do assignment as per case study.
38 Managing business operations: how New Zealand organisations can get better and better by David Robb 39U N I V E R S I T Y O F A U C K L A N D Business Review V o l u m e 3 N u m b e r 2 2 0 0 1 Many New Zealand businesses can lift their game appreciably by pursuing improvements in their operations management. I make a passionate plea for business managers to dig deep into a goldmine of available opportunities, extending from suppliers to internal operations to customers. Based on my experience in consultancy (primarily in the building products, consumer goods, pharmaceutical and postal communications sectors) and executive education, as well as scholarship on the function, I offer a framework that should guide operations improvement initiatives in New Zealand businesses. T he operations management “domain”for manufacturers, service providersor distributors spans the traditional decision areas of facility choice (location, size and focus), capacity (timing, size and type), process/technology selection and degree of vertical integration/outsourcing. It also includes the “infrastructural” policy areas encompassing supply chain management (procurement, inventory and internal operations planning/control), quality management and even aspects of human resources and new product/service development. My framework for improving operations in any organisation involves four aspects. 1 Establishing direction: aligning operations with business objectives. 2 Eliminating bad practice: moving to the performance frontier. 3 “Horses for courses”: positioning on the performance frontier. 4 Innovation and mitigating trade-offs: shifting the performance frontier. These facets cover, at least conceptually, all the activity areas of managers seeking ▼ 40 improvement. I believe many New Zealand firms have room for improvement in most of these categories. 1. Establishing direction: aligning operations priorities with business objectives Business strategists emphasise the importance of achieving coherence both within and between functional areas in a firm by insisting that objectives and policies in each area are aligned with the business strategy as a whole. This may seem straightforward in theory, but in reality practices inconsistent with the business strategy are legion. Table 1 presents the results of an informal survey of executive students, giving examples of misaligned policies and practices, categorised into various operations decision areas. What leads to such incongruence? Perhaps the biggest culprit is the dearth of firms with a clear vision of where their operations are headed, based on their business strategy and readily articulated by staff at all levels1. Some may express incredulity toward various aspects of strategy – e.g., St Dilbert’s quip defining a mission statement as “a long, awkward sentence that demonstrates management’s inability to think clearly” (Adams, 1996). However, there is little excuse when managers create policies and staff act in ways that pull in diverse directions. Within a given industry (even a commodity industry), business objectives should differ TABLE 1 Facilities • Operating a “seconds” shop when quality is a high priority • Locating away from major clients when delivery is paramount Process choice • Choosing products that add considerable complexity to processes when cost is important Vendor relations • Sourcing low-quality products when quality is important • Not certifying suppliers on quality and time when these were the organisation’s objectives Inventory/logistics • Insufficient stock when delivery/customer service is important • High inventory when low cost is a prime objective Production/operations planning and control • No operations planning (just financial planning) • Opting for mass production when staff skills/competencies are in flexibility • Putting everyone on a schedule when flexibility is desired • Accepting all orders without exception • Poor call management (lost calls) • “Get stuff out the door” policy at end of financial year (when quality is important) • Reducing appointment times to increase throughput when quality is the number one priority • Making customers wait inordinately long periods to correct mistakes that are the fault of the organisation (e.g., voids at cashiers) Quality, customer service and performance measurement • Employing fear/intimidation to improve quality levels • No quality [time/delivery] measurement at all (when quality [time/delivery] is important) • No measurement of staff satisfaction or morale • Performance measurement tied to each department rather than to the organisation as a whole (which encourages “local optimisation” and discourages flexibility) Human resources/organisational design • “Attract highest calibre staff” a goal, but recruitment practices mediocre • Obsolete (or non-existent) staff training methods (in particular, for new staff and in quality) • Staff continually asked to work late/overtime (when quality is important) • Part-time untrained front-office staff (when quality is important) • Staff not helping each other provide delivery (e.g., one busy, another idle) • Rotation of technical staff in the middle of product introduction (inexperienced staff became responsible for key products) • Downsizing across the board to cut costs (when service is important) • Cross-training to too low a level (e.g., everyone trained in filing) • Staffing to meet minimum rather than average (or maximum) demand Examples of inconsistent operations policies in New Zealand organisations (SOURCE: SURVEYS OF AUCKLAND BUSINESS SCHOOL EXECUTIVE PROGRAMME STUDENTS, 1997) 1The benefits of such communication are well-documented by a survey of 106 New Zealand manufacturing managers which found profitability to be positively related to the depth of communication (Corbett and Harrison, 1992). 41U N I V E R S I T Y O F A U C K L A N D Business Review V o l u m e 3 N u m b e r 2 2 0 0 1 between firms2. And different priorities, such as emphasising variety over cost (e.g., Foodtown vs Countdown), necessitate a different set of policies and operations practices (location, staff training, etc). Managers deliberating over whether and how to embark on a Just-in-Time (JIT) programme, seek ISO accred- itation, or adopt an enterprise resource planning (ERP) package should be governed largely by the business objectives of their firm. These objectives will also dictate what a company doesn’t pursue. A classic example is Southwest Airlines whose refusal to provide baggage transfers is a key element in its ability to lead the industry in on-time arrivals and customer service, measured by least number of lost bags and customer complaints. 2. Eliminating bad practice: moving to the performance frontier On, or possibly before, securing a contract, consultants worth their salt will develop at least a ballpark picture of where a firm is at in terms of its overall current performance (on multiple dimensions) and where it could be. In the supply chain area, for example, the two key dimensions are service level (e.g., measured as “fill rate” – proportion of customer demand met from stock or within a pre-determined delivery window) and inventory turnover (the reciprocal of inventory level). Figure 1 illustrates a gap between the current operating point and the “performance frontier” (or “trade-off curve”), reflecting what the system should be capable of under its particular demand-and-supply characteristics. A large gap reflects a lot of low-hanging fruit and/or a poor model of the business environment. In my experience, many New Zealand firms are operating a long way from the frontier, particularly when considering that performance deviations occur on multiple, rather than just two dimensions. For example, take the competitive priority of delivery which beyond the obvious aspect of speed has other sub-dimensions such as availability, reliability and completeness. The caselette provides a disguised and, unfortunately, all-too-common example of poor availability. In at least one industry, the reliability (expressed as the proportion of orders arriving on or before the supplier-stated due date) of local providers is routinely worse than that of international suppliers, despite the vast differences in market proximity. I know of one firm where for several years its largest supplier, which happens to be local, never delivered a complete order. Some of these gaps are caused by genuine but avoidable mistakes (e.g., ordering the wrong items/quantities), but most are attributable to poor management (e.g., taking “punts” on special offers to procure without doing the FIGURE 1 Actual and theoretical performance of a supply chain 0 20 40 60 80 100 Average inventory turnover E xp ec te d f ill r at e (% ) Theoretical: existing system Theoretical: modified system Current operation point ▼ 2For more information on there being “more than one way to skin a cat” (the technical term is “equifinality”), see Boyer and McDermott (1999). “The critical factor determining the success of a strategy is not necessarily which competitive priorities are stressed (i.e., cost or flexibility), but rather how these priorities are translated into a consistent set of decisions which support the particular priority that the organisation stresses most.” 42 appropriate analysis, wasting effort in duplication, etc). For other examples one need look no further than one’s own “customer service disaster” stories. Perhaps more concerning than poor performance is the chilling reality that many firms don’t know where they are in terms of performance on key dimensions. One firm insisted its customer service level was 95 per cent – that ubiquitous value! But when it recorded lost sales by asking customer service reps to record requests for products that were not available, it was shocked to discover how much revenue was being lost. And that was just the tip of the iceberg. CASELETTE Jodie was getting frustrated in her search for a lightbulb to replace one that had burned out in her kitchen. So far her early-morning trip to Patchcobblers and Brush Hardware had proven fruitless, so she headed up the road to Lighting Additions. They carried it, but it was out of stock. “We get a monthly shipment, so it should be in within a month,” the clerk politely advised. After some pressing, Jodie, not wanting to remain in the dark that long, asked if other stores carried the product and was told of a competing firm nearby. Jodie tried to wait patiently outside the premises of Lighting Non-Stop. When the doors finally opened at 9am, she found out that although they carried a different brand of the lightbulb, it too was out of stock and “would be ordered today – with our weekly order on our supplier”. Resigned to being bulbless, Jodie left the store. Despite the threat of being late for work, she was tempted by another store on the way and, inquiring of the fellow behind the counter at Megalight, she was told: “Sure, we have them. We sell one of those every day.” Not even asking the cost, Jodie responded: “Thanks, give me two!” One common error I have found is a belief that acquiring sophisticated hardware is sufficient to achieve advantage Fundamental to improving performance on more than one dimension simultaneously (moving toward the top right-hand corner of Figure 1) is establishing, recording and acting on critical performance metrics. The set and desired level of key performance indicators (KPIs) will and should differ from firm to firm. They should be considered from your customers’ perspective, as well as your own perspective (e.g., delivery reliability) and traced back