra batch per day). I had to bake the 2 kg cakes in Oven 1 and the quality wasn’t really so good, but none of our regular customers noticed! Even so, I had to work into the evenings all those months; it was a lot of work. All other months we have kept to the plan of two batches of each size each day (1 kg, followed by 2 kg, 1 kg, 2 kg), which helps us keep to a rhythm’.



Sales

Records were kept of monthly sales of each size during 2006 (see table below). On 1st January 2006, there was an opening stock of 100 of each size of cake. Dave commented:

‘I am worried that we won’t be able to cope with demand in 2007, and that we will start giving bad service. Perhaps we should drop the idea of selling to the tourist spots, although the margins are very attractive. Clearly, we must not upset the retailers who give us so much business’.

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Questions

1. With the current method of working, what are the monthly and annual capacities of the business?

2. Is the total weight (kg) of product a useful aggregate measure of capacity for this business?

3. How does capacity compare with demand in 2006 and the forecast demand in 2007?

4. Why did Dave have to sell stock at reduced prices in 2006? In which months do you think that happened, and explain clearly the reasons? Justify your answer with simple calculations.

5. Jean believes that they should try to get more business from craft shops and tourist centres. What advantages/disadvantages would this market have compared with the existing retail outlets?

6. What are the main differences in operations tasks of running the proposed retail shop? What are the implications of this for the owners?

7. What are the operational implications of making 10 varieties of cake, each in two sizes?



Teaching note – Fine Country Fruit Cakes

Question 1. With the current method of working, what are the monthly and annual capacities of the business?

The capacity has been calculated according to the following assumptions:-

There are five working days per week.

There are 4 weeks per month.

The 2007 forecast assumes a demand pattern that is similar to that of 2006.

The rate of production is the same as in 2006. No down time is assumed.

The sales for 2 kg cakes in February 2006 have been corrected to 340 cakes (680 kg) as the original sales figure results in negative stock figures.

The total opening stock of 300 kg is not taken into account for the calculations.

The calculations are as follows:

All production in 10 kg batches, that is, ten 1 kg cakes or 5 kg cakes.

Production

Cake size (kg)

Cakes/ batch

Batches/ day

Cakes/day

kg/day Cakes/week

kg/week Cakes/ month

Kg/month

1 10 2 20 20 100 100 400 400

2 5 2 10 20 50 100 200 400

TOTAL 30 40 150 200 600 800

During March, April, November and December, production of the 2 kg cakes was increased by 50 per cent:

Cake size (kg)

Cakes/batch

Batches/ day

Cakes/day

kg/ day

Cakes/week

Kg/ week

Cakes/ month

kg/ month

1 10 2 20 20 100 100 400 400

2 5 3 15 30 75 150 300 600

TOTALS 35 50 175 250 700 1000



The annual and monthly capacities are summarized in Attachment 1a.

Attachment 1

1a: Current and Annual Capacities of the Business

Month Jan Feb Mar April May Jun Jul Aug Sep Oct Nov Dec Annual

1 kg cakes

400 400 400 400 400 400 400 400 400 400 400 400 4800

Weight 400 400 400 400 400 400 400 400 400 400 400 400 4800

2 kg cakes

200 200 300 300 200 200 200 200 200 200 300 300 2800

Weight 400 400 600 600 400 400 400 400 400 400 600 600 5600

Total cakes

600 600 700 700 600 600 600 600 600 600 700 700 7600

Total weight

800 800 1000 1000 800 800 800 800 800 800 1000 1000 10,400

1b: Monthly and Annual Sales (2006)

Month Jan Feb Mar April May Jun Jul Aug Sep Oct Nov Dec Annual

1 kg cakes

80 200 600 320 120 80 120 80 240 480 800 1600 4720

Weight 80 200 600 320 120 80 120 80 240 480 800 1600 4720

2 kg cakes

160 340 300 240 140 160 240 160 180 260 300 400 2880

Weight 320 680 600 480 280 320 480 320 360 520 600 800 5760

Total cakes

240 540 900 560 260 240 360 240 420 740 1100 2000 7600

Total weight

400 880 1200 800 400 400 600 400 600 1000 1400 2400 10,480



Question 2. Is the total weight (kg) of product a useful aggregate measure of capacity for this business?

The company is producing a mix of outputs, so some kind of aggregate measure of capacity is required. As much of the production process is done in 10 kg batches and the products have little variation (only varying in weight), the total weight (kg) of output may be considered to be a good measure of capacity. It gives an easily understood maximum value to capacity and allows an analysis of the input resources required. However, as a capacity measure, it does have some disadvantages in terms of analysing maximum output should market conditions change. The total weight is a measure of output, which assumes that the mix of 1 kg and 2 kg cakes remains the same (i.e. 50:50 mix in an average month). However, 1 kg cakes take less time to cook. Consequently, a shift in demand towards 1 kg cakes and the resulting shift in manufacturing would increase capacity, even though the process and labour inputs have not changed. Hence, capacity changes as the mix of cakes changes, because the different products have different production rates. Currently, with production of fairly standardized products in a repetitive manner, a total output measure of capacity seems most useful. Should the mix of products increase, it may become necessary to measure capacity in ter ms of labour inputs. As the process requires large labour inputs, one may wish to measure capacity in terms of inputs, such as person-hours, which would require calculation of standard hours.

Question 3. How does capacity compare with demand in 2006?

From Attachments 1a and 1b, the total demand for cakes in 2004 was greater than the normal aggregate capacity of the business (10,400 kg capacity compared with 10,480 kg demand). This extra demand seems to be met by the stock from the previous year, but further investigation shows that there was a shortage of 2 kg cakes and a surplus of 1kg cakes. This was dealt with by making another batch of the 2 kg cakes per day in the months of March, April, November and December. The graphs 1a, 1b and 1c show the total supply and demand pattern of the two cake sizes (in total kg), and each cake size respectively. It can be seen that the supply of 1 kg cakes is seasonal, peaking at Easter and Christmas (graph 1b). However, the planned capacity is level and consequently surplus cakes are produced during the summer months, some of which are later sold off cheaply as old stock (see question 2). Supply of the 2 kg cakes follows demand more closely, but failed on one occasion, February, to meet demand (graph 1c). The only answer for them appearing to sell more cakes than they had is that opening stock was available to cover the demand (unaccounted for on the graphs). Again, the annual demand for the 2 kg cakes appears to show some seasonality, peaking again at Christmas and Easter. However, there is less fluctuation in demand for the 2 kg cakes over the year compared to the 1 kg cakes.



Question 4. Why did Dave have to sell stock at reduced prices in 2006? In which months do you think that happened, and explain clearly the reasons? Justify your answers with simple calculations.

There are two main reasons why Dave had to sell stock at reduced prices in 2006. The first is that some cakes may have been nearing the end of their storage life and so they had to be sold because their quality was deteriorating (with time), and thus were sold cheaply in order to increase demand. The second reason is that Dave may have filled his cool room and therefore had to sell off some cakes, so as to put any new production in the storage room. Looking at the accumulated production and sales data (Graph 2a), one can see that stock never exceeds (or closely approximates) the maximum capacity of the store room (3000 kg). Thus, it would seem that he sold off some cakes cheaply because they were becoming ‘old’. A stock analysis indicates that this occurred in July, August, September, October and November for the 1kg cakes (Graph 2b). The stock analyses by age for both the 1kg and 2 kg cakes are featured in Attachments 2b and 2c. The calculation for July (1kg cakes only) is demonstrated below as an example of the method used.

July 2006 –1 kg Cakes

At the beginning July, opening stock = net stock at end of June = 1100 kg. This is split according to age as follows:

2–3 months: 300 kg


0–1 month: 400 kg

During July, a further 400 kg of cakes are produced and the stock continues to age. Thus, assuming no sales at the end of July, the stock will have increased as follows:




0–1 month (July production): 400 kg

Sales for July 2006 was 120 kg. Assuming first-in first-out (FIFO) stock rotation, this is subtracted from the stock levels:

Age Sales = 120 kg Total stock, end of July

3–4 months: 300–120 180

2–-3 months: 400 400

1–2 months: 400 400

0–1 month: 400 400

TOTAL: 1380 kg



The net stock at the end of July is therefore 1380 kg. This becomes the opening stock for August.

Following this method, it may be seen that quantity of old stock (> 3 months) sold off is as follows:

July 180 kg

August 500 kg

September 660 kg

October 580 kg

November 180 kg

The 2 kg cakes stock was analysed using the same method. It was found that no stock was held for more than one month (Graph 2c and Attachment 2c).

The stock of 1kg cakes builds up because the capacity plan is level and there is a low seasonal demand during the summer. Because demand does not fluctuate so critically with the 2 kg cakes, a similar situation is avoided.

Attachment 2

2a: Stock Analysis: Total Weight of Cakes

Month Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Opening stock

300 700 620 420 620 1020 1420 1620 2020 2220 2020 1620

Capacity (kg)

800 800 1000 1000 800 800 800 800 800 800 1000 1000

Sales (kg) 400 880 1200 800 400 400 600 400 600 1000 1400 2400

Net stock (kg)

700 620 420 620 1020 1420 1620 2020 2220 2020 1620 220

0–1 month 700 620 420 620 800 800 800 800 800 800 1000 220

1–2 months

0 0 0 0 220 620 800 800 800 800 620 0

2–3 months

0 0 0 0 0 0 20 420 620 420 0 0



2b: Stock Analysis: 1 kg Cakes (in kg)


Opening stock (kg)

100 420 620 420 500 780 1100 1380 1700 1860 1780 1380

Produced (kg)

400 400 400 400 400 400 400 400 400 400 400 400

Sales (kg) 80 200 600 320 120 80 120 80 240 480 800 1600

Net stock (kg)

420 620 420 500 780 1100 1380 1700 1860 1780 1380 180

0–1 month 400 400 400 400 400 400 400 400 400 400 400 180

1–2 months 20 220 20 100 380 400 400 400 400 400 400 0

2–3 months 0 0 0 0 0 300 400 400 400 400 400 0

3–4 months 0 0 0 0 0 0 180 400 400 400 180 0

4–5 months 0 0 0 0 0 0 0 100 260 180 0 0

2c: Stock Analysis: 2 kg Cakes (in kg)


Opening stock (kg)

200 280 0 0 120 240 320 240 320 360 240 240

Produced (kg)

400 400 600 600 400 400 400 400 400 400 600 600

Sales (kg) 320 680 600 480 280 320 480 320 360 520 600 800

Net stock (kg)

280 0 0 120 240 320 240 320 360 240 240 40

0–1 month 280 0 0 120 240 320 240 320 360 240 240 40



Question 5. Jean believes that they should try to get more business from craft shops and tourist centres. What advantages/disadvantages would this market have compared with the existing retail outlets?

The immediate advantage of craft shop and tourist business is the higher margins that can be obtained, compared with the discounts that the existing retailers, such as restaurants, demand. The new outlets may not require the goods at such short notice, reducing pressure on the operation. They also require 1 kg cakes, which take less time to produce and so more can be made in a given time period, which if sold could yield higher profits than under the current mix of products. Their present custom is largely seasonal with heavy demand during Easter and Christmas. The ‘new’ outlets would allow the company to smoothen demand over the year, with much of the new demand being in the summer months. Thus, by developing alternative non-peak demand, the firm would be able to utilize a level capacity plan, without the large inventories, which are costly and resulted in the firm selling off cakes cheaply in 2006. However, much of the present production is used to satisfy winter demand. This implies that in order for the company to keep all its customers, it would have to increase production hours, especially of the 1kg cakes during the autumn. This would lead to longer hours and possibly increased staff levels or more production facilities, such as ovens. If they were unable to increase production, the company faces the threat of alienating their original customers, by reducing their delivery reliability and/or quality, and they are left with the original seasonal demand. Consequently, the new outlets offer the same seasonal problems, except that this time there is only one peak during the summer, making a level capacity plan less practical and further increasing inventories. The new areas of demand will change the present product mix and may make scheduling harder as more 1 kg cakes are required, and this may in turn affect quality (bad oven). Their new customers may also demand a greater variety of cakes (mix flexibility) and a different presentation of the product.

The Fulbrights have some experience of the demand patterns of their present customers, but this is not true of any new trade. There is uncertainty in forecasting possible demand in these new areas, which means the firm will have to be responsive to changes as otherwise they might incur unnecessary costs or their customer service could be unsatisfactory.

If the company can augment its present business with new customers, then it can gain many benefits. It will have to increase capacity and it is the company’s response to this that is important. Increased capacity and smooth demand would allow better use of resources and thus result in reduction in costs and potentially lower costs per unit.

Question 6. What are the main differences in operations tasks of running the proposed retail shop? What are the implications of this for the owners?

If they operate a retail shop alongside the present production, then the company would deliver a service along with a physical product. This involves a front office/back office process whereby there is a higher customer contact compared with the situation when the company has only manufacturing activity. The operations task and design considerations are very different. The customer is now a participant in the service process, that is, the customer is present. This means that the owners will have to pay attention to the physical surroundings, for example, the interior decor. As customer perception is the all important factor (this is how a customer will assess the quality of the service), the staff (initially the owners) will need to be courteous, friendly and helpful. The service is created and consumed simultaneously and thus cannot be stored, which



implies the owners will have to be there when the service is demanded. This could mean coming from the production area (back office) when a customer arrives, and hence they may need to be available at all times. Thus, the owners will have to be flexible, so that the service, that is, selling the goods, is immediately available (volume flexibility).

In manufacturing, demand varies by week, month and season, whereas for a service demand often varies by day, hour or minute. Demand may follow cyclical behaviour during the day, for example, busy during the lunch hour, when people are on lunch breaks. This implies that the owners may no longer be able to have lunch together or that extra staff will be required during heavy periods, which is a new facet of operations management. The new demand patterns will also be unknown to the owners, making production decisions harder. The service will have to be dependable with predictable opening hours, placing further ‘restrictions’ on the owners' time. The owners will also have to learn how to promote the product directly to the consumer, which is very different from selling to shops and may require advertising or more product variety.

Thus service management requires the owners to acquire a new set of skills, particularly interpersonal and selling skills. The operation will have to be flexible (volume and product mix) and fully capable of serving both markets. They must ensure that the demands of the service do not adversely affect their production efficiency and scheduling.

Question 7. What are the operational implications of making ten varieties of cakes, each in two sizes?

The most obvious operational implication of making ten varieties of cakes in two different sizes is that it will dramatically increase the complexity of the entire production and planning processes. It should be noted that the original idea for the company was to get away from the complexity of a normal bakery.

Sales of the standard cake might not be greatly affected by the introduction of new varieties. This means that operations would have to change to meet the new demand. If the production process and plant stay as they are, it would take a week to produce one batch of each size of each variety. This means that they would need to keep large stocks of each type of cake simply because of the manufacturing lead time, increasing the risk of obsolescence and stock-holding costs. It would also be impossible to meet the demand if it increases above the present levels.

It may be possible to increase flexibility by using smaller batch sizes and making a mix of cakes at the same time. This increases the complexity of the manufacture by having different baking times, ingredients and decorating fruits and nuts being used simultaneously.

It is likely that they would increase capacity by hiring people and buying more plants. This would require training and would put Dave in a supervisory position over the staff. New operations such as quality checking may be necessary as the employees will not be as concerned with quality as the couple are.

Another problem would be the planning of production and ordering of raw materials. With ten varieties of cakes each with their own recipes, ordering materials would be very difficult, and could need some simple form of a MRP system working from recipes as BOMs. Computers would also be useful for keeping track of stock levels of the 20 products.



Diversification would make every operation more difficult, and this would cause increased costs. These complexity costs would come from increased stocks, materials, hired labour etc., but can not be recovered by simply increasing the price of the cakes. It would therefore, need an increased volume of sales to support the cost of variety.


C H A P T E R 9

Case exercise – Inventory management at Flame Electrical

Inventory management in some operations is more than just a part of their responsibility; it is their very reason for being in business. Flame Electrical, South Africa’s largest independent supplier and distributor of lamps, is such a business. It stocks over 2900 different types of lamps, which are sourced from 14 countries and distributed to customers throughout the country.

‘In effect, our customers are using us to manage their stocks of lighting sources for them’, says Jeff Schaffer, the Managing Director of Flame Electrical. ‘They could, if they wanted to, hold their own stock but might not want to devote the time, space, money or effort to doing so. Using us, they get the widest range of products to choose from, and an accurate, fast and dependable service’.

Central to the company’s ability to provide the service its customers expect is its computerized stock management system. The system holds information on all of Flame’s customers, the type of lamps they may order, the quality and brand of lamps they prefer, the price to be charged and the location of each item in the warehouse. When a customer phones in to order, the computer system immediately accesses all this information, which is confirmed with the customer. This leaves only the quantity of each lamp required by the customer to be keyed in. The system then generates an instruction to the warehouse to pick up and dispatch the order. This instruction includes the shelf location of each item. The system even calculates the location of each item in the warehouse that will minimize the movement of stock for warehouse staff.

Orders for the replenishment of stocks in the warehouse are triggered by a reorder point system. The reorder point is set for each stocked item depending on the likely demand for the product during the order lead time (forecast from the equivalent period’s orders the previous year), the order lead time for the item (which varies from 24 hours to 4 months) and the variability of the lead time (from previous experience). The size of the replenishment order depends on the lamp being ordered. Flame prefers most orders to be for a whole number of container loads (the shipping costs for part-container loads being more expensive). However, lower order quantities of small or expensive lamps may be used. The order quantity for each lamp is based on its demand, its value and the cost of transportation from the suppliers. However, all this can be overridden in an emergency. If a customer, such as a hospital, urgently needs a particular lamp that is not in stock, the company will even use a fast courier to fly the item in from overseas – all for the sake of maintaining its reputation for high service levels.

‘We have to get the balance right’, says Jeff Schaffer. ‘Excellent service is the foundation of our success. But we could not survive if we did not control stocks tightly. After all, we are carrying the cost of every lamp in our warehouse until the customer eventually pays for it. If stock levels were too high, we just could not operate profitably. It is for that reason that we go as far as to pay incentives to the relevant staff, based on how well they keep our working capital and stocks under control’.



Questions

1. Define what you think the five performance objectives (quality, speed, dependability, flexibility and cost) mean for an operation such as Flame Electrical.

2. Which of these performance objectives are the most important for Flame Electrical?

3. What seems to influence the stock replenishment policy of Flame Electrical?

4. How does this differ from conventional economic order quantity theory?

Teaching note – Flame Electrical

Question 1. Define what you think the five performance objectives mean for an operation such as Flame Electrical?

Quality

Quality in this case means the quality of service to the customers. This means getting their order right, giving them any relevant information about the product (such as any changes in its design or whether it is available immediately) and being able to suggest alternatives for the customer (this is enabled by the sophisticated computer system the company uses).

Speed

Speed refers to the time between a customer placing an order for lamps and the lamps arriving at their premises.

Dependability

This is the operation’s ability to stick to its explicit or implicit delivery times. For example, if there is a chance that an item cannot be delivered the next day, the customer needs to be told as soon as possible.

Flexibility

This could mean various things such as the operation’s ability to change its level of output when demand fluctuates, its ability to find substitute products if the customer’s first choice is not available, or the ability to override its normal procedures in an emergency (such as when a hospital wants a special lamp).

Cost

As the owner of the company says, an important cost is the working capital costs of holding the stock. Other costs include the cost of the warehouse and the computer system that takes inventory decisions.



Question 2. Which of these performance objectives are the most important for Flame Electrical?

Cost is clearly important to it, which is why it even pays incentives based on how well costs and working capital are kept under control. At the same time, excellent service is also mentioned. Partly, this is quality but it is also availability. Availability is a combination of speed and dependability.

Question 3. What seems to influence the stock replenishment policy of Flame Electrical?

The company uses the reorder point system. In other words, when stocks of an item get below a certain point they are reordered. Reorder points are set on the basis of predicted demand, the order lead time, the variability of lead time, the physical size of the lamp and the transportation cost.

Question 4. How does this differ from conventional economic order quantity (EOQ) theory?

The main departure from conventional EOQ theory is the influence of the container load. Shipping items when the total load is less than a full container is relatively expensive. Thus, if the theoretical EOQ is slightly less than a full container load, the order quantity would be possibly increased to fill the whole container.


Case exercise – An Ideal Standard of inventory

Ideal Standard, part of American Standard Inc., are manufacturers of bathroom and sanitary ware. Like many manufacturers of consumer products, they must plan and control their operations so as to best utilize their production resources, as well as give a good standard of customer service. At one time, the only way of doing this was thought to be by the use of large finished goods inventories. But since the advent of ‘just-in-time’ type principles, manufacturers such as Ideal Standard have managed to raise productivity, improve quality and dramatically reduce inventory. The programme that was put in place throughout American Standard Inc. was called ‘Demand Flow Manufacturing’. All areas of inventory holding were scrutinized and driven down by reducing batch sizes and making to demand rather than making to stock. In some parts of the company, stock turns increased threefold and the money tied up in inventories reduced by over 75 per cent; productivity and quality also improved significantly.

Questions

1. What do you think are the particular difficulties in inventory management at Ideal Standard?

2. What are the major changes in attitude necessary in moving from a make-to-stock to a make-to-order philosophy of planning and control?

Teaching note – An Ideal Standard of inventory

Question 1. What do you think are the particular difficulties in inventory management at Ideal Standard?

With products such as these, the physical characteristics of the products themselves can be a major issue. In the accompanying photograph, one can see the packing necessary between the various items, as they are stacked on pallets in the warehouse. This is because, being large, the items can take up a large volume of space. Also, being made of ceramic material, they are susceptible to damage. Moving the goods around the warehouse could easily cause cracks and chipping. Relatively small amounts of damage will reduce the value of the product to zero.

Question 2. What are the major changes in attitude necessary in moving from a make-to-stock to a make-to-order philosophy of planning and control?

Mainly, it is the way stock is seen. In a make-to-stock plant, inventory is ‘the customer’ of manufacturing. Whoever manages the inventory is placing orders on the production plant, or at least that is how it should work. Often, the manufacturing department makes and ships products through to the warehouse knowing that they will not be sent back. However, with a make-to-order philosophy inventory is seen as having considerable negative qualities. The basic assumption is that inventory should not be there at all. If products are being made to order, they should be manufactured and then (after spending as little time as possible in storage) shipped to the customer who has placed the order.


Case exercise – Trans-European Plastics (TEP)

Trans-European Plastics (TEP) is one of Europe’s largest manufacturers of plastic household items. Its French factory makes a range of over 500 products, which are sold to wholesalers and large retailers throughout Europe. The company dispatches orders within 24 hours of receipt using an international carrier. All customers would expect to receive their requirements in full within one week. The manufacturing operation is based on batch production, employing 24 large injection-moulding machines. Weekly production schedules are prepared by the Planning and Control office, detailing the sequence of products (moulds and colours) to be used, the quantity required for each batch, and the anticipated timing of each production run. Mould changes (set-ups) take, on an average, 3 hours, at an estimated cost of €500 per set-up.

Concerned about the declining delivery reliability, increased levels of finished goods inventory and falling productivity (apparently resulting from split-batches where only part of a planned production batch is produced to overcome immediate shortages), the CEO, Francis Lamouche, employed consultants to undertake a complete review of operations. On 2nd January, a full physical inventory check was taken. A representative sample of 20 products from the range is shown in the table.

Table 1 – Details of a representative sample of 20 TEP products

Product reference number*

Description Unit mfg. variable cost (€)

Last 12 months’ sales (000s)

Physical inventory 1st Sept '96 (000s)

Reorder quantity

(000s)

Standard moulding rate** (items/ hour)

016GH Storage bin large

2.40 10 0 5 240

033KN Storage jar + lid

3.60 60 6 4 200

041GH 10-litre bucket

0.75 2200 360 600 300

062GD Grecian-style pot

4.50 40 15 20 180

080BR Bathroom mirror

7.50 5 6 5 250

101KN 1-litre jug 0.90 100 22 20 600

126KN Pack (10) bag clips

0.45 200 80 50 2000

143BB Baby bath 3.75 50 1 2 90

169BB Baby potty 2.25 60 0 4 180



188BQ Barbecue table

16.20 10 8 5 120

232GD Garden bird bath

3.00 2 6 4 200

261GH Broom head 1.20 60 22 20 400

288KN Pack (10) clothes pegs

1.50 10 17 50 1000

302BQ Barbecue salad fork

0.30 5 12 8 400

351GH Storage bin small

1.50 25 1 6 300

382KN Round mixing bowl

0.75 800 25 80 650

421KN Pasta jar 3.00 1 3 5 220

444GH Wall hook 0.75 200 86 60 3000

472GH Dustbin + lid 9.00 300 3 10 180

506BR Soap holder 1.20 10 9 20 400

* The reference number uses the following codes for ranges:

BB = Baby care, BQ = Barbecue, BR = Bathroom, GD = Garden, GH = General household, KN = Kitchen

** Moulding rate is for the product as described (e.g. includes lids or pack quantities).

Because of the current high demand for many products, the backlogue of work for planned stock replenishment currently averages 2 weeks, and so all factory orders must be planned at least that far in advance. The reorder quantities had always been established by the Estimating Department at the time when each new product was designed and the manufacturing costs were established on the basis of Marketing’s estimates of likely demand. Recently, however, to minimize the total cost of set-ups and to maximize capacity utilization, all products were planned for a minimum production run of 20 hours. The individual reorder levels have not been reviewed for several years, but were originally based on 2 weeks’ average sales at that time. About 20 per cent of the products are very seasonal (e.g. Garden range), with peak demand from April to August. Storage bins sell particularly well from October to December. The European Marketing Manager summarized the current position, ‘Our coverage of the market has never been so comprehensive; we are able to offer a full range of household plastics, which appeals to most European tastes. But we will not retain our newly developed markets unless we can give distributors the confidence that we will supply all their orders within one week. Unfortunately, at the moment, many receive several deliveries for each order, spread over many weeks. This certainly increases their administrative and handling costs, and our haulage costs. And sometimes the shortfall is only some small, low-value items like clothes pegs’.



The factory operates on three 7-hour shifts, Monday to Friday that is, 105 hours per week, for 50 weeks per year. Regular overtime, typically 15 hours on a Saturday, has been worked for most of the last year. Sunday is never used for production, allowing access to machines for routine and major overhauls. Machines are laid out in groups so that each operator can be kept highly utilized, attending to at least four machines. Any product can be made on any machine. Pierre Dumas, the production manager, was concerned about storage space:

‘At the moment our warehouse is full, with products stacked on the floor in every available corner, which makes it vulnerable to damage from passing fork-lifts and from double-handling. We have finally agreed to approve an extension (costing over one million Euros) to be constructed in June–September this year, which will replace contract warehousing and associated transport which is costing us about 5 per cent of the manufacturing costs of the stored items. The return on investment for this project is well above our current 8 per cent cost of capital. There is no viable alternative, because if we run out of space, production will have to stop for a time. Some of our products occupy very large volumes of rack space. However, in the meantime we have decided to review all the reorder quantities. They seem either to result in excessive stock or too little stock to provide the service required. Large items such as the Baby bath (Item 143BB) could be looked at first. This is a good starting point because the product has stable and non-seasonal demand. We estimate that it costs us around 20 per cent of the manufacturing variable costs to store such items for one year’.

Questions

1. Why is TEP unable to deliver all its products reliably within the target of one week, and what effects might that have on the distributors?

2. Applying the EBQ model, what batch size would you recommend for this product? How long will each batch take to produce, and how many batches per year will be made? Should this model be applied to calculate the reorder quantity for all the products, and if not, why?

3. How would the EBQ change if the set-up costs were reduced by 50 per cent, and the holding costs were re-assessed at 40 per cent, taking account of the opportunity costs of capital at TEP?

4. What internal problems result from the current planning and control policies? In particular, analyse stock turns and availability (e.g. high and low levels).

5. Using Pareto analysis, categorize the products into Classes A, B, C, on the basis of usage value. Would this approach be useful for categorizing and controlling stock levels of all the products at TEP?

6. What overall recommendations would you make to Francis Lamouche about the proposed investment in the warehouse extension?

Teaching note – Trans-European Plastics (TEP)

TEP makes a range of more than 500 plastic household items using batch injection moulding. The case highlights increasing problems with inventory shortages and declining service levels, at the same time that total inventory levels were at a high level. The company was even



considering investing in a warehouse extension. This case allows students to explore the underlying reasons for this situation, and there is considerable numerical data that can be analysed.

This case provides an ideal introduction to the topic of inventory management, and is at a level to be of use on both undergraduate and Masters/MBA courses. Although describing a manufacturing situation, there are no technical issues to be understood, the analysis would be little different in a retailing type of service. It provides sufficient information for the students to prepare spreadsheets for ABC analysis and categorization. This would be a good case for assessed work, but is too long and complex for a traditional examination.

Question 1. Why is TEP unable to deliver all its products reliably within the target of one week, and what effects might that have on the distributors?

There are 24 machines working a standard (non-overtime) week of 105 hours. Thus, there are 2520 machine hours available per week. There are 500-plus SKUs, each taking 3 hours to set-up, and the minimum run length is 20 hours. Thus, any batch takes at least 23 hours of machine time. The theoretical maximum number of SKUs per standard (non-overtime) week is thus 2520/23 = 110. Thus, on average, each SKU could be made only every 4.5 weeks (500/110 = 4.54) or even less frequently, because larger batches for popular items will occupy more machine time. This illustrates that it would be impossible to make all products within the one week delivery window, and the company must operate a make-to-stock (MTS) system, with inventory levels based on forecasts rather than actual orders.

The table of representative products shows 2 products out of 20 (10 per cent) out of stock as on 2nd January. In addition, there are three products at very low inventory levels (Baby bath, Storage bin (small), and Dustbin and lid), all of which have stocks of less than 2 weeks’ usage. This indicates that stock levels for about 25 per cent of the SKUs are low or zero, putting supply at risk.

Analysing the 20 products listed, the moulding time per product varies greatly between SKUs, as calculated in Table 2 below. Of the 20 products in the sample, 6 only need to be made once a year, or less frequently. The average batch moulding time is actually 137 hours plus 3 hours set-up =140 hours. Thus, it is only possible to make 2520 hours/140 hours per batch =18 batches a week! On an average, therefore, each of the 500 products can be made every 500/18 weeks = 27 weeks. For the high-volume products such as the 10-litre bucket, the annual moulding hours (7333) exceed the time available on one machine (120 hours max × 50 weeks = 6000 hours), and thus the machine must be dedicated to the product, with no set-ups. The extra demand above 6000 hours production must be satisfied using a second mould intermittently.

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th

5090

2 22

555

25

169B

B

Bab

y po

tty

6018

04

2233

315

188B

Q

Bar

becu

e ta

ble

1012

05

4283

2

232G

D

Gar

den

bird

bat

h 2

200

4 20

10<1

261G

H

Bro

om h

ead

6040

020

50

150

3

288K

N

Pac

k (1

0) c

loth

es

pegs

10

1000

50

5010

<<1

Sla

ck, C

ham

bers

, Joh

nsto

n, a

nd B

etts

, Ope

ratio

ns a

nd P

roce

ss M

anag

emen

t, 2nd

Edi

tion,

In

stru

ctor

's M

anua

l

480

© P

ears

on E

duca

tion

Lim

ited

2009

Tabl

e co

ntin

ued

Prod

uct

ref

num

ber

Des

crip

tion

Last

12

mon

ths’

sa

les

(000

s)

Stan

dard

m

ould

ing

rate

**

item

s/ho

ur

Reo

rder

qu

antit

y (0

00s)

Reo

rder

qu

antit

y m

ould

ing

time

(hou

rs)

Ann

ual

mou

ldin

g (h

ours

)

App

rox

no. o

f ba

tche

s pe

r ye

ar

302B

Q

Bar

becu

e sa

lad

fork

5

400

8 20

13<1

351G

H

Sto

rage

bin

sm

all

2530

06

2083

4

382K

N

Rou

nd m

ixin

g bo

wl

800

650

80

123

1231

10

421K

N

Pas

ta ja

r 1

220

5 23

5<1

444G

H

Wal

l hoo

k 20

030

0060

20

673

472G

H

Dus

tbin

+ li

d 30

018

010

56

1667

30

506B

R

Soa

p ho

lder

10

400

20

5025

<1

A

VE

RA

GE

13

762

0



Thus, the reasons for poor delivery performance are as follows:

• The product range comprises 500 products (SKUs), with a very wide range of demand per SKU, but there are only 24 machines, so production of many items is extremely infrequent. This is exacerbated by the need to run each batch for at least 20 hours with a 3-hour set-up. Thus, production has to be MTS, with forecast levels of demand for months ahead. During this long period of anticipation of demand, fluctuations in actual sales can lead to stock-outs or excess stock.

• The reorder levels are historic, based on the estimated demand rate, and originally representing 2 weeks’ usage; these do not take account of current actual demand which could be greater or less than at the time when they were established. Because there is now a 2 week backlogue of moulding to replenish stocks, there is a high probability that stock-outs will occur before moulding has commenced. There is ample evidence that this has occurred.

• Some of the products are seasonal: demand is higher than average at certain times. However, the system is not sensitive to this seasonality – the reorder levels do not change. The figures in the table are as in January, which is a period of relatively LOW demand! Stock availability can only get worse when the factory becomes overloaded with seasonal demand in April–August.

• Delivery lead times are universally ex-stock, with delivery within 1 week by carrier. This gives no scope at all for last-minute stock replenishment. The only way to achieve this is to hold sufficient stocks of every item in the list. The company is already considering extending the warehouse to achieve this, but that will not be sufficient without providing more moulding capacity as well. The investment is justified by the reduction in outsourced warehousing and transport, which suggests that the uplift in storage capacity may not be so great in practice.

The effects on distributors could be as follows:

• loss of confidence in TEP;

• loss of potential sales of products, particularly seasonal ones;

• extra costs involved in their ordering and accounting systems (e.g. multiple deliveries against one order, complex reconciliation of statements);

• extra time and costs involved in chasing deliveries;

• possible resistance to ordering new items to the range, on the basis that they are already awaiting existing mature products!

• need to hold more inventory just-in-case TEP does not deliver. Space and money consideration.



Question 2. Applying the EBQ model, what batch size would you recommend for this product? How long will each batch take to produce, and how many batches per year will be made? Should this model be applied to calculate the reorder quantity for all the products, and if not, why?

The critical data on the Baby bath (143BB) is

• Demand Rate (D) = 50,000 per year

• Production Rate (P) = 90 per hour = 9450 per week (105 hours) = 4,72,500 per year

• Unit variable cost = €3.75

• Annual unit holding cost (Ch) = 0.20 × 3.75 = €0.75

• Cost of set-up (Co) is stated as €500

The formula to be used is the EBQ

EBQ = 2 CoD

Ch (1–D/P)

where

Co = cost of ordering or of set-up

D = demand rate

P = production rate

Ch = cost of holding one unit for a period of time.

Applying the data,

EBQ = 2 × 500 × 50,000

0.75 × [1 – (50,000/472,500)]

= 8634

(This compares with current ROQ of 2000).

The moulding rate is 90 per hour, so 8634 represents about 96 hours of work, which is exactly 4 days of continuous 24-hour production (output 8600).

To achieve an annual production of 50,000 baths, 5.2 batches of 8600 would have to be made per year, at a frequency of about once in every 10 weeks, assuming no seasonality and steady demand.



This approach could be used for all non-seasonal products. However, it is based on a number of assumptions that must be valid for it to be of use:

• Demand is stable, and, in particular, non-seasonal. This will not be valid for the Garden and Barbecue ranges in particular.

• The real cost of inventory is understood. In this case, the company is proposing to construct a very expensive warehouse extension. If this is required simply to hold the total EBQ of the company, one could argue that the opportunity cost of this capital, as well as the working capital of the inventory should be included in the holding cost percentage.

• The validity of prescriptive models: there seems to be no emphasis on set-up reduction in TEP. The high set-up cost is the main reason for large EBQs, but it has also had an effect on service levels, as discussed in Question 1.

• The EBQ should not be considered for very bulky items, such as storage boxes, which might fill up excessively large amounts of storage.

Question 3. How would the EBQ change if the set-up costs were reduced by 50 per cent, and the holding costs were re-assessed at 40 per cent, taking account of the opportunity costs of capital at TEP?

Students should note that the demand rate and production rate do not change. However, the cost of holding one unit DOUBLES, and the cost of the set-ups HALVES. Applying these changes to the EBQ formula changes the EBQ values of Co and Ch ,

EBQ = 2 CoD

Ch (1 – D/P)

Change in EBQ = Square root of (0.5/2)

= Square root of a quarter (or of 0.25!)

= A half.

Thus, the EBQ becomes 4300, which is 2 days’ production every 5 weeks or so.

Question 4. What internal problems result from the current planning and control policies? In particular, analyse stock turns and availability (e.g. high and low levels).

Some of this has been answered in Question 1, but a more detailed analysis is justified. With an ROP system, average inventory will be approximately half of the ROQ, ignoring the buffer inventory that does not seem to exist for many products. Thus, the stock turns can be estimated as shown in Table 3.

Sla

ck, C

ham

bers

, Joh

nsto

n, a

nd B

etts

, Ope

ratio

ns a

nd P

roce

ss M

anag

emen

t, 2nd

Edi

tion,

In

stru

ctor

's M

anua

l

484

© P

ears

on E

duca

tion

Lim

ited

2009

Tabl

e 3

– St

ock

leve

ls a

nd e

stim

ated

sto

ck tu

rns

Prod

uct

refe

renc

e nu

mbe

r*

Des

crip

tion

A) L

ast 1

2 m

onth

s’

sale

s (0

00s)

Phys

ical

in

vent

ory

2 Ja

n 03

(000

s)

Reo

rder

qu

antit

y (0

00s)

B) A

vera

ge

inve

ntor

y (a

ppro

x ha

lf of

RO

Q, 0

00s)

Estim

ate

of

stoc

k tu

rn

(A/B

)

016G

H

Sto

rage

bin

larg

e 10

0

5 2.

5 4.

0

033K

N

Sto

rage

jar +

lid

60

6 4

2.0

15.0

041G

H

10-li

tre b

ucke

t 22

00

360

600

300.

0 7.

3

062G

D

Gre

cian

-sty

le p

ot

40

15

20

10.0

4.

0

080B

R

Bat

hroo

m m

irror

5

6 5

2.5

2.0

101K

N

1-lit

re ju

g 10

0 22

20

10

.0

10.0

126K

N

Pac

k (1

0) b

ag c

lips

200

80

50

25.0

8.

0

143B

B

Bab

y ba

th

50

1 2

1.0

50.0

169B

B

Bab

y po

tty

60

0 4

2.0

15.0

188B

Q

Bar

becu

e ta

ble

10

8 5

2.5

4.0

232G

D

Gar

den

bird

bat

h 2

6 4

2.0

1.0

261G

H

Bro

om h

ead

60

22

20

10.0

6.

0

288K

N

Pac

k (1

0) c

loth

es p

egs

10

17

50

25.0

0.

4

302B

Q

Bar

becu

e sa

lad

fork

5

12

8 4.

0 1.

3

Sla

ck, C

ham

bers

, Joh

nsto

n, a

nd B

etts

, Ope

ratio

ns a

nd P

roce

ss M

anag

emen

t, 2nd

Edi

tion,

In

stru

ctor

's M

anua

l

485

© P

ears

on E

duca

tion

Lim

ited

2009

Tabl

e co

ntin

ued

Prod

uct

refe

renc

e nu

mbe

r*

Des

crip

tion

A) L

ast 1

2 m

onth

s’

sale

s (0

00s)

Phys

ical

in

vent

ory

2 Ja

n 03

(000

s)

Reo

rder

qu

antit

y (0

00s)

B) A

vera

ge

Inve

ntor

y (a

ppro

x ha

lf of

RO

Q, 0

00s)

Estim

ate

of

stoc

k tu

rn

(A/B

)

351G

H

Sto

rage

bin

sm

all

25

1 6

3.0

8.3

382K

N

Rou

nd m

ixin

g bo

wl

800

25

80

40.0

20

.0

421K

N

Pas

ta ja

r 1

3 5

2.5

0.4

444G

H

Wal

l hoo

k 20

0 86

60

30

.0

6.7

472G

H

Dus

tbin

+ li

d 30

0 3

10

5.0

60.0

506B

R

Soa

p ho

lder

10

9

20

10.0

1.

0



As discussed earlier in Question 1, the shaded areas in the table show that 2 products out of 20 are (10 per cent) out of stock as on 2nd January. In addition, there are three products at very low inventory levels (Baby bath, Storage bin (small), and Dustbin and lid), all of which have stocks of less than 2 weeks’ usage. This indicates that stock levels for about 25 per cent of the SKUs are low or zero, putting supply at risk.

Conversely, 4 out of the 20 products have a stock turn of 1.0 or less! This is tying up working capital and space.

This analysis suggests that control of inventory for nearly half the product range is unsatisfactory (too high or too low).

Question 5. Using Pareto analysis, categorize the products into Classes A, B, C, on the basis of usage value. Would this approach be useful for categorizing and controlling stock levels of all the products at TEP?

Students will have to prepare a table (ideally in MS Excel) such as that shown in Table 4 below (actually shown here in Word Table format), to calculate all the Annual Usage Values.

Sla

ck, C

ham

bers

, Joh

nsto

n, a

nd B

etts

, Ope

ratio

ns a

nd P

roce

ss M

anag

emen

t, 2nd

Edi

tion,

In

stru

ctor

's M

anua

l

487

© P

ears

on E

duca

tion

Lim

ited

2009

Tabl

e 4

– C

alcu

latio

n of

usa

ge v

alue

s

Prod

uct

refe

renc

e nu

mbe

r*

Des

crip

tion

Uni

t mfg

. va

riabl

e co

st (€

) La

st 1

2 m

onth

s’

sale

s (0

00s)

Ph

ysic

al

inve

ntor

y 2

Jan

03

(000

s)

Reo

rder

qu

antit

y (0

00s)

Usa

ge v

alue

£0

00 (c

ost *

sa

les)

016G

H

Sto

rage

bin

larg

e 2.

40

10

0 5

24

033K

N

Sto

rage

jar +

lid

3.60

60

6

4 21

6

041G

H

10-li

tre b

ucke

t 0.

75

2200

36

0 60

0 16

50

062G

D

Gre

cian

-sty

le p

ot

4.50

40

15

20

18

0

080B

R

Bat

hroo

m m

irror

7.

50

5 6

5 37

101K

N

1-lit

re ju

g 0.

90

100

22

20

90

126K

N

Pac

k (1

0) b

ag c

lips

0.45

20

0 80

50

90

143B

B

Bab

y ba

th

3.75

50

1

2 18

7

169B

B

Bab

y po

tty

2.25

60

0

4 13

5

188B

Q

Bar

becu

e ta

ble

16.2

0 10

8

5 16

2

232G

D

Gar

den

bird

bat

h 3.

00

2 6

4 6

261G

H

Bro

om h

ead

1.20

60

22

20

72

288K

N

Pac

k (1

0) c

loth

es p

egs

1.50

10

17

50

15

Sla

ck, C

ham

bers

, Joh

nsto

n, a

nd B

etts

, Ope

ratio

ns a

nd P

roce

ss M

anag

emen

t, 2nd

Edi

tion,

In

stru

ctor

's M

anua

l

488

© P

ears

on E

duca

tion

Lim

ited

2009

302B

Q

Bar

becu

e sa

lad

fork

0.

30

5 12

8

2

351G

H

Sto

rage

bin

sm

all

1.50

25

1

6 37

382K

N

Rou

nd m

ixin

g bo

wl

0.75

80

0 25

80

60

0

421K

N

Pas

ta ja

r 3.

00

1 3

5 3

444G

H

Wal

l hoo

k 0.

75

200

86

60

150

472G

H

Dus

tbin

+ li

d 9.

00

300

3 10

27

00

506B

R

Soa

p ho

lder

1.

20

10

9 20

12

This

can

then

be

rank

ed b

y us

age

valu

e, a

nd c

umul

ativ

e us

age

valu

e ca

lcul

ated

, as s

how

n in

Tab

le 5

.

Sla

ck, C

ham

bers

, Joh

nsto

n, a

nd B

etts

, Ope

ratio

ns a

nd P

roce

ss M

anag

emen

t, 2nd

Edi

tion,

In

stru

ctor

's M

anua

l

489

© P

ears

on E

duca

tion

Lim

ited

2009

Tabl

e 5

– R

anke

d an

d cu

mul

ated

usa

ge v

alue

Prod

uct

refe

renc

e nu

mbe

r*

Des

crip

tion

Uni

t m

afg.

va

riabl

e co

st (€

)

Last

12

mon

ths

’ sal

es

(000

s)

Phys

ical

in

vent

ory

2 Ja

n 03

(0

00s)

Usa

ge v

alue

£0

00 (c

ost *

sa

les)

Cum

ulat

ive

usag

e va

lue

% o

f Cum

us

age

valu

e A

BC

Cat

y.

472G

H

Dus

tbin

+ li

d 9.

00

300

3 27

00

2700

42

.4

A

041G

H

10-li

tre b

ucke

t 0.

75

2200

36

0 16

50

4350

68

.3

A

382K

N

Rou

nd m

ixin

g bo

wl

0.75

80

0 25

60

0 49

50

77.7

A

033K

N

Sto

rage

jar +

lid

3.60

60

6

216

5166

81

.1

A

143B

B

Bab

y ba

th

3.75

50

1

187

5353

84

.1

B

062G

D

Gre

cian

-sty

le p

ot

4.50

40

15

18

0 55

33

86.9

B

188B

Q

Bar

becu

e ta

ble

16.2

0 10

8

162

5695

89

.4

B

444G

H

Wal

l hoo

k 0.

75

200

86

150

5845

91

.8

B

169B

B

Bab

y po

tty

2.25

60

0

135

5980

93

.9

B

101K

N

1-lit

re ju

g 0.

90

100

22

90

6070

95

.3

B

126K

N

Pac

k (1

0) b

ag

clip

s 0.

45

200

80

90

6160

96

.7

C

261G

H

Bro

om h

ead

1.20

60

22

72

62

32

97.9

C

Sla

ck, C

ham

bers

, Joh

nsto

n, a

nd B

etts

, Ope

ratio

ns a

nd P

roce

ss M

anag

emen

t, 2nd

Edi

tion,

In

stru

ctor

's M

anua

l

490

© P

ears

on E

duca

tion

Lim

ited

2009

080B

R

Bat

hroo

m m

irror

7.

50

5 6

37

6269

98

.4

C

351G

H

Sto

rage

bin

sm

all

1.50

25

1

37

6306

99

.0

C

016G

H

Sto

rage

bin

larg

e 2.

40

10

0 24

63

30

99.4

C

288K

N

Pac

k (1

0) c

loth

es

pegs

1.

50

10

17

15

6345

99

.6

C

506B

R

Soa

p ho

lder

1.

20

10

9 12

63

57

99.8

C

232G

D

Gar

den

bird

bat

h 3.

00

2 6

6 63

63

99.9

C

421K

N

Pas

ta ja

r 3.

00

1 3

3 63

66

100.

0 C

302B

Q

Bar

becu

e sa

lad

fork

0.

30

5 12

2

6368

10

0.0

C



This illustrates that four ‘A’ items account for 81 per cent of annual usage value. These items should be the focus of management’s attention in respect of ensuring that forecasting is done thoroughly, and that inventory levels are controlled tightly without prejudice to service levels of 100 per cent.

Conversely, the ten ‘C’ items account for very little (€298 000) of the total annual costs (€6.3 million), so risk of stock-outs can be minimized by making batches that satisfy (say) at least 3 months’ demand (i.e. costing around €75,000 for the sample of 10 C items). Thus EBQ may not be appropriate here, and low stock turns are acceptable. Simple two bin or Kanban arrangements could be used to ensure availability.

Question 6. What overall recommendations would you make to Francis Lamouche about the proposed investment in the warehouse extension?

The earlier analyses indicate that inventory is very badly planned and managed. Before pursuing the development of the warehouse extension, Francis must be sure that better systems are in place to ensure that no large excesses of inventory exist, while service levels are improved. A summary of improvements required is as follows:

• Pareto analysis to provide highly visible categorization (ABC);

• different reordering and forecasting requirements for each category;

• use of EBQ for high-usage value items, establishing new ROQs;

• remove slow moving and obsolete stock from warehouse;

• monitor service levels by product category;

• Delay warehouse extension decision.


C H A P T E R 1 0

Case exercise – Air traffic control: a world-class juggling act

Air traffic controllers have one of the most stressful jobs in the world. They are responsible for the lives of thousands of passengers who fly every day in and out of the world’s airports. Over the last 15 years, the number of planes in the sky has doubled, leading to congestion at many airports and putting air traffic controllers under increasing pressure. The controllers battle to maintain separation standards that set the distance between planes as they land and take-off. Sheer volume pushes the air traffic controllers’ skills to the limit. Jim Courtney, an air traffic controller at La Guardia Airport in New York, says ‘There are half a dozen moments of sheer terror in each year when you wish you did something else for a living’.

New York – the world’s busiest airspace

The busiest airspace in the world is above New York. Around 7500 planes arrive and depart each day at New York’s three airports, John F. Kennedy, La Guardia and Newark. The three airports form a triangle around New York and are just 15 miles from each other. This requires careful coordination of traffic patterns, approach and take-off routes and using predetermined invisible corridors in the sky to keep the planes away from each other. If the wind changes, all three airports work together to change the flight paths.

Sophisticated technology fitted to most of the bigger planes creates a safety zone around the aircraft, so that when two aircraft get near each other, their computers negotiate which one is going to take action to avoid the other and then alerts the pilot who changes course. Smaller aircraft, without radar, rely upon vision and the notion of ‘little plane, big sky’.

During its passage into or out of an airport, control of each plane will pass through the hands of about eight different controllers. The airspace is divided into sectors controlled by different teams of air traffic controllers. Tower controllers at each airport, together with ground controllers who manage the movement of the planes on the ground around the airport, control the planes landing and taking off. The Terminal Radar Approach Control (TRACON) controllers oversee the surrounding airspace. Each New York air traffic controller handles about 100 landings and take-offs an hour, about one every 45 seconds.

TRACON controllers

The 60 TRACON controllers manage different sectors of airspace, with planes being handed over from one controller to the next. Each controller handles about 15 planes at a time, yet they never see them. All they see is a blip on a two-dimensional radar screen, which shows their aircraft type, altitude, speed and destination. The aircraft, however, are in three-dimensional airspace, flying at different altitudes and in various directions. The job of the approach controllers is to funnel planes from different directions into an orderly queue before handing each one over to the tower controllers for landing.



Tower controllers

The tower controllers are responsible for coordinating landing and taking off. Newark is New York’s busiest airport. During the early morning rush periods, there can be 40 planes an hour coming in to land, with about 60 wanting to take-off. As a result, there can be queues of up to 25 planes waiting to depart.

At La Guardia, there are two runways that cross each other, one used for take-off and the other for landing. At peak times, air traffic controllers have to ‘shoot the gap’ – to get planes to take-off in between the stream of landing aircraft, sometimes less than 60 seconds apart. Allowing planes to start their take-off as other planes are landing, using ‘anticipated separation’, keeps traffic moving and helps deal with increasing volumes of traffic. At peak times, controllers have to shoot the gap 80 times an hour.

Most airports handle a mix of large and small planes, and tower controllers need to be able to calculate safe take-off intervals in an instant. They have to take into account aircraft type and capabilities in order to ensure that appropriate separations can be kept. The faster planes need to be given more space in front of them than the slower planes. Wake turbulence – mini-hurricanes that trail the downstream of a plane’s wing tips – is another major factor in determining how close planes can follow each other. The larger and slower the plane, the greater the turbulence.

Besides the usual large planes, controllers have to manage the small aircraft, business helicopters, traffic spotter planes and the many sightseeing planes flying over Manhattan, or up the Hudson towards the Statue of Liberty. The tower controllers have to control the movement of over 2000 helicopters and light aircraft that fly through New York’s airspace every day, being sure to keep them out of the airspace around each airport used by the arriving and departing aircraft.

Ground controllers

As an aircraft lands, it is handed over to the ground controllers who are responsible for navigating it through the maze of interconnecting taxiways found at most international airports. Some airport layouts mean that planes, having landed, have to cross over the runway where other planes are taking off, in order to get to the terminal. All this needs careful coordination by the ground controllers.

Some pilots may be unfamiliar with airport layouts and may need careful coaxing. Worse still is poor visibility, fog or low cloud. At Kennedy airport, the ground radar does not show aircraft type, so the controllers have to rely upon memory and constant checking of aircraft position by radio to ensure they know where each aircraft is at any time.

Stress

Dealing continually with so many aircraft movements means that controllers have but a split second to analyse and react to every situation, yet they need to be right 100 per cent of the time. Any small error or lapse in concentration can have catastrophic consequences. They cannot afford to lose track of a single aircraft, because it may stray into someone else’s air space and into the path of another aircraft. If the computer projects that two planes are about to fly closer



than three miles, the Conflict Alert buzzer sounds and the controllers have just seconds to make the right decision and then transmit it to the pilots. Sometimes, problems arise in the planes themselves, such as an aircraft running short of fuel. Emergency landing procedures cover such eventualities. At Kennedy airport, they have about one such incident each day. As one controller remarked: ‘It’s like an enhanced video game, except you only have one life’.

Questions

1. What does ‘planning and control’ mean to air traffic controllers?

2. What are the differing problems faced by TRACON, tower and ground controllers?

3. What sequencing rules do you think the tower controllers use?

Teaching Note – Air traffic control: a world-class juggling act

The case describes three sets of controllers who are in charge of the incoming and outgoing aircraft in the New York triangle. This triangle is formed from the three airports of John F Kennedy, LaGuardia and Newark, within 15 miles of each other. The problems of the controllers together with the issues of volume and timing are emphasized.

This case exercise is best used as an introduction to control. In fact, it is not a particularly representative example of planning and control in most operations. However, it does have drama and it is useful to illustrate the consequences of losing control. Furthermore, it also illustrates the idea of coordinating three sequential operations – TRACON controllers planning and controlling the air space, tower controllers planning and controlling take-off and landing and ground controllers planning and controlling movement on the ground.

This exercise may also be extended by asking students to speculate on other issues. For example,

• how does technology help the planning and control task in this example?

• what are the job design issues that you think need to be addressed by air traffic control?

Question 1. What does ‘planning and control’ mean to air traffic controllers?

Planning – There are three elements to the planning task described in this case. The first concerns the drawing of the invisible corridors in the sky through which the planes are channelled. Related to this is the planning of how these invisible corridors are changed to cope with different weather conditions. In effect, this is route planning, a task that is undertaken in any transportation operation. The second part of the planning activity involves setting out procedures for emergency situations, such as emergency landings. This will involve predetermined routines on what happens not only to the plane subject to the emergency, but also to the other traffic in the air space and on the ground during the emergency. The third part of planning will involve rough capacity planning. Airlines run to schedules and therefore, it is possible to forecast the expected number of planes arriving in the air space at any particular time. In some ways, this is similar to the MRP (see Chapter 10) planning approach. So, if an aircraft is due at a certain point in air space at a particular time it should be possible to forecast



when that aircraft will become the responsibility of the tower controllers, when it will become the responsibility of the ground controllers and so on. Of course, this is in theory only. Contingencies will have to be built into the plan to account for variation in the actual arrival times of aircraft.

Control – Control, in this case, places particular emphasis on monitoring – in other words, knowing where all the aircraft are at any point in time. Any loss of information means loss of control. As with most control procedures, air traffic controllers will be comparing what should be happening (where the aircraft should be) against what is actually happening (where the aircraft actually is). The important issue here is that if a particular aircraft is not approaching according to plan, it will have an impact on all the other aircraft in the air space at the time. The final part of control therefore, means adjusting the instructions given to the aircraft in order to take account of each other’s position or deviation from position.

Question 2. What are the differing problems faced by TRACON, tower and ground controllers?

TRACON controllers – There are two types of problems for this control activity. First, the aircraft must be kept apart while they are in a particular sector. This will involve closely monitoring the position, direction and speed of each aircraft and predicting their relative positions over time. In this, the TRACON controllers are assisted by the computers that help predict whether the aircraft are getting dangerously close, or will become dangerously close. The second issue for TRACON controllers concerns the handover between different sectors. It is necessary for one controller to have charge of all aircraft in his or her air space because it is the position of the aircraft relative to each other that is important. However, the consequence of doing this is that there must be a handover between sectors. This is potentially a major failure point. Any failure to understand that responsibility has been passed on or loss of monitoring, could be disastrous here.

Tower controllers – The major problem for tower controllers is capacity. The major bottleneck in capacity for air journeys is the airport itself. It is the tower controllers who schedule and control the passage of planes into and out of the airport. This is why the tower controllers at La Guardia have to shoot the gap. Although this is intrinsically risky, it increases the capacity of the airport substantially. Another issue for tower controllers is the variation between aircraft. The gap between planes taking off and landing is a function of size because of the wake turbulence. This is the equivalent to changeover times in a factory. Just as changeover times for a machine will depend on what is being changed from and what is being changed to, so the gap between aircraft depends on the size of the two aircraft.

Ground controllers – Although ground control seems the least dangerous of the three areas, several accidents have been caused at airports by aircraft straying onto the runway. Ground control therefore is important from a safety point of view as well as from an efficiency point of view. To be efficient, ground controllers must move the aircraft swiftly away from the runways so as not to cause bottlenecks or interfere with other aircraft. Where the ground path cuts across runways, this is a particularly sensitive task.



Question 3. What sequencing rules do you think the tower controllers use?

Probably the most common sequencing rule will be that of due date – in other words, prioritizing landing slots according to aircraft schedules. However, this is probably only a rough guide for aircraft controllers. ‘First in, first out’ rules, or orderly queuing, is also likely to be a principle adopted by the controllers. However, overriding all these will be a variant on the customer priority rule that emphasizes safety. Any aircraft that is short of fuel or has an emergency on board will always be given priority, irrespective of its due date or its position in the queue.


Case exercise – Planning and control at ICI Chlor-Chemicals

Many businesses depend on their ability to perform a perpetual balancing act between supply and demand. Throw in too many orders and the plant becomes overloaded, with the threat of leaving customers dissatisfied. Manufacture too much product and the plant shifts the other way, tying up money and filling storage space with unsold stock. At ICI Chlor-Chemicals a process known as sales and operations planning (S&OP) works to ensure that the business keeps all the promises it makes to its customers. The S&OP process helps the business to order the raw materials and services it needs with accuracy, while also providing its plants with information as to which products to produce and in what quantity. The process has the power to plot the best plans and schedules for virtually any set of circumstances – planned or unplanned – in a way that will make the best use of all the company’s resources. By running a financial model, it is possible to find a solution to unforeseen production problems by rescheduling production in ways that keep customers satisfied and avoid a potentially damaging impact on the bottom line. By providing accurate estimates of future demand it helps the procurement process and reduces the amount of both raw materials and products that need to be held in stock. The interface with the S&OP programme is via intranet connections that allow customer service staff to view the production plans for the coming days and weeks. Every time customer service staff pick up the telephone to take a customer’s order, details of the relevant production plans are displayed automatically on screen to allow an instant and informed response. Receipts of raw materials trigger payments to the supplier, just as dispatches of finished products trigger the raising of an invoice to the customer. By providing more people with more information, S&OP helps the company’s staff to take better decisions – for the benefit of the business and its customers.

Questions

1. What should a good planning and control system be able to do to help a complex operation such as ICI Chlor-Chemicals?

2. Why is the financial modelling part of S&OP useful?

Teaching note – Planning and control at ICI Chlor-Chemicals

Question 1. What should a good planning and control system be able to do to help a complex operation such as ICI Chlor-Chemicals?

First, it should be able to coordinate activities between the many processes involved in a large integrated operation such as ICI Chlor-Chemicals. This means, through a shared database, enabling all operations to see the state of operations progress at any point in time. Second, it should be able to help individual parts of the operation make decisions. For example, if one part of the operation wishes to reschedule its activities, it must not only be able to predict the impact of that rescheduling on the part of the operation doing it, but it must also indicate its impact on other parts of the total operation. In this way it can help optimize scheduling decisions across the whole operation rather than ‘locally sub-optimize’. Third, it must integrate operations



activities and decisions with other activities and decisions in the organization. So, for example, invoices are sent to the customer by the same system that dispatches the goods to the customer. Raw material payments are made and orders given by the same system, which controls when those raw materials are needed. In this way the system described in the case is in effect an enterprise resource planning (ERP) system as described in Chapter 10.

Question 2. Why is the financial modelling part of S&OP useful?

It is useful because it allows the financial consequences of potential decisions to be calculated and therefore evaluated. A relatively small scheduling change could have important implications on the macro financial measures of the company such as its profit and loss account. The financial modelling part of the process connects such operational decisions with overall measures of financial performance.


5654Bat

1 per

0499 Handle assy

1 per

7754 Shaft 1 per

0955Connector

1 per

9110Nail

4 per

8744Rivet4 per

0772 Face assy

1 per

1821 Handle 1 per

9110 Nail

2 per

8561 Foam panel

2 per

2547Wooden inner

1 per

6511Rubber face

2 per

Product structure for Bat 5654 5654Bat

1 per

0499 Handle assy

1 per

7754 Shaft 1 per

0955Connector

1 per

9110Nail

4 per

8744Rivet4 per

0772 Face assy

1 per

1821 Handle 1 per

9110 Nail

2 per

8561 Foam panel

2 per

2547Wooden inner

1 per

6511Rubber face

2 per

Product structure for Bat 5654

Case exercise – Psycho Sports Ltd

Peter Townsend knew that he would have to make some decisions pretty soon. His sports goods manufacturing business, Psycho Sports, had grown so rapidly over the last 2 years that he would soon have to install some systematic procedures and routines to manage the business. His biggest problem was in manufacturing control. He had started making specialist high-quality table tennis bats, but now made a wide range of sports products, including tennis balls, darts and protective equipment for various games. Furthermore, his customers, once limited to specialist sports shops, now included some of the major sports retail chains.

‘We really do have to get control of our manufacturing. I keep getting told that we need what seems to be called an Material Requirements Planning (MRP) system. I was not sure what this meant and so I bought a specialist production control book from our local bookshop and read all about MRP principles. I must admit that these academics seem to delight in making simple things complicated. And there is so much jargon associated with the technique, I feel more confused now than I did before’.

‘Perhaps the best way forward is for me to take a very simple example from my own production unit and see whether I can work things out manually. If I can follow the process through on paper, then I will be far better equipped to decide what kind of computer-based system we should get, if any!’

Peter decided to take as his example, one of his new products: a table tennis bat marketed under the name of the ‘high-resolution’ bat, but known within the manufacturing unit more prosaically as Part Number 5654. The figure shows the product structure for this table tennis bat.

As can be seen from the figure, the table tennis bat is made up of two main assemblies: a handle assembly and a face assembly. In order to bring the two main assemblies together to form the finished bat, various fixings are required, such as nails, connectors and so on.



The gross requirements for this particular bat are shown here. The bat is not due to be launched until week 13 (it is now week 1), and sales forecasts have been made for the first 23 weeks of sales:

Weeks 13–21 inclusive, 100 per week

Weeks 22–29 inclusive, 150 per week

Weeks 30–35 inclusive, 200 per week.

Peter also managed to obtain information on the current inventory levels of each of the parts that made up the finished bat, together with cost data and lead times. He was surprised, however, at how long it took him to obtain this information.

‘It has taken me nearly two days to get hold of all the information I need. Different people held it, nowhere was it conveniently put together, and sometimes it was not even written down. To get the inventory data, I actually had to go down to the stores and count how many parts were in the boxes’.

The data Peter collected is as shown in the table below.

Peter set himself six exercises that he knew he would have to master if he was to understand fully the basics of MRP.

Table. Inventory, cost and lead-time information for parts

Part no. Description Inventory EQ LT Std cost

5645 Bat 0 500 2 12.00

0499 Handle assy 0 400 3 4.00

7754 Shaft 15 1000 5 1.00

0955 Connector 350 5000 4 0.02

9110 Nail 120 5000 4 0.01

8744 Rivet 3540 5000 4 0.01

0772 Face assy 0 250 4 5.00

1821 Handle 0 500 4 2.00

6511 Rubber face 0 2000 10 0.50

2547 Wooden inner 10 300 7 1.50

8561 Foam panel 0 1000 8 0.50

LT = lead time for ordering (in weeks); EQ = economic quantity for ordering; Std cost = standard cost in £.



Exercise 1

Draw up:

(a) the single-level bill of materials for each level of assembly;

(b) a complete indented bill of materials for all levels of assembly.

Exercise 2

(a) Create the materials requirement planning records for each part and sub-assembly in the bat.

(b) List any problems that the completed MRP records identify.

(c) What alternatives are there that the company could take to solve problems? What are their relative merits?

Exercise 3

On the basis of the first two exercises, create another set of MRP records, this time allowing for a one-week safety lead time for each item, that is, ensuring the items are in stock the week prior to when they are required.

Exercise 4

Over the time period of the exercise, what effect would the imposition of a safety lead time have on average inventory value?

Exercise 5

If we decided that our first task was to reduce inventory costs by 15 per cent, what action would we recommend? What are the implications of our action?

Exercise 6

How might production in our business be smoothed?

Questions

1. Why did Peter have such problems getting to the relevant information?

2. Perform all the exercises that Peter set for himself. Do you think he should now fully understand MRP?



Teaching Notes – Psycho Sports Ltd

The case describes the position of the owner of a small sports goods manufacturing business that has experienced rapid growth over the last 2 years. He is now realizing that he must begin to consider installing some systematic procedures and routines to manage the business. His biggest problem is in manufacturing control, and with the product range growing, he has been told that an MRP system is the most appropriate for his requirements. The case is based around his analysis of the business and generation of the MRP detailed figures.

Question 1. Why did Peter have such problems getting to the relevant information?

The main reason Peter had such difficulty collecting all the data was because there is currently no central location where all the information is held. The information is scattered about in different departments and amongst different individuals. Collecting it together proved to be a formidable task because Peter needed to first find out where the information was located (if anywhere) and then go to the place and actually record hard data. For example, he would have had to go to different areas of the manufacturing department in order to find out which materials were necessary for manufacturing the bat. Then, would have had to go to Purchasing to find out what the economic quantity for ordering each part would be. He would have had to call the suppliers in order to find out the lead times for ordering and would have then had to go to Accounts to get the pricing information, and so on. It was a really big task. The existing information was held in each area that used it, but no communication between areas was apparent, and the information that did not exist had to be gathered manually, for example, counting the inventories by hand. Psycho Sports would benefit from some sort of MRP system to introduce organization and discipline into the manufacturing planning and control processes.

Question 2. Perform all of the exercises that Peter set for himself. Do you think he should now fully understand MRP?

Exercise 1

Appendix A and B show the single-level bills of material and the indented bill of material respectively.

Exercise 2

Appendix C (MS Excel) shows the material requirements planning calculations. From these, it is obvious that Psycho Sports is faced with some serious problems. Assuming that the demand and lead times are accurate, the company will not be able to meet the production requirement. The rubber face, wooden inner and foam panel will all have to be delayed because the items will not be available by the required time. In each of these cases, the available inventory shows negative numbers. This failure to supply would affect the entire production schedule since the remainder of the operations depend on this Level 2 activity. The whole process would have to be delayed until the items were available. This would result in Psycho Sports not being able to meet the initial demand for the table tennis bats.



This problem could be solved by rush ordering these necessary items from the suppliers. Even though this would be likely to increase costs, Psycho Sports would then be able to meet the forecast demand. The company could also attempt to find new suppliers who would be willing to provide the same materials quicker. This is a very attractive option since it could lead to improved delivery in the future, but will not help supplier relationships in future with the original supplier. The company could also wait for its supplier to deliver as scheduled, and then try to rush production, however, this could possibly lead to lower quality and lower worker morale, if the workers were unconvinced of the need to increase the production rate and work overtime, for example.

Exercise 3

Appendix D (MS Excel) works through the material requirements planning records with a 1-week safety lead time.

Exercise 4

Allowing for a one-week safety lead time would have a dramatic effect on the average available inventory. Under such a system, the available inventory would increase from a value of around £3500 to well over £5900, a 70 per cent increase. See right-hand columns of the Excel spreadsheets in Appendices C and D for a detailed analysis of these effects on available inventory.

Exercise 5

To decrease inventory, one could focus on raw materials, finished goods, work in process or any combination of them.

Raw materials: To decrease inventory of raw materials, we would have to decrease the order quantities to fit our requirements. Currently, Psycho Sports is only ordering in set quantities, but this has led to high inventory levels. If these order quantities were lowered to reflect a system closer to Just-in-Time (JIT), then available inventory could be considerably reduced. Lower order quantities, however, could cause various other problems. Order costs would increase since more orders would need to be made. Also, the company may not receive any price discounts on smaller orders from suppliers. The costs of stock-outs must also be taken into account since the risk of such events could be higher with lower levels of inventory. These potential problems could be overcome by the development of closer supplier relationships.

Finished goods: To decrease inventory, Psycho Sports could produce at a level more matched to demand quantities. Currently, the company is only producing in batches of 500 and this lack of flexibility leads to high storage and inventory costs. By adopting a more flexible production schedule, Psycho Sports could dramatically decrease inventory. Again, this approach will also have negative implications. First, reducing the quantity in production batches may decrease machine and worker productivity, and there is also a greater risk of stock-outs that could lead to customer dissatisfaction.

Work in process: Inventory could also be reduced by decreasing the amount of time that materials are held up in the work in process. Psycho Sports could accomplish this by gaining a better understanding of its machine production capacity, and then adopting JIT methods along with a Kanban control system. Each of these would vastly decrease the unnecessary delays due to work in progress.



It is difficult to recommend a specific course of action to reduce inventory with the limited information available in this case. However, it is certain that Psycho Sports will most likely have to focus on more than one type of inventory. To begin with, the company should put most of their attention on their finished goods. This section accounts for nearly half of the available inventory and it is under their direct control. Slight reductions in this inventory will have significant effects on the company as a whole. Also, Psycho Sports should look to decrease the order quantities required by their suppliers in order to decrease raw materials inventory. Any action that is taken as cited earlier, however, must be closely monitored since they all have associated negative aspects (described earlier). Psycho Sports must make sure that they are not solving a problem by causing a bigger one. The costs of reducing inventory (especially in an uncertain market) may be greater than the benefits.

Exercise 6

This exercise will have highlighted the lumpy nature of the schedules produced by the MRP system. Smoother schedules could be created by producing the same quantities each week, and arranging supplies accordingly – some of the elements of JIT outlined earlier. Production may be smoothed by combining the MRP system with some of the principles of OPT (optimized production technology). The MRP system has several limitations, one of which is that lead times and batch sizes are fixed for simplicity. In reality, however, this is not the case, and companies could exercise considerable flexibility in varying these parameters. Also, unexpected events (such as breakdowns) may change the whole production priorities. The OPT system takes into account these needs and potential bottlenecks in order to determine schedules. In this case, for example, it is obvious that the bat cannot be assembled until the subassemblies are complete. Attention must be focused on bottlenecks to ensure that these operations are given priority (e.g. for maintenance) since the entire production output revolves around them. Quite simply, the two systems, MRP and OPT, working together could vastly smooth production.

After completing these exercises, Peter should have a very good understanding of the Psycho Sports production system. More importantly, however, he will have a better understanding of the complexity involved with such a system. The issues and problems he uncovered while working through these exercises will prove to be valuable lessons. So, even if Peter does not understand the process completely, these exercises will have certainly increased his appreciation of the value of a properly working MRP system.



Appendix A

Single-Level Bills of Material

Part Number: 5654

Description: High-resolution bat

Level: 0

Level Part number Description Quantity

1 0499 Handle assembly 1

1 7754 Shaft 1

1 0955 Connector 1

1 9110 Nail 4

1 8744 Rivet 4

1 0772 Face assembly 1

Part Number: 0499

Description: Handle assembly

Level: 1


2 1821 Handle 1

2 9110 Nail 2

Part Number: 0772

Description: Face assembly

Level: 1


2 6511 Rubber face 2

2 2547 Wooden inner 1

2 0955 Foam panel 2



Appendix B

Indented Bill of Materials for Complete Product


0 5654 High-resolution bat 1

1 0499 Handle assembly 1

2 1821 Handle 1

2 9110 Nail 2

1 7754 Shaft 1

1 0955 Connector 1

1 9110 Nail 4

1 8744 Rivet 4

1 0772 Face assembly 1

2 6511 Rubber face 2

2 2547 Wooden inner 1

2 0955 Foam panel 2

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C H A P T E R 1 1

Case exercise – Just-in-time at Jimmy’s

St James’s Hospital, in Leeds in the north of the United Kingdom, affectionately known as ‘Jimmy’s’, is Europe’s largest teaching hospital. It employs around 4500 people to support the 90,000 in-patient treatments per year and over 450,000 total admissions. Under increasing pressure to reduce costs, to contain inventory and improve service, the Supplies Department has undertaken a major analysis of its activities to try and adopt some of the ideas from the Just-in-Time (JIT) approach.

The initial review highlighted that Jimmy’s had approximately 1500 suppliers of 15,000 different products at a total cost of £15 million. Traditionally, the Supplies Department ordered what the doctors asked for, with many cases of similar items being supplied by six or more firms. Under a cross-functional task force, comprising both medical and supply staff, a major programme of supplier and product rationalization was undertaken, which also revealed many sources of waste. For example, the team found that wards used as many as 20 different types of gloves, some of which were expensive surgeons’ gloves costing around £1 per pair, yet in almost all cases, these could be replaced by fewer and cheaper (20 pence) alternatives. Similarly, anaesthetic items, which were previously bought from six suppliers, were single-sourced. The savings in purchasing costs, inventory costs and general administration were enormous in themselves, but the higher-order volumes also helped the hospital negotiate for lower prices. Suppliers are also much more willing to deliver frequently in smaller quantities when they know that they are the sole supplier. Peter Beeston, the Supplies Manager, said:

‘We have been driven by suppliers for years ... they would insist that we could only purchase in thousands, that we would have to wait weeks, or that they would only deliver on Wednesdays! Now, our selected suppliers know that if they perform well, we will assure them of a long-term commitment. I prefer to buy 80 per cent of our requirements from 20 or 30 suppliers, whereas previously, it involved over a hundred’.

The streamlining of the admissions process also proved fertile ground for improvement along JIT principles. For example, in the Urology Department, one-third of patients for non-urgent surgery found that their appointments were being cancelled. One reason for this was that in the time between the consultant saying that an operation was required and the patient arriving at the operating theatre, there were 59 changes in responsibility for the process. The hospital reorganized the process to form a ‘cell’ of four people who were given the complete responsibility for admissions to Urology. The cell was located next to the ward and made responsible for maintaining all records, planning all operations, ensuring that beds were available as needed and telling the patient when to arrive. As a result, the 59 handovers are now down to 13, and the process is faster, cheaper and more reliable.

Jimmy’s also introduced a simple kanban system for some of its local inventory. In Ward 9’s storeroom, for example, there are just two boxes of 10-mm syringes on the shelf. When the first is empty, the other is moved forward and the Ward Sister then orders another. The next stage will be to simplify the reordering: Empty boxes will be posted outside the store, where codes will be periodically read by the Supplies Department, using a mobile data recorder.



The hospital’s management is convinced about the benefits of its changes. ‘Value for money, not cost cutting, is what this is all about. We are standardizing on buying quality products and now also have more influence on the buying decision ... from being previously functionally oriented with a number of buyers we now concentrate on materials management for complete product ranges. The project has been an unmitigated success, and although we are only just starting to see the benefits, I would expect savings in cost and excess inventory to spiral! The report on Sterile Wound Care Packs shows the potential that our team has identified. The “old” pack consisted of four pairs of plastic forceps, cotton wool balls and a plastic pot, which were used with or without additional gloves. This pack cost approximately 60 pence excluding the gloves. The “new” pack consists of a plastic pot, swabs, and so on, and only one pair of latex gloves. This pack costs approximately 33 pence including gloves. Total target saving is approximately £20,000’.

Questions

1. List the elements in St James’s new approach that could be seen as deriving from JIT principles of manufacturing.

2. What further ideas from JIT manufacturing do you think could be applied in a hospital setting such as St James’s?

Teaching note – Just-in-time at Jimmy's

Question 1. List the elements in St James's new approach that could be seen as deriving from JIT principles of manufacturing.

At the more philosophical level of JIT, the case describes the concept of waste identification and elimination. Waste is seen as a wide range of non-added value activities and costs. In this case, students should be able to spot most of the following:

• Excess inventory

• Use of expensive items in lieu of low-cost ones

• Duplicated inventory

• Purchasing administration (too many suppliers)

• Too many buyers

• Excess materials in standard packs

• Cancelled appointments in Urology surgery

• Process complexity in Urology administration.

The first six of these are typical of wastes that can be identified in manufacturing operations, as they involve material management. The last two concern process management in administration systems, and as the textbook points out, ‘some processes are themselves waste(ful)’.



The main emphasis in the case is on the elimination of waste in the purchasing system. Jimmy's relationship with suppliers is changing from a medium-term trading commitment towards a more stable long-term relationship with fewer suppliers. Some characteristics of these relationships appear to correspond to Lamming’s lean supply concept, particularly with respect to delivery practices. However, the conditions that make this possible and the risks involved are worth discussing.

In this case, the main problem appears to be the medical staff's preferences for a wide range of materials. To reduce input variety means standardization, and this can be achieved by negotiation/persuasion or imposition/conflict. Jimmy's Supplies Manager seems to have used the former approach using cross-functional task forces. Suppliers must be assessed for their capability and interest in order to ensure that they are likely never to fail delivering as promised. The risks then are around the actual dependability and quality of the suppliers. As is emphasized in the case, low cost (of the purchased items) is no longer the predominant issue: Long-term value for money in the overall purchasing/inventory processes is more critical. But it may be more difficult to measure! So perhaps there is an element of faith (or hope) involved here.

Another element of improvement allied to JIT principles is the use of cellular operations. The case describes the complexity of the existing system for Urology admissions, which involved 59 handovers of information. One approach in class would be to ask the students what sort of information might have been involved and which departments would have been responsible for providing it. Most people have some idea of the main functional areas in a hospital, and so you should be able to derive a list of around 20 pieces of information and a variety of departments. You could then ask why the traditional large organization, such as a hospital, divides up in this way. Arguments for functional organization include:

• Economies of scale

• Faster learning of narrow work content tasks (specialization)

• Safety (e.g. in X-ray and pharmacy)

• Security of information

• Convenient position, in the proximity of operation theatres

• Clear boundaries of responsibility

• Concentration of expertise and training.

The application of cellular principles involved making just four people responsible for a dedicated, self-contained admission system. While the case does not give details, we can surmise that this must have involved devising a new process that cut across the functional boundaries and gave much broader responsibilities to the employees. Some safeguards would have been made to ensure that neither the patient nor the employee was exposed to the risk of mistakes, such as the failure to notice that clinical tests had not been completed before admission. Most problems would have been ‘political’ since the redesigned system was faster and simpler. Opposition would be expected from managers of existing functions who might have seen this as undermining their department and expertise. These problems are common in manufacturing where production cells are first established in a batch/process layout environment.



Another example was the use of kanban systems for some inventory management. This development was clearly in its infancy, but the case illustrates the simplicity of this approach. You should remind yourself that some students who have not seen the bureaucracy of a conventional purchasing system might not appreciate the radical changes suggested here! What is described is really a two-bin system for consumable independent items. Developments described in the case indicate that the empty carton will become the kanban communication direct with purchasing, eliminating the waste effort of the Ward Sister. It is useful to discuss the applicability of such systems for other items and compare this case with the approaches used in the Temple University Hospital boxed example in this chapter.

Question 2. What further ideas from JIT manufacturing do you think could be applied in a hospital setting such as St James's?

There are many issues that could be discussed here. Those that have experienced outpatient treatment in a general hospital might refer to the obvious ‘wastes’ involved with patient waiting (WIP). These can be reduced or eliminated by better scheduling. However, the complexity of the product range offered by a conventional clinic and its supporting centralized functions makes smooth scheduling virtually impossible, and WIP is used to buffer out the fluctuations in arrival and processing times. Perhaps the best approach here could be to separate high-volume repetitive ‘products’ and create treatment cells or plant-within-plant operations. These types of operation, with more focused product ranges, allow more levelled schedules and much lower WIP, often with reduced overheads and less WIP storage space (waiting rooms). If you wish to pursue this argument with the class, a good case to use is Shouldice Hospital (from the Case Clearing House), which describes the flow process of a focused hernia hospital in Toronto.

Other areas of waste reduction that could be identified by students are:

• Motion reduction: Better layout can be designed into new hospitals to reduce the amount of patient and material transport required (portering). In existing hospitals, this may be difficult to achieve because of old buildings and a history of incremental, ad hoc developments.

• Defective goods reduction: Inspection-based approaches to quality still prevail in many hospitals. Prevention-oriented quality should reduce quality costs in the long-term. It is interesting to note that surgery generally adheres to these principles anyway: Good outcomes are achieved by paying attention to the quality conformance of inputs and processes (purchased items, training of surgeons and nurses, attention to tidiness, obsession with cleanliness and sterility, use of standardized procedures, etc.). This approach, applied to all areas of a hospital, should bring dividends in reducing failure costs, including rework.

• The involvement of everyone: Many aspects of this (as described in this chapter) are being introduced in the more progressive hospitals. It could be argued that JIT is only made possible by first establishing TQM principles and practices at every level in the hospital. Some hospitals have successfully introduced cross-functional teams for (waste reduction) problem resolution and improvement activities. In some cases, functional teams have developed service performance standards for their own work (e.g. porters, intensive care nursing).



Other JIT techniques:

Most of the JIT-related techniques outlined in the chapter and other parts of the text have, at first sight, little relevance to a hospital. However, some ideas that might come out of a discussion, or from assessed work, include:

• Total Productive Maintenance: This is a particularly important technique in areas where critical pieces of expensive machinery are involved (e.g. scanners, X-ray and intensive care). Improved up-time not only improves clinical safety but also reduces the costs of rescheduling and lost utilization.

• Set-up reduction: This approach could be important for activities such as bed linen changing, operating theatre set-ups and clinic changeovers.

• Visibility: This is increasingly seen around wards, clinics, and so on, to show utilization, waiting times, problem analysis, and so on.

• Kanbans: This could (perhaps) be applied to moving of patients, as well as materials!


Case exercise – JIT principles at Little Chef

The Little Chef roadside restaurant chain has over 350 sites located on busy roads around the United Kingdom. All restaurants trade from 7.00 am to 10.00 pm, 365 days a year and offer an all-day menu supplemented by part-day menus and various seasonal promotions. Customers receive a table service of cooked-to-order meals. Target times are 30 minutes for a starter plus main course, with an extra 10 minutes for a dessert. To achieve a high standard of customer service, it is necessary to forecast demand as accurately as possible and then to provide for sufficient resources (staff, food, etc.) to meet that demand. In practice, an all-year-round core of regular staff is maintained, supplemented by seasonal staff at peak periods. Staff planning is undertaken at three levels:

1. The quarterly manpower plan – the main input to this plan is the forecast number of customers for each of the 12 weeks of the forecast period.

2. The weekly forecast – the sales forecast from the quarterly plan is updated and broken down into daily sales.

3. The daily plans – allocate duties between staff.

All materials (food, cleaning items and crockery) are supplied from a single supplier. This helps ensure that goods are up to a consistent standard. Each restaurant has three deliveries a week, typically Monday, Wednesday and Friday, with orders being placed the same morning. A weekly stock-take provides consumption of each item. The manager uses a locally determined re-order level combined with forecasted daily sales to compute material orders. Most foods are delivered and stored frozen. Only salads and cured meats arrive date-coded, usually with 4 to 5 days shelf-life after delivery. Bread and milk are delivered daily by local suppliers. Stock-holding amounts to about 7 days at any one time.

Each restaurant has a ‘menu manual’, which specifies the ingredients, cooking procedures and presentation standards for every item on the menu. Orders are added to the cook’s order pad, including the time when the waitress takes the order. Orders are marked once cooking has started and marked again when cooking has finished. The cooking process is simple. The cooking equipment is also simple – griddles, fryers and pre-programmed microwave ovens. Similarly, a housekeeping board enables, ‘at a glance’, the staff to see the jobs that need to be done. Standard cleaning products and methods are used throughout the company, and each cleaning task is broken down into ‘how, what, when’ elements. To help ensure that standards are maintained across the network, quality audits are conducted every 3 months by the local training officer.

Tasks fall into eight categories; however, there is usually enough flexibility to react on a daily basis to changing needs. The categories are:

• Reception/cashier

• Cooking/production

• Beverage production

• Sweet/salad production



• Serving to tables

• Relaying tables

• Washing up

• Cleaning/toilet checks

Staff are cross-trained for greater flexibility (50 per cent of staff can cook). At quiet times, one person may perform more than one task. The facility of flexibility is assisted by moveable tables and chairs, so that parties of varying sizes can be accommodated.

Question

1. Although different from a manufacturing company, some of the principles that apply in the Little Chef case are similar to those used in a JIT manufacturer – what are they?

Teaching note – JIT principles at Little Chef

Question 1. Although different from a manufacturing company, some of the principles that apply in the Little Chef case are similar to those used in a JIT manufacturer – what are they?

Several issues are very similar to a JIT manufacturer. Some are listed below.

• Limited product range – this helps simplify the material control task. The operation only produces ‘runners’ and ‘repeaters’.

• Simple products – which only require basic production equipment.

• Pull scheduling – known customer orders are used to pull meals from the kitchen to the restaurant according to the actual demand. There are no buffer stocks. The signal to make more is the order from the waitress. The routine is simple but strict: Order one, make one, supply one in response to specific customer demand.

• A batch size of one – orders are not held up (or batched) until a sufficient number have been accumulated nor are they produced in advance; they are made on receipt of the order.

• Flexibility – a standard time for serving a customer is aimed for irrespective of the demand level. This is done by flexing the number of staff on duty.

• JIT supply – replenishment stocks are ordered on a short (daily) cycle from Little Chef’s sole supplier.

• Visibility – recipes, preparation methods, pictures of ideal finished products and cleaning checklists are all examples of how key data can be made visible to all staff, both for control and audit purposes.


Case exercise – Flexibility helps JIT at L’Oréal

L’Oréal cosmetics is now the world’s largest toiletries and cosmetics group, with a presence in over 140 different countries. In the UK, the 45,000 m2 purpose-built facility in mid-Wales produces 1300 product types in a spotlessly clean environment, which is akin to a pharmaceutical plant in terms of hygiene, safety and quality. The plant has 55 production lines and 45 different production processes, and the manufacturing systems employed are of a flexibility that allow them to run each of the 1300 product types every 2 months – this means over 150 different products each week. But the plant was not always as flexible as this. It has been forced to enhance its flexibility by the requirement to ship over 80 million items each year. The sheer logistics involved in purchasing, producing, storing and distributing the volume and variety of goods has led to its current focus on introducing JIT principles into the manufacturing process.

To help achieve its drive for flexibility and for JIT production, L’Oréal organized the site into three production centres, each autonomous and focused within technical families of products. Their processes and production lines are then further focused within product sub-divisions. The production centre managers are responsible for all the activities within their area, from pre-weighing to dispatch; their role also encompasses staff development, training and motivation. Within the focused production centres, improvement groups have been working on improving shop-floor flexibility, quality and efficiency. One of the projects reduced the setup times on the line that produces hair colourants from 2.5 hours to only 8 minutes. These new changeover times mean that the company can now justify even smaller batches and may give the company the flexibility to meet market needs just-in-time. Prior to the change in setup time, batch size was 30000 units; now batches as small as 2000 to 3000 units can be produced cost-effectively.

Questions

1. What did L’Oréal do to help it organize the process of setup reduction?

2. What do you think L’Oréal gained from doing each of these things?

3. If we could halve all changeover times in the factory, what effect would this have on inventory?

Teaching note - Flexibility helps JIT at L’Oréal

Question 1. What did L’Oréal do to help it organize the process of setup reduction?

L’Oréal did several things that probably helped with its overall objective of reducing setup time.

It organized the whole factory into three production centres, each with separate teams making different types of product. One manager was placed over the whole process from end-to-end in each product area. An alternative would have been to have a separate manager responsible for each stage of manufacturing through which all products would have passed. So, for example,



one manager could have been responsible for all pre-weighing, another for the first stage of manufacture, and so on.

The production centre manager was made responsible for training and staff development.

Improvement groups were set up in each focus production centre with clear objectives of improving flexibility, quality and efficiency.

Question 2. What do you think L’Oréal gained from doing each of these things?

Focusing production cells on the whole set of manufacturing tasks for a particular product helps both to enhance individuals’ ‘ownership’ of the process and to identify any problems that occur as products move between one stage and another.

Making the production centre manager (in effect the operations manager) responsible for training and staff development made human resource tasks an integral part of operations management. An alternative organizational structure used in many companies is to have separate managers for human resource issues. However, with a JIT philosophy, people issues are seen as being totally integrated with more technical issues.

Organizing shop floor improvement groups harnesses the skills and enthusiasm of the shop floor workers, gives them clear objectives allows and improvement to contribute directly to reduction of changeover time.

Question 3. If we could halve all changeover times in the factory, what effect would this have on inventory?

It would reduce the cost of changeover substantially. It may even halve the cost of changeover. (This is probably unlikely because there is a ‘fixed cost’ element of a changeover cost.)


C H A P T E R 1 2

Case exercise – Six Sigma at Xchanging

‘I think Six Sigma is powerful because of its definition; it is the process of comparing process outputs against customer requirements. Processes, operating at less than 3.4 defects per million opportunities means that you must strive to get closer to perfection, and it is the customer that defines the goal. Measuring defects per opportunity means that you can actually compare the process of, say, a human resources process with a billing and collection process’, says Paul Ruggier, head of Process at Xchanging, who is a powerful advocate of Six Sigma, and credits the success of the company, at least partly, to this approach.

Xchanging, created in 1998, is one of a new breed of companies, operating as an outsourcing business for back-office functions for a range of companies, such as Lloyds of London, the insurance centre. Xchanging’s business proposition is for the client company to transfer the running of the whole, or part of their back-office functions to Xchanging, either for a fixed price or a price determined by cost savings achieved. The challenge Xchanging face is to run that back office in a more effective and efficient manner than the client company had managed in the past. So, the more effective Xchanging is at running the processes, the greater its profit. To achieve these efficiencies, Xchanging offers a larger scale, a higher level of process expertise, focus and investment in technology. However, above all, they offer, a Six Sigma approach.

‘Everything we do can be broken down into a process’ says Paul Ruggier, ‘It maybe more straightforward in a manufacturing business, frankly they have been using a lot of Six Sigma tools and techniques for decades. However, the concept of process improvement is relatively new in many Service companies. Yet, the concept is powerful. Through the implementation of this approach, we have achieved 30 per cent productivity improvement in 6 months’.

‘There are five stages in the improvement process’, explains Rebecca Whittaker, who is what Six Sigma practitioners call a ‘Master Black Belt’ (a top practitioner) of the Sigma technique. ‘First is the ‘Define’ stage, this is where senior management define what it is that needs doing, the next stage is ‘Measure’, this is where the team, guided by the Black Belt, will measure the process as it presently is. The third stage is ‘Analyse’, we would have obtained a lot of data in the measure stage, this stage is where we stand back, challenge and ask questions like: ‘Why are we doing this’? The fourth stage is ‘Improve’, where all the ideas, mostly generated by the team are implemented. The final stage is ‘Control’. This is where controls are put in place to ensure that the new process continues to be used. At this time, the Six Sigma expert leaves the team and moves on to the next project’.

The company also adopts the Six Sigma approach to managing its improvement projects, including the terminology for its improvement practitioners – Master Black Belts, Black Belts and Green Belts. Attaining the status of Black Belt is very much sought after as well as fulfilling. Rebecca Whittaker, who is a Master Black Belt at Xchanging says. ‘At the end of a project, it is about having a process that is redesigned to such an extent, that is simplified and consolidated, that people come back and say, ‘It is so much better than it used to be’. It makes their lives better and it makes the business results better, and those are the things that make being a Black Belt worthwhile’. Rebecca was recruited by Xchanging along with a number of other Master Black Belts as part of a strategic decision to kick-start Six Sigma in the company. It is seen as a particularly responsible position by the company and Master Black Belts are



expected to be well versed in the Six Sigma techniques and be able to provide the training and know-how to develop other staff within the company. In Rebecca’s case, she has been working as a Six Sigma facilitator for 5 years, initially as a Green Belt, then as a Black Belt.

Typically, a person identified as having the right analytical and interpersonal skills will be taken off their job for at least a year, trained and immersed in the concepts of improvement and then sent to work with line staff as project manager/facilitator, their role as Black Belt will be to guide the line staff to make improvements in the way they do the job. One of the new Black Belts at Xchanging, Sarah Frost, is keen to stress the responsibility she owes to the people who will have to work in the improvement process. ‘Being a Black Belt is about being a project manager. It is about working with the staff and combining our skills in facilitation and our knowledge of the Six Sigma process with their knowledge of the business. You always have to remember that you will go onto another project but they (process staff) will have to live with the new process. It is about building solutions that they can believe in’.

Prior to becoming a fully trained Black Belt, Sarah had been involved with Six Sigma projects as a Green Belt. ‘I was working as part of a project team under the direction of Rebecca and I enjoyed the whole experience so much that I thought, ‘hey, I fancy doing that’, so I asked if I could be trained to be Black Belt myself. The move has been even better than I thought it would be. Since becoming a Black Belt, I really do feel that I have contributed to improving the performance of individual processes and, through that, the company as a whole. Working full time as a Black Belt allows you to build your knowledge of the improvement process over a wide variety of projects. It lets you reach a new level of understanding that you can’t get when you are only spending part of your time on improvement’.

Questions

1. What are the benefits of being able to compare the amount of defects in a human resources process with those of collection or billing?

2. Why is achieving defects of less than 3.4 per million opportunities seen as important by Xchanging?

3. What are the benefits and problems of training Black Belts and taking them off their present job to run the improvement projects rather than the project being run by a member of the team with responsibility for actually operating the process?

Teaching note – Six Sigma at Xchanging

Question 1. What are the benefits of being able to compare the amount of defects in a human resource process with those of collection or billing?

Using defects per opportunity (or more commonly, per million opportunities) allows complex operations (where there will be lots of opportunities to make mistakes) to be compared against relatively simple operations (where there will be fewer opportunities to make mistakes). This means that the teams that run these processes are competing to a common standard. They cannot use the excuse that their processes are different from each other. This makes it easier to measure the relative success of different processes in improving their performance.



Question 2. Why is achieving defects of less than 3.4 per million opportunities seen as important by Xchanging?

Because, as explained in Chapter 13, this level of process control reduces the chances of producing services or products outside their specification range to a very low level, even when the average process performance drifts away from its nominal mean value.

Question 3. What are the benefits and problems of training Black Belts and taking off their present job to run the improvement projects rather than the project being run by a member of the team that has responsibility for actually operating the process?

This issue centres around balancing experience and technical expertise on one hand against process ownership on the other. Some organizations disagree with the Six Sigma approach of having dedicated improvement practitioners. They prefer improvement to be organized by the people who will have reasonability for running the improved process. Six Sigma proponents, however, argue that the accumulated expertise and training of Black Belts is what really counts. As quoted in the box, it is important to gain the trust and understanding of the staff who will operate the process after the improvement project, but this can be done by an experienced Black Belt with good interpersonal skills.


Case exercise – Calling Sue

The idea of having a Personal Banking Consultant (PBC) seemed a great one at the time it was suggested. For a modest annual fee, we would get a differentiated range of ‘relationship’ financial services designed for busy business people like us. These were listed in an attractive glossy ‘membership’ brochure and included: a larger overdraft facility with preferential interest rates, free annual travel insurance, a rewards point scheme, a ‘gold’ credit card with no credit limit, and our own PBC (Sue) and her personal assistant (Richard), who would be there to help whenever we needed them. Every other aspect would be as before, but our accounts would have to be transferred from our old branch in the south (where we lived until 6 years ago, but never bothered to transfer our accounts) to the north, where we now work. Having a remote bank branch had not been a problem until recently. If we needed anything done with any account, we simply had to ring the Assistant Manager in the south and he arranged it. But recently, a South West Region Office was established, and all phone calls were handled remotely, so it had become more difficult to maintain this personal relationship. Moreover, our business and private accounts were handled by separate people at different offices, using different telephone numbers. We were ready for a change!

Despite the attractions of the package described, we were hesitant to accept this generous offer. Changing all the cheque books, credit cards, standing orders, direct debit instructions and anything else we had forgotten, including our personal and business accounts, seemed rather complex and time-consuming. We raised these concerns with the advisor who had been sent to sell us the idea on a dark December Monday.

‘Oh, there will be absolutely no problem, we can deal with all that. All that you and your wife will have to do today is to sign a few forms authorizing us to transfer the accounts, and one to agree to the new arrangements. Then leave the rest to us. There will be no problems, it is easy with all the technology we have today. You should get the new cheque books within 7 days, and all balances will be transferred automatically by the computer’.

We signed up immediately – it looked a good scheme, and even the value of the free insurance alone would more than compensate for the annual membership fee.

The four chequebooks for the two accounts arrived separately, over a three-day period, the last arriving on the Tuesday, 9 days after the agreement. The business account cheques had an incorrectly spelt business name, and the current account cheques had my wife’s initials reversed. At the same time, we received (from Sue) a personalized welcoming pack and a professionally presented loose-leaf folder of information concerning the account and PBC services, which confirmed that the accounts were in operation. All this correspondence was correctly addressed and written in a friendly style, using our first names. I decided to call Sue about the spelling.

‘I am awfully sorry, sir, I’ll order some new ones, and I will ask them to send them to you quickly. I know they have had a backlog due to computer problems at the card centre, but they can prioritize any PBCs cards. In the meantime, you can use your existing accounts, since they are linked to your new ones. I will call you to confirm when this has been done. Again, may I apologize for any inconvenience you have experienced?’ One hour later she rang as promised, confirming her actions. On the tenth day, our credit cards arrived, correctly embossed with our names.



However, these could not be used for cash withdrawals without personal identification numbers (PINs) and the cheques could not be used in UK retail outlets without cheque guarantee cards. The cheque guarantee card doubled as a cash card, for use at ATMs with another PIN number. Neither PIN number had arrived by the second Friday after our signing-up (11 days). I decided to call Sue, to see what was happening.

‘Don’t worry’, she said confidently, ‘The PINs always come a day or two after the cards, for security reasons, and you should get the guarantee cards about the same time’.

By the following Friday lunchtime, returning from a week’s business trip, we were getting concerned. Although our new cheque guarantee cards had arrived and were correct, our names on the envelope were again incorrect, which seemed odd and slightly disconcerting. We still had not received the new PIN numbers. I decided to call Sue, who apologized again, politely expressing her amazement at our dilemma, and asked me to hold while she checked the system. ‘They have certainly been correctly issued on Monday’, she said confidently, ‘and have been sent, perhaps they have been lost in post. I will check with the card centre about what we should do, and I will call you back’.

‘You will have to be quick’, I retorted, ‘We are just about to leave for a long weekend vacation, but you could call me on the mobile’.

Sue phoned 2 hours later and confirmed that because the PIN numbers had been mislaid, it would be necessary to reissue the cards for security reasons. ‘You should receive the replacement cards and PIN numbers within 3 days’, she stated confidently. ‘You should carry on using your original account’s cards until then’.

Her suggestion seemed okay at the time, but proved to be rather more of a problem than we had anticipated. On checking out of the hotel on Monday evening, we discovered that the existing credit card had expired, and the bill came to more than our existing cheque guarantee card limit. We settled the account with a combination of cheques and most of our remaining cash – an embarrassing end to a pleasant weekend.

In the post on Tuesday morning, we were surprised to receive two sets of PIN numbers, along with further cheque guarantee cards and credit cards. We went to the ATM with our new cards to draw out much needed cash, but the PINs were not accepted. Careful examination of the packaging revealed that the PINs related to the original cards, not the replacements! We borrowed cash from a friend and called Sue!

By Friday, everything was working, and we had received a correctly addressed letter of apology from the card issuing centre in Glasgow. An excellent bouquet of flowers was delivered that afternoon and Sue phoned to check that we were now happy. She even called in to see us a week later, bringing some leather holders for cards and chequebooks. We have had no more problems and generally the service is excellent. Sue has, however, confided that such problems are quite common (they apparently use a lot of agency staff in the processing centres, and mistakes are common).

But we can always call Sue.



Questions

1. What were the gaps between the customers’ expectations and perceptions in the process described?

2. How were the customers’ expectations influenced from the outset?

3. Evaluate Sue’s reaction to the problems at every stage. Was the bank’s service recovery successful?

4. What costs have been created by these problems, and how do they compare with the underlying costs at the root cause of the problem?

Teaching note – Calling Sue

Question 1. What were the gaps between the customers’ expectations and perceptions in the process described?

There was a significant mismatch between customer’s expectations and perceptions, that is, poor perceived quality. Although the problems were eventually sorted out, the events may have left a sour taste in the mouth of the customer, making them even more wary of the bank and any future offers.

Looking at each of the gaps in turn:

Gap 1: The customer’s specification–operation’s specification gap

There does not appear to have been a mismatch between what we can assume to be the operational specification (new cheque books within 7 days, automatic transfer of balances, overdraft facility, annual travel insurance, gold card and the use of a PBC), as promised by Sue, and the customers’ requirements. We do not, however, know what the internal specification was for these activities. It is possible that the standards were not as needed, which would lead to such a gap.

Gap 2: The concept–specification gap

It is difficult to know if there was a mismatch between the service concepts developed by the bank and the detailed specification of the products and services. One assumes not. The problem of which we are acutely aware pertains to gap three.

Gap 3: The quality specification–actual quality gap

This is an important gap in this case. It appears that Sue was well aware of the problems that were often incurred in these transfers. She referred to these as ‘computer problems’ but later admitted to problems with agency staff. Rather than warn the customers of the problems and setting appropriate expectations, she had promised something that she knew would be difficult to deliver. Was this a good idea? Yes, in so far as the transfer was undertaken and she kept the



business, but no in that she has created somewhat dissatisfied customers who are now even more wary of their relationship with the bank and who may, if they should experience another problem, terminate their valuable accounts.

It is important to remember that all the other parts of the promise (we assume) were kept – annual travel insurance, gold card etc. The problems that were experienced were only in the transfer process. However, particular promises had been made about this were not delivered.

Gap 4: The actual quality-communicated image gap

One might argue that there was no mismatch here. The customers were extremely wary about transferring their account because they had experienced problems with the bank in the recent past. However, the communication they received from Sue provided them with the reassurance they needed to make the decision, which as we know were rather hollow promises.

Question 2. How were the customers’ expectations influenced from the outset?

The customers were wary of making the changes to their accounts. They had experienced several other problems with the bank – remote and impersonal handling of their calls at a regional call centre, lack of access to their trusted assistant bank manager, and different telephone numbers for the two types of accounts. Their expectations were not high, though they needed a solution to the problems that the bank had created for them. Sue, however, had a significant influence on their expectations by explaining that there will be absolutely no problem and that they should get the new chequebooks within 7 days. They went ahead on the basis of trust.

What aspects of the bank’s service quality specification have been revealed to the customer? Are these reasonable for such an account?

We can assume that the bank delivered on its promises to provide annual travel insurance, gold credit card and a larger overdraft facility, and such specifications should appear to be quite reasonable for such an account. The fact that errors are common at the processing centres due to the use of agency staff is not appropriate for any type of account. The prime concern of bank customers is an error free service and this underpins customers’ relationship with the bank. The use of agency staff implies that the bank is having problems dealing with demand, yet consultants such as Sue are pressing clients to make the changes presumably trying to meet their own targets. This would suggest serious managerial problems in terms of coordination, target setting and capacity management.



Question 3. Evaluate Sue’s reaction to the problems at every stage. Was the bank’s service recovery successful?

Problem Sue’s response

One cheque book arrived after 9 days Sue was not told of this problem.

Business accounts had incorrect spellings and current account had wife’s initials reversed

Sue apologized and ordered speedy dispatch of new ones assuring customers that they could use the old ones in the interim. She promised to confirm her actions, which she did.

The credit/cash cards arrived without the PINs Sue explained they would take a day or two.

One week later they still had not arrived. Sue apologized, checked her records and suggested they had been lost in the post. Agreed to reissue the cards.

Names on envelope still incorrect, but correct names on cheque guarantee cards.

Next letter was correctly addressed.

Credit cards had expired and ATM would not accept PINs for the original cards

Sue apologized and sent a bouquet of flowers. She also personally provided leather holders and cards and chequebooks.

Sue reacted as well as she could to each stage. The problems were systemic rather than personal, which these customers seem to have accepted. Although they were dissatisfied during the process, Sue appears to have done enough to appease them. Given that they have had no problems since; customer satisfaction appears to have been restored; however, any further problems, small or large, might well have led to a less measured response from the customers.

Question 4. What costs have been created by these problems, and how do they compare with the underlying costs and root cause of the problem?

The costs created by these problems include Sue’s time, though this is what she is paid for, the costs of rework (reproducing and reissuing the cards and cheque books), the costs of compensation (flowers, leather holders and delivery) and the costs to the customers (goodwill, inconvenience and embarrassment). The root causes of the problems are poor capacity management, lack of communication between departments and inappropriate target setting. Some of these, in particular capacity changes, could be expensive to deal with and the recovery procedures seemed to be being used to alleviate the problems in the short term. The critical issue is whether the bank dealt with these problems in the long-term.


Case exercise – Handles and Hinges Ltd

H&H was established in Birmingham England, by two young entrepreneurs, Dave Philips and Chris Agnew, both experienced in the hardware trade. The business specialized in the ‘designer’ market for polished metal (brass or stainless steel) door handles, cupboard knobs, furniture fittings (mostly used in shop/office furniture) and hinges. The success of their company was based on H&H’s reputation for high-quality, unique designs of both traditional and modern products, many of which were selected and specified by architects for large and prestigious projects, such as the new office developments in London’s Docklands. Dave, the Chief Executive Officer, with responsibility for sales, believed that most of the orders from the construction companies were placed with H&H because they assumed they had no other choice once the H&H products had been specified. Larger companies would sometimes suggest to the architect that similar products were available at less than half the price. This advice was invariably ignored as the architect would be attracted by H&H’s designs and quality and would be reluctant to risk ‘spoiling’ the multi-million pound projects for the sake of saving a few thousand pounds. Dave outlines the characteristics of the changing marketplace:

‘During a recession in the construction industry, particularly in office building, we expanded our direct sales to large UK hardware retail companies, which now account for about 40 per cent of our sales value, but only about 15 per cent of our gross profit. This segment is much more price-sensitive, so we must be able to manufacture good-quality, simple and standard products at low costs comparable to those of our competitors. Some of the reduced costs have been achieved by using thinner and cheaper materials similar to those used in our competitors’ products. We have just received our first consignment of brass sheet from Poland with a saving of over 10 per cent in this case. We also had to reorganize to reduce our processing costs. Chris has done a great job of changing all production to modern batch methods. However, I am concerned that we are often late in delivering to our UK retail customers and this makes it difficult to keep good relationships and to get repeat orders. Fast delivery of relatively small quantities is required in the ‘retail “segment’, whereas the construction/contractors market allows very long production lead times. Dependable delivery is crucial to avoid completion delays, for which we have been held financially accountable on some occasions!’

‘When customers complain about delivery or about faulty products, we try to compensate them in some way to keep their business – for example, by issuing credit notes or giving discounts on the next order. Each of our representatives spends about one day a week dealing with the consequences of late deliveries, but on the positive side, a meeting with a client is an opportunity to get the next order. The hardware retail companies often require very quick delivery, which is often achieved only by switching production to the item that is required first’.

‘Really, I am more concerned about reports of quality problems; an increasing number of construction companies have complained to us about dented or scratched handles, but our production department assures us that they left the factory in good condition and must have been damaged on site; that is to be expected on a large construction site. The Quality Control Manager says, however, he cannot give an absolute guarantee that they were all OK, because we only do sampling of final production; if more than a few in the sampling are found at final inspection to be sub-standard, the whole batch is rejected, re-inspected, sorted and reworked. Using express courier transport and working overtime in the factory, rework can usually be done in about a week, but invariably the contractors complain to the architect, perhaps because they dislike being told whom to buy from. This can lead to lots of correspondence and meetings between H&H, the contractor and the architect, when we could be doing other things. This



problem seems to have worsened in the last 2 years; often it’s also difficult to agree whether the product is sub-standard. It is frequently just a question of how shiny (or matt) the polish and lacquer finish is; at other times there are scratches in areas that really can’t be seen in use. Often the customers are too fussy, anyway’.

Chris (the Manufacturing Director) put a different perspective on the problem. ‘The sales catalogue shows pictures of our products prepared for photography; special effects are used to give a bright polished finish but we actually use a matt finish. The samples used by Sales are specially made by experienced craftsmen to eliminate any scratching or minor faults; of course, we cannot always repeat that standard with the modern batch production methods. We were aware that the reorganization of production methods could lead to quality problems, so I introduced statistical control, a subject I studied extensively in a quantitative methods course at the local college. Our inspectors now take random samples of batches of components and measure important dimensions such as the diameter or length of brass handles, the thickness of the incoming materials and so on. Batches that fail are either rejected or reworked and all material in which we have identified any fault at all is returned to the supplier, and our buyers routinely threaten to place orders elsewhere. I instructed the supervisors to inspect press tooling just before the start of each production batch to ensure that there are no surface faults, so I think it is unlikely that the dents and blemishes are caused in production. I must make a point of checking that this is happening. Anyway, our final inspection sampling has been changed to give an acceptable quality level (AQL) of 2 per cent whereas until recently it was only 5 per cent. We have had to increase the number of final inspectors by four at a cost of £15, 000 each per annum, but all the management team agrees that with quality products we must be confident of the final quality before packing. We trained some of our best assemblers in SPC and made them full-time inspectors; the combination of their technical and statistical skills ensures that we have the right people for this job. We could not rely on our operators to do any dimensional checks; because, hardly any of them know how to measure using a metric rule, let alone a micrometer or gauge. It is best to keep them concentrating on achieving correct output targets. I believe that most quality problems here must be caused by occasional operator carelessness’.

‘The batch method of production has given us much more control over operations. No longer do we have to rely on hard-to-recruit craftsmen who did everything slowly and unpredictably. Now we make the most of economic batches at each stage, benefiting from the economies of scale of longer runs and cheaper unskilled labour. With incentive bonuses based on effective performance against agreed standard times, all our people are working faster to achieve the company’s goal of higher productivity. There is no doubt that our operations are now more productive than they’ve ever been. With high quality and low costs, we are now set for a major assault on the competition. We expect our profits to rise dramatically from the currently inadequate 1 per cent return on sales’.

Questions

1. How does the company compete in its market place and what is the role of ‘quality’ in its competitive strategy?

2. Do you think that the company’s use of statistical quality control is sensible?

3. Apply the gap model of quality diagnostics to the company.



Teaching note – Handles and Hinges Ltd

Question 1. How does the company compete in its market place and what is the role of quality in its competitive strategy?

At present the company has two markets, both of which have different requirements for H&H products.

The construction market: H&H’s long running product line has competed against less expensive competition by providing tightly specified and controlled quality products, with innovative designs in the right quantities at the right time. This has satisfied the two influencing parties in the market, the designing architect who wants innovation and quality and will be prepared to purchase in order to enhance multi-million pound projects; and also the contract builders who require dependable deliveries in order to keep to construction deadlines. This market, because of continuing recession, declined and H&H looked elsewhere to recover the loss in demand.

UK retail hardware market: This market is much more price-sensitive and this has placed pressure on the production facility at H&H to produce standard products of quality comparable to that of the competition and at a lower cost relative to the construction market. As a result, H&H altered all production from long lead-time made-to-order craft-based methods to batch production of made-to-stock items.

Quality

The role of quality at H&H is only clarified by understanding the meaning of quality. Quality means different things to different markets and the two markets H&H is aiming to satisfy have different requirements and so will have different descriptions of quality.

‘Fitness for purpose’

Each market will value this equally; it will be seen as an order qualifier in that the handle must be capable of opening doors, for example.

‘Design quality’

The design appeal of the products in both the markets is important, but critical in the construction contractors market, as it is innovation that is an order winning aspect. The retail market is looking for simpler standard designs and therefore the aesthetic design quality is less important.

‘Conformance to specification’

This is where H&H’s problems arise. Both markets require conformance to specifications, but to what specifications? Is the specification appropriate to each market and consistent with the production capability? As shown in Fig 2, the specifications will be very different for the two markets.



‘Meeting customer expectations’

The customer’s expectations are influenced by the specifications they believe the supplier has offered to them. A misleading or unachievable specification could lead to a failure in meeting customer expectations.

It is the specification of a quality product, however, that is one of the areas in which a lack of understanding is causing problems in the competitive strategy.

‘The sales catalogue shows pictures of our products prepared for photography; special effects are used to give a bright polished finish but we actually use a matt finish. The examples used by sales are specially made by experienced craftsmen to eliminate any scratches or minor faults; of course, we cannot repeat that standard with modern batch production methods’.

From the onset, the customer’s perception of product specification is falsely pushed higher than the achievable specification.

This leaves potential for failure even when producing at the best quality possible. The specification creates the customer’s expectations and leads directly to problems in all aspects of conformance to specification. The struggle to produce at a certain quality specification to an almost unattainable level reduces the ability to satisfy the other aspects of customer expectation: dependability of delivery and quantity. Failings in these are already becoming more apparent, incurring financial costs from the construction market and the cost of repeat business from the UK retail market. The combination of financial penalties, the cost of disruption from rework and loss of future business all show the large (quality) costs associated with a poor understanding and communication of a quality specification and conformance to it.

This indicates that at present quality is a burden on the company’s competitive strategy. Poorly managed, misunderstood quality specifications cause problems in satisfying the customer’s expectations in all the markets. H&H management have realized that poor quality is the underlying cause of their problems, but they have not understood how to manage quality better, so have simply tried to apply SQC.

Question 2. Do you think the company’s use of Statistical Quality Control is sensible?

It has been recognized that quality is causing big problems. Initial steps to implement a quality improvement tool, ‘Statistical Process Control’, have begun. In this case, the SPC tool has not been sensibly implemented because there is an obvious misunderstanding in how to apply it to the situation. There is no clear understanding of what exactly the problems are that the tool has been introduced to help solve.

Random samples of batches of components are taken and measured for discrepancies in important dimensions and batches that fail are scrapped or reworked. These checks are done in two stages during the process, firstly at the raw material ‘in’ stage and secondly at the end of the production stage, prior to the final assembly and dispatch. Failed raw material at Check 1 is returned to the supplier with a threat to ‘improve quality or lose business’. Failure at Check 2 can only be reworked or scrapped. No information on the cause of the failure, or at what stage within the process, is available. This approach tries to make sure that bad products do not enter the process but the feedback method does not conform to the ‘total quality’ ethics of supplier relations. At Check 2, the product already has most of the value added. The cost of scrapping



the product (or adding to its cost but not its value through rework) is high and does not provide a base upon which long-term quality conformance can be built.

The only way to use SPC positively-based quality control is to break down the ‘process’ into the individual operations upon which a more informed and structured formal sampling method should be imposed. The positioning of the samples will give a clear picture of where the problems are occurring and allow proactive work to solve them. A better understanding and communication of quality standards will allow better judgements to be made regarding a pass or fail and formalizing the process will allow the smallest number of defective products to be produced prior to detection. More structured monitoring could include say, first-off of every batch then at every 50th produced; this will ensure that the process remains under control and should reduce the amount of scrap/rework. Of course, trained operators should carry out these quality inspections, as part of their normal work pattern. There should be no need to recruit more quality inspectors.

At any checkpoint, there is a need for a well-understood specification. H&H at present does not account for the varying end-product requirements and must introduce a specification to describe what a ‘fail’ or ‘pass’ is for each product/market. This should include attributes such as surface finish, scratches or dents, the type of polish finish, the feel of the action and so on and also the product variables: thickness of material, weight of the product, certain critical dimensions and location of assembly holes and processing variables such as plating time and heat treatment parameters.

The above describes the physical failings of the SPC method used at H&H. However, good quality is not related to purely physical factors: the work force, their involvement and attitudes toward any improvement package play a large role in its success. The process is only as strong as its weakest links! Therefore, apart from introducing quality measurement and control tools, the attitudes and objectives of the employees must also be changed. H&H have not encompassed this into their quality drive, the workforce is not viewed as being capable of checking measurements; and are still given output targets in standard hours, to qualify for bonuses. These workers will not be driven by a company drive for a quality product: they have been removed from the equation and have little understanding and involvement with the improvement requirement. This bonus for output is not conducive to moving towards producing a higher quality product.

Question 3. Apply the Gap model of quality diagnostics to the company

One of H&H’s problems is defining quality standards and relating them to customers’ requirements, expectations and perceptions. The underlying problem is that different markets have different requirements and upon receipt of the product, different customers may perceive the product in different ways. The perception of quality needs to be understood from the customer’s point-of-view because a quality product is only a quality product if it satisfies the customer’s expectations and perceptions. If a gap exists such that customer’s perceptions of the product don’t match their expectations, then problems may occur. There are four of these potential gaps that aim to describe all discrepancies between the supplier and customer relationship. These provide a focus with which to attack the problems. ‘The Gap Model’ (see chapter 12) includes:

• GAP 1: The customers specification – The product specification

• GAP 2: The management’s product concept – The product specification



• GAP 3: The product specification – The actual product quality

• GAP 4: The actual product quality – Image of the product (and customers’ expectations)

Applying this analytical tool to H&H shows the mismatches that exist between H&H and its two markets.

• Gap 1: Indicates any differences that exist between what the customer requires and what the company aims to produce. This gap is small here, because both the markets’ requirements are well understood, as are delivery patterns, price dependence and so on. The only possible weakness is the communication to the producers of the product as to what quality of product is required.

• Gap 2: Arises because of any internal differences between the management’s product concept and the internal specification. At H&H, it is understood that the two markets require different approaches to the product. The construction industry requires a high quality, innovatively-designed product at almost any price, but the UK retail market requires standard design of product at the right price. An understanding of the product concepts is shown in the company, but the communication of these by use of a specification is lacking. Little differentiation seems to occur on the shop floor to take account for the different requirements of the markets.

• Gap 3: Is, any difference between the finished products as received by the customer and its specification, that is, a conformance gap. This gap is small here as the specification is met at all costs, because regardless of the relevance of the specification or the cost involved in sticking to it, the product will leave as it is specified. These costs are shown by the rework and scrap costs, the delivery failure, the increased delivery costs and the representatives’ time spent smoothing out problems.

• Gap 4: Shows differences between the customers’ image of the product and the actual product. The problems in this area are the drivers for many of the problems occurring in the company. In both markets, with different needs for different levels of quality products, the H&H marketing team shows the same examples and catalogues, portraying a quality of finish that is not achievable by the production facility. This artificially increases the customers’ image of the product they are expecting. It is this that is causing rejection by the customer. This is the largest gap in the company and the one that is recognized and that the SPC tool has wrongly been induced to reduce.

H&H does not seem to have a problem with conforming to specification but they have a problem with understanding the specification they are setting for themselves. Most of their costs are associated with the unrealistic and unrepresentative market specification to which they produce.



The basis of specifications for the two markets

Product/Service feature Construction market Retail market

Functionality Smooth action, robust feel and heavy duty. Good safety margin (over designed?).

Just sufficient to do the job. Designed down to the minimum cost.

Appearance Upmarket, innovative prestige, unique, blemish-free.

Industry standard, domestic. Finish good on most visible surfaces.

Reliability Critical, at least during the first 10 years.

To industry norms.

Durability Long life, heavy duty, serviceable (e.g. if vandalized).

Medium life, domestic use. Not serviceable.

Recovery Ease of repair, spares availability, quick response to problems.

N/A.

Contact Critical technical relationship with architect/specifiers.

Commercial relationship with buyers.


Case exercise – Quality measurement of fraudulent fuels

After any product leaves the factory it becomes increasingly difficult to trace. Out in the global supply chain, products can be changed, adulterated or diverted to illicit uses. When this happens, it is the manufacturer’s profits and reputation that can suffer. For example, throughout the East African countries of Kenya, Uganda, Tanzania and Zambia, fuel is shipped in bulk across national borders. This opens up the possibility of two types of fraud. Tax exempt fuel destined for export can be diverted and sold internally causing loss of tax revenue to governments. More serious for the producer that taxed diesel and petrol can be diluted with tax-free paraffin and other low-tax solvents. Again, the tax is lost and also the manufacturer’s brand suffers by being associated with an adulterated product. Conventional systems for ‘marking’ fuels using dyes proved ineffective. The markers are easily visible and can be copied or removed easily, nor could they be used to provide a quantitative measure of the degree of any dilution. That changed with a new development from Biocode, who are specialists in high-tech security technology. Biocode marks fuels with their unique chemical markers using extremely low concentrations of parts per billion. This marked fuel can be detected with Biocode’s technology, employing a specific recognition molecule that detects and extracts the marker from the fuel. The test is not only accurate, but also can be used easily in the most demanding of field conditions. Using this method, genuine tax paid and tax-free fuel can be differentiated and the degree of any adulteration or dilution measured precisely. This type of ‘quality recognition’ technique can save millions of dollars annually through recovering stolen revenues, enhancing brand credibility and protecting corporate reputations, say Biocode.

Question

1. What other examples can you think of, where the ability to include ‘markers’ within any material could protect a company from fraud?

Teaching note – Quality measurement of fraudulent fuels

Question 1. What other examples can you think of, where the ability to include ‘markers’ within any material could protect a company from fraud?

Almost any material that can be stolen, copied or diluted could be protected in a similar way. However this does depend on the feasibility of checking materials or products. For example, counterfeit CDs could be easily detected but, although this does happen with large-scale fraud, it is unlikely that spot checks on your CD collection would be acceptable to most people. It is more likely that such marking will be useful where a company has to protect its brand (such as in the boxed example), or where safety is concerned. Diluted chemicals or non-authorized spare parts for trucks or aircraft could be checked in this way.


C H A P T E R 1 3

Case exercise – World-class operations in a developing country

South African Breweries plc is currently the third largest brewing company in the world. SAB Limited, the domestic arm of the organization, embarked on a process of improving operations capabilities through the 1990s, which was founded on three best operating practices:

• Process control – operator-driven quality measurement, control and corrective action.

• Process performance management – improvement in yield and reduction of waste in all its forms: motion, materials handling, processing, waiting, over-production, correction and inventory.

• Plant availability – reliability-centred maintenance (see next chapter) with operators performing simple autonomous maintenance (including condition monitoring), with specialists being utilized for specialist tasks and coaching.

South Africa’s history has resulted in an unusual mix of first- and third-world conditions in one country. It has been ranked relatively low in the Global Competitiveness Report published by the World Economic Forum. Of particular concern is the ranking for labour skills, where it was placed last. Historically, poor educational infrastructure had resulted in many South Africans being functionally illiterate. This obviously has huge ramifications for South African operations attempting to implement world-class operations on the shop floor. Attempts to improve the situation through part-time literacy training were of limited success and it was realized that successful implementation of the changes envisaged would result in some job modification and, unfortunately, some staff losing their jobs. Following a joint management/union international benchmarking investigation, it was agreed that SAB needed to implement new world-class work practices in order to remain internationally competitive, but that negatively affected employees would need to be helped through the transition. A visit to ILO in Geneva resulted in SAB and the union jointly instituting Project Noah – an initiative aimed at developing alternatives for redundant employees. The process involved ongoing formal administrative, business and psychological support for employees moving into alternative employment or entrepreneurial activities. Project Noah is now widely acknowledged as a great success, with past employees running a number of profitable SMEs, many involving the provision of non-core activities such as cleaning, building maintenance and catering services to other manufacturing organizations. The improvement programme has also enabled SAB to move towards world-class operations results, with the new work practices resulting in large improvements in production reliability and product quality.

Question

1. What are the particular challenges of implementing an improvement programme in a developing country?



Teaching note – World-class operations in a developing country

Question 1. What are the particular challenges of implementing an improvement programme in a developing country?

There are many challenges in managing operations in developing countries generally, but improving operations can prove to be particularly challenging. Most of these challenges relate to the way the business interacts with its environment. For example, problems could include a lack of transport infrastructure, political interference, market uncertainties, power shortages, interruptions to material supplies, a lack of support for maintenance, and so on. In the case of South African Breweries, much of the infrastructure is reasonably well-developed and political instability is low. However, the country's history had it that after years of political and trade isolation, markets opened up, exposing indigenous companies like SAB to international competition in a harsher environment. This would have become especially difficult when it was realized that improvement would mean both a reduction in the number of people employed (to reduce costs) and substantial retraining of those who remained. The company tackled this partly by providing a greater degree of fundamental skills training than one would normally see in a developed country. More innovatively, in respect of the workers who were made redundant, it did not abandon its responsibility towards their care and, jointly with the trade unions, helped them become independent business people.


Case exercise – Lombard Direct

One of the most significant trends in the financial services industry has been the growth in telephone access. Many financial services, such as banks, have developed a more focused approach to personal customers through 24-hour telephone access. The concept of telephone-based financial services is not new. It was first launched successfully in 1985 by Första Sparbanken in Sweden with a service called Första Direckt. This has become a blueprint for several similar services.

Typical of these ‘total access’ services is that described below:

‘You can call us 24 hours a day, 365 days a year. If you want to give us instructions to pay your gas bill on Christmas Day, that’s fine. If you want to tell us to transfer money at 2.00 a.m., that’s fine too. If you’re on the other side of the world in a different time zone you can still call us ... [we are] ... more than just a convenient telephone banking service. Your own Personal Account Manager will offer you a highly individual approach to both your day-to-day finances and your long-term financial planning’.

Financial services have developed networks of call-centre operations to support such products. Call-centre staff are linked to sophisticated telephone and computer systems where up-to-date information and customer requests are instantly available so that customers can be dealt with promptly and efficiently. The companies who offer loans and related services are part of this sector. Lombard Direct who must have one of the best-known telephone numbers in the UK: 0800 2 15000 is typical. This is based on their slogan ‘loans from 800 to 15 000 pounds’. Lombard Direct is a subsidiary of Lombard Bank, part of the National Westminster Bank group. Unsecured loans over the telephone constitute about 90 per cent of the company’s business, and other products include loans, house, contents and motor insurance, savings and credit cards.

The main call centre, in Rotherham, West Yorkshire, is a 24-hour operation, which operates every day of the year. The centre handles about two million calls a year. Monday is a typically busy day, when around 6000 calls are received. The call centre has around 200 ‘seats’ or desks for their ‘customer advisors’ (CAs) and employs around 250 full-time equivalent staff, most of whom work part-time. When potential customers call to request a loan, they are asked a number of questions to rate their creditworthiness and then allocated into a band that reflects their ‘credit rating’. This risk assessment affects the size of the borrowing allowed and the rate of interest to be charged.

From control to enabling culture

Sean Guilliam is the head of the call centre and has been working with the managers and team leaders to try to move from a ‘control’ culture to a more ‘enabling’ culture. Sean explains – ‘We have a great atmosphere here, people really enjoy their work and we have lots of great events to build our team spirit and also develop the business. The problem is that despite these efforts, the emphasis is still too much on control’.

One problem faced by Sean was how he should use ‘scripts’. Scripts are the set of questions and responses that CAs follow when they talk with customers and potential customers. They are often very carefully worded so as to avoid misunderstandings. ‘We need to move away from the need to follow a set script in a strict way that allows no discretion and try to work with the



customer to understand his or her needs and respond to them. We would also like to put ourselves in a position of being able to offer more of our products, where appropriate. This is difficult to do when you are using a script that is devoted to loans. The script is a useful base, of course. Indeed, there are several questions we are obliged to ask and information we have to provide to comply with the financial services laws. But there is a tendency to rely too heavily on the script. The problem is not people’s willingness to improve but our systems that encourage them not to. For example, the CA’s performance is partly assessed on tapes of their interactions with a customer. We call this “call analysis”. If they are judged as not having followed the correct procedure, it is qualified as a “non-standard tape”, which will affect their pay, and possibly even their contract.

We have five grades of performance, or “spot” levels, and CAs are reviewed every three months. Each level has a set of criteria based on six key measures. If someone attains a higher level for two consecutive assessments, they go up by one spot level; if they perform less well over three periods, they will go down. Going up a level can mean a significant increase in pay. Also, CAs need to get to level 2 before we will offer them a permanent contract, although I believe that we need to remove this barrier and put everyone on permanent contracts from the start.

We are making progress, however. Take, for example, our call analysis measure. In the past, it was just used as a means of assessing people. Now it is a developmental tool. We have identified nine different skills we expect to see, including greeting callers (what we call the verbal handshake), the general approach to the conversation, gathering information, and so on. We now have descriptors for each of these skills, defining what constitutes excellent, very good and good performance, or “an area for development”. People can see exactly what we are trying to achieve. The call analysis framework tries to assess CAs but also encourages them to do the right things, such as using the caller’s name, showing interest in, and respect for, the customer, not asking for the same information twice, ensuring that customers know all the costs involved and giving customers time to make their decisions.

Also, we now refer to the script as a call guide and use about thirty cards in a simple “flip-open” type of photograph album to help the CAs. But yet, when we get a new recruit, we still give them the cards and tell them to go home and learn them! The other issue is “cross-selling” other products. I compare loan conversions and insurance sales, for example. And, although we want a good ratio of insurance sales to loans, too high a ratio might mean that the staff are doing too hard a sell. We don’t want customers to be put off from using us again. The problem is in balancing flexibility with control, especially when a one per cent increase in insurance sales can contribute half a million to the bottom line’.

Questions

1. What do the five operations performance objectives (quality, speed, dependability, flexibility and cost) mean for call-centre operations such as Lombard’s?

2. What do you think are the main operations management issues faced by call-centre managers?

3. What do you think might be the main obstacles facing Sean Guilliam in trying to improve CA performance?



Teaching Note – Lombard Direct

The case describes a typical call centre in a financial service – Lombard Direct, who offer unsecured loans over the telephone. It describes the use of ‘scripts’, the way in which customer advisers (CAs) are encouraged to ask a certain set of questions. These scripts are there to ensure that certain information, for which there is a statutory requirement, is gathered and that a minimum level of courtesy and comprehensiveness is achieved by the CAs.

This case exercise is best used in the improvement section of an operations management course. It is particularly useful to highlight some of the difficulties in both increasing efficiency and allowing staff to develop their own skills. Central to the case is the issue of control. If scripts are used in a very prescriptive manner, there are some advantages. For example, it ensures that a minimum level of ‘service’ is achieved and it reduces the risk of misrepresentation or mis-selling. However, scripts are rigid and unless they become exceptionally complex, cannot cope with a high level of variation in customer requests. Furthermore, this allows little or no opportunity for staff to learn and develop or more importantly, contribute to improvement.

It is possible to emphasize this issue of staff development and link the case to issues of job design. Questions that would lead to discussion in this direction include the following:

• What are the trade-offs between commitment and control in the design of jobs in a call centre?

• How does the reward system used at Lombard Direct affect the motivation of staff to improve their system?

• What do you think are the conflicts between the aspirations and requirements of staff and the objectives of the business in a call centre?

Question 1. What do the operations performance objectives (quality, speed, dependability, flexibility and cost) mean for call-centre operations such as Lombard’s?

Quality – There are several aspects to quality of service in a call centre. Some are relatively easy to quantify, for example, the time a customer has to wait before speaking to a CA. Others are less clear but still quantifiable, for example, the extent to which the CA asked the appropriate (or obligatory) questions during the call. Some are easy to quantify but difficult to judge, for example, the actual length of the call time. Too long a time might mean that the customer is being kept on line longer than necessary, while too short a time might be indicative of curt conversation where the customer is likely to feel that the CA is not interested in their issues. There are other aspects of quality that are important but difficult to measure in any way. For example, the general tone of the CA, the level of friendliness, and so on. Yet, it is such aspects of service quality that may be particularly significant in establishing an appropriate relationship with the customer.

Speed – One can divide speed into a number of components. For example, the time taken to get through to an operator, the time taken to conduct the interview, the time taken to gain approval (or not) for the loan, the time taken before the money is available to the customer, the time taken for the relevant documentation to be processed and arrive at the customer’s home, the time taken for subsequent processing, and so on. To some extent, there will be a trade-off between



the risk the company is willing to take in granting a loan and the time it spends talking to the customer. After all, it does not take long to say, ‘No’.

Dependability – There are two obvious elements to dependability for Lombard Direct. The first is, in effect, availability. In other words, is there someone available in the call centre to answer queries, make decisions, etc. 24 hours a day, 365 days of the year? This is partly a function of how many staff the company has committed to the call centre at any point in time, but it is also a function of the reliability of the technology used by the company or the telephone system used, etc. The other aspect of dependability is the company’s performance in keeping its promises on the delivery of decisions or money.

Flexibility – As usual, there are a number of aspects to flexibility. New product or service flexibility means the ability of Lombard’s call centre to introduce new services. Mix flexibility means the ability of the call centre to cope with a wide variety of different types of query. Volume flexibility means the ability of the call centre to change its capacity at relatively short notice.

Cost – Some aspects of a call centre’s costs are related to the capital investment it has made. So, highly automated centres may have incurred large amounts of capital cost but reduced their operating costs. One example of this is the ‘call switching’ technology used by many call centres. This automatically detects the volume of calls coming into any centre and diverts calls from busy call centres to less busy ones, while at the same time making the information available to the CA’s screen, thus enabling them to cope with the diverted call. Other costs of the call centre will trade-off directly with the other performance objectives. So, for example, lowering some aspects of quality of service (reducing the amount of ‘friendly’ chat), allowing customers to queue up for a longer period, reducing the availability of staff, and limiting the range of queries with which they will deal, could all save the call centre money. On the other hand, lengthy calls by well-trained staff, who are employed in such numbers to make the service instantly available and who can cope with any kind of query or advice request, will give excellent customer service, but at a considerable cost to the operation.

Question 2. What do you think are the main operations management issues faced by call-centre managers?

One of the main issues has been described above, namely, the issue of the trade-off between customer service and cost. The real task of call-centre management is to do what it can to overcome as much of this trade-off as possible. To do this, it has a number of dilemmas to tackle.

Capacity scheduling – Too many staff at any point in time means extra expense to the business; too few staff means a loss of customer service because customers have to wait too long before their call is answered. The call switching technology described above could be a partial answer to this. Another solution could involve developing the ability to bring staff in at short notice if demand is higher than expected. For example, staff living locally could be ‘on call’ and paid a retainer for which they would be available to be brought in at a few minutes notice.

Staff training – Subtle and sensitive staff training may be able to reconcile the natural courtesy and helpfulness of staff with their ability to process customers efficiently. This is a difficult task but generally in call centres, some staff are better at it than others. The management task is to identify what makes some people better at this reconciliation than others and infuse those skills throughout the workforce.



Technology investment – Again, the call switching technology has helped many call centres. Other technologies such as decision support systems (see Chapter 8) can be used to help staff make decisions quickly and efficiently.

Question 3. What do you think might be the main obstacles facing Sean Guilliam in trying to improve CA performance?

In addition to the issues described above, it seems that the main problem Sean has is his reward stem. While this emphasizes the more prescriptive aspects of the job (such as sticking to the script) it will be difficult to allow staff to contribute to the improvement process.


Case exercise – Raydale Conference Centre

(Note, this case is a simplified version of the Ferndale Conference Centre case that is the Active case on the CD material associated with Chapter 13)

‘Well, I suppose it’s a mixed review: there are some things where we come out really well; on the other hand, there are clearly areas where we need to improve’.

Alan Ray was speaking after the publication of an article in the Conference Centre Journal. Alan was the owner and General Manager of Raydale Conference Centre. He had bought the centre, which used to be a country house hotel, just over 2 years before and was broadly pleased with the business he had attracted so far. The centre had managed to establish a presence in the fast growing and profitable conference market. His customers (usually large companies) would book some or all of his facilities for their sales conferences, training events and meetings. These events could be anything from one-day’s duration through to 2 weeks’. Raydale Conference Centre, together with three others in the area, had been reviewed by the Conference Centre Journal, a summary of whose findings is shown in the Table.

Table Reviews of conference centres

Factor Raydale Miston Hexley Stannington

Price Average High Average Low

Size of menu Excellent Good Good Poor

Quality of food Good Excellent Good Acceptable

Quality of room Very good Good Good Good

Courtesy of staff Very good Good Good Poor

Flexibility to accommodate special needs

Poor Very good Good Good

Documentation errors Occasional None Very few None

Special off-peak price discounts No Yes Yes Yes

Room availability Good Very good Poor Poor

Alan was more worried by some findings than others:

‘Not everything is of equal importance, of course. In our part of the business, probably the two things that customers value particularly are courtesy of staff, where we score very well, and the flexibility to accommodate their special needs, where we score very badly. I think there are two reasons for this. First of all, our conference rooms are relatively small and we have difficulty in accommodating very large groups. The other reason is, quite frankly, that some of our staff are not used to coping with the unexpected problems. Price is only slightly less important to our customers but we seem to score reasonably. What worries me more is that I know that our costs



tend to be higher than those of our competitors. Given the level of business that we are doing, our profits are less than those being achieved by our competitors. Less important than price comes a middle range of factors that, although not of prime importance to customers, will certainly irritate them if we are not up to standard. Room decor, room availability, the quality of our food and document errors all come into this category. I am particularly cross about the way they have reviewed document errors. I suppose they talked to our customers and must have got one where we had made mistakes with their invoices or something. I’m sure a wider survey would have revealed us to be no worse than our rivals. Quite frankly, I am unconcerned about our performance in terms of the size of our menu or our ability to give special off-peak price discounts. In our type of market, neither of those factors rates particularly highly with any customers’.

Questions

1. On what competitive factors would you advise Alan to concentrate if he wished to improve the competitive performance of his operation?

2. Do you think he is right to feel aggrieved by his operation’s poor showing on the document errors factor?

3. Is he right to be unconcerned about the size of menu (i.e. the range of different dishes offered on his standard menu) and his policy of not offering off-peak price discounts?

Teaching note – Raydale Conference Centre

Question 1. Where should Alan Ray concentrate his improvement efforts on?

In order to answer this question it is necessary to understand both the relative importance of the various factors that could be improved and how good the operation is compared to its competitors. One way of doing this is by using the importance–performance matrix.

We have some indication of the manager's view of the way in which customers see the relative importance of these factors through his comments in the case. The table below lists the factors which are given in the case and allocates a rating for each of them using the nine-point scale used by Slack et al., based on the manager's comments.

Factor How important is it to customers? Rating

Price

Size of menu

Quality of food

Quality of rooms

Courtesy of staff

Flexibility to accommodate special needs

Documentation errors

Special off-peak discounts

Room availability

‘only slightly less important’

‘doesn't rate highly’

‘middle range’

‘middle range’

‘customers particularly value’

‘customers particularly value’

‘middle range’

‘doesn't rate highly’

‘middle range’

2

7

5

5

1

1

5

7

5



1

2

3

4

5

6

7

8

9123456789

LOW HIGH

GO

OD

BA

DC

urre

nt

perf

orm

ance

Importance of each performance factor

F

C

The importance-performance matrix for Raydale

Price

Size of menu

Quality of food

Quality of rooms

Courtesy of staff

FlexibilityDoc errorsOff-peak

discounts

Room availability

X

X

XX

X

X

X

X X

1

2

3

4

5

6

7

8

9

1

2

3

4

5

6

7

8

9123456789

LOW HIGH

GO

OD

BA

DC

urre

nt

perf

orm

ance

Importance of each performance factor

F

C

The importance-performance matrix for Raydale

Price

Size of menu

Quality of food

Quality of rooms

Courtesy of staff

FlexibilityDoc errorsOff-peak

discounts

Room availability

X

X

XX

X

X

X

X X

The performance of the operation against competitors can be judged by looking at the Table in the case exercise. Using the nine-point scale described in Slack et al., each factor can be allocated a rating.

The figure shows the profile of both importance and performance for the conference centre together with the position of each factor on the importance–performance matrix. One can see that the issues of ‘flexibility to cope with special customer needs’ and ‘documentation errors’ are the two areas where improvement would have the greatest effect on the operation's performance.

Question 2. Should Alan feel worried about his document errors?

Alan may indeed be unlucky in the fact that the magazine picked up a couple of dissatisfied customers on this issue. However, documentation error is a qualifying factor, which means that a less than satisfactory performance can lose business for the organization. If nothing else, it merits a further investigation.

Question 3. Is he right in being unconcerned about menu size and no off-peak discounts?

If fact, these two issues are very different. Looking at their position on the importance–performance matrix, ‘size of menu’ comes in the ‘excess’? area. This means that if customers start to rate this as more important than they do currently, it will move to the right into the ‘appropriate’ area. This would pose no threat to the overall performance of the operation. However, the factor ‘off-peak discounts availability’ is in the general ‘improve’ area. If customers started to find this more important, it would move to the right into the ‘urgent action’ area. In other words, this factor is more significant in terms of how it could affect the performance of the conference centre as a whole.


Case exercise – Xerox benchmarking

Possibly, the best-known pioneer of benchmarking in Europe is Rank Xerox, the document and imaging company, which created the original market for copiers. The virtual monopoly the company had in this sector almost became its undoing, however. Spurred by the threat from the emerging Japanese copier companies, an in-depth study within the company recognized that fundamental changes were needed. To understand how it should change, the company decided to evaluate itself externally – a process which became known as competitive benchmarking. The results of this study shocked the company. Its Japanese rivals were selling machines for about what it cost Xerox to make them. Nor could this be explained by differences in quality. The study found that, when compared with its Japanese rivals, the company had nine times more suppliers, was rejecting ten times as many machines on the production line and taking twice as long to get products to the market. Benchmarking also showed that productivity would need to grow 18 per cent per year over 5 years if it was to catch up with its rivals.

Rank Xerox sees benchmarking as helping it achieve two objectives. At the strategic level, it helps set standards of performance, while at the operational level, it helps the company understand the best practices and operations methods that can help it achieve its performance objectives. The benchmarking process developed by Rank Xerox has five phases.

Its experience of using this approach has led Xerox to a number of conclusions:

The first phase, planning, is crucial to the success of the whole process. A good plan will identify a realistic objective for the benchmarking study, which is achievable and clearly aligned with business priorities.

A prerequisite for benchmarking success is to understand thoroughly your own processes. Without this, it is difficult to compare your processes against those of other companies.

Look at what is already available. A lot of information is already in the public domain. Published accounts, journals, conferences and professional associations can all provide information that is useful for benchmarking purposes.

Be sensitive in asking for information from other companies. The golden rule is: ‘Don’t ask any questions that we would not like to be asked ourselves’.

Questions

1. What kind of information did Xerox discover in its benchmarking study?

2. Of the five performance objectives (quality, speed, dependability, flexibility, cost) which do you think are the most difficult to discover about your competitors’ performance?



Teaching note – Xerox benchmarking

Question 1. What kind of information did Xerox discover in its benchmarking study?

The benchmarking study revealed information about their competitors’ performance as follows.

Cost – Although few direct details of costs seem to have been revealed, it was clear that competitors had lower costs because they were selling their products for what it cost Xerox to make them.

Quality – Ten times as many mistakes were being discovered on Xerox’s lines than on those of its competitors.

Supply chain management – Xerox had nine times the number of suppliers to manage than its competitors.

Speed – Xerox was taking twice as long to design and make its new products from concept through to market launch.

Question 2. Of the five performance objectives (quality, speed, dependability, flexibility and cost) which do you think are the most difficult to discover about your competitors’ performance?

The fine details of cost will always be difficult to discover. Cost is measured in different ways by different companies anyway and is likely to be very confidential information. However, a broad idea of competitors’ costs can be gained by looking at who it buys its parts from, how many people it has, how much of its activities are performed in-house as opposed to out-house, and so on. Quality, speed and dependability are usually easier to benchmark. Often, your customers are also customers to your competitors. Your customers will soon tell you if your quality, speed and dependability are substantially below that of your competitors. Also, quality can be partially judged by buying your competitors’ products and testing them. The most difficult thing to find out about your competitor is perhaps, flexibility. Often, your competitor will not know how flexible it is because flexibility is a complex and multi-dimensional aspect of operations performance.


C H A P T E R 1 4

Case exercise – Better late and happy than just late

Fiona Rennie sat and enjoyed her coffee at the Warsaw airport. Returning home to the UK after a week of energetic academic research, she was pondering her over latest project – how service businesses have to be more aware of their customers’ needs and in order to compete, be able to offer a high level of customer service, especially if the intended delivery package has been compromised in some way.

She knew that airlines, especially, had well-developed recovery procedures. In the case of failure, the airline could activate various levels of preconceived and ad hoc customer care.

Warsaw airport was busy with passengers waiting to board the afternoon British Airways flight to London Heathrow, the anticipation growing as they passed through the scanners and walked down the aisle onto the aircraft. Safely in their seats, the 200 travellers were soon dismayed to hear from the captain that there was a slight mechanical problem and that their take-off would be delayed by approximately half an hour. This delay did not merit having to disembark and complimentary drinks were soon on the way round.

Inevitably, the half-hour delay soon blossomed into a bigger problem and an apologetic captain announced that he felt that passengers would be better placed, waiting for the repair to be completed, back in the departure lounge and please could they take all of their hand baggage off the plane with them. A few grumbles and mutters about connections at Heathrow and other missed appointments could be heard – but generally the mood was fairly genial and the airline staff went out of their way to try to accommodate passenger queries. One representative escorted a worried passenger off to the airline office to allow her to phone home and advise her family of the late departure. She had spent all of her Polish ‘holiday money’ and so couldn’t use the standard phones in the departure area. After an hour in the departure lounge and with no definitive answer available on the estimated take-off time, the airline moved into the next stage of its ‘customer-placating programme’ by providing meal vouchers for everyone and directing them to the airport restaurant. As the mood quietened and passengers began to question further just how long they were going to have to wait, the airline announced the departure time – some 4 hours behind schedule.

The flight itself went according to plan and the cabin crew walked up and down the aisles answering, where possible, queries on connecting flights and subsequent travel arrangements.

On arrival (finally) at Heathrow, the captain, who had been very apologetic throughout the whole process, bade the passengers farewell, expressing his concern at the late arrival and hoping that it had not inconvenienced them too much. For some, though, the four-hour delay meant considerable problems in trying to reach their onward destinations that evening and the airline sales desk was soon busy with anxious passengers looking for help. Several were to be put up in a local hotel, courtesy of the airline, leaving them to recommence their travels, fresh, the next morning. Others did not have to go so far and to stay overnight in the United Kingdom’s capital city would actually mean more inconvenience the following day. Unperturbed, the airline’s Customer Service Manager quickly took it upon himself to arrange chauffeur-driven transport for these people, ensuring that the inconvenience caused by the delay



was effectively minimized. The priority was not necessarily to deal with each customer as quickly as possible, but to ensure that each person was given a solution that suited his or her needs. No awkward questions asked – only ‘How can I help you’?; ‘What can I possibly do to ensure that given the choice you will fly again with our airline’?

Fiona was certainly impressed, and although very late back, glad to be safely home as planned.

Questions

1. Is Fiona a particularly tolerant person or was she right to be impressed by the way British Airways reacted?

2. Draw up a ‘failure plan’ for delays of this type. How could it help the airline to improve its recovery procedures further?

3. When are failure and recovery particularly important to an operation?

Teaching note – Better late and happy than just late

Question 1. Is Fiona a particularly tolerant person, or was she right to be impressed by the way that BA reacted?

We do know that Fiona is a researcher with interest in customer service. Academics tend to be disproportionately critical in their area of expertise, so BA must have done a lot of good things to impress her! There is ample evidence of a staged approach to apology, which is designed to minimize stress and uncertainty. The passengers were kept informed of progress and their convenience was always first. For example, they were kept on the plane to begin with, to avoid the effort of disembarkation, and were taken off only when longer delays were predicted. Opportunities to apologize and empathize were used effectively, but not excessively. Above all, all the contact staff went to great lengths to provide whatever the passengers needed, going far beyond symbolic atonement, even into the area of expensive chauffeur-driven transport on arrival, and so on.

Fiona is certainly right to be impressed, but would not this have been an extremely expensive recovery? Could BA have ‘got away’ with less? Much less care and provision would have been possible, but the reaction of customers could lead to memorable scenes of conflict and hostility. Although insured customers could claim compensation, this does not absolve BA from the need to leave positive memories of the incident, particularly as they would then be more likely to fly BA again.

Question 2. Draw up a ‘failure plan’ for delays of this type. How could it help the airline to improve its recovery procedures further?

Students will probably use the four-stage model described in the chapter as a basis for their plan. These could be discussed as follows:



Discover

In the case of delayed departures as described in the case, the pilot is often the first crew member to know of the delay and its probable duration. The facts surrounding the technical problem have to be filtered and translated before being communicated to passengers, to avoid unnecessary alarm. This process must be well planned and forms part of flight deck crew training. Emergencies in flight (such as engine fires) must be ‘translated’ into layman terms to avoid panic and hysterical reactions. All technical eventualities on the ground and in the air are planned from a technical and communication point of view

Act

In general, passengers trust the professionalism of the pilot, and hence he/she (rather than cabin crew) is usually chosen to make announcements concerning technical issues such as delays and turbulence. The emphasis in this case is on informing customers, so planning must include procedures for obtaining information on flight connections, etc.

The need to provide information continues after landing, and plans must be in place to provide customer support staff in sufficient numbers, either at departure or arrival situations.

Learn

The air travel industry has made enormous progress in reducing the frequency and duration of technical delays. Much of this has come from better design of aircraft and more efficient maintenance procedures. Even delays caused by weather conditions have been reduced by the application of new technology. Severe delays are therefore less common, but provide the opportunity to learn how to recover better. Because they are less frequent, generous compensation and atonement should be more affordable, but should be planned for and tested just as for any new product or service. Each incident should be carefully monitored to record the facts: how many customers were involved, the quantity and nature of complaints, the cost of recovery, and so on. Follow-up calls to customers can provide feedback for further process improvement.

Plan

The failure plan can be refined periodically based on the evidence from the above Learn stage. Students invariably propose various improvements to the process described in the case, but not all are practical and some are very costly. Empowerment must have its boundaries: a good debating point!

Question 3. When are failure and recovery particularly important to an operation?

Repetitive failure in an operation is often seen as a sign of poor management of processes. Some organizations are particularly successful at preventing avoidable mistakes through fail-safe devices (Poka Yoke), and others prevent mistakes being seen by customers (buffered out by inventory and inspection processes). Customer processing operations generally do not have these protections and failure may be, at least in part, beyond the control of operations. For example, the disruptive effects of weather on travel and leisure events, and the effects of unruly customers on others.



In these cases, good recovery procedures can leave a lasting positive impression on customers' perceptions. Recovery does not just happen; it must be planned for, and staff must be trained to be competent at it. Some organizations even make a whole business of it: the motoring organizations such as the Automobile Association (AA) and the Royal Automobile Club (RAC) in the UK provide recovery services for motor manufacturers' customers. Breakdowns in the first few years of car ownership could be unpleasant and time-consuming experiences, but through efficiencies of scale and carefully planned processes, the motoring organizations provide tailor-made services for the manufacturers. The recovery services provided are both office-based (information processing) and material processing (getting the car working again). Similar businesses exist in the consumer durables (TV, hi-fi, washing machines, etc.) markets.

Food manufacturers have specialized departments to deal with complaints. It is critical for them to learn from failure and to avoid adverse publicity. Dissatisfied customers have the potential to refer their complaints to official regulatory bodies and to the media.


Case exercise – Failed philosopher

Sleek, fast and smooth, the TGV trains of France’s SNCF rail network look more like aircraft than the traditional train. They provide a service that carries passengers throughout Europe at speeds in excess of 175 mph. Inside too, the trains show the influence of air travel. Seats are wide and comfortable with space for leg-stretching relaxation. The French press described the TGV as being like ‘an airbus on rails’. SNCF also decided to emulate the airlines by buying a high-tech seat reservation and ticketing system, which they named after the Greek philosopher Socrates. That was when their problems began. Design flaws in the booking systems software, combined with inadequate training of SNCF staff, caused chaos for months after the system was introduced. Socrates refused to believe in the existence of some places. Suddenly, it refused to issue tickets for Rouen or Barcelona, insisting that neither city existed. It also failed at times to recognize the existence of several of the trains that ran between Paris and Lyon. As a result, the trains made the trip with only four passengers on board. However, these straightforward system design errors have been compounded by over-complexity of some parts of the system: the automatic ticket-vending machines often stand unused by passengers because they have given up trying to understand how to use them. The graffiti outside the Gare de Lyon station reads ‘One hour from Lille to Paris ... one hour to buy a ticket!’ Although the problems were eventually sorted out, the reputation of what was essentially a fast and efficient operation took longer to recover.

Questions

1. This case contrasts two operations processes that affect overall quality from a customer’s point of view. What are these two operations processes and what other operation might affect the customer’s overall perception of quality?

2. Why did the ticket-issuing and reservations system cause such chaos?

Teaching note – Failed philosopher

Question 1. This case contrasts two operations processes that affect overall quality from a customer’s point of view. What are these two operations processes and what other operation might affect the customer’s overall perception of quality?

The two processes in the case are, first, the actual train network itself which connects various parts of Europe, and second, the system which reserves seats, issues tickets and schedules capacity on the trains. The first is a ‘customer processing’ system. The other is primarily ‘information processing’. The whole business will contain other micro operations in addition to these two. For example, it will need a maintenance operation to clean and maintain both the rolling stock and the tracks (very important with such fast trains). This is a ‘materials processing’ micro-operation because it processes the trains and the track. There may also be other micro operations such as those that produce and serve food and beverages on the train.



Question 2. Why did the ticket-issuing and reservations system cause such chaos?

The chaos occurred for two reasons. First, the system acted as a ‘gateway’ for passengers wishing to enter the system. If the system did not recognize trains being there or could not efficiently produce tickets, passengers would find it difficult to enter the rail network system itself. Second, the system controlled much of the activities of the trains and rolling stock. If the system does not programme a train to travel on a particular route, that will be just as disruptive as the train breaking down.


Case exercise – Keep left

For over half an hour, the pilot of an Airbus A320 jet with nearly 200 people on board fought to control his aircraft, which did not seem to be responding to the controls. The aircraft would not turn left no matter what the pilot tried. Eventually, he managed to make a high-speed emergency landing at the second attempt. Fortunately, no one was hurt, but the pilot was not pleased to find out that the cause of the near-disaster was that engineers had forgotten to reactivate four of the five spoilers on the right wing. Spoilers are the panels that help the plane to roll and hence turn. The official air accident investigation report on the incident blamed ‘a complex chain of human errors’, not only by the engineers but also by the pilots who had failed to notice the problem before take-off. The A320 is a ‘fly-by-wire’ aircraft where computer-controlled electrical impulses activate the hydraulically powered spoilers and surfaces that control the movement of the plane. When the aircraft went for repair to a damaged flap, the engineers had put the spoilers into ‘maintenance mode’ to block them off from the controls so that they could be worked on independently. They had then forgotten to reactivate them when the plane was needed urgently to replace another aircraft. According to the official report, the engineers were guilty of:

‘Simple acts of neglect or ignorance. Their approach implied that they believed there were benefits to the organization if they could successfully circumvent problems to deliver the aircraft on time. With the introduction of aircraft such as the A320 it is no longer possible for maintenance staff to have enough information about the aircraft and its systems to understand adequately the consequences of any deviation. The avoidance of future unnecessary accidents with high-technology aircraft depends on an attitude of total compliance within the industry. If a check has previously been carried out numerous times without any fault being present, it is human nature to anticipate no fault when next the check is carried out’.

Questions

1. Why should fly-by-wire aircraft pose a more complex maintenance problem than conventional aircraft, which have a physical link between the control and the flaps?

2. If you were the accident investigator, what questions would you want to ask in order to understand why this failure occurred?

Teaching note – Keep left

Question 1. Why should fly-by-wire aircraft pose a more complex maintenance problem than conventional aircraft, which have a physical link between the control and the flaps?

The advent of fly-by-wire controls allows for more sophisticated linkage between the aircraft’s control panel and the physical moving parts of the aircraft. So for example, the engineers who put the spoilers into ‘maintenance mode’ probably could not have done the same thing if the controls had been physically connected. Or, if they could disconnect the two, it would have been obvious what they had done. As the accident report stated, ‘It is no longer possible for maintenance staff to have enough information about the aircraft and its systems’. Increasing sophistication means greater potential for mistakes to happen. However, it also means a greater



potential for the type of error monitoring and diagnosis that can prevent catastrophic errors occurring.

Question 2. If you were the accident investigator, what questions would you want to ask in order to understand why this failure occurred?

Probably, three sets of issues are worth questioning more closely. This first involves the training of maintenance engineers and the checklists they need to go through. The intention would be to prevent maintenance engineers making any mistakes. Simple failure prevention or fail-safe mechanisms may be appropriate here. The second set of questions would concentrate on the automatic computer-based checks that the system itself could do after any maintenance intervention. Presumably, the fly-by-wire systems greatly increase the ability of systems to check themselves whether everything is in working order. The third set of questions could involve making sure that the pilots and other aircrew, fully check all systems before they take-off.


Case exercise – Leading light

In January 2001, an electrical firm in Suffolk, England, lost something that had been part of their lives (or at least the male employees’ lives) for 70 years. The light bulb in the men’s lavatories finally burnt out. Brian Stopher, a manager at the firm said, ‘It is actually a little bit sad. I joined the firm when I was fifteen (he is now sixty three) and it was there then. Over the years, when you went into the toilet, you’d occasionally look up, look at the bulb and think how long it had been there’. In fact, the twenty five watt Edison bulb had survived traumas that should have caused it to fail much earlier. Bombs dropped in the Second World War had devastated buildings in neighbouring streets, shaking buildings in the whole area but leaving the bulb intact and working. Also during the 1950s, the army regularly fired its field guns in the neighbouring park land. The bulb was not even affected by the less than quiet punk band the Clash when they played at a neighbouring venue and caused residents to complain that their windows were being shaken by the noise. When it did eventually fail, the firm had it mounted on a stand and gave it a place of honour. More remarkable, they tracked down the original supplier of the bulb. He had also survived. He was ninety 9 years old and still remembered selling them.

Question

1. Does this incident invalidate the use of failure data in estimating component life?

Teaching note – Leading light

Question 1. Does this incident invalidate the use of failure data in estimating component life?

This (very) short case exercise is useful as a class discussion point. It emphasizes the (in this case very) probabilistic nature of failure statistics. The answer, of course is….

No! All failure data is probabilistic. In other words, it indicates the chance that something will fail rather than the certainty that something will fail. Most failure probability distributions have an upper ‘tail’ that approaches zero asymptotically. In other words, there is very small but finite likelihood that a product will last for very long periods indeed. This was such a bulb!


Case exercise – Long-distance monitoring

Monitoring the performance of equipment at a distance was once confined to checking up on computer-based systems. Internet technology has changed all that. It is now far easier to link up widely distributed equipment with a central monitoring and diagnostics facility. Here are two (very different) examples.

Rüdiger Kapitza is the chairman of Gildemeister, a German machine tool company. With an advertising campaign based on images from Star Trek, the company has launched a service where customers can link their Gildemeister machines through the internet to one of three special service centres. For an initial payment and a small monthly subscription, customers can download new software from the service centres as well as have their machines checked and talk to the company’s technical experts about any programming or mechanical difficulties. Given that machines can cost up to [€]3 million, it is important that they are kept running. Says Mr Kapitza:

‘This is why customers are willing to pay extra for a service in which we can sort out their problems. In 30 per cent of cases, using the service centre concept, we can fix machine breakdowns in less than one hour’.

Doctors (the maintenance engineers of the human body) have long complained that a patient’s vague description of his or her symptoms, or even a rushed examination by an overworked doctor, is an inadequate basis for proper diagnosis. This may change for patients with access to a new product from LifeShirt.com, an internet-based telemedicine company. The ‘LifeShirt’ is a comfortable washable garment that can be worn at home, work or play. Embedded sensors monitor over 35 physical and emotional signs derived from trends in heart activity, breathing pattern and blood pressure. The data is stored in a pocket-sized digital recorder. At the end of each monitoring session (up to 24 hours), the record is placed in a PC docking station and the data is uploaded via the internet to the LifeShirt.com data hub. It is then analysed by physicians and technicians and posted to a secure website for review by patients and their physicians. The company plans to develop products with real-time transmission of data in the near future. The company says its products enable doctors to see a ‘movie’ of a patient’s physical signs instead of a ‘snapshot’. It also allows postoperative outpatients to be monitored 24 hours a day.

Question

1. What are the advantages of such ‘distance monitoring’ to the people or operations being monitored, and to those doing the monitoring?

Teaching note – Long-distance monitoring

Question 1. What are the advantages of such ‘distance monitoring’ to the people or operations being monitored, and to those doing the monitoring?

The advantages to the people or operations being monitored are largely connected with convenience, quality and security. First, it is convenient to be monitored from a distance because the people doing the monitoring do not have to visit those being monitored or vice



versa. This saves everyone’s time. Second, the quality of diagnostics based on data taken over a prolonged period should presumably be higher than the conventional ‘snap shot’ diagnoses. Third, the systems or people being monitored have the peace of mind that they are connected to someone who can detect problems which they themselves could not.

From the point of view of those doing the monitoring, as well as increased customer (or patient) satisfaction, monitoring offers the potential to increase the quality of service while reducing costs. Quality is higher because of the extended period of observation. Costs are lower because of the reduction in time necessary to do the monitoring.


C H A P T E R 1 5

Case exercise – The London Eye

(A shorter version of this case exercise is included in the study guide associated with this chapter on the accompanying CD to the text.)

The British Airways (BA) London Eye is the world’s largest observation wheel with a diameter of 135 m, carrying 32 capsules of up to 25 people on a half-hour continuous ride above London. Its unique engineering design comprises a hub, rim and spokes construction similar to a giant bicycle wheel, supported on an arm cantilevered out over the Thames, just downstream of the Houses of Parliament. The air-conditioned capsules, featuring curved laminated glass, were to be fixed outside the rim, each requiring a motorized levelling system. The whole structure had to be designed to withstand high winds and to damp any natural-frequency resonance in the elegant and slender wheel structure. The extremely challenging technical complexity of the project can be appreciated when one considers the scale of the parts: the wheel rim weighs 800 tonnes, the hub and spindle are 330 tonnes, the cables (spokes) total 100 tonnes and the legs are 400 tonnes. It was decided to manufacture the wheel in sections and assemble it horizontally on platforms in the river. The subsequent elevation of the whole wheel and leg assembly would attract worldwide press coverage, raising public awareness of London’s latest tourist attraction, which was to be completed for 31 December 1999, deriving the unofficial name ‘The Millennium Wheel’.

The technical complexity and scale of the London Eye were mirrored by an equally difficult project management task. Although the original design had been conceived in 1994, and BA had become involved as the sponsor in 1996, real progress had been dogged by technical, safety-related, commercial and contractual difficulties. By August 1998, some of the original aesthetic design concepts had been compromised by the current engineering design, £5 million had been spent to date, and the opening date had been put back to Easter 2000! However, Bob Ayling, then the Chief Executive of BA, was adamant that the project had to be completed by the turn of the century.

In September 1998, Mace Ltd, a large firm of international consultants and the original project advisor to BA, was contracted to take full design and project management responsibility, with a brief to develop plans and processes to meet BA’s end date. A new project team was formed comprising Mace, the original architect, the Tussauds Group (selected by BA as the operator of the completed attraction), marine engineers, independent checking engineers and major component-manufacturing contractors. Much of the original compromised engineering design was rejected, but key long lead-time tasks were prioritized in the new design to allow early commencement of civil engineering works. The first two months of the project were used to resolve most of the outstanding technical and operational problems. Over the next few months, contracts were placed with manufacturers throughout Europe: for example, the French ski-lift contractor Poma would design and make the 32 capsules, the Dutch firm Hollandia was responsible for the rim segments, and so on. The overall budget, originally for around £11 million, was reset to £20 million.

The main site works Gantt schedule was prepared, comprising 149 major site activities, grouped into work packages such as civil engineering works, river works (for example, piling and platforms), wheel assembly, capsule fixing and so on. Work was scheduled to begin in week 2



(11 January 1999) and to be completed in week 50. The Gantt chart identified the dependencies and the critical path. The rim segments were to arrive sequentially on barges from late May to mid-July. Task 89, scheduled for week 34 (23 August), was ‘Up-end wheel’, the critical and technically complex, crucial step of pulling the whole assembly upright. This was to be undertaken under the full scrutiny of the world’s media!

Cumulative small delays in preparing the wheel assembly resulted in some programme slippage, and phase 1 of the lift (planned to tilt the wheel by 30 degrees) was actually first attempted late in week 36. On Friday, 10 September, five of the anchor blockheads (which secured temporary stabilization cables to the rim) failed under unexpected lateral load, and the lift was stopped. Press releases explained the effect on the project…

‘Other works are being rescheduled in an attempt to keep the programme on track. The construction and commissioning of components like the boarding platform, lighting and assembly of the viewing capsules have been brought forward’.

The Mace project director, Tim Renwick, said: ‘The floating crane equipment has been off-hired and no definite date has been given as to when it will be needed again. Although the wheel lift is critical, it has to be done safely’.

The BA spokesman added: ‘We do not yet know the likely impact on completion ... we think the target date is still possible, but it is too early to say’.

The anchors had to be re-designed, made, shipped, fitted, connected to the cables and tested, culminating with final tests on Friday 8 October (week 40). The lift began on the Saturday at the rate of 35 cm every five minutes and was completed in week 41.

On Monday, 25 October, the structure was ‘occupied’ by 10 men from a Basque environmental group protesting against dam projects in the Itoitz valley in Spain and the Narmada valley in India. Eight were quickly removed and arrested, but two men, Bibi and Dany, remained at the top, spending one night in a mountaineers’ tent at 135 m, surrounded by protest banners. All work on the wheel assembly was stopped. A Mace spokesperson said: ‘This is a civil construction site, not a high-security building. Short of having dogs and barbed wire, there is little we could do!’ The two protestors came down on Tuesday lunch time, having delayed the work by 2 days.

Work proceeded through November and December, under the eagle eye of the press. Capsules were fitted, and the site was prepared for the visitors. Valuable time was made up by carefully selected ‘crashing’ of selected activities. The target of 31 December for the first party of important guests and prize winners looked increasingly achievable, so invitations were sent out. By 9.00 am on 30 December, the commissioning team had completed all but the last 10 hours of their 500-hour safety testing and inspection work when disaster struck! The safety clutch on one capsule failed to release during a simulation of the fail-safe mechanism. This clutch is intended to release the capsule levelling mechanism in the event of a power failure to the capsule, allowing it to hang level under gravity. The failure had resulted in the automatic monitoring system shutting down of the whole system.

The 10-person project team met and decided to postpone the preview ride. The press release emphasized that safety was always the first priority.

The BA London Eye passed all tests in mid-January and began taking paying customers in February. It is expected to serve 2.2 million customers in the first year and is firmly established



as a leading tourist attraction. The team was proud of what had been achieved, as explained by Tim Renwick:

‘No one had ever done anything like this before; it is unique and technically innovative. Our success has been the result of many things, not least the enthusiasm of the team. We needed to develop entirely new construction processes from scratch. We talked to the local community and got their buy-in to the project, despite the difficulties it presented them at times. We had to interface closely with the sponsor, BA, especially at times of difficulty. While always having the target date in sight, we were never prepared to compromise safety’.

Questions

1. How would you characterize this project?

2. What was the ‘project environment’ for this project?

Teaching note – The London Eye

The BA London Eye observation wheel construction project not only was extremely technically challenging but also had unusually demanding project management requirements. In particular, the highly visible central location of the site adjacent to the Thames meant that the project environment would be subject to scrutiny (and potential interference) from many external stakeholders. The case (along with suggested video materials) allows students to consider these project environment issues, and to suggest strategies that could be adopted to minimize their impact on completion time and costs. The case also allows students to apply the typology of projects model and to suggest the project definition of this project.

Visits to the completed wheel, and/or viewing of the suggested videos, can provide a rich mix of learning opportunities.

Question 1. How would you characterize this project?

This is a fairly straightforward first question, and any useful set of characteristics could be used. However the following points are worth including.

Uncertainty

This is clearly a project with considerable uncertainty, in terms of cost, schedule and technical issues; taking each in turn…

• Cost: The case indicated that the original budget of £11 million had to be revised to £20 million at the commencement of the new contract (under Mace Ltd’s management). Students will (probably) quickly begin to realize that even the £20 million was an ‘order of magnitude’ estimate, as the actual costs will be influenced by ongoing technical and environmental considerations that could not possibly have been addressed at the time of this estimate. For example, the original engineering design had recently been rejected, and replacement engineering work was continuing, with only time-critical activities being given priority.



• Schedule: At first sight, this was the least uncertain element of the project, since Bob Ayling had insisted on the 31st December, 1999 completion, and this was clearly the top priority for the project managers, Mace. However, as is clear from the case, many of the activity times could be affected by technical and environmental issues, so the detailed schedule would certainly be subject to very significant change. Most students will understand that many of the work packages included technical tasks that had never been done before; they were truly unique and previous experience would only provide the most limited indication of likely activity time. The schedule was therefore, in practice, highly uncertain.

• Technical Issues: As outlined above, there were many pioneering technologies involved in the project, for example,

(a) World’s largest observation wheel

(b) Continuous rotation and boarding

(c) Cantilevered support frame and hub, single-side support

(d) Unique ‘bicycle wheel’ construction

(e) Horizontal assembly, rotated to vertical

(f) Powered levelling system for capsules

(g) Three-dimensional laminated glass capsule panels.

Each of these technologies increased the level of uncertainty around the project.

Overall, we can conclude that this project was relatively high on the uncertainty scale, although the exact position is debatable and subjective.

Complexity:

This project had been defined in terms of 149 major site activities, supported by an international team of suppliers of major components (e.g. the capsules, the wheel structure). Each of these component packages would comprise a complex project itself, involving many internal departments and external suppliers in a time-critical network of inter-relating activities. In parallel, an independent safety engineering and inspection consultancy kept a tight watch on every aspect of the project, adding to the overall complexity to be managed. Overall, we can conclude that this project was of high complexity, and involved multinational inputs for all major transportable elements.

The implication of this is that extremely high levels of project management skills will be required. In fact, the size of the Mace PM team had to be considerably larger than anticipated, leading to overcrowded site offices! BA also provided project management, more directed towards external issues (political, environmental, PR, operational, etc.). The Mace project managers (Tim Renwick and Ian Crockford) were both very experienced and together provided all five characteristics of an effective project manager described on page 506–7. The case illustrated the flexibility to cope with change when technical problems arose on 10 September 1999. Rescheduling was rapid, and external communications to the media were clear and professional.



Question 2. What was the ‘project environment’ for this project?

The project environment consists of all the factors that can affect the project. Some are directly, contractually linked to the project; the resources, sub-contractors, suppliers, customers and sources of finance.


Case exercise – The Channel Tunnel

The £15 billion Channel Tunnel project was the largest construction project ever undertaken in Europe and the biggest single investment in transport anywhere in the world. The project, which was funded by the private sector, made provision for a 55-year concession for the owners to design, build and run the operation. The Euro Tunnel Group (technically two holding companies, one in France and one in the UK) awarded the contract to design and build the tunnel to TML (Trans-Manche Link), a consortium of 10 French and British construction companies. For the project managers, it was a formidable undertaking. The sheer scale of the project was daunting in itself. The volume of rubble removed from the tunnel increased the size of Britain by 90 acres, equivalent to 68 football fields. Two main railway tunnels, split by a service/access tunnel, each 7.6 m in diameter, run 40 m below the sea bed. In total, there are in excess of 150 km of tunnels. The whole project was never going to be a straightforward management task. During the early negotiations, political uncertainty surrounded the commitment of both governments, and in the planning phase, geological issues had to be investigated by a complex series of tests. Even the financing of the project was complex. It required investment by over 200 banks and finance houses, as well as over half a million shareholders. Furthermore, the technical problems posed by the drilling itself and, more importantly, in the commissioning of the tracks and systems within the tunnel needed to be overcome. Yet, in spite of some delays and cost overruns, the project ranks as one of the most impressive of the 20th century.

Questions

1. What factors made the Channel Tunnel a particularly complex project and how might these have been dealt with?

2. What factors contributed to ‘uncertainty’ in the project and how might these factors have been dealt with?

Teaching note – The Channel Tunnel

Question 1. What factors made the Channel Tunnel a particularly complex project and how might these have been dealt with?

The first factor that must have increased the complexity of the project was its sheer size. A £15 billion project, almost by definition, will have a large number of stakeholders, each of whom have to be managed. As a project management task, looking after £15 billion worth of effort clearly requires a wider span of control than a smaller project. This would have been complicated by the owners of the project, the building consortium put together to construct it, and the funding bodies, all being multi-partner bodies. So, if the Euro Tunnel Group wished to negotiate with TML, the latter must first have had to agree amongst its consortium members how to respond. Also, the companies were from two countries speaking two languages. The volume of rubble removed must have been an environmental problem for the company. Disposal of the waste would have been negotiated with local government authorities. Furthermore, because the tunnel connected two nation states, the respective governments would have to have been in agreement. Such a large project would have political overtones and the



lifespan of a government can be much shorter than the construction time for a project this size. Even the geological issues presented some degree of uncertainty. At the beginning of the project, it would not have been totally clear how construction would proceed because TML would have to wait for the results of geological tests. Financial pressures would have been dictated not only by the need to keep the project in control (it actually went slightly over time and budget), but by the fact that over 200 banks and finance houses were involved. These, together with the half a million shareholders, would have had slightly different attitudes to the return and risk associated with their money. Finally, TML were not building a ‘static monument’. They were building a structure that would have to work on an ongoing basis after construction. Thus, during construction, they would have to be in constant working partnership with the people who would run the tunnel after completion.

All of these issues require significant project management skills. In addition to the issues covered in Chapter 15, these would have included financial and communication skills, as well as political (with a small and a large P) astuteness.

Question 2. What factors contributed to ‘uncertainty’ in the project and how might these factors have been dealt with?

The main drivers of uncertainty would have been,

• Political uncertainty – would a change in government in either country affect the political commitment to the project?

• Financial uncertainty – would the backers continue to come up with money even if the project over ran?

• Geological uncertainty – might some unexpected geological condition incur extra cost or time?

• Technical uncertainty – would the planned construction methods really work in practice?

• Relationships between stakeholders – with so many different interests involved, could the stakeholders maintain their partnership arrangements?

Again, it is project management skills that would do something to mitigate these risks. Mainly though, it is probably a willingness by the stakeholders to identify the sources of risk and jointly agree to a strategy to cope with each.


Case exercise – Lemming Television

Lemming Television (LTV) is a television production company that specializes in making outside broadcast (OB) ‘specials’ for a variety of television networks. It was recently commissioned to make a series of ‘summer road show’ programmes that would be shot at locations around Europe during the spring and early summer and broadcast by the customer (a satellite broadcasting network) during the summer. The programmes would involve circus acts, displays, events and computer-graphic displays to entertain the crowds and popular entertainment acts and interviews that would be interspersed with contestant games. Managing the preparation for the series was the responsibility of the show’s producer, Flo Brown. Flo, who had recently graduated with distinction from her MBA course, knew that she would need to keep a tight grip on the arrangements for the road show series. The shooting would start at the end of May and the final show would be recorded at the end of July. The shows would be broadcast between early July and late August, so any delay either in recording the material or in editing the programmes would cause considerable complications.

The company had known that it would be commissioned to make the programmes since December, but Flo had only been allocated the job in early February! Her first act was to list the various jobs that would have to be done before shooting could start. She then discussed each job with the part of the company that would carry it out to try to understand what decisions would need to be made before they could start on their jobs. The jobs that needed to be done prior to the start of the shooting are listed below, together with some details.

The producer’s responsibilities (as well as managing the whole project) included:

• Scheduling the venues: would take about 2 weeks to finalize and could be started straightaway.

• Defining the design concept: would need discussions with the chief designer and would take about 4 weeks of considering alternative designs before finalizing the concept but could be started straight away.

• Specifying computer-graphic displays: again in consultation with the chief designer, it would take about a week but could not be started until all the detailed planning had been finalized.

The design department’s responsibility was:

• Producing artwork for printed materials: would take about 3 weeks but could be started only after completion of the detailed planning.

• The programme-planning department’s responsibilities were:

• Booking the venues: a one-week job that could be started as soon as the venues had been decided by Flo.

• Detailed planning: the preparation of detailed plans and schedules, a two-week task that could be started once the design concept had been finalized and the venues booked.



• Printing the brochures: an outside printer could be given this job as soon as the artwork for the printed materials had been prepared by the design department. The printer usually quoted a four-week delivery from receipt of the artwork.

• Printing the display posters: again depended on the preparation of the artwork but could be delivered within 2 weeks of the artwork being ready.

• Ordering the road show vehicles: several trailer trucks and ancillary vehicles were needed which could be ordered on completion of the detailed planning; delivery of the vehicles would take about 6 weeks.

• Writing the graphic display software: contracted out to a software house; it would take about 4 weeks but could only be started after the computer graphics had been specified by the producer and chief designer.

• Final testing and rehearsals: the programme-planning department was finally responsible for getting the ‘whole act together’ immediately prior to shooting. Testing and rehearsals could only start once the brochures had been printed, the vehicles fully fitted out and customized and the promotion staff trained. Final tests and rehearsals should take around a week, but, if things went wrong at any stage, these could take longer.

The workshop’s responsibility was:

• Customizing and fitting out the vehicles: after the vehicles are delivered and the artwork agreed and the computer-graphics software finished, the vehicles could be fitted out and customized for the shows; this would normally take around 2 weeks.

The personnel department was responsible for:

• Recruiting the promotion (promo) staff: these were the people (often ‘resting’ actors) who staffed the exhibits and entertained the crowds; they could be recruited as soon as the detailed planning was completed. Usually it took 2 weeks to recruit all the promo staff.

• Training the promo staff: once all promo staff had been recruited they would need training – a one-week task.

Questions

1. Can Flo get the project together in time to start shooting on schedule?

2. Which are the jobs that she will have to manage particularly closely?

3. What general advice would you give her to help her to manage this project?



Teaching note – Lemming Television

Question 1. Can Flo meet the deadline?

In order to answer this question it is necessary to draw a project network diagram. A summary of all the activities in the project is given below. It shows their likely duration and their immediate predecessor.

TV SUMMER ROAD SHOW

Activities Immediate predecessor

Estimated duration in weeks

a Schedule venues — 2

b Define design concept — 4

c Book venues a 1

d Detailed planning b,c 2

e Artwork for printed mail d 3

f Print brochures e 4

g Print display posters e 2

h Order vehicles d 6

i Customize vehicles e,h,k 2

j Spec. computer-graphic displays d 1

k Write software j 4

l Recruit promo staff d 2

m Train promo staff l 1

n Final tests and rehearsals f,i,m 1

The complete network can be drawn from this. It can be seen that the time available is probably just sufficient to plan and organize the road show project, although there is little, if any, room for delay (17 weeks from beginning of February to end of May, 15 weeks for project). This will make the whole project particularly sensitive to delays in any of its constituent activities.



Question 2. Which jobs will have to be managed closely?

The ‘critical path’ through the network includes the following activities:

b – define the design concept

d – detailed planning

h – ordering (and awaiting delivery) of the vehicles

i – customizing the vehicles and fitting them out

n – final tests and rehearsals

Any delay on these will delay the whole project, and savings in time on them might (up to a point) be saved for the whole project. Of particular significance is the final activity which seems, from the narrative, to have a particularly uncertain time estimate. This activity should warrant close attention.

Question 3. What else might Flo do?

The following recommendations are made to Flo with reference to the factors important for successful project management:

• Flo should clearly define the goals of the project to all the organizations involved. She should also stress on the critical time scales involved in the project.

• She should ensure that the project has the support of top management (as the project is for a popular summer programme, this should not present a problem).

• She needs to establish a project team of competent, experienced members who will be involved for the entire duration of the whole project. All the organizations involved in the project should be represented in the team to improve communications.

• Communications between the organizations should be improved to optimize co-operation.

• The resources allocated to the project should be checked to ensure that the project can be completed within the strict time scales imposed.

• Effective control mechanisms should be established to provide instant measures of project progress. Thus the problems can be identified as early as possible.

• Feedback capabilities and trouble-shooting mechanisms should also be installed to identify and solve potential problems as they occur.

• Methods of reducing the time scales for the critical path should be examined.

• The project budget should be tightly controlled. Problems could be encountered if any part of the project needed to be crashed to ensure on-time completion.


Case exercise – Oxfam

Oxfam is a major international development, relief and campaigning organization dedicated to finding lasting solutions to poverty and suffering around the world. Oxfam GB, which is affiliated to Oxfam International, works closely with the communities it helps through a network of local partners and volunteers to provide safety, dignity and opportunity for many disadvantaged people around the world.

The Oxford Famine Relief began as one of many famine relief agencies that sprang up during the Second World War. It continued after the war and extended its remit to provide for the relief of suffering whatever the cause might be. Oxfam, as it soon became known, set up collection points for donations and opened its first charity shop in 1948. Oxfam’s current network of more than 830 charity shops are run by about 22,000 volunteers and are a key source of income. The shops sell donated items and handcrafts from around the world giving small-scale producers fair prices, training, advice and funding. Orders for items can be made by mail or over the internet. Oxfam has also teamed up with Yahoo! to provide free access to the internet in the United Kingdom and at the same time raise funds. Together with legacies and donations for general use and monies raised for particular emergencies (restrictive funds), Oxfam generated a total income of around £124 million in 1998–99. Oxfam employs around 1300 staff, of whom around 700 are based in Oxford, and the others, together with about 1500 locally recruited staff, work overseas.

Oxfam is perhaps best known for its work in emergency situations providing humanitarian aid where it is needed. Oxfam has a particular expertise in providing clean water and sanitation facilities. Around 80 per cent of diseases and over one-third of deaths in the developing world are caused by contaminated water. Yet much of Oxfam’s work continues out of the spotlight of disasters and the charity provides continuing help, working with poor communities through a range of programmes concerned with:

• Building livelihoods – providing seeds and tools so that people can grow their own food, helping them secure access to markets, credit and land;

• Improving health and education – building flood prevention barriers, developing schools and providing building material so that people can rebuild homes, for example;

• Participation in processes – providing people with some control over their lives;

• Gender issues – for example, working to remove barriers to girls’ education.

Oxfam also speaks out on behalf of disadvantaged communities, pressuring governments and decision-makers on a range of issues including pesticides, food aid, landmines, worker exploitation and Third World debt.

Whether the disasters are natural (such as earthquakes and storms) or political (such as riots and wars), they become emergencies when the people involved can no longer cope. In poor countries, disasters leave homeless and hungry people who will become ill or die within days if they do not get aid. In such situations, Oxfam, through its network of staff in local offices in 70 countries, is able to advise on the resources and help that are needed. Indeed, local teams are often able to provide warnings of impending disasters, giving more time to assess need and coordinate a multi-agency response.



The emergency programmes are run by Oxfam’s regional and country offices. The organization’s headquarters in Oxford provides advice, materials and staff, often deploying emergency support personnel (ESPs) on short-term assignments when and where their skills are required. Shelters, blankets and clothing can be flown out at short notice from the Emergencies Warehouse in Bicester. Engineers and sanitation equipment can also be provided, including water tanks, latrines, hygiene kits and containers such as the ‘Oxfam bucket’ which is easy to transport, has a sealable lid, is light and very useful.

Every emergency is different, with differing security situations, aid needs, logistical problems and access issues. In addition, the responses of other agencies such as governments or other relief agencies will also depend on the nature and location of the disaster. Oxfam relies on its local team to help assess each situation to decide whether the organization can make a difference. Sometimes they are unable to respond; the security situation may be too difficult, or other governments may be responding with all that is needed. Local, regional and head office managers have to weigh up all the factors to decide upon the degree and nature of response.

When an emergency is over, Oxfam continues to work with the affected communities through their local offices to help people rebuild their lives and livelihoods.

Question

1. What are the main issues facing Oxfam’s project managers in terms of:

• Globalization and international management

• Environmental management

• Social responsibility

• Technology

• Knowledge management?

Teaching Note – Oxfam

This case exercise describes, in very broad terms, the types of projects carried out by a major charity – Oxfam. It describes the extent of the operation in terms of staff employed (1300), together with locally recruited staff (1500), and the geographical extent of its operations (global). More significantly, it also distinguishes between the ongoing work of the charity and the more high profile emergency response part of its work. Issues include, the appropriateness of operations and process management generally in not-for-profit organizations, and the differences between long-term and short-term projects. It is one of those cases that can be used either at the beginning or at the end of a course in operations management. If used at the beginning, its purpose would be to demonstrate how project management is relevant to not-for-profit organizations as well as commercial companies. It could also be used to prompt a discussion of the differences between providing ongoing assistance and development in different parts of the world and the shorter, more dramatic ‘projects’ associated with emergency relief. Both aspects of operations are important to Oxfam.



Question 1. What are the main issues facing Oxfam’s operations managers in terms of:

• Globalization and international management

• Environmental management

• Social responsibility

• Technology

• Knowledge management?

Globalization and international management

By definition, Oxfam’s scope of operations is global. Anywhere a disaster is likely to strike could receive the attentions of the charity. However, much of Oxfam’s work is not concerned with the high profile disaster relief side of its business, but rather the ongoing community development projects it undertakes. Most of these projects will be in the poorer, less developed parts of the world. The implication of this is that, from an operation point of view, services must be delivered without an assumed level of infrastructural support. The ability to adapt development methodologies to such circumstances would be a key operations task. Another aspect of globalization for Oxfam concerns the coordination of expertise. Experts, either in development or disaster relief, may be located anywhere in the world. The task of understanding and coordinating this pool of potential help must be a major operations task. It will rely on maintaining a database of expertise and on the ability to deploy it, sometimes at short notice.

Environmental management

To Oxfam, the concept of environmental management must be tackled at two levels. The most obvious one is that environmental awareness is an ‘output’ from the charity’s operations. In other words, environmental management, to some extent, is one of the operation’s ‘products’. It will engage in lobbying governments and non-governmental agencies to achieve its aims of greater environmental sustainability. However, there is also another, related, issue. Oxfam’s operations themselves must also be environmentally sound. Agricultural projects for example, must be managed to ensure that there is no inappropriate use of fertilizers and pesticides locally, even when there may be local pressures to do so.

Social responsibility

Again, this is one of those issues that both an output from the operation and an objective for the way it runs its own operations. A key issue here must be the way in which the ‘on the ground’ managers of development projects tackle some of the particularly sensitive cultural issues. For example, ‘gender issues’ are one of Oxfam’s campaigning points; however, appropriate gender roles are seen in very different ways in different parts of the world. Pursuing its own ends in terms of, say girls’ education, must be balanced against traditional ideas of women’s role. Whereas this difficulty may be relatively straightforward to reconcile at a strategic level back in the charity’s Oxford headquarters, its success depends on how local operations managers deal with the issue on a day-to-day level.



Technology

Again, this has elements of both output and process. Developing appropriate technologies for use in developing countries is both an output in terms of the charity wishing to influence technology usage and also an issue that it must demonstrate itself. Also, although we are used to thinking of ‘good’ technology as being ‘high’ technology, in many cases ‘good’ technology for Oxfam means ‘appropriate’ technology. Thus, technology which is sustainable, capable of being made and/or adapted locally and maintainable under normal conditions of use, is just as challenging a task as developing high-tech solutions to operations problems.

Knowledge management

The work of charities such as Oxfam is extremely practical. It cannot rely on a theoretical knowledge base (although obviously it makes use of many branches of science and economics). The knowledge embedded within Oxfam’s operations is the result of many years of attempting difficult tasks in very difficult conditions. It is vital for operations such as Oxfam that this knowledge is captured and deployed. Reinventing the wheel, or learning from scratch, on every project is a waste of the charity’s resources and a failure in its responsibility to the people it is trying to help. The capture and development of knowledge through manuals, databases and (even more important) discussions and on-the-job training must be a key issue for charities such as Oxfam.


Case exercise – Virtual project management

The oil industry has always placed a high value on project management. Cost and time overruns in the construction of offshore facilities or onshore refineries can mean the difference between profit and loss in the early years of most capital projects. The operating companies themselves are increasingly stepping back from hands-on engineering activities to focus more on their core business. They are relying on project management experts who can integrate services extending from design and fabrication to maintenance and asset management. The working practices of these project management collaborators are also changing. Advanced computer-aided systems are helping to facilitate a new approach to major project design and management. Project teams can view computer models of major projects such as an offshore structure using CADCENTRE plant design software and visualization system. This allows them to check out not only the original design but also any modifications that have to be made during construction. More detailed CAD images can be used for more specific analysis.

Questions

1. Why do you think a realistic picture of a completed project helps the process of project management?

2. Why are such visualizations becoming more important?

Teaching note – Virtual project management

Question 1. Why do you think a realistic picture of a completed project helps the process of project management?

Most projects of a large and/or complicated nature have a number of important issues that must be resolved. Unfortunately, involving one issue often has a impact on the others. This makes predicting the consequences of small changes to the project very difficult. Visualization helps to understand some of these interactions. So, for example, if changes are made to the access hatches to part of an oil rig, a visualization could show whether this would seriously impair the ability of maintenance engineers to reach different parts of the rig. Furthermore, a visualization such as that shown in the illustration can be viewed by several experts simultaneously. This increases the chances of any problems being spotted and also may help the brainstorming process which may deliver a solution to any of the problems.

Question 2. Why are such visualizations becoming more important?

First, many projects are getting more complex. Thus visualization helps to manage such complexity. Second, increasing computer power allows for more sophisticated visualization. Many of the simulations and visualizations that are now becoming commonplace in project management were just not technically feasible until very recently.

Operations and Process Second edition Instructions Manual

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Transcript of Operations and Process Second edition Instructions Manual