Operations Management 101

Operations management aka OM or Execution Plan involves systematically managing production processes (of goods or service) to occur at their highest possible level of productivity. In OM terminology, the function is described as 'transforming inputs into outputs' where inputs are resources that include labor, machinery, materials, capital and methodologies while outputs include products, services and their outcomes like throughput (of units produced, customers served and so on through their system). The task of OM professionals may be described as exploring changes in different input factors in search of better productivity in outputs, however it is defined; whether revenue, quality, customer satisfaction and so on. This function relies heavily on data. Furthermore, to be effective, OM requires in-depth knowledge not only of the specific system being addressed but also external factors influencing on the system and each other that can justify or negate the insular benefit for the system. In other words, this discussion (along with its popular ratios) should be considered as only one dimension of OM that requires situation-specific considerations.

For context, OM is one of the 3 key essential functions within all organizations. The 3 are marketing, finance / accounting and operations. Being cross-functional  however, OM is practised within any other function; be it like human resourses management, supply chain management, customer service, quality assurance management, warehousing and so on.

Here is a diagram of the transformation process. When tackling your OM, consider how each of these points exist in your organization.

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This post will cover beneficial uses of OM, calculating productivity ratios, decision-making with productivity analysis and some famous case studies.

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Uses & Benefits of Operations Management

Whle all organizations, regardless of industry engage in operations management, not all do so in a very conscious and deliberate way. However, the following are ways in which the deliberate use of OM can be used and benefit organizations. 

• OM allows businesses to be deliberate about how goods or services are produced, ie business operations. This involves systematically learning the organizational goals, how people are organized within the organization, how products and services are produced, to deeply understand the costs associated with the production process. (Operations are very costly for businesses). 
• Example: this systematic approach prevents the reliance on potential misconceptions like the notion that more work hours and or having more workers are necessarily more productive. 
• OM answers questions like the following.
• What products should be produced? What design should be applied? (Product Management). Example(s):
• Standardized parts in manufacturing, even if using the mass customization model and then seeking cheaper prices from input suppliers to achieve scale economies with large orders.
• Should the business produce their product entirely or at all? What is required? If the business buys, from whom? (Supply Chain Management)
• In an attempt to shorten the leadtime (especially since their raw materials and food products do not have a very extended shelf life), they own several activities within the supply chain like potato farms, controlling a fleet of trucks for transporting raw materials, warehousing, distribution and delivery trucks. 
• How much stock should you maintain? When should you re-order? (Inventory Management)
• FritoLay raw materials like oil, potatos, corn and seeds do not have a very extended shelf life. Consequently, 'holding costs' (ie the cost of holding inventory) are great (because of potential loss). In response, FritoLay mitigated that risk. They opened production facilities near to raw materials and consumers. This reduces the time needed for the product to remain on the shelf. Additionally, to produce the product, there is only one efficiency-oriented assembly line that lasts an average of only a few hours. After that point, their internal storage for each batch is only 2.5 days worth of products.  
• What are the short- and long-term schedules (Forecasting & Production Capacity Planning)
• FritoLay base forecasts on historical sales, new product introductions,production innovations and promotions and dynamic local (tentpole-motivated) demand forecasts. 
• What are your needs in materials, personnel, overheads, etc? (Operations scheduling)
• Caste study: Colins Title Company (below) illustrates factor analyses regarding the possible introduction of new overheads to improve outputs
• Fritolay reduces staff turnover with several measures like competitive wages and paid uniforms among other things.
• Which quality should be used? (Quality Management)
• How should the facilty be used in production? How should the space be arranged? (Facility Management)
• Case study: McDonald's revolutionized their production to ensure positive customer experience that delivered on expectation for fast food; food that took 30 minutes and not 3 hours.
• Presentations to explain how and why the organization functions: Business plan

Historical developments in OM that improved productivity include standardization of parts in manufacturing, assembly line design, use of statistics, process analysis and mass customization. Recently, there has been pressure for OM to also consider ethical and environmental issues.

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Calculating productivity

The single-factor productivity ratio for calculating productivity is as follows.

Productivity = Outputs of goods or services produced / Inputs used 

 

Example:

1,000 cakes produced

5 labor hours used

productivity = outputs / inputs

productivity = 1,000 cakes / 5 labor hours

productivity = 200 cakes per labor hour

As illlustrated below, when considering options for improving productivity, OM practitioners perform a 'productivity analysis' by calculating the percentage changes in inputs and outputs from the old to new systems. For a single situation, they may use whichever variable in the system as inputs or outputs and re-run the analysis as many times as they wish. More reflective of real life however, they may combine multiple factors in their calculations. However, to do this 'multiple-factor productivity' ratio, they will need to combine variables whose values can be standardized. The easiest and most common example of this is converting inputs into a dollar value.

Case study: Colins Title Company 

OLD System

Inputs	Outputs
. Workers: 4 . Work hours / day: 8 . Total Wages: $640 . Overheads: $400	8 units daily

 

NEW System

Inputs	Outputs
. Workers: 4 . Work hours / day: 8 . Total Wages: $640 . Overheads: $800	14 units daily

 

Here is the contrast between old and new systems and then the productivity analysis. In the example immediately below, the practitioner is interested in productivity per work hours.

OLD system	NEW system
productivity = 8 units / 32 work hours = 0.25 units per work hour	productivity = 14 units / 32 work hours = 0.43 units per work hour  Productivity analysis +75%*, more units per work hour

* change as a percentage of the old system:

0.43 - 0.25 units = 0.19 units

0.19 units / 0.25 = 75%

Using the same situation, the practitioner is interested in productivity regarding expenditure (and no longer work hours). Furthermore, the practitioner combines multiple costs because they have a standardized measurement, dollars.

Productivity = Outputs of goods or services produced / (Input 1 + Input 2) used 

OLD system	NEW system
productivity = output / (wages + overheads) costs = 8 units / ($640 + $400) = 0.0077   per dollar spent	productivity = output / (wages + overheads) costs = 14 units / ($640 + $800) = 0.0097 units per dollar spent Productivity analysis +26%, more outputs

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Productivity Analysis for Decision-making: Switch to the new system?

Here is an efficient format for presenting the results. 

 

Productivity Analysis
	OLD system: Without new overheads	NEW system: With new overheads	% change (+ increase, - decrease)
Units per day	8	14	+75% in units
Overheads per day	$1,040	$1,440	+38% units per overheads
Labor productivity	0.25 units per hour	0.44 units per hour	+75% units per labor productivity
Multi-factor productivity	0.0077 unts per dollar	0. 0097 unts per dollar	+26% units per costs (labor, overheads)

 

When reporting on the results, explain whether the productivity has risen or fallen. Assuming it has risen, report specifically how this rise has occurred. For instance, increased productivity always occurs because 1) output increased while maintaining or decreasing inputs or 2) inputs decreased while maintaining or increasing outputs.

Do not perform productivity analyses on only outputs.  Notice how tempting it would be to run with the large 75% results for that one variable alone. Rather consider: each single factor alone; as well as multiple factors together once they can be measured with a standardized means.

Re single-factor analyses, consider the implications of altering each individual. For instance, if the increase in overheads relates to fixed (ie versus variable) overheads, that fact should be highlighted and then specially investigated further as a matter for risk management. Afterall, increased fixed costs increase business risk (ie the threat of financial failure because of factors, in this case fixed costs, that lower profitability if the these factors become excessive).

The multi-factor analysis is likely more trustwothy because, as seen in this case, the results can be more sobering with lower overall percentage changes. However, whether multi-factor analyses are more appropriate depend on your business circumstances.

As suggested earlier, extend the bases for your decision-making process beyond these ratios. Consider in-depth knowledge of the organization and its goals. For instance, if high quality is particularly important to your type of product (such as a speciality product), ensure that you are sacrificing quality in the name of increasing productivity. 

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Case studies of how OM improved productivity.

Case study: 

Starbucks hired analysts to find ways of saving time. The following are among the the proposed changes that translated into improved productivity by 27% or roughy 4.5% annually and , in turn, increased yearly revenue per outlet by $200,000 to $400,000 within 6 years.

> To stop requiring customer signatures on credit card purchases under $25, to save 8 seconds per transaction.

> To change the ice cream scoop size to save 14 seconds per drink.

> To get new and better espresso machines to save 12 seconds per shot.

Taco Bell improved productivity by making the following changes.

> revised the menu

> designed meals for easy preparation

> shifted some preparation to suppliers

> efficient layout and automation

> training and employee empowerment

> new water and energy saving devices

This video illustrates the OM casestudy of FritoLay.

Examples of OM-related professional societies include American Society for Quality (ASQ), Project Management Institute (PMI) and so on.

Skills required for successful OM 

Previously, I discussed how the job interview process should pay special attention to the skillset required of the interviewees. The following are considerations specific to OM about OM managers. 

• detail oriented and analytical, especially quantitative (regarding issues that include input costs, processing costs, inventory costs, quality management costs, scale economies and so on)
• people skills that can be used to influence change
• tech-savviness and willingness to learn new technology
• can keep in mind and honor the goal of delivering customer value.

CONTENT RELATED TO OPERATIONS MANAGEMENT

• Business plan
• Breakeven analysis
• Demand. Understanding consumer demand can help you plan the appropriate level of inventories (not too much that can become costly or too little that you can not meet growing demand.)
• Managerial accounting
• Strengths and weaknesses of your business' distribution channels

Notes:

• Throughput refers to the amount of inputs or outputs passing through the 'transformation' system or process.
• A management system refers to the set of policies, processes and procedures used to fulfill required tasks. As shown in the case studies above, old and new scenarios are referred to as the old and new 'systems'.

Spend-Based Loyalty Reward Programs Offer Better Value for Higher Value Customers

Previously, I discussed why the old school 'earn & burn' loyalty rewards programs fail in recent times. I suggest that as customers change with modern times, so too shou ld your loyalty rewards programs in modern times in order to be successful. The discussion was also extended regarding how to use tiers for your modern loyalty rewards programs as a major game changer. We also considered that a great loyalty rewards program is no use if no one can understand it. On that basis, we examined how to create a loyalty rewards program explainer page.

In April 2016, Starbucks changed its rewards program from a visit-based to a spending-based system. This post will illustrate why Starbucks and many more companies are making this huge change. I will compare and contrast the 2 types of rewards structure; the 1) visit-based and 2) spend-based program. The key difference between them is how much it costs you to reward customers and how well you reward customers with a higher customer lifetime value (CLV).

Specifically, in the visit-based program, customers earn points based on a milestone related to visits or items bought, NOT on the dollar value of the purchase. However, this often applies with the condition that customers meet a minimum dollar value. Conversely, a spend-based program awards points based on the dollar value of purchases, regardless of the number of visits made.

The health shakes example below is based on the common consumer practices to repeatedly buy their favorite product and to generally not deviate notably from their average purchase value, ie at least when they must pay out of pocket. Consequently, customer 1 continues to buy his favorite shake valued at $10 while customer 2 buys his favorite valued at $7.

The gross cost of the program to you per customer as a percentage is (Reward value / CLV) x 100. 

VISIT-BASED Reward = $10 off after 9 visits

Example of visit-based loyalty program. Customers are required to buy 9 health shakes in order to get a free $10 shake (or $10 off). This program disregards the dollar value of each shake. Therefore customers may buy 9 of the least expensive shakes and opt for the most expensive when reaping the reward of the 10th free shake. In an attempt to keep the program as simple as possible, management may not have stated a minimum required value per shake because the value of all of the available shakes are within an acceptable amount.  Otherwise, they might specify the type of shake that qualifies, like 'high protein' shakes. This program is likely to require only a card and stamp, the latter of which is used to cancel the ten spaces that represent purchases.

Customer 1: ($10 / $90) x 100 = 11%. Smaller reward to the customer with the higher CLV.

Customer 2: ($10 / $63) x 100 = 15.8%. Bigger reward to the customer with a lower CLV and higher cost to you. Among the 2 customers and you (the seller), the biggest winner is the lower value customer. Customer is motivated to spend as little as possible.

Customer 2: ($7 / $63) x 100 = 11%. The only way to maintain the same 11% is if you can somehow force customers to take a reward that is NOT a fixed dollar amount for all customers but the same value as the customer's usual order - a possibility for only some situations.

SPEND-BASED Reward = $10 shake after $90 spent

[Fixed dollar value (NOT percentage) after a set CLV]

Example of spend-based loyalty program. Customers must spend at least $90 on health shakes in order to get the 10th free. This program focuses on the dollar value of each shake while disregarding the number of shakes each customer buys. Consequently, unlike the visit-based approach (and assuming that shakes range in price from $6 to $10), customers must spend more in order to get the rewards (than in the visitor-based version of this program).

 

Customer 1: ($10 / $90) x 100 = 11%. The cost is fixed. The program encourages customers to spend more.

Customer 2: ($10 / $91) x 100 = 11%. The cost is maintained at 11% percent, thereby preventing you from rewarding disproportionately, ie giving higher rewards to this lower value customer. As illustrated above, customer 2 is now forced to wait until well after the 10th visit to reap rewards.

If you want lower lifetime value customers to spend more and faster, you may need to

• motivate customers to earn points using non-payment means like promoting brand awareness for you through social media.
• motivate customers by sending personalized text messages to their mobile phone. 
• expire the points after a given period. 

SPEND-BASED Reward = 10% Off after $90 spent

BEWARE: If you offer a reward as a fixed percentage rate on a sale valued at any amount, like '10% off of your next purchase', again, you run the risk of exceeding your desired cost (re dollar value), ie if you can not establish a maximum order value. 

Customer 1: ($1.5 / $13.50) x 100 = 11.11%. Although rewards are proportionately distributed according to CLV, customer selecting pricier items raise the costs to an extent that may exceed your desired amount if cash flow is a problem.

Customer 2: ($1.0 / $9.00) x 100 = 11.11%. 

Customer 3: ($0.50 / $4.5) x 100 = 11.11%.

DO:

If you want to keep your program costs at fixed dollar amounts;

• provide the option for customers to redeem rewards by 'buying' specific items with points. This can ensure the costs are fixed to the extent that you want. However, do this sparingly, especially with very high value items as you will again run the risk of giving lower rewards to higher value customers. 
• Example: Special edition 'Power' shake priced at 99 rewards points (ie based on giving 10% discount on sale of $10 shake after earning 90 points). The customer can redeem 90 points and pay the balance in dollars or earn more points otherwise.
• 90 points (minimum spend)
•  9 points (corresponding with $9 payable after the 10% discount).

CONTENT RELATED TO VISIT-BASED AND SPEND-BASED LOYALTY REWARDS PROGRAM

• As consumers change, so too should loyalty rewards programs in order to be successful. Here's how.
• Use these results, along with financial and managerial ratios to establish assumptions for a business plan.
• How using tiered loyalty rewards programs can be a game changer.
• What's the point of having a great loyalty rewards program if no one can understand it? Let's talk how to create a loyalty rewards program explainer page.
• The case of Starbucks' change from a visit-based to spend-based rewards program. In the new spend-based system, customers needed to spend $1 to earn 2 stars and could redeem star points for a free item when they had accumulated 125 stars. Previously, customers received a free item after 12 visits (regardless of the items bought during the 12 visits and without restriction which drink they could select as the reward). In the old visit-based system, lower value customers were earning roughly 4 times more than higher value customers. However, Ultimately, after the new spend-based system, higher value customers earned roughly 50% more than before, lower value customers lost over 60% and Starbucks saved considerably.
• The calculations involved in your point system can easily become hard to understand for the average customers. See how to introduce your program in an attractive and digestible way with explainer pages.
• Measure the success of your loyalty rewards program.
• Incorporate a referral program into your loyalty rewards program. These 2 types of program complement each other. While the loyalty rewards program seeks to retain customers, referral programs seek to acquire new customers.
• Analyze how well your rewards catalog has been curated.
• Gift card programs may be designed to be stand alone or an integrated component of your current referral and or loyalty rewards programs.

Brand Awareness Measurement

This post focuses on measuring brand awareness is an extension of the discussion on brand awareness and brand awareness strategy. Measurements of brand awareness include the following. Perform this form of research at regular intervals while maintaining as many variables the same like the target respondents, location and so on. Although this type of research is the most costly, it produces the most internally valid form of data.

• Brand Recognition / Aided-Awareness checkbox survey. Provide a list of brands to customers and ask something along the lines of, "Which of these brands do you recognize as offering product X?". This is an internally valid way of measuring recognition through aided-awareness.
• Recall , unaided awareness, open-ended survey. This involves asking an open ended question for the brands that people know offer product X. Example, you leave a blank space to allow respondents to respond to the question; "When it comes to brands in this market, what brands have you heard of that offer product X?"

The following methods of measurement are common but arguably not as internally valid as the first two.

• Direct traffic. Direct traffic refers to situations in which someone types in your brand's web address in order to find information, ie as opposed to writing generic text in order to find options. For instance, compare traffic periods 1 against 2. If direct traffic is growing over time, it means that brand awareness is growing.
• Search volume. How often do people search for your particular product by name? Of course, this also depends on the uniqueness of your brandname as some names like 'Apple'  can be the subject of searches regarding the fruit and not the technology company.
• Impressions. This refers to how many times your advertisement or content was viewed, regardless of whether the audience clicked through. If you also maintain YouTube content, the views can count also.
• Reach & Frequency. Reach refers to the unique number of people to whom your advertisement or content was served. However, the frequency (ie impressions) may be a higher number as the same person may see your content multiple times over a specified period of time.
• Social listening aka Media monitoring. Social listening is the process of monitoring unpaid online discussions about your brand. (This helps you to understand what customers are saying about your brand.

CONTENT RELATED TO BRAND AWARENESS MEASUREMENTS

• Brand awareness and brand awareness strategy 101.
• Brand awareness measurements along with varios ratios can be one consideration in calculating sales projections in a business plan. 
• How to build a new brand for modern consumers.
• Emotional advertising; deeply personal emotional triggers
• Brand core values
• Genericide is noteworthy phenomenon for very successful brands! Know how to care for what you hoped for. Wildly successful branding can result in losing your brand if you do not know how. Learn how to prevent brand genericide.