1Operations: the
engine of the
business

Four managers were debating the relative importance of the functions which they represented.

‘A business can't do anything without finance’, argued the accountant. ‘Without money, there'd be no resources. If we didn't make a profit, we'd go bust. The finance function has a vital job to do. You depend on us to raise the money you need, to make sure everything you do is cost-effective and that you make enough profit for the business to survive’.

‘That's all very well’, replied the marketing manager, ‘but finance doesn't make money. You just borrow it from somebody else, then stop us wasting it. The biggest contribution you make is to say ‘No, we can't afford it’. It's marketing that's most important. We're the people who find out what customers want, make sure our products and services meet their needs, tell customers about them and persuade them to buy. You may count the money, but we're the ones who make it’.

‘Now hang on’, interjected the personnel officer. ‘You're both missing the point. Our business depends on people. Whether they're accountants, administrators, sales staff or shop-floor workers, someone needs to recruit them, pay them, deal with the unions, handle their complaints, train them and keep them happy. Of course, we work with line managers to do a lot of that, but don't forget that our staff are our most important resource. And without the personnel function they just wouldn't be there’.

The supervisor from the production line felt a bit overawed by all this. Of course, he saw the accounts for the factory – he and his colleagues reviewed them with the Production Manager once a month. And he knew that finished goods from the line were packed and sent to customers. He'd been involved with personnel when he'd been promoted to supervisor – and it was obvious that someone must prepare the payroll, otherwise nobody would get paid! But surely finance, marketing and personnel were all support functions – there to help him and his production colleagues get on with the real work: making the things that customers paid for. He tried to put his thoughts into words.

‘You marketing people talk about “adding value”. Well, it seems to me that it's production that does that more than anyone else. We take raw materials and subassemblies, process them and put them together to make the finished goods that customers want. We transform bits that are useless in their original state into products that serve a useful purpose. Without us, marketing would have nothing to sell, finance would have nothing to count and there'd be no need for personnel’.

This debate is typical of discussions which take place regularly in organizations. As you would expect, all the speakers are attempting to justify their own function as the one on which the business depends. As you would also expect, in making their cases, each speaker is making selective use of points in their favour – and conveniently ignoring others!

The four functions represented in the debate – finance, marketing, personnel, operations – are commonly recognized as the core activities which make up the work of any organization. That organization may be:

a retail business

a manufacturing business

offering a service such as dry-cleaning, training courses or vehicle maintenance

a charity

a hospital

a government department

a local council

a school or college.

In all cases, the organization will be dependent on the work of all four functions, as will become evident from the descriptions below.

FINANCE

Many managers have difficulty with the principles of finance – and even more with the conventions of accounting! That does not change the fact that the finance function, as our accountant mentioned in the debate, does play a vital role in business. There are two parts to the role. The first is the management of money as a resource. All organizations require resources to conduct their business. These are likely to be made up of materials, labour, premises and equipment. But all these resources need to be paid for. At startup and during periods of expansion, the organization is unlikely to have enough money to pay for the resources it needs. It will gain access to that money through borrowing or through issuing shares.

Most organizations carry at least some burden of debt. That raises the obligation to ensure that lenders’ or shareholders’ money is used carefully. Which brings us to the second part of the finance role – to monitor income and expenditure. Financial accounts provide a historic record of the monies which have come into and gone out of an organization. Management accounts monitor income and expenditure against budgets and targets, and provide a basis for forecasting future performance.

MARKETING

The Chartered Institute of Marketing defines the marketing function as:

This process can, in turn, be broken down into a range of activities:

Market research finds out what customers want, what they are currently buying and how much they are prepared to pay.

Advertising and sales promotion are ways of informing customers and persuading them to try a product or service.

Sales management may involve telephone sales staff or a field sales force.

Distribution is to do with getting the product or service physically to the customer.

Product management involves developing, improving and updating in line with changes to customer needs and competitor activity.

Historically, the marketing function has been applied to external customers – those outside the business who paid with their own money for the goods and services which the business produced. The customers may have been members of the general public in the case of retail outlets, other businesses in the case of heavy engineering, or taxpayers in the case of local government, schools or hospitals. Even charities have customers. Somewhat cynically, it has been argued that a charity's customers pay for the benefit of being relieved of guilt when confronted with others less fortunate than themselves. Or, slightly less cynically, for the ‘feel-good’ factor of knowing they are helping others.

Regardless of the activities in which they are engaged, all organizations need to communicate with customers, offer customers something which they will see as being of benefit to them and persuade them that the benefit is worth paying for.

As the marketing manager in our debate pointed out, it is the marketing function which ensures that an organization continues to attract the funding it needs by keeping its offerings in line with customer needs and wants.

However, as Chapter 4 of this book will point out, current management thinking has extended the definition of ‘customer’ to include colleagues within the organization. As a result, every activity in an organization is being encouraged to measure its success in marketing terms:

Are we giving our customers what they want?

Is our service efficient enough to meet their needs?

How well do we compete with alternative suppliers? (For example, if we make components, are they as reliable or as cheap as those from an outside supplier?)

Looked at from this point of view, marketing ceases to be a specialist responsibility with a focus on external customers. Instead, it becomes the responsibility of every member of staff throughout the organization, based on the uncomfortable recognition that there is no such thing as a captive customer. Assuming that the organization is willing to allow it, any activity, from warehousing to payroll preparation to training to transport to selling, could potentially be carried out by an agent or contractor.

PERSONNEL

Increasingly, organizations are abandoning the ‘personnel’ title in favour of the grander term ‘human resources’. There is little justification for this change as far as the meanings are concerned. Rather, it indicates a change in status of the function.

Traditionally, personnel has been regarded largely as a branch of administration – there to hire staff, pay them, train them, draw up employment contracts and, when necessary, to make sure redundancies are legal. Only very rarely has personnel had any involvement with the strategic direction of an organization.

The move to the ‘human resources’ title reflects this strategic involvement. In growing numbers of organizations, strategic decisions are now being taken, not only on the basis of:

Can we afford it?

Do customers want it?

Have we got the technology?

But also on the basis of:

Have we enough people?

Do they have the right skills?

Where will tomorrow's managers come from?

These are all human resources questions and go to the heart of an organization's ability to survive and prosper. But, of course, people are no more important as a resource than money or customers.

OPERATIONS

So is our production supervisor right to argue that operations is the most important function?

The answer to that question depends largely on how we define the term. If we view operations as synonymous with manufacturing or service delivery, then it is as important as finance, marketing and personnel; but no more so. From that viewpoint, it is one of four functions, all of which depend on each other.

On the other hand, we have already had several clues which suggest that operations management means more than just manufacturing or service delivery. In the Introduction to this book, we defined operations as:

There are other definitions which make similar points:

The emphasis on customer needs is also a reminder that customers can be internal as well as external. Add to that the idea from the Introduction to this book that operations management involves adding value through the transformation of inputs into outputs and we are suddenly faced with a rather daunting prospect: that all managers in every function in every organization are responsible for managing operations. If that is the case, then operations must be the most important of our four functions because it is central to all of them. The remainder of this chapter explains how operations management works in a wide range of industries and activities.

Operations management in manufacturing

The production supervisor in our original debate made most of the points which are relevant to this heading. In broad terms, the manufacturing process takes inputs in the form of raw materials, components or subassemblies and adds value by transforming them into finished goods. Of course, the process is more complicated than that brief description suggests. Operations management in manufacturing must ensure that the necessary inputs are available in the right quantities and at the right times; that machines are set up to the correct specifications; that machine operators are available; that outputs meet quality standards and are delivered in a way that meets the needs of the next internal customer in line – packing, perhaps, or warehousing or transport.

Operations management in retailing

In manufacturing, it is easy to see the change in form or content which the transformation process brings about. In retailing, the transformation is less obvious, but it is still there. Take a petrol station, for example. Its primary products – petrol and oil – come out of the ground in huge quantities many hundreds or thousands of miles away from where the final customer – the motorist – wants them. The petrol station adds value by making them available at convenient locations. It brings about a transformation in both form and location. Or take another example – that of a DIY supermarket. The inputs here are the products on the shelves, but also the expertise of the staff. The customer brings a need – to build a wall, perhaps. A member of staff offers advice on the products to buy, explains how to do the job or provides an explanatory leaflet. The transformation here is that of the customer – from someone with neither the resources nor the knowledge to build a wall, to someone with both.

Operations management in a service industry

In Western Europe more than half of the workforce is employed in the service sector. In the USA three out of four jobs are in the service sector. In most cases, the primary input is the expertise of the worker. These are the jobs that Peter Drucker describes as the ‘knowledge workers’. It is tempting to think of jobs in the service sector as involving complex and rather obscure skills – computer programming, for example, or management consultancy, or transport planning. But similar transformations take place as a result of less sophisticated work. Picture the service department of your local garage. You take your car into the garage because it keeps stalling at traffic lights. The mechanic uses his or her expertise and the test equipment available to confirm that petrol is getting to the engine. So it's not a fuel problem. Using his or her experience, the mechanic then asks you when it happens – all the time, or only when the engine has warmed up? The latter, you say. So he or she takes the car out to warm it up and notices the temperature gauge never reaches full temperature. This suggests that the thermostat may be faulty. The mechanic removes it, checks it and confirms that it is not working properly. He or she then fits a replacement and the problem is solved.

What have the inputs and outputs been in this process?

What sort of transformation has taken place?

What value has the process added?

Now compare your thoughts with Figure 1.1.

Figure 1.1

Operations management in a charity

Charities in the UK operate in a bewildering variety of ways. You may think of charity shops selling new and second-hand goods, street collections, volunteer services such as the Samaritans or hospital visiting, animal sanctuaries or the Royal National Lifeboat Institute. All or any of these offer practical day-to-day examples of operations management.

Take charity shops as an obvious example. Operations management involves transforming public goodwill into saleable goods, volunteer goodwill into trained staff, donations and revenue into the services the charity is designed to support and into the running expenses of the shop. Street collections involve mobilizing teams of volunteer collectors, providing collecting boxes, arranging the safe transport of the money, counting and distributing it.

The operation of a volunteer service like the Samaritans involves recruiting, training and scheduling volunteers, making available telephones, furniture and accommodation and publicizing the service. An animal sanctuary requires accommodation. It also requires volunteers, vets, transport and drivers. A major operational task for the RNLI is the design and commissioning of boats to meet the needs of both the volunteer crews and those whom the boats are designed to rescue.

Operations management in a hospital

You will have recognized by now that operations management can be considered at two levels: first, at the big-picture level, as the transformation of inputs to achieve the satisfaction of the final customer; and, second, at the detailed level, where it involves consideration of individual processes and activities from the viewpoint of the next customer in the chain.

As you would expect, this distinction applies equally to a hospital. The big picture involves the transformation of sick patients into well people through the inputs of medical expertise, drugs, surgical equipment, catering and accommodation. At the detailed level, we could consider any of a thousand separate processes. For example, consider the preparation of a patient for an operation. In this case, the next customer in the chain is the surgeon. The surgeon needs the patient to be sedated, the operating site to be cleaned and the patient delivered to the operating theatre. These are, in turn, the responsibilities of the ward staff and of the porters. At this detailed, or micro, level the transformation is one of form and location – from a conscious patient in the ward to a sedated patient in the theatre.

Operations management in a school

As you would expect, the two levels of operations management apply here as well. At the big-picture, or macro, level we can regard the transformation in a school as being from uneducated to educated pupils, or from pupils without skills or qualifications to pupils with these. Value is added to the benefit of the individual pupil, employers or universities and society as a whole.

Once again, there are hundreds of examples of micro-level transformations. The catering staff, for example, who may be in the employ of the school or of a specialist subcontractor meet the needs of pupils, parents and teachers by transforming raw materials (food) into cooked meals. They change the form of the raw materials, and the content, by adding spices and seasoning to provide added value in the form of nutrition and stamina at an economic price. At least, that's the way the process ought to work! Not always, of course. Complaints about the price and quality of school meals are simply an indication that, in some cases, operations managers have not given enough thought to the needs of their customers.

Operations management in a government department

Our earlier definition of operations as:

presents a fundamental challenge to a government department. This is not because the definition does not apply, but because a government department is heavily influenced by both the demands of the party in power and by the expectations of the electorate. As a result, government departments often find that their customers come to challenge what has been seen historically as their ‘basic reason for existence’ and, by extension, the service they provide.

In Chapter 2 of this book, we return to the theme of how operations management contributes to the achievement of strategic objectives. As far as government departments are concerned, it is important to recognize two major issues: firstly, that operations at macro level – which depend for their success on the understanding and commitment of staff at all levels – are seriously hampered if people do not know how the work they do contributes to the big picture; and, secondly, that the fundamental question ‘Why do we exist?’ is being asked, not only in the Ministry of Defence, but also in the National Health Service, Social Security, the Department of Transport and elsewhere.

Operations management in local government

Operations managers in local government have the benefit of being much closer to their final customers than do their counterparts in national government. But is that really true?

Who do you see as the customer of local government? Locally, it is reasonable to define customers as shopkeepers, rate-payers, road-users, schoolchildren, parents and, in general, the local electorate. But, at the same time, local government is accountable to political parties, both at a local and national level, and limited by national government as to the amount of tax it can collect and, in consequence, the resources it can allocate.

As a result, at a macro level, local government has several groups of customers to satisfy, whose needs may well be contradictory. And yet, at the micro level, there will always be the next customer in the chain with an urgent need for authorization to redecorate a council house, the resources to repair a damaged street light, the money to recruit a new teacher or to buy textbooks.

Consequently, operations managers in local government are faced with the same problems as those facing operations managers everywhere:

Who are my priority customers?

How do I use my resources to achieve maximum output?

How can I streamline or improve activities to achieve outputs more efficiently?

We will return to these questions again in Chapters 3 and 4 of this book.

Project, batch and continuous operations

So far in this chapter, we have emphasized that the essential process of operations management is the transformation of inputs or resources into something which is of value to the customer. We have also pointed out that such a definition of operations management applies at both a macro and a micro level. To finish the chapter, we will look briefly at three different types of operations, raising in the process some of the systems and resource management issues which we will examine in greater detail later in this book.

The descriptions we shall be using

project operations

batch operations

continuous operations

have their origin in the vocabulary of manufacturing. However, as we have seen, there are fundamental similarities between operations management across a wide range of industries and activities. So it should come as no surprise that these descriptions are as relevant to service, government, health care or education as they are to manufacturing. The distinction between these three operating modes stems from the relative continuity of each system.

Project operations

Sometimes known as ‘job operations’, these provide products on a ‘one-off’ basis. Each output is unique and prepared to meet the specific needs of an individual customer. Here are some examples:

the market-testing of a new product

the analysis of the performance of a potential acquisition target

the design and manufacture of a new battleship

a decorator asked to repaint a single home

a hole-in-the-heart operation

the introduction of a one-way traffic system.

Discontinuity is the principal characteristic of a project operation. It works by bringing together a series of well-tried processes (micro operations) but in a way which is customized to the requirement of a specific customer.

The main difficulty with project operations comes from the need to set up and resource each such operation from scratch. Any organization involved in project operations either needs to keep expert staff and specialist equipment lying idle until called upon – with all the cost implications that involves – or else trust that it can find subcontractors to carry out parts of the project, raising doubts about quality and availability if it does so.

Batch operations

The distinguishing feature of batch operations is that the same resources (people and equipment) are used to provide a range of goods or services. The following are examples of batch operations:

a biscuit manufacturer using the same machines and operators to produce, for example, custard creams or bourbons according to demand

a local authority renovating a group of similar houses in the same neighbourhood at the same time

a school processing a ‘batch’ of pupils through the syllabus of a single examination

a car manufacturer producing and promoting a range of ‘special editions’

a doctor's surgery offering antenatal classes at a specific time each week.

The output pattern of batch operations is discontinuous but regular or repetitive. Such operations involve significant set-up costs but bring benefits over project operations in the shape of economies of scale. Nevertheless, they also bring drawbacks in terms of customer satisfaction because of the waiting time involved. That is why, in a manufacturing context, batch operations are often used to make-for-stock.

Continuous operations

Known alternatively as ‘line operations’, the dominant feature here is that of continuity, with a high degree of repetition in work patterns. Line operations depend on sophisticated production equipment, which in turn demands significant capital investment. As a consequence, three-shift, seven-days-a-week working is commonplace in line operations. The most obvious examples come from manufacturing: car production lines, or the extrusion of plastic pipe. But there are others:

natural gas extraction

twenty-four-hour shop opening

emergency services (police, fire, ambulance).

Continuous operations bring significant cost advantages because of reduced downtime and set-up time. Nevertheless, they are becoming increasingly inconsistent with customer demand. Henry Ford's well-known dictum that ‘You can have any colour so long as it's black’ is axiomatic of the impact of continuous operations on customer choice.

What sort of operation are you responsible for – project, batch or continuous? Which is the best? As we shall see in later chapters, operational design walks a narrow line between efficiency and cost-effectiveness on one side and customer satisfaction on the other. As we have seen, the move from project to batch to continuous operations increases efficiency and cost-effectiveness while reducing consistency with customer requirements and expectations – except, of course, that the same progression reduces the cost of the product or service, which in turn lowers the price, which in turn increases customer satisfaction. The impact is the same whether customers are internal or external. So is it possible to identify one best form of operational design out of the three we have described?

As previously explained, project operations offer an exact match with customer requirements, but at a high price. They are suited to customers who recognize the uniqueness of their need, but are likely to be unpopular with those who believe that they could have done just as well – but more cheaply – by buying ‘off the shelf’.

At the other extreme, continuous operations result in products or services which are identical to thousands or millions of others. If you are looking for a new gas cooker, you probably will not mind that there are several identical models in the same street. But you will be less pleased to turn up at a party to find that three other guests are wearing the same dress as you!

As customers have come increasingly to demand products and services which meet their individual needs, so suppliers have adapted continuous operations so that they can offer the benefits of batch, or even project, operation.

There are other examples. Aided by new paint technology, Land Rover are willing to match any colour a customer asks for on a new Range Rover. Even service companies are going down the same route. In the past, if your television gave trouble, you would be told the day when the engineer would arrive, but not anymore. Now, you can expect to be told the hour as well.

It would be dangerous to draw any long-term conclusions from these examples. All we can say is that, at the time of writing, suppliers seem to be placing customer satisfaction ahead of efficiency and cost-effectiveness in their list of priorities. Whether this is the result of an increased focus on customers, or of fear of the competition, is difficult to say. For the time being, though, the priority for operations management is customer satisfaction.