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Part One
Introduction
Table 2.1 Some operations management characteristics of two companies
Company A has operations managers who . . .
Employ skilled, enthusiastic people, and encourage them
to contribute ideas for cutting out waste and working more
effectively.
Carefully monitor their customers’ perception of the quality
of service they are receiving and learn from any examples
of poor service and always apologize and rectify any failure
to give excellent service.
Have invested in simple but appropriate systems of their
own that allow the business to plan and control its activities
effectively.
Hold regular meetings where staff share their experiences
and think about how they can build their knowledge of
customer needs and new technologies, and how their
services will have to change in the future to add value
for their customers and help the business to remain
competitive.
Last year’s financial details for Company A:
Sales revenue = A10,000,000
Wage costs = A2,000,000
Supervisor costs = A300,000
General overheads = A1,000,000
Bought-in hardware = A5,000,000
Margin = A1,700,000
Capital expenditure = A600,000
Company B has operations managers who . . .
Employ only people who have worked in similar companies
before and supervise them closely to make sure that they
‘earn their salaries’.
Have rigid ‘completion of service’ sheets that customers
sign to say that they have received the service, but they
never follow up to check on customers’ views of the
service that they have received.
Have bought an expensive integrative system with
extensive functionality, because ‘you might as well invest in
state-of-the-art technology’.
At the regular senior managers’ meeting always have an
agenda item entitled ‘Future business’.
Last year’s financial details for Company B:
Sales revenue = A9,300,000
Wages costs = A1,700,000
Supervisor costs = A800,000
General overheads = A1,300,000
Bought-in hardware = A6,500,000
Margin = A700,000
Capital expenditure = A1,500,000
Table 2.2 The effects of three options for improving earning at Kandy Kitchens
Original Option 1 – Option 2 – Option 3 –
(sales volume = sales campaign operations efficiency ‘speedy service’
50,000 units) Increase sales volumes Reduce operating Increase price
by 30% to 65,000 units expenses by 20% by 10%
(B, 000) (B, 000) (B, 000) (B, 000)
Sales revenue 5,000 6,500 5,000 5,500
Operating expenses 4,500 5,550 3,800 4,500
EBIT* 500 1,000 1,200 1,000
Investment required 100 70
*EBIT = Earnings before interest and tax = Net sales – Operating expenses. It is sometimes called ‘Operating profit’.
Increasing sales volume by 30 per cent certainly improves the company’s sales revenue,
but operating expenses also increase. Nevertheless, earnings before investment and tax (EBIT)
rise to a1,000,000. But reducing operating expenses by 20 per cent is even more effective,
increasing EBIT to a1,200,000. Furthermore, it requires no investment to achieve this.
The third option involves improving customer service by responding more rapidly to customer
orders. The extra price this will command improves EBIT to a1,000,000 but requires
an investment of a70,000. Note how options 2 and 3 involve operations management in
changing the way the company operates. Note also how, potentially, reducing operating costs
and improving customer service can equal and even exceed the benefits that come from
improving sales volume.
So if operations performance has such a significant effect on the whole organization, it
follows that any organization needs some way of assessing the performance of its operations
function and its operations management. We shall look at three perspectives on operations
performance, from macro to micro. First, we examine how each of the organization’s stakeholders
may view operations performance. Next, we consider what top management may