38
Managing business
operations:
how New Zealand
organisations can
get better and bette
y David Ro
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 XXXXXXXXXX
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 ▼
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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
etween 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
eality 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
eadily 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 diffe
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 co
ect mistakes that are the fault of the
organisation (e.g., voids at cashiers)
Quality, customer service and performance
measurement
• Employing fea
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 cali
e staff” a goal, but
ecruitment 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
esponsible 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
(Co
ett and Ha
ison, 1992).
41U N I V E R S I T Y O F A U C K L A N D Business Review
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etween 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 ove
whether and how to embark
on a Just-in-Time (JIT)
programme, seek ISO accred-
itation, or adopt an enterprise
esource 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 a
ivals and customer service,
measured by least number of lost bags and
customer complaints.
2. Eliminating bad practice: moving
to the performance frontie
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 cu
ent 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
eciprocal of inventory level).
Figure 1 illustrates a gap between the cu
ent
operating point and the “performance frontier”
(or “trade-off curve”), reflecting what the
system should be capable of under its particula
demand-and-supply characteristics. A large gap
eflects a lot of low-hanging fruit and/or a poo
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
eliability (expressed as the proportion of
orders a
iving 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, neve
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 turnove
E
xp
ec
te
d
f
ill
at
e
(%
)
Theoretical: existing system
Theoretical: modified system
Cu
ent 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 o
flexibility), but rather how these priorities are translated into a
consistent set of decisions which support the particular priority that
the organisation stresses most.”
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appropriate analysis, wasting effort in
duplication, etc). For other examples one need
look no further than one’s own “custome
service disaster” stories.
Perhaps more concerning than poo
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 pe
cent – that ubiquitous value! But when it
ecorded lost sales by asking customer service
eps 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 fo
a lightbulb to replace one that had burned out
in her kitchen. So far her early-morning trip to
Patchco
lers and Brush Hardware had
proven fruitless, so she headed up the road to
Lighting Additions. They ca
ied 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
emain in the dark that long, asked if othe
stores ca
ied the product and was told of a
competing firm nea
y. 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 ca
ied
a different
and 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 counte
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 e
or 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 you
customers’ perspective, as well as your own
perspective (e.g., delivery reliability) and traced
ack