E-Book Heriot Watt Operations Management 1

Heriot-Watt Management Programme
Operations Management 1
Nigel Shaw
School of Management and Languages

Heriot-Watt University
Edinburgh EH14 4AS, United Kingdom.
Version 2010.1
Heriot-Watt Management Programme
School of Management and Languages
Heriot-Watt University
Edinburgh
Scotland
UK
EH14 4AS
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First published 2007 by Heriot-Watt Management Programme (ISBN: 8-273-64546-3).

Republished 2009 (ISBN: 978-1-907291-18-0).
This edition published in 2010 by Heriot-Watt Management Programme.
Copyright © Heriot-Watt Management Programme.
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Heriot-Watt Management Programme : Operations Management 1
ISBN 978-1-907291-18-0
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Acknowledgements
W Nigel Shaw BSc, MBA, PhD Prior to joining the School of Management and Languages,
Nigel Shaw worked for Du Pont and 3M in the areas of Industrial Engineering, Distribution and
Planning. His teaching and research is in Operations Management and Innovation Management
where he has conducted studies in Productivity Improvement, Managing Computer Aided
Design, Quality Management and Operations Strategy. He has been a grant holder, with several
other colleagues, in three Teaching Company (now called Knowledge Transfer) Programmes
and for two Management Teaching Fellowships. He has published extensively, acted as a
consultant to both public and private sector organisations and has been on the Board of
Directors of two University companies. He was awarded a Travel Fellowship by the Institute
of Management Services to study Productivity Developments in the USA. He has been an
external examiner for undergraduate programmes and postgraduate research degrees at several
universities. He is a past Head of Department and past Academic Director of the UniversityŠs
MBA Programme. Currently he is Teaching Programme Director for the undergraduate degrees
within the Management Division of the School.
i
Contents
1 Introduction to Operations Management 1
1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2 What is operations management? . . . . . . . . . . . . . . . . . . . . . . 3
1.3 Operations within the organisation . . . . . . . . . . . . . . . . . . . . . . 4
1.4 The evolution of operations management . . . . . . . . . . . . . . . . . . 4
1.5 Activities of the operations manager . . . . . . . . . . . . . . . . . . . . . 8
1.6 Volume, variety, variation and visibility . . . . . . . . . . . . . . . . . . . . 9
1.7 Environmental issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.8 International operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.9 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1.10 Review questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
1.11 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2 Operating Systems, Performance Objectives and Operations Strategy 21

2.1 Overview of the systems approach . . . . . . . . . . . . . . . . . . . . . . 22
2.2 Application of the systems school to operations management . . . . . . . 23
2.3 Open and closed systems . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.4 Performance objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.5 Operations strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
2.6 IKEA -Story of a Swedish success . . . . . . . . . . . . . . . . . . . . . . 40
2.7 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
2.9 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3 Product and Service Design 47

3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
3.2 Defining ‘product’, ‘service’ and ‘design’ . . . . . . . . . . . . . . . . . . . 49
3.3 The product and service design process . . . . . . . . . . . . . . . . . . . 51
3.4 Model of the product or service design process . . . . . . . . . . . . . . . 62
3.5 Differences between product and service design . . . . . . . . . . . . . . 63
3.6 Role of quality in product and service design . . . . . . . . . . . . . . . . 65
3.7 Reasons for product and service failure . . . . . . . . . . . . . . . . . . . 66
3.8 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
3.9 Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
3.11 Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
4 Facilities Location 71
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
4.2 What is location? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
4.3 The importance of location . . . . . . . . . . . . . . . . . . . . . . . . . . 73
4.4 Reasons for location decisions . . . . . . . . . . . . . . . . . . . . . . . . 73
4.5 Objectives of the location decision . . . . . . . . . . . . . . . . . . . . . . 76
4.6 Location factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
ii CONTENTS
4.7 Levels of the location decision . . . . . . . . . . . . . . . . . . . . . . . . . 82

4.8 Location analysis techniques . . . . . . . . . . . . . . . . . . . . . . . . . 85
4.9 Economic development . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
4.10 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
4.11 Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
4.12 Review Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
5 Demand Forecasting and Capacity Management 95

5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
5.2 Case Study 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
5.3 Demand forecasting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
5.4 Effective forecasting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
5.5 Nature of demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
5.6 Forecasting techniques . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
5.7 Case 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
5.8 What is capacity? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
5.9 Long-term capacity strategies . . . . . . . . . . . . . . . . . . . . . . . . . 107
5.10 Capacity planning and control . . . . . . . . . . . . . . . . . . . . . . . . . 110
5.11 Chapter case study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
5.12 Review Questions - case study . . . . . . . . . . . . . . . . . . . . . . . . 114
5.13 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
5.14 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
6 Process Types 117

6.1 Understanding processes in operations management . . . . . . . . . . . . 119
6.2 Controls in operations management . . . . . . . . . . . . . . . . . . . . . 120
6.3 Examples of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
6.4 Classifying process types in manufacturing organisations . . . . . . . . . 123
6.5 The service process mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
6.6 Classifying process types in service organisations . . . . . . . . . . . . . 129
6.7 Characteristics of operating systems . . . . . . . . . . . . . . . . . . . . . 130
6.8 Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
6.9 Different processes - different demand patterns . . . . . . . . . . . . . . . 133
6.10 Operating systems and business markets . . . . . . . . . . . . . . . . . . 135
6.11 The importance of selecting the optimum operating system . . . . . . . . 138
6.12 Example: Comparison between two automotive production systems . . . 139
6.13 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
6.15 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
7 Facilities Layout and Flow 145

7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
7.2 What is operations layout and flow? . . . . . . . . . . . . . . . . . . . . . 146
7.3 Market effects on layout decisions . . . . . . . . . . . . . . . . . . . . . . 146
7.4 The benefits of good layout . . . . . . . . . . . . . . . . . . . . . . . . . . 147
7.5 Choices and trade-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
7.6 Market changes and flexibility . . . . . . . . . . . . . . . . . . . . . . . . . 149
7.7 Making layout choices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
7.8 Basic layout types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
7.9 General objectives of good layout . . . . . . . . . . . . . . . . . . . . . . . 157
© Heriot-Watt University
CONTENTS iii
7.10 Detailed design of layout . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

7.11 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
7.13 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
8 Process Design and Process Technology 169

8.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
8.2 The design process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
8.3 Creativity in design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
8.4 Simulation in design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
8.5 Environmental issues in design . . . . . . . . . . . . . . . . . . . . . . . . 172
8.6 Volume-variety in design . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
8.7 Process types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
8.8 Documenting processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
8.9 Process technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
8.10 Materials processing technology . . . . . . . . . . . . . . . . . . . . . . . 177
8.11 Information processing technology . . . . . . . . . . . . . . . . . . . . . . 180
8.12 Customer-processing technology . . . . . . . . . . . . . . . . . . . . . . . 184
8.13 Integrating technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
8.14 Technology strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
8.15 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
8.16 Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
9 Performance Improvement 193

9.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
9.2 Why is performance improvement important? . . . . . . . . . . . . . . . . 196
9.3 A systems approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196
9.4 The relationship between management and performance improvement . . 197
9.5 Performance improvement process . . . . . . . . . . . . . . . . . . . . . . 197
9.6 Creating a performance culture . . . . . . . . . . . . . . . . . . . . . . . . 202
9.7 Case examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
9.8 Interventions associated with performance improvement . . . . . . . . . . 206
9.9 Performance measurement . . . . . . . . . . . . . . . . . . . . . . . . . . 207
9.10 Business process improvement . . . . . . . . . . . . . . . . . . . . . . . . 209
9.11 Benchmarking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210
9.12 Performance improvement success . . . . . . . . . . . . . . . . . . . . . . 219
9.13 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
9.14 Comments on chapter case study . . . . . . . . . . . . . . . . . . . . . . 221
9.15 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222
Answers to questions and activities 223

1 Introduction to Operations Management . . . . . . . . . . . . . . . . . . . 223
2 Operating Systems, Performance Objectives and Operations Strategy . . 225
3 Product and Service Design . . . . . . . . . . . . . . . . . . . . . . . . . 228
4 Facilities Location . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229
5 Demand Forecasting and Capacity Management . . . . . . . . . . . . . . 230
6 Process Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232
7 Facilities Layout and Flow . . . . . . . . . . . . . . . . . . . . . . . . . . . 234
8 Process Design and Process Technology . . . . . . . . . . . . . . . . . . 235
iv CONTENTS
1
Chapter 1
Introduction to Operations
Management
Contents
1.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2 What is operations management? . . . . . . . . . . . . . . . . . . . . . . 3
1.3 Operations within the organisation . . . . . . . . . . . . . . . . . . . . . . 4
1.4 The evolution of operations management . . . . . . . . . . . . . . . . . . 4
1.4.1 The production era . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.4.2 The sales era . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
1.4.3 The marketing era . . . . . . . . . . . . . . . . . . . . . . . . . . 7
1.4.4 Reasons for recent changes in operations management . . . . . 7
1.4.5 Changing terminology . . . . . . . . . . . . . . . . . . . . . . . . 8
1.5 Activities of the operations manager . . . . . . . . . . . . . . . . . . . . . 8
1.6 Volume, variety, variation and visibility . . . . . . . . . . . . . . . . . . . . 9
1.7 Environmental issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
1.7.1 Government legislation and regulations . . . . . . . . . . . . . . 10
1.7.2 Public opinion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
1.7.3 Financial pressures . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.7.4 The environmental technology sector . . . . . . . . . . . . . . . . 15
1.8 International operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.9 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1.11 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Learning Objectives
By the end of this chapter you should be able to:
• explain the term operations management;

• describe how operations management has evolved since the start of the 20th
century;
• outline the main sources of environmental management pressures on operations
managers;
2 Chapter 1. Introduction to Operations Management
• appreciate why an understanding of international operations is of increasing

importance to operations managers.
1.1. Introduction 3
1.1 Introduction
Everything we come into contact with during a normal day has been delivered to us by an
operation. The post delivered to us every morning, the breakfast cereal we eat, the car
we drive, as well as the radio programmes we listen to, and the banking services we use
have all been delivered to us by what is called an operating system, organised using
the principles of operations management. This chapter aims to explain exactly what
is meant by operations management, as well as discussing the growing importance
of the operations function within all types of organisations, within a rapidly changing,
environmentally aware, global business environment.
All organisations operate in an environment of increasing complexity and global
competition, due primarily to advancements in both process and communications
technology. In the past, the concern of most organisations and their managers was the
effective and efficient delivery of products and services, using tried and tested methods
- if a system worked, why change it? As a consequence, there was little concern
for new methods and new technologies. However an organisation’s survival may now
hinge on the successful implementation of new technologies and the adoption of new
operating systems. Because operations activities exist in every type of organisation, and
usually account for a large share of the capital invested, resources used and work force
employed, the way this area is managed can have a major impact on an organisation’s
competitive performance and ultimately on its survival.
Any organisation can take a set of inputs, and given unlimited time and resources,
produce outputs that a customer wants. However, all operational transformations (i.e.
taking inputs, doing something to them to produce outputs) have to be carried out
effectively and efficiently with limited resources. The skill therefore, is in designing
products/services and processes which facilitate this and to make sure that these
activities are not only planned and controlled but constantly improved upon. Good
operations management can give organisations the advantage they need to survive in
today’s hugely competitive, global marketplace.
1.2 What is operations management?

Operations management is concerned with creating, operating and controlling a
transformation system that takes inputs of a variety of resources and produces
outputs of goods and services needed by customers (J. Naylor, 2002)
The operations function is the area involved with the day to day delivery of the product
or service to the customer. Operations management therefore is the term for the broad
range of activities, decisions and responsibilities associated with the delivery of that
product or service. If we take the above quote and break it down into three parts;
inputs, a transformation system, and outputs, we can begin to see the broad range
of activities covered by the term operations management and therefore the responsibility
of the operations manager:
• Inputs include staff, facilities, buildings, machinery, and raw materials.

Managing inputs therefore requires knowledge of human resources, maintenance,
purchasing, supply chain management, logistics etc
• A Transformation System includes the technology, facilities and layout employed

to deliver an appropriate product or service in appropriate volumes to the
customer. Managing transformation systems therefore involves technological
awareness, as well as knowledge of health and safety issues, quality control,
planning and control techniques etc
• Outputs from an operation include tangible products such as a tin of baked beans,
or intangible outputs, such as a successful mortgage application. The output from
some operations is the customer who has been transformed in some way; for
example a beauty parlour changes the physical state of the customer whilst a
therapist changes the psychological state of the patient. Customer service, the
physical appearance of surroundings, logistics, transportation, distribution etc are
all therefore important issues when managing outputs.
The breadth of the tasks and the range of management skills required make the area
of operations management a hugely complex and demanding but also hugely rewarding
one.
1.3 Operations within the organisation

The contribution and the value-adding role of operations management are at the heart
of nearly all organisations. Although the operations function is often regarded as one
of three core functions within organisations (the other two being marketing/sales and
finance), it could be argued that the operations function has the greatest potential
either to make or break an organisation. No matter how good your marketing or your
development functions, if you fail to deliver then the effort has been wasted.
The core functions are supported by other functions such as Human Resources, IT,
Engineering and Technical, Purchasing etc. However, many of these support functions
are central to the success of the operations function and for this reason may be included
under the jurisdiction of the operations manager. For example, both Purchasing and IT
can be central to the way a product or service is delivered.
Excellence in operations management can have a double bonus. Effective and efficient
operations management helps to reduce your cost base (i.e. use your resources more
effectively), and at the same time can help to bring in more revenue because you are
satisfying more customers more of the time.
1.4 The evolution of operations management

Whenever there is a transformation process (a system for converting inputs to outputs),
there is a need for operations management. Businesses 100 years ago did have an
operations function i.e. they did have a method of converting inputs into outputs but
formalised operations management as we know it has evolved over a period of time. If
we consider the mass production of consumer goods from around the end of the 19th
century up until the present day, the evolution of operations management as we know
1.4. The evolution of operations management 5
it today can be traced. (Many of the Schools, described in Figure 1.1, are explored in
more detail in the Schools of Management Thought text.) Different writers may also use
slightly different titles and terminology when discussing this subject.
Figure 1.1: The evolution of operations management
1.4.1 The production era

The production era (refer to Figure 1.1) was ushered in by the Industrial Revolution,
and by the last half of the 19th century, dramatic changes were occurring in technology
and transport. This allowed the concept of mass production to be developed, and to
facilitate this, factories brought together large groups of people who needed managing
and organising. (Up until then products had been made in small workshops or
domestically.) This led to the necessity for the provision of education for the people
who would be managing these factories and increased production.
At this time, consumers, rightly or wrongly, presumed that mass-produced products
were superior to hand made products. Businesses found that they could sell everything
they could produce and it was not uncommon to have product shortages due to high
consumer demand. Henry Ford famously said that his customers ‘could have any colour
they wanted as long as it was black’, demonstrating that there was little regard for
individual customer needs. The operations function’s sole responsibility was to churn
out the products with no real emphasis on considering anything other than production
issues.
Taylor developed his Scientific Management ideas around this time with the aim of
maximising productivity. By searching for the best method, a time could be assigned
to a job. Tasks became specialised, with one operator doing a very small part of the
whole. Production could then be measured and planned and Taylor believed that the
tasks of planning and execution should be separated, as different levels of education
were required.
Taylor concerned himself with studying the worker, whereas the Classical School
of Management which developed around this time concerned itself with studying
managers and provided them with 14 principles to use. Both of these schools adhered
to a very bureaucratic, authoritarian structure as this was seen as the best way to cope
with the increased production and the operations function.
1.4.2 The sales era

From the mid-1920s to the 1950s, we can recognise what is often referred to as the
sales era (refer to Figure 1.1). Manufacturers became so effective at producing goods,
consumer demand could not keep up. Businesses then began to focus on activities to
sell the products they had already made and personal selling and advertising became
key activities within most organisations. The theme of most advertising at that time was
that of a consumer paradise where ‘products made better living’. Still the operations
function was only responsible for making the product. Someone else would deal with
the customer. They would get rid of the product some how. The operations function was
being buffered from the external environment.
There was a shift in thinking during this time in how to deal with the people within
an organisation. The Human Relations School developed, considering the social and
human needs of the workers, issues that Taylor and the Classical School had failed
to consider (although some would argue that Taylor did consider the human side
by motivating people with money, and making them more prosperous). Again the
Human Relations School was concerned with achieving greater productivity but in a
very different way.
At the same time as the Human Relations School was emerging, the Management
Science School was developing its approach to managing and controlling using
mathematical and statistical models. (Also known as the Quantitative School of
Thought.) This school emerged due to the demands for large scale planning during
the Second World War, when models explaining and predicting real world behaviour, by
recognising patterns, were developed
Post-industrial revolution managers were able to oversee all activities in the organisation
due to the small scale. But this was becoming increasingly difficult as organisations
became larger and more complex and it was felt that this school of thought exposed the
shortcomings of the previously discussed approaches.
This school recognised that Management is largely a decision making process and
hence introduced tools to help the manager. Mathematical methods were applied to
areas such as planning and problem solving. Its origins can be traced to the military
where teams of scientists were set assignments to make improvements. Each team was
assigned an operation which needed improvement, and by studying past operations,
collecting facts and statistical data, Operational Research was undertaken.
Some opponents of this school argue that it is a very ‘black and white’ approach, and
perhaps doesn’t take account of the human factors so necessary when dealing with
operations reliant upon manual labour. Quantitative techniques may reveal the size of a
problem, but fail to highlight fully the human aspects.
1.4. The evolution of operations management 7
1.4.3 The marketing era

(Refer to Figure 1.1) Around the 1960s, thinking changed again. Up until then the prime
concern of all organisations had been with their own operations and with maximising
productivity.
What had not yet been considered was the outside world and how the organisation
interacted with it. After World War Two factories stopped producing tanks and artillery
and began again to produce consumer goods in greater quantities than ever before.
Due to supply outstripping demand, there was a shift from a sellers market to a buyers
market; more mass producers, more competition. Many businesses realised that large
production quantities and extensive promotion did not ensure that consumers would buy
their product.
Businesses had first to determine what customers wanted, and then produce it. This
created a whole new set of challenges for the operations of a company, actually having
to consider issues such as delivery dates, controlling costs, planning, quality control etc.
The Systems School was the next school of thought to emerge and had a broader
perspective and consideration of the external environment, realising that organisations
and their operations are continually dependent upon and influenced by the external
environment. (Up until now theorists had seen organisations as closed systems, always
looking internally.) As organisations and the environments in which they operate become
more complex, other schools of thought have emerged such as the Comparative
Management School, benchmarking, comparing and learning from the practices and
activities of organisations and their operations in the same and in different industries,
and the Contingency School, where activities within an organisation are seen as
contingent on what happens externally.
1.4.4 Reasons for recent changes in operations management

The last two decades of the 20th century brought about enormous changes in the
consumer market for goods and services. The Internet quite literally opened the world
up to both consumers and businesses and meant that we are no longer restricted to
using local suppliers to meet our needs. We can enter the global marketplace and
seek out suppliers who meet our needs more exactly in terms of price, delivery, quality
etc. Around the mid 1980s, many organisations differentiated themselves by using
this technology and offered us an improved and extended level of service, or range
of products. While initially, this gave them a competitive advantage, it soon became the
norm. For example, booking low cost flights on-line was once the competitive advantage
offered only by Easyjet. However, all other airlines now operate in this way, establishing
this as the norm within the industry.
This increased competition has placed immense pressure on the operations functions
in all kinds of organisations: guaranteed next day delivery, one hour processing, twenty
four hour fast food, seven day a week shopping, direct banking etc. We now live in a
culture where we expect to have access to goods and services twenty four hours a day,
seven days a week; as a consequence, operations management has to provide for this.
Stop for a moment and think about co-ordinating the people, the facilities, the raw
materials, the suppliers, the transportation, (not to mention the waste!) necessary to
deliver us the products and services we come into contact with every day, and you start
to appreciate the challenges faced by an operations manager.
1.4.5 Changing terminology

Over the years changing terminology has been used to describe the overseeing of this
transformation process.
• Factory management
• Works management
• Manufacturing management
• Production management
• Operations management
The term operations management perhaps best reflects the activities in this area today;
an area of the business concerned with interacting with the outside world and with
members of the supply chain as well as with what is happening within the four walls
of the ‘factory’. The terms used previously, such as works and factory management,
have a manufacturing bias but operations management is now as important in service
industries, especially as the economies of the developed world rely increasingly on the
service sector.
Operations management is never ending. Once one challenge has been overcome,
there are always improvements to be made and external conditions demanding changes
in the way operations are carried out internally.
1.5 Activities of the operations manager

The ultimate responsibility of the operations manager lies with ensuring that products
or services are efficiently and effectively delivered to the customer, in a way that is
consistent with the organisation’s overall strategy i.e. what is the company trying to
achieve. Therefore his/her task is to take the gaols of the organisation and translate
them into realistic objectives for the operation. Planning is therefore a key task, both
long and short term. Planning is simply a statement of intent as to what the operations
resources should be doing and when. The operations manager can then use the plan to
monitor and control the reality of what is happening. Much of the operations managers’
working day will be spent responding appropriately to deviations in the plan!
External factors of all kinds impact on an operation’s ability to deliver product/services
effectively. In the face of these challenges, the operations manager must strive to
continually improve the transformation process so that current and future customers
are satisfied and so that the rest of the organisation can depend on an efficient and
effective operations function.
In order for this to happen, the operations manager must also interact with other
functions with the organisation:
• Product/service design function - from the outset, it is beneficial for the

operations manager to input advice at the product/service design stage in order
1.6. Volume, variety, variation and visibility 9
that products/services are designed in such as way as to be compatible with

the operation. However if new products or services are being developed, the
operations manager’s input can be invaluable and early collaboration means that
the operation can gear up for changes.
• Marketing function - marketing activity can cause demand for products and
services to increase e.g. price promotions. The operations manager must
anticipate these potential increases in demand for products or services and can
plan to take account of this.
• Human resource function - changes in the operation because of new
products/services or fluctuations in demand must also be planned for in
human resource terms i.e. the transforming resources. As many operations
rely increasingly on part-time or temporary workers, this interaction becomes
increasingly important.
• Finance/accounting function - the operations function within most organisations
accounts for the largest amount of spend. Raw materials, wages, capital
equipment, logistics etc. all cost the organisation money but are an integral part of
the transformation process. The operations manager will have a responsibility
to provide data to the accounting and finance function on current and future
spending.
Other areas such as IT and Engineering must also be kept informed of current and future
requirements.
As well as the day to day activities within the four walls of the operation, the
operations manager must embrace other broader issues such social responsibility and
environmental protection.
1.6 Volume, variety, variation and visibility

It has been noted by Slack et al (2001) that operational processes differ in four different
ways, namely:
• the volume of their output;

• the variety of their output;
• the variation of their output;
• the visibility which customers have of the processes.
Where volume of output is high, the tendency is for many tasks to be repeated and for
individuals to specialise in one or a small number of these tasks. Other implications of
a high volume output are the systemisation of work and lower unit costs.
As the variety of output increases then there is a likelihood that volume will decrease.
Greater variety usually implies greater flexibility and increasing customisation of output.
Variation in demand for a product or service has impacts on the planning of capacity to
meet that demand, the scheduling of tasks and the utilisation of resources.
Visibility means the extent to which customers are exposed to the operation’s activities
or to put it another way, how much the customer sees of the operation. In a traditional
bank branch the customer is able to observe some of the bank’s operations in the high-
visibility ‘front-office’ where staff are trained in customer contact skills. However, many if
not most of a bank’s operations are carried out in the ‘back-office’ which has low-visibility
for most customers.
These four dimensions, or characteristics, have significant implications for the cost of
creating products or services. High volume, low variety, low variation and low visibility
(or customer contact) generally result in lower processing costs. Whereas, low volume,
high variety, high variation and high visibility generally lead to increase costs. Market
demand is the major determinant of where a process will be located in each of the
dimensions. Further discussion of volume, variety, variation and visibility will be found
throughout the text, especially in the chapter on process types.
1.7 Environmental issues

One of the key external conditions with which operations managers now have to concern
themselves is environmental management. The delivery of every product or service
involves the creation of waste of some sort. One only as to look at the overflowing
bins at the roadside to appreciate the waste created by fast-food chains, or walk around
the back of a manufacturing plant to see a pile of packaging waste, or look to the sky
above a power plant to see the emissions. Before, during and sometimes after every
transformation process, waste of some sort is generated. As the 21st century consumer
becomes ever more hungry for products and services, and the industrial world expands
to cope with this increased demand, the atmosphere is becoming increasingly polluted,
landfill sites are bursting at the seams and rivers, lakes and seas are becoming ever
more polluted. Unfortunately, economic growth, for years, has involved the continued
degradation of the environment but as the 20th century drew to a close, it was generally
accepted globally by consumers, governments and industry that this could not go on.
Organisations in all sectors have got to be concerned with environmental management
within their operations and there are pressures from three main sources.
• Government legislation and regulations

• Public opinion
• Financial pressures
1.7.1 Government legislation and regulations

By the end of the 1980s, governments in all countries recognised something had to
be done in order to accelerate the de-coupling of economic growth from environmental
degradation. Government leaders met in Rio in 1992 but it was generally agreed that
‘ progress in implementing sustainable development has been extremely disappointing
since the 1992 Rio Earth Summit.’ 1
During August and September 2002, world leaders met once again in Johannesburg for
the World Summit on Sustainable Development (WSSD). This time it was recognised
1.7. Environmental issues 11
that action had to be taken and regulations and legislation had to be not just formulated
but enforced.
The UK Sustainable Development Strategy (published in May 1999 by the Labour
Government under the Prime Minister Tony Blair’s leadership) defined sustainable
development as:
Integrating economic, environmental and social policies to ensure a better quality

of life for everyone, now and for future generations 2
This means achieving four objectives simultaneously.
• Maintenance of high and stable levels of economic growth and employment
• Effective protection of the environment
• Prudent use of natural resources
• Social progress which meets the needs of everyone
Manufacturing and service providers of all sorts have the ability to affect the environment
adversely. Not only is the environment affected, but the inefficient use of raw materials,
packaging and technology can cost companies thousands of pounds in lost revenue
and in many cases could also be ruining competitiveness. Adopting a sustainability
development strategy can therefore lead to a competitive advantage.
There are many government bodies, programmes and initiatives in place now to make
sure that companies in all sectors are taking their environmental responsibilities
seriously. For example, SEPA (Scottish Environment Protection Agency) is the public
body responsible for environmental protection in Scotland. Its main aim is to:
provide an efficient and integrated environmental protection system for Scotland

that will improve the environment and contribute to the government’s goal of
sustainable development. 3
SEPA was established by the Environment Act in 1995, when their powers and
responsibilities were decided upon. In broad terms, SEPA regulates:
• activities that may pollute water;
• activities that may pollute air;
• storage, transport and disposal of waste;
• keeping and disposal of radioactive materials.
Sepa
Nearly all operations will have to concern themselves with the regulations laid down by
the likes of SEPA. Can you think of operations whose activities SEPA would regulate in
each of the categories listed above?
Other agencies or advisory bodies are involved with improving, not just regulating,
sustainable development practice within existing companies, thus allowing them to adopt
best practice, gain competitive advantage and enjoy the benefits of sound business
growth. They design frameworks within which an organisation can combine the interests
of the business and those of the environment. Although businesses in all sectors must
now consider the effects of what they do on the environment, the government must also
address the fact that businesses must see real benefits in terms of savings and profits,
in order to be encouraged to participate in Environmental Management.
One such government programme which offers free, independent and practical advice
for UK businesses to reduce waste at source and increase profits is Envirowise. A
company which has benefited from their advice is Kingsmead Carpets in Ayrshire,
Scotland. A small tufted carpet manufacturer employing 49 people, their principle
motivation was to save money through environmental improvements. Their initial step
was to review utility supplier contracts and utility bills, which resulted in the installation
of water-saving devices in the staff toilets, as well as optimising the size of its water
meter, reducing water network charges by 89% (£10530 per annum). Most impressively
however, just over £11000 a year has been saved by reducing waste disposal costs,
namely landfill and skip charges. All waste packaging is now compressed, resulting in
much better utilisation of skips and consequently lower landfill charges (a 30% reduction
in waste sent to landfill). Plastic waste is now also compressed, bailed, tied and sold on
at £80 per tonne to a plastic recycling plant. As substantial as these savings may seem,
the transformation process has had to change, adapt and be managed to achieve these
specific results.
1 www.johannesburgsummit.org
2 www.dti.gov.uk/sustainability
3 www.sepa.gov.uk
Product life cycle
The European Union (EU) has introduced legislation and regulations at least to control,
if not eliminate waste in all industries, and encourage recycling where possible. For
decades governments have seen the priority as setting new regulations and legislation
to force businesses in all sectors to clean up production processes. Landfill charges,
waste disposal taxes, control of emissions and industrial effluent etc. are all measures
which have been taken and have affected operations in all sorts of ways. All this will
continue to be extremely important but attention is now turning to the concept of Product
Life Cycle.
To survive, manufacturers must be able to understand and adapt to the new

pressures, appreciate that their environmental responsibilities extend from ‘cradle
to grave’ - from design to disposal of their products - and take an active role in
formulating ‘green policies’. (DTI, 1996)
Two such European Union directives which will have a major impact on two large
manufacturing sectors are detailed below:
End of life vehicle directive
This will force car manufactures to recycle 80% of vehicles by weight by 2006, and 88%
by 2015. This will obviously impose very high costs on manufacturers and as such has
been intensely controversial (Houlder, 2001). The directive aims to encourage the use
1.7. Environmental issues 13
of recycled materials in the industry and hopes that after 2007, 85% of the weight of
all vehicles sold will be made of reclaimed substances. Handling new components and
parts within an operation is a consistent process, where the supplier guarantees quality.
However, because the recycled parts have been previously used and handled, quality
control may be harder, building more cost and handling into the operation. Costs will
of course at some point be passed on to the consumer, but currently, many large car
manufacturers are busy building recycling plants in order that they will have a reliable
supply of ‘raw’ materials, and so that taxes, fines or penalties imposed by the EU as a
result of non-compliance will be avoided.
Impact on automotive supply chain

Think about the impact of this directive at every stage of the automotive supply chain on
• Raw material suppliers - steel, aluminium etc
• Component suppliers - valves, exhausts, axles etc
• Car Assembly plants
• Car Dealerships
• The final consumer
Waste electrical and electronic equipment directive (WEEED)

This will force manufacturers of electrical goods and equipment to recover between 60%
and 80% of electronic waste by 2006. Goods covered by the directive include freezers,
washing machines, personal computers, televisions, electrical toys etc. However its
success will rely largely on the willingness of the consumer to return an old appliance
to a retailer (many of us store defunct electrical goods in the back of a cupboard before
finally dumping them in the bin) (Guthrie, 2001).
Practical implications
Consider the practical implications of such a directive at every stage of the supply chain.
What are your attitudes to directives such as these?
As these directives come into place, other industrial sectors will be looking with interest
and apprehension at how well organisations within the affected industries cope. In the
long run, once operations have changed and adapted to this new way of operating, their
attitudes and efforts towards recycling could not only substantially reduce their own
running costs but could help attract a more environmentally aware consumer, and be
used as a competitive advantage.
1.7.2 Public opinion

It could be argued that the government legislation and regulations, which have just been
discussed, are a reaction to general public opinion about the environment. There are
specific groups of people, discussed below, whose opinions on the environment have
forced operations of all kinds to make changes and adapt their practices:
Consumers
As mentioned previously, 21st century consumers are increasingly concerned about
the environmental soundness of the products they buy (and the processes used in
manufacture) and the services they use. The ‘green’ consumer now has immense
power and expects products that make less demands on the environment, favouring
companies with an environmentally sound track record (it could be argued however that
many consumers are still swayed by price). The Body Shop, the international retail chain
selling toiletries and cosmetics, is a testament to the marketing success of ‘greenness’.
Shareholders
These investors want the best possible return and increasingly will favour companies
with sound environmental policies. The potential public embarrassment and consequent
loss of share value to a company exposed as environmentally irresponsible may be seen
as a threat to investors.
Business partners
Suppliers and contractors with poor environmental records can damage a customer’s
image i.e. a large retailer using suppliers with poor environmental practices again could
be the potential source of embarrassment and damaging publicity.
Employees
Employees should be kept informed and involved with environmental protection. The
small carpet company mentioned previously in Section 1.7.1 admits that it could not
have achieved the results it has without the enthusiasm, willingness and involvement of
all employees who realise that, if environmental management benefits the company’s
profitability, then their long term future is more secure.
The Community
Companies must co-exist with the local community. People value their environment and
will look very unfavourably at manufacturers or service providers who adversely affect
their local environment in any way, be it through emissions, noise pollution, litter etc.
1.7.3 Financial pressures

Because of increased global competition, all organisations face the challenge of
reducing their costs whilst maintaining or increasing profits. As mentioned previously,
the operations function within most organisations usually employs the largest share of
the manpower and has the highest spend on materials and equipment. As demonstrated
in Section 1.7.1, more environmentally sound practices within operations can actually
reduce a company’s cost base considerably. This is just one example of the savings
a small company can make using environmental management. Think of the scale of
potential savings to be made for a large global organisation!
As governments tighten up their environmental policies, the cost of waste disposal is
rising (partly due to a shortage of landfill sites) and more stringent legal controls have
been introduced about what can and can’t be disposed of in this way.
If some sort of toxic waste is an inevitable by-product of the transformation process
(such as in a chemical works, a power plant, or a hospital), then a special licence
must be applied for from a body such as SEPA. However, this will cost the operation
1.8. International operations 15
as SEPA operate in line with the ‘polluter must pay’ principle. Consent will be issued to
the operation, detailing the location of the discharge, allowable flow, and the maximum
allowable concentration of chemicals, emissions etc. SEPA will monitor the discharge
(again charging the operation for this service), and heavy penalties and fines will be
imposed should the conditions of the consent be breached. SEPA has the power, if
necessary, to refer cases to the procurator fiscal for prosecution and, if found guilty,
a ‘polluter’ may be fined or face a term of imprisonment. The accompanying adverse
publicity would also impose huge financial pressures on the organisation.
A company’s environmental track record is increasingly considered by potential investors
such as banks, venture capitalists etc. Insurance cover is also another financial
consideration for manufacturing processes; insurers now require manufacturers to carry
out environmental audits before insurance cover will be provided.
1.7.4 The environmental technology sector

Whole industries have grown up around environmental protection, and as directives
such as the ones described previously come into place, many will turn what could be
seen as a problem into an opportunity. One only has to put any of the examples listed
below into an Internet search engine to see the extent of the growth in this sector. All the
services provided interact in some way with operations, either at the input stage, during
the transformation process or at the output stage.
• Environmental Auditing and Consultancy

• Air pollution control
• Water and sewage effluent treatment
• Measuring, control and analysis equipment
• Soil remediation and site clean-up
• Marine pollution control
Environmental technology sector

Can you think of other such businesses in this Environmental Technology Sector?
At first, an operations manager may regard environmental issues, public opinion,
legislation and regulations etc. with derision, thinking perhaps that the whole
transformation process is difficult enough without these added complications. But these
so-called ‘complications’ ensure a sustainable future for both businesses and the public,
where economic growth is not at the expense of the environment.
1.8 International operations

So far we have established that the operations manager has a highly challenging,
complex and sometimes hugely demanding job, affected greatly by the external
environment. Unfortunately, as the 20th century progressed, that job got harder!
As global competition in all sectors intensifies, and the opening of new markets
reshapes the global market place, many operations managers must now deal with the
internationalisation of their activities. The study of international operations is therefore
becoming increasingly important.
For most organisations, the decision to ‘go global’ has been forced by the market. As
consumers demand more choice, more innovation, lower prices, faster delivery etc,
changes must be made.
You do not choose to become global. The market chooses you; it forces your hand.
There are no impediments to world-wide distribution. We must have an
organisation that can install and move the links of the business chain to any part of
the world (McCormick and Stone, 1990).
In many sectors it has actually become imperative that firms develop overseas capacity
and distribution networks in order to stay competitive. In the service sector, globalisation
is all about bringing the service closer to the customer. As the media exposes different
cultures to what is available in other parts of the world, demand is generated and a
market is then created for a service, allowing for the expansion of the operation. We now
have a McDonalds fast-food restaurant on almost every major high street in the world,
and retailers such as GAP can be found in many major cities and shopping centres.
Services previously delivered to us by independent local providers, for example a small
independent electrical retailer, are increasingly now provided by large national, if not
international chains. They strive to provide us with goods and services at competitive
prices and are able to do so largely because of their immense buying power and the
achievement of economies of scale. They also strive to provide us with consistent
service; every time you walk through the door of a McDonalds, you have expectations
in terms of price, quality and speed of service as well as the quality of the product, and
the physical surroundings. The operations manager must put the resources in place to
achieve this. Many service operations may be linked globally, but on a day to day basis,
the transformation process may actually acquire inputs from, and produce outputs for,
the local area. Despite the consistency they strive to achieve, geographically dispersed
global service organisations must recognise that cultural local differences exist. ‘
Think globally, act locally’ (Barham, 1991) must be the message for the international
operations manager.
Manufacturing operations have gone global for very different reasons. As trade
agreements are dissolved, markets become flooded with cheap imports, forcing the
hands of many manufacturers in the West to seek out alternative suppliers. A growing
number of products, from garments to cars, are produced in multiple plants dispersed
around the globe. Products previously manufactured in a single factory location are
now produced by a complex network of facilities, often separated by thousands of
miles (Meijboom, 1999). Because of improved communications technology and logistics
management, companies are no longer restricted to using local suppliers for inputs and
can seek out opportunities internationally to reduce costs, improve quality and innovate
(Swamidass and Kotabe, 1998). Firms can expand their horizons and increase their
competitive advantage by sourcing externally and globally.
For example the clothing and textiles manufacturing industry in the UK, which is still
relatively labour intensive, has found it necessary to move most garment and fabric
production overseas in order to take advantage of cheaper labour costs. These cost
benefits are then passed on to the increasingly demanding consumer who scrutinises
1.9. Summary 17
purchases in terms of price, style, quality and value. However, most of the well-known
British high street retailers still have their head office functions in the UK; thus the
operation has become international.
Co-ordination of international operations can seem like a daunting task.
Operations manager responsibilities

Contemplate the operations manager’s responsibilities in the following global
organisations:
The car rental company
Mr Jones sits at home in Scotland and books a hire car via the Internet. He flies to Paris
and picks up the car. He then drives from Paris to Madrid where he returns the car to
the service desk and flies home. The operations manager must then decide how best
to deal with this change in location of resources.
The multi-national clothing retailer
Mrs Smith enters a well know multi-national clothing retailer to buy a dress in Scotland.
The fabric for the garment was sourced from the Far East, the buttons and labels were
sourced from the USA, the garment was made in Turkey, distributed via a warehouse in
central Europe and delivered to the store using a British haulier.
Behind many seemingly straightforward transformation processes there is an intricate
network of supporting systems, organisations and suppliers, all of which require the
attention of the operations manager if the organisation is to deliver the product or service
efficiently and effectively to the customer. Mr Jones would not be impressed if he was
asked to drive back to Paris to return the car, and Mrs Smith would be disappointed if
the retailer was not providing her with the type of garments she expected, in terms of
quality, style and price.
1.9 Summary
Operations management is the term used to describe the tools, activities, decisions and
responsibilities of the people who manage the transformation of inputs into outputs. All
operations conform to this transformation process, whether service or manufacturing,
small or large, national or global. The operations manager’s prime concern was
once what was going on within the operations. Today he or she must look to
the external environment for factors which could affect the operation both positively
and negatively. Changes in consumer demand, increased competition, increased
environmental awareness, government legislation, advancements in technology, and the
globalisation of many organisations are some of the external factors changing the face of
operations today and making it a critical function within any successful and competitive
organisation.
1.10 Review questions

For questions 1 to 5 select the appropriate response.
Q1:
During the Production Era, management was primarily concerned with:
a) The customers needs

b) Productivity
c) Human resources
d) Consumer choice.
Q2:
Operations management has grown in importance because
a) Consumers are less demanding now than they were 100 years ago
b) Technological advancements have created a global marketplace
c) Competitive advantage is now very easy to achieve
d) Competition is much less intense today.
Q3:
Which of the following is not a core function of an organisation?
a) Marketing (including sales)

b) Operations function
c) Accounting and finance function
d) Human resources function.
Q4:
Sustainable development is concerned with
a) The environmental soundness of products only

b) The social concerns of the community only
c) Economic growth only
d) Economic growth that considers environmental and social issues.
Q5:
The End of Life Vehicle Directive will force car manufacturers to:
a) Crush and dispose of used cars in landfill sites

b) Use at least 80% recycled parts within new cars
c) Clean up their production processes only
d) Source new suppliers for car parts and accessories.
1.11. References 19
Q6:
Discuss the opportunities and threats that exist when an organisation decides to ‘go
global’.
Q7:
Debate the importance of the operations function over the other two core functions within
organisations.
Q8:
Look at the garment labels in the pieces of clothing you and your fellow students are
wearing today.
• In which country was the garment made?

• Where did you buy the garment?
• If the garment is branded, where is the country of brand origin? (i.e. Nike originates
in the USA)
• Why do you think these two countries may be different?
• What are the operational implications of the country of manufacture, the country of
brand origin and the country of purchase all being different?
1.11 References
Barham, K. (1991) The quest for the international manager, Executive Development, Vol
4, No. 1, Emerald
Guthrie, J. (2001) Industry left to bear the burden, Financial Times, 19th March.
Hill, T. (2000) Operations Management, Strategic Context and Managerial Analysis.
McMillan Business.
Houlder, V. (2001) Talking tough about hardware and packaging, Financial Times, 6th
March.
McCormick and Stone (1990) quoted in Shi, Y. & Gregory M.,International Manufacturing
Networks: A new Manufacturing System for the Future Competition, taken from book
published for Workshop on International Operation, Aston University, Tuesday 31st
March 1998.
Meijboom, B. (1999) Production-to-order and International Operations, International
Journal of Operations & Production Management, Vol. 19, No. 5, 602-619.
Naylor, J. (2002) Introduction to Operations Management (2nd ed.) FT/Prentice Hall.
O’Connor, G. (6th March 2001) A moving glimpse of an afterlife for the car, Financial
Times.
Slack, N. et al. (2001) Operations Management (3rd ed.) F/T Prentice Hall.
Swamidass and Kotabe, (1998) in Ope, J.A. & Prasad, Sameer, The measurement of
international inventory systems, Logistics Information Management, Vol. 11, No. 6,
375-385
www.sistech.co.uk
www.envirowise.co.uk
www.sepa.org.uk
21
Chapter 2
Operating Systems, Performance

Objectives and Operations Strategy
Contents
2.1 Overview of the systems approach . . . . . . . . . . . . . . . . . . . . . . 22

2.2 Application of the systems school to operations management . . . . . . . 23
2.3 Open and closed systems . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
2.4 Performance objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.4.1 Types of performance objectives . . . . . . . . . . . . . . . . . . 32
2.4.2 Performance objectives future directions . . . . . . . . . . . . . . 35
2.5 Operations strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
2.5.1 Approaches to formulating an operations strategy . . . . . . . . . 39
2.6 IKEA -Story of a Swedish success . . . . . . . . . . . . . . . . . . . . . . 40
2.6.1 The business idea . . . . . . . . . . . . . . . . . . . . . . . . . . 42
2.6.2 Organisational structure . . . . . . . . . . . . . . . . . . . . . . . 42
2.6.3 Sustainability of the environment . . . . . . . . . . . . . . . . . . 43
2.7 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
2.9 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Learning Objectives
By the end of this chapter, you should be able to:
• explain systems and its importance to operations management;
• distinguish between open and close systems;
• understand the role of feedback and performance objectives;
• explain the role of operations strategy within an organisation.

22 Chapter 2. Operating Systems, Performance Objectives and Operations Strategy
2.1 Overview of the systems approach

According to Naylor (2002), the operations function is the core of an organisation and
accounts for 80% of the employees and most of the added value in many organisations.
Given the importance of operations management to organisations, and the fact that
operations management probably existed for as long as mankind produced goods and
services, it is important that we take a step back and look at what makes up an
organisation by revisiting the various schools of organisational thought. Figure 2.1 below
illustrates the evolution of management theory over the last century.
Figure 2.1: An overview of management schools

You are probably familiar with the term Taylorism and the Scientific Management School
of thought that came about between the 1890s and 1930s during a period of labour
shortage and the need to increase productivity through scientifically engineering the
best methods for performing any task. This complemented the Classical School of
Management thought, coined by the founder Henri Fayol (1841-1925), who ‘believed
that sound management practice falls into certain patterns that can be identified and
analysed’ (Stoner et al, 1995).
While the Scientific and Classical Management Schools of thought focused on the
technical aspects of the tasks, it was perceived later on by the Human Relations
movement that too much emphasis was placed on the technological factor at the
expense of the human one. It was Elton Mayo (1880-1949) and his infamous Hawthorne
Experiments, which pioneered the use of the scientific method in the studies of
people in the work environment and brought about the human relations movement and
behavioural science approach.
The Second World War saw the emergence of operations research and the growth of
the Management Science School. This is basically a problem solving approach using
mathematical techniques for modeling, analysis and developing solutions to predict the
future. Although this was useful, the approach tended to ignore the importance of
people.
2.2. Application of the systems school to operations management 23
So, during the first half of the twentieth century, we saw the importance of increasing
efficiency by analysing the tasks and using the machine metaphor to treat the workforce
(Scientific Management and Classical School of thought), understanding the behaviour
of the workforce so as to motivate and hence improve the productivity (Human Relations
movement and Behavioural Science) and the need to understand the organisation and
extrapolate into the future (Management Science).
What these earlier schools of thought achieved was to deal with various segments of an
organisation, but separately. In 1950, Ludwig von Bertalanffy (1901-1972), a theoretical
biologist by profession, sent for publication An Outline of General Systems Theory after
noticing that in physics, biology, psychology and social sciences it was no longer was
acceptable ‘to explain phenomena by reducing them to an interplay of elementary units
which could be investigated independently’. Bertalanffy thought that General Systems
Theory would ‘be methodologically an important means of controlling and investigating
the transfer of principles from one field to another’; that it would ‘guard against superficial
analogies, which are useless in science and harmful in their practical consequences’
(Bertalanffy, 1950).
The word system is derived from the Greek word synistanai, which means ‘to bring
together or combine’. General Systems Theory therefore is a general science of
‘wholeness’, and can be applied to the understanding of organisations.
The Systems School is in essence an attempt to overcome the perceived problems of
earlier schools of management thought and attempts to get the manager to see the
whole organisation as composed of sub-units called sub-systems. Systemic thinking
forces managers to appreciate that any action they might take in their own area will
create a direct or indirect effect on all the other areas within the organisation.
The finance department of a university, for example, may decide to increase revenues
by increasing student intake, whereas the academic unit responsible for teaching quality
might be concerned with enlarging the teacher to student ratio and may wish to keep
classes sizes down. So, a systems oriented manager within this setting would consider
the impact of these decisions on other departments and on the entire organisation.
2.2 Application of the systems school to operations

management
Consider the classic assembly line situation in a factory. At one end, we begin with the
various inputs such as land for the factory, workers on the assembly line, raw materials
for the end products, management of the workforce, supply chain and information etc.
The input resources are then transformed into the end products, both tangible (e.g. cars,
computers etc.) and intangible (e.g. reputation, experience and satisfaction).
The classic assembly line example above gives us an idea of the basic operations
systems model, depicted in Figure 2.2 below.
Figure 2.2: Input-output systems model

This model not only represents the typical factory example, but also can be used to
describe the operations of virtually any type of organisation. Take a service type
operation such as enrolling students into a university. The inputs would include the
students, lecturers and support staff (e.g. administrative, halls of residence, catering
etc.), the classrooms and teaching materials, and not forgetting examinations. Through
the duration of the course, these resources are transformed into such outputs as the
attainment of the qualification pursued, the experience of being in university, a hopefully
good career for the student, which is translated to satisfaction expressed by the student
in the form of a continued relationship with the university’s alumni department. See
Figure 2.3 below.
Figure 2.3: Application of input-output systems model in a university

So, you see, the input-output systems model can really be used to explain the operations
under any given scenario.
Situations
Have a think about other situations around you, e.g. withdrawing money at the bank or
air travel to a holiday destination. Table 2.1 below offers a few more examples.
2.2. Application of the systems school to operations management 25
Table 2.1: Examples of organisational inputs, outputs and transformation processes

Organisation Inputs Transformation Outputs
process
Airline Aircraft Move passengers Transported
Pilots and air crew and freight around passengers and
Ground crew the world freight
Passengers and
freight
Bank Cheques Safekeeping Interest
Deposits Investment Storage
ATM’s Statement Loans
Customers Preparation Statements
Department store Goods for sale Display goods Give Customers and
Staff sales sales advice Sell goods assembled
Computerised goods together
registers
Customers
Frozen food Fresh food Food preparation Frozen food
manufacture Operators Freeze
Food-processing
Equipment
Freezers
Hospital Patients Surgery Cured Patients
Equipment Nursing Care Laboratory Test
Drugs Drug Prescriptions Results
Source: adapted from Slack et al (2001)

We have so far looked at the inputs and outputs without much elaboration on the
transformation process. Slack et al (2001) identified three types of transformation
process, namely materials, information and customers transformation.
• Materials transformation is perhaps the most apparent of the three probably

because one can actually see change and transformation taking place. Take the
standard factory example for instance, raw materials are procured and made or
assembled into semi-finished or finished goods in the factory. Whilst Slack et
al termed this as the transformation of physical properties, they also identified
materials transformation with regards the location of the materials. Therefore, the
delivery of raw materials to site, or even the delivery of a letter, all constitute a
transformation process.
• Information processing is extremely vital in this day and age, especially in a
financially driven economy such as that of cities like London and Edinburgh in the
UK. Think about the countless number of times you fill out a customer satisfaction
survey, or the times when you make a transaction with your credit card, we are
almost always faced with the giving or accepting of information, which seems to
disappear somewhere (in electronic databases that replace the colossal number
of factories that we would need to store files conventionally!). In most cases, the
information is processed and merely the ownership is transferred. In some others,

information is actually processed into an actual product, for example, a concept for
a new product or even transforming building plans into actual buildings.
• Customers are also a very important part in today’s business world. We

have talked about customer satisfaction earlier in this chapter. This represents
the transformation of the psychological state of the customers. Indeed, the
‘experience’ industry is a very vibrant one, from a night at the theatre to gasping
mouths as visitors walk into a large theme park for the first time. However,
customers may also be transformed physically. For instance a trip to the
hairdressers or a makeover at the cosmetics counter are apparent examples of
physical transformation whilst a visit to a massage therapist constitutes a less
obvious example.
Examples of transformation processes can also be found in Table 2.1 above.
2.3 Open and closed systems

It was mentioned earlier that under the systems approach, an organisation as a system
has sub-systems working interdependently. One of the earlier portrayals of such
interaction between sub-systems was probably developed by Kast and Rosenzweig
(1979) in the organisational system shown in Figure 2.4 below. Kast and Rosenzweig
identified five sub-systems that make up an organisation. These were:
• Goals and values sub-system;
• Technical sub-system;
• Psychosocial sub-system;
• Structural sub-system, and;
• Managerial sub-system.
2.3. Open and closed systems 27
Source: adapted from Kast and Rosenzweig (1979:109)

Figure 2.4: The organisational system with the 5 sub-systems and suprasystem
According to Kast and Rosenzweig, every organisation should have goals and values
that it aims to accomplish. In order to achieve these goals and values, there must be
adequate knowledge on the techniques required. These are in the form of facilities
and equipment. Additionally, it is important to embrace human resource management,
for facilities and equipment would be useless without the presence of people. The
management and understanding of the workforce, the motivation and interaction among
the employees therefore constitute the psychosocial sub-system. Integrating the
physical and human aspects of every organisation represents the structural sub-system
and at the very heart of these sub-systems is the managerial sub-system. This
managerial sub-system is effectively suprimposed on the other four sub-systems as
it involves such activities as planning and controlling, goal setting and monitoring and
evaluation of the organisational operations.
The five sub-systems offer a general model that can be used in understanding the
relatively fixed elements of organisations and the organisational taxonomy allows for
a wider view of organisational systems to be taken. As evident from Figure 2.4, the
central tenet of the model is still the basic input-transformation process-output model.
Thus, this model can also be applicable to the study of the various operations of an
organisation, e.g. product development, sales, production, finance etc.
A key aspect of the Kast and Rosenzweig model is the introduction of the suprasystem
called the environment. In principle, systems can be categorized as either open or
closed systems. As the name suggests, open relates to some form of interaction
with the environment whilst closed implies no interaction at all. Kast and Rosenzweig
saw an organisation as a system that gathered inputs from the environment and then
transformed them, within the organisation, into outputs. The outputs produced will
then be ‘thrown back’ into the environment and become inputs for other systems (or
organisations). As such, the modern organisation is very much an open system, which
interacts with the environment. However, the extent to which the interaction takes place
differs. Therefore, systems can really be described as more open or more closed in
reality. More detailed discussion of these areas is contained in the environmental issues
section of the previous chapter.
Unlike the traditional theorists who assumed that an organisation is always stable
due to an unrealistic closed system assumption, the systems approach realizes that
organisations are constantly subjected to stable and unstable periodic cycles. This
means that the relationships within each sub-system and the relationship between the
external environment and the organisation may not be the status quo. Instead, they are
constantly changing for the better or the worse. It is therefore important to analyse the
factors that would subject the organisation to this stable-unstable cycle or continuum.
These factors can be broadly classified into
• Social variables;
• Technological variables;
• Economic variables, and;
• Political variables.
Social variables include demographic, lifestyle and social values. Perhaps the
greatest influence on operations is the result of immigration. A once Irish dependent
UK construction industry now sees a diminishing number of English-speaking Irish
tradesmen and a workforce replaced by an influx of Eastern European migrants,
partly due to the growing affluence of the Irish republic and the opening up of former
communist states in Eastern Europe. Consequently, differences in language and
working culture need to be embraced by the management of operations, e.g. modifying
safety hand signals on sites to make it understandable across the different nationalities.
Developments in technology are probably most apparent in the latter half of the twentieth
century. One obvious effect of the rise in the use of computers is the management of
information and data. Boxes of files stored in archiving warehouses are now replaced by
a click of the mouse button, improving efficiency and effectiveness tenfold. The presence
of the Internet allows organisations to work virtually twenty-four hours a day by tapping
into resources anywhere in the world thus changing the face of many operations. For
instance, one can now fly round the globe with an e-ticket purchased over the Internet,
from an agent working in a back office in say, India, as opposed to walking into a ticket
office physically located near to you.
Economic variables are defined as general economic trends that would affect the
organisations’ activities like wages, prices and employment. As we all know, every
economy is subjected to cycles of boom and bust. These cycles would inevitably have an
effect on operations. For example, new product development and even the production
line would depend on the financial climate at any given point in time. The significant
downturn of the global stock markets at the turn of the twenty-first century resulted in
decreasing consumer confidence and many stories of redundancy and unemployment.
Operations managers are in the front line in having to respond to the impact of these
2.4. Performance objectives 29
factors.
Last but not least, regulations and legislation play an active role in influencing operations
as well. The ratifying of the Kyoto Protocol on the emission of greenhouse gases
and the trend towards sustainable development means that operations like car design
and manufacturing will have to adapt to meet the new legal requirements. Another
example where operations have been influenced by legislation was the introduction and
enforcement of the Disability Act within the Building Regulations in the UK in 1999. As
a result, a great number of building contractors attempted to complete existing projects
before the start of the new legislation, for fear of losing millions of pounds by having to
incorporate the new legal requirements in the design of buildings.
Sub systems
These are some of the examples of how the systems and sub-systems interact with
each other and with the external environment. Consider for a moment an organisation
that you are familiar with and attempt to map out the various sub-systems within it and
how these are inter-related with one another and the external environment.
2.4 Performance objectives

We have hitherto defined the systems approach and its application in our study of
operations and established that virtually all systems interact with each other and the
external environment. With such interaction, the element of feedback constitutes a
vital role whether it is feedback from within the organisation throughout the input-
transformation process-output model or from external stakeholders such as customers.
Organisations are able to then respond to feedback by constantly adjusting and
controlling operations to ensure sustainability and survival. What is to be covered in
this section is how this can be used in the controlling of operations.
By definition, management control is the process of ensuring that actual activities
conform to planned activities. It is perhaps why planning and controlling tend to go hand
in hand. Outcomes do not necessarily occur as planned and it is essential to ensure
that the inputs transformed into outputs are carefully planned and controlled to meet
goals and targets satisfactorily. As the infamous Murphy’s Law states, ‘If it is possible
for something to go wrong, then it will.’ Figure 2.5 below depicts a basic process control
model.
It has been claimed that Peter Drucker, the famous American management guru, once
said, ‘if you cannot measure it, you cannot manage it.’ Although feedback is vital to
ensure that operations are run satisfactorily, one cannot manage them if there are no
measurable objectives upon which feedback is based on. The setting of standards
and the measurement of performance indicators (Figure 2.5) are therefore extremely
essential.
Source: adapted from Stoner et al (1995:559)

Figure 2.5: Process control model
Case 1: The gloom over Britain’s universities

Read this illustrative case reporting on the gloom over Britain’s universities and attempt
to identify some of the performance objectives highlighted.
The procrastination would impress the idlest of students. During last year’s general
election campaign, the government discovered that changes it had made to the way
universities and their students are financed had upset many voters. As in many other
western countries, the number of students entering higher education in Britain has
grown enormously in the past 40 years. Whereas around one in 20 school-leavers went
on to university in 1960, more than one in three do so now. There was an especially
big boom in the number of young people going on to higher education in the late 1980s
and early 1990s. The Prime Minister Tony Blair wants to revive this expansion, and has
set a target for 50% of 18-30 year olds to experience higher education by 2010. Many
countries have struggled to manage such educational explosions, but in Britain, it has
been handled especially badly. Kingsley Amis, a novelist and academic, famously stated
in 1960 that ‘More will mean worse.’ To an extent, that was inevitable.
Expenditure per student has declined steadily, with a more rapid fall during the early
1990s. Since 1989, funding per student has fallen by 37% in real terms, while student
numbers have increased by 90%. This squeeze has had predictable results. The ratio
of students to teachers has doubled from around 9:1 ten years ago to 18:1 now. A
new lecturer at one of Britain’s old universities now earns about the same as a new
policeman. Buildings, facilities and equipment have deteriorated.
Money is not the only problem. Within the broad economy of higher education, many
different types of students study an enormous variety of subjects in a wide range of
institutions. Unfortunately, the tendency of the policy makers has been to erase or deny
the differences between them. Martin Trow, of the University of California, Berkeley, a
long-term student of British and American higher education, says that this was a move
‘exactly in the wrong direction’: whereas what was needed was a clear articulation of
the different characteristics and callings of different institutions, the reform obliged many
of them to compete for the same resources and be judged (in some cases unfairly) by
the same criteria.

It is difficult conclusively to prove the notion that Britain’s top universities are falling
behind their international counterparts, such as Harvard and Yale in the US. There
is, after all, no internationally agreed definition of what a university is supposed to do.
‘Fitness for the world’ - what J. H. Newman, the great 19th century advocate of a liberal
education, saw as its ultimate aim - is tricky to measure. Teaching is obviously part of
any definition; but is difficult to compare the modular education offered in top American
colleges with Britain’s predominately single-subject approach.
The creation of wealth is increasingly regarded as part of a university’s role; and in terms
of the efficiency with which they spin off companies and pull in outside investment, British
universities seem to be doing rather well. They still attract more than their fair share of
foreign students.
But there are some indications that Britain’s share of top-level research is diminishing.
Britain won 11 Nobel prizes in chemistry, physics, physiology and medicine in the 1960s,
13 in the 1970s, four in the 1980s and two in the 1990s. According to Andrew Oswald
of Warwick University, only 80 of the world’s 1200 most cited scientists are working in
Britain, compared with 700 in America, whose lead is growing. The government sees
the problem but not the solution. It tinkered with funding arrangements in 1998 when
it introduced small student fees to cover part of the cost of tuition, and supplement the
much larger state subsidy. Some economists argue for cutting universities loose from
government and allowing them to raise money through fees, a solution Adam Smith
would approve. Smith observed that a teacher’s diligence is likely to be proportional
to the motive which he has for exerting it. Britain’s universities have been subjected to
socialist centralism for too long. It would be good to bring a bit of Smith back into them.
(Source: adapted from ‘The ruin of Britain’s universities’, The Economist, 16-22 Nov
2002, 29-30)
You are probably able to identify the importance of funding, quality and spread of
courses offered and taken, ability to attract investment and even the number of Nobel
prizes won as some of the performance objectives stated in the article.
Indeed, there exists some commonality between these objectives. That is, they are
measurable and comparable. While performance objectives can be a powerful tool to
align the resources to operate towards goals and targets satisfactorily, the purpose of
such achievement would be defeated if it is not laid out in measurable terms. So the
age-old question of what makes a good product good needs to be examined.
Take for instance a visit to a local restaurant. It is very difficult to establish if the food
tastes good or not because let’s face it; we all have different tastes where the palette is
concerned. However, if we were to use criteria such as number of satisfactory comments
received from patrons, or number of good reviews in the various periodicals, or more
unlikely, number of food poisoning incidents reported, this allows the objective of good
quality to take the shape of a number, which is not only measurable, but also comparable
across time. So, if a restaurant reports 50 food poisoning occurrences in year 1 and 25
occurrences in year 2, we know that the objective of serving ‘good’ food is probably met.
Reflecting on the article on British universities above, this is clearly manifested in the
report on funding figures, student to staff ratio and even number of Nobel prizes won
across the last 40 years.
The extent of measuring and managing performance objectives also varies from
organisation to organisation, and operation to operation. For example, the punctuality of
public transportation may be taken to have a greater allowable tolerance as opposed to
the safety of public transportation. In other words, it may seem reasonable that 90% of
an airline’s flights depart and arrive on time, but not so much the same if only 90% of the
same airline’s flights arrive safely with no fatalities. Therefore, it is important to establish
performance objectives as it is seen fit for purpose.
2.4.1 Types of performance objectives

Slack et al (2001) broadly classified performance objectives into five key categories of:
• cost;
• speed;
• quality;
• dependability, and;
• flexibility.
Cost
At the turn of the twenty-first century, with a trend towards rationalisation and a need
for organisations to be cost-effective, the cost performance objective is perhaps one of
the most important and major performance objectives to be looked into. Indeed, an
organisation that is able to achieve cost-savings in its operations would be able to pass
on the savings to the customer in terms of lower prices. Although many customers would
consider the quality of the purchased goods and services among other factors, in reality,
most decisions are perhaps based on price. Therefore the need to manage the cost of
operations would affect the organisational ability to attract customers and thus lead to
the sustenance of profitability over time.
Costs are manifested in terms of staff costs, facilities and technology and material costs.
Staff costs are perhaps the easiest to adjust as evident in times of crisis, whereas costs
relating to facilities and technology may not be easily reduced or increased, as there
are often the issues of time and financial investment involved. Material costs relate
to the costs of using or transforming materials in the process, and may at times be
adjusted to meet the cost performance objective. For instance, one would not expect
a housebuilder to reduce the cost of building materials by cutting corners on a project.
Instead, the ability to source for cheaper products or even alter the method of procuring
materials, e.g. Just In Time, would be desirable.
We have hitherto implied the financial aspects of the cost performance objective and
that we should aim to reduce the costs of operations to please the customer. It is
increasingly important to consider the non-financial costs to the organisation as well. For
instance, downsizing a workforce in a wave of redundancies may represent significant
savings on a company payroll. Yet, this axing of staff also constitutes the severing of
relationships built over time and the knowledge loss in the process. The reputation of a
company with the other stakeholders (apart from the customers) such as shareholders,
members of the public, governmental bodies etc. may be detrimental to the survival
of the business. Therefore, it is important, when managing performance objectives to
consider the relevant stakeholders involved.

Speed
Time is money seems to be a business cliché. Nevertheless, while the cost savings
in operations may lead to increased business, the ability to be efficient and compete
on the basis of time are also vital in areas of organisations such as hospital accident
and emergency departments. Of course, not all situations represent a matter of life and
death. Take the article above on Britain’s universities. It was mentioned that Britain
‘still attracts more than their fair share of foreign students.’ Perhaps the time needed to
complete a degree in Britain (e.g. 3 years in England and Wales; 4 years in Scotland)
is relatively shorter than universities in the Continental Europe (e.g. 5 years or in some
cases up to 7 years). Furthermore, the reduction in time needed to finish a degree
translates to cost savings for the student and a much quicker move into the job market.
The ability of a supermarket to sell its food products quicker could save many pounds
or dollars on storage and maintain the freshness of products on display. Speed is
essential in competitive situations as well. One clear example is in the technology
sector. The ability of organisations such as Microsoft to launch new software ahead
of its competitors ensures its ability to maintain its position as market leader. Getting
ahead also reduces risks and uncertainties of the future. A housebuilder would want to
seize the opportunity of a booming economy to ‘churn out’ saleable property during an
economic boom for it would be disastrous if the houses were completed only during a
downturn in the economy.
Quality
The quality performance objective relates to ‘doing things right’ and in many cases
represent a very subjective concept. Afterall, consumer tastes varies across the board
and often it is very difficult to quantify one’s experience of a product. Quality can be
obvious in certain situations and not so clear-cut in others. For instance, the quality of
an aircraft in a long-haul journey across the globe would be undoubtedly judged by the
ability of the aircraft to arrive at the destination in one piece! On the other hand, the
number of Michelin stars a restaurant bears may determine its quality or as mentioned
earlier, quality could also be reported in the form of number of food poisoning incidents.
It has to be reiterated here that regardless of the performance objective in question, it is
important that it should be related in measurable terms.
We have so far talked about quality in terms of products and services. However, quality
of operational processes are equally, if not more, important. Particularly in the service
sector where customer satisfaction is the prime objective, quality of say the process of
reserving a seat in the train is vital to ensure the customer gets the tickets on time,
with the journeys and times requested and in some cases, the type of seats required.
Correcting simple errors like wrong journey times would not only mean more financial
costs on the company, but loss of customer confidence in the organisational operations
as well.
Dependability
This brings us to the next performance objective of dependability. It goes without saying
that operations within an organisation have to be reliable in order to achieve stability,
for the other internal operations that are intertwined or for external stakeholders e.g.
customers and shareholders. So, how do we identify dependability in measurable
terms? Consider the use of emailing and Internet facilities in a present day company. It
is almost an indispensable and often taken for granted resource in modern operations.
Now, think about a multi-national consultancy firm that employs such a medium to
communicate information and possibly business transactions through such a network.
Dependability can be measured by number of days the computer system crashes and
if an organisation were to have say, for arguments’ sake, three crash days reported,
this is equivalent to roughly 1% of the working year. To set it into perspective, this
could represent 1% loss of annual profits. Perhaps this may seem an outrageous
exaggeration, but it certainly drives the idea of dependability forward.
Lack of dependability can also cause an adverse effect on a company’s operations.
The crash of Pan Am flight number 103 at Lockerbie in Scotland in 1988, certainly cast
a shadow of doubt on the dependability of security operations of both the airline and
also the airport from which the flight departed. This is, however, not how the public
viewed it and a stigma at the very mention of Pan Am is probably one of the major
causes for that airlines eventual failure. The instances of poisoning by the then market
leader of sparkling water, Perrier, certainly indicated to the customers of a shortfall in
dependability of its bottled water, resulting in the breakup of a monopolized industry.
Flexibility
Finally, flexibility relates to the ability in changing and adjusting an organisation’s
operations, and relates to the responsiveness towards such stakeholders as the
customers. Flexibility can be manifested in terms of product/service type or mix,
volume or delivery flexibility. For instance, the wide range of courses offered by British
universities in the article above is an example of product type and mix flexibility. This is
perhaps another reason contributing to the success of British universities in attracting
foreign students. This flexibility enables British universities to mix and match courses
to meet current market demands (e.g. during the dot.com boom and the current
trend towards the study of life sciences), and reduces the gap between academia
and industrial knowledge. Another example relates to the use of the Internet in home
shopping that allows for the customer to take charge of buying, and increasingly delivery,
options to suit the individual lifestyles - an example of an organisation’s delivery flexibility.
The ability to maintain flexible operations also reduces the risks involved with future
uncertainties and thus brings us back to the point of maintaining stability and
dependability. In the developed world traditional artisan trades such as bricklaying,
carpentry etc. are losing their appeal to a younger, more affluent working population
as a result of the presence of ‘more comfortable’ office jobs. It is essential therefore
to ensure that so called blue-collar industries such as construction maintains flexibility
within the workforce in terms of skills and training. Indeed the ability of construction
workers to multi-task in countries like Germany and the Netherlands is often cited as the
major reason for the relatively better productivity and performance on project schedules
as compared to Britain which is still operating under a single trades scheme where
a bricklayer will always be a bricklayer etc. Saving time, and henceforth money, by
incorporating flexibility within the operations can be achieved outwith human resources
as well. For instance, the utilisation of machines often plays an important part in
ensuring effectiveness and efficiency. Bottlenecks and idle time sometimes occur as
a result of failure to build in flexibility in the schedules or simply because the equipment
is not designed to handle multi-tasking. For example, a printing company may be
producing black and white copies, colour copies and posters as part of their product
mix. Ideally, flexibility within the operations could be brought about by procuring copy
machines that can perform all three operations of black and white, colour and larger size
printing, as opposed to having three different types of machines for each of the three
individual tasks.
We have now covered very broadly the five performance objectives that can be used
to measure the operations of an organisation. Try to come up with examples of
measurable and manageable performance objectives for a particular operation within
the organisation that you had thought about earlier.
2.4.2 Performance objectives future directions

While keeping track of the performance of the operations by setting and measuring
performance objectives is essential, it doesn’t really tell managers what to do with say,
a bad report, or instances of good performance. By measuring performance, it tells us
what we have done yesterday, and today and tomorrow is really left for management to
make the right decisions, often through gut feeling.
In 1992, Robert S. Kaplan and David P. Norton presented a revolutionary method
of setting, measuring and managing performance objectives in the Harvard Business
Review. Called the Balanced Scorecard Method, it is based on the three dimensions
in time: yesterday (how we performed), today (what we have and what we need)
and tomorrow (what we should do). In a balanced scorecard (see Figure 2.6 below),
performance objectives are combined with measures that describe resources spent
or activities performed. In essence, the objectives measured are not aimed at just
telling managers how the operations are performing at a given point in time, but offer a
‘learning and growth’ perspective for the internal processes, so that the adjustments to
operations would determine and influence future outcomes. In other words, performance
objectives are not only used operationally, but as part of an organisations strategy for
future operations. The next section, will address the issue of operations strategy.
The balanced scorecard method offers middle managers an easy way to see their
operations as a balancing act between different significant interests. It is not concerned
merely with financial ratios, but looks into non-financial measures as well. This,
however, may conflict with a profit-making organisation’s bottom-line of maximizing
profits. Nonetheless, it addresses the issue mentioned earlier of attempting to satisfy
different stakeholders at the same time.
Source: adapted from Olve et al (1997: 6)

Figure 2.6: The balanced scorecard
2.5 Operations strategy

It has been established in this chapter that the systems approach can be used to
explain the various operations within an organisation, and just as sub-systems and
systems interact with each other and the external environment, so do the operations
of any organisation. Most, if not all, of the time, the success and sustainability of the
organisation depends on how well the sub-systems of an organisation operate together.
In reality, operations tend to get caught in the middle as a result of conflicting demands
of various sub-systems within an organisation.
Take for instance three key departments within an organisation: Marketing and Sales,
Finance and Human Resources. On the one hand, marketing and sales would be keen
in churning out goods and services for sale and would aim to produce good quality
products and efficient customer service at a reasonable cost. However, this ‘reasonable’
cost may not be what the finance department, which is constantly trying to keep costs
to the minimum, has in mind. Similarly, efficient customer service may not be achieved
if the human resource department, which in principle is there to enrich the employees,
were to withhold staff through say, their welfare or training and development policies.
Therefore, there must be, in theory, some form of guidance (preferably from the top) in
the form of the business strategy to ensure that operations are able to function properly
with as few conflicts as possible.
One of the earliest definitions of a business strategy is offered by Chandler (1962), who
stated that strategy is ‘the determination of the basic long-term goals and objectives of
an enterprise, and the adoption of courses of action and the allocation of resources
necessary for carrying out those goals.’ Whilst a business strategy is concerned
with projecting towards the future, operations tends to focus more on the short-term,
2.5. Operations strategy 37
day-to-day activities of the systems within the organisation. Despite this fundamental
difference, one can view operations as complementing the overall strategy of a business.
Meredith Schroeder (1992: 68) saw this interdependency between operations and
strategy and asserts, ‘An operations strategy is a set of objectives, plans and policies
describing how the operations function will support the business strategy of the
organisation.’
Schroeder (1985: 53) argues that ‘the operations strategy is a functional strategy along
with financial, marketing, R & D, and personnel strategies and it should be a part of
the overall business strategy - not separate from it.’ He then explicitly describes what
the operations strategy should include:
• A statement of operations objectives (e.g. cost, quality, delivery, flexibility) for each
product line or business segment or both. Measures of objectives should be stated
along with priorities among objectives.
• The principal operations task or mission must be defined. What is it that operations
must do well for the business to succeed?
• Key policies should be stated for each of the five decision areas (process, capacity,
inventory, work force and quality). These policies should help operations achieve
the stated objectives, and they should be consistent so as to focus operations on
the primary task.
• The strategy should clarify how operations will help the business achieve its
objectives and how operations will contribute to the unique competitive posture
of the business (distinctive competence).
Despite the fact that Schroeder wrote this in the 1980s, it is still very much applicable
today. The balanced scorecard, for example, is a manifestation of how Schroeder
perceives an operations strategy should be. The scorecard approach includes a
statement of operations objectives and sets out definitive goals to be achieved. Based
on the analysis of yesterday, policies aimed at improving the organisation, seen as a
learning organisation, are being put forward today and implemented for tomorrow. Thus,
driving the organisation and its operations forward.
Slack et al (2001) viewed the role of operations as implementer, supporter and driver
of the overall business strategy. Figure 2.7 below presents an example suggested by
Slack et al (2001) of a general model of where operations management and strategy
fits within a business. Ostensibly an extension of the input-output model, it represents
a continuous cycle transforming inputs into outputs to satisfy not only the customers
externally, but also internally by achieving the strategic objectives of the organisation.

Figure 2.7: Linking operations strategy and operations management
According to Hayes and Wheelwright (1984) and later Chase and Hayes (1991), as
cited by Slack et al (2001), the ability for operations to implement, support and drive
the business strategy undergoes four key stages. In the first stage, operations are
simply managed by achieving internal neutrality, i.e. by avoiding making mistakes but
not making any real positive contribution to the organisation. In other words, it is just
about getting the everyday job done to meet the targets set by the business strategy -
operationalizing the strategy!
Once the operations function begins to look beyond the organisation and sets its
performance indicators against other similar operations in other organisations or
industry, it is said that the operations function moves into the second stage of achieving
external neutrality. In this second phase, the operations function aims to benchmark
against others to seek ‘best practice’, but is still performing as an implementer of the
overall business strategy.
The operations function then progresses to the first signs of driving business strategy
by trying to be the best in the industry. In the third stage, instead of merely adopting
‘best practice’, the operations function starts to align with the organisational competitive
or strategic objectives and supports these goals by developing its resources to excel in
the strategic areas set by the organisation. This is where the operations function takes
on an internally supportive role.
The final stage is when the organisation achieves the status of being the best in the
competition. In this externally supportive stage, the operations function is not only able
to support the business strategy, but also become proactive in driving the business
strategy and industrial expectations forward.
2.5. Operations strategy 39
2.5.1 Approaches to formulating an operations strategy

Four approaches to formulating the operations strategy are:
• top-down;
• bottom-up;
• market requirements, and;
• operations resources.
The traditional top-down approach is where the overall business strategy dictates what
the operations have to do. A production facility will procure more resources, e.g.
machinery, and take on more orders to achieve the strategic goals laid out by the
expansionary strategic policy decided by senior management. The operations function
simply operationalizes the business strategy, which is developed from the overall
corporate strategy of the organisation. Therefore, this three-tier approach begins with
the company asking itself what businesses to be in the first place and a rough estimate
of how much resource to pour into individual businesses. Strategic decisions such as
mergers and acquisitions, specialisation and diversification of portfolio etc. are taken
at the corporate strategic level. This is then filtered down into the business strategic
decision-making process, where the scope becomes narrower and more specific to
individual businesses. Mission statements and key strategic objectives are formulated
at this level, which is then filtered down eventually to the operational functional level,
where performance objectives, as discussed above, are developed.
The converse of the top-down approach is the bottom-up approach. Instead of senior
management developing the overall strategy of the organisation, the strategic ideas
begin to emerge over time from operational experience. Through day-to-day operations,
governed by performance objectives, problems are identified, mistakes are rectified
and hopefully the positive aspects of these experiences are embraced and learning
takes place. The strategy is the passed on upwards and contrary to the top-down
approach where it is somewhat ‘dictated’ to the next level, strategy evolves over time.
The emergent issues are dealt with by middle management and then consolidated at
senior management level into a formal strategy for the organisation.
The top-down and bottom-up approaches can be seen as the formulation of strategy
from within, i.e. internally within the organisation. The market requirements and
operations resources approach can be seen as strategy formulation as a result of
external forces. As the name suggests, the market requirements approach looks at
the market that the organisation aims to satisfy. It is an approach aimed at satisfying the
customers through its performance objectives. Strategy formulation using this approach
aims to tackle questions such as what to produce, how much is needed, when and
where to market, sell and deliver, how much is it going to cost the customer, product mix
etc. While it is important to understand the needs of the customers, it is also essential
when viewing this approach to consider the effects of competition in the market place.
At this point, it is necessary to look at two key concepts - order winning factors and order
qualifying factors. The former refers to those factors that will win the bid or customers’
purchase, whereas the latter relates to a characteristic of the product or service that is
required for it even to be considered by the customer. If we were to take long-haul air
travel for instance, safety can be seen to be an order qualifying factor, since it is a major
reason why a customer may consider purchasing an air ticket from a particular airline.
In contrast, flat beds in economy class or a personal masseur/masseuse at-seat may be
an order winning factor.
The market requirements approach works on the basis that the organisation merely
chooses which part of the market it wants to satisfy. However, in reality, it is also
important to consider the resource ability of the organisation to satisfy the potential
market. The operations resources perspective aims to do just that. Under this approach,
questions such as; what facilities do the organisation need; where do we site these
facilities to gain optimal effectiveness; can we develop a new product or work on the
existing range; what technology do we have and what is needed; how many employees
do we have and how many are needed; what are the inventory and supply chain
management issues etc. Of course, it is not only the tangible resources that the
organisation is interested in defining. Intangible aspects such as business processes
are also essential when considering the operations functional strategy. Are the current
processes working efficiently and effectively? Are there points of wastage, excesses of
fat that the organisation can remove (this is essence of business process re-engineering,
lean thinking and continuous improvement)? How can the organisation enhance its
operations by expanding on the knowledge base or improving the relational aspects of
the supply chain?
2.6 IKEA -Story of a Swedish success

Chapter case study: IKEA -Story of a Swedish success
Think about a Swedish success in business and one would probably think of the home
furnishing store - IKEA. Founded in 1943 by Ingvar Kamprad, IKEA originally sold pens,
wallets, picture frames, table runners, watches, jewelry and nylon stockings - whatever
Ingvar found a need for that he could fill with a product at a reduced price. IKEA grew
from producing furniture manufactured in Sweden from wood obtained from forests close
to Ingvar’s home in 1947, to managing 154 stores in 22 countries (as of 31 August 2002),
clearly a ‘MacDonald-isation’ of the home furnishing industry.
Figure 2.8: Turnover for the IKEA group

The growth of turnover for the IKEA group to 11 billion Euros (see Figure above) is
2.6. IKEA -Story of a Swedish success 41
an indication of how much the company has grown over the years. So is the product
range of around 10000 products. The IKEA group employs 70000 co-workers and
co-coordinates around 1800 different suppliers across the globe. The group runs 25
regional distribution centers in 14 countries responsible for supplying goods to IKEA
stores and handles 42 Trading Services Offices in 33 countries aimed at developing
rational, long-term relations with the suppliers. All of these developed from the humble
beginnings in the south of Sweden. In 2001, 286 million people from Scandinavia to
Spain, Russia to China visited the IKEA Group’s stores around the world and 118 million
copies in 45 editions of the IKEA catalogue were printed in 23 languages.
So, how did the IKEA concept become so successful?
Products and customers! The basic thinking behind the IKEA product range is low
prices, making well designed functional home furnishing products available to everyone
- what IKEA likes to call ‘democratic design’. The low prices means that as many people
as possible will be able to afford the products and still have money left! According to
the IKEA vision, most of the time, beautifully designed home furnishings are created
for a small part of the population - the few who can afford them. From the beginning,
IKEA has taken a different path, i.e. to side with the many. This means responding to
the home furnishing needs of people throughout the world. People with different needs,
tastes, dreams, aspirations and wallets (see Figure 2.9).
Source: adapted from the IKEA 2003 UK catalogue

Figure 2.9: How does IKEA keep their customers happy?
2.6.1 The business idea

The IKEA product range is wide in several ways. Firstly, it’s wide in function because you
shouldn’t have to run from one specialty shop to another to furnish your home. You can
find plants, living room furnishings, toys, kitchen appliances and even entire kitchens all
under one roof.
The range is wide in style so that the romantic at heart will find just as much as the
minimalist.
The range is also coordinated. No matter which style a customer prefers, there’s
always the latest armchair that goes with the classic bookcase that goes with the new
extendable table that goes with last year’s armchair etc. - total versatility!
The versatility is also apparent in the fact that IKEA encourages customers to fix their
own boundaries between what the company will do for them and what they will do for
themselves. Deliveries can be arranged, as can skilled assembly of furniture in pieces.
However, customers can save these costs or assume them if their time can be more
profitably used in other work.
Combining good design with good function with the right quality is not easy. It is even
more difficult to add an affordable price tag to it. IKEA prides itself in having the ability to
work closely together with skilled manufacturers and finding ways to get the most out of
a raw material. By being able to create the unique IKEA range, which is often called the
clever range, it focuses on what is important and eliminates the unnecessary, because
that costs money.
IKEA also firmly believes that the business idea stems from the partnership with not
only the supply chain, but the customers as well. Outsourcing is a very vital part of
IKEA’s operations. IKEA’s buyers are constantly looking all over the world for good
suppliers with the most suitable raw materials before buying in bulk on a global scale to
ensure best deals and lower prices. As Sweden’s slower growing northern trees have
had to compete with faster growing tropical forests, IKEA has sourced much of its wood
abroad, using indigenous carpenters and furniture makers. The combination of very
high volume, fast turnover, low-price furniture, locally sourced in countries like Poland,
Mexico etc. is perhaps IKEA’s winning combination.
But it doesn’t stop at the supply chain. The manufacturing process is also outsourced to
the end user by means of the IKEA catalogue, self-serve warehouse and as mentioned
above, own delivery and assembly.
2.6.2 Organisational structure

The founder of IKEA, Ingvar Kamprad, has always been eager to create an ownership
structure and an organisation that stands for long-term independence and security.
Decentralisation is the maxim at IKEA, but to fully exploit economies of scale, experts in
central positions deal with certain key areas - from the food in the store restaurants to
the production of the catalogues (see Figure 2.10 below). Work at IKEA is organized to
match the needs of the customers to the potential of the suppliers in the best possible
way, but enabling co-workers to contribute by their individual involvement in the process
from development and production to sales.
2.6. IKEA -Story of a Swedish success 43
Figure 2.10: Working within the IKEA group
2.6.3 Sustainability of the environment

It is no accident that the IKEA logo is blue and yellow. These are the colours of the
Swedish flag!
Furthermore, the Swedish heritage is encompassed within the group’s sustainability
policy. In Sweden, nature and the home both play a big part in people’s lives. In fact,
one of the best ways to describe the Swedish home furnishing style is to describe nature
- full of light and fresh air, yet restrained and unpretentious.
IKEA was founded when Sweden was fast becoming an example of the caring society,
where rich and poor alike were well looked after. This is also a theme that fits well with
the IKEA vision. In order to give the many people a better everyday life, IKEA asks the
customer to work as a partner. The product range is child-friendly and covers the needs
of the whole family, young and old.
The whole family concept is also now extended to include the environment. Being
economical and inventive means being kind to the wallet as well as to the environment.
In 2001, Anders Dahlvig, president of the IKEA group, asked the question, ‘can you do
good business while being a good business?’ Indeed, the role of business is changing
so that to provide jobs, create profits and pay taxes is no longer enough. IKEA believes
that the group is expected by both the customers and co-workers to take an active role
in influencing both social and environmental issues.
Throughout the group, there are examples of IKEA’s involvement with the environment.
In 1993, a basic environmental training programme was initiated for all co-workers
within the group, which was followed by the production of the OGLA chair from recycled
material, among other things waste material from the production of yoghurt cups were
used a year later in 1994. In 1999, the technical development had made it possible
to produce parts of the chair in plastic tubes instead of solid plastic. With this new
technology, the group saved almost 30% of the material in the leg and the back!
Today, the Environmental Policy and overall Environmental Action Plan is the basis
for the environmental work. The main statement in the Policy of the group states,
‘At IKEA, we shall always strive to minimize damaging effects to the environment,
which may result as a consequence of our activities.‘ One of the key activities that
IKEA is actively pursuing is the sourcing of all wood in the IKEA range from verified
well managed forests, thus reducing the devastating effects of deforestation of the
world’s natural ecosystems. Additionally, IKEA continually supports the research and
development efforts of UNICEF and organisations such as the Global Forest Watch
(GFW) in contributing to the knowledge of the remaining intact natural forests of the
world.
(Adapted from: http://www.ikea.com and the IKEA Home catalogue)
2.7 Summary
The Systems School developed from a number of other Schools of management thinking
which themselves evolved during the first part of the twentieth century. All organisations
can be viewed as input - output systems models, where the transformation process
converts or transforms the inputs to outputs. Organisations are open systems that
interact with their external environments and in so doing attempt to achieve performance
objectives of cost, speed, quality, dependability and flexibility. The achievement of these
operational performance objectives is set within the context of an operations strategy
which may take a top-down, bottom-up, market requirements or operations resources
approach.

IKEA case study questions.
Q1:
Identify the various operations of the IKEA business, as well as stakeholders (both
2.9. References 45
internal and external) of these operations.
Q2:
Illustrate in the form of a diagram the interaction between systems and sub-systems and
the external environment of the IKEA business.
Q3:
Identify the various performance objectives apparent in the case study and discuss the
role of such objectives in the IKEA business.
2.9 References
Chandler, A. (1962) Strategy and structure. MIT Press.
International Society for the Systems Sciences (2002) Website information on Ludwig
von Bertalanffy 11 July http://www.isss.org/lumLVB.htm, accessed on 5 May 2002.
Kast, F. and Rosenzweig, J.E. (1979) Organisation and Management: A Systems
Contingency Approach (3rd ed.) New York: McGraw-Hill
Meredith, J. (1992) The management of operations: a conceptual emphasi. (4th ed.)
John Wiley and Sons Ltd.
Naylor, J. (2002) Introduction to operations management (2nd ed.) England: FT-Prentice
Hall.
Olve, N., Roy, J. and Wetter, M. (1997) Performance drivers: a practical guide to using
the balanced scorecard. England: John Wiley & Sons.
Schroeder, R. (1985) Operations management: decision making in the operations
function (2nd ed.) McGraw-Hill International.
Slack, N., Chambers, S. and Johnston, R. (2001) Operations management (3rd ed.)
England: FT-Prentice Hall
Stoner, J., Freeman, R. and Gilbert, D. (1995) Management (6th ed.) USA: Prentice Hall
The Economist (2002) The ruin of Britain’s universities.16-22 Nov, 29-30
von Bertalanffy, L. (1950) An outline of general systems theory. British journal for the
philosophy of science, 1(2)
von Bertalanffy, L (1976) Perspectives on general system theory: scientific-philosophical
studies. E. Taschdjian (ed.) New York: George Braziller Inc.
47
Chapter 3
Product and Service Design
Contents
3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
3.2 Defining ‘product’, ‘service’ and ‘design’ . . . . . . . . . . . . . . . . . . . 49
3.2.1 Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
3.2.2 Service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
3.2.3 Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
3.2.4 What is designed in a product or service? . . . . . . . . . . . . . 50
3.3 The product and service design process . . . . . . . . . . . . . . . . . . . 51
3.3.1 Ideas generation . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
3.3.2 Feasibility study . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
3.3.2.1 Primary data collection . . . . . . . . . . . . . . . . . . 54
3.3.3 Design and development specification . . . . . . . . . . . . . . . 55
3.3.4 Design evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . 58
3.3.5 Final design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
3.3.6 Production, distribution, and customer use . . . . . . . . . . . . . 61
3.3.7 Monitoring and review . . . . . . . . . . . . . . . . . . . . . . . . 62
3.3.8 Disposal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
3.4 Model of the product or service design process . . . . . . . . . . . . . . . 62
3.5 Differences between product and service design . . . . . . . . . . . . . . 63
3.6 Role of quality in product and service design . . . . . . . . . . . . . . . . 65
3.7 Reasons for product and service failure . . . . . . . . . . . . . . . . . . . 66
3.8 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
3.9 Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
3.11 Reference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Learning Objectives
• define the terms product, service and design;
• outline what is contained in a product package;

48 Chapter 3. Product and Service Design
• explain how ideas are generated;
• describe the mechanisms for specifying what should be contained in a product or

service;
• outline the range of techniques that can be used to evaluate a design;
• describe the product or service design process;
• discuss the differences between product and service design, including the role of
quality and the reasons for design failures.
3.1. Introduction 49
3.1 Introduction
The function of every business is to provide a product or service that people want.
The consistent and successful development of new and modified products or services
therefore represents a major source of competitive advantage for companies. The
majority of new products are, however, failures; in the last 60 years, the average failure
rate for new product development was 30%, and only 10% of new products made a
significant contribution to corporate profits. In addition, the market life span of products
is decreasing and their rate of development is predicted to double every 5 years.
Product and service design represents the activity of converting various requirements
into a form suitable for the manufacturing or operational process and further use. It is
based on a combination of creative and practical activities. It is also an integral part
of the production and operations management process, and a process that needs to
be managed. In this chapter, we examine product and service design, outlining the
process by which new products and services are designed, the role of quality in design,
and finally we discuss the main reasons for product/service failure.
3.2 Defining ‘product’, ‘service’ and ‘design’

Before we begin our discussion of design, we must first define what we mean by
‘product’, ‘service’ and ‘design’.
3.2.1 Product
The word ‘product’ implies a tangible physical object, e.g. car, pencil; something that
can be taken away by the customer.
3.2.2 Service
A service may be defined as ‘any activity or benefit that one party can give another’.
Services are essentially intangible; that is, customers usually don’t know what they are
getting until they get it e.g. an insurance policy. With a service, the product is often
produced and consumed simultaneously and involves the customer. It is therefore not
always possible to separate the design of the product from the design of the process.
The service package may be broken into four components which are:
• supporting facility - physical resources;
• facilitating goods - the material purchased or consumed or items provided to the

customer;
• explicit services - the benefits that are readily observable by the customer and
consist of the essential or intrinsic features of the service;
• implicit services - psychological benefits that the customer may sense only
vaguely.
3.2.3 Design
Design has been defined by Slack et al (2001) as, the activity of determining the physical
form, shape and composition of products, services and processes.
3.2.4 What is designed in a product or service?

All products and services can be considered as consisting of:
• a concept - which is the set of expected benefits that the customer is buying;
• a package - of ‘component’ products and services that provide those benefits

defined in the concept;
• a process; which defines the relationship between the component products and
services.
Concepts comprise a package of products and services (Figure 3.1): Normally the word
‘product’ implies a tangible physical object and the word ‘service’ a more intangible
experience. Most, if not all, operations produce a combination of products and services
e.g. a washing machine is usually sold with a warranty. The product is usually also sold
using the services of the salesperson. After sales service is often a factor.
Figure 3.1: The product package

The collection of products and services is usually referred to as the package that
customers buy. Some of the products or services in the package are core - they are
fundamental to the purchase and can not be removed without destroying the nature of
the package. Other parts will serve to enhance the core. These are supporting goods
and services.
By changing the core, or adding or subtracting supporting goods and services,
organisations can provide different packages, and in doing so design quite different
products or services. In the car example above, the car could be sold without after-
sales support or warranties as a ‘cheap purchase’.
The packages of components that make up a product, service or process are the
‘ingredients’ of the design. To make them into a final design they need to be connected
in some way by having the relationship between them formalised.
3.3. The product and service design process 51
The first definitions imply that the design approach is very different depending on
whether the organisation is producing a product or a service. But, in fact, the processes
of product design and service design are very similar; most operations produce a
combination of products and services In the next section, we examine product and
service design together. We then discuss the elements which are unique to either
product or service design.
3.3 The product and service design process

The importance of successful new products to competitive ability can not be over-
emphasised. But with a typical success rate of less than 30%, there is a great need
for organisations to ensure that new product or service development is managed in
such a way so as to minimise the chance of failure. An effective way of achieving
this is to consider design as a ‘total process’. This means considering the entire life
cycle of the product or service. For products where maintenance may be required, the
spare parts for maintenance must be available for the lifetime of the product, due to the
effect on follow-up sales if parts can’t be located quickly and at a reasonable cost. For
maintenance-free products the life of the product is as long as the life of the weakest
component.
The term ‘New Product Development’ (NPD) is all embracing and ranges from products
that are totally new to those that are minor modifications of old designs. Here we discuss
design from scratch, but the same principles may be applied to products that are ‘newly
modified’.
3.3.1 Ideas generation

The first step in most design processes consists of generating an idea. Ideas may be
internally or externally generated (customers may approach an organisation and ask for
a service which does not currently exist). Internally generated ideas often stem from
technological advances.
Internal generation
Ideas from Staff- the contact workers in a service operation and the salespeople
in product oriented organisations meet the customers every day. Such staff should
therefore have a good idea of what the customers do and don’t like. They may also have
ideas of their own or ideas passed on from customers.
Ideas from Research and Development- a decreasing number of organisations contain
a formal research and development function. The ‘research’ part usually means the
production of new knowledge to solve a particular problem. The ‘development’ part
includes exploitation of new ideas.
Reverse engineering- taking apart a product to understand how a competing
organisation has made it (frequently used in the car industry). Closely analysing what
constitutes a competitors design and how the product has been produced can help to
isolate the key features of the design which are worth emulating. As a result, a company
may amend and incorporate the key features in some way. Alternatively, it might apply
to use, under licence, the part of the product that seems to be providing the difference.
Some aspects of services may be more difficult to reverse engineer as they are less
transparent to competitors.
External generation
Ideas from Competitor Activity- whether to follow a competitor or not, or to come up with
a different idea that may minimise/reverse the competitor’s lead.
Government- funding initiatives/tax breaks may be in place to promote the production of
specific types of product or service.
One of the main challenges for businesses is to capture ideas. A number of companies
set up official processes (channels) for input of ideas from both internal and external
sources. Recruiting the right people and creating the right environment for ideas
generation is the method of some operations. There is no ‘correct’ way to create
an environment which stimulates the production of ideas, but a number of useful
techniques, for both groups and individuals, are described below:
• Analogy - similar to transfer. Often compares product/service with nature.
• Assessing new concepts - Assessment of safety requirements, alignment with

company strategy, market requirements, assessing best features, and finally
ensuring that it conforms with the requirements of specification.
• Brainstorming - method for generating a large number of ideas, most of which

will subsequently be disregarded, but perhaps a few novel ideas followed up.
Usually 4-8 people from diverse backgrounds take part. The essential rules for
brainstorming are the following.
– No criticism is allowed during the session

– A large quantity of ideas is wanted
– Seemingly crazy ideas are quite welcome
– All ideas are kept short and snappy
– Try to combine and improve on the ideas of others.
• Challenge - Examine current products/services and think of ways of improving

them.
• Checklist for new ideas - Using a list to stimulate ideas.
• Delphi method - A group of experts estimate the solution to a problem and give
their solutions with reasons to others in the group.
• Enlarging the Search Space - Preventing/overcoming ‘mental block’ -

transformation, random input, why?, why?, why?, counter planning.
• Lateral thinking - ‘Looking outside the box’.
• Morphological analysis - Involves listing the attributes of the product or service

then thinking of as many alternatives as possible for each attribute. The final stage
is to make random runs through the alternatives.
• Synectics - Another group activity in which criticism is ruled out and group
members attempt to build, combine and develop ideas towards a creative solution
to a set problem. The difference from brainstorming is that the group tries to work
collectively towards a particular solution, rather than generating a large number of
ideas. Sessions usually start with ‘the problem as given’, e.g. by a customer.
• Transfer - Can the product or methods be used for another purpose?
• Visualisation - Daydreaming or deep relaxation often leads to new ideas.
Many of these are abstract methods which encourage creativity. Alternatively, a more
rational approach may be adopted, such as:
• clarifying objectives;
• establishing functions;
• setting requirements;
• determining characteristics;
• generating alternatives;
• evaluating alternatives;
• improving details.
Once there is a stimulus or product idea, the idea must be transformed into a concept
so that it can be evaluated and then ‘operationalised’ by the organisation. Concepts
are different from ideas in that they are clear statements which communicate the idea.
The next stage in the design process is then a feasibility study - we need to assess
the potential of the idea. For a new product to be a success it needs to be better that
what already exists - being just as good isn’t enough. A good first step is therefore to
list advantages and disadvantages - what attributes do you, and consumers, want the
new product/service to have? The commonest method of finding this is through market
research.
3.3.2 Feasibility study

Very early in any design process there is a need for research into the feasibility
of the project. Before we can bring a new product or service to market, we must
gain an understanding of the consumer and of the processes required to make the
product/service. Not all concepts generated will necessarily be capable of further
development into products and services. The purpose of concept screening is to
take the flow of concepts emerging from the organisation and evaluate them for their
feasibility, acceptability, and vulnerability. Simply, if there is no need or want for a new
product, it won’t sell.
Generally, the main activity at this stage of the design process is market research.
Market research brings into consideration the mix of qualities and price that will attract
customers to your organisation’s products rather than those of the competition. It covers
the following areas.
• The description of channels through which products and services reach

customers, the way in which these products and services are used, and the
perception and attitudes that lead to customer choice.
• The explanation of these attitudes, perceptions and behaviours.

• Evaluation of the cost effectiveness of marketing designs.
• Prediction of trends and of a proposed direction for future plans.
Marketing research can be divided into two broad categories.
• Primary data collection - includes interviewing, observation, and

experimentation.
• Secondary data collection - includes desk research, the collection of existing
documentation, and expert estimation.
Secondary data collection

Secondary data collection should always be undertaken first. It is inexpensive, quick,
and the principal source of marketing information. Desk research is particularly
important when considering export markets - differences in legislation etc. Secondary
data collection includes competition analysis, gathering census data, government
statistics, examination of advertising and stocks/shares analysis.
A common form of desk research is parametric analysis. Parametric analysis is
a simple method of identifying a product’s place in the market compared to the
competition. It shows which products are leading the market and where the popular
areas of design are clustered. It can be used to identify the areas of strength and
weakness as part of competition analysis at the start of the design process.
Parametric analysis takes two major forms.
• Various aspects of a service, for example number of outlets, number of sales,

specific features etc are plotted against time. This may show in what areas
companies are concentrating their design effort. A decline in the number of
companies in the market will suggest that the design is probably static.
• Plot of any parameter against any other. This demonstrates where organisations
believe the main market to exist, as there is usually a clustering of plots. It is
important to consider like with like. Usually time vs. sales/no. of outlets/products.
The best results are obtained by plotting as many parametric graphs as possible.
3.3.2.1 Primary data collection
Interviewing is still the most widely used method of acquiring new information. This
generally comes under two headings.
• Qualitative research - usually carried out first and is exploratory and diagnostic. It
is used to determine people’s attitudes. Usually used to structure questionnaires.
• Quantitative research - using the questionnaire designed from qualitative
research, quantitative research determines how widely attitudes are held. The
findings are usually expressed in numerical form.
Interviewing takes four forms: telephone, postal, personal (small group, large group,
or one-on-one), and computer based. Generally, small group interviews are performed
initially and the results used to design a questionnaire for wider use.
The results of interviews may be interpreted and presented in a number of ways. It is
often tempting to present results in such a way as to give the impression that the product
or service is a desirable one. It is imperative therefore that the questions are designed
to be unambiguous and to give a ‘true’ answer, i.e. one that is not open to incorrect
interpretation.
In addition to market research, the following elements are also considered as part of a
feasibility study.
• Cost - prohibitive?
• Technology - commercialisation of new concept feasible?
• Logistics - scheduling, location.
• Physical constraints - availability of land or building space?
• Compatibility - product/service fit with current portfolio?
We now move on to the next phase of the design process. Once an idea has
been generated, the product planned and proven by market research, we move to an
‘implementation’ phase.
Implementation is the ‘doing it’ part of the design process. For engineered products, this
phase entails detailing the design and manufacturing the product. For service design,
this involves ‘fleshing out’ the design specification. For both, evaluation is a key part of
the implementation phase.
3.3.3 Design and development specification

Design specification involves more detailed consideration of ideas. It describes in detail
all of the relevant aspects to which the proposed design must conform and defines
exactly what will go into the product or service. This requires collecting information on
the constituent components, the product/service structure, and the bill of materials.
For products, the design specification stage results in the production of the following
documents.
• Product specifications.
• Manufacturing drawings.
• List of components.
• Manufacturing process data.
• List of tools for manufacture.
• Material specifications.
• Details of equipment.
• Details of special labour skills.
Commonly, Computer Aided Design (CAD) is used as a tool in product specification.

CAD facilities enable designers to create new and sophisticated products in a very short
time-scale. The advantages of CAD include:
• Computer generated drawings and blueprints can be stored electronically.
• CAD systems provide additional savings in the process of product modification

and blueprint storing procedures.
• CAD systems enable the designers to store relevant product information, including
dimensions, tolerances, material specifications etc, in a database and provide the
information in a variety of formats.
• CAD systems provide additional design capabilities, such as engineering

calculations, optimal weight or size determination, cost optimisation, component
reduction, product standardisation, stress and thermal analysis etc.
CAD is usually associated with computer aided manufacturing (CAM). CAD-CAM is

described in more detail in the process design chapter.
CAD-CAM enhance the productivity of both design and production personnel,
because the computer can assimilate enormous quantities of information, display the
consequences of a design or a course of action, and institute programmed controls of
the manufacturing process. It is therefore not exclusively used for product design. For
example, CAD is used to design new routes for fire engines and emergency vehicles,
and to design routes through service facilities.
CAD is also used during product evaluation (see below).
For services, the specification process is slightly different. Usually the following
procedure is necessary.
• Establish the basic parameters and limitations of the proposed new service.
• Identify and summarise all steps involved in the new service.
• Develop a flowchart of all main steps related to the new service.
• Identify potential strengths and weaknesses of the proposed flow chart and each
step.
• Develop a suitable time frame for executing each step of the new service. Keep in
mind that time and quality are two very important parameters during the service
rendition process. Thus, if customers can get what they want from your service at
minimum time and maximum quality at the right price, your new service design will
have a chance for success.
• Analyse the key profitability factors related to the new service design. Identify
factors which may cause a negative response from customers thereby potentially
reducing the profitability of the newly proposed service. Among prime profitability
factors are time, quality, and reliability of the service. Establish design parameters
to ensure that negative response by customers will be minimised and positive

response will be maximised to secure a successful and profitable operation.
Not all factors of the new service design can be specified exactly but for many services
those that can include:
• Location.
• Room requirements.
• Facilities in the room.
• Records.
• Security - for access to records.
• Access - when is the service on offer? 24hr help line?
• Staff - details of qualifications and experience.
• Process - length of sessions, back-up in emergency.
• Customer - clientele.
It has been found that the documentation required for product specification and service
specification differs, but there is a series of elements that are important in any design
specification (Figure 3.2 ):
Figure 3.2: Elements of design specification
• Reliability - the ability of an item to perform a required function under stated

conditions for a stated period of time. Often associated with quality.
• Safety - consumers generally assume that any product or service they buy is safe.
It is also law that all products and services are safe.
• Aesthetics - appearance is a key feature of both products and services.
• Maintainability - the ease with which faults can be corrected.
• Ergonomics - the ‘people’ side of design. Also known as ‘user-friendliness’.
• Price - the price of a product or service, although not always a main factor
in purchase, is generally one of the most important features which determines
success or failure.
3.3.4 Design evaluation

Once detailed specifications have been drawn up for the product or service, it must be
evaluated before it can move on to the production stage. There are various methods
for assessing value, predominantly for products. Most companies use more than one
method.
Quality function deployment (QFD)
Quality Function Deployment (QFD) is a technique developed in Japan and used
extensively by Toyota. It is a customer-driven technique in which design, manufacturing
and marketing decisions are made to meet customer requirements. The technique
attempts to relate what the customer requires or needs and the design characteristics
of how this might be achieved. This interrelationship between customer needs and
technical requirements is often represented by a matrix called the House of Quality. The
customer requirements/needs form a list of competitive factors which customers find
significant. The design characteristics of the new product are the various dimensions of
the design which translate these requirements into the product or service.
Value engineering
Value engineering, also known as function analysis, value analysis, or value
management, is the process of analysing the functional requirements of systems,
equipment, facilities, procedures and supplies for the purpose of achieving essential
functions at the lowest total cost, without sacrificing function or quality. It usually comes
into play after the design is finished. However, ideally it should be an integral part of
the design process. Most of us practise value engineering to some degree when we go
shopping - comparing prices, materials and services to find the best value for money. In
business, the benefits of value engineering include:
• improved competitive position;
• improved performance;
• standardisation or simplification of operation;
• re-utilisation of materials;
• elimination of materials;
• relative ease of repair and replacement.
The Taguchi method

The Taguchi method (named after its Japanese originator) is an efficient and systematic
way to optimise product designs for performance, quality and cost, to the manufacturer,
customer and society as a whole. This relatively new approach is designed to minimise
economic loss associated with rework, waste of resources during manufacture, warranty
costs, customer complaints and dissatisfaction, time and money spent by customers in
failing products and eventual loss of market share. This is achieved through testing of
the performance and robustness of the product following changes in the manufacturing
conditions or changes made to raw materials, and by testing the product under extreme
conditions.
The Taguchi method utilises orthogonal arrays in experimental design. A set of
experiments is arranged in such a way that each experiment tests a range of different
parameters. Orthogonal arrays enable an extremely effective study of the effect of
the development parameters on the performance of the product. A number of very
successful companies have adopted Taguchi methods including Ford, Xerox, and
Kodak.
Robust design refers to products or services which are relatively insensitive to some
change in operating conditions. That is, products or services with robust design have
a broader range of conditions under which they can function in an acceptable manner
than products or services lacking this feature. That can be a real advantage in terms of
reliability and customer satisfaction.
CADCAM
Over the last few years two systems have been developed in manufacturing, that
focusing on the interface between design and production. These are computer- aided
design (CAD) and computer- aided manufacture (CAM). CAD enables the designer
to evaluate the consequences of various design alternatives using computer graphics
and memory. The ability to carry out such a procedure on screen, without actually
constructing prototypes, represents an enormous saving in both time and money. It also
assists in the accuracy of the design stage.
A linked CADCAM system has a memory bank of standard designs and the appropriate
machines and tools required for manufacture. In many industries this has assisted in
the development of modular production methods where products are built by the different
combination of a family of standard items. CADCAM systems have also had a significant
impact on the ability of firms to set up global manufacturing systems with a global
network of components suppliers and sub assembly plants, often located in different
regions of the world.
Prototyping
Building a small-scale, full-size or virtual prototype is a common method of evaluating
a product design. Product prototype construction is usually carried out by production
employees in conjunction with the engineering department. The main objective is to
translate the information laid down in specifications and drawings into a real prototype.
The completion of a working prototype is the only way to provide information relating to
product design parameters. The prototype also gives a clear indication of the feasibility
of the proposed design in meeting all aspects of the required product specifications.
The prototype should be examined by the production department and the design team
to establish possible manufacturing problems. All components, subassemblies and
the final assembly should be examined separately and detailed manufacturing cost
estimates should be prepared.
Services are generally regarded as intangible commodities. It is therefore very difficult,
if not impossible, to generate a prototype. However, depending on the nature of the
service, it might be possible to develop a simulation procedure which creates the
environment and conditions similar to ‘the real thing’. Once staff have completed
training, a simulation may be set up using other members of staff or the public as mock
customers. The test customers then give feedback on the service, the surroundings and
the overall experience. Ideally, services should be tested in more than one branch/area
in order to give more comprehensive feedback.
Virtual reality
Improvements in virtual reality computer and video technology are providing marketers
with many exciting new ways to test concepts with customers. Methods include IA -
Information Acceleration. Respondents are brought in to a virtual buying environment
which simulates the information typically available in a realistic purchase situation.
Dimensional analysis
Dimensional analysis involves listing all of the features of a product type. Product
concept creativity is triggered by the mere listing of every feature because we
instinctively think of how that feature could be changed. Some of the most interesting
features are those that a product doesn’t seem to have. Listing hundreds of features
is not uncommon. Successful users claim that just citing a unique dimension sparks
ideation.
Checklists
One of today’s most widely used idea-generating techniques is the checklist. Typical
questions on such a checklist include the following: Can it be adapted? Can something
else be substituted? Can it be magnified? Can it be reversed? And so on. Checklists
produce a multitude of potential new product concepts. They enable designers to use
knowledge of requirements which have been found to be relevant in similar situations.
Screening
In addition to the methods described above, the evaluation procedure depends on
assessment of the environment in which the product is marketed and on the actual
production process. Thorough evaluation will involve screening under headings such as
the following:
• Marketing considerations
How does the product or service impact on competition?
How does the product or service impact on existing product line?
How does the product or service respond to market need?
What are the promotional requirements?
Are there patent requirements?
What are the predicted annual sales?
What are the lengths of product lifecycles?
• Operational considerations
Is producing the product technologically feasible?
Is the product compatible with existing processes, existing facilities and equipment
and supplier capabilities?
What are the capacity requirements?
What are the service requirements?
What prototype testing of product features and reliability would be required?
What new technology would be required for product/production?
• Financial considerations
What amount of investment might be required?
What degree of risk could there be?
What is the predicted profit margin per product?
What return on investment could be expected?
• Other non-financial considerations
What are the environmental considerations? - waste reduction, use of cfc’s
What are the ethical consideration? - use of employee testing.
Further methods of evaluation include:
• selecting criteria - deciding how an acceptable design is to be recognised;

• ranking and weighting - comparing a set of alternative designs using a common
scale of measurement;
• specification writing - describing an acceptable outcome for designing which has
yet to be done.
All of these methods of evaluation are designed to present ideas or specifications to a

broader audience and to generate feedback for the design team although comments and
feedback from users may be valuable throughout the product development process. It is
at this stage that it may be possible to estimate exactly what resources will be required
in what mix and when. The evaluation stage is generally the last point at which product
or service design may be scrapped without having incurred significant costs.
3.3.5 Final design

Only once the product or service has been fully tested and the market for it demonstrated
are the final specifications written. This stage includes detailed drawings and final
process design requirements.
The final design stage is also the point at which the marketing campaign is started. This
involves large expenditure; designers must be sure of success.
3.3.6 Production, distribution, and customer use

We now move on to the final stages of the design process - production, distribution
and launch. The production phase is the ‘process’ phase and is therefore explained in
more detail in the process design development chapter. The many aspects relating
to distribution are dealt with in depth in the supply chain management chapter in
Operations Management 2.
However good a service or product is, it will not sell itself. Effective marketing is
imperative. Potential customers must know that the product exists before they will
purchase it for their use.
3.3.7 Monitoring and review

Changes to improve the product/service, however, may only become apparent once it
has gone to market and there is some customer feedback.
At this stage it is important to avoid ‘over design’ - taking out aspects that are popular.
Few people like change; therefore it is more difficult to build customer loyalty if the
product/service is constantly changing.
With all products and services, once it has been designed and successfully launched,
its success or otherwise should be continually monitored and periodically reviewed.
3.3.8 Disposal
In a total design process, consideration of the ‘afterlife’ of the product must be an integral
part of the process from an early stage. Environmental impact of waste is an important
issue - breach of government regulations on waste can be devastating to any business.
The importance of assessing scrap value and the potential for recycling and thinking
about dis-assembly techniques at the design stage cannot be underestimated. Chapter
One has already discussed a number of these issues.
3.4 Model of the product or service design process

We’ve now been through the entire process of product and service design and we can
summarise it using the following flow diagram (Figure 3.1).
We can see that both product and service design may be roughly divided into four
stages.
• Motivation/Opportunity - ideas generation and market research. (feasibility

study)
• Product/Service Generation - design specification and review, product/service

development, prototype generation and build up to full production.
• Launch - market planning and testing, full launch, distribution and review.
• Re-Use - possible recycling or regeneration of product.
3.5. Differences between product and service design 63
Figure 3.3: The Product or Service Design Process

Simultaneous with development, for both goods and services, is the development of the
augmented aspects of the product - pre- and post sale service, warranty, image etc.
This activity, most often led by marketing people, is called ‘envelope design’.
From Figure 3.3, the relevant considerations in planning a product or service
system include research, design, production, life cycle, safety in use, reliability and
maintainability. Also included are regulatory and legal problems.
3.5 Differences between product and service design

So far we have identified a series of elements shared by both product and service
design. However, the design of services differs in many respects from the design
of products because of certain basic differences between products and services.
For example, service organisations tend to have higher customer contact than
manufacturing ones. In addition, services cannot be inventoried.
The principal differences between product and service design include the following.
• Product is tangible; service is intangible. However, in both cases the main focus is
on customer satisfaction.
• Product is manufactured; service is rendered. For this reason customers can
discover problems with a product before receiving it; problems with a service can
be discovered only after it has been rendered. Consequently, the service design
process must incorporate effective training procedures for the service providers.
• Product can be stored; service can not be stored. This imposes additional
restrictions on the operational capacity design since there can be no ‘service
inventory’ in the stores.
• Product is delivered in a ‘package’; service is rendered during a ‘process’. This
creates an additional dimension which must be taken into account during the
service design process to ensure full customers’ satisfaction.
• Product can be delivered at any location; rendering service may require a special
location which will be acceptable to the customer. Location selection, therefore, is
very important in the service design process.
• Product does not require contact between the manufacturer and the customer;
service may require various levels of contact between the service provider and the
customer. It is essential, therefore, to identify the degree of contact requirement
between the service provider and the customer and to take it into account during
the process of service design.
• Copyrights don’t exist to protect service-based companies.
• With a service, labour is the main utilisation and a ‘capability’ is the product being
sold. As a result the important consideration for the location of a service is to be
near potential customers.
There are many and diverse types of service design.
• Professional services e.g. an architect’s practice.

• Service shops e.g. car rental companies.
• Mass services e.g. supermarkets.
Specifying the actual parameters for a service is probably the most difficult task facing
an operations manager. The explicit service being provided may differ each time it
is provided as each customer is different and has individual needs. The interaction
between two individuals can never be exactly the same on every occasion. This is
a consequence of the heterogeneous nature of services. The product itself may be
tangible and is often an experience.
When designing a service, all too often supporting facilities and implicit service do
not receive an appropriate level of attention. Often it is the management of the
3.6. Role of quality in product and service design 65
supporting facilities and the facilitating goods which determine the quality of the
customer experience. Sometimes the supporting facilities and facilitating goods are
designed with the service provider in mind rather than the customer.
Generally, service customisation requires professional judgement; low contact and
interaction requires more attention to the physical process. High labour intensity requires
close attention to people’s behaviour.
For services, one of the main design areas is the facility. The surroundings should
enhance a customer’s physical and psychological needs and expectations. Colour, light,
noise, ergonomics, smell, spatial layout and personal space are all important elements
in facility design.
Another element of importance to service design rather than product design is queuing
- there is a trade off between low demand and high demand times. Providing sufficient
capacity to prevent queues involves the cost of paying for resources that will be idle
for considerable periods. The cost of not having sufficient capacity is in dissatisfied
customers.
Service design considerations can be summarised as being:
• consistent with the operating focus of the firm;
• user-friendly;
• robust;
• easily maintaining consistent performance;
• providing effective links between ‘front’ and ‘back’ office;
• helping customers to see the value of the service provided;
• cost-effective.
Because the process itself is often what is being bought, it is not always possible to
separate the design of the product from the design of the process.
3.6 Role of quality in product and service design

Ultimately the product/service has to satisfy the customer. This means that the product
must be reliable. Reliability is reflected in the quality of the product or service. Quality,
therefore, needs to be ‘built in’ during the design process.
A variety of management techniques have been developed to help businesses build in
quality. These include Total Quality Management (TQM). TQM itself embraces methods
such as Poka-Yoke (designing so that mistakes can’t be made), International Standards
Organisation (ISO) quality standards, Zero defects, six-sigma, continuous improvement,
just-in-time, and investors in people. Further information on quality may be found in the
chapter ‘Quality and Total Quality Management’ in Operation Management 2.
In general, putting in place quality guarantees as design drivers is a good method of
maintaining production of successful products and services. Good service guarantees

include being:
• unconditional (no small print);

• meaningful to customer (payoff fully covers customer’s dissatisfaction);
• easy to understand and communicate (for employees as well as customers);
• painless to invoke (given proactively).
In addition to quality, designers have an ethical obligation to design products and

services so as to avoid damaging or polluting the environment, to employ safe
manufacturing processes and to ensure that the product is harmless in its intended
uses.
3.7 Reasons for product and service failure

It has been found that less than 30% of new products are successful and that only
a fraction of these contribute to company profits. What are the reasons for such low
figures?
Overwhelmingly, research shows that the main reason for both product and service
failure is lack of understanding of customer requirements; in other words, poor market
research. It has been shown that the feasibility study is critical in the design process.
Market research must be thorough and must ‘ask the right questions’. If customers
cannot see a use or need for the item or service, they will not buy it.
The second major factor contributing to product or service failure is inadequacy of
specification. For products, errors occurring at the detailing stage are the main cause of
technical failure. An example of failure at the technical stage is the Millennium Bridge:
The £18.2m bridge, central London’s first new river crossing for more than a century,
was opened on 10th June 2000 but was shut three days later after it began to sway
alarmingly. Dampers were then needed to correct the fault at a cost of £5 million.
For services, one of the most significant problems with specifications is definition - it
is very difficult if not impossible to define specifically an ‘experience’. The difference
between a successful and an unsuccessful service organisation is often the way in which
customers are treated. As a consequence, attention to customers, surroundings etc
must be detailed at the specification stage.
Ineffective and inefficient marketing and selling are faults in the organisation and often
not a problem with the actual product or service. Nonetheless, marketing is part of
the total design process and must be planned and managed. It is a third cause of
product/service failure. Similarly, entering a product into the market at the wrong time
can be devastating - entering too late when design is going into decline or when the
market contains an established product with a similar design. The same applies to
distribution and promotion.
Finally, scores of products and services fail simply because of poor design management;
design problems are generally not a lack of design skills but an inability to manage
3.8. Summary 67
design.
3.8 Summary
The objective of designing products and services is to satisfy customers by meeting
their actual or anticipated needs and expectations. This, in turn, enhances the
competitiveness of the organisation.
An ideal design process will have the following characteristics.
New ideas for goods and services are generated, ideas are screened and accepted
ideas are translated into final designs (for both goods/ services and process). There
are investment costs. One of the most important elements of the product or service
feasibility study entails a detailed evaluation of specific manufacturing or operational
requirements. This relates to the manufacturability of the newly designed product or the
viability of the newly designed service. Their analysis will indicate the ease of product
manufacturing, fabrication, assembly, or ease of providing the service, cost, profitability,
and quality.
Introduction - sales begin, profits begin to be made (but are still small), production and
delivery operations are refined, marketing efforts intensify.
Growth - sales increase rapidly, profits rise, operations must keep up with growing
demand.
Over £100 billion are spent every year on the technical phase of product development
alone. New products hold the answer to most organisations’ biggest problems. But, as
we have found, the design of successful products involves a process that needs to be
managed.
3.9 Further Reading

Cooper, R.G. (1993) Winning at New Products. (2nd ed.) Preseus.
Trott, P. (2002) Innovation Management an New Product Development. (2nd ed.)
FT/Prentice-Hall.
Ulrich, K.T. and Eppinger, S.D. (2000) Product Design and Development. McGraw-Hill.

Q1:
All of the following are part of the screening and selection process for a new idea except
a) Market analysis
b) Economic viability analysis
c) Technical feasibility studies

d) Prototype testing
e) Assessments of the reaction of competitors
Q2:
Ideas for promising potential products or services can come from
a) Customers
b) Salespersons
c) Competitors
d) Both a and b
e) All of the above
Q3:
Prototyping is
a) The process of analysing the functional requirements of systems

b) A technique that relates what the customer needs or requires and the design
characteristics of how this might be achieved
c) A common method of evaluating a product design
d) None of the above
e) All of the above
Q4:
CAD stands for
a) Computer-assisted design
b) Computer-aided design
c) Computer-assisted drawing
d) Computer-assisted development
e) None of the above
Q5:
CAD is being used for all of the following purposes except
a) Part design
b) Factory layout
c) Design of new routes for fire engines and emergency vehicles
d) Operating equipment
e) Design of rings and other jewellery
Q6:
The returns on Research and Development are frequently meagre, whereas the costs
are great.
a) true
b) false
Q7:
Marketing plays a key role in the idea generation process.
3.11. Reference 69
a) true
b) false
Q8:
Using standard parts rather than specially made parts always means lower quality or
reduced performance products.
a) true
b) false
Q9:
The service design is much the same as for products except that the role of engineering
is significantly reduced.
a) true
b) false
Q10:
Professional services have low contact intensity and are capital intensive.
a) true
b) false
3.11 Reference
Slack, N. (2001) Operations Management (3rd ed.) F/T Prentice Hall
71
Chapter 4
Facilities Location
Contents
4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
4.2 What is location? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
4.3 The importance of location . . . . . . . . . . . . . . . . . . . . . . . . . . 73
4.4 Reasons for location decisions . . . . . . . . . . . . . . . . . . . . . . . . 73
4.4.1 Globalisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
4.5 Objectives of the location decision . . . . . . . . . . . . . . . . . . . . . . 76
4.6 Location factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
4.6.1 Locating manufacturing facilities . . . . . . . . . . . . . . . . . . 78
4.6.2 Locating service facilities . . . . . . . . . . . . . . . . . . . . . . 79
4.6.3 Locating warehouse facilities . . . . . . . . . . . . . . . . . . . . 80
4.6.4 Locating fire/hospital/police facilities . . . . . . . . . . . . . . . . 81
4.7 Levels of the location decision . . . . . . . . . . . . . . . . . . . . . . . . . 82
4.7.1 Region/country . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
4.7.2 Area and community . . . . . . . . . . . . . . . . . . . . . . . . . 84
4.7.3 Site . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
4.8 Location analysis techniques . . . . . . . . . . . . . . . . . . . . . . . . . 85
4.8.1 Factor-rating (or weighted-score) method . . . . . . . . . . . . . 85
4.8.2 Centre-of-gravity method . . . . . . . . . . . . . . . . . . . . . . 88
4.8.3 Load-distance technique . . . . . . . . . . . . . . . . . . . . . . . 90
4.8.4 Breakeven analysis . . . . . . . . . . . . . . . . . . . . . . . . . . 90
4.9 Economic development . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
4.10 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
4.11 Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
Learning Objectives
By the end of this chapter, you should be able to:
• explain in some detail why location decisions are critical for some organisations;
72 Chapter 4. Facilities Location
• identify the main factors in location decisions and how they can be grouped in
layers;
• outline the differing locational issues for manufacturing, service, retail,

warehousing and emergency facilities.
4.1 Introduction
In nature, location is crucial. Most living things thrive in certain environments and
collapse in others. The business world is no different. Most businesses have an ideal
‘habitat’ in which to operate, as well as environments they should avoid. In this chapter,
we examine the importance of location to all types of business and the methods by
which the location decision may be made. We begin by asking, what is location?
4.2 What is location?

Location is the geographical positioning of a business relative to the raw materials or
inputs, and other businesses or customers with which it interacts. This includes not
only the supply chain, but also the surrounding facilities and the local communities.
Many businesses are located for historical reasons; the founder(s) family seat is often
the location for a business, regardless of the surrounding infrastructure. For other
businesses the product or service may need to be associated with a particular place
e.g. Scotch whisky must be made in Scotland. Not all businesses can however justify
their location.
4.3 The importance of location

Why is location important? And why is location research necessary? The answer to
both is that, if the location is wrong, the impact on profits can be catastrophic. ‘Location,
location, location’ is an often quoted phrase made by Lord Sieff, a past chairman of the
retail chain Marks and Spencer. In retailing, a difference in location of a few metres can
make the difference between profit and loss. Similarly, in manufacturing, locating in an
area with few or limited resources may result in rapid closure of the operation.
The location decision is also an expensive one. It is usually a major decision made by
an organisation and it is a long-term decision not easily reversed. Building or renovating
premises involves spending large sums of money. Further, location decisions will affect
the organisation’s costs as well as its ability to serve customers.
4.4 Reasons for location decisions

As described, the location decision is a significant one involving a large investment in
time and money. There must therefore be a good argument for altering an operations
location. Here we discuss the main drivers for making a location choice.
Advances in telecommunication and transportation infrastructure have facilitated a
major change in the way organisations make decisions about where they locate.
Manufacturing may take place in a developing country, where labour is cheap and
electric and water resources have become reliable. Administrative operations may be
located in an area where property/land prices and labour costs are low and the labour
force is well educated and articulate. Executive management may be located in a more
exclusive location with good access to for example, an international airport and attractive
lifestyle amenities.
High-contact customer processing operations may not have the choice of expanding on
the same site to meet rising demand. Part of their competitive advantage is location
close to its customers. Therefore, there is no significant advantage in moving to larger
premises further away. A balance must be struck between moving the entire operation,
or setting up a second one close to the existing location.
Changes in cost or availability of supply of inputs to the operation provide other reasons
for location decisions e.g. a mining company will have to move as materials become
depleted. A manufacturing company may choose to relocate to an area where there is
cheaper labour. Price of land may also prompt a move - selling the site and moving
could generate funds for the company.
Changes in ownership often involve reorganisation. Companies still tied to their founders
tend to be located in or near the founder’s home town. A company may seek a
new location when its current location inhibits its ability to compete or when new and
influential outside shareholders and executives push for a move.
In many cases, the need to reorganise business processes is more likely to motivate
a location change than the need for more space. For instance, if a manufacturer
has problems which inhibit day-to-day operations - such as the plant layout, materials
handling, or storage, or if new technology has been developed and needs to be
implemented - then a new location may be warranted.
High levels of relocation activity are associated with periods of rapid technological
change. Examples of how technological innovation has altered location decisions
include:
• high rise office buildings - allowing companies to make a physical separation

between their administrative and clerical functions and the factory floor;
• bar-coding and sophisticated package handling - allowing companies to track the
movement of goods with greater precision;
• improved motorway and air transportation - reducing the need for large warehouse
facilities.
Cyber-retailing is challenging the traditional need for a street-level storefront presence

and also provides customers significantly greater choice, convenience and access to
inventory e.g. Amazon. E-commerce is revolutionising retailing, and its proliferation will
change the role of the city centre shopping areas and the out-of-town retail centres.
Changes in government policies affecting the cost of business inputs create another
important factor motivating location moves. Government has historically regulated many
of the industries which influence business costs, such as utilities, telecommunications,
air travel, and postage (in USA).
Telephone rate structures and taxation influence the location decisions of firms whose
work depends on telecommunication services. Access to this utility and the affordability
of rates may become increasingly important as telephone lines connect more companies
and people to the Internet.
4.4. Reasons for location decisions 75
Massive US Federal spending programmes have also shaped the location decisions
of businesses and markets since the turn of the century. Extensive Federal highway
spending in the 1950s and 1960s also made it easier for businesses and their customers
to move westward, away from densely populated cities.
Defence spending has also affected location decisions. San Diego, USA, is home to the
fifth biggest concentration of military contractors. This enticed Space and Naval Warfare
Systems Command (SPAWAR) to locate there in the late 1990s. Over the next few
years, billions of dollars of defence spending is expected to flow to international defence
giants with operations in the county, to other local technology firms and even to small
obscure start-ups.
4.4.1 Globalisation
Over the last decade the world’s economies have been involved in dramatic
re-organisation and restructuring of enterprise, especially through mergers and
acquisitions which can create major geographic realignments. More and more
companies are becoming truly ‘global’ in their operations due to significant
improvements in telecommunications and transportation. Greater opportunities are
emerging for organisations to develop both supplier and customer relationships in new
parts of the world. The main opportunities firms seek overseas are expansion of sales,
reduction of costs and reduction of risks. The advantages of global expansion may be
described by the following strategies.
1. Centralisation/exporting strategy:
• Everything done in one place. Foreign markets are served by exporting.

• Home country is the major market
• Large fixed costs
• Low transportation costs
2. Replication/multi-domestic strategy:
• Each subsidiary is a self-sufficient entity

• No substantial cost differences between countries
• High transportation costs, high border costs
3. Specialisation/global strategy:
• Each function is performed in one place, but the functions are not all
performed in the same place e.g. finance in US, R& D in Germany, assembly
in the Philippines.
• Costs vary substantially across countries for different kinds of production and
services.
• Low transportation costs, low border costs.
• Fixed costs are large.
Most multinational corporations use a mixture of these strategies e.g. Branching

strategy (some functions are centralised, others are decentralised), Offshore
outsourcing strategy (company contracts other companies to carry out its foreign
operations).
Globalisation has offered many firms potential competitive advantage through location.
Cheap labour can be found in Eastern Europe, Asia, and Latin America, while specialist
skills can be found in the USA and Western Europe.
To summarise, we can identify five main reasons why businesses make a location
decision.
1. Initial set up site for business (new business).
2. Expansion - local or international.
3. Change in demand - for goods or services.
4. Change in supply - of raw materials/other inputs.
5. Changes in demographics, competitor locations, or transportation patterns.
4.5 Objectives of the location decision

As described above, the location decision is a strategic one.
• It commits large sums of money for long time periods
• Mistakes are very costly, and difficult and slow to correct
• The decision is infrequent or irregular at best
• The wrong location will put the company at a competitive disadvantage, and may
result in the failure of the enterprise
• The decision is clearly linked to the organisation’s mission
• The decision is made by senior management in the organisation
• The decision has long-term impact.
The aim of the location decision is to achieve an appropriate balance among

three related objectives within the strategic plan: the spatially variable costs of the
organisation, the service/product the organisation provides to customers and the
revenue potential of the organisation. The assumption of the last two points is that
the better the service or product the operation can provide to its customers, the better
will be the potential to attract customers and therefore generate revenue. Customers are
therefore a big ‘pull’ in the location decision. Before we look at making the decision in
more detail, we need first to take a look at the factors impacting most heavily on where
a business is situated.
4.6. Location factors 77
4.6 Location factors

What are the major attributes businesses look for in a new location? A number of factors
depend on the nature of the business, whether they are service or manufacturing. We
will examine business-specific factors in the next few sections, but there are some
common features which, in general, all types of organisation have to consider to a
greater or lesser extent.
Basic location factors:
• Skill level and suitability of the labour market.
• Availability and cost of housing.
• Adequacy of transportation systems
• Access to suppliers and contractors (markets)
• Proximity to natural resources
• Presence of competitors
• Business climate/ external economies
• Positioning within the market for the company’s product
• General taxation levels and tax policies of the state
• Workers’ compensation costs
• Public services
• Community amenities
• Nearness to customer
• Government subsidies
• Educational system and facilities
• Degree of unionisation
• Quality of life
• Climate.
These basic location factors are usually evaluated early in the decision making process.
Once they have been assessed, a further set of factors tend to come into play, namely
site factors.
Basic site factors:
• Land availability
• Cost of construction
• Rent charges
• Road/train/truck access
• Title complexities on the property
• Rates and service charges
• Cost and availability of water, sewer, solid waste disposal
• Telecommunications capacity
• Possible environmental remediation
• Availability of banking facilities
• Insurance costs.
Looking at the basic location factors in more detail, the labour market is one of the major
draws for most businesses. Which place has the best-trained and lowest labour market
costs? Which community has the best educational resources? Labour costs, including
wages and non-wage benefits (contributions to medical plans, unemployment insurance,
vacation time and pay, pension schemes), vary by industry, country, region, unionised
and non-unionised sectors. Tremendous differences in labour costs can be seen
between countries with high wages (developed countries) and less developed countries
such as China and India. For example, educational level of potential employees and
labour costs are two of the driving forces for the huge growth of contact(call) centres
being set up in India.
External economies of scale are a second major location factor, particularly for
manufacturing companies. There are usually a number of advantages of being near
other manufacturing companies. For example in a manufacturing district, particularly
for operations employing Just-In-Time manufacturing, parts, components and sub-
assemblies can be obtained from suppliers within minutes/hours.
Community Infrastructure and Amenities are also important - all types of organisation
require access to a community infrastructure, most significantly economic overhead
capital, such as roads, railways, port facilities, power lines and service facilities, and
social overhead capital like schools, universities and hospitals.
As a result of improvements in energy networks, the availability of a good energy supply
is no longer a major pull for businesses, although large manufacturing plants with high
energy demands may still look for a location near to energy production plants. For
example, aluminium smelters still tend to be located near a power plant.
Fixed capital costs, such as building and construction costs, vary from region to region
and therefore influence most location decisions. Financial capital is highly mobile and
does not influence decisions very much. Capital becomes a main factor when it comes
to venture capital - countries/regions frequently offer financial incentives to attract young
companies.
However, inability to access customers, markets, goods and services will rapidly reduce
income and profitability.
4.6.1 Locating manufacturing facilities

Factories making products for different markets are usually threatened by transportation
costs i.e. procurement costs (bringing raw materials or semi-finished products into the
company) and product distribution. Basically transportation costs are determined by

physical characteristics, such as value of product, quantity of goods, and freight rates.
Dominant location factors in manufacturing include:
• regional costs - land, construction, labour, taxes, energy, education and training
capabilities;
• outbound distribution costs - shipping products to retailers, wholesalers, plants;
• inbound distribution costs - proximity of raw materials, availability, costs and lead-
time for inputs.
4.6.2 Locating service facilities

For service facilities, different sites are likely to have different intrinsic characteristics
which can affect the operation’s ability to serve customers and generate revenue. For
example, the area surrounding a hotel impacts greatly on the attractiveness of the
operation.
Dominant location factors for services are:
• nearness to customer - multiple sites, lower expansion costs, heavily dependent

on market selection;
• impact on revenues - rate all possible demand generators, demographic issues
(unemployment, income, population), accessibility;
• impact of competitors - anticipating their reaction, critical mass and follow-the-
leader.
Today’s contact (call) centres - also known as ‘information factories’ - are following the
evolution of early manufacturing. Some of these operations originated in multi-story
office buildings, but are now moving to single-level structures in places where real estate
is less expensive and readily available.
Some locations are firmly associated in customers’ minds with a particular image
e.g. Princes Street in Edinburgh, Scotland or Bond Street in London, England, are
major shopping areas. Financial districts which contain banking services, insurance
companies and so on are to be found in Edinburgh, Scotland, London, England and
Frankfurt, Germany.
Retail facility location
Retail property (shops and shopping centres) constitutes an important part of the UK’s
built environment. There are almost 320000 retail outlets in Britain, plus some outlets
devoted to ‘service’ uses of the type normally found within shopping centres (2001/2002
figures).
Development of new retail floor space has been one of the most important areas of
capital expenditure in Britain in the last two decades e.g. the capital expenditure of
Tesco Plc (a major supermarket chain) was £2bn in the financial year 2001/2002. The
development of new retail space is of great significance both as a source of economic
growth and change and as a social event able to arouse both positive and negative
reaction (development of open/green land).
At the same time, town and city centres have radically changed in their appearance. In
the UK, the patchwork pattern of small shops, mixed with office, residential, and other
uses, has in many cases been replaced by giant buildings containing 100 or more shops.
There are two types of retail development.
1. Planned retailing - deliberately developed in a co-ordinated manner for retail use:
• a single building with one/more retail stores contained within it.

• an organised group of physically separated retail stores with common
arrangements for vehicle access and car parking.
2. Unplanned retailing - building has evolved in a gradual manner over a period of

time.
The simplest type of retail development is a free-standing store, built with access and
car parking facilities, physically separate from other shopping areas e.g. food/non-food,
superstores, retail warehouses. However, retail development takes place broadly as a
result of demand from two sectors of the service economy which are:
• the property investment industry;
• response to customer needs and preferences.
In addition, there are two broad trends which underlie changes in retail demand and
retail provision which are:
• changes in population and its expenditure on consumer goods;
• changes in the structure of the retail sector (often arising from competition) -
generally an important location influence.
One of the most important location issues in retail is whether development is carried out
within or outside existing retail areas.
4.6.3 Locating warehouse facilities

Warehouses/distribution centres are intermediate in the supply chain. They are
buildings used to receive, handle, store, and then ship products. Light assembly
and packaging may sometimes be carried out in a warehouse and some warehouse
operators will provide sales support and personnel. Some companies marketing
primarily through the internet, like Amazon.com, operate exclusively in a warehouse-
like environment.
Factors important in influencing the location of a warehouse include:
• moderate environmental conditions;
• utilities if refrigeration is required;
• security;
• transportation costs;
• proximity to markets, especially if frequency of delivery is high.
Construction and land costs, labour availability, proximity to raw materials and waste
disposal are less important for location of warehouses.
4.6.4 Locating fire/hospital/police facilities

Convenience for customers is the dominant location factor for services such as fire
stations, hospitals and police. Such facilities must be located near to the ‘customers’
and be readily accessible.
The first step in identifying a location for emergency services is usually to determine
the boundaries of the facility’s jurisdiction and those parts which may need additional
or improved coverage. This is primarily a result of improving response time, response
distance and response workload. The defined coverage area will identify an ideal central
location for the new facility.
For services which include emergency call out it is necessary to examine carefully the
existing infrastructure. More specifically
• Investigate the conditions of the existing streets, especially width.

• Are there major thoroughfares and how do they relate to the coverage area?
• What are the traffic patterns? Are there particular times of day that traffic could
impede response time?
• Are there any potential barriers such as railroad crossings, one-way streets,
narrow bridges, and school zones?
• Are there any plans for significant street modifications or changes?
In addition, consideration must be taken of the safety issues associated with emergency
vehicles exiting the desired site. Are there adequate site lines, clearances, etc.?
We can now identify five fundamental components of business which help determine
where a company or firm may locate.
1. Business sector - different business sectors approach the location issue with
varying needs e.g. manufacturing companies need to balance proximity to end-
user markets against supplier resources (distance/decay curve analysis weighs
cost of transporting materials to a company against cost of transferring products
to market).
2. Business function - businesses increasingly separate their operations
geographically, creating a division of labour among sites. One site may be
preferred for warehousing and distribution, another for headquarters, another for
back-office functions. Function is not always a factor - some companies move to
a location in order to consolidate facilities.
3. Product maturity - The ‘life-cycle’ stage of a product is closely linked to the cost of
labour and real estate.
4. Competitive strategy - The increase in availability of information about potential

locations allows businesses to incorporate location factors into their cost analyses
and competitive strategy.
5. Business culture - corporate culture is also a factor in location decision making.

For example, software development companies do not like to be ‘lone wolves’ -
they seek interactions with other, similar firms. Pharmaceutical companies, on
the other hand, desire confidentiality and tend to favour more isolated campus
locations.
4.7 Levels of the location decision

So far we have assessed the factors which attract operations to particular locations,
but how do we go about actually making a location decision? Decision-makers
have numerous locations and sites from which to choose. Most often, companies
make decisions on their own, without using an external location consultant. However,
companies considering a long-distance move or major repositioning are more likely to
hire a relocation consultant. What does a relocation consultant do? Here we look at
levels of the location decision and, at the decision process rather than the factors. In the
next section we will examine techniques to facilitate the decision process.
The first step in the location decision is to organise the appropriate location factors into
‘layers’ according to the layers model:
There are four ‘layers’ of location factors which are:
1. NATIONAL and INTERNATIONAL factors;
2. those specific to the REGION;
3. those specific to the COMMUNITY;
4. those specific to each SITE.
1. National and International factors:
• Tax laws
• Labour availability
• Labour cost
• Labour laws
• Environmental considerations
• Political and business climate
• Cultural and economic issues.
2. Regional factors:
• Labour Force
• Energy supply and cost
4.7. Levels of the location decision 83
• Climate
• Transportation networks - road, rail, water, pipeline, telecommunication, air
• for inputs and outputs, and for employees
• Degree of unionisation (labour climate)
• State industrial climate - tax incentives, development boards, etc.
• Labour costs
• Availability of banking facilities, other financial considerations.
3. Community factors:
• Quantity, quality and skills of labour force

• Availability and costs of energy sources
• Cost of living
• Educational system
• Quantity, quality and cost of housing
• Personal Taxes
• Quality of air and water
• Availability of cultural and recreational facilities
• Political climate - attitude toward development.
4. Specific site factors:
• Land availability - zoning, initial construction, expansion space

• Land cost
• Construction cost - prevailing wage scales, special building codes, special
pollution control facilities
• Image of the site
• Convenience for customers.
The location decision is usually carried out in the order (Figure 4.1).
1. Choosing the region/country in which to locate the operation.
2. Choosing the area of the country/region.
3. Choosing the community within the area
4. Choosing the specific site within the community
Figure 4.1: The location decision using the layers model
4.7.1 Region/country
Increasingly, larger companies are taking a global view of possible locations. The
operational skills (as well as brand image) of many service operations are transferable
across national boundaries e.g. McDonalds. Therefore location decisions are made
on an international stage. Similarly, information processing operations can now
locate outside their immediate home base, thanks to sophisticated telecommunications
networks. Companies look for sources of keyboard operators, computer service
managers and computer programmers.
4.7.2 Area and community

Many of the factors which come into play in the choice of a country also apply when
choosing an area and a community: Land prices, local labour force, infrastructure
development and community factors also play a part.
4.7.3 Site
Usually the number of alternative sites is far smaller than country/area choices. The
factors used to accept or reject a specific site are usually concerned with its immediate
surroundings, the shape of the site/soil composition etc. The access to the site by
road/rail etc is also likely to be important. Similarly, the availability of utilities, drains and
waste disposal facilities will need to be taken into account. Room for expansion might
also be an issue e.g. ability to lease/buy land close by.
Within a given location there are likely to be many sites from which to choose, and there
are nearly always alternatives if one site proves to be difficult or costly.
4.8. Location analysis techniques 85
4.8 Location analysis techniques

In Section 4.6 we identified an enormous range of factors which impact on the location
decision. How can we organise the plethora of information? How can we ensure that all
factors are taken into consideration? Ultimately, operations managers are responsible
for judging which location is ideal. However, there are a number of systematic and
quantitative techniques which can help in the decision process. Sophisticated software
and databases permit broad-based searches for information. They also enable today’s
location decision-maker to sort through a vast array of information about global labour
markets, housing costs, transportation, specialised services, tax structures and tax
subsidies when choosing a location.
The simplest method of tackling the location decision is to use a scientific approach.
• Define problem - state locational objective and constraints imposed by inputs,

processing capabilities, or outputs.
• Identify decision criteria - economic issues such as labour, material and

transportation costs. Non-economic and intangible issues must also be
considered.
• Identify alternatives - list of possible sites - may use prior screening to reduce
number of choices.
• Build mode - breakeven analysis, linear programming and checklists/rating

schemes.
• Collect data, test model - score each location by established criteria (Chambers of
commerce, Country/State economic development offices may be useful.)
• Choose best solution.
The following techniques are commonly used to assist the location decision process:
factor-rating systems, the centre-of-gravity method, load distance and breakeven
analysis.
4.8.1 Factor-rating (or weighted-score) method

Location factors provide a way to evaluate relative cost differences between two
geographic locations. Usually the factor-rating method is used for initial screening and
for numerical inputs into the location decision. They are often applied to conceptual
estimates for identifying ‘go/no go’ projects at an early stage.
Factor rating schemes provide a (partially subjective) method of adding up the diverse
items. The site selection project team (or person) must identify those factors relevant to
the location decision and rank them in order of importance. Weights are then assigned
to each factor to reflect each level of importance: the most important factor will receive
the highest weight and so on.
Based on assembled data and/or on site visits, each factor will be scored. Such scores
may be absolute or relative, but generally, the better any site meets a particular factor
requirement, the higher the score will be. The scores are multiplied by the weights and
each site will have a total score. If the factors and weights have been well selected and
if the judging process was objective and uniform, the highest-site score will reflect the
‘best’ possible location among the sites evaluated.
Method:
a) List all relevant factors.
b) Assign importances (weights).
c) Assign a grading scale for each factor.
d) Score each site on each factor.
e) Multiply scores by weights; get a total for each site.
f) Choose site with highest score.
Example : Factor rating

A small paper manufacturer has decided to expand its production of speciality
photographic paper by opening a new factory. Table 4.1 provides a list of qualitative
factors management has decided are important. Their weightings and their rating for
two possible sites, London and Edinburgh, are shown in Table 4.2.
Table 4.1:
Table 4.2: Weights, scores, and solution
Using the weighted score method, Edinburgh has the higher score and is therefore a
better location for the new paper plant. The scores however are very close; further
analysis of the weighting or the points assigned may be appropriate.
Although the factor rating method looks quantitative, it is really quite subjective. Small
shifts in weights or scores may cause changes in the rankings. Different individuals
evaluating various sites may well give them very different scores, even though they are
supposed to be using the same scoring formula.
A factoring method requires a detailed survey of labour, material, equipment, and other
project-specific data completed for the base location on a periodic interval (say once a
year).
The benefits of using the factoring method include the fact that it generates relative
cost differences (percent), not absolute currency values, which means that estimates
for factoring can be used over and over again, and various estimates can be used and
maintained for providing location factors which represent various types of construction
(civil, residential, petrochemical, etc).
The pricing of labour, material, equipment, and other project-specific data can be
compared and tracked when surveyed on a periodic basis. This helps ensure
consistency and continuity and can be an ongoing process.
4.8.2 Centre-of-gravity method

A second commonly used method in facility location is the centre-of-gravity, or weight
centre, technique. This method takes into account the locations of operations and
markets, the volume of goods moved and transportation costs in arriving at the best
location for the premises. It would seem reasonable to find some ‘central’ location
between the operation and customers.
In general, transportation costs are a function of distance, weight, and time. The centre-
of-gravity technique is a quantitative method for locating a facility such as a warehouse
at the centre of movement in a geographic area based on weight and distance. It
identifies a set of co-ordinates designating a central location on a map relative to all
other locations.
The centre-of-gravity method is used to locate a facility using the weight and distance
travelled by establishing a grid-map of the area then using the formula below.
The co-ordinates for the location of the new facility are computed using the following
formula:

co - ordinates of the new facility at centre of gravity.

, = co - ordinates of existing facility, i.,
= weight shipped to or from facility, i.
The centre-of-gravity method is based primarily on cost considerations and is used to
assist managers in balancing cost and service objectives.
Example : The centre of gravity method

A clothing company has four outlets in shopping malls. The distribution centre is old and
inadequate and is currently located near to one of the malls. A more central location
is desired. Using the centre of gravity method, a more convenient location may be
identified.
Demand rates for each of the outlets is shown in Table 4.3.
Table 4.3: Shipping weights

No. of containers shipped
Outlet
per month
A 2000
B 1000
C 1000
D 2000
Figure 4.2: Coordinates of outlets

Using the shipping weights and the co-ordinates we can define W, x, and y, for each
location.
Location x y W
A 30 120 2000
B 90 110 1000
C 130 130 1000
D 60 40 2000

Fitting the data into the centre of gravity equations, we get:

Therefore the centre of gravity, the most central location for a new distribution centre, is
at (66.7, 93.3) as shown in Figure 4.2.
4.8.3 Load-distance technique

A variation of the centre-of-gravity method for determining the co-ordinates of a facility
location is the load-distance technique. The objective of the load-distance technique is
to minimise the total weighted loads moving into and out of the facility. In this method,
a single set of location co-ordinates is not identified. Instead, various locations are
evaluated using a load-distance value which is a measure of weight and distance. For a
single potential location, a load-distance value is computed as follows.
Where:

LD = the load-distance value.
li = the load expressed as a weight, number of trips from the proposed site to location i.
di = the distance between the proposed site and location i.
The distance di in this formula can be the travel distance, if known, or can be determined
from a map. It can also be computed using the following formula for the straight line

distance between two points:

Where:
( x, y) = co-ordinates of proposed site
( xi , yi ) = co-ordinates of existing facility
Method:
• Calculate load distance for each site

• Choose site with lowest load distance
• Distance can be actual, straight line (Euclidean), or series of 90 Æ turns (Rectilinear)
The load-distance technique is applied by computing a load-distance value for each

potential facility location. Locations generating big loads going short distances
reduce LD. Therefore the location with the lowest value would result in the minimum
transportation cost and thus would be preferable. Other factors, such as price of land,
zoning, suitability of land for building, etc. may require consideration of other sites.
4.8.4 Breakeven analysis

A further location decision aid is breakeven analysis. Cost curves, revenue functions,
and other analysis tools can be used to demonstrate, graphically or algebraically, the
cost, profit and volume analysis of each site under consideration. The breakeven
points of each site may be one of the factors in factor rating schemes described above.
Breakeven analysis can demonstrate the ability of various sites to maintain satisfactory
profits or contribution under a variety of output conditions. Such analyses should be
compared at the forecast demand levels to determine which alternative site has highest
4.9. Economic development 91
profit.
Breakeven analysis should, in location cases, include such factors as diminishing returns
and lack of perfect competition. This will result in the use of non-linear breakeven models
which contain an upper breakeven point as well as the traditional lower breakeven point.
4.9 Economic development

In this final section on facilities location we take a look at the process from a
different perspective, that of economic development. Economic development is in
many respects the inverse of location analysis. Given the factors necessary, how can
a nation/state/region/community enhance its factors, create new factors, or enhance
its infrastructure so that it can attract new industry? Considering the decision from
this angle will aid significantly our understanding of the problems involved in location
decisions.
So far we have identified the following critical location factors.
• Transportation
• Labour characteristics
• Utility considerations
• Tax burdens
• Investment incentives
• Business climate
• Environmental regulations
• Property availability
• Support services
• Quality of life.
If we are looking to promote a specific site as a desirable location for new business, we
can generate the following tasks for location services.
• Determine favourable geographic area for new operation
• Establish local/regional operating costs
• Perform distribution/logistics network analysis
• Identify available sites and existing buildings
• Perform community/site screening
• Evaluate labour quality and availability
• Review site characteristics/conditions

• Assess impact of air quality and clean water regulations on local operations
• Evaluate transportation access and service characteristics
• Determine rail service/quality/cost
• Evaluate access to telecommunications network
• Evaluate water/waste services
• Assess electric power and natural gas reliability and quality
• Evaluate state and local development initiatives
• Assess community reception/political issues
• Establish site development costs
• Perform lease/purchase negotiations
• Perform Pre-acquisition Due diligence
• Review zoning ordinances/Building codes
• Co-ordinate environmental audit/soils testing/boundary survey/title search
• Develop timetable for approvals
• Perform preliminary planning/ budget projections
• Establish project scheduling.
Production of tasks in this way helps us to identify those factors of most importance in
developing our own operations as well as promoting economic growth.
Scottish Development International (SDI) is a UK initiative which serves to attract
international businesses to locate in Scotland. This organisation not only promotes
Scotland’s facilities abroad but also negotiates support packages for incoming investors.
Organisations such as the SDI carry out the following functions, they:
• attract the right kind of workforce for the business;

• locate the right kind of property or location;
• tap into financial support;
• give up-to-the-minute information on market opportunities;
• give information on issues like wages, tax and utility costs.
A further role of initiatives like the SDI is to develop suitable sites for new businesses.
They examine the major factors which attract businesses and use these to create
potential sites. Both parties benefit: location searching is easier for new businesses (the
infrastructure is sound and good support systems are available), and the area benefits
by the creation of jobs, both within the new business and in the support and social
services required.
4.10. Summary 93
4.10 Summary
Location, as we have found, can make or break a business. Getting the location correct
is central to success. In this chapter, we have identified the major factors influencing
businesses in location decisions and how these impact on further expansion and growth.
Examining economic development highlights the importance of location not only for
businesses but also for a country’s economy.
4.11 Further Reading

Naylor, J. (2002) Operations Management. (2nd ed.) FT/Prentice-Hall. Ch. 7.
Waller, D.L. (2003) Operations Management. (2nd ed.) Thomson, Ch. 3.
Wild, R. (2002) Operations Management. (6th ed.) Continuum. Ch. 5.
4.12 Review Questions

Q1:
Multiple Choice Questions
Globalisation of the location decision is the result of all of the following except
a) Better international communications

b) Higher quality of labour overseas
c) Ease of capital flow between countries
d) High differences in labour costs
e) More rapid travel and shipping.
Q2:
In location planning, environmental regulations, cost, and availability of utilities, and
taxes are
a) Regional/community factors
b) Global factors
c) Site-related factors
d) Country factors
e) None of the above
Q3:
When making a location decision at the country level, which of these would be
considered?
a) Rent/lease charges
b) Land/construction costs
c) Road/rail/truck access
d) Zoning restrictions
e) Political and business climate
Q4:
The location decision is a strategic one because:
a) It is made by senior management

b) It has a long-term impact
c) It commits large sums of money
d) Generally, it is made infrequently in an organisation
e) All of the above
Q5:
Location analysis techniques typically employed by service organisations include
a) Factor rating method

b) Centre-of-gravity method
c) Break-even analysis
d) Load distance technique
e) All of the above
Q6:
When selecting a location, service organisations typically focus on minimising costs.
Q7:
When selecting a location, manufacturing organisations typically focus on minimising
costs.
a) true
b) false
Q8:
Unfavourable exchange rates can offset low wage rate and high productivity advantages
in foreign countries.
a) true
b) false
Q9:
The factor-rating method does not assign weightings to factors.
a) true
b) false
Q10:
Economic development is in many ways the inverse of location analysis.
a) true
b) false
95
Chapter 5
Demand Forecasting and Capacity

Management
Contents
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
5.2 Case Study 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
5.3 Demand forecasting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
5.4 Effective forecasting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
5.5 Nature of demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
5.6 Forecasting techniques . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
5.6.1 Qualitative techniques . . . . . . . . . . . . . . . . . . . . . . . . 103
5.6.2 Quantitative techniques . . . . . . . . . . . . . . . . . . . . . . . 104
5.7 Case 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
5.8 What is capacity? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
5.8.1 Types of capacity . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
5.9 Long-term capacity strategies . . . . . . . . . . . . . . . . . . . . . . . . . 107
5.9.1 Leading strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
5.9.2 Lagging strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
5.9.3 Tracking strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
5.10 Capacity planning and control . . . . . . . . . . . . . . . . . . . . . . . . . 110
5.10.1 Approaches to capacity planning and control . . . . . . . . . . . 111
5.11 Chapter case study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
5.12 Review Questions - case study . . . . . . . . . . . . . . . . . . . . . . . . 114
5.13 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
5.14 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
Learning Objectives
By the end of this module, you should be able to:
• explain the importance of forecasting demand and what makes a forecast effective;
• outline the various techniques used in forecasting demand;
• understand the role of capacity planning within operations management;

96 Chapter 5. Demand Forecasting and Capacity Management
• discuss the various ways of measuring capacity;
• explain how capacity may be planned and managed effectively.
5.1 Introduction
All organisations require to be able to estimate the demand for their products/services.
Forecasting demand is generally undertaken by the marketing department or a strategic
planning unit. Although this task is rarely, if ever, the responsibility of the Operations
function, the data generated form the basis on which many long, medium and short term
operational decisions are made e.g. locating facilities, deciding capacity, scheduling
tasks, loading processes etc. All organisations need to decide on the size (capacity) of
their facilities, be it a hotel, a supermarket, a large retail store or a manufacturing plant.
The forecasted demand for a product/service is a major determinant of the capacity
required.
5.2 Case Study 1

Boeing v Airbus
The world’s biggest airliner, the A380, will start to be assembled next year for a maiden
flight towards the end of 2004. This airliner, a result of a $10.7 billion programme, aims
to become a rival to the Boeing 747, the 416-seater jumbo that has enjoyed a monopoly
in big airliners for over 30 years. Airbus, which opened for business in 1970 - the year
of the jumbo’s first commercial flight - has now caught up with Boeing in market share.
Airbus’s decision in December 2000 to proceed with a 555-seat super-jumbo sets it
head-to-head with Boeing’s 747 for the first time.
Boeing will tweak the jumbo here and there, improving its performance, but its big effort
is going into an entirely different aircraft, the 250-seat Sonic Cruiser, which flies at 98%
of the speed of sound. Championing speed rather than size suggests that Boeing thinks
most future growth will come from frequent point-to-point flights, rather than those that
go through the big hubs. Airbus, by contrast, still sees a healthy market for a relatively
low-cost super-jumbo to connect the world’s biggest international airports.
Both companies accept the consensus view of the air-travel market - a tripling over the
next 20 years. But they disagree on how the demand will be met. Boeing’s projections
are for a total demand of 18,120 new planes, of which only a third will be twin-aisled
(i.e. large). By contrast, Airbus thinks the market will consist of 14 670 planes, 20%
fewer than Boeing. But the European manufacturer reckons that almost half of those
will be twin-aisled. Boeing believes in ‘fast and frequent’ as deregulation allows airlines
to fly where they want. Airbus is counting more on the bulk capacity that has served
the industry well over the past 30 years, when governments have restricted routes and
flights. Airbus believes that fragmentation from deregulation will be countered, to some
extent, by capacity constraints at airports. These will encourage the use of fewer, larger
aircraft to move the same number of passengers.
(Source: adapted from a Special Report on ‘Boeing v Airbus’, ‘Towards the wild blue
yonder’, The Economist, 27 Apr - 3 May 2002, 75- 77)
5.3 Demand forecasting

Forecasting is about making the seemingly unpredictable predictable! It is embodied in
every aspect of life and its key purpose is to reduce uncertainty. For instance, most of us
tend to look out for weather reports prior to going outdoors for a picnic, mainly to see if
we can expect a warm and sunny day. Furthermore, this prepares us for what to expect
(e.g. possibility of a cloudy day) and subsequently enables us to plan for contingencies
(e.g. taking an umbrella and waterproof mat) or, the worst-case scenario, a cancellation.
In this age of consumer sovereignty, customers have grown accustomed not to have to
wait. Therefore, the forecasting of demand is vital to organisations since an organisation
which does not produce an accurate forecast may lose out in over or under-production
with bankruptcy the result in extreme cases. Demand forecasting effectively offers
directional ‘solutions’ to two operational questions.
• What do we have to do?

• How many do we need?
This is clearly illustrated in the case study above where Boeing and Airbus adopt
completely different plans. One company plans to develop the Sonic-Cruiser and the
other the Super-Jumbo (What do we have to do?) and they even project different
capacities of planes required (How many do we need?) based on the future of air travel.
Source: adapted from Naylor (2002)

Figure 5.1: Demand forecasts and capacity planning
However, predicting the future in terms of what to do and the extent of production is
insufficient. It is also important that managers undertake forecasts in order to maximize
the utilisation of resources, i.e. planning capacity. Demand forecasts, also known as
sales forecasts (possibly due to the fact that the sales department is nearest to the
customer and ‘should’ know what is going on in the market), merely form the basis of
5.4. Effective forecasting 99
marketing, financial and capacity planning depicted in Figure 5.1 above.

Accurate predictions of demand are closely linked to successful capacity planning.
Demand, on the one hand, is uncertain and fluctuates. In the past, it was probably
reasonably safe to expect that somewhere in the market there would be a demand for
a firm’s goods and services. Today, it is no longer the case in many industries due to
globalisation and technological advances, resulting in customers having more product
choices. This makes demand forecasting much more difficult to carry out.
Capacity, on the other hand, is relatively inflexible. Although demand for tickets to a
particular football match in a World Cup may vary according to say, the popularity of
the teams involved and the perceived excitement that the game would bring, the fact
remains that the number of seats available in a stadium is constant and realistically
could not increase or decrease overnight. This example reinforces the point that the
need to forecast cannot be managed away. The real question is how best to prepare
forecasts.
5.4 Effective forecasting

In order to determine what makes a demand forecast effective, it is necessary to
understand its composition. The following working definition is suggested.
Demand forecast refers to an attempt, whether qualitative or quantitative, and usually
based on past performance, to predict future outcomes and trends within the internal
and external environments of an organisation in order to limit the risks and uncertainty
involved in devising and implementing an operational strategy.
The key component in this working definition is the time frame. This is identified in the
illustrative case of Boeing v Airbus as being 20 years. Although managers would like to
believe that there exists an all-purpose forecast which, once made, can always be used
for everything, this is merely a fantasy. The reality is that forecasts are different in terms
of the time frame they must cover and hence the detail that is needed. Forecasts may be
broadly classified according to the short-term, medium-term and long-term time frame.
Imagine for a moment that you are part of a business concerned with the storing and
distribution of stock for a large supermarket chain. What would constitute demand
forecast in the short-term, medium-term and long-term?
Let us start off with the long-term and work backwards. One obvious forecast would
be the location and sizing of distribution centres. This often requires a time frame of
between three to five years (or longer), given the need to select an appropriate site,
coordinate the design specifications, obtain the planning permission required and build
the facility. The demand forecast for a distribution centre would therefore be a long-term
forecast.
Buildings need maintenance and from time to time, upgrading. Maintenance includes
issues such as the cleaning of the facility and the checking of the physical fitness of
the building (e.g. annual checking of mechanical and electrical installations, security
measures etc.). Upgrading may include such matters as the refurbishment (replacing
old for new) and extensions of capacity to meet increased levels of stock. Forecasts for
such activities can probably be classified as medium-term, with a time frame of one to
three years.
Up to this point, the demand forecasts have been concerned with the distribution centre.
It would therefore be reasonable that the short-term forecasts should focus on the actual
contents of the facility, i.e. what to stock and what to distribute. Other forecasts in
the short-term will include staffing requirements, loading and unloading schedules etc.
Table 5.1 below summarises the forecasts needed in the three time frames.
Table 5.1: Forecasting time frames for a distribution centre

Time Frame Examples Responsibility
Long-Term (3-5 years, Location and Sizing of Senior Management
maybe longer) Distribution Centres
Medium-Term (1-3 years) Maintenance and Middle Management
Upgrading of Distribution
Centres
Short-Term(up to 1 year) What to stock and Junior Management
distribute; Staffing
Requirements; Schedules
It is important to note that the examples of the three time frames are given arbitrarily
and that overlaps do occur. For example, a senior manager considering the sizing of
distribution centres would also need to take into account overall demand forecasts on
the type and quantity of stock to hold. All forecasts, despite the time frame, would need
to follow the four principles below.
• Part of decision making

Forecasts need to make sense! As we saw in Figure 5.1, forecasting forms the
basis of marketing, financial and capacity planning. Hence, forecasts must be
expressed in terms useful for carrying out these responsibilities. We can take
the illustrative case of Boeing v Airbus for example. Forecasts can take the form
of configuration of aircraft in the case of the marketing mix (e.g. proportion of
twin-aisled aircraft compared to single-aisle aircraft); programme budgets to aid
financial planning (e.g. Airbus’s programme budget of $10.7 billion) and such
measures as staffing requirements, types and quantities of materials and machine
hours for capacity planning.
• Forecasts are always wrong
Forecasts are based on working assumptions and, as the working definition
suggests, past performance. Therefore, any forecast produced is almost bound
to be incorrect. Changes in the environment, both internal and external, will
invalidate working assumptions. Past performance may soon be outdated with
new technology, the reliance on mechanisms like the Internet and unforeseeable
circumstances. Examples where past performance may not be relied on would
be the immediate and sudden dip in air travel shortly after the terrorist attacks
on America in September 2001, the SARS outbreaks in 2002 and the ongoing
problems in several Middle Eastern countries in 2003/2004. As a result, many
companies within the travel industry were affected and some even had to close
down. So, what can the forecaster do to mitigate such undesirable effects? In
reality, very little. The forecaster can only build in the degree of flexibility within
5.5. Nature of demand 101
forecasts and capacity to enable operations to respond quickly to changes in the

environment. For instance, most airlines tend to overbook flights in an attempt to
achieve full passenger load on their planes. Distribution centres tend to maintain
buffer stocks of key items in anticipation of a sudden surge in demand and so on.
In essence, these reinforce the comment made earlier about not having a once-
for-all forecast. Rather, every forecast needs to be updated usually on a regular
basis.
• Choose method to fit need

This is an extension to the first point made about translating forecasts to an
appropriate, understandable language which will aid marketing, financial and
capacity planning. KISS - (Keep It Short and Simple!). There is always a
danger for managers to utilize the most up-to-date, sophisticated technological
packages to churn out figures for the forecasts. However, the complexities of
using such packages not only mean greater training costs of personnel creating
the forecasts, but may also prove to be a disincentive when it comes to updating
forecasts periodically. Therefore, it is important to use the simplest method
possible. Besides, simple methods can often serve as a of sanity check on
complex methods.
• Confused with a goal

Although it has been established earlier that forecasts need to be part of decision
making, this must not be confused with the linkage between forecasts and the goal.
Operations managers have long been aware of the optimism of sales people and
hence have been wary of establishing service capacity or building stocks based
on demand forecasts provided solely by sales and marketing, which, they believe
from experience, may not be as accurate as suggested.
5.5 Nature of demand

The initial discussion has concentrated on forecasting. Let us now look at the nature of
demand. In essence, demand can be broken down into four main components which
are illustrated in Figure 5.2 below.
Figure 5.2: Graphical representation of demand behaviour
• Trend
A trend represents a gradual upward or downward movement of demand over time.
For instance, Boeing, in the opening case, believes in a rising trend of ‘fast and
frequent’ air travel, with deregulation allowing airlines to fly where they want over
the next 20 years.
• Seasonality
Seasonality refers to the demand fluctuation pattern above and below the trend
line occurring over a predictable period. An example of seasonality is portrayed in
the business of a bank with peaks and lows at around the end and middle of the
month respectively.
• Cycles
Cycles are quite similar to seasonality, apart from the fact that demand cycles run
over periods of more than a year. An example of a demand cycle which closely
follows the business cycle of boom-recession is the investment in property, with
the peak often coming towards the end of a business boom period.
• Random variations
These are chance variations in the data which do not follow a set pattern from
which you could derive a forecast. This, however, does not mean that the
underlying causes are not known. An example could be the record number of
marriages, and hence demand for wedding services, in Britain in 2001 partly
attributed to the number of celebrity weddings the world over.
5.6. Forecasting techniques 103
5.6 Forecasting techniques

Heizer and Render (2001) have developed seven basic steps for a forecasting system.
These are illustrated with reference to the Boeing v Airbus case study in Table 5.2 below.
Table 5.2: A forecasting system, theory and practice

Stage Illustrative example Boeing
v Airbus
i. Establish the use of the To gain a competitive
forecast. advantage over the other in
terms of market share with
the forecast of future
capacity
ii. Select the items to be Configuration of Aircraft
forecasted.
iii. Choose a time frame for 20 years
the forecast.
iv. Select which techniques Quantitative: Future of air
will be used. travel in terms of numbers
of passengers
Qualitative: Future style of
travel
v. Gather the data needed for Surveys?
the forecast.
Past performance?
vi. Make the forecast. Tripling of passenger travel
‘Fast and Frequent’
journeys
vii. Validate and implement the 18120 new planes (Boeing)
results.
14670 planes (Airbus)
$10.7 billion programme
(Airbus)
Techniques of forecasting fall into two categories, qualitative and quantitative, which are
briefly outlined below.
5.6.1 Qualitative techniques

Qualitative techniques are used to tap into the experience, intuition and value systems
of individuals to predict future trends in demand. Postal and telephone surveys, and
increasingly popular web-based surveys, are perhaps the more common methods used
in obtaining consumers’ attitudes and intentions. However, one must be wary that
although such data may be valuable in establishing current tastes and spending habits
with questions such as ‘how much and how often do you shop for groceries online?’ it is
important not to rely on such data too heavily for making firm forecasts because of the
degree of uncertainty often implied in such data.
Expert opinion, gathered through focus group interviews or the Delphi method, is also
extremely valuable. These methods involve gathering together a number of ‘experts’ to
discuss future demand trends. So, for example, in the case of establishing the future of
air travel, the forecaster may wish to gather together representatives from the major
international airlines, aviation authorities and aircraft manufacturers to form a focus
group. Where the Delphi method is used, the researcher will ask the knowledgeable
experts to complete a series of surveys independently over a number of rounds,
where responses from each round are circulated to all respondents anonymously until
consensus is achieved.
5.6.2 Quantitative techniques

On the whole, human beings are not good forecasters. That is why a computer using
relatively simple forecast models usually produces the most reliable forecasts. These
models adopt the quantitative approach whereby demand is predicted on an objective
basis, usually based on historical figures. One such model is known as the Time Series
Analysis where forecasts draw inferences from past demand history, with the underlying
assumption that the future will look like the past. A method making use of such a
model is the Moving Average where the average of a number (usually between 4 and
7 weeks/months before) of previous observations of actual demand is taken to be the
forecast for the next period’s demand. One needs to be conscious of the underlying
assumption when using the time series analysis, for any major upheaval in the industry
sector or unforeseeable circumstance that could invalidate the forecast.
Whilst the time series analysis takes the average figures from the past to become the
forecast for the next period, it does little to establish or quantify the causes behind
the demand. This is where causal models are used not only to forecast the level of
demand but also to explain the relationships between the variables affecting the level
of demand. For instance, an ice cream company trying to forecast its future sales may
come to realize that the main influence on demand is the average temperature of the
week. The company would then gather data on weekly temperatures (average) and
plot them on a graph against the total sales to understand the relationship between the
average weekly temperature and demand for ice cream. This is known as a Regression
Model. Obviously, the expectation is that, as the average temperature rises, so does the
demand for ice cream. This, however, is an over-simplification of the variables affecting
demand for other consumer goods and services. In reality, there needs to be a balance
between establishing the number and nature of variables so that, on the one hand, the
forecaster does not simplify matters too much and, on the other hand, does not create
a complex forecast through a myriad of variables.
5.7. Case 2 105
5.7 Case 2
The American car wash
As I stood at the automatic car wash in my neighbourhood waiting for my car to come out
of the washing sequence, I was becoming more interested as the cars to be dried were
lining up in greater numbers. It was obvious there were nowhere near enough personnel
to dry the cars coming out of the wash area, but yet the cars kept coming. I then looked
to the vacuum and pre-preparation area and saw a larger number of people working at
a fever pitch to get the cars into the wash cycle which also had a large backlog. Their
boss was standing over them shouting at them to get the pace picked up and the cars
advanced to the wash area. At this point an older gentleman, in his late 70’s, came
over to me and said, ‘You know if these guys had any education at all they’d shift some
of those workers from the prep area over to the drying area where they already can’t
handle the work.’ He continued to say, ‘Heck, if American companies built our products
this way we’d never get anything done.’
I agreed with the gentleman and then left to go to work with a well established, ‘well-
educated’ American manufacturing firm that needed to have it explained to them that
simply pushing work into a bottlenecked area does not get the work done any faster.
(Source: adapted from Nelson, M. (1987))
5.8 What is capacity?

We can perhaps identify similar situations to the American Car Wash in our daily lives,
from the occasional five-minute wait for a burger at a fast food chain to the more frequent
struggles through the queues at banks and the post office. These examples would be
symptomatic of poor capacity management.
Capacity management is about matching the size of a facility to the demands (actual
or forecasted) placed on it. As in demand forecasting, the issues surrounding capacity
management may be seen as short-term, medium-term or long-term. The American Car
Wash is clearly a case of capacity management in the short term. An earlier example of
locating and sizing a distribution centre demonstrated capacity management in the long
term. In the remaining sections of this chapter, we shall take a closer look at capacity
management by discussing what capacity really is, the various strategies involved and
its impact on the organisation.
Capacity is commonly viewed in terms of physical stock, e.g. 250 seating capacity
of a Boeing Sonic Cruiser or 40 gigabyte storage capacity of a computer’s hard disk.
However, looking at capacity only in terms of its stock units would mean very little to
operations managers unless the time dimension, i.e. capacity in terms of flow rates, is
added. Operations managers, who are primarily concerned about the transformation
of inputs into outputs over time, would be more interested in statements such as a
tap delivering 8 litres per minute or the Renault company car production line producing
seventeen R25s per hour. Therefore, the capacity of an operating system is expressed
in terms of throughput per period.
Having defined capacity, how do we measure it? In a process involving a standard
product, it is easy to state its capacity as number of units per period. However, because
most operations involve a variety of products, difficulties in measuring capacity arise.
People will probably work with different definitions (or viewpoints) and numbers from
each other. It is important that an organisation should come to an agreement on what
capacities are and how to define them so that people can be brought together and plans
established for everyone to work on a level platform. For instance, instead of looking at
number of units per period, standard hours per week as a form of capacity measurement
can be applied.
Perhaps the best way to measure capacity is to look at capacity in relation to its
sequence of usage. Therefore, the first thing we need to know is how much capacity
we need, i.e. the required capacity, and then how much capacity we have. In theory,
perfection in the use of capacity means equating the required capacity with that available
i.e. full capacity utilisation. However, in reality, most organisations do not run at full
capacity. In fact, many tend to operate below full capacity either because there is
insufficient demand to fill it, or to maintain a level of flexibility so that operations can
respond quickly to every new order.
5.8.1 Types of capacity

There are three types of capacity.
• Designed capacity
This is the maximum achievable capacity under ideal conditions. Often known as
the theoretical capacity of an operation, it cannot always be achieved in reality.
A machine used in a manufacturing process, which may be designed to produce
x number of a component, will probably not produce a designed capacity of 24x
components daily simply because, in reality, machines cannot be run continuously
at their maximum rate. Even if a machine runs continuously at its maximum
rate, the people operating it will most definitely not work 24-hours per day, 7
days a week. Therefore, allowances need to be made for planned breaks, shift
changeovers, maintenance etc.
• Effective capacity
The effective capacity, also known as utilisation, is the proportion of designed
capacity an organisation achieves after taking into account the losses of planned
breaks, shift changeovers, maintenance etc. An organisation which increases
its utilisation will undoubtedly be more profitable. The arrival of mail order and
Internet shopping meant that retailers were able to continue obtaining revenue
outside ‘normal’ opening hours, thereby increasing the utilisation of their facilities
and systems.
• Achieved capacity
Effective capacity is further reduced by inefficiency. Factors such as quality
problems, machine breakdowns, inclement weather, absenteeism and other
avoidable problems mean that the actual capacity will be even lower than the
effective capacity. Consider the strikes by air traffic controllers across Europe
in Summer 2002 and the impact of such problems on the achieved capacity of
an operation becomes clear. Nonetheless, these issues are within management
control and steps can be taken to minimize such inefficiencies.
5.9. Long-term capacity strategies 107
5.9 Long-term capacity strategies

Poor decisions generally result in either excess capacity or under-capacity. In the first
case, unused capacity will add to the cost of overheads and reduce the organisation’s
ability to compete by increasing breakeven points and decreasing unit profits. If capacity
proves to be insufficient to meet demand, sales, and possibly customers, will be lost and
this could result in decreased market share for the firm’s products. Therefore, strategic
planning for operational capacity is one of the dominant issues to be resolved in the
development of the overall strategic plan for firms.
In an operations strategy, the capacity issues relate to the strategic relationship between
capacity and demand levels, specifically translated into capacity expansion or reduction
strategies. It is important to note that changing the capacity of an operation is not just
a matter of deciding on the best size of a capacity increment or reduction, but also the
timing of the change. Therefore, it is of strategic importance to decide whether capacity
should come first before the expected changes of demand, or if capacity should be
acquired in response to a corresponding level of demand. In principle, there are three
different strategies: lead, lag or track (sometimes known as smoothing). Put simply,
capacity can lead demand or it can lag demand or it can track demand.
5.9.1 Leading strategy

Leading strategy is where capacity is added in anticipation of increasing demand so that
there is always sufficient capacity to meet forecast demand. Most manufacturing firms
probably rely on leading capacity strategy to determine the size and timing of a new
production facility. In a production scenario, this may be advantageous since, if there
is always sufficient capacity to meet demand, then revenue is maximized and, most
importantly, customers are satisfied. However, one major problem of such a strategy
is the build up of inventories of finished goods as a result of insufficient demand. A
viable course of action is to reduce production rate, which will drive up the production
costs per unit. Also, a high level of inventory will put pressure on marketing to become
more competitive, perhaps by reducing prices. This would, in turn, lead to a decrease
in profit per unit, arising not only from the reduced sales price, but also from increasing
production and inventory costs.
5.9.2 Lagging strategy

This is the exact opposite of the leading strategy, where capacity is added after the
demand is known so that demand is always equal to or greater than capacity. Hotel
rooms provide an example where the lagging strategy would be applicable since most
hotel operators hope to have all their rooms filled at any one time. One clear advantage
of such a strategy is the ability of an operation to achieve full (or close to full) capacity,
thus minimizing per unit costs. However, one would expect the lost sales due to
unsatisfied demand to have an undesirable effect on a firm’s profitability. A natural
response on discovering that the company cannot keep up with demand is to increase
capacity, e.g. build an extension to the hotel. However, this would usually involve a
relatively significant cost which will, in a manufacturing company, change the production
costs per unit for each unit sold, but may, or may not, increase a company’s overall
profitability. There is always a risk of facing the problems with over-capacity if the
forecast of unsatisfied demand is optimistic.
5.9.3 Tracking strategy

Figure 5.3 below shows a graphical representation of the ‘pure’ types of capacity
strategy (i.e. capacity leads demand or capacity lags demand). In reality, it is
neither possible nor desirable to maintain a pure strategy and, often, a middle way
is implemented. The tracking strategy is a switching strategy where the differences
between capacity and demand levels are kept to a minimum. Figure 5.4 shows a
graphical representation of this switching effect. Ideally, an over-capacity in one period
resulting in inventory should cover an under-capacity in the next period. This could
mean that all demand is satisfied and that the utilisation of capacity remains high.
However, there is a risk to a company’s cash flow, given the cost of maintaining inventory.
The advantages and disadvantages of the three capacity strategies can be found in
Table 5.3.
Figure 5.3: Graphical representation of leading and lagging capacity strategies
5.9. Long-term capacity strategies 109
Figure 5.4: Graphical representation of tracking capacity strategies
Table 5.3: Advantages and disadvantages of the three capacity strategies
Strategy Advantages Disadvantages

Leading Sufficient capacity to meet Utilisation of facilities
demand. Revenue is relatively low, costs will be
maximized and customers high
satisfied
Capacity ‘cushion’ can Risks of over-capacity if
absorb extra demand if demand does not reach
pessimistic forecasts forecast levels

Lagging Sufficient demand to keep Insufficient capacity to
facilities working at full meet all demand, reduced
capacity, unit costs revenue and dissatisfied
minimized customers
Over-capacity problems No ability to exploit
are minimized if forecasts short-term increases in
are optimistic demand
Capital spending on Start-up problems with new
facilities delayed facilities intensified

Tracking All demand satisfied, Cost of inventories can be
customers satisfied, high
revenue maximized
High utilisation of capacity Risks of product
and low costs deterioration and
obsolescence
Very short-term surges in
demand can be met from
inventories
Source: adapted from Slack, N. et al (2001)
5.10 Capacity planning and control

Operations managers have to make short to medium term capacity adjustments which
involve the possibility of making some changes to flexible parameters within a defined
plant capacity (e.g. scheduling staff and inventory) established from the long-term
strategy.
Medium term capacity planning is concerned with achieving the best overall balance
between demand and capacity and is referred to as aggregate planning. The aggregate
plan is a preliminary, approximate schedule of an organisation’s overall operations which
will satisfy the demand forecast at minimum cost. Thus the aggregate plan specifies the
optimal combination of production rate, the workforce level and inventory on hand. The
term ‘aggregate’ is used because demand and capacity calculations are performed on
an aggregated basis, i.e. it is not broken down into the individual products and services
which the operation produces. This plan takes fairly substantial time units, e.g. monthly
rather than daily, outputs and uses data on the available capacity of the plant and on
the required time for each operation on every product. Products which make similar
demands on the production system are grouped together.
The aggregate plan covers the general range of the operation. Aggregate planned
outputs are then broken down into individual scheduled items which customers actually
want and can be checked for feasibility against lead time - the time to produce or ship the
items, and operational capacity. This forms the basis of the master production schedule
which, as the driving force of the operation, is concerned with the projected demand
for individual products per time period. The master schedule shows the resources
required and changes in output of individual products over the future: hiring, limitations
on capacity, relative increases and decreases in inventories and output rates of goods
and services.
Short-term planning applies to what is going to happen in the next hour, day or
week and involves the response to variations in capacity requirements brought about
by seasonal, random and irregular fluctuations in demand or supply. Such planning
involves scheduling jobs, workers and equipment and usually culminates in batch/job
production schedules which take into account such issues as how much to produce
5.10. Capacity planning and control 111
in each batch/job and the sequence, or order, in which the batches/jobs are to be
produced.
5.10.1 Approaches to capacity planning and control

There are three common approaches to capacity planning and control: level capacity,
chase capacity and demand management.
• Level capacity
When production is levelled, constant output rates are maintained during the
planning horizon. The aim is to achieve a uniform and high utilisation of production
resources, including a minimisation of costs related to changes in production
rates. Take the manufacturing of winter clothing for example. A level capacity
plan may be feasible for such an operation as stable employment patterns are
maintained and high productivity levels achieved. Finished sweaters which have
been produced but not sold immediately can be transferred to the warehouse and
stored as inventory for future sales. However, this poses a potential problem in
the summer months when the sales of winter clothing will most certainly dip. The
company will then have to deal with the financing of such storage, which would
undoubtedly raise operational costs. Level capacity plans are also suitable where
future demand is relatively stable. However, as with the winter clothing example,
there is also a risk of a particular line going out of fashion.
• Chase capacity
When the sales plan is chased, output rates are adjusted to match sales each
period during the planning horizon. This matching of forecasted demand aims to
minimize the investment in inventories. However, this is at the expense of low
utilisation of production resources and at higher costs associated with changes
in output rates. Examples of operations where chase capacity plans are most
applicable include the production of perishable items (e.g. Christmas Turkey
and Cranberry Sauce) and service-oriented industries (e.g. Call-centres). Since
output rates are varied in chase capacity plans, capacity is often adjusted by
the use of flexible staffing policies (e.g. part-time staff or subcontracting), or
changing working hours (e.g. overtime). As with long-term capacity strategies, a
combination of the level and chase planning strategies will commonly be observed
in practice.
• Demand management
This is usually the responsibility of the marketing and/or sales functions, and is
aimed at inducing demand at certain periods within a planning horizon so as
to maintain stable and uniform demand which would then allow the company to
make better use of its capacity. Where possible, the aim is to transfer customer
demand from peak periods to quiet periods. Promotions (e.g. hotel breaks during
the Winter months), advertising and pricing strategies can be used to stimulate
off-peak demand to achieve a more levelled production. Another approach to fill
periods of low demand is to develop new outputs which can be produced using
existing processes.
The reality is that each of the three approaches is used only where its advantages
outweigh its disadvantages. Most organisations choose to use a mixture of the above
approaches.
Yield management is an approach used when organisations, such as airlines or hotels,
have relatively fixed capacities, the service cannot be stored, the marginal cost of
making a sale is relatively low and the services are sold in advance. Typical methods for
maximising yields include price discounting and over-booking capacity.
5.11 Chapter case study

Launch timetables for 3G services: Bottlenecks may delay roll-out
programmes
No one doubts the commitment of third-generation operators, but network designers do
not really know how much capacity will be required in different areas.
This year is scheduled to see the launch of the first third-generation (3G) services
using wideband code division multiple access (W-CDMA) technology, which has been
developed on the basis of Europe’s existing global system for mobile (GSM) second-
generation system.
In Japan, the main operator NTT DoCoMo is due to launch W-CDMA services in Tokyo
in May, and in Osaka and Nagoya in December, before reaching nationwide service in
April 2002. Rival J-Phone is hoping to launch in the autumn.
In Europe, where 3G is also known as the universal mobile telecommunications system
(UMTS), the leader is the BT-owned Manx Telecom, operator for the tiny Isle of Man
(which, as a British crown dependency, has its own licensing regime). This company is
also planning a May launch.
In Spain, all four operators are aiming for August, in line with licence conditions requiring
them to commence service in the 23 main cities by that date. Most other western
European countries are hoping to start by the end of the year, in line with the timetable
set down by the European Union.
Strictly speaking, none of these is the first to launch 3G services, that accolade goes to
SK Telecom of Korea, which last October launched a service using 1xRTT technology
(a higher-speed variant of the US-developed cdma2000 2G system), which is included
in the International Telecommunications Union’s globally-agreed family of 3G standards.
Other operators are also launching 1xRTT in Korea, the US and Japan. However, this
offers data speeds of only 144 kilobits a second (kbps), with higher-speed variants
coming later.
W-CDMA can offer speeds of up to 2 megabits (million bits a second (Mbps). However,
no operator will be doing this from the beginning - they are more likely to start with 384
kbps.
But there are serious doubts about these timetables, particularly in Europe. Experts say
that even if the start dates are achieved, services are likely to be very limited until at
least the middle of 2002.
The more pessimistic experts do not expect to see serious services until 2003 or even
later. They argue that new technologies always arrive more slowly than expected -
5.11. Chapter case study 113
as with GSM itself in the early 1990s and, more recently with its higher-speed variant
GPRS, still being run by only a handful of operators.
Sceptics say that W-CDMA standards remain immature, so that manufacturers are likely
to interpret its features in different ways. There could thus be problems in getting the
handsets of one supplier to run on the network of another, or in enabling infrastructure
from different vendors to work together.
Manufacturers say they are fully aware of this issue and have set up agreements to
test each other’s equipment. But observers maintain that this work has yet to start in
earnest.
Producers may also have difficulty keeping pace with demand. One problem is that
so many European countries have licensed so many operators almost simultaneously.
Another is that 3G networks will be rolled out more quickly than their 2G predecessors.
Both require many more base stations.
Fred Knops, principal at the Booz Allen & Hamilton consultancy, says that, as a result, in
western Europe by next year demand for W-CDMA base stations will be double the level
of current demand for GSM stations. And investment bank Lehman Brothers forecasts
that about 60 000 W-CDMA base stations will be deployed in Europe and Japan this
year, thereby generating ‘one of the challenging ramp-ups in telecom supply history’.
Even if the equipment can be produced on time, it will still have to be installed and tested.
Jonathan Lewis, telecommunications analyst at investment bank Dresdner Kleinwort
Benson, points out that this will be a major task which will put immense pressure on the
industry’s limited supply of skilled engineering manpower.
Robin Potter, director of UMTS business development at the MSI consultancy, which
helps to plan and manage roll-outs, says that an operator’s requirement for base stations
depends on what data rate it wants to offer to how many people. But he expects a typical
UK operator to need perhaps 15 000 base stations, roughly twice as many as now.
An operator in one of the bigger European countries would need more. Finding sites
for all these base stations is likely to prove problematic. Moreover, network designers
do not really know how much capacity will be required in different areas because it is
unclear what services customers will want, and how heavy their usage will be.
Mistakes here could lead to serious problems, according to Rodney Stewart, managing
director of Quotient Communications, another network consultancy. Without careful
planning, a 3G operator could find itself in a position where the addition of a new service
seriously undermines the quality and availability of the existing ones. “You may find that
the ‘killer application’ kills everything else”, he warns.
Nor have the operators determined their charging approaches, making it difficult to
specify exactly what sort of billing systems they need. And these will be difficult to
develop.
Stephen Pentland, a partner at Spectrum Strategy Consultants, argues that suppliers
‘have an enormous task ahead of them to develop systems that are robust enough to
handle the increased level of data processing that is implied.’
Operators also have to think about what coverage is needed before they can start
serious marketing. They will not want to wait until they have national systems, given
the time and cost that this will entail. So they will probably start when they have covered
the main urban centers. This would enable them to offer W-CDMA at 384kbps in these
areas and GPRS at 50kbps or 60kbps elsewhere.
But this depends partly on the availability of handsets. Their late arrival has been a key
delaying factor with every previous new wave of technology. There seems little reason to
expect W-CDMA to be any different. Experts say that the handset manufacturers have
little incentive to gear up to produce new technologies in volume when they are making
so much money out of existing equipment.
A further headache is that the first handsets will be ‘simple’ W-CDMA devices, so users
will need one handset in areas of W-CDMA coverage, and another everywhere else.
Operators would prefer to offer multi-mode equipment that can be used to ram between
GSM, GPRS, and W-CDMA. But such equipment is more difficult to produce and will
take longer to arrive. Some experts do not expect this to happen until the end of next
year at the earliest.
(Source: Financial Times Survey ‘Telecoms’, 17 January 2001, III)
5.12 Review Questions - case study

Suggested solutions to Launch timetables for 3G services case study.
Q1:
Identify and evaluate the various methods which can be used in forecasting demand for
3G services.
Q2:
Use a flow diagram to show the processes involved in getting 3G services from the
operators to the end users. What are some of the capacity management problems
highlighted?
Q3:
Discuss the role of aggregate planning in the case study.
5.13 Summary
Forecasting demand is crucial for all organisations large or small, service or
manufacturing or public sector. [It is a major input into capacity planning and control
decisions]
It is an attempt, based on past performance, to predict future outcomes and trends with
a view to minimising risks and uncertainty. The qualitative and quantitative techniques
of forecasting, where possible, take into account trends, seasonality, cycles and random
variations. Organisations need to match the size (in terms of capacity) of their facilities
and demands (actual or forecasted) placed on them. Three types of capacity, designed,
effective and achieved, need to be considered when developing long term strategies.
The main types of strategies evaluated are referred to as leading, lagging and tracking.
5.14. References 115
In the short- to medium-term, capacity planning and control can utilise level, chase or
demand management approaches.
5.14 References
Cole, G.A. (1994) Strategic Management. London: DP Publications Ltd.
Financial Times (2001) Financial Times Survey “Telecoms”. 17 January 2001, III
Heizer, J. and Render, B. (2001) Operations Management (6th ed.) New Jersey:
Prentice Hall.
Lines, A.H. (1996) Forecasting - key to good service at low cost. Logistics Information
Management, 9(4). MCB University Press, 24-27.
Naylor, J. (2002) Introduction to Operations Management (2nd ed.) England: FTPrentice
Hall.
Nelson, M. (1987) Capacity planning and execution: the other half of the equation.
BPICS Control, 13(5), 25-31.
Olhager, J., Rudberg, M. and Wikner, J. (2001) Long-term capacity management:
linking the perspectives from manufacturing strategy and sales and operations planning.
International Journal of Production Economics, 69, 215-225.
Slack, N., Chambers, S. and Johnston, R. (2001) Operations Management (3rd ed.)
England: FT-Prentice Hall.
The Economist (2002) Boeing v Airbus - towards the wild blue yonder. 27 Apr-3 May,
75-77.
117
Chapter 6
Process Types
Contents
6.1 Understanding processes in operations management . . . . . . . . . . . . 119
6.2 Controls in operations management . . . . . . . . . . . . . . . . . . . . . 120
6.3 Examples of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
6.4 Classifying process types in manufacturing organisations . . . . . . . . . 123
6.4.1 Project process . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
6.4.2 Jobbing process . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
6.4.3 Batch process . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
6.4.4 Mass (or line) process . . . . . . . . . . . . . . . . . . . . . . . . 126
6.4.5 Continuous process . . . . . . . . . . . . . . . . . . . . . . . . . 127
6.5 The service process mix . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
6.5.1 Differences between manufacturing and service industries . . . . 128
6.5.2 Anomalies in manufacturing and service industries . . . . . . . . 128
6.6 Classifying process types in service organisations . . . . . . . . . . . . . 129
6.7 Characteristics of operating systems . . . . . . . . . . . . . . . . . . . . . 130
6.7.1 Repeatability and standardisation . . . . . . . . . . . . . . . . . . 131
6.7.2 Flexibility and planning/control complexity . . . . . . . . . . . . . 131
6.7.3 Lead time and inventory . . . . . . . . . . . . . . . . . . . . . . . 131
6.7.4 Technology and capital investment . . . . . . . . . . . . . . . . . 132
6.8 Exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
6.9 Different processes - different demand patterns . . . . . . . . . . . . . . . 133
6.10 Operating systems and business markets . . . . . . . . . . . . . . . . . . 135
6.10.1 The traditional product life cycle . . . . . . . . . . . . . . . . . . . 135
6.10.2 The modern product life cycle . . . . . . . . . . . . . . . . . . . . 136
6.10.3 Implications for process choice . . . . . . . . . . . . . . . . . . . 137
6.10.4 Example: Barr and Stroud . . . . . . . . . . . . . . . . . . . . . . 137
6.11 The importance of selecting the optimum operating system . . . . . . . . 138
6.12 Example: Comparison between two automotive production systems . . . 139
6.13 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
6.15 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
118 Chapter 6. Process Types
Learning Objectives
At the end of this chapter you should be able to:
• understand the relationship between process types, business markets and product
life cycles;
• distinguish between different process types in manufacturing and service

organisations;
• discuss the strategic importance of selecting the right process type;
• choose an appropriate operating system for a variety of situations.
6.1. Understanding processes in operations management 119
6.1 Understanding processes in operations management

We build on the material about the systems approach already discussed in Chapter 2.
The terms ‘system’ and ‘process’ are often used with little discrimination; however, they
are not the same. According to Johnson et al (1979), a system can be defined as ‘an
organised or complex whole: an assemblage or combination of things, or parts forming
a complete or unitary whole.’ In contrast to this the PMBOK (2000) defines a process as
‘a series of actions bringing about a result.’
The key difference between a system and a process is that processes are time bound
whereas systems are not. Systems contain processes which operate within a timeframe,
but systems themselves are not bound by a particular direction or sequence in time. The
concept of sequence, however, is essential to a process.
Another related term is ‘procedure’. A procedure is a formalised set of instructions,
written down or passed on verbally, which inform people about how to do something.
In manufacturing, for example, the use of a machine may be described by a standard
operating procedure (SOP). A process, on the other hand, indicates what needs to be
done rather than how to do it; and a system includes the relationships between the
different parts - it provides the ‘big picture’ view of all the system elements and their
environment.
A working production system is a collection of activities which together constitute a
production process over time. A process can be defined as: any activity or group of
activities which produce outputs by transforming inputs, see Figure 6.1.
Figure 6.1: A basic operations or production management system

This definition, however, does not distinguish between a useful process and a non-useful
process. Consequently, we need to add some qualifiers to the above definition. First,
we can say: The transformation must add value to the inputs.
There is still one piece of information missing. Consider nuclear fusion and fission: each
of these transformations generates energy. To an electricity generating company, this
must surely be a useful process! Not necessarily; not if the transformation results in the
destruction of the production facility. The last part of the definition is needed to account
for this: The transformation must be regulated by control and feedback signals, see
Figure 6.2.
Figure 6.2: Operations system showing feedback and control signals

To summarise, in the context of operations management, a process is any activity which:
• produces outputs by transforming inputs;
• adds value to inputs;
• is regulated by control and feedback signals.
6.2 Controls in operations management

Processes in operations management are subject to a variety of control mechanisms.
For example, at the local level there may be many internal process used to monitor
and adjust the process on a regular basis, e.g. hourly, daily or weekly. Other process
controls will relate to the business market and still others to the corporate strategy of the
enterprise. In this way, there is a hierarchy of controls which influence the system and
its processes, see Figure 6.3; they are:
• local controls (process specific, e.g. temperature, pressure, quality tests);
• global controls (company wide, e.g. market forecasts, corporate strategy).
6.3. Examples of operations 121
Figure 6.3: Control hierarchy in operations management processes
6.3 Examples of operations

There are many types of operating systems in organisations. Each one can be analysed
in terms of its:
• inputs;
• transformation activities or processes;
• outputs;
• control and regulation mechanism.
Consider the range of operating systems listed in Table 6.1.
Table 6.1: Examples of operating systems in organisations

The making of office furniture
Criminal investigation by the police
Development and implementation of a new IT system by IBM
Fabrication of a customised machine tool for an engineering firm
Manufacture of Black and Decker’s gardening and workshop equipment
Production of a new drama series by the BBC
Production of a set of turbine blades for the new Eurofighter aeroplane
The activities of a hospital casualty unit over a weekend
The activities of the Argos Group
The building of new university residences by Taylor Woodrow Construction
The manufacture of silicon chips
The manufacture of knitted garments
The manufacture of polypropylene rope
The production of ethylene by ICI
The production of specialist paints by International Paint
Thorn Lighting’s production of office lighting systems
Each one can be analysed as suggested above. For example, an analysis of The
production of a new drama series by the BBC might result in Table 6.2.
Table 6.2: Analysis of operating system ‘Production of a new drama series by the BBC’
Inputs Actors, Script, Director, Producers,
Finance, Film crew, Stage set
Processing (transformation) The actors perform the script in front of
the camera. The film is edited and
assembled into a full production
Outputs The final output is a transmission on
television, and later video sales of the
production
Control and regulation Control and regulation is provided by the
Director in terms of artistic control and by
the film crew in terms of technical control
of multimedia quality
6.4. Classifying process types in manufacturing organisations 123
Process
Try putting the definition of a process to the test yourself. Choose a few examples of
operating processes from Table 6.1 and analyse them in the same way.
6.4 Classifying process types in manufacturing

organisations
Several slightly different ways of classifying processes in manufacturing operating
systems exist. The following five generic types are the most commonly used of these
classifications.
• project,
• jobbing,
• batch,
• mass (or line), and
• continuous.
All production systems fall into one of these five categories. Some firms will use several
types depending on their product mix, or they may use one type to assemble a finished
product and another type to manufacture certain components.
Each process type has several distinguishing features. Many of these features increase
or decrease in intensity as one moves through the process types from project to
continuous. For example, consider the production volume typically associated with each
process type. It ranges from a unit of one in the project type to unlimited volume in a
continuous process. There is an increase in volume as one moves through the process
types as illustrated in Figure 6.4.
Figure 6.4: Process types showing the trend of increasing volume (approximate
quantities)
Each of the five process types is considered below.
6.4.1 Project process

The project operating system is particularly suitable for one-off processes requiring
the use of specialised process and organisational tasks. Typically, it has fairly
complex inputs and organisation structure and is often characterised by low repeatability
and low standardisation of task. In a project system the operating environment is
generally flexible and easy to adapt. The system is responsive to changing customer
specifications well into the production process. However, good planning and strong
control measures need to be established on every occasion. Demand forecasting is
difficult; therefore production tends to be based on firm orders only. Capacity problems
are common because each project can use up a large percentage of a firm’s resources.
Summary
• Suitable for one-off processes requiring specialised process tasks
• Complex input/output relationships
• Characterised by low repeatability and little standardisation
• Flexible and adaptable operating system, responsive to changing customer

specification
• Good planning and control essential
• Demand forecasting difficult; based on firm customer orders
• Capacity problems common
Examples
1. Taylor Woodrow: Construction
2. BBC: Film production
3. Police service: Criminal investigation
4. IBM: Customised software development
6.4.2 Jobbing process

It is similar to a project operating system but typically carried out in a single location such
as a jobbing workshop. Often fewer people are involved; therefore it is less complex
organisationally. Still concerned with low volumes or one-offs, again it is difficult to
forecast demand other than from firm orders or consistently stable historical demand
patterns.
Summary
• Similar to project but
• Input/output system less complex
• Can produce one-offs or very low volumes
Examples
1. Tool maker
2. Large engineering jobs
3. Doctor’s surgery
6.4.3 Batch process

This is the most common operating system for manufacturing in the UK and elsewhere.
The product is produced in batches. The size of the batch can vary enormously to cater
for customer preferences or to take advantage of economies of scale. The production

facility can typically handle a wide range of products, but would expect repeat orders
for each one over a certain time period. The batch system can take advantage of
better production efficiencies due to higher standardisation and increased productivity.
However, the variation in product means it must still maintain some flexibility. Work in
progress moves from one activity to the next in batches; there is little automation, or
moving conveyor belts.
Summary
• Greater variation in batch size; facilities layout important

• Expect repeat orders; increased efficiency and productivity
• Flexibility of system still required to respond to ongoing market changes
• Large product range common; but significant standardisation possible
Examples
1. Black and Decker: Gardening and workshop tools
2. Office furniture company
3. Thorn Lighting: Office and home lighting systems
4. International Paints: Specialised paints
6.4.4 Mass (or line) process

This process has greater standardisation and repeatability than batch. Variations in
product are typically reduced to a minimum, i.e. different versions or grades of the
same or similar product. Production times are low and it is common for this system to
make to stock in order to keep the line in operation. Mass production means that profit
margins can be kept low. Automation is often in evidence. Individual tasks are often
unskilled, with the materials handling and other production equipment being designed
to carry out many of the skilled operations automatically. On occasions, robots are
used for handling, processing and assembly. Even set-up activities are automated.
High production volumes and investment in production facilities (which cannot easily
be reconfigured for different outputs) mean that this process relies heavily on accurate
demand forecasts.
Summary
• Greater standardisation and repeatability

• Mass production; low profit margin per unit sold
• Manufacture to stock
• Process lends itself to automation
• Tasks often require low level of skill
• Robots may be used
• Market and demand forecasting crucial
Examples
1. Car manufacturer
2. Distribution outlets
3. Clothing manufacturer
4. Electronics manufacture
6.4.5 Continuous process

This process is characterised by highly dedicated plant, full automation, self regulating
process control, small product range (if any), and 24 hour operation to justify the level
of investment usually required. Again demand forecasts are vital. Capital intensive
technologies are used.
Summary
• Highly dedicated plant

• Full automation common
• Self-regulating process control
• Product range minimal
• Utilisation rates very high to justify investment
Examples
1. ICI: Production of ethylene, polythene
2. Rope manufacture
3. Water companies: Sewage treatment
6.5 The service process mix

Before defining different types of service processes it is useful to consider the difference
between manufacturing and service industries. Outlined below are the most important
differences between these two industries.
6.5.1 Differences between manufacturing and service industries

Manufacturing industries:
• turn physical raw materials into tangible products which can be easily touched and
measured, e.g. automobiles;
• use and generate high volume of inventory;
• require high capital investment;
• use a well-developed materials management system.
Service industries
• produce intangible end products (usually), which cannot be physically measured

and touched in the same way as manufactured products;
• require greater client contact in the operating environment than manufacturing.
However, not all businesses fit cleanly into one industry or the other. There are many
shades of grey. Outlined below are some of the anomalies found in manufacturing and
service industries.
6.5.2 Anomalies in manufacturing and service industries

Service firms which violate the intangible rule are:
• restaurants which provide meals or inventory that can be touched;
• distribution firms which receive and sell finished goods inventory;
• retail shops which are service type organisations selling tangible end products.
Manufacturing firms always include some service elements such as:
• after sales service for product repair and/or replacement;
• legal services;
• purchasing services;
• human resource services;
• staff restaurants.
6.6. Classifying process types in service organisations 129
6.6 Classifying process types in service organisations

Figure 6.5 shows a range of services and how they can be classified according to
product variety and volume of sales. For example, a counselling psychologist offers
a specialised service to a small number of clients. The counsellor can meet the needs
of a wide variety of presenting problems from different clients. At the other end of the
spectrum is a supermarket in which the service provision is highly standardised and
meets the needs of a lot of customers at the same time.
Figure 6.5: A comparison of service variety and service volume in the service industries
Another way to classify the service process mix is by comparing the amount of customer
interaction/customisation with the labour intensity of the service operation. A simple
analysis of these variables produces a two by two matrix as shown in Figure 6.6.
Figure 6.6: Differentiating service providers according to labour intensity and

customisation
In this approach we can identify and classify several well known types of service
business into four categories, represented by the four quadrants of the matrix:
• Service factory - low customisation and low labour intensity, e.g. hotels
• Service shop - high customisation and low labour intensity, e.g. hospitals
• Mass service - low customisation and high labour intensity, e.g. schools
• Professional service - high customisation and high labour intensity, e.g. lawyers
As a general rule, as the degree of interaction with the customer increases and
customisation becomes more important, a service provider changes from being a mass
service provider to a professional service provider.
It should be noted that in both manufacturing and service industries there is a similar
progression from highly customised and low volume products and services (e.g. projects
and professional services) to those that are highly standardised and high volume (e.g.
continuous production and mass service).
6.7 Characteristics of operating systems

To enjoy a better understanding of the suitability of different operating systems and
process types for different operating environments and customer demand patterns, we
need to focus on how each process type varies with respect to several characteristics:
• Repeatability and standardisation.
6.7. Characteristics of operating systems 131
• Flexibility and planning/control complexity.

• Lead time and inventory.
• Technology and capital investment.
6.7.1 Repeatability and standardisation

Repeatability refers to the execution of similar or identical tasks as part of an operation.
For example the techniques used to clean 100 similar windows in a building would
normally be highly repeatable. The degree to which an operation consists of repeatable
activities is related to the degree of standardisation in the operation. Higher levels
of standardisation lead to more repeatable tasks. This in turn can lead to higher
productivity. For example in aeroplane design, the greater the degree of standardisation
in the design of the various cabin doors, the easier it is to manufacture, assemble and
maintain all the doors. Assembly operations, spare parts and maintenance tasks will be
similar, even identical, from one door to the next. However, if the aeroplane has very
different designs of cabin door, this will lead to many separate and non standard parts
and tasks during manufacture and operation of the aeroplane.
The different process types in operations management are suited to different levels
of standardisation. The project and jobbing process types are particularly good for
managing operating systems with non-standardised elements. Mass or continuous
types can only function cost effectively if the whole process has been optimised with
significant standardisation and commonality from one item to the next.
6.7.2 Flexibility and planning/control complexity

Flexibility is about being able to respond to new information quickly and appropriately,
for example, changes in market conditions or customer requirements. The general
trend here is that project processes are usually the most flexible, with decreasing
flexibility through the list of process types down to mass and, especially, continuous
processes. Increasing flexibility tends to come at a price and that includes greater
planning and control complexity. Flexible manufacturing systems have much more
demanding scheduling and control problems to solve compared to large batch and mass
operations which are based on longer term forecasts and do not tend to change in terms
of customer requirements so frequently.
6.7.3 Lead time and inventory

A system which can deliver at very short lead times is said to be highly responsive. The
trade off for short lead times is increased inventory. By keeping inventory, especially
at the start and end of a process, the company can respond quickly to customer
demand. Project and jobbing tend to keep inventory very low. They are based on
firm orders. Each production run is a one-off (or very low volumes), so inventory of
specialised items would not help meet future demand, but would tie up liquid assets - a
lost opportunity cost, for example, money tied up in inventory cannot be put into other
investments and projects. On the other hand, mass and continuous operations tend to
operate with more inventory in the system to compensate for issues such as seasonal
demand patterns by maintaining productivity during low demand periods in order to
meet customer requirements during high demand periods, or simply to meet short lead
times and avoid stock outs (essential in the retail industry). The just-in-time philosophy
of managing operations aims to reduce inventory and lead times simultaneously. It is

based on Japanese automotive manufacturing practices and is covered in a separate
chapter.
6.7.4 Technology and capital investment

Investment in new technology can benefit all forms of process type. However, certain
process types are generally more dependent on technology than others. Project
management and jobbing process types traditionally operated with low technology which
was tried and tested. The jobbing craftsman would build everything by hand with general
purpose tools. Henry Ford, who pioneered the mass process type, introduced the
moving conveyor belt into his operating environment and used high technology tools to
simplify the work, so that even farm labourers could join the company and be productive
within a few days. In this way technology was used to take out the skill requirements
from the task. The skill was built into the machine - the worker just had to be quick!
These techniques were typical of the methods developed in the industrial revolution and
were generally based on the ideas of Scientific Management espoused by management
thinkers such as Frederick Winslow Taylor and Frank Gilbreth (George, Jn., 1972).
6.8 Exercise
Process types
This is an exercise designed to test your understanding of the different process types.
The task is to draw several graphs showing how the different process types are related
to a range of variables, shown on the x-axis of the graphs in Figure 6.7. One of the five
graphs has been completed to help you. Try to explain the shape of your graphs. There
is not necessarily a clear relationship in each case.
6.9. Different processes - different demand patterns 133
Figure 6.7: Exercise on the characteristics of the five process types
6.9 Different processes - different demand patterns

It is common to divide manufacturing companies into those which make to stock or
forecast and those which make to order. Make-to-order companies may be further
divided into those which make or assemble to existing designs on receipt of orders
and engineer-to-order businesses which generate a new design to satisfy each new
order received. Engineer-to-order manufacturing may be thought of as an extreme form
of engineering production in which a new design cycle is required for each and every
make cycle. Typical engineer-to-order products are power generation equipment, certain
types of process plant and specialist control gear.
Beyond engineer-to-order in the spectrum of manufacturing, see Figure 6.8, is

construction. In construction, as in engineer-to-order, a new design is almost always
required for each project. A construction site is in effect a temporary factory, engaged
in building a single product in the place it is to be used. Engineer-to-order products are
usually made in a factory and transported to the site where they are to be located. Even
in this case however final execution and assembly frequently take place on site rather
than in the originating factory.
Figure 6.8: Various demand patterns in manufacturing

The variety of process types is generally suited to different patterns of demand. For
example, the project process type is very flexible and well suited to one of a kind
engineer-to-order type demand. On the other hand, the mass (line) system is more
suited to make-to-stock (or forecast) demand patterns, see Figure 6.9.
Figure 6.9: Matching process type to demand pattern
6.10. Operating systems and business markets 135
6.10 Operating systems and business markets

Gone are the days of Henry Ford where ‘you can have any colour of car you like as long
as it is black.’ Market competition is increasing world-wide and firms must compete
globally. The old mass production strategy of ‘economies of scale’ is slowly being
replaced by a modern strategy termed ‘economies of scope’ ( Browne et al, 1988) and
companies are aiming to attain ‘World Class Manufacturing’ (Schonberger, 1986).
This includes:
a) flexibility in product type, manufacturing processes and methods;
b) reduced design cycle times;
c) reduced time to market new products;
d) reduced order cycle times;
e) reduced manufacturing times.
In general customers are looking for better quality and highly dependable delivery of
finished goods. The main characteristics of this new environment are:
a) increased product diversity;
b) reduced product life cycles;
c) changing cost patterns.
The modern manufacturing market is driving companies towards more personalised

products (mass customisation). A firm must prioritise its order-winning criteria from:
• Price
• Quality
• Delivery
and, a fourth criterion, is now
• Service.
6.10.1 The traditional product life cycle

Traditionally companies have consolidated their market share quite easily due to lack
of competition in the market place. This has given them the opportunity of developing
either new products or variants of old products over a longer period of time at a pace
which suits them; cost recovery and profit taking place over a long period of time, see
Figure 6.10. In the modern market this is not the case.
Figure 6.10: The traditional product life cycle
6.10.2 The modern product life cycle

In a competitive market, a company’s manufacturing facilities must produce wide
varieties of parts and a variety of different product designs. Much shorter lead times
are required for all aspects of product development and manufacture.
This is due mainly to two particular modern market aspects:
a) increased international competition;
b) the change in market demand.
This scenario produces a much altered product life cycle diagram (see Figure 6.11).
Figure 6.11: The modern product life cycle

From the above figure, it can be seen that for new products, design and development
is carried out while they are being marketed. A much sharper market build-up takes
place (Stage 1). This is due to the fact that as soon as a new product is released the
competition quickly designs, develops and markets alternatives. It is therefore important
that new products are developed, manufactured and marketed quickly and effectively.
Manufacturing costs should be kept to a minimum and dependable delivery is essential
with good quality and reliability built in.
6.10. Operating systems and business markets 137
Stage 2 is considerably reduced in duration due to the increased competition and peaks
much sooner. New product development may take place in parallel with ‘old’ product
design/development, a small time lag being apparent. The cost recovery and profit time
period is also much shorter.
Due to this pattern, a company must now invest in and effectively manage:
a) the specification, purchase and implementation of new technology (e.g. Computer

Aided Design/Computer Aided Manufacture (CAD/CAM), Numerically Controlled
(NC) machine tools, Computer Aided Production Management (CAPM), all of
which are discussed in a subsequent chapter;
b) the management and efficient organisation of its manufacturing resources.
In some cases (a) may be carried out in conjunction with (b) and vice-versa.
6.10.3 Implications for process choice

The modern manufacturing market is driving companies towards more personalised
products and mass customisation. The operating system will be influenced to some
extent by the maturity of a particular product range. Manufacturing firms are typically in
one of three states: a growth market, a stable market or a declining market. Problems
can arise for a firm when economic circumstances cause a change in state. For
example, a continuous manufacturer, making Chloro Fluro Carbons (CFCs) used in
the past as a refrigerant in the early 1980s, would find it difficult to keep operating
in the current environmental climate. The inflexibility of most continuous systems (for
producing CFCs) would be particularly troublesome to adapt for other purposes, and
the decline in demand may make it impossible to maintain and operate the facility at a
profit.
Increased competition has steadily reduced product life cycles. This change affects
operations management in terms of the operating system used and the technology
required to meet and excel at the order winning criteria.
Sometimes, a customer has certain expectations which favour one operating system
over another. For example, a customer requiring many non-standard features would
indicate jobbing or small batch operation as the best system. On the other hand, a
customer requiring low price, no frills, and high volume would suggest the adoption of a
line production system.
6.10.4 Example: Barr and Stroud

Barr and Stroud, which manufactures defence systems and is located in Glasgow,
Scotland, is a subsidiary of the UK-based multi-national company Pilkingtons. This
company has faced serious problems with a declining market since the end of the cold
war between the USA and Russia. It has eliminated many products from its product
range and re-organised production to manufacture small batch sizes which can be more
easily controlled and more efficiently operated. It is also diversifying into new but related
product areas.
6.11 The importance of selecting the optimum operating

system
Perhaps the most crucial question for a company is how to configure its operating system
to maximise operating profit. There is a wide range of process types and numerous
variations and hybrids which have developed from those discussed in this section (Hill,
1993).
The choice of process type (or types) to use in operations management will depend on
a wide range of issues including:
• order winning criteria;
• nature of the product;
• product life cycle;
• corporate strategy;
• market characteristics.
Production companies are in business primarily to make a profit. The achievable profits
are greatly influenced by the choice of the process type. Get it right and the production
manager can have a large positive effect on profit. Get it wrong and no amount of effort
can significantly increase profits. This idea is best explained by the leverage available
from an operating system which is well suited to the product and market place in which
the company is competing. See Figure 6.12.
Figure 6.12: Operating system well aligned to business market and corporate
objectives: high leveraging effect on company profits
With an operating system which is poorly aligned to its market and corporate objectives,
it will be difficult to increase profits no matter how much attention is paid to the quality
and effectiveness of the operating system. See Figure 6.13.
6.12. Example: Comparison between two automotive production systems 139
Figure 6.13: Operating system poorly aligned to business market and corporate
objectives: low leveraging effect on company profits
6.12 Example: Comparison between two automotive

production systems
Consider the following two companies: Henry Ford’s Motor Company (as originally
established by Henry Ford) and the Morgan Motor Car Company.
• Henry Ford - a car for every man, cheap, easy to use and maintain; epitomises the
line production process, using the automated assembly line.
• Morgan - a comparatively cheap sports car, easy to drive and maintain; epitomises
the craftsman at work in a jobbing shop or low volume batch process.
There are many differences and some similarities between the production systems used
in these two companies. The following analysis compares and contrasts each system
with regard to the following:
• Repeatability
• Standardisation
• Technology management
• Production volume
• Product variety
• Supplier relationships
• Type of operating system and appropriateness
• Facilities layout and appropriateness
• Quality management
• Research and development

• Potential threats faced by each company
Repeatability
• Vital in Ford’s factory - Ford used the idea of repeatability to create a system where
creativity and decision making had no place. Every operation was reduced to a
simple repeatable task.
• Morgan’s factory valued the craftsman. The skill and ability to work with simple
tools, to use them creatively and with precision is central to Morgan’s vision.
• In Ford’s system - immigrant workers could arrive and be adding value in days.
• Morgan worker have a three-or four-year apprenticeship to learn the trade before
they are qualified.
Standardisation
• In Ford’s factory repeatability paved the way for standardisation. If a job was
easily repeatable then it could be standardised. Standardisation took advantage
of scientific management and work study. Taylor’s time and motion studies, and
later Gilbraith’s work with film, helped to add science to production. The more
standardisation that could be built into the system the greater control the system
had over the worker. The system was optimised as an efficient machine.
• Morgan’s factory is disorganised by comparison. The company exerts little overt
control over its workers. No time and motion studies are carried out here. The
emphasis on craft skills is that the worker has internalised the skills to do his job.
He doesn’t need standard operating procedures. There is no measurement or
systematic optimisation.
Technology management
• In Ford’s factory, technology was an enabler. Ford used technology to give more
and more control to the system. The assembly line is one example of this.
It controls the speed of production. Coupled with standardisation, this was a
powerful weapon. With technology the machine could have the skill built into it
reducing the tasks to simpler and simpler operations - reducing the risk of error -
and the assembly line controlled the speed.
• Morgan, on the other hand, prides itself on the use of basic technology, little
changed since the company was formed. This gives the car its appeal as being
hand-built and all the romantic notions and nostalgia attached to the concept.
Production volume
• Fords system is a mass production system. The system is so standardised and

the elements of repeatability are so enshrined in its make up that it can boast
incredible production figures.
6.12. Example: Comparison between two automotive production systems 141
• Morgan struggles to make 10 cars a week. Its philosophy of hand-built and

comparative cheapness seems contradictory. Demand is there (long waiting lists)
but volume is unavailable - the system is not easily controlled.
Product variety
• The original Ford plant offered no choice - any colour as long as it was black.
Newer plants offer an amazing variety of models. The apparently wide choice is
often deceiving. Many parts are the same in all models. The number of genuinely
different products is still quite low. However, the production system allows choice
in a number of areas (colour, trim, engine, etc) giving an apparently massive
combination of choices (i.e. mass customisation).
• Morgan moved from a three-wheel car to a four-wheel car. There is virtually no

choice. What you get is what you get. It’s a Morgan. However, with a craft-based
production system, the scope for choice is huge. The company chooses not to
allow it.
Supplier relationships
• Ford diversified into other markets to control the supply chain. Control is a driving
force.
• Morgan, as a very small car company, has low clout with suppliers. It makes most
parts of the car itself and appears to build from as far down the supply chain as
possible giving it better control, but it is not very efficient for such low volume
production.
Type of operating system and appropriateness
• Ford employs mass production in which the assembly line is a key feature because
it suits high volume production.
• Morgan uses a small batch system but with many features of a traditional job shop
(flexibility due to craft skills and unspecialised tools), but without product variety.
Facilities layout and appropriateness
• Ford uses a line layout which gives it maximum control and offers greatest
efficiency.
• Morgan, which uses a functional layout, is very disorganised with product moving
large distances.
Quality management
• Ford has quality built into the system, with little room for error. Tasks are
standardised and require little skill.
• Morgan makes each worker responsible for his/her own quality as expected from
a craftsman/woman.
Research and development
• Ford emphasises high investment in new technology to increase capacity and

reduce operating costs.
• Morgan makes virtually no investment in R & D. Small improvements are made to

the car over time but there is no attempt to modernise any part of the production
system. Unit costs remain high.
Potential threats faced by each company
• Ford faces strikes by workers who do not like being controlled. Redundancies and
factory closures occur when demand for the product drops (problem faced by all
high volume producers).
• With Morgan, the lack of investment keeps unit production costs high and may
erode their customer base (demand over time) as price increases relative to the
cost of other goods. Customers go elsewhere because the waiting list is too long.
Lack of investment may also lead to high maintenance costs.
6.13 Summary
Processes are time bound and play an important part in operations management. They
are found in all operating systems. The main process types found in manufacturing
organisations are project, jobbing, batch, mass and continuous. In service
organisations, the process types are professional services, service shops/factories and
mass services. Regardless of whether the organisation is a manufacturing or a service
one, there is no precise point at which a process changes from one type to another
and there is effectively an overlap between processes. Each process has a number
of distinguishing features. In manufacturing, each process type is generally associated
with a particular pattern of demand.

Q1:
What is the purpose of control and feedback in a process?
Q2:
Do certain operations require more extensive control than others?
Q3:
How black and white are the boundaries between the different process types?
Q4:
Why are some companies described as using a hybrid process?
Q5:
Do the descriptions of process types apply to service companies?
6.15 References
Browne, J., Harken, J. and Shivnan, J. (1988) Production Management Systems - A CIM
Perspective. Addison-Wesley.
George, Jr., C.S. (1972) The History of Management Thought (2nd ed.) NJ, USA:
Prentice Hall.
Hill, T. (1993) Manufacturing Strategy (2nd ed.) Macmillan.
Johnson, R.A., Kast, F. and J.E. Rosenzweig (1979) The Theory and Management of
Systems. New York: McGraw Hill.
PMBOK (2000) Guide to the project management body of knowledge. Pennsylvania,
USA: Project Management Institute.
Schonberger, R. (1986) World-Class Manufacturing. The Free Press (Macmillan).
145
Chapter 7
Facilities Layout and Flow
Contents
7.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
7.2 What is operations layout and flow? . . . . . . . . . . . . . . . . . . . . . 146
7.3 Market effects on layout decisions . . . . . . . . . . . . . . . . . . . . . . 146
7.4 The benefits of good layout . . . . . . . . . . . . . . . . . . . . . . . . . . 147
7.5 Choices and trade-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148
7.6 Market changes and flexibility . . . . . . . . . . . . . . . . . . . . . . . . . 149
7.7 Making layout choices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
7.8 Basic layout types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
7.8.1 Fixed position layout . . . . . . . . . . . . . . . . . . . . . . . . . 152
7.8.2 Process (or functional) layout . . . . . . . . . . . . . . . . . . . . 153
7.8.3 Product layout . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
7.8.4 Cell layout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
7.9 General objectives of good layout . . . . . . . . . . . . . . . . . . . . . . . 157
7.10 Detailed design of layout . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
7.10.1 Detailed design of fixed position layout . . . . . . . . . . . . . . . 158
7.10.2 Detailed design of process layout . . . . . . . . . . . . . . . . . . 158
7.10.3 Detailed design of cell layout . . . . . . . . . . . . . . . . . . . . 161
7.10.4 Detailed design in product layout . . . . . . . . . . . . . . . . . . 162
7.11 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166
7.13 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 167
Learning Objectives
• explain the relationship between market requirements and layout decisions;

• distinguish between the four basic layout types and understand their relationship
with process types;
• understand the main objectives of each layout type, and their effects on volume
and variety;
• appreciate various techniques used to design layouts in detail.
146 Chapter 7. Facilities Layout and Flow
7.1 Introduction
Facilities layout and flow is concerned with the actual ‘shop floor’ configuration of the
transforming resources which deliver a product or service to a customer. Once an
appropriate geographical location has been selected for an operation, and a process
type has been adopted (appropriate to the volume and variety requirements of the
customer), it is up to the operations manager to ensure that machinery, equipment,
and staff are arranged in such a way that the customer’s requirements are met. After a
general introduction to layout and flow, this chapter describes the four basic layout types
and what each is trying to achieve and then goes on to discuss the detail of designing
operations, using each layout type.
7.2 What is operations layout and flow?

Operations layout is all about the physical location of the transforming resources within
an operation. Layout is what you physically see when you go ‘into’ an operation. Be it
a manufacturing facility, a hotel, a supermarket or a hospital, at some point decisions
were made about what to place where in order that the service or product be delivered
appropriately. Some operations managers have the luxury of starting with a blank
canvas, for example when a new manufacturing plant is being built, but other operations
managers have to work around the constraints of old buildings or large pieces of capital
equipment which perhaps make the layout less than ideal.
Good layout facilitates have effective and appropriate flow in terms of:
• materials/work/ components in manufacturing operations such as a car assembly

plant;
• customers in operations such as theme parks and supermarkets;
• information in many service operations e.g. banks, call centres etc.
Many operations must cope with the flow of a combination of the above in different parts
of the operation. For example, a supermarket must receive deliveries thus concerning
itself with the flow of physical materials; it must also cope with the flow of customers in
the front shop. However, the way in which these two areas will be physically laid out will
be quite different, not least because of the degree of visibility of each area.
7.3 Market effects on layout decisions

There is no right or wrong way to lay out an operation. However, depending upon
the market being served, there will be a layout that is most appropriate, facilitating an
appropriate flow of products or services to meet the customer’s needs. Sometimes it
is the customer who will ‘flow’ through the operation and the layout will determine how
easy or difficult, pleasurable or tortuous, their journey is! In many markets, speed and
cost are the overriding factors when making layout decisions; in other markets, quality
and dependability will dominate.
7.4. The benefits of good layout 147
Organisations within an industry can essentially be providing the same product or

service type, but, because of the delivery system adopted and the layout of the
operations, they differ considerably in what they are able to provide. In all the examples
below, the product or service being delivered is the same in a technical sense i.e. cars,
clothing, food etc but the market requirements for each product are entirely different,
thus affecting the process adopted and the layout of the delivery system:
• The operations of a sports car manufacturer, such as Aston Martin, will be very
different from that of Ford’s mass produced models.
• The operations of a specialist retailer, such as Armani, will be very different from
that of a more general retailer like Marks & Spencer,
• The operations of a fast food restaurant such as McDonalds will be very different
from that of the prestigious Ivy Restaurant in London,
• The operations of the multi-national Prentice Hall Publisher will be very different
from that of a small specialist publisher.
The role of the operations manager is to arrange the necessary process technology,
together with other inputs such as staff, information and materials, to meet the needs
of the market and the cost requirements of the business. Any operation can meet the
market requirements if resources are unlimited but the skill of an operations manager
lies in doing it in a way that not only meets the requirements of the market but also
satisfies the business requirements of the company, especially in terms of cost.
7.4 The benefits of good layout

Layout is an extremely important area of design in operations management because of
the way resources within the transformation process are positioned relative to one an
other. Layout can have an impact on a number of areas:
• The operations effectiveness in terms of throughput - this is concerned with

the speed at which the transformation process can take place; the shorter the time,
the more work the operation can process
• An operation’s costs - poor layout can lead to materials or people travelling
further than they need to through the operation. Generally, layouts try to minimise
distance travelled because cost, not value, is being added whilst materials or
customers are delayed or being moved within the process.
• The quality associated with an operation - if materials or information or
customers are continually being passed from one part of the operation to another,
in an illogical sequence, there will be many points at which damage (or annoyance)
can occur, or mistakes can be made. Think of the retailer who sends you to several
different departments when dealing with a return. Imagine a patient undergoing
open-heart surgery being moved from place to place during the operation!
• The amount of space necessary for the operation - Space costs money.
Consider a financial services operation in a high cost location such as the City
of London. Every square metre is important so a compact layout can save costs.
Consider that a square metre of retail space in London’s West End costs approx.
5000 Euro to rent each year and you begin to see the importance of getting it just
right!
• The wellbeing (and ultimately the productivity) of those who work within the
operation - increasingly, employers are being forced to consider the more human
aspects of operations design, not just in high visibility operations such as retailing,
but also in operations environments such as manufacturing plants, call centres etc.
The quote below, taken from a Mintel Report (2002) on UK Retail Store Design,
highlights the fact that operations layout can have far reaching effects, not just on the
functionality and efficiency of the transformation process but on the wellbeing of those
working within or interacting with it.
Store design has to meet a variety of needs, from the functional to the aesthetic.
Stores should appeal to shoppers, entice more people into the stores and create
good visibility for merchandise and good customer flow. They also need to create a
sense of corporate brand, while at the same time developing an environment that
allows the retailer to function properly. There is a huge range of elements that go
to make up good store design including tangibles like fixtures, décor and lighting,
as well as psychological and emotional elements that influence shopper behaviour.
(Mintel, 2002).
7.5 Choices and trade-offs

No operation can be all things to all customers successfully. Once an operation has
decided upon its strategic objectives, a process type will be adopted that helps meet
these objectives. If the objective is to serve a niche market with large, specialist,
one-off products or services, then a project type process will be adopted. If, on the
other hand, the market requires to be served with a low unit cost product in high
volumes, then quite a different process type will be adopted. Having established the
most appropriate process type, it is time for the operations manager to design and
lay out the resources necessary to facilitate the transformation process efficiently and
effectively. Figure 7.1 demonstrates, very simplistically, the relationship between market
requirements, process type, layout and flow.
7.6. Market changes and flexibility 149
Figure 7.1: Relationship between market requirements, process types, layout and flow
Once these decisions have been made, it may then be difficult to serve another area
of the market. A self-service restaurant, for example, would find it hard to cope with a
request for a meal which is not on the normal menu. Equally, a high class, gourmet
restaurant would find it difficult to serve 100 identical meals within 30 minutes. It could
do so, but in a way that would be extremely inefficient and ineffective and within a time
scale probably unacceptable to the customer.
A company attempting to serve different segments within the same market must
adopt different layouts (often within the same operation) to cope with the volume and
variety differences required by each segment. An example of this is a small clothing
manufacturer in Fife, Scotland, which supplies children’s wear to Marks & Spencer. For
the staple, high volume school wear products (relatively unaffected by fashion trends),
the company adopts a product layout, in the form of a long, standardised production
line. However, to cope with the fast moving, ever-changing fashion end of the market,
the company set up quick response production cells, where operators are multi-skilled
and machinery is laid out in such a way as to facilitate team work and very short through-
put. (The italicised terms will be explained in much more detail later in this chapter.)
7.6 Market changes and flexibility

The 21st century consumer has placed enormous amounts of pressure on the
operations of all sorts of organisations, operating and supplying products and services
in all sectors. Many of the large organisations and brands with which we are familiar,
for example Nike, Tommy Hilfiger, Intel, Microsoft etc are so light or virtual that they
consist only of the brand name and the head office functions. Instead of owning large
production facilities, product manufacturing and service provision are out-sourced, to
contractors or subcontractors who have a delivery system appropriate to the particular
market requirement, at that time. If the market requirements change, so too do the
contractors and subcontractors.
The textile and clothing industry further reinforces this point. Up until the late 1980s,
large companies such as Courtaulds and Coats Viyella felt it advantageous to own and
control all parts of the supply chain, literally from cotton field to the retail outlets in some
cases. They owned very large garment manufacturing facilities, laid out in such a way
as to produce high volumes efficiently and cost effectively. However, as the consumer
became more sophisticated and the firms more exposed to competition from overseas,
both in terms of product choice and cost, these operations were no longer able to serve
this changing and increasingly demanding market. These large ‘dinosaurs’ producing
limited variety in very high volumes were no longer appropriate for the British high street
and its consumers. Corporations realised that they were too bloated: they were over-
sized, they owned too much, employed too many people, and they were weighed down
with too many factors, not least their operations and the way they were laid out to serve
a particular area of the market. Where once the primary concern of every corporation
was the production of goods, now production itself - running one’s own factories, being
responsible for tens of thousands of full-time, permanent employees - began to seem
like a liability.
The likes of Niki, and later Tommy Hilfiger, made the bold claim that production
was only an incidental part of their operations. What these companies produced
primarily were not things, they said, but ideas and images for their brands, and
their real work lay not in manufacturing, but in building up their brands. The formula
for these brand-driven companies is pretty much the same: get rid of your
unionised factories in the west and buy your products from Asian or Central
American contractors and sub-contractors. Then, take the money you save and
spend it on branding, on advertising, superstores, and sponsorships. Based on
overwhelming success of this formula, much of the corporate world is racing
towards weightlessness: the companies which own the least, keep the fewest
employees on the payroll and have the ability to flex and change in terms of the
market requirements win the race. (Klein, 2000).
7.7 Making layout choices

What affects the design of the delivery system and consequently the layout?
• The nature of the product or service; it goes without saying that what you are
actually processing affects layout decisions. A food processing plant requires very
different equipment to a clothing manufacturer. Even if each was using the same
layout type, the physical ‘look’ of the transformation process would be different.
• The complexity of the product will also affect the layout - number of components,
processes etc.
• What is actually being processed within the transformation process, i.e.
7.8. Basic layout types 151
materials, information, customers, will also affect the layout. If customers are being
processed, then the layout must be not only functionally effective but aesthetically
pleasing (see quote from Mintel, in Section 7.4)
• The variety required by the market - the operations of a specialist cabinetmaker
will look very different from that of a manufacturer of standard kitchen units.
• The volumes required by the market - is the product or service to be supplied
as a ‘one-off’ or is there going to be a high degree of repeatability?
7.8 Basic layout types

In the previous chapter, a process was defined as any activity which:
• produces outputs by transforming inputs;

• adds value to inputs;
• is regulated by control and feedback signals.
The layout chosen to facilitate this process must fulfil all the above requirements. It must:
1. facilitate the transformation process, i.e. arrange the machinery, technology etc so
that a product or service can be delivered;
2. also add value: delays and wasted time should be avoided, resources should be
utilised to best effect, the time within the process should be acceptable to the
customer, and the cost of the resources committed during the process must not
exceed what the customer is willing to pay.
3. allow control and feedback to be an integral part of the operation. A large,
automated production line designed and arranged in such a way that no
intervention or access is possible until the product is finished would be an
extremely foolish approach since control and feedback can result in early
intervention and a reduction in scrap or waste. Layout design should therefore
take this into consideration.
Whichever layout type is chosen, it should be capable of meeting the above criteria. (As
mentioned previously, however, many operations are not making layout decisions on a
blank canvas and sometimes less than ideal conditions will persist due for example, to
building or machinery constraints.)
There are historically, three basic layout types which can be adopted by operations
in order to facilitate a particular process type (and respond to a particular market
requirement); fixed position, process and product. However, because of changing
market requirements, we will also discuss a fourth, namely cell layout, which aims to
combine the advantages of both process and product layout. Modern manufacturing
plants are often a hybrid (or mixture) of various layout types, combining different
principles at different stages of manufacture. Hence, in reality, it is generally accepted
that four layout types exist.
The relationship between process and layout is not totally deterministic i.e. if you use
a project-based layout, there may be more than one way to lay out your facility, but
there will be one particular layout type which is most appropriate for the volume and the
variety you are providing. The process types and the most appropriate layout type for
that process are shown in Figure 7.2.

Figure 7.2: The relationship between process types and layout
7.8.1 Fixed position layout

This type of layout is best suited to project processes, where staff, materials and
equipment are brought to the work area as and when required. The transforming
resources are brought to the be transformed resources because of the uniqueness,
the complexity and often the scale and physical size of the undertaking. Examples of
products or services created using this type of layout are civil and marine engineering,
hospital theatres, film making and ship building.
The effectiveness of this type of layout has as much to do with access, scheduling and
dependability of deliveries, as with the physical location of resources.
Often, subassemblies are carried out away from the site and brought in when needed.
The only limit to this is transportation i.e. very large articles cannot be easily
transported and need, therefore, to be constructed on site.
Fifty years ago operations such as house building would have been pure fixed position
layout, with all materials and people coming to the site of construction. This had
implications on how the site was laid out, access to the site, supervision on the site
etc. Since the 1960s however, in many countries much of a house is prefabricated and
brought to the site, speeding up construction and moving away from pure fixed-position
layout, standardising parts and procedures, and ultimately reducing costs. Many would
argue, however, that initially the quality was affected by this change and many of the
prefabricated, system-built flats and houses of the 1960s have now been demolished.
However, the principle of bringing as much to the site, already ‘made’ is advantageous
and, today, much of the house building in the UK uses elements of this approach.
Advantages
• Very high product mix and product flexibility - each job will almost certainly be
unique and because the operation is set up in this way, it can cope with this. In
fact each layout of each job will be unique, as it will be in situ.
• Product or customer is not moved or disturbed - this might be because of size
or because of the delicate nature of the operation, such as in an operating theatre.
• High variety of tasks for staff - staff will tend to be highly skilled, and involved in
a variety of tasks i.e. each job that comes in will be different and will require them
to adapt their skills accordingly.
It should be noted here that the implications of layout and flow decisions are far reaching,
not just in terms of the actual product or service being delivered. Operations managers
need to be aware of the Human Resource implications of their decisions, not just in
terms of ergonomics and work place design, but in terms of the tasks people are asked
to do. In general, the higher the volumes, the more repeatable and perhaps monotonous
the task becomes. The lower the volume, the greater is the variety of tasks for staff
involved.
Disadvantages
• Very high unit cost - individuality comes with a price

• Scheduling of space and activities can be difficult - many jobs will be
dependent upon a subsequent stage. In the building trade, all the ‘transforming
resources’ i.e. the tradesmen, may be ready to come to the site to deal with the ‘to
be transformed resources’, but a problem in one area can have a huge knock-on
effects for the next stage i.e. a digger going through a mains water pipe means
that the foundations have to be delayed. Weather can even have an effect on many
fixed position operations, as many of them happen out of doors.
• Much movement of plant and staff - this is time that is unproductive and just
adds cost to the process instead of adding value.
• Training costs may increase - if staff are being asked to perform a task on a
particular project they have never undertaken before, this will require specialist
training
7.8.2 Process (or functional) layout

This type of layout is best suited to jobbing processes and is sometimes called
functional layout because all transforming resources with the same, or similar, function
are grouped together. A printing company would be organised in this way, always
printing in some shape or form, but every job that comes into the organisation will be
unique and will involve a slightly different process. It might be a single item being printed
or a small batch.
Because the volume requirements of a product or service are insufficient to justify
dedicating processes to their singular use, the layout is designed to be used and reused
by a range of products and services, but all of a similar type technically.
Because orders are unpredictable and variety within the product/service type is high,
the sequence of operations will also be unpredictable.
The most sensible way to group machinery or activities is according to the process i.e.
grouping of related machinery or processes. A job is then routed around the areas
required to complete that job, in apparently no logical sequence. One inherent problem,
therefore, is that there is uncertainty of loading in different areas. Because you can, at
any one time, have many jobs being handled, a jobbing shop will consequently have
very high levels of work in progress (WIP), need large areas of storage and look, at
times, a little disorganised.
Other examples of process layout would be the way hospitals processes are grouped,
i.e. x-ray, theatre, laboratories; supermarkets i.e. frozen foods, tinned foods,
confectionery, stationery, and libraries i.e. study desks, computing facilities, reference
section, copying area.
Advantages
• High product mix and product flexibility - because you have a variety of process
areas, you can send work to the areas required to complete the product or service.
Very simple products can be manufactured alongside very complicated products.
• Able to cope with disruptions - these may be internal disruptions such as

absenteeism, or external such as sudden surges in demand, or jobs to be turned
round very quickly
• Easy to supervise plant or equipment - because processes and machinery of a

similar nature are grouped together, you can have a supervisor who is a specialist
in that field and who doesn’t need to know about the whole operation in detail, just
his or her specialist area and how it fits into the operation as a whole.
Disadvantages
• Low utilisation of facilities - many parts of the plant i.e. many of the process
sections may not be fully utilised all the time, but they need to be there in order to
offer a suitable product/service mix. Remember that demand is unpredictable and
relatively unstable when you adopt this type of layout.
• High levels of WIP - again due to the unpredictable nature of demand for the
product or service on offer, it is necessary to have a high level of WIP to keep
plant efficiencies at a reasonable level.
• Complex flow which is difficult to control - this refers to the flow of work around
all the operations. If you were to study the path of, say, the printing of a brochure
in a print jobbing shop, it may seem haphazard, involving excessive handling and
backtracking.
7.8.3 Product layout

When volumes justify dedicating processes or functions to a given range of products or
services., a product layout should be adopted. Product layout is most appropriate for
very high volume, low variety production, such as is found in either mass or continuous
processes. All the transforming resources required for the provision of the service or
the manufacture of the product are laid out to suit the particular product being made or
the service being delivered, and the transformed resources flow along a line of process
(You may also hear this layout referred to as flow line or line layout.)
Demand for the product is sufficiently high, predictable and stable to justify doing this,
and committing resources in this way. Examples of companies able to do this would be
Heinz, for their baked bean production. Canning lines can be set up and engineered
specifically for this product. Highly specialised machinery can be introduced and high
efficiencies can be achieved.
Line balancing is very important in this type of layout. It is essential that each stage of
the process is balanced and does not run out of work. The temptation is to load the
whole operation with high levels of WIP to ensure that plant utilisation is high but WIP
levels should be kept to a workable minimum.
Advantages
• Low unit cost for high volumes - economies of scale can be achieved due to
standardisation and repetition.
• Specialisation of equipment - it is worth investing in specialist, automated
equipment which will not only improve productivity but also quality.
• Material or customer movement is convenient and logical - transformed
resources are moving through the process in a logical sequence. Handling time
will be reduced and the process concentrates on adding value as opposed to
adding cost.
Disadvantages
• Low product mix flexibility - because your operations are geared specifically for
one product, this reduces your ability to offer your customer variety.
• Sensitive to disruption - the production line will be balanced in such a way that
each stage in the process is dependent upon the previous stage. Line balancing
is vital in this type of layout; this can be difficult as all tasks in all parts of the
process will not take the same length of time. In services, this leads to queuing;
in manufacturing, it can lead to bottlenecks or out of work situations. Absenteeism
or changes in demand can have major effects on the production process, as can
variation in quality of raw materials.
• Repetitive work - standardisation and specialisation bring monotonous and
repetitive tasks where the operator becomes just a cog in a machine. Because
of the nature of line balancing, time pressure can be placed on an operator to
complete a task if there is not a high level of WIP built into the system.
7.8.4 Cell layout

This is really a ‘half-way house’ between product and process layout, trying to combine
the advantages of each by means of:
• the variety and flexibility offered by process layout;
• the volumes and efficiency of product layout.
We are dealing here with companies which operate, in general, batch processes but
are torn between the flexibility offered by process layout and the efficiency and volume
opportunities which arise from specialised lines. So a hybrid and a compromise is Cell
Layout (also known as cellular manufacture, or group technology).
The concept is perhaps most easily explained in the retail sector. Traditionally, large
clothing retailers display their merchandise in product areas i.e. ladies skirts, men’s
trousers, underwear, shoes etc. This means that a customer wishing to buy a complete
outfit has to travel from department to department, acquiring the products needed to
complete the outfit before approaching the pay point. However, in a convenience and
consumer driven market, where retailers are trying to appeal to very specific market
segments, there has been a move towards the ‘store within a store’ approach, using
sub-brands to appeal to specific target customers. This means that the same customer
only needs to enter this micro-store or cell to find all the constituent elements of his or
her outfit before going to a central area to pay.
A good example of this system is the Per Una and Blue Harbour sub brands (appealing
to 25-35 year old ABC1 females and males respectively) found within Marks & Spencer
stores. The consumer has effectively entered a specialist service delivery cell i.e. a
micro operation, but has then to re-enter the macro operation to pay. The tills are shared
facilities, used by more than one cell, as are the customer service areas, the café etc.
There are obviously more complex marketing and psychological theories behind this
concept in retailing but it does demonstrate the advantages of a cell type layout.
The same principles can be applied in a manufacturing environment.
This layout is a step up from jobbing in terms of scale, offering a more limited range
of products than a jobbing shop, but in larger quantities. With increased volumes it
becomes more economical to start specialising, but not to the extent of mass production
because you are still dealing with relatively high variety. So what is introduced are teams
or cells or families of machines, usually arranged in a product type layout, dedicated to
one product type, or family of products.
The scale of orders received is not sufficient to change the layout of the whole operation,
but just small subsections which will deal with specific product types. Operators within
these sections will be multi-skilled and able to cope with a variety of tasks.
There will be several mini-layouts within the whole operation, with all the machinery and
equipment to meet the need of the product passing through the cell being located in the
cell.
Very often you will find cells within process layouts. So the process layout provides the
operation with the bulk of its products/services, allowing the ‘cell’ to offer another unique
product or service.
Another example of this would be the ‘lunch’ section often found in a supermarket. The
whole operation is predominantly process layout, but there is a specialist cell within this
providing everything the customer needs in terms of lunch products.
Advantages
• Good compromise between cost and flexibility - for relatively high variety
7.9. General objectives of good layout 157
operations and high volumes.
• Fast throughput - the product does not have to move through each department
in turn, as with process layout. The product, or customer, is processed by the
team or the cell, so the throughput time is just the time taken to complete the
transformation process in a specific cell.
• Group motivation - operators can focus on the finished product or service and
are often paid according to group output. In some situations, the group will have
responsibility for planning, scheduling and controlling the activities within the cell.
Disadvantages
• Costly to rearrange existing layout - an operation wishing to move towards this

type of layout would not only require its facilities to be re-arranged, but it would also
require a change in the culture of the organisation. During the period of change,
which could be substantial, customers may exhibit limited tolerance.
• Need more equipment - more machinery may be required in each department

than is necessary for any one product which is being provided. This consequently
leads to the next disadvantage.
• Lower plant utilisation (than product layout) - at any one time, all plant within
each cell may not be used, depending upon the orders received.
• Higher training time/costs - operators are required to be multi-skilled for this

layout to work effectively. This requires them to be trained in a wider range of skills
which takes time and money.
7.9 General objectives of good layout

No matter what market is being served, what process type has been adopted and
what layout decisions are made, good layout design should consider the follow listing
of factors.
• Inherent safety - the most efficient layout might pose a hazard to either staff or
customers.
• Length of flow - usually concerned with minimising the distance travelled by the
transformed resources. The distance travelled must be in line with the objectives
of the operation.
• Clarity of flow - all flow of materials and customers to be well signed or indicated.
This is not only important from a processing point of view but from a control and
from a safety point of view.
• Staff comfort - again, what is best for production efficiency may not always be
best for staff comfort i.e. a noisy piece of machinery. Space should be well lit,
well ventilated etc. (issues dealt with in the chapter on Job Design in the second
Operations Management text)
• Management co-ordination - layout should assist with management supervision

and communication, not hindering it in any way.
• Accessibility - all areas and machines should be accessible not only for the
transformed resources but for maintenance and cleaning.
• Use of Space - getting as much from the space as possible, and minimising the
floor space devoted to a particular process. But in a luxury hotel for example, in
order to achieve objectives, it may be necessary to have a very large, impressive
entrance hall, sending out a certain message about the company.
• Long-term flexibility - layout will need to change periodically due to

product/service changes, new product/service introduction, fluctuations in demand
etc. An operations manager must consider the future needs of the operation as
well as the current.
Exercise
Can you think of an operation where you would want your customers i.e. your
transformed resources, actually to travel further than is absolutely necessary?
7.10 Detailed design of layout

Once an appropriate layout has been decided upon, the detailed design can take place.
7.10.1 Detailed design of fixed position layout

The detailed design of fixed position layout will be very much dependent on the specific
project undertaken and scheduling of events will be one of the prime concerns of anyone
looking at the detailed design. There are techniques designed to locate resources
appropriately when using fixed position layout but they are not widely used due to the
uniqueness of each project and the constantly evolving nature of each project. For these
reasons, our discussion will focus on the detailed design of the remaining three layout
types.
7.10.2 Detailed design of process layout

The relationship of one department or functional area to another is important when using
process layout. Transformed resources need to move from process to process in order
to complete the Transformation Process. However, increasing numbers of departments
or functional areas lead to an increasing number of combinations.
If you have a factory arranged using process layout, with only two departments, then
there are only two ways of arranging these relative to each other. If you have three
departments, there are six ways of arranging the departments relative to each other. As
soon as you get up to a realistic figure i.e. a factory laid out using process layout, with
10 departments, there are just over 3.6 million different ways of arranging these facilities
relative to one another. You can work this out by using the x! Factorial key on your
calculator.
7.10. Detailed design of layout 159
Optimal solutions are therefore very difficult to find in practice. Most layout decisions are
made using a combination of intuition, common sense and systematic trial and error, but
there are techniques which can be used.
The operation manager’s key objective will be to minimise the cost to the operation
associated with the flow of transformed resources through the operation. Cost
minimisation is usually the key objective (reduction in distance travelled and handling)
apart from in operations perhaps such as theme parks, supermarkets etc., where
increasing the distance the customer must travel can actually be advantageous,
stimulating impulse purchasing for example.
Certain information needs to be collected in order to make informed layout decisions in
process layout, for example:
• the area required by each work centre, work station or department;
• any particular requirements of the department (fresh air, natural light, refrigeration
etc);
• the degree and direction of flow between each work centre (i.e. number of
journeys, number of loads, cost of flow per distance travelled);
• the desirability of work stations being close to one another.
Figure 7.3 details the journeys between departments in an organisation per day. For
example, there are 22 journey made from Department A to Department B, 50 from A
to D etc. This information would be collected by observation over a period of time (to
establish averages) and can then be used to assist with layout decisions. If the direction
of journey is unimportant i.e. it costs the same to go in either direction, then the data
can be condensed into the table in Figure 7.4 and used to formulate a logical layout.
Figure 7.3: Journeys made per day between departments
Figure 7.4: Journeys made per day when direction has no bearing on nature of journey
or cost of journey
From the data gathered, it would seem sensible to locate departments A and D, and A
and B close to one another as there are 59 and 54 journeys made between these two
sets of departments respectively in any one day.
But cost needs to be considered also. A to D is not the most costly route along which
journeys are made.
Cost of routes
By using the data provided in Figure 7.5, and referring back to Figure 7.3, can you work
out the most costly and least costly routes using a similar table?
Figure 7.5: The cost of each single journey

The deductions you can make from collecting data like this provide an objective measure
of which departments are most appropriate to locate together, based on the cost
associated with making particular journeys between particular departments, not just on
what has always been done in the past or a gut feeling. Another aspect that may need to
be considered is the relationship between departments. It may be important to evaluate
how close certain departments should be to each other. Relative closeness can range
from being absolutely essential to unimportant to undesirable. In some circumstances,
the effectiveness of the layout may be judged solely on the total distances travelled
by materials, employees and/or customers. Techniques which can help with such
evaluations exist.
7.10.3 Detailed design of cell layout

It must be remembered that cells have been introduced as a compromise between the
flexibility of process layout and the simplicity and efficiency of product layout. What
a production unit will try to do if they wish to adopt a cell type layout is to examine
all their product groups being manufactured or offered, all the machinery required to
create these products or services and then group them logically, creating cells capable of
dealing with a family of products. The small clothing manufacturer mentioned previously
has seen the successful implementation of 15 cells, each devoted to a particular product
family i.e. girls’ T-shirts, girls’ dresses, boys’ trousers. Within these product families
there can be substantial variation but the machinery and the skills within the cell can
cope. After having formed the cells, there were certain pieces of large, expensive
machinery required by more than one cell. These were then located in a central resource
area.
The method described above uses a technique called Production Flow Analysis
(PFA). This is a very common technique for allocating machines and tasks to cells. In
a very simple example, the machinery required to manufacture a selection of products
is listed down the left-hand side of a matrix and the product families are listed along
the top. Once this information has been collected and put onto the chart, it is still quite
meaningless until we start to group it. See Figure 7.6.

Figure 7.6: Matrix of machines v product families
When the columns and rows are moved, using appropriate formulae or algorithms (so
that each cross is moved as close to the diagonal as possible) a pattern starts to emerge
and groupings become obvious, See Figure 7.7.

Figure 7.7: Machine/product family cells
Because not all products fall neatly into the cells which start to emerge, it might be
necessary to establish a special cell (or remainder cell) or buy an extra piece of
machinery or re-route a product into 2 cells for completion. But the majority of production
in most cases can be grouped.
7.10.4 Detailed design in product layout

At first thought one might deduce that little design is needed because all that has to be
done is to organise the resources in the order in which they are required in the operation
to create the product or service. But there are still detailed decisions to be taken. In other
layouts the main decision is where to place what?
That decision has already been made with product design. The decision now is what to
place where?
Line balancing
The main design decisions concern line balancing. First, something called a cycle time
(CT) must be established. This is the time between completed products or ‘processed’
customers emerging from the operation and is calculated by considering two items, the
likely demand for the product and the production time available.
For example, a bank has calculated that it is required to process 140 loan applications
every week. It has a 38 hour week in which to do this.
time available
The cycle time required from the layout is then =
Expected demand
38 60 minutes
=
140
= 16.29 minutes
The layout must be such that an application emerges from the process every 16.29
minutes. This means that the operation will be capable of meeting the market demand.
The next point to be established is the number of work stages required. To do this
we need to know the work content of the task i.e. how long it takes to process one
application. In this example, it takes 45 minutes to process one application.

Total work content
Number of stages =
Required cycle time
45 minutes
=
16.29
= 2.76 stages
If the answer to this equation is not a whole number then you need to round up. In this
example, we need a total of 3 work stages, or 3 operators in order that the demand be
met.
Unfortunately, in the real world all tasks do not neatly divide themselves up into equal
portions for work. Each stage’s work might take an average of about 16 minutes but is
unlikely to be exactly that. There will also be variations in the physical effort put in by
each person.
Sometimes these two factors can lead to irregularities in the flow along the line, queuing
and lost production time. More resources have to be introduced into the system to
compensate for this, thus eroding profit.
To demonstrate the technique of line balancing fully, we shall use a very simple example.
ZZ Manufacturing Limited have established that the weekly demand for their product Y
is 7000 units. They work a 38-hour week in this factory. The total work content for this
product (i.e. how long it takes to make one product) is 0.82 standard minutes. (Standard
minutes (sm), are used when balancing lines. This is simply a decimal minute, divided
into 100 seconds instead of 60, to which allowances have been added. So 1 minute 30
seconds becomes 1.5sm and this includes a percentage for rest breaks etc.)
time available
The cycle time (CT) required from the layout is =
Expected demand
38 60 minutes
=
7000
= 0.33sm
Therefore, the layout must be such that if demand is to be satisfied, a product Y emerges
from the system every 0.33 minutes.
Total work content
Number of stages required =
Required CT
=
sm
0.33sm
= 2.49 stages
In order to satisfy demand, a cycle time of 0.33 sm must be achieved. In order to achieve
this, 3 stages must be introduced into the process.
The process for constructing this particular product is divided into 7 distinct tasks and,
unfortunately, none of the times match the cycle time exactly. See Table 7.1.
Table 7.1: Task list for Product Y

Task Number sm
1 0.08
2 0.12
3 0.10
4 0.20
5 0.12
6 0.15
7 0.05
TOTAL 0.82
Tasks must therefore be combined so that at each stage, the work content is as close to
0.33sm (the CT) as possible. See Table 7.2.
Table 7.2: Allocation of tasks to stages and calculation of balancing loss

Stage 1 Stage 2 Stage 3
Task Number 1 = 0.08 Task Number 4 = 0.20 Task Number 6 = 0.15
Task Number 2 = 0.12 Task Number 5 = 0.12 Task Number 7 = 0.05
Task Number 3 = 0.1
TOTAL = 0.30 TOTAL = 0.32 TOTAL = 0.2
CYCLE TIME = 0.33 CYCLE TIME = 0.33 CYCLE TIME = 0.33
Therefore, there is a 0.03 Balancing loss = 0.01 Balancing Loss = 0.13

difference, called a
balancing loss
The imbalances mean that there are certain stages which will not be working as
efficiently as would ideally be desired because very rarely in the real world will task
times match cycle times exactly.
Idle time during every cycle = 0.03 + 0.01 + 0.13 = 0.17
0.17
3 0.33
% of idle time per cycle =
= 17%
We have now established that we need 3 stages, but there are decisions to be made
with regards to the actual physical layout of these stages. Probably the most logical way
to think about it is in a single, long thin production line with 3 stages, with a product Y
emerging every 0.33 minutes - see Figure 7.8
Figure 7.8: Long thin arrangement

However, weekly demand could also be met by producing 3 products every 0.99
minutes. See Figure 7.9.
Figure 7.9: Short fat arrangement

At the end of each week, demand is satisfied by both arrangements, but there are
advantages of each.
Advantages of long thin arrangement
• Controlled flow of materials or customers.
• Simple materials handling.
• Lower capital requirement (only one piece of specialist machinery will be required
per stage).
• More efficient operation (more direct contact with product, not involved with moving
to the next machine or picking up the next tool to perform the next task).
• Each operator very efficient at performing his/her task, leading to increased

productivity. (However the HR issues discussed earlier should be considered.)
Advantages of short fat arrangement
• Higher mix flexibility (each operator has a greater range of skills).
• Higher volume flexibility - if you need to adjust capacity, open up another section,
or close down a section.
• Higher robustness - one stage breakdown does not affect the whole line.
• Less monotonous work.
7.11 Summary
What has been covered by this chapter inevitably involves simplifications. They are
intended to provide the underlying principles which help when designing a layout.
In practice, there are many more factors, other than production or service delivery
efficiency to be taken into consideration. The techniques described however, provide
a good starting point, to be combined with intuition, experience, knowledge of market
conditions and an in depth understanding of what the customer wants and expects from
the operation.

Q1:
When scheduling of work is as important as actual physical layout, what layout would an
operation be using:
1. Cell layout
2. Product layout
3. Process layout
4. Fixed position layout
Q2:
A department store is traditionally laid out using
1. Cell layout
2. Product layout
3. Process layout
Q3:
A layout which tries to provide relatively high volumes with relatively high variety is:
1. Cell layout
2. Product layout
3. Process layout
Q4:
A process with very low variety and high volume is likely to have a
1. Cell layout
2. Product layout
3. Process layout
Q5:
Which of the following is not an advantage of a long-thin line?
1. Simple material handling

2. Lower capital requirement
3. Controlled flow of materials or customers
4. Higher mix flexibility
Q6:
Cell layout usually results in:
1. Lower training costs

2. Higher investment in capital equipment
3. Less motivated staff
4. Repetitive, monotonous tasks
Q7:
When using fixed position layout:
1. All the transforming resources are located on the site throughout the duration of
the project
2. Transformed resources are usually not moved
3. Transformed resources will be moved and handled frequently
4. Transforming resources can be brought to the site of work at any time
Q8:
A balancing loss is incurred because of:
1. Careless operations management

2. Variations between cycle times and actual task times
3. Variations between customer demand and the cycle time
4. Variations between work content and cycle times
7.13 References
Hill, T. (2000) Operations Management, Strategic Context and Managerial Analysis.
McMillan Business
Klein, N. (2000) The Tyranny of the Brands, New Statesman, 24th January.
Britannica.com/bcom/magazine/article/0,5744,343654,00.html
Mintel International Group Limited, Retail Store Design, UK. December 2002
Naylor, J. (2002) Introduction to Operations Management (2nd ed.) FT/Prentice Hall.
Slack, N. et al (2001) Operations Management (3rd ed.) FT/Prentice Hall
169
Chapter 8
Process Design and Process

Technology
Contents
8.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171

8.2 The design process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
8.3 Creativity in design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
8.4 Simulation in design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
8.5 Environmental issues in design . . . . . . . . . . . . . . . . . . . . . . . . 172
8.5.1 Ergonomics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
8.6 Volume-variety in design . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
8.7 Process types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
8.7.1 Process types in manufacturing . . . . . . . . . . . . . . . . . . . 174
8.7.2 Process types in service operations . . . . . . . . . . . . . . . . 174
8.8 Documenting processes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
8.8.1 Flow charts, routing sheets and flow process charts . . . . . . . 175
8.8.2 Customer-processing framework . . . . . . . . . . . . . . . . . . 175
8.9 Process technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
8.9.1 What is ‘process technology’? . . . . . . . . . . . . . . . . . . . . 176
8.9.2 Process technologies . . . . . . . . . . . . . . . . . . . . . . . . 176
8.10 Materials processing technology . . . . . . . . . . . . . . . . . . . . . . . 177
8.10.1 Computer numerically controlled machine tools (CNCs) . . . . . 177
8.10.2 Robotics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
8.10.3 Automated guided vehicles (AGVs) . . . . . . . . . . . . . . . . . 178
8.10.4 Flexible manufacturing systems . . . . . . . . . . . . . . . . . . . 178
8.10.5 Computer-integrated manufacturing (CIM) . . . . . . . . . . . . . 179
8.11 Information processing technology . . . . . . . . . . . . . . . . . . . . . . 180
8.11.1 Centralised and decentralised information processing . . . . . . 180
8.11.2 Telecommunications and information technology . . . . . . . . . 181
8.11.3 Management information systems (MIS) . . . . . . . . . . . . . . 183
8.12 Customer-processing technology . . . . . . . . . . . . . . . . . . . . . . . 184
8.12.1 Technology involving customer interaction . . . . . . . . . . . . . 184
170 Chapter 8. Process Design and Process Technology
8.12.2 Interaction with technology through an intermediary . . . . . . . 184

8.12.3 Customer training . . . . . . . . . . . . . . . . . . . . . . . . . . 184
8.13 Integrating technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
8.14 Technology strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
8.14.1 Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
8.14.2 Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
8.14.3 Operations management and process technology . . . . . . . . 190
8.15 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
8.16 Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191
Learning Objectives
• explain the process design activity and the role played by creativity and simulation;
• discuss the links between volume, variety and process types in manufacturing and
service organisations;
• explain the concept of process technology;
• outline the concepts of materials processing technology, information processing

technology and customer processing technology and how they might be
integrated;
• discuss the implementation and evaluation of technology strategies.
8.1 Introduction
In Chapter we examined product and service design. As we found, the product or
service structure and bill of materials specify what has to be put together. In this chapter
we examine how the final product or service is put together. In other words, we look
at designing the processes which make products and services. The way in which the
process which creates a product or service is designed has a significant impact on the
ability of the operation to meet customer needs. For example, a process arranged in
a jumbled and confused layout, which has inappropriate technology, or which is staffed
with unskilled people, cannot satisfy customers because it cannot perform efficiently
or effectively. Similarly, if the process is located in the wrong place or has insufficient
capacity, it will not run optimally and will not meet customer needs.
Here we first look at the design process in general. We then examine process types and
design of the operations network. Finally, we survey process technologies, and examine
the implementation of a technology strategy.
Process design cannot be regarded as a stand-alone subject - the process must be
designed alongside the product or service. Process design also relates to facilities
design, layout and flow and job design, all of which are discussed in other chapters
within the Operations Management texts. It will be helpful to refer to the other chapters
in the texts while studying process design so that a complete picture of the operation is
generated.
8.2 The design process

Before we discuss process design in detail we must first identify the important
components which comprise ‘design’. As with design of products and services, the
process design activity can be considered as one of progressively reducing uncertainty.
It is a method of determining the optimal path through the operation and is therefore
progressive. The original idea or concept is refined and developed until it contains
sufficient information to be turned into an actual product, service or process.
8.3 Creativity in design

Innovation is a vital ingredient in effective design. However, innovation must be balanced
by a more systematic approach. That is, each design option must be assessed so that a
choice can be made between them. For this purpose a number of design criteria should
be set. Such criteria may include:
• Feasibility i.e. what financial investment is required?
• Acceptability i.e. what financial returns can be achieved?
• Vulnerability/risk i.e. what could go wrong?
• Are the skills available to make it?
• Are there enough resources (both financial and in terms of quantity) to make it?
• Performance criteria i.e. what should these be?
8.4 Simulation in design

One of the most useful, and money saving, techniques used in any design process is
simulation. It is a method of increasing confidence in a design by simulating how the
process would work in practice. Simulation explores the consequences of decision-
making rather than directly advising on the decision itself.
Using modelling and simulation, many questions regarding the design may be answered
quickly and cheaply. Computer simulation software may be used for a variety of
processes including manufacturing systems (from simple processes to complex large-
scale processes), health care systems, insurance and banking, and other service
systems. Virtual reality, an extremely powerful three dimensional process design tool,
is being used in an ever-increasing range of industries; current examples include
petrochemical plant design, architecture and manufacturing plant design.
8.5 Environmental issues in design

In any design process, the effect of the process on the environment must be kept under
review. In most countries around the world, strict legislation such as the Environmental
Protection Act (UK), places restrictions on design. Basic standards are established
regarding the use of toxic materials and the release of waste to air and water. Such
legislation serves to protect not only the environment but also employees and the public
from harm.
Regarding process design, consideration should be taken of the following.
• Sources of materials - do they originate from rain forests? Are they scarce
materials? Have they involved exploitation of a labour force?
• What quantities and sources of energy are consumed in the process?
• What types and amounts of waste are produced?
• What is the expected life of the product?
• What happens to the product at the end of its life?
The product life cycle has an impact on the sustainable use of environmental and
energy resources. Similarly, the design of the process, the facilities and operations
also affect the environment. For a variety of reasons, product designers are now
required to take into account the disposal of a product at the end of its useful life.
Because of this, process designers are also obliged to consider the issue in designing
the making process. There is now a rapidly developing industrial sector focussing on
the regeneration and recycling of disassembled parts, components and materials. Such
8.6. Volume-variety in design 173
facilities may either be an extension to an already existing manufacturing plant or a new,

specially designed, plant often on a green field location.
8.5.1 Ergonomics
Within the area of environmentally sensitive design we can also include ergonomics. If
a good fit is achieved between people and the objects they use, and the things that they
do, in a process, then stresses are reduced and the process is made more efficient.
When staff are comfortable, they can do things more quickly and easily and they make
fewer mistakes. This ‘fit’ concerns psychological as well as physical aspects of the job.
In some industries the impact of human errors can be catastrophic. Examples include
the nuclear and chemical industries and aviation. Often, the errors are caused by poor
equipment and system design. It is therefore vital that the processes used in such
industries are designed with the operators in mind, for example, designing tasks and
equipment to minimise the chances of misreading information or operating the wrong
controls. Adopting an ergonomic user-centred approach to the design can go along way
in achieving improved efficiency, quality and job satisfaction.
8.6 Volume-variety in design

The volume and variety of the products/services produced also influence the way in
which a process is designed. If the process is required to produce a large volume, then
the process should ideally be dedicated. If small volumes are produced, the process
could be designed to be more general purpose so that it can cope with all types of jobs.
Standardisation and modularisation move operations down the volume-variety scale.
Standardisation of inputs to an operation can reduce its complexity and, therefore, its
costs.
8.7 Process types

A comprehensive explanation of process types took place in Chapter 6; however, as a
reminder, we briefly summarise the main process types and their chief characteristics
below. By grouping processes by volume/variety we can identify process types. These
are shown in Figure 8.1 and summarised in the following two sections.
Figure 8.1: Process types
8.7.1 Process types in manufacturing

As shown in Figure 8.1, five process types in manufacturing may be identified.
• Project processes - deal with discrete, usually highly customised products. Low
volume, high variety.
• Jobbing processes - very high variety, low volume. Each product has to share the
operation’s resources with many others. Each differs in its exact needs.
• Batch processes - produce more than one of each variety. Wider range of volume
and variety levels than other process types.
• Mass processes - high volume, narrow variety. Essentially repetitive, largely

predictable.
• Continuous processes - higher volume and lower variety than mass processes.
Relatively inflexible, capital intensive with highly predictable flow.
8.7.2 Process types in service operations

Three process types may be identified in service operations.
• Professional services - high contact organisations where customers spend

considerable time in the service process. High levels of customisation. Highly
adaptable. Ratio of staff to customers high. People-based rather than equipment
based - emphasis placed on the process rather than the ‘Product’.
• Mass services - many customer transactions, limited contact time, little

customisation. Predominantly equipment based and ‘product’ oriented. Most
value added in the back office and relatively little judgement applied to the front
office staff.
• Service shops - between professional and mass services. Service is provided

by a mix of front and back office activities, people and equipment and of
product/process emphasis.
In both manufacturing and service operations different process types overlap; therefore
organisations have a choice of process type to employ. The choice will have
consequences for the operation, especially in terms of cost and flexibility.
8.8. Documenting processes 175
8.8 Documenting processes

We now turn to examine the techniques which may be used to aid process design.
There are many techniques for improving process design and the actual process.
These include techniques that can be used for documenting processes (also called
blueprinting), such as:
• simple flow charts;
• routing sheets;
• flow process charts;
• the customer-processing framework.
All the techniques have two main features.
• They show the flow of materials or people or information through the operation.
• They identify the different activities which take place during the process.
Many of the documentation techniques originate from the fields of work study, industrial
engineering and information systems design.
8.8.1 Flow charts, routing sheets and flow process charts

Flow charts or process maps are commonly used to identify the main elements of
a process. They record stages in the passage of information, products, labour or
customers (or anything else that flows through the operation). They do this by requiring
that the decision makers identify each stage in the flow process by means of processing
mapping symbols. There is no universal set of symbols but most derive from either the
scientific management school or more recently from information systems flowcharting
(i.e. the systems school).
The result is a detailed picture of parts of the process where some sort of flow occurs.
The act of recording each stage in the process quickly shows up poorly-organised flows.
The technique can also clarify improvement opportunities and shed further light on the
internal mechanics or workings of an operation. The use of flow charts also highlights
problem areas where no procedure exists to cope with a particular set of circumstances.
8.8.2 Customer-processing framework

The customer-processing framework is a recording method devised specifically for
customer flows. It identifies some of the key activities in ‘processing’ customers through
an operation, including selection (of service), point of entry, response time (waiting time),
point of impact (moment at which customer is dealt with), delivery (of service), point of
departure, and follow up (checking with customer that service was acceptable).
Such techniques are invaluable in identifying areas for improvement in a process, and
essential tools in recognising where process technologies may be applied.
8.9 Process technology

We have defined the ‘process’ as the method by which products and services are
put together. We have also identified a variety of different process types, which are
designed around the product or service they produce, and we have highlighted methods
for improving process design. We now turn to process technology.
Process technology is universal. It varies from complex and sophisticated to simple
and ‘crude’. All operations use technology, from the simple telephone to expensive
dedicated machinery. Such technology is used because it is hoped to get some kind
of advantage from it. There is therefore a need for operations managers to understand
what emerging technologies can do, its advantages, and the constraints it might impose
on the operation.
8.9.1 What is ‘process technology’?

‘Process technology’ pertains to the techniques of producing and marketing goods and
services. It includes the machines, equipment and devices which help the operation
transform materials and information and customers in order to add value and fulfil the
operation’s strategic objectives. It also includes work methods, equipment, distribution
and logistics. Some technology is peripheral to the actual creation of goods and services
but plays a key role in facilitating the process. For example, the computer systems
which run accounting systems and inventory control systems can be used to assist
operations managers’ control and improve processes. Thus it is embedded in a firm’s
value chain. Process technology changes are designed to produce and market goods
and services faster, more efficiently, or in greater volume. In a university, technological
changes represent changes in techniques for teaching courses and, in recent years,
have ranged from the traditional lecture format to multimedia presentations and self-
based learning methods.
In the next few sections we look at specific technologies which have particular
significance for operations managers. We then examine technology strategies and the
function of the operations manager in relation to process technology.
8.9.2 Process technologies

Traditionally, the term ‘process technology’ has been used to describe innovations
in manufacturing tools. It was to manufacturing processes that automation was first
applied. Today, however, service companies spend an average of $3000 per employee
per year on computers and other technology. This is twice the amount that industrial
companies invest annually in new plants and equipment per employee. In addition,
since 1982 the service sector has surpassed the industrial sector in capital stock per
employee. That is, service sector employees now have more computers than industrial
sector employees have machine tools and assembly lines.
To describe all process technologies is, of course, an impossible task. In the following
sections, we review the most significant of the technologies currently available. These
have been categorised as materials processing, information processing, or customer-
processing technologies. The list is not exhaustive - new technologies are being
developed continuously and there are innumerable process combinations of materials,
people and customers.
8.10. Materials processing technology 177
8.10 Materials processing technology

This section is not about the specific materials forming technologies; rather it focuses
on the technological context in which they are used.
8.10.1 Computer numerically controlled machine tools (CNCs)

Computer numerically controlled (CNC) machine tools are responsible for assisting in
the manufacture of virtually everything we purchase or use today. CNCs take data
containing tool and path information and use it to select tools and trace paths on a
piece of stock material. They can load and use multiple tools. Original CNCs, such as
the 2-axis lathes and slitting operations, did little more than the machines or operators
they replaced. However, more recent machines are 3-, 4-, or even 5-axis tools such
as milling machines, grinders, router tables, and robotic welders. These tools require
sophisticated software to translate 3-dimensional models into simple text files which
directly control tool motion.
CNC machining capabilities have many applications.
• Design verification and feasibility - allow analysis of designs in production material

before it goes into full production.
• Pattern tooling development - from computer aided design model to part by

creating tool patterns in house.
• Multi-material products - parts can be produced in a variety of materials e.g. wood,

rubber, metal, plastic.
CNCs are used in operations mainly to replace operators. They are accurate, precise,
perform repeatable, mundane tasks and offer better productivity through elimination of
operator error. In addition, cutting patterns can be optimised to reduce the amount of
wasted material produced.
8.10.2 Robotics
The term ‘robot’ was coined by the Czech playwright Karel Capek from the Czech word
for forced labour or serf. A robot may be defined as ‘A programmable, multifunctional
manipulator designed to move material, parts, tools, or specialised devices through
various programmed motions for the performance of a variety of tasks.’
The first industrial robots were developed in the late 50s and early 60s for transferring
parts. By the 1980s industrial arms had increased capability and performance
through controller and language development, improved mechanisms, sensing and drive
systems. More recent robots also include sensory feedback through vision and touch
control.
Most robots are used for mundane operations such as welding, painting and loading. In
other words, repetitive, monotonous, or often hazardous tasks. The drivers for robotic
automation include labour reduction and quality improvements. However, the act of
automating has enabled many manufacturers to save on the consumables used in the
process, including power, components and raw materials.
8.10.3 Automated guided vehicles (AGVs)

Automated guided vehicles (AGVs) are a primary focus of robotics. They are small,
independently powered vehicles which move materials to and from other, value-adding
parts of the operation. Vehicles may be controlled in a number of ways.
• By entering the destination manually via the keyboard on the control panel.
• By coding the product that is being transported.
• By specifying fixed routes and transport operations which are continually repeated.
• By communications between the vehicle controller and a central computer or a
local terminal.
This automation of transport helps to achieve the following.
• Reduction of labour and vehicle maintenance costs.

• More efficient plant operation through more rapid and reliable delivery of materials.
• Greater level of round-the-clock production.
Examples of AGVs are given in Figure 8.2.
Figure 8.2: Automated Guided Vehicles
8.10.4 Flexible manufacturing systems

A flexible manufacturing system (FMS) is a totally automated manufacturing system
which consists of machining centres with automated loading and unloading of parts,
8.10. Materials processing technology 179
an automated guided vehicle system for moving parts between machines and other
automated elements to allow unattended production of parts. In a flexible manufacturing
system, a comprehensive computer control system is used to run the entire system.
FMSs are seen as a method of creating a large variety of products in smaller numbers
to meet the needs of today’s customers. They relax the trade-off between volume
and variety and costs and flexibility. FMSs involve substituting machines capable
of performing a wide and redefinable variety of tasks for machines dedicated to the
performance of specific tasks. FMSs can also be programmed to handle new products,
thus extending the machines’ life cycles. As a result, they represent a change from
‘standardised goods produced by customised machines’ to customised goods produced
by standardised machines.
Flexible manufacturing systems can have great benefits for a company: They can do a
variety of tasks at a much faster rate than humans often can, and therefore free up staff
to do more complex, challenging tasks. FMSs generally take up less space in the factory
than traditional assembly lines. They have lower cost; also, changeover times from one
type of production to another can be carried out while the machine is still running, thus
gaining competitive advantage.
There are a number of disadvantages to implementing a flexible manufacturing system,
however, not least is of which is cost. A company may have to restructure its entire
plant in order to start this type of process. In the truest sense, an FMS will involve
robot technology. It is very expensive for a company to acquire robot technology, not to
mention the cost of installing that technology into the factory. The other consideration
when thinking about robot technology is the loss of jobs to humans. Although using the
robots will increase productivity and lower costs, it is often hard for a company to justify
letting some people go because their jobs can now be done by robot.
8.10.5 Computer-integrated manufacturing (CIM)

Computer-integrated manufacturing technology develops and integrates software,
equipment, communication, processes and human resources within a manufacturing
enterprise to deliver sustained improvements in efficiency, effectiveness, and product
quality. CIM is an extension of flexible manufacturing systems which are concerned
with the transformation process and not on the other activities necessary for parts
to be manufactured. CIM represents a family of technologies which helps to move
manufacturing systems to higher levels of flexibility. It is an attempt to cover all aspects
of the operation. The emphasis is on the effective use of digital data throughout product
and process design, prototyping and manufacturing.
Computer-integrated manufacturing (CIM) is widely recognised as a key competitive
strategy for industries. At its heart CIM is computer-aided design (CAD) and
computer-aided manufacturing (CAM). CAD/ CAM systems, which are a high technology
integrating tool between design and manufacturing, are essential to reducing cycle times
in an organisation. CAD techniques make use of group technology to create similar
geometries for quick retrieval of data. Electronic files replace drawing rooms. CAD/CAM
integrated systems provide design/drafting, planning and scheduling, and fabrication
capabilities. CAD provides the electronic images of parts and CAM provides the facility
for toolpath cutters to work on the raw materials.
8.11 Information processing technology

The materials handling technologies described above are based on manufacturing
industries. The largest increase in process technologies is, however, for use in the
service industries. Information processing technology has outpaced materials handling
technology in terms of both technological advances and use. A massive range of
devices which collect, manipulate, store, or distribute information is now available. In this
section, we examine some of the most significant information-processing technologies.
8.11.1 Centralised and decentralised information processing

The use of computers for storing and processing information is regarded as essential
to almost every industry. Early systems were prohibitively expensive and there was no
easy way of keeping track of information on every computer owned by a company, or of
transferring information between them. That was until the development of LANs: Local
Area Networks.
A LAN is a short-distance network used to link a group of computers together so that
they can share files and computer equipment. Most LANs are confined to a single
building or group of buildings (Figure 8.3). However, one LAN can be connected to
other LANs over any distance via telephone lines and radio waves. A system of LANs
connected in this way is called a wide-area network (WAN).
Figure 8.3: A Local Area Network

Most LANs connect workstations and personal computers. Each node (individual
computer) in a LAN has its own processor with which it executes programs, but it also
is able to access data and devices anywhere on the LAN. This means that many users
can share expensive devices, such as laser printers, as well as data. Users can also
employ the LAN to communicate with each other by sending e-mail or engaging in chat
sessions.
There are many different types of LANs, ethernets being the most common for PCs.
Most Apple Macintosh networks are based on Apple’s AppleTalk network system which
is built into Macintosh computers.
The following characteristics differentiate one LAN from another.
8.11. Information processing technology 181
• Topology: The geometric arrangement of devices on the network. For example,

devices can be arranged in a ring or in a straight line.
• Protocols: The rules and encoding specifications for sending data. The
protocols also determine whether the network uses peer-to-peer or client/server
architecture.
• Media : Devices can be connected by twisted-pair wire, coaxial cables, or

fibre optic cables. Some networks do without connecting media altogether,
communicating instead via radio waves.
LANs are capable of transmitting data at very fast rates, much faster than data can be
transmitted over a telephone line; but the distances are limited and there is also a limit
on the number of computers that can be attached to a single LAN.
LANs are generally used in operations as centralised systems of information
processing. There is strong control of access by a central, specialised group,
enforcement of standards and little opportunity for customisation. Some organisations
are large enough to have separate information systems for major sections of business.
Such systems are referred to as decentralised. They have reduced integration but
enhanced customisation.
8.11.2 Telecommunications and information technology

The scope of telecommunications is vast. It includes any medium used to transmit
or receive voice, data, or video signals and information. That means telephones,
wireless/mobile phones, pagers, and broadcast or cable television.
The original methods of telecommunication were based on analogue technology. This
wasn’t particularly good because, as a voice went farther down the line and through
more switches, the quality became worse and worse as noise crept in. There was also
no way to eliminate the noise or to know what the signal was supposed to be. To combat
this, telecommunications transmissions have been digitised. Digital encoding converts
information into a binary form using 0s and 1s (the method used in computer-based
technologies), creating a signal that is recognisable. Digitisation also allows information
to be squeezed into a smaller ‘space’ so that more can be sent using a given amount
of transmission capacity. Today it is rare to find a telephone company that isn’t digital.
The original network of telephone lines was known as the Integrated Digital Network,
or IDN. However, more recently phone networks have been made completely digital
from end to end. This eliminates ALL noise from audio data within the network. This
network is known as the integrated services digital network, or ISDN. The ISDN
is an international communications standard for sending voice, video and data over
digital telephone lines or normal telephone wires. The original version of ISDN employs
baseband transmission. Another version, called B-ISDN, uses broadband transmission
and is able to support transmission rates of 1.5 Mbps. B-ISDN requires fibre optic cables
and is becoming more widely available.
Popular ISDN applications include, internet access, telecommuting/ remote access to
corporate computing, video conferencing and small and home office data networking
The World Wide Web
The World Wide Web (WWW) began as a networked information project at CERN, the
European Organisation for Nuclear Research, where Tim Berners-Lee, now Director of
the World Wide Web Consortium [W3C], developed a vision of the project. The Web
has a body of software, and a set of protocols and conventions. Through the use of
hypertext and multimedia techniques, the web is easy for anyone to roam, browse and
contribute to.
The WWW has revolutionised the way many industries work. It contains a wealth of
information which is expanding at a phenomenal rate. The ability of any computer to
talk to another, wherever it is in the world, opens up a plethora of opportunities not just
for businesses but for individuals. The ability to access information from your desktop
rather than travelling to a library or searching through thousands of records and books
is an extremely valuable tool.
A number of businesses subscribe to electronic data interchanges (EDIs). In its
simplest terms an EDI is a method of delivering unambiguous and durable business
transactions via electronic means. It works by providing a collection of standard
message formats and an element dictionary in a simple way for businesses to exchange
data via any electronic messaging service. Because the main drawback to subscribing
to an EDI is cost, many businesses are looking instead at business-to-business
(B2B) e-commerce, a more sophisticated method of exchanging information where
companies buy from and sell to each other online. There is more to it than just
purchasing. It has evolved to encompass supply chain management as more companies
outsource parts of their supply chain to their trading partners.
B2B efforts do require negotiation. Selling to another business involves haggling over
prices, delivery and product specifications. This is not the case for consumer sales,
where it is easier for retailers to put a catalogue online. It also provides the reason for the
first B2B applications to be for buying finished goods or commodities which are simple to
describe and price. B2B efforts also require integration. Retailers don’t have to integrate
with their consumer customers’ systems. Most companies selling to businesses do
integrate because their systems have to be able to communicate with those of their
customers without human intervention.
B2B e-commerce can save or make a company money. Some ways companies have
benefited from B2B e-commerce include:
• managing inventory more efficiently;
• adjusting more quickly to customer demand;
• getting products to market faster;
• cutting the cost of paperwork;
• reigning in rogue purchases;
• obtaining lower prices on some supplies.
Already extensions are being made from B2B. The first of these is B2B Exchange.
At its most basic, a B2B exchange (also called a marketplace or hub) is a website
where many companies can buy from and sell to each other using a common technology
platform. Many exchanges also offer additional services, such as payment or logistics
services which help members complete a transaction. Exchanges may also support
8.11. Information processing technology 183
community activities: distributing industry news, sponsoring online discussions and

providing research on customer demand or industry forecasts for components and raw
materials.
8.11.3 Management information systems (MIS)

So far we have examined the process technologies used for information processing.
What we have not discussed are the technologies used to manipulate and present
information in such a way that it may be used to manage an organisation. The systems
which do this are collectively known as management information systems (MIS). MISs
support management control of operations by processing information (often from other
systems like sales, finance, production and inventory) into structured summary reports.
Operations managers make great use of MISs, particularly in planning and control
activities.
Decision support systems
Decision Support Systems (DSS) evolved early in the era of distributed computing.
They are systems which combine information from other systems, such as transaction
and MIS, with the direct objective of aiding or supporting managerial (usually tactical)
decisions. They do this by storing relevant information, processing it and presenting it in
such a way as to be appropriate to the decision being made. DSSs are often used for
‘What if?’ analyses which explore the consequences of changing operation practices.
Expert systems
Expert systems (ES), also known as knowledge-based systems, go one step beyond
DSSs. They are an offshoot of artificial intelligence research which attempts to mimic
human thought processes. They collect experts’ analyses of problems and their
solutions and incorporate these as a set of ‘rules’. By applying these rules, they help
managers to solve new problems.
There are potential problems with expert systems in that they usually only treat narrow
problems rather than more realistic issues of integration and conflict. They are also very
expensive due to the time taken to input and process data. ESs are also useless if not
accurate.
Executive support systems
Executive support systems (ESS) are simply extensions of ESs. They incorporate large
amounts of data from other systems and use them to support the strategic activities of
‘top’ management. They are designed to summarise very large amounts of information
and present summaries in a compact manner.
Office information systems
Office information systems combine several network-based software tools, including fax,
e-mail, video conferencing, and bulletin boards. They are concerned with managing the
flow of information (text, images etc.) between users of the network.
8.12 Customer-processing technology

Operations involving customer processing have traditionally been viewed as ‘low
technology’ when compared to those described above. However, process technology
is very much in evidence in customer processing. In a number of operations the human
element has been removed, for example automated check-in for hotels. The objective
of such technologies is to give an acceptable level of service while significantly reducing
costs to the operation.
Essentially there are two types of customer processing technology, those involving
customer interaction and those operated by an intermediary.
8.12.1 Technology involving customer interaction

Examples of process technologies involving customer interaction include internet
bookings, cash machines (ATMs), and touch-tone telephone gas/electricity meter
reading services. In such processes, customers effectively ‘drive’ the technology to
create the service for themselves. More passive examples include lifts and mass
transport systems where customers are ‘guided’ rather than self-driven. Customers
are interacting with the technology but the technology ‘processes’ the customers and
controls them by constraining their actions in some way. In such cases, the technology
helps to reduce the variety in the operation.
Sometimes the technology is covert. For example, in shopping centres and large
workplaces, security cameras monitor customers - the technology is ‘aware’ of the
customers, but not the other way round. Similarly, most shops use bar codes to track
the relationship between customers and their propensity to buy particular products. In
both cases the technology is not made obvious to the customers.
8.12.2 Interaction with technology through an intermediary

Technology can never entirely replace the human element in most operations. The
majority of people still prefer to interact with a person rather than a machine when using
services such as airline ticket or restaurant booking services. The benefit to a customer
of using an intermediary is a more flexible service. A person will be able to deal with
special requests whereas even the most sophisticated machines may not be able to do
this.
There are also technologies which the potential to harm customers and which must
therefore be governed by strict rules. An example is robot surgery where the pace of
progress is slow, not because of technological constraints but because surgeons cannot
take risks with their patients’ lives.
8.12.3 Customer training

In the first section we have described process technologies which require customer
interaction. If customers have to have contact with technology, they must have some
understanding of how they should use it so that it can be used to its full potential.
If a customer cannot interact effectively with a company’s technology, there may be
expensive consequences. Manufacturing companies insist on training courses for staff
before permitting them to use their process technologies. Rarely do service operations
provide training for customers to use their technologies. Training to use domestic
8.13. Integrating technologies 185
technology, such as video recorders, is also rarely offered. This results in most pieces
of equipment not being used fully or correctly.
The ability of service operations to train customers is dependent on a number of factors
including the complexity of the operation, the repetition of the service and the variety
of focus. If services are complex to operate, higher levels of training will be required to
ensure correct use of the technology. The frequency with which a technology is used is
also an important factor: if a service has to invest in customer training, then the return
on the investment will be greater if the technology is used frequently. Regular repetition
also helps to reinforce any training given. Finally, if the customer is presented with a
small variety of tasks, training will be easier.
8.13 Integrating technologies

Increasingly, integration is taking place both within each type of process technology
and across the three main technologies themselves. Figure 8.4 shows how various
technologies can come together in a manufacturing company. Within the materials
processing areas, the initial integration links the designing (CAD) activity with the
making and controlling processes (CAM). At the same time CAM links with the materials
handling activities to form FMS. Elements of information processing (i.e. loading,
sequencing, scheduling etc.) are then integrated with CAD/CAM and FMS to form CIM.
Eventually, other information and customer processing technologies integrate with CIM
to create the computer integrated organisation (CIO).
Figure 8.4: Integration of technologies in a manufacturing context (adapted from Slack

et al, 2001)
8.14 Technology strategies

We have identified a wide variety of technologies which are available to aid the
production of goods and services. Process technologies may, however, do more than
simply speed up a production process. Introduction of new technologies can have a
significant effect on a company’s competitive advantage. Acquisition of new capabilities
sometimes enables firms to redesign existing products or to develop new products so
that they can differentiate themselves in the marketplace. Process technology changes
8.14. Technology strategies 187
may also modify the way a company conducts its business by bringing about changes
in the organisation, including its human resources practices, logistics and marketing
functions. In some industries, acquisition often enables a firm to manage its value chain
more efficiently and effectively.
New technologies may therefore be used to:
• create a fundamentally new business and competitive domain;

• alter rules of rivalry in existing competitive domains (increase competitive
advantage) and acquire new market position;
• support existing business by improvement of manufacturing processes or use of
different/new raw materials.
The success of process technology influences a company’s current and future

competitive position and is a fundamental driver of profitability. For these reasons, it
is important for companies to develop a technology strategy alongside their business
plan and other strategic plans. The implementation of a technology strategy is a big
commitment. Such commitment does, however, influence the ability to create new
businesses, to pioneer new markets and to discern new strategic directions.
Technology strategies are usually formulated over 5 stages.
• Strategic diagnosis.
• Formulation of technology strategy.
• Crafting an implementation approach.
• Execution.
• Evaluation.
Two of these stages, implementation and evaluation, are examined in more detail below.
8.14.1 Implementation
It is easy to get carried away in introducing new technologies. Nevertheless,
successful operating strategies must be grounded in the marketplace and competitive
requirements. A holistic approach, taking into account operational drivers, technological
capabilities and real world constraints, ensures that customer needs are met, that
internal competing factors are balanced and that technology is fully integrated into
operations.
Typically, an implementation process has four phases.
• Initiating - embraces the initial stimuli for technological change including problem
clarification and exploration of solutions, as well as selection.
• Planning - teambuilding, consultation, clarification of feasibility and expectations,
and budgeting.
• Applying - commissioning and testing.
• Consolidating - assessment of monitored factors and future planning.
The initial stages of implementing new process technologies therefore involve

technology intelligence, addressing the needs and competitive position of the firm and
assessing the potential impact of technology on business. Questions asked at the early
stages include the following.
• Where in the value chain are the opportunities for deployment of technology?
• Which technologies are available?
• What are the reasons for deploying technology?
• Do we have adequate resources?
• Do we execute the process on our own, or in collaboration with others?
The choice of which technologies to deploy is guided by environmental and firm-related

factors, both market and technology related. At this stage it should be stressed
that appropriation of technology capabilities is not confined to high-tech industries.
Technology appropriation choices also embrace both software and hardware-dominant
technologies.
The most frequent approach to implementing technological improvements is to
superimpose new systems and applications onto existing operations.There is danger
that such a method of implementation dangerously institutionalises inefficient and
ineffective operating procedures. It is difficult to achieve optimal pay-off from technology
investments. Highly competitive companies build automated systems on a foundation
of well designed and executed operations. In most cases, to achieve sustainable
improvements, operations must first be restructured for efficiency and effectiveness, and
then be integrated with technology.
The implementation of new technology is not, therefore, entirely straightforward. We
can identify a series of activities to be carried out once the decision to invest has been
made; they are:
• the acquisition of new equipment and consumables;
• undertaking associated construction work e.g. increasing floor loading;
• design of new and improved products;
• development of new services;
• equipment installation;
• consultation;
• training;
• cost control;
• pilot production and testing;
8.14. Technology strategies 189
• advertising;
• commissioning;
• hand-over.
Diffusion of new technologies can be a prolonged process, mainly due to the obstacles
that have to be overcome to adapt the technology to the needs of the operation (as
opposed to slowness of workers!). The process of diffusion is likely to be progressive.
Delays in project initiation or hold-ups with implementation give competitors crucial time
advantage. Unit costs of production may be inflated by over-specification of project
requirements. Under-specification may constrain future development and flexibility. For
a variety of reasons a new technology may fail to provide all of the predicted benefits
or perform at specified levels and may have unforeseen adverse consequences beyond
the directly affected areas of the production system (independent of the competence
of the organisation). For businesses in the current climate, it is often a good policy
to take the risk of pioneering at least some of the important prospective advances.
A common strategy is to use 10-15% capital investment funds to explore potentially
promising technologies which are too new to permit estimates of their eventual economic
benefits.
Frequently, there are subsequent benefits from further adaptations and developments
within the production unit. In order to integrate these factors and to ensure that they
inform future projects, the conceptualisation of implementation needs to be broad.
8.14.2 Evaluation
For all the state-of-the-art hype and glitter, technologies (robot arrays, computerised
machinery, FMSs etc.) commonly produce largely disappointing results. They are often
not nearly productive or efficient enough.
Common failing points in introducing new technologies include:
• an underestimation of manpower requirements;

• underestimation of purchased material requirements;
• ratio of output capabilities to fixed investment;
• time needed to adapt an innovation, testing and optimisation (Caterpillar took over
2 years to get their first large FMS working effectively and more than 2 further
years to optimise the system);
• overestimation of average utilisation rates - fluctuation in demand levels;
• need for broader evaluative criteria - knock-on effect on other parts of the business.
such reorganisation takes time and money;
• overemphasis on hardware relative to staff support - additional contributions
needed from staff e.g. planning, systems engineering, maintenance, procurement,
distribution, product designers;
• labour acceptance of major innovations - workers have to learn new operating
procedures, changes in job classifications, adjustments in wages and benefits,
even layoffs.
During the implementation stages managers tend to paint too rosy a picture. They
usually overestimate expected reductions in wage costs when in reality there are
often demands for increases in wages due to increased production. In manufacturing,
reduction in waste and reject levels is not always offset by cost of materials because
new technologies often require better quality materials. In addition, the firm must still
bear the cost of under-utilising older equipment. There tends to be an assumption that
all reductions will be converted to profits. However, lowered prices and increased sales
will compel competitors to lower their prices. If productivity levels do not improve after
introduction of new process technologies, managers also tend to blame external factors.
This use of financial data (comparison of actual and predicted outlays and costs) to
evaluate new technologies can be misleading. In order to assess the impact of new
technologies more fairly, other changes to production should be considered such as:
• changes in quality specifications as well as in quantities of inputs and outputs;
• shifts in operating tasks between new and other stages of production;
• alteration in product mix and length of production runs;
• adjustment in reject rates and equipment downtime;
• gains in adaptability to changes in product designs.
It is often necessary to make appraisals repeatedly at 6 monthly intervals for 2-3 years in
order to obtain a complete picture of the benefits of a new piece of equipment or method
of performing a process. The evaluation procedure should ideally be wide-reaching and
of sufficient length to assess all potential benefits thoroughly.
If a new piece of technology is not evaluated properly, there is a danger of future
resistance to ‘improvements’. Market pressures do, however, make standing still, or
even progressing slowly, threatening. It is therefore critical that the evaluation process
in a technology strategy is performed using a realistic set of criteria. Similarly, early
attainment of expected performance targets should not deter continuing efforts to
enhance performance.
8.14.3 Operations management and process technology

As technological competitiveness has become a determinant of market competitiveness,
it has become necessary for senior managers to be leaders in that domain. Operations
managers are continually involved in the management of process technologies. In order
to do this effectively, they should be able to:
• explain how technology could improve the operation’s effectiveness;
• be part of the project team involved in the choice of the technology itself;
• assist with the management of the installation and adoption of the technology so
that it does not interfere with ongoing operations activities;
• assist with the integration of the technology into the rest of the operation;
• assist with the ongoing monitoring of the performance of the technology;
8.15. Summary 191
• be involved with the decisions regarding the upgrading or replacement of the

technology when necessary.
At first sight, this list of requirements appears daunting. However, operations managers
do not need to be experts in all aspects. What they need to know is enough about the
basic principles behind the technology to be able to evaluate technical information, deal
with experts in the technology and ask pertinent questions such as the following.
• What does the technology do that is different from other similar technologies?
• What specific characteristics of the technology are used to perform its function?
• What benefits would we get from using the technology?
• Does using the technology place any constraints on the operation?
Operations managers should not be frightened to embrace new technologies because

the potential benefits are immense.
8.15 Summary
Invisible in the marketplace, process design and process technologies have an essential
role in reducing business running-costs. The way in which a process is organised and
developed has an enormous effect on cycle time. The effect on profitability of good
process design and pertinent use of process technologies can sometimes be greater
than improvement in product/service design! It is the role of operations managers to be
aware of new technologies, to realise the benefits of their use and to optimise processes
for the improvement of their products and services.
8.16 Further Reading

Hill, T. (2000) Operations Management. Macmillan Business, Chapters 4, 5 & 7
Russell, R.S. and Taylor, B.W. (2000) Operations Management (3rd ed.) Prentice Hall.,
Chapter 6.
Waller, D.L. (2003) Operations Management (2nd ed.) Thomson. Chapter 7.

Q1:
Which of the following can be used for documenting processes?
a) Flow process charts
b) Simple flow charts

c) Routing sheets
d) The customer-processing framework
e) All of the above.
Q2:
CIM stands for:
a) Computer Integration Methodologies

b) Computer Integrated Management
c) Computer Integrated Methodologies
d) Computer Integrated Manufacturing
e) None of the above.
Q3:
Which of the following could be described as an example of a Management Information
System (MIS)?
a) Expert Systems (ES)

b) Flexible Manufacturing Systems (FMS)
c) Decision Support Systems (DSS)
d) Executive Support Systems (ESS)
e) Automatic Guided Vehicles (AGVs).
Q4:
What are the main types of process technologies?
a) Consumer processing technology

b) Information processing technology
c) Management processing technology
d) Customer processing technology
e) Materials processing technology.
Q5:
In order for operations managers to be involved in the management of process
technologies they should:
a) be part of the project team involved in the choice of the technology

b) help to manage the installation of the technology
c) assist with the ongoing monitoring of the technology performance
d) be involved with the decisions regarding upgrading of the technology
e) all of the above.
193
Chapter 9
Performance Improvement
Contents
9.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195

9.2 Why is performance improvement important? . . . . . . . . . . . . . . . . 196
9.3 A systems approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196
9.4 The relationship between management and performance improvement . . 197
9.5 Performance improvement process . . . . . . . . . . . . . . . . . . . . . . 197
9.5.1 Obtain and maintain stakeholder agreement . . . . . . . . . . . . 198
9.5.2 Consider institutional context . . . . . . . . . . . . . . . . . . . . 198
9.5.3 Define desired performance and key performance indicators . . 198
9.5.4 Measure and analyse performance . . . . . . . . . . . . . . . . . 199
9.5.5 Find root causes of identified gaps . . . . . . . . . . . . . . . . . 200
9.5.6 Select interventions . . . . . . . . . . . . . . . . . . . . . . . . . 201
9.5.7 Implement interventions . . . . . . . . . . . . . . . . . . . . . . . 202
9.5.8 Monitor and evaluate performance . . . . . . . . . . . . . . . . . 202
9.6 Creating a performance culture . . . . . . . . . . . . . . . . . . . . . . . . 202
9.7 Case examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
9.8 Interventions associated with performance improvement . . . . . . . . . . 206
9.9 Performance measurement . . . . . . . . . . . . . . . . . . . . . . . . . . 207
9.10 Business process improvement . . . . . . . . . . . . . . . . . . . . . . . . 209
9.11 Benchmarking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210
9.11.1 Benchmarking in practice . . . . . . . . . . . . . . . . . . . . . . 212
9.12 Performance improvement success . . . . . . . . . . . . . . . . . . . . . . 219
9.13 Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
9.14 Comments on chapter case study . . . . . . . . . . . . . . . . . . . . . . 221
9.15 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222
Learning Objectives
• articulate the issues involved in performance improvement;
• describe, in some detail, a model of the performance improvement process;

194 Chapter 9. Performance Improvement
• outline examples of well known frameworks for measuring performance;
• describe the concept of benchmarking and the Rank Xerox approach to

benchmarking.
9.1 Introduction
Put simply, performance improvement is an ongoing effort in an organisation to find new
and better ways of doing things. It is a step-by-step methodology for finding out what is
needed to ensure good performance and delivering it.
The goal of performance improvement is to solve performance problems or realise
performance opportunities at the organisational, process and employee levels in order
to achieve desired organisational results. It can involve some or all of the work areas of
an organisation to:
• improve productivity;
• gain and maintain competitive advantage;
• optimise resources;
• increase profit and shareholder value;
• deliver high quality, sustainable, products and services;
• meet customer expectations and demands.
Performance improvement achieves results through a systematic process which
• considers the organisational context;
• describes desired performance;
• identifies gaps between desired and actual performance;
• identifies root causes of any identified gaps;
• selects, designs and implements interventions (i.e. activities to be carried out) to

fix the root causes;
• measures changes in performance.
It is a continuously evolving process which uses the results of monitoring and feedback
to determine whether progress has been made and to plan and implement additional
appropriate changes.
The performance improvement process is most likely to achieve its goal and desired
result when:
• managers and staff from the organisation actively participate in all stages of the
process improvement methodology and change process;
• managers undertaking performance improvement identify and build on existing

performance standards and successes as well as address performance problems.
There are two approaches or strategies which can be taken to achieve performance
improvement: one is referred to as breakthrough or radical improvement; the other is
continuous or incremental improvement. Breakthrough improvement implies a major

and dramatic change in the way that all or part of an organisation works. Continuous
improvement (CI) implies more and smaller incremental steps in the improvement
process. Continuous improvement is also known as Kaizen, a Japanese word which,
amongst other things, means continuing improvement involving everyone, managers
and workers alike. Continuous improvement is a key activity of operations managers.
9.2 Why is performance improvement important?

Although the idea of improving performance may be new to some industries and sectors,
striving to improve performance in the workplace is not new. A variety of disciplines
(e.g. organisation development, management, industrial engineering) have long focused
on ways to improve performance in the workplace. Over recent years, performance
improvement efforts have contributed clear and simple models, assessment tools,
methods, practices, performance standards and measures for all organisations to use.
Performance improvement is important today because the industrial world has entered
an era marked by:
• increased emphasis on results;

• higher customer expectations;
• greater accountability.
Increasingly, successful companies are characterised by an ability to adapt to changes

in the environment, in markets and in customer expectations. Modern management
‘gurus’ frequently urge business executives and managers to think in radical terms, often
recommending the overhaul of a firm’s entire operations at a single stroke. ‘Most of
[them] agree that a firm should organize itself on the basis of process, such as fulfilling
an order, instead of functions, such as marketing or manufacturing’ (Byrne, 1992). A key
feature of this type of change is that it takes the firm’s focus off its own internal structure
and puts it onto meeting the customers’ needs.
9.3 A systems approach

Performance improvement uses a systems-based approach to create improvements
which can be applied to large organisations, work processes, business units, teams
or other groups of workers. The overall performance of an organisation is the result
of the performance at all of these levels. Each level and part of an organisation is in
some way connected to many other parts. Therefore, to create real, sustained improved
performance, a systems approach needs to be taken by working at different levels at
the same time and recognising the ways in which interventions at one level affect, or are
supported by, interventions at other levels (the systems approach was discussed more
fully in Chapter 2 ).
A performance improvement framework provides a shared definition and enables
9.4. The relationship between management and performance improvement 197
organisations in the same supply chain to work more easily together to resolve
performance issues. Conducting a performance improvement exercise jointly helps set
in motion a collaborative process among cooperating firms and other partners. This
assists in defining each partner’s particular role in addressing performance issues.
It is likely that the performance improvement goals of particular organisations may differ.
One organisation may, for example, apply performance improvement to improving a
management system, while another may apply it to improving the performance of a
service or manufacturing process. With a shared framework, it is easier for different
units to collaborate with one another, especially at the local level, each unit bringing
their best skills and expertise to achieve the shared goal of improving performance.
9.4 The relationship between management and performance

improvement
Management is a multidisciplinary practice which involves the efficient and effective
planning, organisation, implementation, monitoring and evaluation of all processes
in support of an organisation’s mission, goals and strategies. The ultimate goal of
management is to improve performance in order to achieve better organisational results
(e.g. client satisfaction, financial viability and services to a larger number of clients).
Management has long had a performance focus.
9.5 Performance improvement process

Performance improvement is a collaborative team process for achieving desired
organisational and individual results. The performance improvement process is
presented in the following framework (Figure 9.1). Each step in the process is described
below.
Figure 9.1: The performance improvement process
9.5.1 Obtain and maintain stakeholder agreement

The purpose of this step is to get everyone working toward the same goal. In order to
solve performance problems or to plan new products and services, those with an interest
in what occurs (the stakeholders) need to have a common understanding of what is to
be achieved. Stakeholders can include employees, customers, the government, partner
organisations, regulatory bodies and others. Stakeholder involvement is essential
early in the performance improvement process and must be maintained throughout the
process.
9.5.2 Consider institutional context

An important starting point for any performance improvement initiative is the
documentation and communication of the firm’s mission in a brief statement of purpose:
what the firm does, how it does it and for whom, its strategies and their relationship to
each other. The perspectives of the client, end user and other major stakeholders should
be incorporated as, generally, they will know far better than a newcomer (e.g. consultant)
how an intervention might really work within their environment. Also important are
the strengths (including core competencies) and weaknesses of the firm, and any
assumptions and data about external factors, for example, government policies, rates of
inflation, markets and demographic changes. From this information, long-term strategic
plans are developed and documented. These multi-level plans identify goals, objectives,
critical success factors CSFs), cross-functional processes, priorities, key performance
measures (KPIs) and potential resource requirements for all parts of the organisation.
9.5.3 Define desired performance and key performance indicators

Performance objectives were discussed in some detail earlier in Chapter 2 . The
performance objectives and the desired level of performance for a particular organization
will be based on stakeholders’ views within an organizational (i.e. institutional) context.
If appropriate, performance objectives may be prioritised and critical success factors
(CSF) identified (see Explanation Box for more information on the terms CSF and KPI).
9.5. Performance improvement process 199
Explanation Box
CSFs (Critical Success Factors)
Critical success factors have been described as:
• ‘the things that must be done exceedingly well to really succeed’
• factors which are crucial to success and without which a firm or project would
fail;
• factors which, if not attained, would seriously impair the likelihood of

achieving a business objective;
• the things that have the greatest bearing on a process achieving the highest
possible level of performance or quality of outcomes.
This stage should also consider the culture within which the work will take place
and link each step of the process to the mission and goals of the organisation. It is
also important to understand what kinds of interventions have been undertaken in
the past, so as not to duplicate and/or contradict worthwhile past efforts.
KPIs (Key Performance Indicators)
• Key performance measures or indicators are measurable characteristics of

products, services, processes and operations which an organisation uses to
track and improve performance. The measures or indicators should be
selected to best represent the factors which lead to improved customer,
operational, and financial performance.
• KPIs are measurements of performance which indicate whether or not the

firm or project is meeting and constantly improving its desired performance.
They are based on the CSFs and therefore measure real business
improvement.
9.5.4 Measure and analyse performance

A large part of any improvement initiative is the measurement and analysis of the
performance indicators. This involves focusing on the performance of an individual,
group, system or the organisation as a whole, in order to conduct a performance analysis
which will identify what gaps, if any, exist between actual and desired performance, as
well as what strengths exist to build upon.
Information is gathered from policies and standards, employees, managers, clients
and as many other stakeholders as possible. After defining the desired performance,
performance measurement tools can be used to gather information about the actual
level of performance.
9.5.5 Find root causes of identified gaps

Once actual performance levels are known, the root causes of any identified
performance gaps between desired and actual performance can be described and
explained. Common causes of poor performance include:
• poorly designed processes;

• functional focus rather than customer focus;
• unclear job expectations;
• dysfunctional management systems;
• lack of performance feedback see Example: Performance feedback in work teams;
• inadequate equipment or supplies and lack of knowledge or skills;
• poor motivation (no incentive to do well);
• deficient knowledge and skills;
• lack of organisational support, including access to leaders and resources.
These factors demand a variety of performance improvement interventions.
Example : Performance feedback in work teams

Carrie Cabrales, 1994, Center for the Study of Work Teams
It is human nature for people to wonder how they are performing. For example, members
of a basketball team often look to their coach or teammates and the scoreboard to
determine how well they are playing the game. Similarly, team members in a business,
industry, or academic setting have a genuine curiosity about their performance relative
to that of their teammates or other teams.
Unfortunately, there are quite a few employees who never find out how they are
performing, or find out via the most negative terms. By implementing a performance
feedback system companies can abolish the guesswork employees’ face about their
performance and save themselves the cost of repeated profit loss due to low productivity.
A performance feedback system incorporates within it, all the essential elements
required to provide team members with the information they need to perform their job
most successfully. A successful performance feedback system includes the following
components:
• specific information;
• focus on areas the team member can control;
• follows as closely to the actual performance as possible;
• is frequently delivered relative to a set goal;
• comes directly before positive reinforcement.
9.5. Performance improvement process 201
First, information given to team members about their performance must be specific.
That is, team members need to know exactly what they did correctly and what aspects
of their performance need to be improved. However, the process does not stop at telling
employees what they need to improve, but it also helps them determine how they can
improve their performance. One way to do this is by providing the needed resources
to help team members improve their performance. A few examples are providing
skills deficit training, supplying the necessary equipment or tools to better complete
a task, giving guidance/coaching to help them, or connecting them cross-functionally
with others who can help them.
Second, performance feedback given to team members must be about something under
their control. For example, a work team in a paper manufacturing company set out
to keep their scrap material down. After a month they noticed that scrap materials
were increasing. They determined that the machines they were using to cut paper
were cutting more paper than usual off the ends, thus increasing scrap. The machine
malfunction was not directly under their control and the increased paper scrap was not
a result of their performance.
Third, feedback should be given immediately, or as close to the time the actual
performance occurs. If given immediately, both parties can easily remember the
performance at hand, making it easier to pinpoint areas that could be done differently
to improve performance, or to point out specific areas that were done excellently and
should be continued in the future.
A fourth component of a performance feedback system is that feedback be frequent.
Providing frequent feedback allows teams to continuously improve their performance, a
goal for which many organisations are striving. Feedback should also be goal-related.
Team members should be given the opportunity to set their own performance goals in
support of overall organisational goals. Team performance can be measured and fed
back to team members based on set goals or standards. If a particular team is not
ready to set goals on their own, they must be aware of performance goals they must
reach in order to accomplish them. In either case, the team will have something specific
to work toward and receive feedback on.
Finally, performance feedback should be given simultaneously with positive
reinforcement for desired performance. If feedback is provided without reinforcement,
it will eventually lose its ability to sustain or improve performance. Team members
need to know how they are performing to standards, but they also need to know (by
some means) that their hard work is paying off (via positive reinforcement). Positive
reinforcement can be delivered socially, tangibly, or can occur automatically for team
members by witnessing their performance increase over time. The bottom line is to
empower teams so that they can set attainable goals, measure their goal success, and
obtain feedback on their performance.
9.5.6 Select interventions

This stage is concerned with selecting and designing interventions to address the
causes of performance gaps. Not all interventions can be undertaken at once.
Performance measurement and analysis typically uncovers problems in more than one
performance factor and will provide data to help prioritise the most needed interventions;
i.e. those that will have the largest impact (greatest benefits) for the lowest cost. In
determining priority, it is wise to consider the following criteria along with others that can
be identified by the stakeholders.
• Appropriateness: Will this intervention contribute to closing the performance gap?
• Economics: Is the intervention affordable and sustainable?
• Feasibility: Are systems in place to support this intervention? Can it be successful

in the organisational context?
• Cultural acceptability: Will the community and clients respond favourably to this
intervention and be willing to advocate for it?
• Employee acceptability: Will the operators, supervisors and managers agree to

support the intervention?
9.5.7 Implement interventions

During this phase, interventions are planned, initiated and monitoring systems
established. Some interventions may be implemented immediately others may require
significant project management and organisational resources. The performance
improvement manager must try to integrate the concept of change into daily work and
carefully manage the direct and indirect impact of that change to maintain organisational
and individual employee effectiveness and achieve performance improvement goals.
9.5.8 Monitor and evaluate performance

Ongoing monitoring and evaluation systems which focus on measurable change
provide timely and essential feedback on the results of the intervention. To evaluate
the impact of interventions on closing the performance gap, it is necessary to
compare formal assessments of actual performance to desired performance regularly.
Information obtained from further evaluations can be used to guide follow-on analyses of
performance gaps and root causes, as well as modify the intervention design as needed.
9.6 Creating a performance culture

Business experts are constantly reminding their clients that organisations no longer exist
in a stable environment, but in one that is rapidly and constantly changing. Change
itself is not new, but the management approaches which coped successfully with the
steady, incremental changes of the past are inadequate for the scale and frequency of
discontinuous change of the present.
Management is not about the preservation of the status quo; it is about

maintaining the highest level of change that the organisation and the people in it
can stand. (John Harvey Jones, Making it Happen, 1988)
A performance culture is one in which management best practice is integral to the way in
which the organisation is structured and managed. It is a culture in which every person
in the organisation understands the organisational mission and priorities and their own
9.7. Case examples 203
role in helping to achieve those priorities. In such a culture, every person is empowered,
encouraged and motivated to use information to act to achieve the agreed goals within
recognised limits of authority.
Managers, like their organisations, face constant and increasing pressures and often
contradictory demands. Culture change is not achieved overnight. Every culture
changes gradually, and corporate culture should be fashioned with a purpose. The
exercise of top-down initiative-led change can create ‘change fatigue’ where the multiple,
and sometimes apparently conflicting, requirements of these initiatives overload
managers.
Creating successful performance change requires inclusion of a culture change
which enables change to be continuous and created ‘by’ the managers more often
than applied ‘to’ the managers. Creating an over-arching framework to align the
specific combination of initiatives being followed and enabling a process of continuous
performance management in a collaborative environment reduces the obstacles to
change and empowers the organisation to succeed.
9.7 Case examples

Below are three cases highlighting different aspects of performance improvement in
organisations.
Case example: Performance improvement in strategic planning and

alignment
Julia Farr Services (JFS) is one of Australia’s best known and highly regarded
rehabilitation facilities, specialising in the rehabilitation of people with neurological
conditions or brain injuries. In 1999, having recently completed a strategic planning
process, JFS were looking for ways of better aligning their business planning and
measurement processes with their new strategic plan.
JFS decided to implement a performance improvement initiative which would provide
clear linkages from stakeholder expectations through to operational measures. The
organisation committed to the project with the full support of its Chief Executive Officer
(CEO) and senior management. This was crucial in order to incorporate the project
into the business and operational plans - an important part of the process. While
there was some scepticism from some managers about this latest ‘fad’, most managers
saw immediate benefits to be gained and were keen to have better ways of measuring
success.
JFS management is committed to continuing to implement its performance improvement
plan and this commitment, demonstrated through ongoing training and progress
reporting, is helping to convert even the hardened sceptics. All managers are now
familiar with the same performance improvement process and all have objectives,
responsibilities and timeframes based on it. Because the managers did the work, there
is a strong sense of ownership of the results.
While I’ve seen a number of strategic plans done, this is the first one to be truly
well aligned, with early performance indicators which can pick up where things are
going astray before they have an impact on stakeholder-related outcomes. (Matt
Lynagh, Quality Activities Co-ordinator, Julia Farr Services)
Benefits for JFS resulting from their performance improvement project were:
• clear linkages from stakeholders’ expectations through to day-to-day activities;
• understanding of stakeholders’ needs now based on data not perceptions and

decisions based on this. JFS now asks stakeholders the ‘hard questions’ about
how the organisation is doing;
• alignment between Strategic Plan, Corporate Plan and Business Plans. This
means that everyone knows they contribute to the organisation’s goals;
• critical success factors clearer and linked to action plans;
• monthly monitoring of progress against plans allowing managers to influence

activities directly and provide an early warning system for emerging problems;
• measurement now providing data directly relevant to meeting objectives.
JFS was actively searching for a solution to rationalising and managing KPIs. This
included Statistical Software Packages and Balanced Scorecard. After seeing
what the Occupational Performance Model (Australia) had to offer, we elected to
examine it further.
At the end of the day I think there’s some very good lessons to be learnt from
business fundamentals relating to alignment and about understanding your
stakeholder needs.
(Matt Lynagh, Quality Activities Co-ordinator, Julia Farr Services)
Case example: Performance improvement implementation in a power

station
An electricity generator has successfully improved performance by creating a
performance measurement system linked to a new strategic plan.
Strategic thinking
The performance improvement initiative began by establishing the external view for the
organisation, i.e. who are the key groups the company needs to add value for and
how well does it do that? The Power Station started by identifying its diverse range
of stakeholders and established their needs in the form of ‘value trees’. It also did a
‘first pass’ assessment of its current performance in providing value. This exercise was
then validated through interviews with a representative number of key stakeholders.
Its stakeholders included the parent company, Government Ministers, electricity market
traders, regulatory bodies, purchasers of by-products, staff and contractors, a range of
key suppliers and the local community. Needs were established for each group; e.g. the
staff identified security of tenure, better than average base rate, their work conditions
and training and skills development as important to them.
9.7. Case examples 205
Planning, priorities and alignment

The first step in the project enabled rigorous debate about ‘what is critical’ for the
organisation to manage. Following the stakeholder work, the management team
developed a comprehensive set of eight Critical Success Factors (CSFs) which
identified priorities and provided the basis for aligning roles throughout the organisation.
Examples of those CSFs included achieving levels of reliability and responsiveness
to meet market demand, managing environmental and occupational health and safety
(OH&S) risk effectively, developing and maintaining skills base, employment conditions
and outsourcing balance required to sustain the enterprise.
Performance Management - monitoring and control
The next step was to develop measures to monitor how well ‘the critical things’ are
done. For each of the eight Critical Success Factors, the management team developed
an appropriate suite of approximately thirty key performance indicators (KPIs). For
example, for the CSF ‘Managing environmental and OH&S risk effectively’, they
identified Number of reportable incidents, Number of notifiable incidents, Number of
first aid/ medical treatments, Percent (%) compliance with environmental plan and %
compliance with OH&S plan.
Information and reporting
This step ensures that the measures form part of the management system. Following
KPI definition, they have collected and collated available data and formatted appropriate
trend charts as the basis for their reporting system, including run charts for trend display
and pareto charts for reporting major problems. The next step will be to develop
indicators at an operational level aligned with their new KPIs.
Case example: Performance improvement helps align people and goals

A not-for-profit hospital used performance improvement techniques to improve its
management system. The improvements were spearheaded through a series of
workshops involving over 150 executives, managers and staff. Improvements included
the following.
• Clarifying and communicating the strategic intent of the hospitals as a whole,

in terms of the desired value-added for stakeholders. This involved raising
awareness, discussion and management of the incredible diversity of needs of the
various groups and an understanding of the often opposing pressures the hospital
had to reconcile. The stakeholders included patients, families and carers, the
religious order that owned the hospital, health insurance funds, Visiting Medical
Officers and referring agents, the staff, as well as local and professional community
groups. Focus groups and interviews were held with each stakeholder group and
this information was used in planning. This work also resulted in the overhaul of
many of the older approaches to, and shape of, stakeholder surveys.
• The Critical Success Factors of the hospital were identified from this work i.e.
what the hospital needed to do really well to be successful. Examples included
cost-effective care, clinical effectiveness, increased surplus, safe, supportive
environment, state of the art physical facilities, community based charitable care,
performance management, staff development and recognition and communication
and involvement of all stakeholders.
• Appropriate Key Performance Indicators (KPIs) which represented a much broader

suite of indicators than had previously been used were then developed. They
included measures of clinical outcome, financial performance and business
growth, safety, charitable services, stakeholder satisfaction, HR issues and cultural
assessments.
• A process model of the organisation was created which depicted the horizontal
flow of the business as opposed to the traditional vertical functional model. This
allowed everyone in the organisation to see how their work contributed to the
overall picture, including the desired outcomes for stakeholders. More detailed
process mapping at a service level followed.
• Aligned measures at a process (service) level were then developed. The required
measures were clear once the ‘critical things’ and KPIs were understood. The
process model pointed to the key drivers of performance and the processes to be
managed for the hospital to be successful. The process measures enabled staff
to evaluate their individual and team success in an ongoing fashion. These were
then directly linked to strategy and allowed tracking of strategy deployment. The
improvements included ceasing use of some older, traditional measures which
actually drove behaviours opposed to the new strategies.
The performance improvement process workshops provided some of the best

outcomes I’ve seen in my professional career. Staff readily worked with the
concept and the materials and felt that, at last, they understood the big picture.
This was, for many, the first time the fundamentals of the business had been
discussed totally and openly - this had a profound unifying affect.
(Director of Strategic Support).
9.8 Interventions associated with performance improvement

An intervention is an activity, process, event or system designed to improve performance
by fixing the root cause of the gap between desired and actual performance. There is a
wide array of interventions which can be used to improve performance. Some examples
are:
• developing an organisational mission and strategies to achieve it;
• improving teamwork and integration across disciplines;
• setting and communicating clear job expectations;
• designing and implementing appropriate performance feedback systems, e.g.

Performance measurement and review;
• creating job aids (e.g. to track supplies, to remind managers about effective ways
to run meetings);
• training - in the past, training has often been the only intervention applied to
performance problems;
9.9. Performance measurement 207
• building monetary and non-monetary incentive systems;

• developing and implementing polices, procedures, guidelines and standards;
• developing simple, non-costly ways to recognise good performance;
• providing supervisors with tools for participatory problem solving and training;
• employing change management;
• reorganisation;
• concentration on core products and competencies;
• niche marketing;
• acquisitions and mergers;
• applying new technologies.
9.9 Performance measurement

The goal of making measurements is to permit managers to see their company more
clearly - from many perspectives - and hence to make wiser long-term decisions.
The Baldridge Criteria booklet (Blazey, 1997) reiterates this concept of fact-based
management:
Modern businesses depend upon measurement and analysis of performance.

Measurements must derive from the company’s strategy and provide critical data
and information about key processes, outputs and results. Data and information
needed for performance measurement and improvement are of many types,
including: customer, product and service performance, operations, market,
competitive comparisons, supplier, employee-related, and cost and financial.
Analysis entails using data to determine trends, projections, and cause and effect -
that might not be evident without analysis. Data and analysis support a variety of
company purposes, such as planning, reviewing company performance, improving
operations, and comparing company performance with competitors’ or with ‘best
practices’ benchmarks.
Establishing the right performance measures is the key to successful performance

improvement. An organisation must be able to tell whether progress is being made
on its critical goals and whether stakeholder expectations are being met.
A good way of doing this is to develop performance measures which are cross-functional
and which are linked to strategies, objectives and performance criteria. These measures
form the framework for a firm’s performance measurement system. Several well-known
frameworks for measuring performance already exist. They are described briefly below.
• Balanced Scorecard: A strategic, measurement-based management system,

originated by Robert Kaplan and David Norton (1996), which provides a method of
aligning business activities to the strategy and monitoring performance of strategic
goals over time.
• Baldridge Award: A prestigious award, developed by Malcolm Baldridge in 1984

to offer an incentive to companies which score highest on a detailed set of
management quality assessment criteria. The criteria include leadership, use of
information and analysis, strategic planning, human resources, business process
management, financial results and customer focus and satisfaction. The award is
currently administered by the USA National Institute for Standards and Technology.
• Benchmarking: The process of learning by making comparisons. For centuries

and even today, comparisons are made in an informal sense. Benchmarking
has come to mean a formal process of comparison between organisations as a
way of generating ideas for improvement; preferably improvements of a major or
‘breakthrough’ nature. (Described in more detail below.)
• Business Process Improvement (BPI)): A methodology for focused change in a

business process achieved by analysing the ‘As-Is’ process using flowcharts and
other tools, then developing a streamlined ‘To-Be’ process in which automation
may be added to result in a process that is better, faster and cheaper. BPI aims at
cost reductions of 10-40%, with moderate risk. (Described in more detail below.)
• Business Process Reengineering (BPR): A methodology for radical, rapid change

in business processes achieved by redesigning the process from scratch and then
adding automation. Aimed at cost reductions of 70% or more when starting with
antiquated processes, but with a significant risk of lower results.
• Capability Maturity Model (CMM): A scale for assessing the degree of built-in
documentation and discipline in a process, in which the scale goes from Level 1,
with no formal process, to Level 6, with a continuous, rigorous and self-improving
process. Developed by the Software Engineering Institute of Carnegie Mellon
University in the USA, and now being extended to a broader range of applications
in management.
• The European Foundation for Quality Management’s (EFQM) Model of Excellence,

which provides benchmarking and self-assessment tools in a framework similar to
that of the Malcolm Baldridge criteria.
• Enterprise Resource Planning (ERP). The collection and use of information in an

organisation to improve and optimise performance. Executives and managers
use the information produced by the enterprise information system to reinforce
initiatives, reward behaviour and change strategies. Employees use it to adjust
operations and respond to strategic needs. By linking timely accurate measures
to specific goals and objectives, process management becomes more of a science
and less of an art.
• Investors in People (IIP): A national UK standard which seeks to encourage

organisations to train and develop all their people. It is based on the practical
experience of organisations which have improved their performance by investing in
their people. The Standard requires that an Investor in People is fully committed to
developing its people in order to achieve its aims and objectives, is clear about its
aims and its objectives and what its people need to do to achieve them, develops
its people effectively in order to improve its performance and understands the
impact of its investment in people on its performance
9.10. Business process improvement 209
• ISO 9000: The International Standards Organisation (ISO) has established

a series of performance and quality measurement procedures for industrial
organisations; if they implement these procedures they may receive certification
by ISO.
• Six Sigma: Literally, refers to the reduction of errors to six standard deviations
from the mean value of a process output or task opportunities, i.e. about 1 error in
300000 opportunities. In modern practice, this terminology has been applied to a
quality improvement methodology for industry.
• Statistical Process Control (SPC): A mathematical procedure for measuring and
tracking the variability in a manufacturing process; developed by Shewhart in the
1930s (Oakland, 2002) and applied by Deming in Total Quality Management.
• Total Quality Management (TQM): A methodology for continuous monitoring
and incremental improvement of a supply-line process by identifying causes of
variation and reducing them. Originated by Deming in the 1950s, and widely
applied in the USA Federal government where it was sometimes called Total
Quality Leadership (TQL) (Oakland, 2000).
The five performance objectives (cost, speed, quality, dependability and flexibility)
described in Chapter 2 are made up of many smaller performance measures. These
‘smaller’ or partial measures are to be found to a greater or lesser extent in the
frameworks outlined. Any assessment of performance needs to be compared against
some kind of standard. Four commonly used standards are:
• historical standards - compare current performance against previous performance;

• target standards - are set at an agreed and appropriate level;
• competitor standards - are based on what is being achieved by one or more of an
organisation’s competitors;
• absolute standards - are based on a theoretical limit.
Each system has its own strengths and weaknesses; consultants and business experts
agree that there is no perfect measurement system. The way in which a measurement
system is used as part of a continuous performance improvement programme is often
more important than the specific system used.
9.10 Business process improvement

Once a firm’s strategies have been documented, performance improvement teams begin
improving its processes. These teams include the managers and staff actually involved
with the process. It is always easier for people who are familiar with a process to improve
it. The teams use software or paper-based tools to diagram and document the firm’s
processes. The resulting models are rich with detail and are linked to the firm’s goals
and objectives.
Just as blueprints depicting a house must be readable to those who use them, so too,
must the models and diagrams which depict the firm’s processes be usable by those
who must make business engineering decisions. The way in which these models are
developed also affects their usability. For example, waiting until every element has been
modeled before beginning improvements may eventually result in an excellent process
model of the firm, but it is unlikely that management or employees will be interested in
such a long-term investment. When remodeling a house, the most successful approach
is often to proceed a room at a time; so it is when remodeling an organisation. Selecting
a methodology which encourages teams to make improvements one process at a time
can produce better results than a ‘big bang’(BPR) approach.
Improving parts of a firm which are not critical to its success is, at best, a waste of
time and resources; at worst, it can have a detrimental impact on the enterprise by
focusing attention needed for crucial functions on areas which are of little relative value.
Initial focus typically targets high impact areas such as customer service, new product
delivery, or significant revenue areas. Successful performance improvement initiatives
concentrate on what the firm actually needs so that efforts result in both long-term and
short-term accomplishments.
Once an existing process has been modeled, it is analysed thoroughly and improvement
opportunities are identified. Potential improvements are tested using techniques such
as ‘what if?’ simulations to keep process costs at a minimum. Only those improvements
showing promise in the simulations are carried forward. New processes are similarly
designed and tested using the simulation tools before they are integrated into a firm’s
operations.
As a firm’s processes change, the process model must also be changed; otherwise, it
will not accurately reflect reality and will become a questionable source of assistance
for decision making and improvement. Suppose the blueprints for a house show the
electrical lines which were originally installed, but someone rewired a few rooms without
changing the diagrams. If an electrician were to use those out-of-date blueprints
for another re-wiring job, the result could be confusion, higher cost and possible
injury. Likewise, firms which invest in developing process models but fail to provide
for maintenance, can expect the value of the models to diminish over time and, if still
used, to have a negative impact.
9.11 Benchmarking
The term benchmark was originally used to describe a mark on a stone, post or other
permanent feature when used as a reference point in surveying. More recently, since the
process of comparing companies against each other in key areas has been identified as
a useful business tool, the term benchmarking has been used to capture the essence of
referencing the differences in process capability between companies.
A working definition used by Robert C. Camp in his landmark book (Camp, 1989)
on benchmarking stated that ‘benchmarking is the search for industry best practices
that leads to superior performance’ (this also forms the title of the book). This clearly
links best practice with superior performance and, by implication satisfied customers.
The objective of carrying out a benchmarking assessment is to gauge and resolve
the performance gap between the processes of one company and those of another
company regarded as being better at the processes being assessed. Benchmarking can
9.11. Benchmarking 211
be regarded as a vehicle for identifying step changes rather than incremental changes
to a company’s processes. Results can be used to help show decision-makers and
implementers that a proposed change is possible and not a dangerous diversion away
from the known business practices that they currently perform.
The search for a better source against which to compare leads to three main themes for
benchmarking exercises.
• Internal
• External - same sector
• External - cross-sector
During internal assessments, comparisons against another part of the company are
carried out. External assessments in the same sector involve potential competitors
(this can lead to obvious difficulties in terms of open, free and trusting access).
Lastly, external assessments cross-sector can be made against companies which are
recognised as being world class or particularly good at a process to be assessed. These
types of benchmarking activities require a proactive approach and can require significant
effort; however, the results have potential to accelerate the company ahead of its position
prior to any benchmarking assessment.
In addition to working directly with other companies, opportunities exist for a company to
benchmark that avoid direct contact with others by applying self-assessment techniques
such as:
• European Foundation for Quality Management (EFQM) Excellence Model, first

awarded in 1992
• Malcolm Baldridge National Quality Award (MBNQA), initiated in the USA in 1987.
The quality model sponsors encourage companies to submit themselves to open

competition amongst their peers for awards. If a company is short-listed for an award, it
will be visited by a team of assessors who will validate the claims made by the company
and submit them for ranking. Being declared one of the top entrants sends a powerful
statement to the rest of the business world, competitors and customers alike. For those
who do not win, the feedback provided by the assessors provides a most valuable source
of knowledge on what can be done to improve the company. Of note, these more recent
awards are predated by the Deming Prize which was initiated in 1951 in Japan following
seminars given by Dr W. E. Deming on statistical quality control to the Union of Japanese
Scientists and Engineers in 1950. The Capability Maturity Model, created at Carnegie
Mellon University, Pittsburgh, is another example of a structured approach to measuring
business processes in order to provide a solid framework for comparison purposes.
Benchmarking provides a clear source from which a company can define the goals
and objectives it can set from knowledge. The strength is the potential to exceed what
could be done by merely extrapolating targets from previous company performance.
The step change is possible because, as well as the level to achieve, benchmarking
brings with it knowledge of the means with which to achieve this new, higher level. By
adopting a culture of continually comparing a company’s processes with those of ‘better’
companies, it is possible to observe how they have been adapted to the constantly
changing business environment. This avoids the prospect of being left behind by
competitors and, more importantly, offers the potential to bring new, world-class-beating
practices into the company’s sector from other industries.
Why benchmark?
In order to grow as a business, if not survive as one, it is essential that a business
remains alert to what its competitors can offer to the market place to solve customer
needs. Benchmarking provides a means to help achieve a competitive edge against
competition from other companies. The myriad of take-overs, mergers and company
closures testify to the inevitable end-result if a company’s management does not
maintain a sufficient edge on its competition. Benchmarking provides management with
tangible evidence that they can relate to their own processes in order to determine if
change is viable.
What to benchmark?
Having established company survival as a powerful motivator to benchmark, the next
key question is to assess what should be benchmarked. Benchmarking can be a
resource intensive activity; consequently, there is little point in investing time and scarce
resources if the optimum areas for leverage are not identified. Understanding what
it is that customers actually want to buy, and where you need to improve from their
perspective, forms a good starting point. Thereafter, a logical understanding of the
company’s relevant business processes is required in order to determine which part of
the operation should be changed.
Developing a good understanding of what the company actually does as opposed to
what it may be thought to be doing, allows the people tasked with benchmarking to
recognise where others are more effective in achieving results when site visits are made.
It is important to recognise that good benchmarking practice not only determines a new,
higher level to achieve, it should also show how to achieve this new level.
9.11.1 Benchmarking in practice

Implementing
Several different models exist which provide a framework for benchmarking
assessments. Although they vary in the number of steps used and hence level of detail
incorporated, they generally follow a logical progression of planning, assessing and then
implementing a solution. In all cases, benchmarking involves a search for new ways of
tackling a host company’s processes by learning what others have to offer.
Rank Xerox are generally credited with being the first company to embark on a
management benchmarking exercise. They were faced with the prospect of having to
survive significant competition from the Japanese photocopier industry which had been
able to take advantage of a lapse in a patent which had effectively prevented serious
competition in the photocopier market place. The initial results of the benchmarking
were significant, it was discovered that the Rank Xerox unit manufacturing costs
were the same as the selling costs of competitors. From this early ‘technical’
benchmarking assessment which had highlighted the quality of the competition’s
products, an evolutionary approach to spreading the technique throughout the company
was adopted. The model used is shown at Table 9.1. Rank Xerox was a Baldridge
Award winner in 1991 and won the European Quality Award in 1992 for a description of
its progress in benchmarking.
Table 9.1: Rank Xerox Ten step approach to benchmarking

PLANNING 1. Identify benchmark outputs
2. Identify best competitor
3. Determine data collection
method
ANALYSIS 4. Determine current
competitive gap
5. Project future performance
levels
INTEGRATION 6. Communication of data:
acceptance of analysis
7. Develop new goals and
functional action plans
ACTION 8. Implement specific actions
9. Monitor results and report
progress
10. Recalibrate benchmarks
The ten steps can be grouped in to four phases i.e. planning, analysis, integration and
action. There is however a fifth phase, maturity, which has two aspects:
MATURITY
11. Leadership position obtained
12. Process fully integrated into company
practices.
Out of all of the phases, the planning phase is generally taken to be the most important
phase to get right. It is essential to understand the company’s own processes so that
those that will add most value after change can be identified and the corresponding
processes of the target company selected for comparison. The need for this true
understanding becomes even more pronounced if the target company is from a different
sector which relies on a different business orientation to meet customer needs. The
remainder of the chapter takes each of the main phases for the twelve step process and
expands upon them.
Planning phase
What to compare: The question of what to compare is fundamental. Three important
areas which can be looked at are:
• Performance
• Process
• Strategy
The performance benchmark is a key enabler for change in that, if an assessment

provides clear indication of a gap, it can be used as a vehicle to underline the need for
change. In its own right it does not tell you how to change but provides clear guidance
that change is required. It also provides a control in that it sets targets and hence limits
on what has been achieved to date.
Performance benchmarks indicate the level which process benchmarks should aim
for. The process benchmark addresses the way in which companies achieve similar
outcomes but by different methods (processes). This forces people to concentrate on
what actually goes on by building up an understanding of the process inputs, constraints,
controls and outputs, thus letting valid comparisons to be made.
Strategic benchmarking is used to compare allocations of resources available to top
management. For example, how much should be spent on research and development,
infrastructure, training or materials. Comparisons across sectors may be instructive but
care must be taken that what works for a market leader in one sector at a strategic level
will not necessarily transfer faithfully across sectors at this level e.g. pharmaceutical
companies have high R&D costs which may not be applicable to some service sectors.
Whom to compare: Benchmarking can be split into the following areas.
• Internal benchmarking.
• Competitive benchmarking.
• Functional benchmarking.
• Generic benchmarking.
Internal benchmarking, which is carried out within a company, is a comparison between

different parts of the same company. This implies easier access to people and
less compromise on confidentiality than other methods. The subsequent gains to be
made are not as high however as the comparisons will generally be made against
business units which conform to company-wide practices. Benefits can accrue, however,
especially where large multi-national corporations are involved which can benefit from
identifying transferable cultural differences. In addition, the safety of working within
the organisation boundaries lets new benchmarking teams gain an understanding and
confidence in a less public environment.
Competitive (external - same sector) benchmarking is a comparison between
competitors in the same or similar markets. It offers the most direct comparison for
a company as the benchmarking company can be expected to be driven by similar
values and constraints. However, confidentiality aspects can shield access to the core
knowledge sought, most companies can be expected to protect their trade secrets from
direct competitors. This natural protectionism can outweigh the benefits sought and thus
limits what can be achieved. Benchmarking in this case is perhaps more limited towards
comparing information such as performance indicators which can be gleaned from the
public domain. They can provide an indication of where process performance could be
addressed.
Functional benchmarking which is a comparison between the same function (e.g.

marketing) in different companies, provides an alternative to direct comparison with a
competitor. It must be used carefully to ensure that accurate comparisons can be made
against performance levels and that subsequent process comparisons are valid. One
strong attribute of functional benchmarking is the potential for introducing what would be
regarded as standard working practices from one sector to another sector which would
regard them as innovative. Functional benchmarking can be carried out within the same
(but not against direct competitors) or cross-sectors.
Generic benchmarking covers those processes which are generic to all companies
e.g. invoicing, wage bills etc. This opens up the potential for a company to compare
against a wide spectrum of other companies (i.e. external - same or cross-sector).
In addition to matching easily recognised practices against each other, this type of
benchmarking provides the possibility of applying lateral thinking from say a specialised
logistic organisation to the problems faced by companies with a limited logistics function
where logistics forms a small but essential part of a company’s overall operations.
Analysis phase
This phase is where the knowledge of the host company’s processes is assessed
against the data gathered from the target company. Data from publicly available sources
is collected prior to any site visits. These data include:
• company reports;
• conference proceedings;
• market research, media;
• suppliers/customers;
• trade journals.
The primary aim at this stage is to identify a suitable company to benchmark against. It
is important to derive from this phase the understanding of why a superior company can
achieve higher levels of performance. An in-depth site visit, or series of visits, form the
main data gathering source. During the site visit a clear understanding of how practices
mesh together must be achieved. This applies not only to the mechanistic processes
used but also to the softer human aspects such as the employee and company attitudes
which go towards making up the culture of a company. Benchmarking may expose
very similar processes but a significant difference in culture and hence problem solving
approach to tasks.
Integration phase
After a benchmarking exercise has been carried out, the host company must set a target
list of new practices and levels to achieve. This will be done with regard to the business
goals of the host company and typically set out in short, medium and long-term business
plans.
Action phase
This is the phase where the new business plans are put into practice. Good
communication and teamwork form the basis of ensuring that the changes required
are understood and implemented to best effect. Reliable feedback will allow progress to
be monitored and, where implementation is weak, allow further changes to be made
to correct any shortfalls. Project management skills are used to implement actions
identified in the business plans.
Maturity
Once maturity is achieved the organisation has two choices. Do nothing or keep a close
watch on what else is happening in the relevant areas that were benchmarked. By fully
integrating the new process into the company, it becomes institutionalised (i.e. ‘that is
the way we do business’). However, if a particular company has been able to improve,
what will stop another from carrying out a similar exercise in order to leapfrog ahead?
This highlights the need to improve continually in order to survive. Once established, a
benchmarking culture provides a useful vehicle for introducing positive change.
Case example: Performance and process benchmarking, staff motivation

and development
This case study has both a performance benchmarking and a process benchmarking
component. The performance benchmarking exercise provides insights into what to
target in the subsequent process-benchmarking project.
Decide what to benchmark
Frances and Mike are old colleagues. Frances now has a senior position in a private
training organisation and Mike is Head of Division in a medium sized rural institute of
education.
Both are grappling with the issue of how to motivate and develop their staff. They agree
that there is a link between staff and student satisfaction and are keen to investigate
ways of improving each.
Both have had some experience with staff and student surveys, but these surveys have
not allowed for comparisons between organisations. Therefore, it has been difficult to
determine priorities for improvement and to gain a sense of how good or otherwise their
performance has been.
Plan project
At a network seminar Frances and Mike mention their interest to colleagues in other
education and training organisations. A steering group is formed to investigate options.
After due consideration, ten organisations commit to a benchmarking project.
The next critical task is to agree on the survey design and administration. Pilot surveys
are developed and tested, logistical matters are discussed and resolved (for example,
when and how the data are to be collected). The group agrees to collect:
• perceptual or satisfaction data;

• information on student completion rates;
• student contact hours per staff member;
• cost per contact hour;
• industry training;
• involvement of staff and related areas.
Analyse results
The group engages an independent benchmarking expert to receive data from each
participating organisation and produce reports for each. This ensures confidentiality
and an objective analysis of the data. Two key findings emerge.
• Staff in most divisions perceive that insufficient effort has been devoted to staff
training and development.
• Students in most divisions perceive that insufficient effort has been made to seek
feedback from them and to use this feedback to improve courses.
The results of the key performance measures (for example, student contact hours per
staff member, cost per hour and time spent on industry training in the last two years) are
also analysed.
Determine further action
Each organisation examines its own results in detail and agrees on actions necessary
to improve performance. For example, Mike decides to proceed with a process
benchmarking exercise.
Case example: Process benchmarking, client-focused training

This case study highlights the challenge in producing a ‘best practice’ model to suit a
range of widely varying circumstances.
Decide what to benchmark
Two partners A and B decided to explore the interface between Registered Training
Organisations (RTOs) and client organisations, where training is jointly managed and
much responsibility is taken by the clients. Partner A was a private training provider,
Partner B was a technical and further education institute and both partners were RTOs.
The aim was to develop a model utilising the skills and experience of the two
benchmarking partners. RTOs could then use this model when consulting with a
prospective client organisation which wanted to grow a training culture.
Partner A was assisting an organisation to establish procedures for training delivery,
assessment and standards, and ensuring that training/assessing was to qualification
standards. Partner B had delivery departments looking at models to re-focus their
delivery and assessment to meet client needs.
Plan project
Identify scope
Initially the partners agreed to:
• a research project to identify existing processes and practices;

• identify appropriate delivery departments and personnel;
• identify the areas of risk at the interface (e.g. delivery issues, assessment issues,
administrative record keeping, professional development, and training of client

staff).
Plan comparisons
The partners decided to:
• establish common ground between the two organisations;

• compare their operations and those of other organisations with a similar training
culture;
• identify areas that could be improved and modify the model accordingly;
• trial the model on a new client.
Conduct project
A mailing list of potential benchmarking partners was established, and information
circulated to all stakeholders after the initial meeting. Suitable case studies were
identified within both partner organisations and externally for evaluation. Contact was
made and appointments set with suitable representatives of each of the benchmarking
partner organisations chosen.
The consortium partners (A and B) agreed on project procedures and quality control
issues and developed a master checklist. They then researched existing practices within
their own organisations and other clients as appropriate. A programme of visits was
arranged, and a report was developed from information gathered during each visit. All
information was tabulated and comparisons made.
Analyse findings
As the project developed, the initial proposal was re-examined. Rather than defining a
clear best practice model, they realised that a series of models might be more suitable.
Consequently, they developed a checklist rather than a single process.
A draft Model of Best Practice (checklist) was developed from the information and tested
against case studies.
Improve practice
The project led to the following benefits for both benchmarking partners.
• Information exchange: information had been regularly distributed between

partners and this relationship would continue.
• Establishment of networks: the opportunity to raise levels of understanding
between the different organisations had been valuable.
• Completion and trialling of models/checklist: the model was completed. Partners
acknowledge that the more generic and simple the model, the more applicable it
would be. One outcome of comparing the organisations was to realise that there
were as many models as there were clients. Essentially the model sought to distil
the core issues which related to the interface examined and to list these in a useful
check list form.
9.12. Performance improvement success 219
Possible improvements to the project

There were logistical difficulties in organising visits, given the distances and reliance
on other organisations. As the project spanned the December-January period, many
organisations were closed for holidays over that period. Hence the timing and the time
allowed for the project might have been better chosen.
In addition, rather than present the model as a checklist, it might have been better
to present it in the form of a simple ‘core’ model (‘these are practices that should be
followed in all circumstances’) supplemented by a series of ‘optional extras’ (‘these are
practices that will be applicable in situations such as ’).
9.12 Performance improvement success

The basic element of successful strategic improvement initiatives is the linkage of all the
critical elements. Whichever methodology and tool set is used, it should allow a firm or
enterprise to define its strategy, then design and implement processes which support
the strategy, and then manage the processes to assure success - all while maintaining
focus on goals, success factors and stakeholder expectations.
Chapter case study: Contico Europe Holdings (Robinson 1998)

Contico Europe Holdings is an interesting case study because, as often happens, things
did not go according to plan. In Contico’s case their US parent decided to re-structure
the company half way through an improvement project with a change of Managing
Director. I was interested to find out what lasting benefits they got from their exposure
to the Business Excellence concepts taught by MRP Ltd on the courses they attended.
Contico, which is an American based company manufacturing plastic storage boxes,
toolboxes and sprayers, also distributes janitorial products. They have a manufacturing
and distribution operation in Redruth in Cornwall employing about 150 people. Many of
their products can be seen in Do-it-all, Wickes and other Do It Yourself (DIY) stores.
Contico installed Uniman planning software and as one of the bigger users of this
software, were able to influence its development. They also installed Preactor, a finite
scheduler package and the forecasting package Demand Solutions to encompass total
manufacturing visibility
In mid 1996 Contico realised they had to improve their customer service levels
dramatically. They were conscious that they had purchased and installed planning
software which they were pleased with but it had not produced the results they were
hoping for. After some preliminary meetings and attendance at MRP Ltd. courses,
Contico launched a business performance improvement project they called ‘Committed
to Excellence’ with a public announcement to all employees by Doug Farrar who was
the Managing Director at that time.
One of the early decisions they made was the appointment of David Bratt, Assistant
Financial Controller, as full time project leader. The structure of the project was a
steering committee of the senior management team with eight task forces reporting
directly to the steering committee Sales and Operations Planning; Master Production
Scheduling; Performance Measures; Data Integrity; Education and Training; Purchasing;

Manufacturing and Systems.
There was no project team, the responsibility for co-ordinating the project was to be
undertaken by the steering committee comprising the Managing Director and the other
senior managers. The task force members were assigned and a training plan drawn.
The objective of the training plan was to make sure that at least two people on each
Task Force were familiar with current best practice in manufacturing planning and
control. This was to be achieved by them attending either the two day Top Management
Seminar or the five day Business Excellence Fundamentals course run by MRP Ltd.,
as appropriate. In addition, selected member was sent on specialist courses and there
were one day overview presentations for another fifty key employees.
To tailor the Business Excellence principles to Contico, they appointed Phil Robinson of
MRP Ltd. as Lead Consultant and Norman B Lees as Associate Consultant
The project set off with a high level of optimism and enthusiasm. The task forces all
drew up agendas and weekly meetings started.
As usual, the first few weeks highlighted more ‘opportunities for improvement’ than
solutions. The injection moulders run 24 hours with production being stored away in
their large stores. The inventory movement paperwork catches up some time during
the day so it was hard to check the stock record accuracy. In addition, Contico had
not got the three software packages (i.e. Uniman, Preactor and Demand Solutions)
communicating with each other and some functionality was missing such as forecast
consumption and an available to promise figure.
Looking back on the project, Alan Elkins, their Financial Controller, felt their biggest
mistake was to underestimate seriously the amount of resource needed to support their
ambitious project. The Steering Committee just did not have the time to co-ordinate
the project properly and carry out their normal roles at the same time. In addition, not
only did the project highlight many key problem areas but also a huge number of other
problems which they were trying to tackle at the same time. The net result was that the
operational overload caused a deterioration in customer service in some areas which
was probably a factor in the decision to re-organise the UK operation.
During the organisational changes the Committed to Excellence project was put on
hold. Once the dust had settled most of the improvement initiatives were completed just
because the education programme made everyone realise how necessary they were to
the operation.
“Business Excellence has become a way of life for us now” comments Phil Macey, now
Business Manager for the Janitorial and Sprayers division. Phil believes they are using
the software tools so much better now because they know not only what they are doing
but also why they are doing it.
“There is still a problem with data accuracy” comments Alan, “but we know we have
to tackle it.” They have undoubtedly been successful in improving the data recording
disciplines and will shortly be implementing a bar code system to speed up the recording
of material movement.
9.13. Summary 221
9.13 Summary
One of the main responsibilities of operations managers is that of making improvements.
Performance improvement, which is an ongoing effort to find new and better ways of
doing things in organisations, can focus either on short-term incremental continuous
changes or long-term radical breakthrough changes. Whichever approach is used,
the goals are the same, namely to improve productivity or put another way to optimise
resource utilisation. Over the years, a number of disciplines using a range of techniques
have been attempting to improve performance in the workplace. Various systematic
ways of representing the performance improvement process exist. The one outlined
in the chapter takes as its starting point a consideration of the organisational context
and getting and maintaining stakeholders agreement. The framework then moves to the
identification of the gap between desired and actual performance and an examination
as to why that gap exists and what can be done to close it. A crucial aspect
of performance improvement is the development of a performance culture whereby
identifying management best practice becomes part of the way of doing things in an
organisation for everyone. Establishing appropriate performance measures is part of a
successful performance improvement culture. The chapter contains a list of the better
known frameworks for measuring performance, for example, the balanced scorecard,
benchmarking, business process re-engineering, EFQM and TQM. An extensively
utilised framework is that of benchmarking which is a search for industry best practice
which leads to superior performance.
9.14 Comments on chapter case study

The main lesson to learn from Contico’s improvement project is the need to tailor an
improvement project to the resources you are prepared to commit to the project. Little
change will happen without at least a full time, committed project leader with a good
understanding of the Business Excellence principles. Our recommendation for a project
the scale of Contico’s is that there should be a project team of at least three full timers
(plus, for larger companies one more for every 200 employees). You should see whom
you want on the project team and then see how you can free them up for the duration
of the project. Companies often employ staff on temporary contracts to ‘back fill’ the
people on the project to give them an assured route back into the business after the
project is completed. The last thing you want is for these valuable staff to leave and
become consultants!
If the company is unable or unwilling to commit this level of resource, the project has
to be scaled down accordingly and the time scale extended. A realistic and attainable
project cost and benefit analysis (for more details see Business Excellence pages 190
to 193 ) will help decide the optimum level of commitment. Many companies find that
the potential benefits from improving their planning and control processes make the
appointment of a full time project team one of the highest yielding decisions of their
careers!
Phil Robinson - www.bpic.co.uk - 5th July 1998
9.15 References
Blazey, M. (1997) Insights to Excellence 1997: Inside Look at the 1997 Baldridge Award
Criteria, American Society for Quality Control.
Byrne, J.A. (1992) Management’s New Gurus. Business Week, August 31, pp. 44-52
Cabrales, C. (1994) Work Teams Newsletter, Winter Vol. 4, No. 4
http://www.workteams.unt.edu/newsletter/Archive/v4-4.html
Camp, R.C. (1989) Benchmarking: The Search for Industry Best Practices That Lead to
Superior Performance. Milwaukee. Wisconsin: ASQ Quality Press.
Harvey-Jones, J. (1988) Making It Happen: Reflections on Leadership. London:
HarperCollins.
http://www.julia-farr.sa.gov.au/
Kaplan, R.S. and Norton, D.P. (1996) The Balanced Scorecard: Translating Strategy Into
Action. Boston, M A.: Harvard Business School Press.
Oakland, J. (2000) Total quality management. Oxford: Butterworth-Heinemann, Oxford.
ANSWERS: Chapter 1 223
Answers to questions and activities

1 Introduction to Operations Management
Answers from page 18.
Q1: b. Productivity
Q2: b. Technological advancements have created a global marketplace
Q3: c. Accounting and finance function
Q4: d. Economic growth that considers environmental and social issues
Q5: b. Use at least 80% recycled parts within new cars
Q6: These are just a few of the issues that should be covered.
Opportunities Threats
Proximity to market Distance from market
Proximity to transformed resources- Effort of coordinating the flow of
reduced lead times transformed resources and outputs
(logistics, transportation to customer
etc.)
Operations may take advantage of low Cultural/language/time differences etc.
cost labour/materials
Technological innovations from other
countries can be exploited
Q7: (Other two core functions are Marketing and Finance)

Operations is directly involved with many aspects of marketing particularly, demand
forecasting, product/service design and development and product/service delivery.
Operations management contributes significantly to the successful fulfillment of
customer requests, therefore it can negatively or positively influence the customers view
of the organisation. In some organisations, the operations function is highly visible. If
you get this wrong, then all other effort has been wasted.
Student could argue however that without effective marketing or product development
then there would be no need for the operation.
Operations is a costly part of most organisations as a large percentage of the revenue
of most organisations is spent in the operations area. Financial systems have a major
impact on an the operations ability to control and measure performance and to develop
and maintain effective competitive stratigies.
What should emerge throughout the debate is that it is crucial for the 3 core areas to
work together for customer satisfaction.
Q8: Globally dispersed supply chains make the job of the operations manager
more challenging, as there will be more variables and ‘uncontrollables’ acting on
the transformation process model. The operations may no longer be close to its
market, so transportation to the final customer must also be considered. Transformed
224 ANSWERS: Chapter 1
resources must also be transported sometimes across long distances. This all requires
coordination and effort on the part of the operations manager.
Students should discuss external factors that act on the TPM such as culture, language,
political instability, exchange rates, import/export restriction etc.
2 Operating Systems, Performance Objectives and Operations Strategy

Sub systems (page 29)
An example can be found in Figure 9.2.
Source: adapted from Naylor (2002:35)

Figure 9.2: Systems model of a manufacturing company
Q1:
This question is aimed at enabling students to start thinking about the myriad of
operations and how various groups of stakeholders are intertwined within a business.
Students may begin by drawing out a list of operations from Figure 2.10. A few examples
are tabulated in the table below.
Q2: The diagram should be similar to the one shown in Figure 9.2 and is simply
an extension of IKEA’s organisational chart (Figure 2.10) to include the external
stakeholders. An example is shown below.
Q3: The answer could highlight such conventional measures as profitability, returns
on investment (on property etc.) and so on. Other performance objectives may include
quality, which can encompass a wide range of indicators such as those shown in Figure
2.10, an extract from the IKEA catalogue that offers an interpretation of what IKEA thinks
of as quality. Quality could also be referred to measures of IKEA’s sustainability policy
with reference to its products. . .or even processes (e.g. how efficient are the business
processes? Productivity of its workforce? Etc.) The answer might also look at some
of the measures referred to within the chapter, e.g. dependability and flexibility, which
could be applied to the case study.
With regards the role of performance objectives, the answer could highlight its usage
in terms of improving current business performance, or for benchmarking to compare
with its competitors. Performance objectives, if measured and managed sensibly, could
also be applied within IKEA’s supply chain to ensure efficiency and effectiveness and
could be filtered down to its selection of its suppliers (where the business function is
outsourced).
3 Product and Service Design

Q1: d) Prototype testing
Q2: e) All of the above
Q3: c) A common method of evaluating a product design
Q4: b) Computer-aided design
Q5: d) Operating equipment
Q6: a) true
Q7: a) true
Q8: b) false
Q9: a) true
Q10: b) false
4 Facilities Location
Q1: b) Higher quality of labour overseas
Q2: a and/or d
Q3: e) Political and business climate
Q6: q6b
Q7: a) true
Q8: a) true
Q9: b) false
Q10: a) true
5 Demand Forecasting and Capacity Management

Q1: This case study does not particularly relate to the operations of a specific firm,
but rather serves to highlight capacity and demand forecasting issues of rolling out 3G
services, more at an industry level. Therefore, it is important in the first instance when
identifying methods of forecasting demand to establish the key stakeholders involved
as this would help you to focus on ‘what’ exactly is being forecasted. For instance,
is it the speed of services (i.e. 2 megabits on W-CDMA services or 384 kbps where
end users are concerned; or the number of base stations where service providers are
concerned?) Still, the question is aimed at allowing the student to start thinking about
forecasting methods applied in reality. A couple of examples are tabulated below.
Interest Group Type of Forecasting Forecasting Method
Manufacturers and Qualitative Expert Panel (perhaps using the Delphi
Suppliers of 3G method described in the chapter) made
services up of key industrial players Might be
useful to highlight issues that figures
alone may not show up, but the process
might become politicised
Quantitative Review of past statistics on the roll out of
previous technology (e.g. GSM in the
early 1990s) Might be useful to aid a
number crunching exercise, but one
should be cautious with the use of past
data, especially where source and
reliability of data to reflect the new
technology are concerned
Consumers of 3G Qualitative Interviews and Surveys Good in terms of
services proximity to the end user, but may be
costly and time consuming
Quantitative Industry Data Again, one must be
cautious with the use of statistics
Q2: The case study may appear complex in that it discusses the roll out of 3G
services to various countries in Europe and Japan, and further complicates matters
by introducing the various strands of technology. Therefore, to simplify matters, it is
worth while establishing a generic process in rolling the technology out, irrespective of
location or technology. An example is shown below.
Based on the above diagram, some of the potential problems highlighted include:
• problems with licensing so many operators simultaneously from the regulatory

body’s viewpoint;
• the choice of technology to roll out from the suppliers’ point of view. The problem
might potentially be exacerbated in Japan, for instance, where some operators will
be launching the 1xRTT technology at lower data speeds and others launching the
higher variant of 384kbps or perhaps even W-CDMA at 2 megabits;
• the issue of building ‘enough’ base stations to cover the ‘forecasted’ demand;
• the fact that problems could potentially escalate when you consider the launch
dates across the different countries highlighted;
• from the operators’ point of view, the issue of not thinking through the charging
strategy at that time might impose financial repercussions on the effective
management of capacity.
Q3: Aggregate planning (see medium-term capacity planning) is appropriate for this
case study given the timescale concerned and the complexities highlighted above. It
would allow the suppliers of 3G technology, and even the regulatory bodies in terms
of licensing operators, to make approximate calculations of demand and capacity in
aggregate terms, which could then be filtered down to the operators in the next stage
when resources required and outputs of individual products to end users would be
factored in within the production schedules.
One should reflect on the case study and be able to note that aggregate planning, if it
was applied at all, would have already been undertaken, given the timing of the article.
For instance, forecasts by Lehman Brothers of about 60 000 W-CDMA base stations
deployed in Europe and Japan in 2001 could be part of the number crunching exercise
done at this stage.
6 Process Types
Process types (page 132)
Q1: Control is needed to keep a process functioning correctly. Feedback forms the
basis for control. For example, by comparing a process characteristic (e.g. temperature)
with a target value, it is possible to monitor the process and make adjustments when
needed (e.g. apply more heat) to keep the process operating within its intended
characteristics.
Q2: Yes. An intensive-care child unit in a hospital requires a high degree of control
compared to a dairy process to milk cows.
Q3: The different process types represent a continuum in which there is an infinite
variety of possible process arrangements.
Q4: Some processes combine elements of various types of process, e.g. a line
operating system with jobbing cells at certain points to increase product options. These
types of arrangement are sometimes referred to as hybrid process arrangements.
Q5: Service companies can be classified into different process types in a similar way to
manufacturing processes. For example, projects and professional services share similar
traits with respect to variety and volume.
7 Facilities Layout and Flow

Q1: 4. Fixed position layout
Q2: 3. Process layout
Q3: 1. Cell layout
Q4: 2. Product layout
Q5: 4. Higher mix flexibility
Q6: 2. Higher investment in capital equipment
Q7: 2. Transformed resources are usually not moved
Q8: 2. Variations between cycle times and actual task times
8 Process Design and Process Technology

Q1: (d)
Q2: (d)
Q3: (a), (c), (d)
Q4: (b), (d), (e)
Q5: (e)

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Heriot-Watt Management Programme

School of Management and Languages

Telephone +44(0) 131 451 3864

First published 2007 by Heriot-Watt Management Programme (ISBN: 8-273-64546-3).

Distributed by Heriot-Watt University.

2 Operating Systems, Performance Objectives and Operations Strategy 21

3 Product and Service Design 47

4.7 Levels of the location decision . . . . . . . . . . . . . . . . . . . . . . . . . 82

5 Demand Forecasting and Capacity Management 95

6 Process Types 117

7 Facilities Layout and Flow 145

7.10 Detailed design of layout . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158

8 Process Design and Process Technology 169

9 Performance Improvement 193

Answers to questions and activities 223

• explain the term operations management;

• appreciate why an understanding of international operations is of increasing

1.2 What is operations management?

• Inputs include staff, facilities, buildings, machinery, and raw materials.

• A Transformation System includes the technology, facilities and layout employed

1.3 Operations within the organisation

1.4 The evolution of operations management

Figure 1.1: The evolution of operations management

1.4.1 The production era

1.4.2 The sales era

1.4.3 The marketing era

1.4.4 Reasons for recent changes in operations management

1.4.5 Changing terminology

1.5 Activities of the operations manager

• Product/service design function - from the outset, it is beneficial for the

that products/services are designed in such as way as to be compatible with

1.6 Volume, variety, variation and visibility

• the volume of their output;

1.7 Environmental issues

• Government legislation and regulations

1.7.1 Government legislation and regulations

Integrating economic, environmental and social policies to ensure a better quality

This means achieving four objectives simultaneously.

• Maintenance of high and stable levels of economic growth and employment

• Effective protection of the environment

• Prudent use of natural resources

• Social progress which meets the needs of everyone

provide an efficient and integrated environmental protection system for Scotland

• activities that may pollute water;

• activities that may pollute air;

• storage, transport and disposal of waste;

• keeping and disposal of radioactive materials.

To survive, manufacturers must be able to understand and adapt to the new

Impact on automotive supply chain

• Raw material suppliers - steel, aluminium etc

• Component suppliers - valves, exhausts, axles etc

• Car Assembly plants

• The final consumer

Waste electrical and electronic equipment directive (WEEED)

1.7.2 Public opinion

1.7.3 Financial pressures

1.7.4 The environmental technology sector

• Environmental Auditing and Consultancy

Environmental technology sector