Operations Management:Effectiveness and Efficiency

by Pat OSullivan on / 3 Comments

Category: Strategic Change

SPECIAL GUEST BLOG By Pat O'Sulllivan, Strategic Change Mentor, Mentors.ie

There are many different definitions out there for what operations management is, but for the purposes of this article we will sum it up as:

"an area of business that is concerned with the production of goods and services, and involves the responsibility of ensuring that business operations are efficient and effective.”

In a simplistic definition this is the role of operations management, doing the right thing, at the right time, for the right price. I short the role of operations management is to protect the profit margin and keep the costs in line to deliver what was promised, when it was promised and for the price that was promised. Rest assured that unless you are in a rather unique industry if the costs of making the good or service exceed the quoted costs, your company will end up bearing the burden of the increased cost. 

Business comes down in short to 2 factors- Sales Price and Cost. Each part of the above equation has a dramatic impact on the continued operation of your business, and in effect how long you are in business. Effectiveness will have a dramatic effect on the sales price of your product, as customer perception and your relevant place within the market will determine whether or not you can charge a premium price within your field. On the contrary efficiency controls cost variables that can dramatically impact the profit margin of the business without having to go after your customer for an additional cost up. 

So how do you know that your operation is effective, and more importantly how do you define effective? Many companies use KPI (Key Process Indicators) measures to determine effectiveness, Six Sigma uses VOC or Voice of the Customer to determine the CTQ (Critical to Quality) requirements that will spell out whether or not you are effective in your operations. Effectiveness is more however about meeting the contractual requirements in all areas, and this equals a perceived value in the marketplace. 

Efficiency on the other hand is optimizing the use of all your resources to deliver the goods or service at the best level. Efficiency will dictate whether or not as an operation you will be able to deliver consistently at the profit margin and deal with the fluctuations of your industry in a way that keeps you on top as an effective entity. Efficiency is about resource optimization, but without being effective it is irrelevant how efficient you can be, because it is not sustainable in the long term. Efficiency without effectiveness will develop a perception in your industry as a cost cutting bottom-feeding organization and cannot lead to sustainable profits. 

7 Questions to Ask About Your Operational Efficiency

by Fiona Flynn on / 109 Comments

Category: Leadership, Mentoring Questions

SPECIAL GUEST BLOG By Fiona Flynn, Sales and Marketing Mentor, Mentors.ie

In good times, executives can make small changes to enhance their business model. Most don’t feel the need to do an overhaul, a major restructuring programme or a complete revamp of the business model. In good times, executives focus more on capturing and servicing new business, than they do on their business model.

Robert Kaplan talks about how in growth times, people become very exuberant – recruiting customers, launching products and spending widely.  Sustained growth hides negative economic fundamentals such as unprofitable relationships, and products.  It’s only when the tide goes out, when recession hits, that the true cost of doing business becomes exposed.  “You find yourself with a bunch of unprofitable customer relationships, products and delivery channels.”

Then companies slash and cut costs.  To Kaplan, this cost-cutting frenzy is like taking a meat cleaver to yourself to remove some fat.  This action removes valuable muscle and leaves the business so badly damaged that in some cases it may not recover.

In recent times, operational efficiency for some companies has meant the difference between survival and failure. Companies can no longer afford to carry inefficiencies in terms of how a product or service production, customer service delivery or distribution effectiveness. That means that instead of incremental changes; major changes to operations have to be made. This time the question is: How do you make sweeping changes to operations without damaging the fabric of the business?

Fiona Flynn, Sales Director, Staff Balance says that there are 7 core questions that you need to ask about operations, before you take an axe to operating costs. “Efficiency is measured in terms of time, cost and effort”, says Fiona. “The measure of an efficient automated system for example is the level of time it takes to produce the goods, the operating cost of the system and the level of human input required.

These 7 questions are drawn from StaffBalance work with corporate companies, helping them to identify and implement operational efficiencies while preserving the integrity of the business.

1. Are our people skilled up and delivering to maximum productivity levels? It is important to forensically understand who in the various operating areas is performing and working to full capacity and who is not. There was one particular team that we looked at, where a guy was earmarked for promotion and a girl of equivalent rank on the team was considered to be a non-performer. We conducted a review of the team’s productivity and even though she worked shorter hours than the rest of the team, the girl came out as the most productive person. Management were surprised to discover that the personable young man was the least productive person on the team. The reality was that the girl applied herself to her tasks efficiently, within a certain timeframe and that the guy applied himself more to profile building and affable interaction with management and colleagues.

2. What parts of our business could we outsource to deliver cost-efficiencies? Outsourcing non-core operational activities can result in significant savings for a company. Choose a reputable supplier and get feedback from their customers directly. Once well-defined service level agreements are adhered to and performance measurements are put in place, then this could be a way to save on management time, costs and effort.

3. What aspects of our operations can we automate? While it might seem perfectly obvious to automate routine transactions and customer interactions – there is still an enormous amount of paperwork and manual activity in most corporate organisations. Automation can be as simple and cost-effective as encouraging bill paying customers to use direct debit rather than sending costly, time-consuming cheques. Some organisations are even looking at closing retail branches and servicing low value customers over the phone or by internet. Relatively few people buy flights from an airline’s retail outlet these days – customers adapted well to the convenience of buying flights online.

4. What are the alternatives to meetings, meetings, meetings? Working with all sorts of corporate companies, we observe that physical meetings are the most time-consuming and least productive daily activity. They can be even more costly, when employees have to travel long distance to meet, invariably using up a day’s travel for meetings that last an hour or two. Where feasible, we encourage companies to introduce teleconferencing, web-conferencing, and video conferencing for meetings. Simply cutting down on the number of meetings works too.

5. Is centralised procurement an efficient option for us? Centralised purchasing from a range of preferred suppliers using online purchasing systems has been shown to reduce costs significantly. Third party suppliers are selected as a result of a competitive process and so costs are contained. Centralised purchasing helps to eliminate costly ad-hoc buying across the organisation. Installing an online purchasing system can lead to tighter management of purchasing, better cost analysis and it helps to simplify the supplier payment process.

6. Can we use staff capacity planning more effectively? Invariably some departments are busier than others. However, as work expands to meet the time allocated, it can be difficult to know which teams are under capacity. Staff capacity analysis and planning can provide tremendous insight into where there is capacity to take on more work, particularly at peak activity times.

7. Starting from scratch, how would we approach this market differently? If you believe that operations is costing too much relative to your business, then it may be time to rethink the way your business is structured and how it addresses customer needs. In the late-1990s, First Active became one of the first banks to operate without cash. This strategy freed up staff time to focus on customers that needed advice on mortgages and investments. Cash transactions were now catered for online. Cost of security and cash transport was wiped out. The bank saw profitability rise significantly.

Each of these 7 questions to consider about your operational efficiency can be identified, explored and addressed using software from StaffBalance. This inexpensive, online software has the tools to help you forensically analyse the operational aspects of your business, enabling you to make changes supported by factual data.

StaffBalance software is particularly useful when you want to make cost savings – by cutting the fat and not the muscle of the business. The results could surprise you. Investment in the software is recouped within three months of implementation.

12 Ways to Reduce Costs in Business

by SeanDonnelly on / No Comment

Category: Finance, Sales & Marketing, Strategic Change

SPECIAL GUEST BLOG By Sean Donnelly, Financial Management Mentor, Mentors.ie

The manner in which costs are reduced can either greatly help or seriously damage a business. Cutting the wrong costs or failing to reduce the appropriate

costs could endanger prospects for getting through the down-turn and the recovery prospects for a business. Irrespective of the organisation size the principles remain the same. The challenges for management are:

1. Not just about reducing costs in absolute terms but reducing unit operating costs.

2. Increasing efficiencies and competiveness.

3. Retaining the right staff and bringing the organisation with you.

4. Do it responsibly and with respect.

In summary there are at least 12 ways to reduce costs:

  1. The simple approach: Cutting all discretionary spending on advertising, recruitment, training, delaying payments etc. This approach is simple, direct & effective at stemming cash outflow quickly.
  2. "Bureaucratic" cost reduction: Centralised, imposed, rule-based cost control with strict budgetary controls.
  3. "Equitable" cost reduction: Setting cost reduction targets e.g. 10% for every department. This approach frequently brings out the "departmental/functional" mentality.
  4. "Stretch targets" – This is similar to the “equitable” approach but "stretch" targets means that the target varies by each functional area so that those areas where there is believed to be greater cost reduction opportunity can be asked to stretch towards a more demanding cost reduction target than other areas.
  5. "Sweat the assets" approach: e.g.. cutting debtor days, reducing stocks, selling assets, delaying supplier payments.
  6. Relocate: moving to a cheaper location.
  7. "Changing the way we do things": Reviewing and re-engineering business processes, reviewing the way we service customers, reviewing overhead and IT effectiveness.
  8. "Changing the mix of what we do": Trimming bad products/services, trimming poor customers, reviewing & changing routes to market & distribution channels, reviewing cost drivers. Activity analysis, data collection, challenging the way we do things are key steps of this process.
  9. Simplify/rationalise the company structure: Review the organisational effectiveness including delegation, accountability, job specifications and performance targets.
  10. Strategic purchasing – working with suppliers, buying smarter etc.
  11. Outsourcing.
  12. The strategic option – This incorporates all the proactive elements of the above including restructuring the company in line with a strategic plan to fulfil customers requirements.

Any approach focused taking only the first few steps alone will be unlikely to yield sufficient advantage over competitors taking a more strategic view. In summary, the most effective way to gain long-term advantage from a cost-reduction process is through squeezing all costs, eliminate all waste, changing strategic shape, playing to and building on strengths, maximising efficiencies from all necessary processes whilst eliminating unnecessary processes. A properly implemented cost-reduction programme offers a business a chance to re-position itself for a better future, re-focus on customer's real needs and to re-define how value is added.

The first step in increasing efficiencies is a thorough analysis of the role of all activities in the achievement of the strategic plan and of how value is created for the company & customer. Research suggests that c. 40% of operational expenses result from wasteful activities that add no value to the customer and therefore should be eliminated. There are 7 types of process waste that can be identified in virtually every organization: 1) Transportation. 2) Inventory. 3) Excess movement. 4) Waiting. 5) Over-production. 6) Over-processing and 7) Defects. Those activities that are not relevant can be eliminated or modified, thereby reducing costs, redirecting associated resources to more relevant tasks, and maintaining a high quality of service at the lowest unit and total operating cost.

Are Your Meetings Full of Blue Thinking?

by Harley Murphy on / No Comment

Category: Leadership, Mentoring Questions

SPECIAL GUEST BLOG By Harley Murphy, Strategic Change Mentor, Mentors.ie

We have all participated in meetings which seem to go nowhere, other than around in circle. Studies have demonstrated that significant amounts of senior managers’ time are wasted at unproductive meeting. Even more importantly is the question mark over the quality of decisions being made at such meetings?

In his book “ The Decisive Moment” Jonah Lehrer makes the following observation:

“There is no universal solution to the problem of decision-making. The real world is just too complex. As a result, natural selection endowed us with a brain that is enthusiastically pluralist. Sometimes we need to reason through our options and carefully analyze the possibilities. And sometimes we need to listen to our emotions. The secret is knowing when to use these different styles of thought. We always need to be thinking about how we think.”

One of the great teachers of the skill of thinking is Edward de Bono and he created  the concept of the ‘Six Thinking Hats’. This framework for meetings has now been used, to great effect, by companies all around the globe, including such names as IBM, NASA, DuPont, Shell, BP, Federal Express and many others.

The Six Thinking Hats

One of the great strengths of the Six Thinking Hats approach is its simplicity. Each of the six thinking hats has a colour: white, red, black, yellow, green and blue. The ‘hats’ are intended to be visualised and normally real hats are not used in the process. The colour provides the name for the hat and is related to its function:

White Hat: White is neutral and objective. The white hat is concerned with facts and figures.

Red Hat: Red suggests anger & emotion to many people. The red hat is concerned with the emotional view.

Black Hat: Black is somber and serious. The black hat is cautious, careful and all about risk. It points out potential weaknesses or consequences arising from an idea.

Yellow Hat: Yellow is sunny & positive. The yellow hat is optimistic and concerns positive thinking.

Green Hat: Green is about growth and abundance. The green hat indicates creativity and innovative thinking.

Blue Hat: Blue is cool. The blue hat is concerned with control and process. It’s about organizing the thinking process and the use of the other hats.

 

Using the Six Thinking Hats in a Meeting

You need to just remember the colour and the associations of each hat. The function of the hat in the meeting will then follow.  In a meeting the hats should always be referred to by their colour rather than their function. There is good reason for this, as asking someone to give his or her emotional reaction to something may carry a connotation resulting in a less honest answer. This is because many people still think it is wrong to be emotional in a business context. However, referring to putting on your red hat is more neutral, carrying less connotations.  Similarly, asking someone to ‘take off their black hat for a moment’ is less threatening than asking them to stop being cautious. The neutrality of the colours allows the hats to be used in a meeting context in a way that is not confrontational. Thinking then becomes a game with defined rules.

There are two basic ways of using the hats:

The hats can be used singly to request a type of thinking. In this case you may come to a point in a meeting where you want to generate some fresh options. For example,  ‘……. I think we need some green hat thinking here.’ Or ‘ …..Maybe we should have some black hat on this.

Alternatively, the hats can be used in sequence to explore a subject or solve a problem.  The sequence may be made up of two, three, four or more hats.  In this case it is recommended that a pre-set sequence is agreed at the beginning of the meeting, under an initial blue hat (process).  Small variations from the pre-set sequence are permitted, depending on output.

Edward de Bono wrote that there are two main purposes to the Six Thinking Hats concept. The first is to simplify thinking by allowing a thinker to deal with one thing at a time. Instead of having to take care of emotions, logic, hope and creativity all at the same time, the thinker can deal with them separately. The second purpose is to allow a switch in thinking.  If an individual at a meeting has been persistently negative, that person can be asked to take off his black hat. By turning it into role play the concept of the hats makes it possible to request certain types of thinking. This can also be very liberating.

“Rarely do we find men who willingly engage in hard, solid thinking. There is an almost universal quest for easy answers and half-baked solutions. Nothing pains some people more than having to think. “

Martin Luther King Jnr.

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